2021
ANNUAL REPORT
ORTHOFIX MEDICAL INC.
Improving Patient
Improving Patient
Mobility Through
Mobility Through
Innovation
Innovation
“The M6 disc definitely changed my life. I’m
surfing again. I’m just looking for the next big
wave. And I honestly am just enjoying life
feeling normal and pain free.”
Koa Rothman
Professional Surfer and M6-C TM Disc Patient
From the President and CEO
DEAR SHAREHOLDERS,
I am extremely proud of how Orthofix upheld our commitments
to surgeons and patients in 2021, while making important
investments in our new product pipeline and business operations,
all during the continuing challenges of the ongoing global
pandemic. We accelerated our strategic plan by investing in
our innovative portfolio and executing on our commercial
channel and operational long-term strategies. Coming out of
2021, we continue to be “On The MOVE!”
LIVING OUR MISSION
development and clinical trials, as well as our focus on
operational improvements and building out our commercial
channel to accelerate future revenue growth in both Spine
and Orthopedics.
On The MOVE in Spine
In our Spine business, we made great strides in 2021. We had
multiple key product introductions including the launch of the
Construx™ Mini Ti and Forza™ Ti 3D-printed titanium interbody
implants with Orthofix’s unique Nanovate™ technology.
Professional surfer Koa Rothman (featured on our cover) has
been riding the waves in Hawaii since he was a small boy.
However, a surfing accident at age 23 damaged his cervical
disc and left him in such severe pain that he was facing the
possibility of leaving behind both his passion and his sports
career. Fortunately, Dr. Robert S. Bray, a renowned orthopedic
surgeon, and our innovative M6-C™ artificial cervical disc
technology helped Koa to heal and return to big wave surfing.
Patients like Koa measure the success of their procedures by
how quickly and fully they can return to normal. That is why
Our Mission to deliver innovative, quality-driven solutions while
partnering with health care professionals to improve patient
mobility is so important. We are proud to be part of the reason
Koa is now back on the big waves.
y
In the fourth quarter of 2021, we hit a big milestone - one-million
patients treated with our Bone Growth Therapy products. It
is gratifying to know how many patients have had their bone
healing supported by Orthofix products. It also demonstrates
our committed leadership position in bone growth stimulation,
one that we continue to build upon to provide important healing
solutions for surgeons and their patients.
In fact, in 2021, we hit a number of other meaningful mile-
stones including:
• 350,000 patients implanted with Trinity Elite™ and Trinity
Evolution™ Allografts
• 150,000 children treated with the eight-Plate Guided
Growth System™
• 125,000 patients treated with one of our spine solutions
in 2021 alone
• 80,000 cases with TrueLok™ and TL-Hex™
• 60,000 M6-C artificial cervical discs implanted worldwide
• 400 patients implanted with the Fitbone™ Limb-Lengthening
System since its launch in 2021
All of these milestones underscore the immeasurable value
of our Mission and the importance of the work we are so
privileged to do.
REFLECTING ON 2021
During 2021, we made solid progress developing and acquiring
products and procedural solutions to address unmet needs in
the marketplace and strengthen our product portfolio.
We were fueled by the investments we made in our product
In our Bone Growth Therapies business, we entered into an
exclusive license agreement to commercialize the innovative
portfolio of Italy-based IGEA S.p.A’s bone, cartilage and soft
tissue stimulation products in the U.S. and Canada to expand
our portfolio of Pulsed Electromagnetic Field (PEMF) products
with additional treatment modalities. We also became the
first and only company in the U.S. to offer a free recycling
program to its bone growth therapy patients as part of our
commitment to improve sustainability.
Within our Biologics business, we expanded our comprehensive
offering of products and services with the introductions of
the AlloQuent™ Structural Allograft Q-PACK, FiberFuse™ Strip
preformed allograft, and the Opus™ Mg Set − a magnesium-
based settable bone void filler for orthopedic procedures. We
anticipate this more robust portfolio will continue to help
drive incremental pull-through of our spine and orthopedics
hardware products.
We also increased investments in R&D related to product
development. In our clinical trial program, we began enrollment
in our two-level M6-C artificial cervical disc IDE trial and
continued to drive patient recruitment in our Bone Growth
Therapies rotator cuff repair study. The latter study represents
our initial entry into the soft tissue regeneration market with
a first-of-its-kind therapy. If successful, we will have first to
market advantage to tap into the more than 650,000 patients
who receive rotator cuff repair surgery in the U.S. every year.
Keeping a pipeline of new technology and therapy applications
is key to our strategy to drive future revenue growth.
On The MOVE in Orthopedics
Within Orthopedics, we focused on investments in limb
reconstruction and pediatric deformity, which included
enhancements and improvements to existing products as well
as launching new products with incremental indications to
increase our addressable markets. The strong performance of
the Fitbone Limb-Lengthening System throughout the year
is one example of the success we have had in bringing highly
innovative technology to the market to address unmet needs.
While we are pleased with the progress made this year, we
anticipate further growth acceleration of these products as
they gain traction in the market. We are On The MOVE!
Commercial Channel Development
An important strategy in 2021 was our intense concentration
on developing our commercial channels. We focused on
our U.S. sales pathways for biologics, spinal implants and
orthopedics − working to expand relationships with the goal
of making these channels as dedicated and steady as those in
our current Bone Growth Therapies business. In Q4, our U.S.
strategic channel partners − which we define as distributors
that carry multiple Orthofix product categories − generated
over one-third of our U.S. revenue, growing 5 percent when
compared to the prior year quarter and 15 percent when
compared to the fourth quarter of 2019. We will continue to
invest in the development and optimization of these channels
to support our growth initiatives.
Operational Improvements
Throughout 2021 we have successfully managed through
several supply chain challenges, including the microchip
shortage, without missing a beat. We are very pleased with
how our team navigated all of the macro challenges during a
challenging year, and we believe that we are well-positioned
to continue to execute across all aspects of our global supply
chain. We look forward to continuing our enhancements and
momentum into 2022 and beyond.
2022 – A YEAR OF IMPLEMENTATION
Looking ahead, we view 2022 as an inflection year for Orthofix.
We have invested in our product portfolio and commercial
channels and more importantly, we have worked hard to
attract top talent and experienced leaders to help guide
Orthofix as we lay the foundation for the future. We are now
well-positioned to drive the next phase of Orthofix’s growth,
and to do this we will focus strategically on two areas: product
innovation and differentiation and developing our commercial
channel.
Accelerating Growth through Product Innovation
and Differentiation
We are passionate about outcome-driven innovation that
provides benefits to our surgeons and to patients. In 2022,
we will focus on delivering near-term growth through the
increased adoption of recently launched new products, acceler-
ate our organic and inorganic investments in new technologies,
indications and solutions that continue to build on our core
portfolio and organizational strengths.
In a continuation of last year, the primary drivers of growth
in 2022 will be our M6-C artificial cervical disc, our Fitbone
Limb-Lengthening System, and our recently bolstered, tech-
nology-leading interbody portfolio. We also expect additional
top-line growth to benefit from the 20+ new products we
launched since 2020 and the products we will launch in 2022.
As we work to drive accelerated growth in future years,
we plan to increase investments during 2022 in key areas
of strength within our product portfolio. While we have a
relatively broad product portfolio today, which is required
to enable the type of distribution needed to compete in the
market, we by no means intend to be everything to everyone.
There are several areas of our business where we have clearly
differentiated ourselves, and other areas where we believe we
have products and procedural solutions that position us well
for pursuing additional opportunities. We intend to put capital
to work in those places to leverage our expertise and current
market position to accelerate our growth. These key areas of
strength and opportunity are:
• Biologics and Regenerative technologies
• Spine technologies
• Limb reconstruction and pediatric deformity
• Enabling technologies
• Alternative surgical site development and single-use
sterile pack product technologies
Biologics and Regenerative Technologies
One of the fundamental aspects of our business that differ-
entiates us from other spine and orthopedics companies is
our industry-leading biologics and regenerative technology
portfolios – a category that includes bone and soft tissue
stimulation and biologics.
We anticipate premarket approval in the second quarter of
2022 from the U.S. Food and Drug Administration for the
AccelStim™ bone healing therapy device. This product, part
of the portfolio we exclusively licensed last year from IGEA, is
a low-intensity pulsed ultrasound therapy for the healing of
both indicated fresh fractures and nonunion fractures.
The AccelStim device will expand our bone growth therapies
portfolio and complement our current PEMF technologies
which focus on nonunion fractures.
We believe 2022 will be a big year for our biologics and
regenerative technology portfolios. We are making meaningful
investments and recently extended our exclusive partnership
agreement with MTF Biologics for the Trinity allograft lines
through 2032. Included in this partnership, we look forward
to launching two additional biologics products mid-year, one
of which is a demineralized bone matrix (DBM) and the other
we believe will be an important differentiated solution in the
biologics market. We are striving to offer a full portfolio of
biologic solutions and pursue future regenerative technologies
so that we can meet the specific needs of the surgeon and
the patient.
Spinal Implants
We currently offer an extensive portfolio of products and
technologies, including a comprehensive cervical offering and
a differentiated artificial cervical disc. Additionally, we have
been re-evaluating our portfolio to bring in additional innovative
and differentiated products and procedures.
As mentioned above, we initiated five new key spine R&D
projects in 2021. These projects include developing innovative
spine products and solutions for anterior column support, a
minimally invasive spinal platform for lumbar, a posterior
cervical system, a deformity correction system, and the
FitSpine™ deformity technology platform. Through these
organic innovation programs, we have engaged key surgeon
thought leaders from around the world to contribute in the
development of these clinical solutions to enable Orthofix to
stand out in the market and create long-term top-line growth.
Limb Reconstruction and Pediatric Deformity
Another key area of differentiation for our business is our
narrow and dedicated focus on limb reconstruction and
pediatric deformity within the orthopedics market. Many
of our orthopedic peers participate in highly competitive
and crowded markets like hips and knees. We are squarely
focused on the complex limb reconstruction and deformity
correction segments of the orthopedics market where we
have expertise and a longstanding track record of leadership
and innovation.
We have a number of exciting new projects in this space. In
Q1, we introduced the TrueLok EVO Ring Fixation system, the
only circular fixator that features both radiolucent rings and
struts to enable clear radiographic visualization. This innovative
design allows physicians to better assess bone anatomy
both during surgery and for post-operative care. We will also
continue to invest in our cutting-edge Fitbone technology with
the development of new products in response to the input
of leading U.S. pediatric orthopedic surgeons and an identified
need in the market. These two projects, along with our
JuniOrtho™ Plating System that is designed to address
the specific demands of advanced deformity and trauma
reconstructions of the lower extremities, will give Orthofix
the broadest deformity care portfolio in pediatrics.
Enabling Technologies
Orthofix is focused on the future of digital preoperative planning
of limb reconstructions and deformity corrections for clinicians
across the world. OrthoNext™, our internally developed planning
software, will have expanded applications and will soon be
connected to most of the major products within our Orthopedics
business. Our goal is to provide preoperative planning and
surgical assurance to surgeons through our intuitive preplanning
software on both pediatric and adult patients.
In January, we also announced a partnership and investment
agreement to jointly develop and co-market the innovative
nView™ system with cervical spine and pediatric limb
deformity correction procedural solutions. The nView s1
imaging and surgical guidance system features the unique
ability to instantly capture 3D images with very low-dose
radiation, thereby making the 3D images available throughout
surgery and enabling real-time visualization. This technology
complements our preoperative and post-operative software
platforms, and we are excited to collaborate with nView to
broaden the use of this technology in cervical spine surgeries
and pediatric procedures.
Alternative Surgical Site Development and Single-Use Sterile
Pack Technologies
Finally, under product differentiation and innovation, we are
looking to continue to develop procedures for alternative
surgical sites of care (ASC) as more procedures are moved out
of the hospital and into ASCs. An example of this is our part-
nership with Neo Medical to develop single-use sterile pack
instrument technologies with patient-centric solutions.
Developing Our Commercial Channel
Throughout last year, we added leadership in our commercial
organization, leveraging both internal and external talent to
drive further penetration in the market and globalization of
our business. We will continue to invest further in the expansion
of our distribution channel with the addition of targeted direct
represenatives in our U.S. limb reconstruction and deformity
business to increase focus on pediatrics in geographies where
direct employees make sense.
With the anticipated 2022 launch of the AccelStim system,
we are making investments in our Bone Growth Therapies
channel to drive the expansion of our market in long bone
application for both indicated fresh fractures and nonunion
care. We are also continuing to focus our efforts on driving
synergies within our commercial channels to increase the
number of strategic partners carrying multiple Orthofix
product lines, which improves our product pull through and
provides for a more predictable and reliable sales channel.
We believe the combination of our differentiated technologies
along with our talented, clinically trained commercial teams
will deliver on our goal of putting our products into the hands
of surgeons and physicians worldwide.
LOOKING AHEAD
In summary, we are very excited about the future of Orthofix.
We have generated tremendous momentum over the last two
years and are moving into an inflection period in our growth
trajectory. We will continue to invest to accelerate growth in
the near term and future years, and importantly, do so while
remaining sustainably profitable.
We entered 2022 with full confidence in our team and in our
long-term strategic plan to drive sustainable growth and
deliver shareholder value. I want to close this letter by
acknowledging and thanking Catherine Burzik, our new Chair
of the Board of Directors who joined us last year, and our
full Board of Directors for their support in 2021. I would like
to give a big shout out to all our great team members – you
make what we do possible each and every day – and I especially
want to thank you for being so resilient and adaptive, while
always staying patient focused. And to you, our shareholders,
thank you for your support as we have executed on our plans.
Like Koa, the patient on our cover, we look forward to staying
On The MOVE in 2022 – and beyond.
“Our Mission is to deliver innovative, quality-driven
solutions while partnering with health care
professionals to improve patient mobility.”
Jon Serbousek
President and Chief Executive Officer
Orthofix Medical Inc.
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, 2021
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
(Registrant’s 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over
financial reporting under Section 404(b) of the Sarbanes‐Oxley Act (15 U.S.C. §7262(b)) by the registered public accounting firm that prepared or issued its audit
report. ☒
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 registrant’s 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, 2021, as reported by the Nasdaq Global Select Market, was approximately $788.9 million.
As of February 22, 2022, 19,852,951 shares of common stock were issued and outstanding.
Certain sections of the registrant’s definitive proxy statement to be filed with the Commission in connection with the Orthofix Medical Inc. 2021 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, 2021
Table of Contents
Item 1.
Business ...................................................................................................................................................................
Item 1A. Risk Factors ..............................................................................................................................................................
Item 1B. Unresolved Staff Comments ....................................................................................................................................
Properties ................................................................................................................................................................
Item 2.
Item 3.
Legal Proceedings ....................................................................................................................................................
Item 4. Mine Safety Disclosure ............................................................................................................................................
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6.
Selected Financial Data............................................................................................................................................
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations ....................................
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..................................................................................
Financial Statements and Supplementary Data.......................................................................................................
Item 8.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ...................................
Item 9A. Controls and Procedures..........................................................................................................................................
Item 9B. Other Information....................................................................................................................................................
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections .....................................................................
PART III
Item 10. Directors, Executive Officers and Corporate Governance .......................................................................................
Item 11. Executive Compensation..........................................................................................................................................
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ...............
Item 13. Certain Relationships and Related Transactions, and Director Independence........................................................
Item 14. Principal Accountant Fees and Services...................................................................................................................
PART IV
Item 15. Exhibits and Financial Statement Schedules............................................................................................................
Item 16. Form 10‐K Summary ................................................................................................................................................
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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. Forward‐
looking statements include, but are not limited to, statements about:
our intentions, beliefs, and expectations regarding our operations, sales, expenses, and future financial performance;
our operating results;
our plans for future products and enhancements of existing products;
anticipated growth and trends in our business;
the timing of and our ability to maintain and obtain regulatory clearances or approvals;
our belief that our cash and cash equivalents, investments, and access to our revolving line of credit will be sufficient to
satisfy our anticipated cash requirements;
our expectations regarding our revenues, customers, and distributors;
our expectations regarding our costs, suppliers, and manufacturing abilities;
our beliefs and expectations regarding our market penetration and expansion efforts;
our expectations regarding the benefits and integration of acquired businesses and/or products and our ability to make
future acquisitions and successfully integrate any such future‐acquired businesses;
our anticipated trends and challenges in the markets in which we operate;
the continuing and/or future effects of the COVID‐19 pandemic on our sales and business operations; and
our expectations and beliefs regarding and the impact of investigations, claims, and litigation;
These forward‐looking statements are not guarantees of future performance and involve risks, uncertainties, estimates, and
assumptions that are difficult to predict. Any or all forward‐looking statements that we make may turn out to be wrong (due to
inaccurate assumptions that we make or otherwise) and our actual outcomes and results may differ materially from those expressed
in these forward‐looking statements. Potential risks and uncertainties that could cause actual results to differ materially include, but
are not limited to, those set forth in Part I, Item 1A under the heading “Risk Factors”, Part II, Item 7 “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” and elsewhere throughout this Annual Report and in any other documents
incorporated by reference to this Annual Report. You should not place undue reliance on any of these forward‐looking statements.
Further, any forward‐looking statement speaks only as of the date hereof, unless it is specifically otherwise stated to be made as of a
different date. We undertake no obligation to update, and expressly disclaim any duty to update, our forward‐looking statements,
whether as a result of circumstances or events that arise after the date hereof, new information, or otherwise.
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
PART I
Item 1.
Business
In this Annual Report, the terms “we,” “us,” “our,” “Orthofix,” and “the Company” refer to the combined operations of Orthofix
Medical Inc. and its consolidated subsidiaries and affiliates, unless the context requires otherwise.
Company Overview
We are a global medical device company with a spine and orthopedics focus. Our mission is to deliver innovative, quality‐driven
solutions as we partner with health care professionals to improve patient mobility. Headquartered in Lewisville, Texas, our spine and
orthopedic products are distributed in more than 60 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 as “Orthofix International N.V.” In 2018, the Company completed a change in
its jurisdiction of organization from Curaçao to the State of Delaware (the “Domestication”) and changed its name to “Orthofix
Medical Inc.” As a result, it is now a corporation existing under the laws of the State of Delaware.
Available Information and Orthofix Website
Our filings with the Securities and Exchange Commission (“SEC”), including our Annual Report on Form 10‐K, Quarterly Reports on
Form 10‐Q, Current Reports on Form 8‐K, Proxy Statements for Meetings of Shareholders, 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.
COVID‐19 Update and Outlook
Refer to Part II, Item 7 of this Annual Report under the heading “Management’s Discussion and Analysis of Financial Condition and
Results of Operations,” for a discussion of the effects of the global COVID‐19 pandemic on our business in 2021 and of its expected
impact in 2022 and beyond.
Business Segments
We manage our business by our two reporting segments, Global Spine and Global Orthopedics, which account for 77% and 23%,
respectively, of our total net sales in 2021. 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, 2021, 2020, and 2019.
s
n
o
i
l
l
i
M
$400
$350
$300
$250
$200
$150
$100
$50
$-
$359
$357
$322
$106
$85
$103
2021
2020
2019
4
Global Spine
Global Orthopedics
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 16 of the Notes to the Consolidated Financial Statements in Item 8 of this Annual Report.
Global Spine
Within the Global Spine segment, we provide implantable medical devices, biologics, and other regenerative solutions which aim to
restore the quality of life of patients suffering from diseases and traumas of the spine. We offer a variety of treatment solutions that
uniquely incorporate multiple treatment modalities, such as mechanical, biological, and electromagnetic modes, to achieve desired
clinical outcomes.
Global Spine Strategy
Our strategy for the Global Spine segment is to drive business growth through organic and inorganic innovation, physician
collaboration, global market expansion, and partnerships with dedicated and high‐performing commercial sales channels. Growth
initiatives include:
Continued expansion of our presence in the U.S. cervical disc replacement market through surgeon training, publication of
clinical evidence, patient education, and sales channel support
A regular cadence of new product launches supporting our spine implant, biologics, and bone growth therapies portfolios
Ongoing, global sales channel optimization
Reinforcement of our bone growth stimulation business through the collection and dissemination of clinical evidence, and
the delivery of new and novel value‐added services
Conducting clinical research to support and broaden our spine implant, biologics, and bone growth stimulation portfolios
Acquiring or licensing products, technologies, and companies to further expand the spine portfolio
Attracting, developing, and retaining key talent
Global Spine Principal Products
The Global Spine reporting segment is largely represented by three principal product categories, i) Bone Growth Therapies, ii) Spinal
Implants, and iii) Biologics. Each of these product categories are further described below:
Bone Growth Therapies
Within the Bone Growth Therapies product category, 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 our 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. We sell these products almost exclusively in the U.S. using
distributors and direct sales representatives to provide our devices to healthcare providers and their patients.
Spinal Implants
Within the Spinal Implants product category, 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 facilities that conduct spine care to include hospitals, ambulatory surgery centers, out‐
patient facilities (“spine care facilities”) and to surgeons who treat patients in need.
Biologics
Within the Biologics product category, we offer a portfolio of products and tissue forms that allow physicians to successfully treat a
variety of spinal and orthopedic conditions. We market tissue forms provided by MTF Biologics (“MTF”) to spine care facilities and
surgeons, 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, Trinity Evolution, fiberFUSE, and fiberFUSE Strip tissue forms for musculoskeletal
defects to enhance bony fusion.
5
In addition, we market regenerative non‐tissue biologic solutions derived from synthetic materials. Our Opus MG Set is our current
synthetic, biologic offering.
The following table and discussion identifies our principal Global Spine products by trade name and describes their primary
applications:
Product
Bone Growth Therapies Products
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
AccelStim
Spinal Implants Products
M6‐C Artificial Cervical Disc
M6‐L Artificial Lumbar Disc
LIPUS healing therapy used to enhance bone growth in fresh, long‐bone
fractures
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
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
FORZA XP Expandable Spacer System
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
FORZA PEEK / Titanium Composite (“PTC”) Spacer
System
A posterior lumbar interbody with 3D printed porous titanium end plates that
may promote bone ingrowth and a polyetheretherketones (“PEEK”) core to
maintain imaging characteristics
FORZA Spacer System
FORZA Ti Spacer System
PEEK interbody devices for PLIF and TLIF procedures
Fully 3D printed titanium devices for PLIF and TLIF procedures
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
PHOENIX Minimally Invasive Spinal Fixation System A multi‐axial extended reduction screw body used with the Firebird Spinal
CONSTRUX Mini PTC Spacer System
Fixation System designed to be implanted during a posterior thoracolumbar
spine fusion procedure
An anterior cervical interbody with 3D printed porous titanium end plates that
may promote bone ingrowth and a PEEK core to maintain imaging
characteristics
CONSTRUX Mini Ti Spacer System
Fully 3D printed titanium anterior cervical interbody spacer system
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Product
CETRA Anterior Cervical Plate System
JANUS Midline Fixation Screw
LONESTAR Cervical Stand Alone
PILLAR SA PTC PEEK Spacer System
SKYHAWK Lateral Interbody Fusion System &
Lateral Plate System
FIREBIRD SI
Biologics Technologies
Trinity ELITE
Trinity Evolution
AlloQuent Structural Allografts (“AlloQuent”)
Collage Synthetic Osteoconductive Scaffold
fiberFUSE
O‐Genesis Graft Delivery
VersaShield
Opus Mg
Primary Application
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
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 stand‐alone spacer system designed to provide the biomechanical strength
to a traditional or minimal invasive anterior cervical discectomy and fusion
procedure with less disruption of patient anatomy and to preserve the
anatomical profile
A standalone anterior lumbar interbody fusion lumbar interbody with 3D
printed porous titanium end plates that may promote bone ingrowth and a
PEEK core to maintain imaging characteristics
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
A minimally invasive screw system that is intended for fixation of sacroiliac
joint disruptions in skeletally mature patients
A fully moldable allograft with viable cells used during surgery that is designed
to aid in the success of a spinal fusion or bone fusion procedure
An allograft with viable cells used during surgery that is designed to aid in 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
An osteoconductive scaffold and a bone graft substitute product comprised of
beta tri‐calcium phosphate and type 1 bovine collagen, available in both putty
and strip formulations
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 complete bone graft delivery system designed to deliver allograft, autograft,
or synthetic bone graft to all orthopedic sites, which is provided in a sterile,
single‐use form
A thin hydrophilic amniotic membrane designed to serve as a wound or tissue
covering for a variety of surgical demands
Injectable, modable, and biocompatible bone void filler
Bone Growth Therapies — 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.
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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 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. It is indicated for patients at high‐risk for non‐fusion.
The SpinalStim and CervicalStim systems are accompanied by an 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.
Bone Growth Therapies — 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.
Similar to our SpinalStim and CervicalStim 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.
Spinal Implants — 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 FDA‐approved 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 a single‐level
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. The M6‐C disc has become our leading spinal implant
device and contributed significantly to our growth in 2021. In addition, we have initiated a U.S. 2‐level investigational device
exemption (“IDE”) study for the M6‐C artificial cervical disc.
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Spinal Implants — 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 Firebird Spinal Fixation System, the Phoenix Minimally Invasive Spinal Fixation System, 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.
Biologics — Regenerative Solutions
The premier biologics tissues we market include the Trinity ELITE and Trinity Evolution tissue forms, which are cortical cancellous
allografts that retain the inherent growth factors and viable cells found in bone. They 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.
The fiberFUSE tissue is the newest biologics tissue form with handling characteristics analogous to the Trinity ELITE product without
compromising bone content. It provides an advanced demineralized bone offering that leverages fiber technology with the
advantages of ingrowth that cancellous bone provides and expands the offering to address a broader scope of surgical applications.
This tissue offering was developed by MTF in close collaboration with Orthofix to expand our portfolio and provides an opportunity
to serve a great number of clinical indications addressed by surgeons.
We receive marketing fees through our collaboration with MTF for the Trinity ELITE, Trinity Evolution, fiberFUSE, AlloQuent, and
VersaShield tissues. MTF processes the tissues, maintains inventory, and invoices hospitals, 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 and exclusive rights to market the fiberFUSE and AlloQuent tissues in the U.S. 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.
Future Product Applications
We remain very active with multiple internal developments to support future, new technology commercialization efforts. These new
technologies will apply to both the cervical and thoracolumbar spinal anatomy. In addition, we remain active in evaluating external
licensing and acquisition opportunities to add implant, biologics, and other emerging technologies to our spine portfolio. We expect
that the contribution of new, internally developed technologies and undefined external acquisitions will be the primary driver of
future growth.
Regarding our Bone Growth Therapy business, 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. In addition, we currently have research and a clinical study underway to identify potential clinical indications
for treating rotator cuff tears and we also have initiated a U.S. 2‐Level IDE study for the M6‐C artificial cervical disc.
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Global Orthopedics
The Global Orthopedics 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
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 Orthopedics Strategy
Our strategy for the Global Orthopedics reporting segment is to continue to offer pioneering solutions to the most complex
reconstructive problems related to trauma, adult and pediatric limb reconstruction and extremities along the entire treatment
pathway.
Our key strategies in this segment are:
Global market and product focus on:
o Adult and pediatric limb reconstruction
o Adult and Pediatric deformity correction
o Complex periarticular fracture reconstruction
Expand our position as the worldwide leader in complex deformity and limb reconstruction, including both internal and
external solutions, through a patient‐centric approach and digital treatment journey
Promote the advantages of our JuniOrtho family of pediatric product portfolio and support tools
Leverage our cross product digital platform, a uniquely developed pre and post planning digital platform called OrthoNext
to allow our clinicians to pre‐plan surgery for patients before surgery to save time, dose, and start surgeries with a greater
degree of confidence, and follow up post operatively to evaluate their chosen surgical plan success
Leverage the market appeal and acceptance of our software platforms: HEX‐ray and OrthoNext
Build on our historical position as a company highly focused on complex and challenging conditions to be at the forefront of
innovation in helping surgeons and patients alike in the management of the Charcot foot and ankle
Within the orthopedic trauma segment, focus on open and complex fracture management with additional attention to joint
pathologies, like dislocations, of upper and lower limbs; we aim to develop new international business opportunities within
trauma, becoming a trusted partner of Non‐governmental Organizations (“NGOs”) and Military Medicine Organizations
Collaborate with physicians and healthcare partners to improve patients’ live through technology, digital transformation,
clinical evidence, and our industry‐leading medical education programs, such as Orthofix Academy
Continue the strong pace of new product launches
Acquire or license products, technologies, and companies to support these market opportunities.
Global Orthopedics Focus Products
Global Orthopedics offers a comprehensive line of limb reconstruction and complex deformity correction technologies. We provide
innovative and minimally invasive extremity solutions to help surgeons improve their patient’s quality of life, which are designed to
address the lifelong bone and joint health needs of patients of all ages. In addition, our well‐rounded product lines offer internal and
external fixation solutions for pediatrics, limb reconstruction, trauma, and foot & ankle specialties.
Our fracture repair solutions comprise a wide range of devices designed for specific anatomical areas. The philosophy underlying
these devices is to provide adequate stability and to allow for early functional recovery, thereby improving patients’ quality of life.
Our goal is to offer devices that enable a simple, standardized approach for reproducible results.
Our trauma products consist of a comprehensive portfolio of ready‐to‐use, sterile, dedicated implant kits designed for a wide range
of anatomical sites.
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The following table and discussion identifies the principal Global Orthopedics products by trade name and describes their primary
applications:
Product
TrueLok
TrueLok Hexapod System (“TL‐HEX”)
Primary Application
A surgeon‐designed, lightweight external fixation system for trauma, limb
lengthening, and deformity correction, which 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
A hexapod external fixation system for trauma and deformity correction with
associated software, designed 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, which 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
FITBONE Intramedullary Limb‐Lengthening System An intramedullary lengthening system intended for limb lengthening of the
JuniOrtho Pediatric Portfolio
Galaxy Fixation System
femur and tibia, surgically implanted in the bone through a minimally invasive
procedure; it includes an external telemetry control set that manages the
distraction process
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. It consists of a 360° approach to the patient journey with
dedicated tools to treat all stages of the healing process: collaterals,
educational games, software applications, and patient apps for post‐operative
management
Our JuniOtho portfolio includes, among the others:
‐ A complete line of nailing systems for trauma and limb reconstruction,
including our elastic nail, MJ‐FLEX, and our rigid intramedullary nail for
adolescents, Agile Nail;
‐ The Galaxy Fixation Pediatric System;
‐ The eight‐Plate Guided Growth System (“eight‐Plate”) and the eight‐Plate
Guided Growth System+ (“eight‐Plate Plus”);
‐ The JuniOrtho Plating System
A pin‐to‐bar system for temporary and definitive fracture fixation, 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
shoulder, elbow and wrist
Galaxy Fixation Shoulder
A unique solution for the treatment of proximal humeral fractures
Ankle Hindfoot Nail (“AHN”)
A differentiated solution for hindfoot fusions
G‐BEAM Fusion Beaming System
A system designed to address the specific demands of advanced deformity and
trauma reconstructions of foot and ankle applications, such as Charcot,
requiring fusion of the medial and/or lateral columns, with or without
corrective osteotomies as well as for joint fusions within the mid‐ and hindfoot
OSCAR
An ultrasonic powered surgical system for revision arthroplasty
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Product
External Fixators
Primary Application
External fixation, including our limb‐lengthening systems, ProCallus, XCaliber,
Pennig, Radiolucent Wrist Fixators, and Calcaneal Fixator
eight‐Plate and eight‐Plate Plus
The first and a market‐leading system for gradual correction of the growth
plate in pediatric patients
LRS advanced Limb Reconstruction System
OrthoNext Digital Platform
‐
HEX‐ray Module
‐ myHEXplan and mySuperheroAcademy
Module
An external fixation for limb lengthening and corrections of deformity, which
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
A digital platform software developed specifically for use with the JuniOrtho
Plating System, which enables the surgeon to accurately plan the osteotomy
position to visualize the implant in relation to the anatomy
Part of the OrthoNext offering, an innovative software designed to facilitate
pre‐operative planning and post‐operative monitoring with the TL‐HEX
software. It allows a unique and realistic representation of the case using x‐rays
and providing accurate and user‐friendly management of the surgery
Part of the OrthoNext offering, mobile apps developed to support patients
treated with TrueLok and TL‐HEX, which are designed to improve
communication and connection with hospital staff (myHEXplan) or to help
patients learn by playing a virtual game (mySuperheroAcademy)
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 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 occurs. External fixation
allows small degrees of micromotion (dynamization), which promotes blood flow at the fracture site, and accelerates the bone
healing process. 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.
We offer most of our products in sterile packaging, which fulfills the need of a streamlined and ready‐to‐use set of products,
particularly in trauma applications where timing is crucial.
Examples of our external fixation devices include the TrueLok, TL‐HEX, the Galaxy Fixation System, and the LRS Advanced Limb
Reconstruction System.
Internal Fixation
Internal fixation devices consist of either long rods, commonly referred to as nails, or plates that are attached to the bone with the
use of screws. Nails and plates come in various sizes, depending on the bone that requires treatment. 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 Chimaera, AHN, and the G‐
BEAM Fusion Beaming System.
Acquired in March 2020, the FITBONE intramedullary lengthening nail provides an internal option for limb lengthening of the femur
and tibia and provides Orthofix with the most complete limb reconstruction portfolio on the market. Over 3,500 cases have been
performed with the FITBONE system in more than 15 countries.
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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), degenerative diseases, and conditions resulting from a
previous trauma. An example of a product offered in this area is the eight‐Plate Plus.
Product Development
Our primary research and development facilities are located in Lewisville, Texas and Verona, Italy. We work with leading hospital
research institutions, as well as with MTF Biologics, surgeons, 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 2021, 2020, and 2019, we incurred research and development expenses of $49.6 million, $39.1 million, and $34.6 million,
respectively.
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 possess 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. We do not believe that the expiration of any single patent is likely to significantly affect our intellectual property position.
The medical device industry is characterized by the existence of a large number of patents and frequent litigation based on
allegations of patent infringement. Patent litigation can involve complex factual and legal questions and its outcome is uncertain.
Our success is dependent, in part, on us not infringing upon patents issued to others, including our competitors and potential
competitors. While we make extensive efforts to ensure that our products do not infringe other parties’ patents and proprietary
rights, our products and methods may be covered by patents held by our competitors. For a further discussion of these risks, please
see Item 1A of this Annual Report under the heading “Risk Factors.”
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 for 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 our fundamental policy 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 (“U.S. DOJ”) (“Evaluation of Corporate Compliance Programs” (updated June 2020)), 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:
Organizational oversight by senior‐level personnel responsible for the compliance function within the Company
Written standards and procedures, including a Corporate Code of Conduct
Methods for communicating compliance concerns, including anonymous reporting mechanisms
Investigation and remediation measures to ensure a 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 to assess program effectiveness
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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
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 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 Orthopedics 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 currently classified as class III by the FDA, and have been approved for commercial distribution in the U.S.
through the PMA process. However, an FDA panel recently recommended that bone growth stimulator devices be reclassified by the
FDA from Class III to Class II devices with special controls. For additional discussion of this development, see Item 1A of this Annual
Report under the heading “Risk Factors.”
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.
In 2017, the European Union (“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 provided a transition period that went into effect on May 2021 for all currently‐approved medical
devices prior to May 2021 (under the European Medical Device Directive) to meet the additional requirements and for certain
devices this transition period was extended until May 2024. After this transition period, all medical devices marketed in the E.U. will
require certification according to these new requirements. Compliance with this new regulation has required us to incur significant
costs over the transition period and we expect to continue to incur significant costs associated with this effort through May 2024.
Failure to meet the requirements of the regulation could adversely impact our business in the E.U. 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 and
Trinity Evolution, our allogeneic bone matrices comprised of cancellous bone containing viable stem cells and a demineralized
cortical bone component. In addition, we provide structural allografts for spinal fusion under the brand name AlloQuent,
demineralized cortical fiber technologies under the brand name fiberFUSE, and an amniotic membrane, VersaShield, which is a
natural tissue barrier. 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. 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
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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.
In addition to our allograft solutions (HCT/Ps), we market and distribute additional biologics products that are synthetic in nature
and are regulated by the FDA as medical devices, specifically Collage Synthetic Osteoconductive Matrix and the Opus MG line of
synthetic grafts. We also provide ancillary technologies regulated by the FDA as medical devices that aid in the delivery of our bone
grafting options clinically. These products are sourced from third party manufacturers, which we believe adequate inventory supply
is maintained to avoid product flow disruptions.
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 in the market, numerous regulatory requirements continue to apply. These regulatory requirements include:
product listing and establishment registration; Quality System Regulation (“QSR”), which requires 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; 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 of our
manufacturing facilities 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. Such additional
regulation, whether in the U.S. or internationally, 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 US LLC, 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 US LLC has demonstrated its commitment to maintain a higher level
of competency and a willingness to 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
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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
(“HHS”), the U.S. DOJ, and other federal, state, and local agencies. Among other things, these laws and others generally (i) prohibit
the provision of anything of value in exchange for the referral of patients or for the purchase, order, or recommendation of any item
or service reimbursed by a federal healthcare program, (including Medicare and Medicaid); (ii) require that claims for payment
submitted to federal healthcare programs be truthful; (iii) prohibit the transmission of protected healthcare information to persons
not authorized to receive that information; and (iv) 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 HHS 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 E.U., the General Data Protection Regulation (“GDPR”), 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”), requires public disclosure
to the U.S. government of payments to physicians and teaching hospitals, including in‐kind transfers of value, such as gifts or meals.
The Sunshine Act also provides penalties for non‐compliance. The Sunshine 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.
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In addition to the Sunshine Act, as expanded by the SUPPORT Act, we seek to comply with other international and individual state
transparency laws, such as 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 Orthopedics.
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, 2021, 2020, and 2019.
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 60 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, an increasing number of 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 Orthopedics reporting segment products
are primarily sold by independent distributors.
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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 and also virtually. In person training locations include our facility in Verona, Italy, various locations in Latin America, and
our corporate headquarters in Lewisville, Texas. In recent years, thousands of surgeons from around the world have attended these
in person and virtual product education seminars, which have included a variety of lectures from specialists, as well as
demonstrations and hands‐on workshops. In response to the COVID‐19 pandemic, our sales and training teams also offered virtual
training opportunities and we have participated in numerous virtual sales conferences. We plan to continue to utilize these virtual
training platforms into the future.
Competition
Our Bone Growth Therapies product category competes principally with similar products marketed by Zimmer Biomet, Inc.; DJO,
LLC; and Bioventus LLC. 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 Orthopedics devices, our principal competitors include
DePuy Synthes; Zimmer Biomet, Inc.; Stryker Corp.; Smith & Nephew plc; and OrthoPediatrics Corp.
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, OrthoNEXT
preoperative planning, and our medical education 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 bone growth stimulation, motion preservation, orthopedic, and
spinal implant products, and subcontract the manufacturing of a substantial portion of the component parts and instruments.
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.
We partner with MTF Biologics to provide our customers allograft solutions (HCT/Ps) for various spine, orthopedic and other bone
repair needs. MTF Biologics provides donor screening, processing, and quality standards that are expected by our customers. We are
the exclusive marketing representative for the Trinity ELITE, Trinity Evolution, fiberFUSE, and AlloQuent HCT/Ps and have a non‐
exclusive marketing agreement for our Versashield amniotic membrane.
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.
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Human Capital Resources
Our key human capital objectives in managing our business include attracting, developing, and retaining top talent while integrating
diversity, equity, and inclusion principles and practices into our core values.
Employees
At December 31, 2021, we had 1,087 employees worldwide. Of these, 786 were employed in the U.S. and 301 were employed at
other non‐U.S. locations. Our relations with our Italian employees, who numbered 208 at December 31, 2021, 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.
Compensation and Benefits
Because attracting, developing, and retaining high‐level talent is a key component of our human capital objectives, we seek to
provide competitive compensation and benefits packages, and to prioritize the health and wellness our employees. In addition to
the comprehensive and competitive health plans that we offer, our employees receive access to the following benefits: a 401(k)
retirement plan with a Company match, an employee stock purchase plan, virtual physician consults, an employee health advocate,
a Company‐provided basic life insurance and disability benefits corporate wellness program, an onsite fitness center, paid parental
leave, an employee assistance program, a flexible spending account, health savings accounts, and local employee discounts
programs.
Talent Development
We believe that success comes from investing in our people and ensuring our workforce is aligned with our mission and values. To
achieve this goal, we devote time and resources to assist our employees in being familiar with our business, industry, and product
offerings. We put an emphasis on training our employees and sales representatives to understand our business, including the
underlying medical conditions that our products treat. In addition, we strive to support our teams in the areas of development,
mentoring, engagement, and health and wellness, enabling them to do their best work as they grow their careers. In 2021, we
launched an internship program with a diversity, equity, and inclusion focus and a global mentorship program to employees across
all departments.
Diversity and Inclusion
The Company’s mission is to deliver innovative, quality‐driven solutions as we partner with health care professionals to improve
patient mobility. It is our corporate values and the diverse individuals who bring these values to life that make our high‐achieving
capabilities a reality. We are committed to fostering, cultivating, and preserving a culture that promotes diversity, equity, and
inclusion. We seek to demonstrate our commitment to providing equal and equitable opportunities to all employees through
programs such as our Moving 4ward initiative, a program created to embrace the value of diversity and reflect the communities
where we live and work. Additionally, we proudly support the Orthofix Women’s Network, a program that provides opportunities for
women to learn from each other and grow within our company and our industry. Throughout the year, we promote a variety of
diverse voices to our employees by recognizing events such as Black History Month, Martin Luther King Jr. Day, Women’s History
Month, Asian Pacific American Heritage Month, LGBTQ Pride Month, Juneteenth, and Hispanic Heritage Month. We seek to embrace
and encourage our employees’ differences and know that diversity, equity and inclusion help build a truly global, transformative
business and will continue to be a source of our strength. Building on this belief, all employees participated in an unconscious bias
training in 2021 to increase awareness and promote equity and inclusion amongst employees.
Health and Safety
Promoting and protecting the safety of our workforce is a top priority. Health and safety is a responsibility that we share throughout
our organization and it is a responsibility that has evolved during the last two years to meet the needs of our workforce during the
COVID‐19 pandemic. Employees’ safety risks vary depending on the roles they perform, and we seek to tailor our safety efforts
accordingly.
Community
We support a variety of charitable organizations through donations, fundraising efforts, educational partnerships with colleges and
universities, and local community development. Over the years, we have raised funds and awareness for veteran support groups,
food and homebuilding organizations, and health‐related institutions. In 2020, we initiated a global food drive in response to food
shortages caused by the pandemic. Through employee donations and matching funds we provided meaningful support to 20 food
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banks around the world. Orthofix also partners with Donate Life America, a U.S.‐based nonprofit organization that promotes the
importance of organ, eye, and tissue donation. Additionally, we have an ongoing engineering partnership with the University of
Texas, Dallas, enabling students to work on real life healthcare solutions as we invest in the next generation of engineers and
business leaders.
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 are subject to the Foreign Corrupt Practices Act (the “FCPA”) and other similar anti‐bribery laws and any violations of such laws
could subject us to adverse consequences.
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 U.S. are with
governmental entities and are therefore subject to such anti‐bribery laws.
Any failure to comply with applicable legal and regulatory obligations in the U.S. 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.
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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:
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. 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. In addition, 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 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.
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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. Further, 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.
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 E.U.
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 E.U. We have received certification for all currently
existing manufacturing facilities.
An FDA panel recently recommended that bone growth stimulator devices be reclassified by the FDA from Class III to Class II devices,
which could increase future competition for us in this product category and negatively affect our future sales of such products.
We have the market‐leading bone growth stimulation platform with the only cervical spine indication granted by the FDA, and the
only mobile device app accessory designed to help patients adhere to their prescriptions and improve their clinical outcomes, STIM
onTrack 2.1. We also are investing in IDE studies to expand indications for use in areas such as rotator cuff tears. Our bone growth
therapy products currently are designated as Class III devices. Class III devices are subject to the FDA’s most rigorous pathway to
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approval for medical devices in the U.S. The FDA may change classification of a device only if the proposed new class has sufficient
regulatory controls to provide reasonable assurances of safety and effectiveness.
In September 2020, the FDA’s Orthopaedic and Rehabilitation Devices Panel recommended that bone growth stimulator devices be
reclassified from Class III to Class II devices with “special controls” to ensure patient safety and therapy efficacy. These proposed
special controls include the condition that such devices be subject to rigorous clinical studies and post market surveillance for any
new products. This would be in addition to other special controls and the Class II general requirement that any new products show
“substantial equivalence” to already‐cleared or approved devices.
We believe that the panel’s recommendation correctly recognizes the importance of PMA‐like clinical data for these devices, so that
manufacturers will continue to be required to submit robust clinical data under the approval or clearance process to ensure the
safety and efficacy of these devices for patients. We, along with other bone growth stimulation manufacturers, submitted comments
in response to the FDA’s proposed rulemaking to underscore the panel’s recommendation of the need for robust clinical data prior
to approval or clearance of bone growth stimulator products, together with post market surveillance requirements.
In the long‐term, the recommended reclassification could enhance the ability of competitors to enter the market if they are able to
create technologies with comparable efficacy to our devices, which could result in our products facing additional competition,
thereby negatively affecting our future sales of these products.
We continue to be affected by U.S. healthcare reform initiatives.
The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (or collectively the
“ACA”), has caused a number of substantial changes to occur in recent years 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:
Established a 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
Implemented 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.
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.
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Risks Related to our Business and Industry
The COVID‐19 pandemic has materially adversely affected, and could continue to materially adversely affect, our operations, supply
chain, manufacturing, product demand, product distribution, customers and other business activities.
The novel coronavirus discovered in late 2019, and the disease it causes, known as COVID‐19, has led to significant disruptions in the
healthcare market and the United States and international economies that may continue for a prolonged duration. The rapid spread
of the coronavirus in 2020 and variants of the virus in 2021, the persistence of the resulting pandemic, the measures governments
and private parties have implemented in order to stem the spread of this pandemic, and the general concern about the virus, have
had, and are continuing to have, a negative effect on the demand for many of our products compared to historical levels, and
consequently upon our business. In particular, many of our products are particularly sensitive to reductions in elective medical
procedures. Elective medical procedures were suspended or reduced at various times in 2020 and 2021 in many of the markets
where our products are marketed and sold, which negatively affected our business, cash flows, financial condition and results of
operations.
The reduction in elective procedure volumes began suddenly in March 2020 when shelter in place and social distancing instructions
were instituted in the U.S. and many of our other sales markets, which caused a pronounced reduction in revenue during April 2020
and May 2020, when a significant number of hospitals were either closed for elective procedures or otherwise operating at
significantly reduced volumes. Generally, this reduction in procedure volumes dissipated during June 2020 and July 2020, as many
regions were able to reopen for elective procedures, with an existing patient backlog. While cases again increased in the Fall of 2021
during the rise of the Delta variant, we did not experience a significant reduction in sales volume during this period, as we believe
that the widespread availability of vaccines provided additional comfort to many patients and providers. More recently, the highly
transmissible Omicron variant, coupled with a pronounced nursing shortage, placed renewed capacity stress on hospitals between
December 2021 and February 2022, which has caused renewed negative pressure on elective surgeries, though these effects have
somewhat dissipated in the past several weeks as case counts and hospitalizations have declined.
The future trajectory of the COVID‐19 pandemic remains uncertain, both in the U.S. and in other markets, particularly due to the
uncertainty as to the nature of future variants, and whether vaccines will protect against severe illness with respect to such future
variants.
Given these various uncertainties, it is unclear the extent to which lingering slowdowns in elective procedures will continue to affect
our business in 2022 and beyond. We expect that the effects of COVID‐19 on our business will depend on various factors including (i)
the magnitude, length and virulence of additional case waves and future variants, (ii) the continued distribution, efficacy,
refinement, and public acceptance of COVID‐19 vaccines, (iii) the comfort level of patients in visiting clinics and hospitals, and (iv)
the extent to which further elective surgery slowdowns occur during periods when hospital capacity is stretched because of the
need to treat COVID‐19 patients.
In addition to its effect on elective surgeries, the pandemic could also negatively affect our ability, and the ability of our third‐party
suppliers, manufacturers, distributors and customers, to retain key employees and ensure the continued service and availability of
skilled personnel necessary to run our, and their, complex operations. To the extent our management or other personnel, or the
management or other personnel of our third‐party suppliers, manufacturers, distributors and customers, are negatively affected by
the pandemic and are not available to perform their job duties, we could experience delays in, or the suspension of, our
manufacturing operations, sales activities, research and product development activities, regulatory work streams, clinical
development programs and other important commercial and corporate functions. Moreover, our relationships with our employees
may be disrupted due to measures implemented in response to the COVID‐19 pandemic. We have observed an overall tightening
and increasingly competitive labor market due to labor shortages caused in part by the COVID‐19 pandemic and responsive
measures, which has included increased wages offered by other employers and voluntary attrition of employees in the industry,
including at third‐party suppliers, manufacturers, distributors and customers.
All of these factors, collectively, could materially adversely affect our business, financial condition and results of operations.
The COVID‐19 pandemic and related supply chain and raw material disruptions could have a continuing material impact on our
global operations and the operations of our supply chain, which could adversely impact our business results and financial condition.
We rely on a limited number of suppliers to manufacture or supply certain products or components. In the event of interruption
within our supply chain, or global shortages of key supplies or components, we may not be able to increase capacity from other
sources or develop alternative or secondary sources without incurring significant additional costs and/or substantial delays. For
example, the COVID‐19 pandemic has led to a global shortage of semiconductor chips, which are used in certain of our products.
This shortage appears primarily to have been caused by manufacturers experiencing shutdowns or slowdowns during the pandemic,
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and it may take several fiscal quarters or longer for normalized capacity to return. In addition, limitations in key raw material
supplies could also cause semiconductor chip and other component shortages to continue. To the extent it continues, or more
shortages are experienced, particularly on a longer term basis, this could adversely affect our ability to procure such components
and manufacture certain of our products or it could require us to redesign any affected products in order to incorporate more
readily available components, which may require additional regulatory testing and approvals. Thus, our business could be adversely
affected in a significant manner if one or more of our suppliers are impacted by any interruption at a particular location or in relation
to a particular material or component.
Our business may be adversely affected if consolidation in the healthcare industry leads to demand for price concessions or if a group
purchasing organization (“GPO”) 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 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 spine and 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.
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Our allograft and cellular bone 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,
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.
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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 cyber‐attack, data breach or ransomware attack, 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 make them vulnerable to a cyber‐attack, malicious
intrusion, breakdown, destruction, loss of data privacy, ransomware attack, 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, disrupt the performance of our
products, or access our proprietary information. We could also be subject to a ransomware attack, which is a type of malicious
software that infects a computer and restricts users' access to it until a ransom is paid to unlock it. 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 E.U. and, the GDPR 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 the 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 effects 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 used by attackers has increased
in recent years, and a successful attack against us could lead to the loss of significant funds.
Although we possess insurance against the risk of cyber‐attacks, there can be no assurance that the liability related to any such
events will not exceed or insurance coverage limits or that such insurance will continue to be available on reasonable, commercially
acceptable terms, or at all. If the costs of maintaining adequate insurance coverage should increase significantly in the future, our
operating results could be materially adversely impacted.
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The physical effects of climate change or legal, regulatory or market measures intended to address climate change could adversely
affect our operations and operating results.
Shifts in weather patterns caused by climate change are expected over time to increase the frequency, severity or duration of
certain adverse weather conditions and natural disasters, such as hurricanes, tornadoes, earthquakes, wildfires, droughts, extreme
temperatures or flooding, each of which could cause more significant business and supply chain interruptions, damage to our
products and facilities as well as the infrastructure of hospitals, medical care facilities and other customers, reduced workforce
availability, and increased costs of raw materials and components. While we do not expect climate change to materially affect the
demand for our products, or the amount of persons with medical conditions we treat, climate change could also contribute to
collateral effects such as increased transmission of viruses or airborne illnesses, which could contribute to unpredictable events,
such as putting stress on hospital and other medical facilities and/or supply chains, and thus disrupting the elective surgery market
in which we do business. In addition, increased public concern over climate change could result in new legal or regulatory
requirements designed to mitigate the effects of climate change, which could include the adoption of more stringent environmental
laws and regulations or stricter enforcement of existing laws and regulations. Such developments could result in increased
compliance costs and adverse impacts on raw material sourcing, manufacturing operations and the distribution of our products,
which could adversely affect our operations and operating results.
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 and their continued maintenance of high standards in their processing methodology.
Termination of our existing relationships with our independent sales representatives or distributors could have an adverse effect on
our business.
We sell our products in many countries through independent distributors. Frequently, 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 standard 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. 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 representing
diverse backgrounds, experiences, and skill sets. Hiring and retaining qualified executives, engineers, technical staff, and sales
representatives is critical to our business, and competition for experienced employees in the medical device industry can be intense.
Maintaining our brand and reputation, as well as a diverse and inclusive work environment that enables all our employees to thrive,
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are important to our ability to recruit and retain employees. If we are less successful in our recruiting efforts, or if we cannot retain
highly skilled workers and key leaders, our ability to develop and deliver successful products and services may be adversely affected.
To attract, retain, and motivate qualified executives and key employees, we offer flexible working arrangements, such as remote and
hybrid models. Offering a practical solution to the workforce allows our employees to balance their many commitments, providing
our business a competitive edge in attracting and retaining talented employees. In addition, we utilize stock‐based incentive awards,
such as employee stock options, 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, certain 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 of these assets or assure their protection.
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 that are similar to, or that compete directly with, our products. 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.
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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 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, Investments, 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 that 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
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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 have provided over $10.0 million in investments and loans to a privately‐held company in Switzerland and may not be able to
recoup our investment.
In October 2020, we entered into agreements with Neo Medical SA, a privately‐held Swiss‐based medical technology company
developing a new generation of products for spinal surgery (“Neo Medical”). Our collaboration with Neo Medical focuses on co‐
developing with them a cervical platform and deploying single‐use, sterile‐packed procedure solutions designed to increase
operating room efficiencies, reduce procedural times and costs, improve patient outcomes through novel device designs and
techniques, and reduce infection rates. These instruments are designed for surgical settings including acute care hospitals,
outpatient hospitals, and also ambulatory surgery centers. Under our agreements with Neo Medical, we will also exclusively
distribute Neo Medical’s thoracolumbar procedure solutions to certain U.S. accounts.
In connection with these arrangements, we purchased $5.0 million of Neo Medical’s preferred stock, and loaned CHF 4.6 million
($5.0 million as of the issuance date) to Neo Medical pursuant to a convertible loan agreement. The loan accrues interest at an
annual rate of 8% and is convertible by either party into additional shares of Neo Medical’s preferred stock. If not otherwise
converted to preferred stock in the interim, the loan and all accrued interest become due and payable in October 2024. We then
made an additional investment of $0.7 million in 2021 in the form of a convertible loan. We made the election to convert the
additional investment into shares of Neo Medical’s preferred stock in January 2022.
Neo Medical is using the proceeds of our preferred stock purchase and loans to fund its ongoing operations. However, no assurance
can be made that Neo Medical’s business ultimately will be successful. As such, we could ultimately be unable to recoup any value
for the preferred stock that we purchased and/or unable to recoup the amount of our loan.
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. This may also
result in us retaining liabilities related to the assets or properties disposed of even though, for instance, the income‐generating
assets have been disposed. 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 and/or establish our sales and
distribution networks in certain domestic and international markets, 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.
Our goodwill, intangible assets and fixed assets are subject to potential impairment; we have recorded significant goodwill
impairment charges and may be required to record additional charges to future earnings if our remaining goodwill or intangible
assets become impaired.
A significant portion of our assets consists of goodwill, intangible assets and fixed assets. The carrying value of these assets may be
reduced if we determine that those assets are impaired, including intangible assets from recent acquisitions.
Most of our intangible and fixed assets have finite useful lives and are amortized or depreciated over their useful lives on a straight‐
line basis. The underlying assumptions regarding the estimated useful lives of these intangible assets are analyzed on at least an
31
annual basis and more often if an event or circumstance occurs making it likely that the carrying value of the assets may not be
recoverable. Any such changes are adjusted through accelerated amortization, if necessary. Whenever events or changes in
circumstances indicate that the carrying value of the assets may not be recoverable we test intangible assets for impairment based
on estimates of future cash flows. Factors that may be considered a change in circumstances indicating that the carrying value of our
intangible assets and/or goodwill may not be recoverable include a decline in stock price and market capitalization, slower growth
rates in our industry, the introduction of newer technology or competing products that may cannibalize future sales, or other
materially adverse events that have implications on the profitability of our business. When testing for impairment of finite‐lived
intangible assets held for use, we group assets at the lowest level for which cash flows are separately identifiable. If an intangible
asset is considered to be impaired, the amount of the impairment will equal the excess of the carrying value over the fair value of
the asset.
Goodwill is required to be tested for impairment at least annually. We review our two reporting units for potential goodwill
impairment in the fourth fiscal quarter of each year as part of our annual goodwill impairment testing, and more often if an event or
circumstance occurs making it likely that impairment exists. During the fourth quarter of 2021, we recorded a full impairment of the
Global Orthopedics goodwill. This resulted in an impairment charge of $11.8 million, which is reflected within acquisition‐related
amortization and remeasurement on the Consolidated Statement of Operations. If actual results differ from the assumptions and
estimates used in the goodwill and intangible asset calculations, we could incur future impairment or amortization charges, which
could negatively impact our financial condition and results of operations.
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
recognize net sales 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 2021 had a favorable impact of $3.0
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.
Beginning in 2022, the Tax Cuts and Jobs Act of 2017 eliminates the option to deduct research and development expenditures
immediately in the year incurred and requires taxpayers to amortize such expenditures over five years. If these provisions are not
deferred, modified, or repealed by Congress with retroactive effect to January 1, 2022, we will be subject to additional income tax
expense and the resulting cash liability. The impact cannot be reasonably estimated as many factors impact income tax expense and
liabilities.
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 $300.0 million secured revolving credit facility secured by a pledge of substantially all of our property.
In October 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 $300.0 million
secured revolving credit facility maturing on October 25, 2024, and amends and restates the previous $125.0 million secured
revolving credit facility. No amount is currently outstanding on the credit facility as of December 31, 2021, or as of the date hereof,
but we may draw on this facility in the future.
32
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, and 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, 2021 (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.
Properties
Our principal facilities as of December 31, 2021 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 orthopedics 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.
Legal Proceedings
For a description of material pending legal proceedings, refer to Note 13 of the Notes to the Consolidated Financial Statements in Item
8 of this Annual Report.
Item 4.
Mine Safety Disclosures
Not applicable.
33
PART II
Item 5.
Market for Registrant’s 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 22, 2022, we had 265
holders of record of our common stock. The closing price of our common stock on February 22, 2022 was $31.12. The following table
shows the high and low sales prices for our common stock for each of the two most recent fiscal years.
2020
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2021
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Dividends
$
$
High
Low
$
$
47.91
39.70
36.00
44.30
48.50
45.96
43.30
39.98
22.11
25.23
28.03
30.56
39.34
39.23
36.35
28.65
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 our 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 2021.
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.
34
The following graph compares our annual percentage change in cumulative total return on common shares over the past five years
with the cumulative total return of companies comprising the NASDAQ Composite Index and the NASDAQ Stocks (SIC 3840‐3849 US
& Foreign) Surgical, Medical, and Dental Instruments and Supplies Index. This presentation assumes that $100 was invested in
shares of the relevant issuers on December 31, 2016, and that dividends received were immediately invested in additional shares.
The graph plots the value of the initial $100 investment at one‐year intervals for the fiscal years shown. The NASDAQ Composite
Index replaces the CRSP NASDAQ Stock Market (US and Foreign Companies) Index in this analysis and going forward, as the CRSP
Index data is no longer accessible. The CRSP index has been included with data through 2020.
$400
$350
$300
$250
$200
$150
$100
$50
$0
2016
2017
2018
2019
2020
2021
Orthofix Medical Inc.
NASDAQ Stock Market (US and Foreign Companies)
NASDAQ Composite
NASDAQ Stocks (SIC 3840-3849 US & Foreign) Surgical, Medical, and Dental Instruments and Supplies
Item 6.
Selected Financial Data
No longer required under Item 301 of Regulation S‐K.
35
Item 7.
Management’s 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 2021 and 2020 financial results, including comparisons of our year‐over‐
year performance between these years. Discussion and analysis of our 2019 fiscal year specifically, as well as the year‐over‐year
comparison of our 2020 financial performance to 2019, 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, 2020, filed
with the SEC on February 26, 2021, 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 with a spine and orthopedics focus. Our mission is to deliver innovative, quality‐driven
solutions as we partner with health care professionals to improve patient mobility. Headquartered in Lewisville, Texas, our spine and
orthopedic products are distributed in over 60 countries via our sales representatives and distributors.
Notable financial results in 2021 include the following:
Net sales were $464.5 million, an increase of 14.2% on a reported basis and 13.5% on a constant currency basis
Double‐digit net sales growth over the prior year for both Global Spine (11.6%) and Global Orthopedics (24.4%)
Net sales growth in the U.S. and internationally for both the Global Spine and Global Orthopedics segments
Generation of net cash flows from operations of $18.5 million
COVID‐19 Update and Outlook
The global COVID‐19 pandemic has significantly affected our hospital and physician customers, patients, communities, employees,
and business operations over the last two years. At various points in time, the pandemic has led to the cancellation or deferral of
elective surgeries and procedures with certain hospitals, ambulatory surgery centers, and other medical facilities; restrictions on
travel; the implementation of physical distancing measures; and the temporary or permanent closure of businesses. At this time, the
future trajectory of the COVID‐19 pandemic remains uncertain, both in the U.S. and in other markets, particularly due to the
uncertainty as to the nature of future variants, and whether vaccines will protect against severe illness with respect to such future
variants.
Given these various uncertainties, it is unclear the extent to which lingering slowdowns in elective procedures will affect our
business during 2022 and beyond. We expect that the effects of COVID‐19 on our business will depend on various factors including
(i) the magnitude, length, and virulence of additional case waves and future variants, (ii) the continued distribution, efficacy,
refinement, and public acceptance of COVID‐19 vaccines, (iii) the comfort level of patients in visiting clinics and hospitals, and (iv)
the extent to which further elective surgery slowdowns occur during periods when hospital capacity is stretched because of the
need to treat COVID‐19 patients.
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)
36
Year ended December 31,
2021
(%)
2020
(%)
2019
(%)
100.0
24.7
75.3
47.6
14.9
10.7
3.9
(1.8)
(8.3)
100.0
25.1
74.9
50.3
16.7
9.6
(0.2)
(1.5)
0.6
100.0
21.9
78.1
48.6
18.6
7.5
7.5
(4.1)
(6.2)
Net Sales by Reporting Segment
The following table provides net sales by major product category by reporting segment:
2021
$ 187,448
115,094
56,421
358,963
105,516
$ 464,479
2020
$ 171,396
94,857
55,482
321,735
84,827
$ 406,562
2019
$ 197,181
94,544
65,496
357,221
102,734
$ 459,955
Percentage Change
2021/2020
Reported
2021/2020
Constant
Currency
2020/2019
Reported
2020/2019
Constant
Currency
9.4%
21.3%
1.7%
11.6%
24.4%
14.2%
9.4%
20.8%
1.7%
11.4%
21.3%
13.5%
‐13.1%
0.3%
‐15.3%
‐9.9%
‐17.4%
‐11.6%
‐13.1%
0.2%
‐15.3%
‐10.0%
‐18.2%
‐11.8%
(U.S. Dollars, in thousands)
Bone Growth Therapies
Spinal Implants
Biologics
Global Spine
Global Orthopedics
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.
2021 Compared to 2020
Net sales increased $37.2 million or 11.6%
Bone Growth Therapies net sales increased $16.1 million or 9.4%, primarily driven by an increase in gross orders across all
sales channels as restrictions associated with the COVID‐19 pandemic have lessened, particularly when compared to the
second quarter of 2020
Spinal Implants net sales increased $20.2 million or 21.3%, primarily driven by the continued recovery from the effects of
the COVID‐19 pandemic within our Spine Fixation product line, both in the U.S. and internationally, and from the continued
growth and adoption of our Motion Preservation product line in the U.S.
Biologics net sales increased $0.9 million or 1.7%, primarily driven by the continued recovery from the effects of the COVID‐
19 pandemic and an increase in revenues from new distributors added over the last 12 months
Global Orthopedics
Global Orthopedics offers products and solutions that allow physicians to successfully treat a variety of orthopedic conditions
specifically related to limb reconstruction and deformity correction unrelated to the spine. Global Orthopedics distributes its
products world‐wide through a network of distributors and sales representatives to sell orthopedic products to hospitals and
healthcare providers.
2021 Compared to 2020
Net sales increased $20.7 million, or 24.4%
Increase of $18.1 million, primarily driven by the continued recovery from the effects of the COVID‐19 pandemic, coupled
with the continued growth of our FITBONE product line, in both the U.S. and international markets
37
Increase of $2.6 million due to changes in foreign currency exchange rates, which had a favorable impact on net sales
Gross Profit
(U.S. Dollars, in thousands)
Net sales
Cost of sales
Gross profit
Gross margin
2021 Compared to 2020
2021
$ 464,479
114,914
$ 349,565
2020
$ 406,562
101,889
$ 304,673
2019
$ 459,955
100,607
$ 359,348
75.3%
74.9%
78.1%
Percentage Change
2021/2020
2020/2019
14.2%
12.8%
14.7%
0.4%
‐11.6%
1.3%
‐15.2%
‐3.2%
Gross profit increased $44.9 million, or 14.7%
Increase in gross profit is primarily due to the continued recovery from the effects of the COVID‐19 pandemic as net sales
have recovered to levels consistent with periods prior to the COVID‐19 pandemic and due to increased absorption of fixed
costs when compared to the prior year period
Increase in gross margin primarily as a result of significant non‐cash inventory related charges recorded in the prior year
due to lower procedure volumes, largely as a result of COVID‐19, and partially offset by unfavorable shifts in product mix,
and from a short‐term increase in electronic procurement costs caused by a global shortage of semiconductor chips, which
are used in certain of our products
Sales and Marketing Expense
(U.S. Dollars, in thousands)
Sales and marketing
As a percentage of net sales
2021 Compared to 2020
Sales and marketing expense increased $16.9 million
2021
221,318
$
2020
204,434
$
2019
$ 223,676
47.6%
50.3%
48.6%
Percentage Change
2021/2020
2020/2019
8.3%
‐2.7%
‐8.6%
1.7%
Increase of $14.0 million in variable compensation expenses as a result of the recovery in net sales
Increase of $4.6 million as a result of additional headcount, increased benefit costs, and increased travel and professional
expenses, as the majority of marketing events and trade shows were virtual in 2020
Partially offset by a decrease in expense of $2.7 million related to the Italian Medical Device Payback liability, as a result of
temporary relief provided by the Italian National Healthcare System in response to the COVID‐19 pandemic through a law
enacted in December 2021
General and Administrative Expense
(U.S. Dollars, in thousands)
General and administrative
As a percentage of net sales
2021 Compared to 2020
2021
69,353
$
2020
67,948
$
2019
85,607
$
14.9%
16.7%
18.6%
Percentage Change
2021/2020
2020/2019
2.1%
‐1.8%
‐20.6%
‐1.9%
General and administrative expense increased $1.4 million
Increase of $2.9 million a result of savings initiatives executed in 2020 in response to the COVID‐19 pandemic, including
temporary salary reductions in the U.S., suspension of the 401(k) match, and restrictions on travel and related expenses,
which are no longer in place for 2021
Offset by a decrease of $1.6 million related to the 2019 CEO transition
38
Research and Development Expense
(U.S. Dollars, in thousands)
Research and development
As a percentage of net sales
2021 Compared to 2020
2021
49,621
$
2020
39,056
$
2019
34,637
$
10.7%
9.6%
7.5%
Percentage Change
2021/2020
2020/2019
27.1%
1.1%
12.8%
2.1%
Research and development expense increased $10.6 million
Increase of $4.2 million related directly to our European Union medical device regulation implementation efforts
Increase of $3.3 million related to increased employee costs as a result of planned headcount increases in 2021
Increase of $2.5 million to support our development of new, innovative, and differentiated products or indications and the
integration of certain acquired products and assets into our business
Acquisition‐related Amortization and Remeasurement
(U.S. Dollars, in thousands)
Acquisition‐related amortization and
remeasurement
As a percentage of net sales
2021 Compared to 2020
2021
2020
2019
2021/2020
2020/2019
Percentage Change
$
17,588
$
3.9%
(499)
‐0.2%
$
34,212
7.5%
‐3624.6%
4.1%
‐101.5%
‐7.7%
Acquisition‐related amortization and remeasurement increased $18.1 million
Increase of $11.8 million attributable to the impairment of our Global Orthopedics goodwill in 2021 primarily due to current
and planned investments in our growth
Increase of $4.1 million primarily related to the remeasurement of potential future revenue‐based milestone payments
associated with the Spinal Kinetics acquisition that become due upon achievement of certain revenue targets
Increase of $1.5 million associated with acquired in‐process research and development assets in 2021, which were
recognized immediately upon acquisition
Increase of $1.1 million from amortization of intangible assets acquired through business combinations or asset acquisitions
Partially offset by a decrease of $0.4 million associated with the reassessment of contingent consideration associated with
the acquisition of a former distributor
Non‐operating Expense
(U.S. Dollars, in thousands)
Interest expense, net
Other income (expense)
2021
2020
2019
2021/2020
2020/2019
$
(1,837) $
(3,343)
(2,483)
8,381
$
(122)
(8,143)
‐26.0%
‐139.9%
1935.2%
‐202.9%
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 certain privately‐held companies, and credit
losses recognized on certain convertible debt investments. 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.
2021 Compared to 2020
Interest expense, net, decreased $0.6 million
Decrease of $0.8 million associated with interest expense incurred in the prior year on our outstanding indebtedness under
the secured revolving credit facility
39
Other income (expense), net, decreased $11.7 million
Decrease of $7.9 million associated with changes in foreign currency exchange rates, as we recorded a non‐cash
remeasurement loss of $4.0 million in 2021 compared to a gain of $3.9 million in 2020
Decrease of $4.7 million attributable to funds received in the prior year from the U.S. Department of Health and Human
Services as part of the Provider Relief Fund included within the Coronavirus Aid, Relief, and Economic Security Act (“CARES
Act”
Partially offset by gains recognized in total of $0.6 million associated with our equity investments in Neo Medical and Bone
Biologics
Income Tax Expense
(U.S. Dollars, in thousands)
Income tax expense (benefit)
Effective tax rate
2021 Compared to 2020
Net income tax expense increased $27.7 million
$
2021
24,884
‐184.4%
$
2020
2019
2021/2020
2020/2019
(2,885)
784.0%
$
1,413
‐5.2%
‐962.5%
‐968.4%
‐304.2%
789.2%
Percentage Change
Increase of $16.0 million primarily due to statute expirations on uncertain tax positions that did not recur in 2021
Increase of $13.3 million for net increase in valuation allowances recognized on domestic and foreign deferred tax assets
primarily due to cumulative losses
Increase of $0.8 million for lower tax benefit on the change in fair value of contingent consideration
Partially offset by tax benefit driven by lower earnings
2020 Compared to 2019
Net income tax expense decreased by $4.3 million
Decrease of $14.6 million primarily due to statute expirations on uncertain tax positions
Decrease of $7.1 million due to the net decrease in the fair value of contingent consideration
Increase of $14.7 million due to net increase in valuation allowance recognized on foreign deferred tax assets primarily due
to cumulative losses
Further offset by tax expense driven by higher earnings
A reconciliation of the effective tax rate for each year is reported in Note 20 to the Notes to the Consolidated Financial Statements
contained in Item 8 of this Annual Report.
Segment Review
Our business is managed through two reporting segments: Global Spine and Global Orthopedics. The primary metric used in
managing the business by segment is EBITDA (which is described further in Note 16 to the Notes to the Consolidated Financial
Statements contained in Item 8 of this Annual Report).
40
The following table reconciles EBITDA to loss before income taxes:
(U.S. Dollars, in thousands)
Global Spine
Global Orthopedics
Corporate
Total EBITDA
Depreciation and amortization
Goodwill impairment
Interest expense, net
Loss before income taxes
Liquidity and Capital Resources
2021
Year Ended December 31,
2020
2019
$
$
58,014
3,374
(31,691)
29,697
(29,599)
(11,756)
(1,837)
$
(13,495) $
63,036
(4,993)
(25,382)
32,661
(30,546)
—
(2,483)
(368)
$
$
39,528
7,496
(49,252)
(2,228)
(24,699)
—
(122)
(27,049)
Cash, cash equivalents, and restricted cash at December 31, 2021, was $87.8 million compared to $96.8 million at December 31, 2020.
(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,
2021
2020
Change
18,475
(23,013)
(3,621)
(815)
(8,974)
$
$
74,272
(52,334)
3,245
1,235
26,418
$
$
(55,797)
29,321
(6,866)
(2,050)
(35,392)
$
$
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,
2021
2020
Change
$
$
18,475
(19,592)
(1,117)
$
$
74,272
(17,094)
57,178
$
$
(55,797)
(2,498)
(58,295)
Cash flows from operating activities decreased $55.8 million
Decrease in net income (loss) of $40.9 million
Net increase of $29.5 million in non‐cash gains and losses, largely related to our impairment of Global Orthopedics goodwill,
deferred income taxes, and changes in fair value of contingent consideration
Net decrease of $44.4 million relating to changes in working capital accounts, primarily attributable to changes in our
contract liability associated with the CMS Accelerated and Advance Payment Program and from changes in accounts
receivable
Two of our primary working capital accounts are accounts receivable and inventory. Day’s sales in receivables remained consistent
and was 58 days at December 31, 2021, compared to 57 days at December 31, 2020 (calculated using fourth quarter net sales and
ending accounts receivable). Inventory turns were 1.4 times as of December 31, 2021, compared to 1.2 times at December 31, 2020,
primarily resulting from an increase in sales volumes, and thus an increase in cost of sales, as 2020 results were heavily impacted by
the COVID‐19 pandemic.
41
Investing Activities
Cash flows from investing activities increased $29.3 million
Increase of $18.0 million associated with cash paid in March 2020 to acquire assets associated with the FITBONE
intramedullary lengthening system for limb lengthening of the femur and tibia bones
Increase of $7.8 million associated with cash paid for purchases of investment securities, primarily attributable to our
investments in Neo Medical SA in the form of preferred stock and convertible loans
Increase of $6.0 million associated with cash paid for asset acquisitions and other investments
Partially offset by a decrease in capital expenditures of $2.5 million
Financing Activities
Cash flows from financing activities decreased $6.9 million
Decrease of $8.4 million associated with cash paid for the achievement of a revenue‐based milestone associated with the
Spinal Kinetics acquisition; the milestone payment totaled $15.0 million with a portion of the payment reflected in both
operating and financing activities
Partially offset by an increase in net proceeds of $1.2 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). Borrowings under the Amended Credit Agreement may be limited based upon EBITDA levels recognized over the
preceding 12 months.
As of December 31, 2021, we have no outstanding borrowings under the Amended Credit Agreement. For additional information
regarding the credit facility, see Note 11 of the Notes to the Consolidated Financial Statements in Item 8 of this Annual Report.
In addition, we have no borrowings outstanding on our Italian line of credit of €5.5 million ($6.3 million) as of December 31, 2021.
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 13 of the Notes to the Consolidated Financial Statements in Item 8 of this Annual
Report.
Impact of COVID‐19 and the CARES Act on Liquidity and Capital Resources
In March 2020, the CARES Act entered into U.S. federal law, which provided emergency assistance and health care for individuals,
families, and businesses affected by the COVID‐19 pandemic.
In April 2020, we received $13.9 million in funds from the CMS Accelerated and Advance Payment Program to increase cash flow to
providers of services and suppliers impacted by the COVID‐19 pandemic. Starting in April 2021, Medicare began to recoup 25% of
Medicare payments otherwise owed to the provider or supplier for submitted claims. Beginning March 2022, recoupment increases
to 50% for another six months. Thus, during these time periods, rather than receiving the full amount of payment for newly
submitted claims, our outstanding accelerated / advance payment balance will be reduced by the recoupment amount until the full
balance has been repaid. As of December 31, 2021, the balance of the liability associated with the Accelerated and Advance
Payment Program of the CARES Act totaled $4.8 million, which is classified within other current liabilities based upon our estimates
of when such funds will be recouped.
Given the various uncertainties attributable to the COVID‐19 pandemic that remain, both in the U.S. and in other markets, our
liquidity may be impacted in the future by the potential of decreases or delays of elective surgical procedures, delays in payments
from customers, facility closures, or other reasons related to the COVID‐19 pandemic. As of the date of issuance of these
42
consolidated financial statements, the extent to which COVID‐19 is likely to materially impact our liquidity in the future remains
uncertain.
Spinal Kinetics Acquisition and Contingent Consideration
As part of the consideration for the Spinal Kinetics acquisition, we agreed to make contingent milestone payments of up to $60.0
million. One milestone payment, which was for $15.0 million, became due upon FDA approval of Spinal Kinetics’ M6‐C artificial
cervical disc (the “FDA Milestone”). The FDA Milestone was achieved and paid in 2019. A second milestone payment, totaling $15.0
million, was achieved and paid in 2021 upon meeting certain net sales targets.
The remaining milestone payment is a revenue‐based milestone payment of $30.0 million in connection with future sales of the
acquired artificial discs. The fair value of the contingent consideration arrangement as of December 31, 2021, was $17.2 million;
however, the actual amount ultimately paid could be higher or lower than the fair value of the contingent consideration (ultimate
payment will either be $30.0 million or the liability will be reversed if the milestone is not met within the required timeline). As
of December 31, 2021, we classified the remaining contingent consideration liability within other current liabilities, as we expect to
pay the revenue‐based milestone in the next twelve months. For additional discussion of this matter, see Note 12 of the Notes to
the Consolidated Financial Statements in Item 8 of this Annual Report.
Related Party Transaction
On February 2, 2021, we entered into a technology assignment and royalty agreement with a medical device technology company
partially owned and controlled by the wife of President and Chief Executive Officer, Jon Serbousek, whereby we acquired the
intellectual property rights to certain assets for consideration of up to $10.0 million. Consideration is comprised of $1.0 million,
which was paid at signing, and $9.0 million in contingent consideration, dependent upon multiple milestones, such as receipt of
510(k) clearance or the attainment of certain net sales targets. For additional discussion of this transaction, see Note 4 of the Notes
to the Consolidated Financial Statements in Item 8 of this Annual Report.
IGEA S.p.A Exclusive License and Distribution Agreement
On April 7, 2021, we entered into an Exclusive License and Distribution Agreement (the “License Agreement”) with IGEA S.p.A
(“IGEA”), an Italian manufacturer and distributor of bone and cartilage stimulation systems. Per the terms of the License Agreement,
we will have the exclusive right to sell IGEA products in the U.S. and Canada. As consideration for the License Agreement, we agreed
to pay up to $4.0 million, of which $0.5 million was paid in 2021, with certain payments contingent upon achieving an FDA milestone.
The License Agreement also includes certain minimum purchase requirements.
Neo Medical Investment and Convertible Loan
In October 2020, we entered into a Convertible Loan Agreement (the “Convertible Loan”) with Neo Medical SA, a privately held
Swiss‐based Medtech company (“Neo Medical”), whereby we loaned CHF 4.6 million to Neo Medical ($5.0 million as of the issuance
date). The loan bears interest at 8.0%, with interest due semi‐annually. The Convertible Loan matures in October 2024; however, if a
change in control of Neo Medical occurs prior to maturity, the Convertible Loan shall become immediately due upon such event.
FITBONE Asset Acquisition and Contract Manufacturing and Supply Agreement (“CMSA”)
In February 2020, we entered into an 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. At
the time of the acquisition, we also entered into a CMSA with Wittenstein to manufacture the FITBONE product line. The CMSA has
an initial term of up to two years. As consideration for the CMSA, we will pay $2.0 million to Wittenstein at the conclusion of the
agreement if certain conditions are met. This payment is expected to be made in the first half of 2022.
Unremitted Foreign Earnings
Unremitted foreign earnings decreased from $53.7 million at December 31, 2020, to $50.0 million at December 31, 2021, 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.
43
Contractual Obligations
As a result of our operations, we are subject to certain contractual obligations with material cash requirements. Our material
contractual obligations include, but are not limited to i) our contingent consideration arrangement associated with the Spinal
Kinetics acquisition, ii) contingent consideration arrangements associated with certain asset acquisitions, iii) operating lease and
finance lease obligations, and iv) uncertain tax positions.
Refer to the Notes to the Consolidated Financial Statements in Item 8 of this Annual Report for a further description of our contingent
consideration arrangements (Notes 4, 12, and 17), lease obligations (Note 9), and uncertain tax positions (Note 20).
Off‐balance Sheet Arrangements
As of December 31, 2021, 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 as of 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 and receipt of a confirming purchase order.
Spinal Implants and Global Orthopedics 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.
44
Commercial revenue is largely related to the sale of our Spinal Implants and Global Orthopedics 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. Revenue derived from
stocking distributor arrangements is recognized 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 our performance obligation has been satisfied.
Allowance for Expected Credit Losses and Contractual Allowances
The process for estimating the ultimate collection of accounts receivable involves significant assumptions and judgments. The
determination of the contractual life of accounts receivable, the aging of outstanding receivables, as well as the historical
collections, write‐offs, and payor reimbursement experience over the estimated contractual lives of such receivables, are integral
parts of the estimation process related to reserves for expected credit losses and the establishment of contractual allowances.
Accounts receivable are analyzed on a quarterly basis to assess the adequacy of both reserves for expected credit losses and
contractual allowances. Revisions in allowances for expected credit loss 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.
These estimates are periodically tested against actual collection experience. In addition, we analyze our receivables by geography
and by customer type, where appropriate, in developing estimates for expected credit losses.
We believe our allowance for credit losses is sufficient to cover customer credit risks; however, a 10% change in our allowance for
credit losses as of December 31, 2021, would result in an increase or decrease to sales and marketing expense of $0.5 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, 2021, would result in an increase or decrease to net sales of
$0.4 million. Our allowance for credit losses 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 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, in‐process research and development
(“IPR&D”), customer relationships, trade names, trademarks, and licensing arrangements. 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.
45
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, and net income.
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, significant 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 2020 and 2019, we performed 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. As part of our qualitative assessment, we included quantitative factors to assess the likelihood of an impairment and
concluded it more likely that not that an impairment has not occurred.
In the fourth quarter of 2021, we performed a quantitative assessment of goodwill as part of our annual goodwill impairment
analysis. Upon estimating the fair value of each of its reporting units, we determined the Global Orthopedics reporting unit’s fair
value was less than its carrying value of net assets. This resulted in recording a full impairment of the Global Orthopedics goodwill of
$11.8 million, which is reflected within Acquisition‐related amortization and remeasurement. The assessment concluded there were
no indicators of impairment for the Global Spine goodwill.
We estimate the fair value of each reporting unit using a weighted average of fair value derived from both an income approach and
a market approach. The fair value measurements are based on significant inputs that are unobservable in the market, with key
assumptions including, but not limited to, our forecasted future net sales and expenses, terminal growth rates, discount rates
applied, and allocation of corporate‐level expenses to each reporting unit. Significant changes in these assumptions could result in a
significantly higher or lower fair value, which in turn can affect the ultimate conclusion regarding if goodwill is impared.
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 as of December 31, 2021, include (i) contingent consideration
attributable to the Spinal Kinetics acquisition and (ii) our convertible loan agreements with Neo Medical.
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 2019 and one of the revenue‐based milestones, resulting in a payment of $15.0 million, was achieved and paid in 2021.
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
46
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 remaining revenue‐based milestone payment 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 net sales of Motion Preservation products, discount rates 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 $4.8 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 $5.2 million.
We estimate the fair value of our convertible loan agreements with Neo Medical using option‐pricing models and a probability‐
weighted discounted cash flow model. The fair value measurement is based on significant inputs that are unobservable in the
market, with significant unobservable inputs including applicable discount rates, implied volatility, the likelihood and projected
timing of repayment or conversion, and projected cash flows in support of the estimated enterprise value of Neo Medical. Significant
changes in these assumptions could result in a significantly higher or lower fair value. Holding other inputs constant, an increase in
the assumed cost of equity discount rate by 2% would have resulted in a decrease in the fair value of the convertible loan of $1.2
million, whereas a decrease the cost of equity discount rate by 2% would have resulted in an increase in the fair value of the
convertible loan by $1.7 million.
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.
47
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 treatment 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
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 restricted 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 the awards 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 the
grants are deemed probable to vest. Vesting probability is assessed based upon forecasted earnings and financial results and
requires significant judgment.
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.
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
48
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 (including the
impacts of any goodwill impairment). 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.
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, 2021, this risk is currently minimal.
We believe that a concentration of credit risk related to our 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, Australian Dollas, Swiss Franc, or British Pound. 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, 2021, we recorded a foreign currency loss of $4.0 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 favorably
impacted during the years ended December 31, 2021, and December 31, 2020, 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
49
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 $9.1 million
and a decrease in operating income of $0.7 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 $9.1 million and an increase in operating income of $0.7
million.
Item 8.
Financial Statements and Supplementary Data
See “Index to Consolidated Financial Statements” on page F‐1 of this Annual Report.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
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.
Management’s 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, 2021, based on the framework set forth in “Internal Control—Integrated 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, 2021, 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 2021 that have
materially affected or are reasonably likely to materially affect, our internal control over financial reporting.
50
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, 2021, based on criteria
established in Internal Control—Integrated 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, 2021, 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, 2021 and 2020, 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, 2021, and the related notes and our report dated February 25, 2022 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
of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal
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 25, 2022
51
Item 9B.
Other Information
None.
Item 9C.
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
None.
PART III
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.
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.
52
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:
1.
Financial Statements
See “Index to Consolidated Financial Statements” on page F‐1 of this Form 10‐K.
2.
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.
3.
Exhibits
Exhibit
Number
2.1
3.1
3.2
4.1
4.2
10.1
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 January 28, 2021 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).
Description of the Registrant’s Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934 (filed as
an exhibit to the Company’s Annual Report on Form 10‐K for the year ended December 31, 2019 and incorporated herein
by reference).
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*†
Amended and Restated Matrix Commercialization Collaboration Agreement, entered into as of February 7, 2022, by and
between Orthofix US LLC and Muscoloskeletal Transplant Foundation Inc.
10.3
10.4
10.5
10.6
10.7
Orthofix Medical Inc. Second Amended and Restated Stock Purchase Plan, as amended by Amendment No. 1 thereto (filed
as an exhibit to the Company’s Annual Report on Form 10‐K for the fiscal year ended December 31, 2020 and incorporated
herein by reference).
Amendment No. 2 to the Orthofix Medical Inc. Second Amended and Restated Stock Purchase Plan (filed as an exhibit to
the Company's Current Report on Form 8‐K filed June 21, 2021 and incorporated by reference).
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).
Amendment No. 1 to Orthofix Medical Inc. Amended and Restated 2012 Long‐Term Incentive Plan (filed as an exhibit to
the Company’s Current Report on Form 8‐K dated June 8, 2020 and incorporated herein by reference).
Amendment No. 2 to Orthofix Medical Inc. Amended and Restated 2012 Long‐Term Incentive Plan (filed as an exhibit to
the Company's Current Report on Form 8‐K filed June 21, 2021 and incorporated by reference).
53
Exhibit
Number
10.8*
10.9
Description
Form of Employee Performance Stock Unit Agreement (2022 grant) under the Orthofix Medical Inc. Amended and
Restated 2012 Long‐Term Incentive Plan.
Form of Employee Performance Stock Unit Agreement (2016 – 2021 grants) under the 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 year
ended December 31, 2019 and incorporated herein by reference).
10.10*
Form of Time‐Based Vesting Employee Restricted Stock Unit Grant Agreement (2018 – 2021 grants) under the Orthofix
Medical Inc. Amended and Restated 202 Long‐Term Incentive Plan.
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
Form of Time‐Based Vesting Employee Restricted Stock Grant Agreement (pre‐2018 grants) under the Orthofix Medical
Inc. Amended and Restated 2012 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).
Form of Time‐Based Vesting Employee Non‐Qualified Stock Option Agreement under the Orthofix Medical Inc. Amended
and Restated 2012 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).
Form of Employee Non‐Qualified Stock Option Agreement under the Orthofix Medical Inc. Amended and Restated 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 Medical Inc. Amended and Restated 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 Medical Inc. Amended and Restated
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 Medical
Inc. Amended and Restated 2012 Long‐Term Incentive Plan (initial grant) (filed as an exhibit to the Company’s Current
Report on Form 8‐K filed July 8, 2016 and incorporated here by reference).
Form of Non‐Employee Director Non‐Qualified Stock Option Agreement under the 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, 2012 and incorporated herein by reference).
Employee Inducement Restricted Stock Unit Agreement for Paul Gonsalves (filed as an exhibit to the Company’s Form S‐8
filed on September 14, 2020 and incorporated herein by reference).
Employee Inducement Non‐Qualified Stock Option Agreement for Paul Gonsalves (filed as an exhibit to the Company’s
Form S‐8 filed on September 14, 2020 and incorporated herein by reference).
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).
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).
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 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).
54
Exhibit
Number
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32
10.33
10.34
10.35
Description
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).
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).
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).
Letter agreement, dated December 4, 2019, between the Company and Kevin Kenny (filed as an exhibit to the Company’s
Annual Report on Form 10‐K for the year ended December 31, 2019 and incorporated herein by reference).
Change in Control and Severance Agreement, dated November 1, 2019, between Orthofix Medical Inc. and Kevin Kenny
(filed as an exhibit to the Company’s Annual Report on Form 10‐K for the year ended December 31, 2019 and incorporated
herein by reference).
Letter agreement, dated August 21, 2020, between the Company and Paul Gonsalves (filed as an exhibit to the Company’s
Annual Report on Form 10‐K for the year ended December 31, 2020 and incorporated herein by reference).
Change in Control and Severance Agreement, dated September 11, 2020, between Orthofix Medical Inc. and Paul
Gonsalves (filed as an exhibit to the Company’s Quarterly Report on Form 10‐Q for the quarter ended September 30, 2020
and incorporated herein by reference).
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).
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.INS
Inline XBRL Instance Document – the instance document does not appear in the interactive Data File because its XBRL tags
are embedded within the XBRL document.
101.SCH* Inline XBRL Taxonomy Extension Schema Document.
101.CAL* Inline XBRL Taxonomy Calculation Linkbase Document.
101.DEF* Inline XBRL Taxonomy Definition Linkbase Document.
55
Exhibit
Number
Description
101.LAB* Inline XBRL Taxonomy Label Linkbase Document.
101.PRE* Inline XBRL Taxonomy Presentation Linkbase Document.
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
*
†
Filed with this Form 10‐K.
Certain private or confidential portions of this exhibit that are not material were omitted by means of redacting a portion of
the text and replacing it with a bracketed asterisk.
Item 16.
Form 10‐K Summary
None
56
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 25, 2022
Dated: February 25, 2022
ORTHOFIX MEDICAL INC.
By:
Name:
Title:
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/ CATHERINE BURZIK
Catherine Burzik
/s/ WAYNE BURRIS
Wayne Burris
/s/ JASON HANNON
Jason Hannon
/s/ JAMES HINRICHS
James Hinrichs
/s/ LILLY MARKS
Lilly Marks
/s/ MICHAEL PAOLUCCI
Michael Paolucci
/s/ JOHN SICARD
John Sicard
/s/ THOMAS WEST
Thomas West
President and Chief Executive Officer, Director
(Principal Executive Officer)
February 25, 2022
Chief Financial Officer
(Principal Financial and Accounting Officer)
February 25, 2022
Chair of the Board of Directors
February 25, 2022
February 25, 2022
February 25, 2022
February 25, 2022
February 25, 2022
February 25, 2022
February 25, 2022
February 25, 2022
Director
Director
Director
Director
Director
Director
Director
57
ORTHOFIX MEDICAL INC.
Statement of Management’s 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 tests 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
58
ORTHOFIX MEDICAL INC.
Index to Consolidated Financial Statements
Index to Consolidated Financial Statements..................................................................................................................................
Report of Independent Registered Public Accounting Firm (PCAOB ID: 42)..................................................................................
Consolidated Balance Sheets as of December 31, 2021 and 2020 ................................................................................................
Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended December 31, 2021, 2020,
and 2019....................................................................................................................................................................................
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2021, 2020, and 2019 ..........
Consolidated Statements of Cash Flows for the years ended December 31, 2021, 2020, and 2019 ............................................
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, 2021
and 2020, 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, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2021, 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, 2021, 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 25, 2022, expressed an unqualified opinion thereon.
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 12 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,
2021, the fair value of contingent consideration was $17.2 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, 2021, the Company’s inventory balance is $83.0 million, which is net of management’s
estimate of inventory excess and obsolescence reserves. As described in Note 5 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
and accuracy of the underlying data used in the model and evaluating whether such data was representative
F‐3
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.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2002.
Dallas, Texas
February 25, 2022
F‐4
ORTHOFIX MEDICAL INC.
Consolidated Balance Sheets as of December 31, 2021 and 2020
(U.S. Dollars, in thousands except share and per share data)
Assets
Current assets
Cash and cash equivalents
Restricted cash
Accounts receivable, net of allowances of $4,944 and $4,848, 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
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 13)
Shareholders’ equity
Common shares $0.10 par value; 50,000,000 shares authorized;
19,836,937 and 19,423,874 issued and outstanding as of December 31,
2021 and 2020, respectively
Additional paid‐in capital
Retained earnings
Accumulated other comprehensive income
Total shareholders’ equity
Total liabilities and shareholders’ equity
The accompanying notes form an integral part of these consolidated financial statements.
2021
2020
$
$
$
$
87,847
—
78,560
82,974
20,141
269,522
59,252
52,666
71,317
1,771
22,095
476,623
26,459
2,590
76,781
105,830
19,890
13,969
139,689
1,983
313,951
21,000
—
336,934
476,623
$
$
$
$
96,291
530
72,423
84,635
16,500
270,379
63,613
60,517
84,018
25,042
22,292
525,861
23,118
510
80,271
103,899
22,338
42,760
168,997
1,942
292,291
59,379
3,252
356,864
525,861
F‐5
ORTHOFIX MEDICAL INC.
Consolidated Statements of Operations and Comprehensive Income (Loss)
For the years ended December 31, 2021, 2020, and 2019
(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 loss
Interest expense, net
Other income (expense), net
Loss before income taxes
Income tax benefit (expense)
Net income (loss)
Net income (loss) per common share:
Basic
Diluted
Weighted average number of common shares:
Basic
Diluted
Other comprehensive income (loss), before tax
Unrealized gain (loss) on debt securities
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)
2021
2020
2019
$
464,479
114,914
349,565
221,318
69,353
49,621
17,588
(8,315)
(1,837)
(3,343)
(13,495)
(24,884)
(38,379) $
406,562
101,889
304,673
204,434
67,948
39,056
(499)
(6,266)
(2,483)
8,381
(368)
2,885
2,517
(1.95) $
(1.95)
0.13
0.13
$
$
$
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)
(1.51)
(1.51)
19,690,593
19,690,593
19,267,920
19,391,718
18,903,289
18,903,289
(942)
—
—
(2,544)
(3,486)
1,881
—
—
4,872
6,753
(2,593)
(1,034)
(5,193)
(653)
(9,473)
234
(3,252)
(41,631) $
(462)
6,291
8,808
$
2,201
(7,272)
(35,734)
$
$
$
$
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, 2021, 2020, and 2019
(U.S. Dollars, in thousands, except share data)
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 expense
Common shares issued, net
At December 31, 2019
Cumulative effect adjustment from adoption
of ASU 2016‐13
Net income
Other comprehensive income, net of tax
Share‐based compensation expense
Common shares issued, net
At December 31, 2020
Net loss
Other comprehensive loss, net of tax
Share‐based compensation expense
Common shares issued, net
At December 31, 2021
Number of
Common
Shares
Outstanding
18,579,688 $
—
—
—
—
—
442,931
19,022,619 $
—
—
—
—
401,255
19,423,874 $
—
—
—
413,063
19,836,937 $
Common
Shares
Additional
Paid‐in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Total
Shareholders’
Equity
1,858 $ 243,165 $ 87,078 $
3,296 $ 335,397
—
70
—
70
—
—
—
—
—
44
(937)
—
— (28,462)
—
—
21,540
—
6,314
—
1,902 $ 271,019 $ 57,749 $
—
—
—
—
40
—
—
—
16,207
5,065
(887)
2,517
—
—
—
1,942 $ 292,291 $ 59,379 $
—
—
—
41
— (38,379)
—
—
15,432
—
6,228
—
1,983 $ 313,951 $ 21,000 $
937
—
(7,272)
—
—
—
(28,462)
(7,272)
21,540
6,358
(3,039) $ 327,631
—
—
6,291
—
—
(887)
2,517
6,291
16,207
5,105
3,252 $ 356,864
(38,379)
—
(3,252)
(3,252)
15,432
—
6,269
—
— $ 336,934
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, 2021, 2020, and 2019
(U.S. Dollars, in thousands)
Cash flows from operating activities
Net income (loss)
Adjustments to reconcile net income (loss) to net cash from operating activities
Depreciation and amortization
Impairment of goodwill
Amortization of operating lease assets, debt costs, and other assets
Provision for expected credit losses
Deferred income taxes
Share‐based compensation expense
Interest and (gain) 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
Accounts receivable
Inventories
Prepaid expenses and other current assets
Accounts payable
Other current liabilities
Contract liability (Note 15)
Payment of contingent consideration
Other long‐term assets and liabilities
Net cash from operating activities
Cash flows from investing activities
Acquisition of a business
Capital expenditures for property, plant and equipment
Capital expenditures for intangible assets
Purchase of investment securities
Asset acquisitions and other investments
Net cash from investing activities
Cash flows from financing activities
Proceeds from revolving credit facility
Repayment of revolving credit facility
Proceeds from issuance of common shares
Payments related to withholdings for share‐based compensation
Payment of contingent consideration
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
$
$
2021
2020
2019
$
(38,379) $
2,517
$
(28,462)
29,599
11,756
3,496
444
24,482
15,432
(1,146)
(3,575)
1,064
(7,049)
619
(2,834)
4,253
1,013
(9,060)
(6,595)
(5,045)
18,475
—
(17,785)
(1,807)
(2,171)
(1,250)
(23,013)
—
—
8,824
(2,555)
(8,405)
(537)
(948)
(3,621)
(815)
(8,974)
96,821
87,847
87,847
—
87,847
$
$
$
30,546
—
3,730
199
10,787
16,207
116
(7,300)
(2,228)
13,283
(873)
4,526
2,532
5,975
13,851
—
(19,596)
74,272
(18,000)
(15,485)
(1,609)
(10,000)
(7,240)
(52,334)
100,000
(100,000)
7,598
(2,493)
—
(323)
(1,537)
3,245
1,235
26,418
70,403
96,821
96,291
530
96,821
$
$
$
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
The accompanying notes form an integral part of these consolidated financial statements
F‐8
ORTHOFIX MEDICAL INC.
Notes to the Consolidated Financial Statements
1.
Business, basis of presentation, COVID‐19 update, and CARES Act
Description of the Business
Orthofix Medical Inc. and its subsidiaries (the “Company”) is a global medical device company with a spine and orthopedics focus.
The Company’s mission is to deliver innovative, quality‐driven solutions while partnering with health care professionals to improve
patient mobility. Headquartered in Lewisville, Texas, the Company’s spine and orthopedic products are distributed in over 60
countries via the Company's sales representatives and distributors.
Basis of Presentation
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. 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
Business, basis of presentation, COVID‐19 update, and CARES Act
Significant accounting policies
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
Income taxes
Earnings per share
COVID‐19 and the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”)
Footnote
Reference
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
The global Coronavirus Disease 2019 ("COVID‐19") pandemic has significantly affected the Company’s hospitals and physician
customers, patients, communities, employees, and business operations. At various points in time, the pandemic has led to the
cancellation or deferral of elective surgeries and procedures within certain hospitals, ambulatory surgery centers, and other medical
facilities; restrictions on travel; the implementation of physical distancing measures; and the temporary or permanent closure of
certain businesses. The Company's consolidated financial statements reflect estimates and assumptions made by management as of
December 31, 2021. At this time, the future trajectory and duration of the COVID‐19 pandemic remains uncertain, both in the U.S.
and in other markets.
These matters are also described in Part I, Item 1A of this Form 10‐K under the heading Risk Factors.
In March 2020, the CARES Act entered into federal law, which was aimed at providing emergency assistance and health care for
individuals, families, and businesses affected by the COVID‐19 pandemic and to provide general support to the U.S. economy. The
CARES Act, among other things, included provisions relating to the deferment of employer side social security payments and
technical corrections to tax depreciation methods for qualified improvement property. The CARES Act had no impact to the
F‐9
Company’s income tax expense/benefit reported within the consolidated statements of operations for each of the years ended
December 31, 2021 and 2020. The CARES Act also provided financial relief to the Company through other various programs, each of
which are described in further detail below.
In April 2020, the Company received $13.9 million in funds from the Centers for Medicare & Medicaid Services (“CMS”) Accelerated
and Advance Payment Program. For discussion of the Company’s accounting for these funds, see Note 15.
In April 2020, the Company also automatically received $4.7 million in funds from the U.S. Department of Health and Human
Services as part of the Provider Relief Fund. The Company recognized this in‐substance grant within other income for the year ended
December 31, 2020.
In addition, as part of the CARES Act, the Company was permitted to defer all employer social security payroll tax payments for the
remainder of the 2020 calendar year subsequent to the CARES Act being signed into federal law, such that 50% of the taxes could be
deferred until December 31, 2021, with the remaining 50% deferred until December 31, 2022. As of December 31, 2020, the
Company had deferred $0.6 million associated with this program, all of which was classified within other current liabilities. This
deferred balance was then voluntarily repaid, in full, in the first quarter of 2021.
Consolidated Appropriations Act of 2021 (the “Consolidated Appropriations Act”)
On December 27, 2020, the Consolidated Appropriations Act entered into federal law. The Consolidated Appropriations Act did not
have a material impact to the Company’s income tax provision for the year ended December 31, 2021.
American Rescue Plan Act of 2021 (“the American Rescue Plan”)
On March 11, 2021, the American Rescue Plan entered into federal law. The American Rescue Plan, among other things, included
provisions related to the deduction of executive compensation beginning in 2027. The American Rescue Plan had no impact to the
Company’s condensed consolidated financial statement for the year ended December 31, 2021.
2.
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,
allowances for expected credit losses, inventories, valuation of intangible assets, 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 these estimates.
The following is a discussion of accounting policies and methods used in our consolidated financial statements that are not
presented within other footnotes.
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 U.S. 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 $4.0 million, a gain of $3.9 million, and a loss of $1.4 million for the years ended December 31,
2021, 2020, and 2019, respectively.
F‐10
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, 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 expected credit losses. The Company believes that a concentration of credit risk related to accounts receivable is limited because
customers are geographically dispersed and end users are diversified.
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.
In September 2019, approximately $0.5 million (based upon foreign exchange rates as of December 31, 2020) 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. In
December 2021, the dispute was settled and the cash was disbursed to the former distributor.
Investing activities that did not result in cash receipts or cash payments during the years ended December 31, 2021, 2020, and 2019
consisted of the following, which were not included within cash from investing activities in the Company’s consolidated statements
of cash flows:
(U.S. Dollars, in thousands)
Supplemental disclosure of cash flow information:
Noncash investing activities:
2021
2020
2019
Intangible assets acquired in asset acquisitions
Contingent consideration recognized at acquisition date
$
— $
—
$
1,575
375
1,600
—
Advertising costs
Advertising costs are expensed as incurred. Advertising costs are included within sales and marketing expense and totaled $0.5
million, $0.9 million, and $0.8 million for the years ended December 31, 2021, 2020, and 2019, 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 Company’s collaborative
arrangement with MTF Biologics (“MTF”) are expensed based on the terms of the related agreement. The Company recognized $0.8
million and $0.8 million in research and development expense for the years ended December 31, 2021 and 2020, respectively, under
the collaborative arrangement with MTF and did not recognize any such expenditures for the year ended December 31, 2019.
In October 2020, the Company and Neo Medical SA, a privately held Swiss‐based company developing a new generation of products
for spinal surgery (“Neo Medical”), entered into a co‐development agreement covering the parties’ joint development of single use
instruments for cervical spine procedures. In connection with this agreement, the Company is responsible for the payment of
variable costs associated with the development of the specified products. Research and development expenses incurred under this
collaborative arrangement for the year ended December 31, 2021 totaled $0.6 million and for the year ended December 31, 2020,
totaled less than $0.1 million.
In December 2021, the Company and nView medical, a Salt Lake City‐based company developing surgical imaging and guidance
systems enabled by artificial intelligence (“AI”), entered into an agreement to jointly develop and co‐market the innovative nView
systems with the Company’s cervical spine and pediatric limb deformity correction procedural solutions. Each party is responsible
for payment of its own development and marketing costs incurred in association with the collaborative arrangement. No such costs
were incurred for the year ended December 31, 2021.
F‐11
3.
Recently adopted accounting standards and recently issued accounting pronouncements
Adoption of Accounting Standards Update (“ASU”) 2021‐10—Government Assistance (Topic 832): Disclosures by Business Entities
about Government Assistance
In November 2021, the Financial Accounting Standards Board (“FASB”) issued ASU 2021‐10, which aims to increase the transparency
of government assistance by requiring entities to provide information about the nature of the transaction, terms and conditions
associated with the transaction, and financial statement line items affected by the transaction. The Company voluntarily elected to
early adopt this standard for the year ended December 31, 2021, on a prospective basis. Adoption of this standard did not have a
significant impact to the existing disclosures made in relation to government assistance received by the Company in 2020 as part of
the CARES Act.
Adoption of ASU 2019‐12, Simplifying the accounting for income taxes
In December 2019, the FASB issued ASU 2019‐12, which 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 U.S. 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. The Company adopted this ASU effective January 1, 2021, with certain provisions applied retrospectively and other
provisions applied prospectively. Adoption of this ASU did not have a material impact to the Company’s condensed consolidated
balance sheet, statements of operations, or cash flows
Adoption of ASU 2016‐13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
and Subsequent Amendments
In June 2016, the FASB issued ASU 2016‐13 (which was then further clarified in subsequent ASUs), which required that credit losses
for certain types of financial instruments, including accounts receivable, be estimated based on expected credit losses among other
changes. The Company adopted this ASU effective as of January 1, 2020, using a modified retrospective approach. Therefore, results
for reporting periods after January 1, 2020, are presented under Topic 326, while prior period amounts are not adjusted and
continue to be reported in accordance with the historical accounting guidance. See Note 15 for additional discussion of the
Company’s adoption of Topic 326 and its resulting accounting policies.
Adoption of ASU 2017‐04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
In January 2017, the FASB issued ASU 2017‐04, which eliminated Step 2 of the previous goodwill impairment test, which required a
hypothetical purchase price allocation to measure goodwill impairment. Under ASU 2017‐04, a goodwill impairment loss is now
measured as the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the recorded amount of
goodwill. The Company adopted this ASU effective January 1, 2020, on a prospective basis and followed this guidance to measure
the goodwill impairment of $11.8 million recorded in the year ended December 31, 2021.
Adoption of ASU 2018‐13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for
Fair Value Measurement
In August 2018, the FASB issued ASU 2018‐13, which eliminated certain disclosures, such as the amount and reasons for transfers
between Level 1 and Level 2 of the fair value hierarchy, and added new disclosure requirements for Level 3 measurements. The
Company adopted this ASU effective January 1, 2020, with certain provisions of the ASU applied retrospectively and other provisions
provided prospectively. Adoption of this ASU did not impact the Company’s condensed consolidated balance sheet, statements of
operations, or cash flows; however, adoption of the ASU did result in modified disclosures in Note 12.
Adoption of ASU 2018‐15, Intangibles—Goodwill and Other—Internal‐Use Software (Subtopic 350‐40): Customer’s Accounting for
Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
In August 2018, the FASB issued ASU 2018‐15, which aligned the requirements for capitalizing implementation costs incurred in a
hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or
obtain internal‐use software. The accounting for the service element of a hosting arrangement that is a service contract was not
affected by the amendments in this update. The Company adopted this ASU effective January 1, 2020, on a prospective basis.
Adoption of this ASU did not have a material impact to the Company’s condensed consolidated balance sheet, statements of
operations, or cash flows, but is expected to impact future cloud computing arrangements.
F‐12
Adoption of ASU 2020‐04, Reference Rate Reform (Topic 848)
In March 2020, the FASB issued ASU 2020‐04, which provided temporary optional guidance to ease the potential financial reporting
burden of the expected market transition away from LIBOR. The new guidance provided optional expedients and exceptions for
applying U.S. GAAP to contract modifications, hedge accounting, and other transactions affected by reference rate reform if certain
criteria are met through December 31, 2022. The Company adopted this ASU effective March 12, 2020, the effective date of the
ASU, on a prospective basis. Adoption of this ASU did not have a material impact to the Company’s condensed consolidated balance
sheet, statements of operations, or cash flows, but is expected to impact the future borrowing rate used for the Company’s secured
revolving credit facility.
Adoption of ASU 2016‐02, Leases (Topic 842)
In February 2016, the FASB issued ASU 2016‐02, which changed how lessees account for leases, requiring a liability to be recorded
on the balance sheet in most cases based on the present value of future lease obligations with a corresponding right‐of‐use asset.
The Company adopted this ASU effective January 1, 2019, using a modified retrospective approach. Upon adoption, the Company
elected a package of practical expedients permitted within the new standard. The elected practical expedients allowed 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. See Note 9 for additional discussion of the Company’s adoption of Topic 842 and its
lease accounting policies.
Adoption of ASU 2018‐02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects
from Accumulated Other Comprehensive Income
In February 2018, the FASB issued ASU 2018‐02, which allowed 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
ASU 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.
4.
Acquisitions
FITBONE Asset Purchase Agreement
In March 2020, the Company completed 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 for $18.0 million in cash consideration. The Company also entered into a
Contract Manufacturing and Supply Aggreement (“CMSA”) with Wittenstein.
Distributor Acquisition
In July 2020, the Company, acquired certain assets of a medical device distributor for consideration of up to $7.6 million.
Options Medical, LLC Asset Acquisition
In January 2019, the Company acquired certain assets of Options Medical, LLC (“Options Medical”), a medical device distributor
based in Florida for $6.4 million. Under the terms of the acquisition, the parties terminated 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.
F‐13
Purchase Price Allocations for Acquisitions Completed in 2020 and 2019
(U.S. Dollars, in thousands)
Assets acquired
Inventories
Other long‐term assets
Intangible assets
Customer relationships
Developed technology
IPR&D
Trade name
Assembled workforce
Total identifiable assets acquired
Liabilities assumed
Other current liabilities
Other long‐term liabilities
Total liabilities assumed
Goodwill
Total fair value of consideration transferred
5.
Inventories
Assigned
Useful
Life
Distributor
Acquisition
Assigned
Useful
Life
5 years
N/A
N/A
N/A
5 years
15 years
8 years
Indefinite
15 years
N/A
$
$
$
$
—
—
7,340
—
—
—
235
7,575
—
—
—
—
7,575
Assigned
Useful
Life
10 years
N/A
N/A
N/A
5 years
Options
Medical
$
—
175
5,832
—
—
—
568
$ 6,575
$
69
106
175
—
$ 6,400
FITBONE
$
528
—
800
4,500
300
600
—
$ 6,728
$
—
—
—
11,272
$ 18,000
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 cost, 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,
2021
2020
9,589
15,096
15,149
43,140
82,974
$
$
8,442
12,149
29,142
34,902
84,635
$
$
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 estimated net realizable value.
F‐14
6.
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.
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 $20.2 million, $19.3 million and $17.7 million for the years ended December 31, 2021,
2020, and 2019, 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,
2021
2020
$
$
3,925
50,275
100,515
53,200
8,307
2,597
23,397
242,216
(182,964)
59,252
$
$
4,096
50,159
93,252
52,565
8,024
1,628
23,337
233,061
(169,448)
63,613
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.
Long‐lived assets are evaluated for impairment annually or 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‐15
7.
Intangible assets
Intangible assets are recorded at cost, or when acquired as a part of a business combination, at estimated fair value, such as for in‐
process research and development (“IPR&D”) assets. These assets are amortized on a straight‐line basis over the useful lives of the
assets, which the Company believes is materially consistent with the pattern of economic benefit provided by the assets.
(U.S. Dollars, in thousands)
Cost
Patents
Developed technology
IPR&D
Customer relationships
License and other
Trademarks—finite lived
Accumulated amortization
Patents
Developed technology
Customer relationships
License and other
Trademarks—finite lived
Intangible assets, net
Weighted Average
Amortization Period
December 31,
2021
2020
10 years
10 years
Indefinite
7 years
8 years
10 years
9 years
$
$
$
$
44,561
43,979
300
15,621
18,924
1,839
125,224
(41,408) $
(13,409)
(4,520)
(12,528)
(693)
(72,558)
52,666
$
50,326
44,334
300
15,685
16,941
1,812
129,398
(46,272)
(8,925)
(2,095)
(11,006)
(583)
(68,881)
60,517
Acquired IPR&D represents the fair value assigned to acquired research and development assets that have not reached technological
feasibility. In a business combination, the fair value assigned to acquired IPR&D is determined by estimating the remaining 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.
IPR&D assets 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.
F‐16
Amortization expense for intangible assets was $9.4 million, $11.2 million and $7.0 million for the years ended December 31, 2021,
December 31, 2020, and 2019, respectively. Future amortization expense for intangible assets is estimated as follows:
(U.S. Dollars, in thousands)
2022
2023
2024
2025
2026
Thereafter
Total finite‐lived intangible assets, net
Indefinite‐lived intangible assets, net
Intangible assets, net
8.
Goodwill
Amortization
9,376
8,692
8,254
7,252
6,215
12,577
52,366
300
52,666
$
$
$
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.
In the fourth quarter of 2021, the Company performed a quantitative assessment of its goodwill. The Company estimated the fair
value of each reporting unit using a weighted average of fair value derived from both an income approach and a market approach
(all Level 3 fair value measurements). Upon estimating the fair value of each of its reporting units, the Company determined its
Global Orthopedics reporting unit’s fair value was less than its carrying value of net assets. This resulted in recording a full
impairment of the Global Orthopedics goodwill of $11.8 million, which is reflected within Acquisition‐related amortization and
remeasurement. This amount also represents the total of the Company’s accumulated goodwill impairment losses as of December
31, 2021. The assessment concluded there were no indicators of impairment for the Global Spine goodwill.
The following table presents the net carrying value of goodwill, and a rollforward of such balances from December 31, 2020, by
reportable segment:
(U.S. Dollars, in thousands)
Global Spine
Global Orthopedics
Goodwill
9.
Leases
December 31,
2020
Impairment
$
$
71,317
12,701
84,018
$
$
— $
(11,756)
(11,756) $
Currency
Translation
Adjustment
December 31,
2021
— $
(945)
(945) $
71,317
—
71,317
As discussed in Note 3, the Company adopted ASU No. 2016‐02—Leases (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. 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 standard
did not have a material impact to the Company’s consolidated statements of operations and comprehensive income (loss) or cash
flows.
The Company determines if a contractual arrangement qualifies as a lease at inception. The Company’s leases primarily relate to
facilities, vehicles, and equipment, and certain contract manufacturing agreements. Lease assets represent the Company’s right to
F‐17
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 the 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 does not recognize lease liabilities or lease assets on the balance sheet for short‐term (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.
For all classifications of leases, the Company combines lease and nonlease components 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.
A summary of the Company’s lease portfolio as of December 31, 2021, and 2020, is presented in the table below:
(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
Classification
December 31,
2021
December 31,
2020
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
$
$
$
$
3,155
18,600
21,755
1,834
2,590
1,443
19,890
25,757
$
$
$
$
4,840
20,552
25,392
2,092
510
2,946
22,338
27,886
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
3.3 years
17.0 years
3.6 years
18.1 years
2.6%
4.2%
2.4%
4.2%
For the Year Ended
December 31, 2021
For the Year Ended
December 31, 2020
For the Year Ended
December 31, 2019
2,049
933
2,234
213
815
6,244
$
$
1,766
940
2,235
230
673
5,844
$
$
972
919
2,161
255
749
5,056
$
$
F‐18
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
For the Year Ended
December 31, 2021
For the Year Ended
December 31, 2020
For the Year Ended
December 31, 2019
4,627 $
907
537
589
149
4,299 $
689
323
959
1,949
4,075
919
365
878
21,179
A summary of the Company’s remaining lease liabilities as of December 31, 2021, is included below:
(U.S. Dollars, in thousands)
2022
2023
2024
2025
2026
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
10. 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
Accelerated and advance payment program
Other payables
Other current liabilities
11.
Long‐term debt
Operating
Leases
Finance
Leases
1,883
614
211
192
189
330
3,419
(142)
3,277
1,834
1,443
3,277
$
$
$
$
December 31,
2021
2020
7,151
23,552
10,787
3,794
17,200
1,834
4,655
4,791
3,017
76,781
$
$
3,480
1,508
1,538
1,543
1,562
22,613
32,244
(9,764)
22,480
2,590
19,890
22,480
6,090
22,362
9,331
5,422
14,900
2,092
5,509
9,834
4,731
80,271
$
$
$
$
$
$
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.
F‐19
In April 2020, as a precautionary measure to increase the Company’s cash position and to preserve financial flexibility during the
initial uncertainty resulting from the COVID‐19 pandemic, the Company completed a borrowing of $100.0 million under the Facility.
The Company made payments totaling $100.0 million in the third quarter of 2020 to fully pay down the outstanding balance. The
Company had no borrowings outstanding under the Facility at December 31, 2021, and 2020, respectively.
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
(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 Company is in compliance with all required financial covenants as of
December 31, 2021.
In conjunction with obtaining the Facility, the Company paid $1.5 million in debt issuance costs and has capitalized a total of $1.8
million associated with the Facility (inclusive of certain capitalized costs prior to the most recent amendment). 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, 2021, and December 31, 2020, debt issuance costs, net of accumulated amortization, were $1.0
million and $1.4 million, respectively. Debt issuance costs amortized or expensed totaled $0.4 million, $0.4 million, and $0.4 million
for the years ended December 31, 2021, 2020, and 2019, respectively.
The Company has an unused available Italian line of credit of €5.5 million ($6.3 million and $6.7 million) at December 31, 2021, and
2020, respectively. 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 $1.5 million, $1.9 million, and $0.8 million for the years ended December 31, 2021,
2020, and 2019, respectively.
F‐20
12.
Fair value measurements and investments
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.
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, accounts receivable, accounts payable, long‐term
secured debt, available for sale debt securities, equity securities, contingent consideration, and deferred compensation plan
liabilities. The carrying value of cash equivalents, restricted cash, accounts receivable, and accounts payable approximate fair value
due to the short‐term maturities of these instruments. The Company’s secured revolving credit facility carries a floating rate of
interest, and therefore, the carrying value of long‐term debt is considered to approximate the fair value.
The Company’s available for sale debt securities, equity securities, 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
Neo Medical convertible loan agreements
Neo Medical preferred equity securities
Bone Biologics equity securities
Other investments
Total
Liabilities
Spinal Kinetics contingent consideration
Other contingent consideration
Deferred compensation plan
Total
(U.S. Dollars, in thousands)
Assets
Neo Medical convertible loan agreement
Neo Medical preferred equity securities
Bone Biologics equity securities
Total
Liabilities
Spinal Kinetics contingent consideration
Other contingent consideration
Deferred compensation plan
Total
Balance
December 31,
2021
$
$
$
$
7,148
5,413
309
1,505
14,375
$
$
(17,200) $
—
(1,314)
(18,514) $
Balance
December 31,
2020
$
$
$
$
7,160
5,000
—
12,160
$
$
(35,400) $
(375)
(1,441)
(37,216) $
Level 1
Level 2
Level 3
— $
—
309
—
309
$
— $
—
—
— $
— $
5,413
—
—
5,413
$
— $
—
(1,314)
(1,314) $
7,148
—
—
1,505
8,653
(17,200)
—
—
(17,200)
Level 1
Level 2
Level 3
— $
—
—
— $
— $
—
—
— $
— $
5,000
—
5,000
$
— $
—
(1,441)
(1,441) $
7,160
—
—
7,160
(35,400)
(375)
—
(35,775)
The fair value of the Company’s deferred compensation plan liabilities are determined based on inputs that are readily available in
public markets or that can be derived from information available in publicly quoted markets; therefore, the Company has categorized
this liability as a Level 2 financial instrument.
F‐21
Neo Medical Convertible Loan Agreements and Equity Investment
On October 1, 2020, the Company purchased shares of Neo Medical’s preferred stock for consideration of $5.0 million and entered
into a Convertible Loan Agreement pursuant to which Orthofix loaned Neo Medical CHF 4.6 million (the “Convertible Loan”). The
loan bears interest at 8.0%, with interest due semi‐annually. At each interest payment date, the borrower may elect to capitalize any
interest due to the then outstanding principal balance of the loan. The Convertible Loan matures on October 1, 2024. If a change in
control of Neo Medical occurs prior to the maturity date, the Convertible Loan shall become immediately due upon such event. The
Convertible Loan may be convertible by either party into shares of Neo Medical’s preferred stock. The Company may convert the
loan at its own election at any time prior to the full repayment or settlement of the Convertible Loan. Neo Medical may elect to
convert the loan only in the event of a qualified financing event, as defined within the agreement. The price per share at which the
loan converts is dependent upon i) the party electing conversion and ii) Neo Medical’s price per share in its most recent fundraising
activities at the time of conversion, as specified within the agreement.
On October 10, 2021, the Company entered into an additional Convertible Loan Agreement (the “Additional Convertible Loan”),
separate and distinct from the investment made in 2020, pursuant to which the Company loaned Neo Medical an additional CHF 0.6
million ($0.7 million as of the issuance date). The Company made the election to convert the Additional Convertible Loan into shares
of Neo Medical’s preferred stock in January 2022.
The equity securities are recorded in other long‐term assets and are considered an investment that does not have a readily
determinable fair value. As such, the Company measures this investment at cost, less any impairment, plus or minus changes
resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer. In November
2021, Neo Medical completed a qualified capital increase. As such, the Company adjusted the carrying amount of its equity
investment to reflect the change in observable price and recorded a $0.4 million unrealized gain recognized in other income.
The table below presents a reconciliation of the carrying value of the Company’s investment in Neo Medical preferred equity
securities for the years ended December 31, 2021, and 2020:
(U.S. Dollars, in thousands)
Fair value of Neo Medical preferred equity securities at January 1
Additions
Foreign currency remeasurement recognized in other income, net
Unrealized gain recognized in other income (expense), net
Fair value of Neo Medical preferred equity securities at December 31
$
2021
2020
$
5,000
—
77
336
5,413
—
5,000
—
—
5,000
Both of the Convertible Loans are recorded in other long‐term assets as available for sale debt securities as of December 31, 2021.
These Convertible Loans are recorded at fair value, with applicable interest recorded in interest income. The fair value of the
Convertible Loans is based upon significant unobservable inputs, including the use of option‐pricing models, Monte Carlo
simulations for certain periods, and a probability‐weighted discounted cash flows model, requiring the Company to develop its own
assumptions. Therefore, the Company has categorized these assets as Level 3 financial assets.
Some of the more significant unobservable inputs used in the fair value measurement of the Loans include applicable discount rates,
implied volatility, the likelihood and projected timing of repayment or conversion, and projected cash flows in support of the
estimated enterprise value of Neo Medical. Holding other inputs constant, changes in these assumptions could result in a significant
change in the fair value of the Convertible Loans. If the amortized cost of the Convertible Loans exceeds their estimated fair value,
the securities are deemed to be impaired, and must be evaluated for the recognition of credit losses. Impairment resulting from
credit losses is recognized within the statement of income, while impairment resulting from other factors is recognized within other
comprehensive income (loss). As of December 31, 2021, the Company has not recognized any credit losses related to the Convertible
Loans.
The following table provides a reconciliation of the beginning and ending balances of the Convertible Loans, measured at fair value
using significant unobservable inputs (Level 3):
F‐22
(U.S. Dollars, in thousands)
Fair value of Neo Medical Convertible Loans at January 1
Additions
Interest recognized in interest income, net
Foreign currency remeasurement recognized in other income (expense), net
Unrealized gain (loss) recognized in other comprehensive income (loss)
Fair value of Neo Medical Convertible Loans at December 31
Amortized cost basis of Neo Medical Convertible Loans at December 31
$
2021
2020
$
7,160
671
421
(162)
(942)
7,148
6,209
—
5,000
103
176
1,881
7,160
5,279
The following table provides quantitative information related to certain key assumptions utilized within the valuation of the
Convertible Loans as of December 31, 2021:
(U.S. Dollars, in thousands)
Neo Medical Convertible Loans
Fair Value as of December
31, 2021
$
7,148
Unobservable inputs
Cost of equity discount rate
Implied volatility
Estimate
16.1%
67.8%
Bone Biologics Equity Securities
The Company holds an investment in common stock of Bone Biologics Inc. (“Bone Biologics”), a developer of orthobiologic products.
Prior to 2021, the equity securities were considered an investment that did not have a readily determinable fair value as Bone
Biologics was privately held. As such, the Company measured 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
2020, the Company recognized an impairment of $0.2 million as a result of concerns over Bone Biologics’ ability to continue as a
going concern.
In the fourth quarter of 2021, Bone Biologics completed a public offering of units, with each unit consisting of one share of common
stock and one warrant to purchase common shares. As a result of the public offering, Bone Biologics’ common stock is now actively
traded on the NASDAQ (ticker BBLG). The Company concluded the investment represented a Level 1 fair value measurement
subsequent to the public offering as the common shares now have quoted prices in active markets for identical assets. As such, the
Company now records the investment at fair value, with changes in fair value recorded within other income (expense), net.
The following table presents the changes in fair value recognized for the equity securities for each of the years ended December 31,
2021, 2020, and 2019:
(U.S. Dollars, in thousands)
Bone Biologics equity securities at January 1
Fair value adjustments and impairments recognized in other income
(expense), net
Bone Biologics equity securities at December 31
$
$
2021
2020
2019
— $
219
$
309
309
$
(219)
— $
219
—
219
Other investments
Other investments represent other assets and investments recorded at fair value that are not deemed to be material for disclosure
on an individual basis. The fair value of these assets are based upon significant unobservable inputs, such as probability‐weighted
discounted cash flows models, requiring the Company to develop its own assumptions. Therefore, the Company has categorized
these assets as Level 3 financial assets. As of December 31, 2021, this balance was classified within other long‐term assets.
Contingent Consideration
The Company recognized a contingent consideration obligation in connection with the acquisition of Spinal Kinetics in 2018. The
Spinal Kinetics contingent consideration consists of potential future milestone payments of up to $60.0 million in cash. The
milestone payments included (i) $15.0 million upon U.S. Food and Drug Administration (“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. Milestones must be achieved within five years of April 30, 2018, to trigger applicable payments. The
F‐23
FDA Milestone was achieved and paid in 2019. A second milestone payment, totaling $15.0 million, was achieved and paid in 2021
upon meeting certain net sales targets.
The estimated fair value of the remaining Spinal Kinetics contingent consideration was $17.2 million as of December 31, 2021. The
estimated fair value reflects assumptions made by management as of December 31, 2021, such as the expected timing and volume
of elective procedures and the impact of these procedures on future revenues. However, the actual amount ultimately paid could be
higher or lower than the fair value of the remaining contingent consideration (ultimate payment will either be $30.0 million or the
liability will be reversed if the milestone is not met within the required timeline). As of December 31, 2021, the Company has
classified the $17.2 million liability within other current liabilities, as the Company currently expects to achieve the remaining
milestone in the next twelve months. Any changes in fair value are recorded as an operating expense 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)
Spinal Kinetics contingent consideration at January 1
Decrease in fair value recognized in acquisition‐related amortization and
remeasurement
Payment made
Spinal Kinetics contingent consideration at December 31
2021
2020
35,400
$
42,700
(3,200)
(15,000)
17,200
$
(7,300)
—
35,400
$
$
The Company estimated the fair value of the remaining potential future revenue‐based milestone payment using a Monte Carlo
simulation and a discounted cash flow model. This fair value measurement is based on significant inputs that are unobservable in
the market and thus represents a Level 3 measurement. The key assumptions in applying the valuation model include the
Company’s forecasted future revenues for Motion Preservation products, the expected timing of payment, applicable discount rates
applied, and assumptions for potential volatility of the Company’s forecasted revenue. Significant changes in these assumptions
could result in a significantly higher or lower fair value.
The following table provides a range of key assumptions used within the valuation as of December 31, 2021:
(U.S. Dollars, in thousands)
Spinal Kinetics contingent consideration
Fair Value as of
December 31, 2021
17,200
$
Valuation Technique
Discounted cash flow
Unobservable inputs
Revenue discount rate
Payment discount rate
Projected year of
achievement
Range
7.13% ‐ 7.55%
3.38% ‐ 3.81%
2022
eNeura Debt Security
Until October of 2019, the Company held a debt security of eNeura, Inc. (“eNeura”), a privately held medical technology company that
was developing devices for the treatment of migraines. In October 2019, the Company and eNeura settled the debt security for a $4.0
million cash payment. As such, the Company determined the investment was impaired and adjusted the carrying value of the debt
security to 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.
13.
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 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 on a quarterly basis. 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
F‐24
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.
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.
A key provision of the law is a ‘payback’ measure, requiring medical device companies 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 periodically
reassesses this liability based upon current facts and circumstances. As a result of certain temporary relief provided by the Italian
National Healthcare System in response to the COVID‐19 pandemic through a law enacted on December 30, 2021, the Company
recorded a benefit of $1.2 million for the year ended December 31, 2021, and expense of $1.5 million and $1.3 million for the years
ended December 31, 2020, and 2019, respectively. As of December 31, 2021, the Company has accrued $5.2 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.
14.
Shareholders’ equity
Dividends
The Company has not historically paid dividends to holders of its common stock. 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 unrealized gains
(losses) on available for sale debt securities. The Company’s policy is to release income tax effects related to items recognized within
accumulated other comprehensive income (loss) using a portfolio approach. The components of and changes in accumulated other
comprehensive income (loss) are as follows:
(U.S. Dollars, in thousands)
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
Other comprehensive income
Income taxes
Balance at December 31, 2020
Other comprehensive loss
Income taxes
Balance at December 31, 2021
Currency
Translation
Adjustments
eNeura
Debt Security
Neo Medical
Convertible
Loans
Accumulated Other
Comprehensive
Income (Loss)
(2,386) $
—
(653)
—
—
—
—
(3,039) $
4,872
—
1,833
(2,544)
—
(711) $
$
$
$
$
$
F‐25
$
5,682
937
(2,593)
642
(1,034)
(5,193)
1,559
— $
—
—
— $
—
—
— $
— $
—
—
—
—
—
—
— $
1,881
(462)
1,419
(942)
234
711
$
$
3,296
937
(3,246)
642
(1,034)
(5,193)
1,559
(3,039)
6,753
(462)
3,252
(3,486)
234
—
15.
Revenue recognition and accounts receivable
Revenue Recognition
The Company accounts for a contract when there is (i) approval and commitment from both parties, (ii) the rights of the parties are
identified, (iii) payment terms are identified, (iv) the contract has commercial substance, (v) 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 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 consideration for 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 December 31, 2032. 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
allografts, packages, and delivers the tissue to the customer. The Company has exclusive global marketing rights for the Trinity
Evolution and Trinity ELITE tissues, exclusive rights to market fiberFUSE and AlloQuent tissues in the U.S., non‐exclusive marketing
rights for certain 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 and receipt of a confirming purchase order.
Spinal Implants and Global Orthopedics
Spinal Implants and Global Orthopedics products are distributed world‐wide, with U.S. sales largely comprised of commercial sales
and international sales derived from both commercial sales and stocking distributor arrangements.
Commercial revenue is largely related to the sale of the Company’s Spinal Implants and Global Orthopedics 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 Orthopedics 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 stocking distributor
F‐26
arrangements, it is the Company’s policy to 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 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.
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, 2021, 2020, and 2019.
(U.S. Dollars, in thousands)
Product sales
Marketing service fees
Net sales
For the year ended December 31,
2020
2021
2019
$
$
409,554
54,925
464,479
$
$
353,087
53,475
406,562
$
$
397,064
62,891
459,955
Product sales primarily consists of the sale of Bone Growth Therapies, Spinal Implants, and Global Orthopedics 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 $54.9 million, or approximately 97% of
total Biologics revenues, for the year ended December 31, 2021. As MTF is the single supplier for the allografts in the Company’s
Biologics portfolio, derived from deceased donors for their bone grafts and living donors for their amnion grafts, any event or
circumstance that would impact MTF’s continued access to donors 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 $3.5 million, $2.4 million, and $2.8 million for the years ended
December 31, 2021, 2020, and 2019, respectively.
Accounts receivable and related 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.
As discussed in Note 3, the Company adopted ASU No. 2016‐13 ‐ Financial Instruments—Credit Losses (Topic 326): Measurement of
Credit Losses on Financial Instruments and subsequent amendments, using a modified retrospective approach. Adoption of the new
standard resulted in an increase to the Company’s allowance for expected credit losses of $1.1 million, an increase in deferred
income tax assets of $0.2 million, and a decrease in retained earnings of $0.9 million as of January 1, 2020. Subsequent to the
adoption of ASU 2016‐13, the Company’s allowance for expected credit losses represents the portion of the receivable’s amortized
cost basis that an entity does not expect to collect over the receivable’s contractual life, considering past events, current conditions,
and reasonable and supportable forecasts of future economic conditions.
The process for estimating the ultimate collection of accounts receivable involves significant assumptions and judgments. The
determination of the contractual life of accounts receivable, the aging of outstanding receivables, as well as the historical
collections, write‐offs, and payor reimbursement experience over the estimated contractual lives of such receivables, are integral
parts of the estimation process related to reserves for expected credit losses and the establishment of contractual allowances.
Accounts receivable are analyzed on a quarterly basis to assess the adequacy of both reserves for expected credit losses and
contractual allowances. Revisions in allowances for expected credit loss 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. These
estimates are periodically tested against actual collection experience. In addition, the Company analyzes its receivables by
geography and by customer type, where appropriate, in developing estimates for expected credit losses.
The following table provides a detail of changes in the Company’s allowance for expected credit losses for the years ended
December 31, 2021, and 2020:
F‐27
(U.S. Dollars, in thousands)
Allowance for expected credit losses beginning balance
Impact of adoption of ASU 2016‐13
Current period provision for expected credit losses
Writeoffs charged against the allowance and other
Effect of changes in foreign exchange rates
Allowance for expected credit losses ending balance
For the year ended December 31,
2021
2020
4,848
—
444
(126)
(222)
4,944
$
$
3,987
1,120
199
(714)
256
4,848
$
$
The Company will generally sell receivables from certain Italian hospitals each year to accelerate cash collections. During 2021, 2020,
and 2019, the Company sold €8.4 million, €8.3 million, and €9.8 million ($9.9 million, $9.6 million, and $10.9 million) of receivables,
respectively. The related fees for 2021, 2020, and 2019, were $0.2 million, $0.3 million, and $0.3 million, respectively, which were
recorded as interest expense. 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 expected credit losses
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 expected credit
losses as a credit to bad debt expense of $1.0 million.
Contract Liabilities
The Company’s contract liabilities largely relate to a prepayment of $13.9 million received in 2020 from the CMS as part of the
Accelerated and Advance Payment Program of the CARES Act.
On October 1, 2020, the President of the United States signed the “Continuing Appropriations Act, 2021 and Other Extensions Act,”
which relaxed a number of the Medicare Accelerated and Advance Payment Program’s recoupment terms for providers and
suppliers that received funds from the program. Starting in April 2021, Medicare began to recoup 25% of Medicare payments
otherwise owed to the provider or supplier for submitted claims. Beginning March 2022, recoupment increases to 50% for
another six months. Thus, during these time periods, rather than receiving the full amount of payment for newly submitted claims,
the Company’s outstanding accelerated / advance payment balance will be reduced by the recoupment amount until the full
balance has been repaid. As of December 31, 2021, the balance of the contract liability associated with the Accelerated and Advance
Payment Program totaled $4.8 million. The Company has classified the entire balance of this contract liability within other current
liabilities based upon the Company’s estimates of when such funds will be recouped.
The following table provides a detail of changes in the Company’s contract liability associated with the Accelerated and Advanced
Payment Program for the years ended December 31, 2021, and 2020:
(U.S. Dollars, in thousands)
Contract liability beginning balance
Additions
Recoupment recognized in net sales
Contract liability ending balance
Other Contract Assets
For the Year Ended December 31,
2021
2020
$
$
13,851
—
(9,060)
4,791
$
$
—
13,851
—
13,851
The Company’s contract assets, excluding 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
distribution of the Company’s products. Other Contract Assets are included in other long‐term assets and totaled $1.4 million and
$2.0 million as of December 31, 2021, and 2020, respectively.
F‐28
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 2021 or 2020. Further, the Company applies the practical expedient to expense sales commissions when
incurred, as the applicable amortization period would be for one year or less.
16.
Business segment information
The Company has two reporting segments: Global Spine and Global Orthopedics. 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.
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 global network of distributors
and sales representatives to sell spine products to hospitals and healthcare providers.
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
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 and also allows the Company to
exclusively distribute the Alloquent and fiberFUSE allografts.
Global Orthopedics
The Global Orthopedics 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
Orthopedics distributes its products through a global network of distributors and sales representatives to sell orthopedic products to
hospitals, and healthcare providers.
Corporate
Corporate activities are comprised of the operating expenses and activities of the Company not necessarily identifiable within the
two reporting segments.
The table below presents net sales by major product category by reporting segment:
F‐29
(U.S. Dollars, in thousands)
Bone Growth Therapies
Spinal Implants
Biologics
Global Spine
Global Orthopedics
Net sales
2021
Net Sales
$ 187,448
115,094
56,421
358,963
105,516
$ 464,479
Year Ended December 31,
2020
Percent of
Total Net
Sales
Net Sales
Percent of
Total Net
Sales
2019
Percent of
Total Net
Sales
Net Sales
40.4% $ 171,396
94,857
24.8%
55,482
12.1%
321,735
77.3%
84,827
22.7%
100.0% $ 406,562
42.2% $ 197,181
94,544
23.3%
65,496
13.6%
357,221
79.1%
102,734
20.9%
100.0% $ 459,955
42.9%
20.6%
14.2%
77.7%
22.3%
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 Orthopedics
Corporate
Total EBITDA
Depreciation and amortization
Goodwill impairment
Interest expense, net
Loss before income taxes
2021
Year Ended December 31,
2020
2019
$
$
58,014
3,374
(31,691)
29,697
(29,599)
(11,756)
(1,837)
$
(13,495) $
63,036
(4,993)
(25,382)
32,661
(30,546)
—
(2,483)
(368)
The following table presents depreciation and amortization by reporting segment:
(U.S. Dollars, in thousands)
Global Spine
Global Orthopedics
Corporate
Total
Geographical information
The following data includes net sales by geographic destination:
(U.S. Dollars, in thousands)
U.S.
Italy
Germany
United Kingdom
France
Brazil
Others
Net sales
2021
Year Ended December 31,
2020
17,548
8,233
3,818
29,599
$
$
18,362
7,896
4,288
30,546
2021
Year Ended December 31,
2020
361,945
20,187
13,716
10,552
10,475
5,108
42,496
464,479
$
$
327,280
18,733
11,940
7,147
8,354
2,347
30,761
406,562
$
$
$
$
F‐30
$
$
$
$
$
$
39,528
7,496
(49,252)
(2,228)
(24,699)
—
(122)
(27,049)
2019
14,329
5,575
4,795
24,699
2019
361,939
19,560
12,688
10,090
8,747
7,685
39,246
459,955
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 Orthopedics
U.S.
International
Total Global Orthopedics
Consolidated
U.S.
International
Net sales
2021
Year Ended December 31,
2020
2019
$
$
$
$
337,455
21,508
358,963
$
304,595
17,140
321,735
24,490
81,026
105,516
22,685
62,142
84,827
361,945
102,534
464,479
$
327,280
79,282
406,562
$
335,410
21,811
357,221
26,529
76,205
102,734
361,939
98,016
459,955
47,646
10,503
2,516
1,540
163
1,245
63,613
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
2021
2020
$
$
45,090
9,412
2,544
1,193
91
922
59,252
$
$
17. Acquisition‐related amortization and remeasurement
Acquisition‐related amortization and remeasurement consists of (i) amortization related to intangible assets acquired through
business combinations or asset acquisitions, (ii) the remeasurement of any related contingent consideration arrangement, (iii)
recognized costs associated with acquired in‐process research and development (“IPR&D”) assets, which are recognized immediately
upon acquisition, and (iv) impairments of goodwill related to previously recognized business combinations. Components of
acquisition‐related amortization and remeasurement for the years ended December 31, 2021, 2020, and 2019, respectively, are as
follows:
(U.S. Dollars, in thousands)
Changes in fair value of contingent consideration
Amortization of acquired intangibles
Acquired IPR&D
Impairment of Global Orthopedics goodwill
Total
Related Party Asset Acquisition
2021
Year Ended December 31,
2020
2019
$
$
(3,575)
7,907
1,500
11,756
17,588
$
$
(7,300) $
6,801
—
—
(499) $
29,140
5,072
—
—
34,212
On February 2, 2021, the Company entered into a technology assignment and royalty agreement with a medical device technology
company partially owned and controlled by the wife of President and Chief Executive Officer, Jon Serbousek, whereby the Company
acquired the intellectual property rights to certain assets for consideration of up to $10.0 million.
F‐31
Consideration was comprised of $1.0 million due at signing, which was recognized immediately as acquired IPR&D expense within
acquisition‐related amortization and remeasurement, and $9.0 million in contingent consideration. The contingent consideration is
dependent upon multiple milestones, such as receipt of 510(k) clearance and the attainment of certain net sales targets. The
Company accounted for this transaction as an asset acquisition. As the transaction is classified as an asset acquisition, the value of
the consideration associated with the contingent milestones will be recognized at the time that applicable contingencies are
resolved and consideration is paid or becomes payable. In addition, the Company is obligated to pay a royalty of 2% to 4% on net
sales, commencing upon commercialization of the assets.
The transaction was approved by the Company’s Audit and Finance Committee, with the Audit and Finance Committee directly
supervising the negotiations of the transaction. Mr. Serbousek was excluded from such discussions and did not participate in the
negotiation or evaluation of the transaction. Mr. Serbousek also continues to be excluded from the oversight of the Company’s
development and commercialization activities in relation to the acquired technology and all other matters relating to the
relationship between the Company and the counterparty
IGEA S.p.A Asset Acquisition
On April 7, 2021, the Company entered into an Exclusive License and Distribution Agreement (the “License Agreement”) with IGEA
S.p.A (“IGEA”), an Italian manufacturer and distributor of bone and cartilage stimulation systems. As consideration for the License
Agreement, the Company agreed to pay up to $4.0 million, with certain payments contingent upon reaching an FDA milestone. Of
this amount, $0.5 million was paid in 2021, which was recognized as acquired IPR&D costs within acquisition‐related amortization
and remeasurement. The License Agreement also includes certain minimum purchase requirements.
18.
Share‐based compensation
At December 31, 2021, and 2020, 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 23, 2018, which
was subsequently approved 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,
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. Awards granted under the 2012 LTIP expire no later than ten years after the date of grant. At December 31, 2021, the Company
reserves a total of 7,050,000 shares of common stock for issuance pursuant to the 2012 LTIP, subject to certain adjustments set forth in
the 2012 LTIP. At December 31, 2021, there were 1,150,898 options outstanding under the 2012 LTIP, of which 748,539 were
exercisable. In addition, there were 13,978 shares of unvested restricted stock awards outstanding and 851,847 restricted stock units
outstanding, some of which contain market‐based vesting conditions, under the 2012 LTIP as of December 31, 2021.
2004 Long Term Incentive Plan
The 2004 Long Term Incentive Plan (the “2004 LTIP”) reserved 3,100,000 shares for issuance, subject to certain adjustments set forth
in the 2004 LTIP. At December 31, 2021, there were 12,500 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, 2021, there were no
remaining options outstanding under the Spinal Kinetics Inducement Plan and 1,284 shares of unvested restricted stock outstanding.
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. As of December 31, 2021,
there were 50,711 options outstanding under this inducement, 25,355 of which were exercisable, and 7,372 unvested restricted
stock units outstanding.
F‐32
In September 2020, the Company appointed a new President of Global Orthopedics. As an inducement to accept employment with
the Company, the individual was awarded a grant of stock options to acquire up to 32,945 shares of common stock and an award of
10,624 restricted stock units. As of December 31, 2021, there were 32,945 options outstanding under this inducement, of which
8,236 were exercisable, and 7,968 unvested restricted stock units 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 expense 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, 2021, the aggregate number of shares reserved for issuance under
the Stock Purchase Plan is 2,850,000. As of December 31, 2021, a total of 2,172,134 shares had been issued pursuant to the Stock
Purchase Plan.
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 expense by line item in the consolidated
statements of income as well as by award type, for the years ended December 31, 2021, 2020, and 2019:
(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
2021
Year Ended December 31,
2020
2019
$
$
$
$
779
3,385
10,289
979
15,432
$
$
705
3,620
10,624
1,258
16,207
2021
Year Ended December 31,
2020
1,893
7,437
—
4,414
1,688
15,432
$
$
2,571
8,485
—
3,509
1,642
16,207
$
$
$
$
715
2,512
16,872
1,441
21,540
4,054
11,084
—
4,733
1,669
21,540
2019
The income tax benefit related to this expense was $3.1 million, $3.2 million, and $3.5 million for the years ended December 31,
2021, 2020, and 2019, respectively.
F‐33
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. 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,
2021
2020
2019
6.0
34.4% – 34.8%
0.83% – 1.25%
—
12.33
$
5.5
30.2% – 35.1%
0.28% – 1.65%
—
8.74
$
5.0
29.7% – 31.0%
1.38% – 2.31%
—
14.64
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.
Summaries of the status of the Company’s stock option plans as of December 31, 2021, and 2020, and changes during the year
ended December 31, 2021, are presented below:
Outstanding at December 31, 2020
Granted
Exercised
Forfeited or expired
Outstanding at December 31, 2021
Vested and expected to vest at December 31, 2021
Exercisable at December 31, 2021
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term
39.56
35.59
36.68
45.49
39.20
39.20
41.10
5.04
5.04
3.51
Options
1,491,019
72,995
(89,151)
(77,809)
1,397,054
1,397,054
944,630
$
$
$
$
$
$
$
As of December 31, 2021, the unamortized compensation expense relating to options granted and expected to be recognized was
$2.0 million. This amount is expected to be recognized through December 2025 over a weighted average period of approximately
1.4 years. The total intrinsic value of options exercised was $0.6 million, $0.9 million and $1.4 million for the years ended
December 31, 2021, 2020, and 2019, respectively. For the year ended December 31, 2021, we received $3.3 million in cash from
stock option exercises, with the tax benefit realized for the tax deductions from these exercises of $0.6 million. The aggregate
intrinsic value of options outstanding and options exercisable as of December 31, 2021, 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 $31.09, the closing price of the Company’s stock on December 31, 2021. The aggregate intrinsic value of options
outstanding was $1.7 million as of December 31, 2021, whereas the aggregate intrinsic value of options exercisable was $0.5 million
as of that date.
Time‐based Restricted Stock Awards and Stock Units
During the year ended December 31, 2021, the Company granted to employees and non‐employee directors 295,240 shares of time‐
based restricted stock stock units, which vest at various dates through December 2025. 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,
2021, there were 59,001 DSUs outstanding that are vested but not settled.
F‐34
The aggregate fair value of time‐based restricted stock awards and stock units that vested during the years ended December 31,
2021, 2020, and 2019, was $9.0 million, $6.5 million and $9.5 million, respectively. Unamortized compensation expense related to
time‐based restricted stock awards and stock units amounted to $15.2 million at December 31, 2021, and is expected to be
recognized over a weighted average period of approximately 2.6 years. The aggregate intrinsic value of time‐based restricted stock
awards and stock units outstanding was $17.4 million as of December 31, 2021.
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, 2021, 2020, and 2019.
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 2021, 2020, or 2019, as the performance targets were obtained in prior years. The fair
value of performance‐based restricted stock awards that vested and settled during the years ended December 31, 2021, 2020, and
2019, were $0.0 million, $0.0 million, and $3.2 million, respectively. No unamortized compensation expense related to performance‐
based restricted stock awards remains as of December 31, 2021. There was no intrinsic value of performance‐based restricted stock
awards outstanding as of December 31, 2021 as the awards were fully settled in 2019.
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. No compensation expense was recorded for these awards in 2021, 2020, or 2019, as the performance targets
were obtained in a prior year. The fair value of performance‐based restricted stock units that vested and settled during the years
ended December 31, 2021, 2020, and 2019, were $0.0 million, $0.0 million, and $2.7 million, respectively. No unamortized
compensation expense remains as of December 31, 2021 related to these 2015 performance‐based restricted stock units. There was
no intrinsic value of performance‐based restricted stock units outstanding as of December 31, 2021, as the stock units were fully
settled in 2019.
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 fair value of market‐based restricted stock units that vested and
settled during the years ended December 31, 2021, 2020, and 2019, were $0.0 million, $1.4 million, and $0.0 million, respectively.
Unamortized compensation expense for market‐based restricted stock units amounted to $8.3 million at December 31, 2021, and is
expected to be recognized over a weighted average period of approximately 1.7 years. The aggregate intrinsic value of market‐based
restricted stock units outstanding was $10.0 million as of December 31, 2021.
F‐35
A summary of the status of our time‐based and market‐based restricted stock awards and stock units as of December 31, 2021, and
2020, and changes during the year ended December 31, 2021, are presented below:
Outstanding at December 31, 2020
Granted
Vested and settled
Cancelled
Outstanding at December 31, 2021
Time‐based Restricted Stock
Awards and Stock Units
Shares
Weighted
Average Grant
Date Fair Value
41.13
$
493,127
41.20
295,240
$
44.50
(191,082) $
41.00
(37,917) $
40.03
$
559,368
Market‐based
Restricted Stock Units
Shares
275,338
152,575
Weighted
Average Grant
Date Fair Value
54.45
$
48.53
$
— $
—
63.97
(104,832) $
48.56
$
323,081
Retirement of the Company’s Former 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 former President and Chief Executive Officer, Brad Mason. 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. The Company did not recognize share‐based compensation expense related to
the Retirement Agreement for the years ended December 31, 2021 and 2020, and recognized approximately $6.5 million in expense
during the year ended December 31, 2019.
19. Defined contribution plans and deferred compensation
Defined Contribution Plans
Orthofix US LLC 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, 2021, 2020, and 2019, expenses incurred
relating to the 401(k) Plan, including matching contributions, were approximately $2.8 million, $1.1 million, and $2.7 million,
respectively.
In April 2020, as a precautionary measure to increase the Company’s cash position and preserve financial flexibility in response to
the initial uncertainty of the COVID‐19 pandemic, the Company temporarily suspended the 401(k) match program through the
remainder of fiscal year 2020. The 401(k) match program was reinstated in January 2021.
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, 2021, 2020, and 2019, were $1.2 million,
$1.1 million, and $1.0 million, respectively.
Deferred Compensation Plans
Under Italian Law, our Italian subsidiary accrues deferred compensation on behalf of its employees, 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 3.5% of total commissions earned from the Company. The Company’s
relations with its Italian employees, who represent 19.1% of total employees at December 31, 2021, 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, 2021, and 2020 was $1.3 million and $1.4 million, respectively, and represents the amount which would be payable
if all the employees and agents had terminated employment at that date.
F‐36
20.
Income taxes
Income (loss) before provision for income taxes consisted of the following:
(U.S. Dollars, in thousands)
U.S.
Non‐U.S.
Income (loss) before income taxes
The provision for income taxes consists of the following:
(U.S. Dollars, in thousands)
U.S.
Current
Deferred
Non‐U.S.
Current
Deferred
Income tax expense (benefit)
2021
Year Ended December 31,
2020
2019
(5,987) $
(7,508)
(13,495) $
5,556
(5,924)
(368)
2021
Year Ended December 31,
2020
(607) $
24,292
23,685
1,009
190
1,199
24,884
$
(15,054)
(29)
(15,083)
1,382
10,816
12,198
(2,885)
$
$
$
$
(24,890)
(2,159)
(27,049)
2019
(1,911)
2,008
97
1,931
(615)
1,316
1,413
$
$
$
$
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, 2021, 2020, and 2019, 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
Unrecognized tax benefits, net of settlements
Equity compensation
Executive compensation
Contingent consideration
Other, net
Income tax expense (benefit) /effective rate
2021
2020
2019
Amount
Percent
Amount
Percent
Amount
Percent
$
(2,834)
(24)
480
27,819
(537)
(1,363)
1,091
456
(640)
436
$ 24,884
21.0% $
0.2
(3.6)
(206.1)
4.0
10.1
(8.1)
(3.4)
4.7
(3.2)
(184.4)% $
(77)
1,151
(147)
14,514
(982)
(17,321)
1,657
375
(1,460)
(595)
(2,885)
21.0% $
(312.8)
39.9
(3,944.0)
266.8
4,706.8
(450.3)
(101.9)
396.7
161.8
784.0% $
(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)%
The Company paid cash relating to taxes totaling $4.8 million, less than $0.5 million, and $8.1 million for the years ended December
31, 2021, 2020, and 2019, respectively.
F‐37
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
Provision for expected credit losses
Net operating loss and tax credit carryforwards
Lease liabilities
Other, net
Total deferred tax assets
Valuation allowance
Deferred tax asset, net of valuation allowance
Withholding taxes
Property, plant, and equipment
Right‐of‐use lease assets
Deferred tax liability
Net deferred tax assets
Reported as:
Deferred income tax assets
Deferred income tax liabilities (classified within other long‐term liabilities)
Net deferred tax assets
December 31,
2021
2020
$
$
$
$
5,245
17,097
3,888
3,082
7,784
1,217
42,546
5,691
1,423
87,973
(76,725)
11,248
(10)
(5,380)
(5,165)
(10,555)
693
1,771
(1,078)
693
$
$
$
$
2,475
17,585
4,035
4,061
8,734
1,178
42,569
6,033
500
87,170
(50,496)
36,674
(40)
(5,975)
(5,617)
(11,632)
25,042
25,042
—
25,042
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 domestic and
certain foreign jurisdictions. The net increase in the valuation allowance of $26.2 million during the year principally relates to
recognizing a full valuation allowance against the net deferred tax asset within the Company’s U.S. operations as well as an increase
in valuation allowance against deferred tax assets within the Company’s Italian manufacturing subsidiary. The Company considered
many factors when assessing the likelihood of future realization of these deferred tax assets, including recent cumulative losses
experienced by the subsidiary, expectations of future taxable income or loss, the carryforward periods available to the Company for
tax reporting purposes, and other relevant factors. That increase was partially offset by a decrease of valuation allowances on net
operating loss carryforwards in other 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 increase in 2022 due to further
losses in certain jurisdictions, offset by decreases related to the expiration of foreign net operating losses.
The Company has federal net operating loss carryforwards of $17.5 million and research and development credits of $2.2 million,
including amounts from 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 $32.3 million,
of which $20.9 million relates to Spinal Kinetics and begins to expire in 2027. Additionally, the Company has net operating loss
carryforwards in various foreign jurisdictions of approximately $125.0 million that begin to expire in 2022, the majority of which
relate to the Company’s Italy, Netherlands, and Brazil operations.
Unremitted foreign earnings decreased from $53.7 million at December 31, 2020, to $50.0 million at December 31, 2021. 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
F‐38
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 $3.5 million and $4.6 million for the years ended December 31, 2021, and 2020,
respectively. The Company recorded net interest and penalties expense (benefit) on unrecognized tax benefits of $(0.4) million,
$(5.4) million, and $(0.1) million for the years ended December 31, 2021, 2020, and 2019, respectively, and had approximately $0.8
million and $1.2 million accrued for payment of interest and penalties as of December 31, 2021, and 2020, 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 $0.4 million to $1.1
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, 2021,
and 2020, is shown below:
(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,
2021
2020
4,629
45
110
—
(1,322)
3,462
$
$
16,904
568
84
(29)
(12,898)
4,629
$
$
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and in certain state and foreign jurisdictions,
including Italy, as well as other jurisdictions where the Company maintains operations. The statute of limitations with respect to
federal and state tax filings is closed for years prior to 2017. The statute of limitations with respect to the major foreign tax filing
jurisdictions is closed for years prior to 2015.
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 the resolution of these tax examinations.
21.
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
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 18).
F‐39
For each of the three years ended December 31, 2021, 2020, and 2019, 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:
2021
Year Ended December 31,
2020
2019
19,690,593
19,267,920
18,903,289
Unexercised stock options and employee stock purchase plan
Unvested time‐based restricted stock units
Weighted average common shares‐diluted
—
—
19,690,593
51,951
71,847
19,391,718
—
—
18,903,289
There were 1,711,323; 1,499,630; and 1,704,708 weighted average outstanding options, restricted stock, and market‐based units
not included in the diluted earnings per share computation for the years ended December 31, 2021, 2020, and 2019, respectively,
because inclusion of these awards was anti‐dilutive or, for market‐based units, all necessary conditions had not been satisfied by the
end of the respective period.
F‐40
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Orthofix S.A.
21-37 Rue de Stalingrad, 24/28 Villa Baudran
94110 Arcueil
France
Tel: +33.1.41983333
Orthofix France SARL (M6 discs)
259 Rue Saint-Honr’e
75001 Paris, France
Orthofix Australia Pty. Ltd.
c/o Baker McKenzie
Tower One – International Towers Sydney
Level 46, 100 Barangaroo Avenue
Sydney NSW 2000
Australia
Tel: +61 2 925 0200
Orthofix Ltd.
6 Waltham Park
Waltham Road
White Waltham
Maidenhead, Berkshire
SL6 3TN
United Kingdom
Tel: +44.1628.594500
COMMON STOCK
Approximately 265 shareholders of record.
Traded on the NASDAQ
Symbol: OFIX
TRANSFER AGENT
Computershare Investor Services
PO BOX 505000
Louisville, KY, 40233-5000
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.cc
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 1/3
37060 Lugagnano di Sona
Verona, Italy
Tel: +39.045.6719000
Orthofix do Brasil Ltda.
Alameda Santos, 1978
16°Andar – Sala 162,
Cerqueira Cesar – 01418-102
SAO PAULO SP, Brazil
Tel: +55.11.30872260
Orthofix GmbH / Orthofix Spine GmbH
Siemensstraße 5
85521 Ottobrunn
Munich, Germany
Tel: +49.89.35499990
Orthofix GmbH (M6 discs)
Gottlieb-Daimler-Str. 6
D-89150 Laichingen, Germany
Tel: +49.7333.925.9986
After his injury, professional surfer Koa Rothman was warned by his spine
surgeons that he needed to have surgery or he would have to quit surfing.
Koa chose to have an artificial cervical disc replacement procedure. His surgeon
selected the M6-C artificial cervical disc and now, following his successful
surgery, Koa is back surfing, jet skiing, and hiking in Hawaii. Koa states,
“The M6-C disc definitely changed my life.”
Orthofix.com
OF-2209 © 2022
©
Orthofix Medical Inc.