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, 2023
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. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect
the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of
the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
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, 2023, as reported by the Nasdaq Global Select Market, was approximately $663.4 million.
As of March 1, 2024, 37,406,644 shares of common stock were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of the registrant’s definitive proxy statement to be filed with the Commission in connection with the Orthofix Medical Inc. 2024 Annual Meeting of
Shareholders are incorporated by reference in Part III of this Annual Report.
Orthofix Medical Inc.
PART I
Form 10-K for the Year Ended December 31, 2023
Table of Contents
Item 1.
Item 1A.
Item 1B.
Item 1C.
Item 2.
Item 3.
Item 4.
Business ..................................................................................................................................................................
Risk Factors .............................................................................................................................................................
Unresolved Staff Comments...................................................................................................................................
Cybersecurity ..........................................................................................................................................................
Properties ...............................................................................................................................................................
Legal Proceedings ...................................................................................................................................................
Mine Safety Disclosure ...........................................................................................................................................
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 9C.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities ................................................................................................................................................................
Reserved .................................................................................................................................................................
Management’s Discussion and Analysis of Financial Condition and Results of Operations..................................
Quantitative and Qualitative Disclosures About Market Risk................................................................................
Financial Statements and Supplementary Data .....................................................................................................
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .................................
Controls and Procedures ........................................................................................................................................
Other Information ..................................................................................................................................................
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Directors, Executive Officers and Corporate Governance .....................................................................................
Executive Compensation ........................................................................................................................................
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters .............
Certain Relationships and Related Transactions, and Director Independence......................................................
Principal Accountant Fees and Services .................................................................................................................
PART IV
Item 15.
Item 16.
Exhibits and Financial Statement Schedules ..........................................................................................................
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,” “continue,” or other comparable terminology. Forward-
looking statements include, but are not limited to, statements about:
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our intentions, beliefs, and expectations regarding our operations, sales, expenses, and future financial performance;
our operating results;
our intentions, beliefs, and expectations regarding the anticipated benefits of the merger with SeaSpine Holdings
Corporation ("SeaSpine"), including the anticipated synergies and cost-savings from the merger;
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 credit facilities 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 (including in connection
with our merger with SeaSpine in January 2023) 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; 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
Orthofix is a leading global spine and orthopedics company with a comprehensive portfolio of biologics, innovative spinal hardware,
bone growth therapies, specialized orthopedic solutions, and a leading surgical navigation system. Its products are distributed in
more than 60 countries worldwide.
The Company is headquartered in Lewisville, Texas and has primary offices in Carlsbad, CA, with a focus on spine and biologics
product innovation and surgeon education, and Verona, Italy, with an emphasis on product innovation, production, and medical
education for orthopedics. The combined company’s global research and development, commercial and manufacturing footprint
also includes facilities and offices in Irvine, CA, Toronto, Canada, Sunnyvale, CA, Wayne, PA, Olive Branch, MS, Maidenhead, UK,
Munich, Germany, Paris, France, and São Paulo, Brazil.
The Company was founded in Verona, Italy in 1980 and formally incorporated in 1987 in Curaçao as “Orthofix International N.V.” In
2018, we completed a change in our jurisdiction of organization from Curaçao to the State of Delaware (the “Domestication”) and
changed our name to “Orthofix Medical Inc.” As a result, we are a corporation existing under the laws of the State of Delaware.
The merger with SeaSpine was completed on January 5, 2023, via an all-stock merger of equals with SeaSpine continuing as a wholly-
owned subsidiary of Orthofix following the transaction (the “Merger”). As a result of the Merger, each share of SeaSpine common
stock issued and outstanding immediately prior to the closing of the Merger was converted into the right to receive 0.4163 shares of
Orthofix common stock. The shares of common stock of Orthofix, as the corporate parent entity in the combined company
structure, continue to trade on NASDAQ under the symbol "OFIX".
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 contained in our website or connected to our website is not incorporated by reference into this
Annual Report. Our website is located at www.orthofix.com. Our SEC filings are also available on the SEC website at www.sec.gov.
Business Segments
Orthofix manages the business by two reporting segments, Global Spine and Global Orthopedics, which account for 85% and 15% of
our total net sales in 2023, respectively. The chart below presents reported net sales, which includes product sales and marketing
service fees, by reporting segment for each of the years ended December 31, 2023, 2022, and 2021.
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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, enabling technologies, 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, and partnerships with dedicated and high-performing commercial sales channels. Growth initiatives include:
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A regular cadence of new and differentiated product launches supporting our spine implant and enabling technologies,
biologics, and bone growth therapies portfolios
Ongoing, global sales channel optimization and expansion
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 and enhance our spine portfolio
Invest in the further development of our pre-clinical and clinical programs designed to generate peer-reviewed scientific
evidence in support of our products
Attracting, developing, and retaining key talent
Global Spine Principal Products
The Global Spine reporting segment is largely represented by two principal product categories, (i) Bone Growth Therapies and (ii)
Spinal Implants, Biologics, and Enabling Technologies. Each of these product categories, and their significant components, 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"). Several devices in our portfolio 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. A new addition to our stimulation
portfolio utilizes our low intensity pulsed ultrasound ("LIPUS"), a technology also supported by strong basic science and published
clinical literature. Orthofix is the only manufacturer which offers both PEMF and LIPUS technologies. 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 Spinal Implants, we design, develop, and market a portfolio of motion preservation and fixation implant products for broad
spectrum use throughout the entire spinal column. Such products are typically used to facilitate fusion in degenerative, minimally
invasive, and complex spinal deformity procedures throughout the lumbar, thoracic, sacral, and cervical regions 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, including hospitals, ambulatory surgery centers ("ASC"), and out-patient hospitals.
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Enabling Technologies
Within Enabling Technologies, we design, develop, and market a portfolio of navigation technologies including tracked surgical tools,
intelligent software and imaging equipment based on Machine-Vision and optical innovations. Specifically, our 7D FLASH Navigation
System with 7D Technology has redefined image guided surgery, delivering a navigation platform with meaningful benefits in spine
and cranial procedures. The speed, accuracy, workflow efficiency, and intraoperative radiation-free safety profile of the 7D FLASH
Navigation System delivers significant economic value, while eliminating the long-standing frustrations and challenges of traditional
image guided navigation systems. We distribute these products globally through a network of direct sales representatives and
distributors to facilitate pediatric, adolescent, and adult procedures in hospitals, ASCs, and out-patient facilities.
Biologics
Within the Biologics product category, we offer a portfolio of bone graft substitutes intended to address the key elements of bone
regeneration that allow physicians to successfully treat a variety of spinal, orthopedic, and dental conditions. Our Biologics portfolio
includes fiber-based and particulate demineralized bone matrices ("DBMs"), cellular bone allografts, collagen ceramic matrices, and
synthetic bone void fillers in various forms with supporting graft delivery solutions to address a wide range of clinical applications.
Distributed globally through a network of distributors and sales representatives, our portfolio is a mix of internally manufactured
tissues and products as well as marketed tissue forms provided by MTF Biologics. The breadth of the product offering and data-
supported product lines position us with greater access to facilities, including group purchasing organizations ("GPOs")/integrated
delivery networks ("IDNs"), hospitals, and ASCs.
The following table and discussion identify our principal Global Spine products by trade name and describe their primary
applications:
Bone Growth Therapies Products
Product
Primary Application
CervicalStim Spinal Fusion Therapy
SpinalStim Spinal Fusion Therapy
PhysioStim Bone Healing Therapy
AccelStim
PEMF non-invasive cervical spinal fusion therapy used to enhance bone
growth
PEMF non-invasive lumbar spinal fusion therapy used to enhance bone
growth
PEMF non-invasive appendicular skeleton healing therapy used to enhance
bone growth in nonunion fractures
LIPUS healing therapy used to enhance bone growth in certain fresh, distal
radius, and tibial diaphysis fractures and nonunion fractures
Spinal Implants and Enabling Technologies Products
Primary Application
Product
Posterior Spinal Fixation Procedures
Artificial Cervical Disc Replacement Procedures
Pedicle screw systems for open and MIS procedures and adult deformity
procedures featuring modular technology and accompanying instrumentation
designed to reduce the number of trays needed for surgery and that provides
surgeons with multiple intra-operative options to facilitate posterior lumbar
fixation. We also provide powerful instrumented compression and distraction
of the spine. Products include our Mariner, Firebird, Firebird NXG, Janus,
Daytona, Newport, and Phoenix product lines. These brands also include
several different screw types including, cannulated, fenestrated, HA coated,
and cortical cancellous. These options give surgeons a full portfolio of choices
for their patients without having to utilize several different screw systems.
Our next-generation artificial disc, M6-C artificial cervical disc, developed to
replace an intervertebral disc damaged by cervical disc degeneration is 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.
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Artificial Lumbar Disc Replacement Procedures
Anterior Lumbar Interbody Fusion ("ALIF")
Procedures
Posterior Cervical Fixation Procedures
Posterior Lumbar Interbody Fusion ("PLIF")/
Transforaminal Lumbar Interbody Fusion ("TLIF")
Procedures
Our next-generation artificial disc, M6-L artificial cervical 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. (Not available in the U.S.)
A complete portfolio of ALIF products, including interbody spacers, disc
preparation instruments, access systems, and plating/ fixation options. Our
spacers come in a variety of material options including PEEK, PEEK Titanium
composite ("PTC"), and 3D printed Titanium. Some of our product also
contain U.S. Food and Drug Administration ("FDA") cleared Nano surface
technology ("Nanovate") that is scientifically proven to upregulate osteogenic
factors in vitro. The multiple material types allow surgeons to select the
material best for their patients, and they come in a variety of footprints and
lordotic options. The interbodies come with a large graft area to
accommodate the addition of biologics to aid in the fusion process. Some of
our interbodies include integrated fixation to eliminate the need for
additional fixation. These options provide a complete list of options for the
ALIF procedural category. Our main contributors to this category include
Meridian, Waveform A, Reef A, and Pillar SA PTC.
We provide spinal fixation systems with novel instrumentation and
anatomically designed implants to provide a safe and effective solution
designed to improve surgical flow when navigating through complex posterior
cervical procedures. These products include a wide array of screws, rods, and
instruments to aid surgeons in performing these procedures. Our products
include Northstar OCT and Centurion.
Our PLIF/TLIF portfolio includes a variety of interbodies as well as several disc
prep and access options. The interbodies come in both straight and curved
footprints to accommodate surgeons in placement of the interbodies, and a
choice of materials from PEEK, PEEK Titanium Composite and 3D printed
Titanium. Some of our product also contain FDA cleared Nanovate that is
scientifically proven to upregulate osteogenic factors in vitro. Our main
products in the static PLIF/TLIF interbodies are Waveform TA/TO, Reef TA/TO,
and Forza. Our straight product category contains both traditional static
interbodies as well as expandable options. These options include both our
Forza XP and Explorer TO product lines. These expandable options allow
surgeons to minimize their exposure and expand the interbody in-situ to the
preferred height and lordosis that best suits their patient. To aid in access we
also offer several retractor options with our latest screw-based retractor
called Fathom. These retractors paired with our posterior disc prep options
completes a surgeon’s need for all PLIF/TLIF procedures.
Lateral Lumbar Interbody Fusion ("LLIF") Procedures The LLIF portfolio includes a full portfolio of interbodies, additional fixation
options, retractor access systems and disc prep instrumentation. Our
interbodies come in a variety of footprint and lordotic options as well as
material types of PEEK, PEEK Titanium composite, and 3D printed Titanium.
Our main LLIF interbody brands are Regatta Lateral and Waveform L. These
interbodies can be paired with the Regatta plate to provide auxiliary fixation
during the LLIF procedure. The Lattus Retractor is our newest market leading
access retractor providing surgeons the ability to access the disc space and
conduct the LLIF procedure. This pairs seamlessly with several lateral disc
prep options that aid surgeons in completing their discectomy prior to
interbody placement.
Anterior Cervical Discectomy and Fusion ("ACDF")
Procedures
The ACDF portfolio includes interbodies with and without integrated fixation
and plating systems to provide fixation of the anterior cervical spine. Like the
rest of our portfolio our cervical interbodies come in a wide variety of
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footprints and lordotic options as well as material options giving surgeons the
ability of choice to accommodate their patient populations. Our top
producing cervical interbodies include, Waveform C, and Construx brands.
The Shoreline product brand provides the ability to turn interbodies without
integrated fixation into fixated spacers reducing time surgeons spend in the
operating room and making it seamless to fixate interbodies into the disc
space. When selecting an interbody without fixation an anterior cervical plate
is needed. Our top brands of cervical plates are Admiral and Cetra. In addition
to these options, we also offer several different disc and endplate preparation
options to satisfy the ACDF procedure.
As an adjunct to our posterior lumbar fixation portfolio, we offer two main
products, Mariner Outrigger and Connectors, that are designed to help
surgeons tackle difficult revision cases. These sets are constructed with an
industry leading number of connectors, specially designed rods, and
instruments to aid in these cases. Giving surgeons a tremendous number of
options is the key to the success of these sets.
Firebird SI is a minimally invasive screw system that is intended for fixation of
sacroiliac joint disruptions in skeletally mature patients. This has and
continues to be a product differentiator as many competitors do not offer SI
fixation options. Firebird SI is one of the only 3D printed Titanium products on
the market and the only 3D printed product that also has Nanotechnology
claims with our Nanovate technology.
Outside of the main spinal procedural categories we also offer several
products in areas such as corpectomy (VuMesh), laminoplasty (Newbridge),
and a unique product, Jazz Bands. Jazz Bands provide a temporary short-term
stabilization as a bond anchor to aid in the repair of bone fractures.
A machine-vision navigation platform for use in open and mini-open posterior
spinal procedures that uses proprietary visible light technology coupled with
advanced software algorithms to deliver a fast, efficient, cost-effective, and
radiation free solution for spine surgery.
A valuable enhancement to the 7D FLASH Navigation System to address
percutaneous spinal procedures; the camera-based technology coupled with
7D Machine Vision algorithms maintain the same fast, accurate, and efficient
surgical workflow as the Spine platform, while also providing an imaging
agnostic solution to percutaneous posterior spine surgery.
A module on the 7D FLASH Navigation System that utilizes 7D Machine Vision
Technology for cranial surgery; the visible light technology allows for a
completely contactless workflow, acquires hundreds of thousands of virtual
fiducials using the patient’s own anatomy, and results in nearly instantaneous
cranial registrations to the skin or skull in almost any surgical position.
Revision Surgical Procedures
SI Fusion Procedures
Other procedures: Corpectomy, Laminoplasty, Jazz
Bands
7D FLASH Navigation System with 7D Technology
(Spine)
7D FLASH Navigation System with 7D Technology
(Percutaneous)
7D FLASH Navigation System with 7D Technology
(Cranial)
Biologics Technologies
Product
Primary Application
Proprietary Technology
Accell Bone Matrix ("ABM")
An open structured, dispersed form of DBM, which increases the
bioavailability of bone proteins at an earlier time in the healing cascade;
when combined with traditional DBM, both fibers and particulate forms,
provides a biphasic release of growth factors to promote healing. Accell is a
technology featured in several key DBM products.
Cellular Bone Matrixes ("CBM")
Trinity Elite, Virtuos Lyograft
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Demineralized Bone Fibers ("DBF")
Synthetics
Procedure specific solutions
Other
Comprised of demineralized cortical bone fibers and cancellous bone with
retained cells, cellular allografts are used during surgery that is designed to
aid in the success of a spinal fusion or bone fusion procedure. Provided in
either a cryopreserved or shelf-stable form.
Strand, Strand Plus, Fiberfuse
DBFs are designed to facilitate and aid in fusion by maximizing osteoinductive
content while providing an improved conductive matrix. Multiple
compositions include 100% fibers, fibers with Accell Bone Matrix, and fibers
mixed with cancellous bone. Provided in both putty and strip formulations.
Cove, Mozaik
To address the synthetic market segment, this portfolio includes an advanced
bioactive synthetic and a value-based offering to meet different customer
profiles. Provided in both putty and strip formulations.
Market differentiated products focused on solving clinical problems tied to
specific procedure techniques in spine for fusion.
Ballast, Ballast MT
Resorbable mesh filled with 100% DBM, or provided empty; aids in simplifying
graft placement and prevents graft migration for posterolateral fusion.
NorthStar Facet Fusion, Flash Facet Fusion
Novel procedural solution for reproducible biologic placement within the
facet joint for cervical and lumbar spine. Kit includes pre-shaped
demineralized bone fibers with single-use instrumentation for facet prep and
biologic delivery.
RAPID, O-Genesis
Reusable and sterile, single use options to aid in bone graft delivery to the
surgical site.
Versashield
A thin hydrophilic amniotic membrane designed to serve as a wound covering
and protective barrier for a variety of surgical demands.
Bone Growth Therapies — Spinal Therapy
Our bone growth therapy devices used in spinal applications are designed to enhance bone growth and improve the success rate of
certain spinal fusion procedures by stimulating the body’s own natural healing mechanism post-surgically. These non-invasive
portable devices are intended to be used as part of a home treatment program prescribed by a physician.
We offer two spinal fusion therapy devices: the SpinalStim and CervicalStim devices. Our stimulation products use a PEMF
technology designed to enhance the growth of bone tissue following surgery and are placed externally over the site to be healed.
Research data shows that our PEMF signal induces mineralization and results in a process that stimulates new regeneration at the
spinal fusion site. Some spine fusion patients are at greater risk of not achieving a solid fusion of new bone around the fusion site.
These patients typically have one or more risk factors, such as smoking, obesity, or diabetes, or their surgery involves the revision of
a failed fusion or the fusion of multiple levels of vertebrae in one procedure. For these patients, post-surgical bone growth therapy
has been shown to significantly increase the probability of fusion success.
The SpinalStim device is a non-invasive spinal fusion stimulator system 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 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
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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 Android and Apple App Stores.
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.
The AccelStim device provides a safe and effective nonsurgical treatment to improve nonunion fracture healing and accelerate the
healing of indicated fresh fractures. The device stimulates the bone’s natural healing process through LIPUS waves to the fracture
site.
Spinal Implants — Motion Preservation Solutions
Our M6-C cervical and M6-L lumbar artificial discs 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 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. In
addition, we have initiated a U.S. 2-level investigational device exemption (“IDE”) study for the M6-C artificial cervical disc, which is
currently enrolling.
Spinal Implants — Spinal Fixation Solutions
We provide a wide range of implants and fixation products for use in spinal surgery, and we cover the entire spine from occiput to
sacrum. See below for a discussion of our portfolio based on the segmentation of our internal franchise groups:
Cervical
Our cervical portfolio includes fixation, interbodies, plates, and motion preservation devices. Our interbody spacer brands
and materials include PTC, Waveform, Reef, and Nanovate 3D printed titanium surface technologies. Each coming with
different material, clinical, and handling characteristics that can be options for clinicians to make the proper choice for their
patients. Some of our spacers also have the option for integrated fixation which eliminates the necessity for additional
fixation. In addition to our spacers, our surgical grade titanium plating systems, Admiral and Cetra, allow for anterior
fixation of the cervical spine. Lastly, for posterior fixation we offer two systems, Northstar OCT and Centurion, as well as a
laminoplasty system, Newbridge. These systems are comprehensive systems comprised of rods, connectors, and screws
that are implanted for posterior fixation.
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Interbody
Our robust interbody group has options for every approach vector, including anterior lumbar, posterior lumbar, and lateral.
Within each group there are several material types, including a thermoplastic compound called PEEK, 3D printed titanium
with FDA approved Nanotechnology claims, and two different composites, Nanometalene and PTC, comprised of both PEEK
and titanium. Our anterior lumbar portfolio has several different footprints and lordotic options as well as options for
integrated fixation or plating. These brands include Waveform A, Reef A, Pillar SA PTC, Unity Lumbosacral Plating, and
Meridian. Our lateral portfolio takes full advantage of our top-of-the-line retractor systems to gain access to the disc space.
The lateral portfolio is complete with the highly competitive footprints and plating options as well. These brands include
Skyhawk, Regatta L, and Waveform L, which are utilized in direct lateral, prone lateral, and anterior to the psoas
procedures. Our posterior portfolio, utilized for PLIF and TLIF procedures, has two key segmentations, static and
expandable. Our expandable posterior interbodies allow for a smaller incision and smaller exposure that then expands to
create or fill the space of the disc space. Our expandable brands are Forza XP, our top performing interbody implant, and
Explorer TO. In the static posterior interbodies, we have several brands serving all material types and offering both straight
and curved footprints to aid in posterior procedures. Our brands are Forza, Forza PTC, Forza Ti, Waveform TA/TO, and Reef
TA/TO.
Thoracolumbar
In our thoracolumbar franchise we have a complete line of fixation products for degenerative spinal conditions, as well as
for complex deformity, midline, and revision cases. Our posterior brands are all modular, meaning surgeons have the option
to select from several different screw shank varieties including, cannulated, fenestrated, HA coated, cortical cancellous, and
a traditional dual lead option. This allows the surgeon to maintain the instrumentation of the parent system, but then select
the proper screw shank for the patient, offering maximum clinical value. The Firebird/ Firebird NXG, Phoenix, and Mariner
brands are available for open or minimally invasive procedures and have options such as connectors, mono axial screws,
and many more instrumentation options to aid in a variety of cases. Also within this franchise group is our SI fixation
product, Firebird SI, the first 3D printed SI fixation product and one of the only with Nanotechnology claims.
Enabling Technologies
Our machine vision 7D FLASH navigation platform is used in a variety of posterior spinal procedures, including degenerative,
deformity, tumor, trauma, and revision surgery. The platform can be utilized in MIS/percutaneous, mini-open, or open techniques.
The technology also offers a comprehensive cranial platform for use in cranial neurosurgery.
Our innovative 7D FLASH Navigation System with 7D Technology delivers a comprehensive navigation platform that utilizes visible
light, machine-vision cameras, and intelligent software algorithms to create a 3D image within seconds for surgical navigation. The
novel technology allows for a fast image reconstruction for surgical navigation with no disruption to surgeon workflow and
eliminates radiation exposure during the procedure to the patient, surgeon, and operating room staff.
Our Spine Module is our leading product in the FLASH Navigation Portfolio with over 130 installations globally. Our recent launch of
the FLASH Percutaneous Module has reached over 25 installations in the US. In 2023, we further enhanced the FLASH Percutaneous
Module to include preplanning features, as well as integrating fixation systems such as Mariner MIS Posterior Fixation System,
Phoenix MIS Posterior Fixation System, and the Fathom Pedicle Based Retractor System. Multiple new spinal reference frame
fixation options were also launched in 2023 to accommodate spinal fusion procedures from cervical spine to pelvis. Further
enhancements and new features to the Spine Module and Percutaneous Module are in development and are expected to launch in
2024.
In addition to these new products focused on spine, the FLASH Navigation Portfolio also includes our Cranial Module for use in
cranial surgeries. The technology uses a completely contactless workflow, acquiring hundreds of thousands of virtual fiducials using
the patient’s own anatomy, and results in nearly instantaneous cranial registrations to the skin or skull in almost any surgical
position. In 2024, we anticipate the commercial launch of FLASH EVD (“Extra Ventricular Drainage”), a new mobile bed-side
navigational system leveraging 7D Technology designed for fast and reliable EVD placement. Initial cadaveric testing has been
completed and FLASH EVD is currently under regulatory review.
Biologics — Regenerative Solutions
Our biologics portfolio is focused on best-in-class bone grafting solutions from each of the major bone grafting categories - cellular
allografts, DBMs, and synthetics. The breadth of the portfolio within each segment allows for a consultative approach with both
physicians and hospitals to determine the best product based on clinical performance and price.
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Our largest portfolio of products is within DBMs, which includes both putty and fiber-based forms that provide different handling
and performance based on clinical applications. Leading this portfolio are Strand Plus, 100% DMB Fiber with Accell, Evo3/Evo3c, and
DBM putty with Accell. ABM is a key differentiator within the DBM market. This internally processed, proprietary technology is an
open structured, dispersed form of DBM, which increases the bioavailability of bone proteins at an earlier time in the healing
cascade. When combined with traditional DBM, it provides a biphasic release of growth factors to promote healing.
Our cellular allografts portfolio features a market-leading graft with Trinity Elite and our newly released Virtuous Lyograft, both co-
branded with MTF biologics. Trinity Elite, an allograft with viable cells, continues to be a market leader due to the long-standing
clinical supported through various clinical studies. Virtuous Lyograft is particularly unique in that it is a first-of-its-kind, shelf-stable
cellular allograft for spine and orthopedic procedures provided in a room-temperature, ready-to-use, moldable form.
Regarding synthetic solutions, our focus products are Cove and Mozaik. Cove, an advanced bioactive synthetic, is the newest
introduction into this segment. Cove has a unique surface topography of the β-TCP and HA granule and has demonstrated the ability
to grow bone in a muscle pouch. Additionally, Cove has handling characteristics ideal for ensuring graft placement remains where it
is needed. The combination of Cove and Mozaik provides different value options within this portfolio to meet varying customer
needs.
In addition to each of the major categories, Orthofix has continued to invest in products that address specific procedural and clinical
needs. Our solutions address many of the issues that physicians see with graft delivery and containment within the surgical site.
Several of our solutions address this through handling characteristics of product, shape and design, instrumentation to aid delivery,
or even added materials to aid in graft containment. All of these solutions are to improve the ease of use and consistency of our
products while driving better clinical outcomes.
We receive marketing fees through our collaboration with MTF for the Virtuous, Trinity Elite, FiberFuse, and certain other 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 Virtuous and Trinity Elite,
and exclusive rights to market the FiberFuse tissues in the U.S.
Our other leading tissue forms and synthetics such as, Strand Plus, Strand, Evo3, Evo3c, Ballast, Cove, and Mozaik are all processed
internally through IsoTis Orthobiologics. This completely integrated business unit allows for a continuous feedback cycle with
research and development, marketing, manufacturing, and quality to ensure high-quality products delivered with consistent
customer fulfillment.
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 and bovine collagen in certain countries.
Global Spine 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. We expect that the contribution of new, internally
developed technologies and undefined external acquisitions will be the primary driver of future growth. In addition, we also have
initiated a U.S. 2-Level IDE study for the M6-C artificial cervical disc.
Regarding our Bone Growth Therapy business, we have participated in research at the Wake Forest University Health Sciences,
Chinese University of Hong Kong, 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, cartilage, meniscus, nerve, and efficacy of healing. From these
efforts, some studies have been published in peer-reviewed journals. Among other insights, the studies illustrate positive effects of
PEMF on callus formation and bone strength, meniscus and nerve injury repair, as well as proliferation and differentiation of cells
involved in tissue regeneration and healing. Furthermore, we believe that the previous research work with Cleveland Clinic, the
Chinese University of Hong Kong, and the University of Pennsylvania, allowing for characterization and demonstration of the
Orthofix new 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.
Global Orthopedics
The Global Orthopedics reporting segment offers products and solutions for limb deformity correction and complex limb
reconstruction with a focus on use in trauma, adult and pediatric limb reconstruction, and foot and ankle procedures. This reporting
segment specializes in the design, development, and marketing of external and internal fixation orthopedic products that are
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coupled with enabling digital technologies to serve the complete patient treatment pathway. We sell these products through a
global network of distributors and sales representatives to hospitals, healthcare organizations, and healthcare providers.
Global Orthopedics Strategy
Our strategy for the Global Orthopedics reporting segment is to continue to offer pioneering limb reconstruction and deformity
correction procedural solutions that address the entire patient treatment pathway.
Our key strategies in this segment are:
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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 expansive pediatric product portfolio and support tools
Leverage our cross-product OrthoNext digital platform, a uniquely developed pre and post planning software that allows
our clinicians to pre-plan surgery for patients so they can start surgeries with a greater degree of confidence, reduce
surgical times, enable better outcomes, and follow up post operatively to evaluate the success of their chosen surgical plan
Expand our foot and ankle portfolio by building on our historical position as a company highly focused on addressing
complex and challenging conditions and remaining at the forefront of innovation in helping surgeons and patients alike in
the management of Charcot foot and ankle
Promote and invest in our Fitbone intermedullary limb lengthening platform, which together with our external fixation
products, offers surgeons internal and external solutions for limb lengthening and deformity correction
• Within the orthopedic trauma segment, continue to focus on open and complex fracture management, with a focus on
providing single use sterile pack procedural solutions to reduce costs and drive surgical efficiencies
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Collaborate with physicians and healthcare partners to improve patients’ lives through technology, digital transformation,
clinical evidence, and our industry-leading medical education program, 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 patients' 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 and 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.
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
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TrueLok EVO
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
A modular circular external fixation system, available pre-assembled in sterile
kits that features both radiolucent rings and struts to enable clear radiographic
visualization and allow physicians to better assess bone anatomy both during
surgery and in post-operative care
Fitbone Intramedullary Limb-Lengthening System An intramedullary lengthening system intended for limb lengthening of the
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, and is the only intramedullary limb lengthening system
with an FDA-cleared pediatric indication
Our pediatric solutions include a range of products and resources dedicated to
pediatrics and young adults with bone fractures and deformities. With our 360°
approach to the patient journey we provide dedicated tools to treat all stages
of the healing process: collaterals, educational games, software applications,
and patient apps for post-operative management
Our pediatric solutions 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 first and market leading
system for gradual correction of the growth plate;
- The JuniOrtho Plating System;
- The Rodeo Telescopic Nail to provide bone fixation in patients suffering from
osteogenesis imperfecta
A pin-to-bar system for temporary and definitive fracture fixation, in the upper
and lower limbs. Available in sterile kits, 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. The latest version, Galaxy
Gemini, includes a universal clamp and other updates to better streamline
surgical procedures
Galaxy Fixation Shoulder
A unique solution for the treatment of proximal humeral fractures
Ankle Hindfoot Nail (“AHN”)
G-BEAM Fusion Beaming System
OSCAR
External Fixators
A differentiated solution for hindfoot fusions that includes a revision option to
address larger bone defects and more complex hindfoot pathologies
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
An ultrasonic powered surgical system for revision hip and knee arthroplasty
External fixation, including our limb-lengthening systems, ProCallus, XCaliber,
Pennig, Radiolucent Wrist Fixators, and Calcaneal Fixator
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LRS advanced Limb Reconstruction System
OrthoNext Digital Platform
An external fixation solution for limb lengthening and deformity corrections,
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 and Fitbone Intramedullary Limb Lengthening System, enabling
surgeons to accurately plan the deformity correction and osteotomy position
as well as visualize the implant in relation to the anatomy
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 correct bone deformities, 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 or fusion
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, TrueLok Evo, the Galaxy and Galaxy Gemini Fixation Systems,
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.
The Fitbone Intramedullary Limb Lengthening System provides an internal option for limb lengthening of the femur and tibia and
together with our external fixation solutions, provides Orthofix with the most complete limb reconstruction portfolio on the market.
We are continuing to invest in the Fitbone technology platform in order to offer surgeons more solutions for deformity correction
and bone defect management.
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 eight-Plate Plus.
Product Development
Our primary research and development facilities are located in Lewisville, Texas, Carlsbad, California, Toronto, Canada, and Verona,
Italy.
We have a research and development organization dedicated to advancing our portfolio of spinal implants, biologics, orthopedic
devices, and machine vision image guidance innovations through product development and clinical affairs programs. Our product
development efforts employ an integrated team approach that involves collaboration between surgeons, our engineers, our
machinists, and our regulatory personnel. We also work with leading hospital research institutions, surgeons, consultants, and
certain non-profit organizations, such as MTF Biologics, on the long-term scientific planning and evolution of our products and
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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.
For our spine and orthopedics products, our product development teams, in consultation with design surgeons, formulate a design
for the product and then our machinists build prototypes for testing our prototyping development and testing operation at our
facilities. We use a broad scope of technologies designed to allow us to meet the complex engineering requirements of customers.
As part of the development process, surgeons test the implantation of the products in our in-house cadaveric laboratories, which
aids in the design of new products intended to meet the needs of both the surgeon, the patient, and the healthcare ecosystem. Our
team refines or redesigns the prototype as necessary based on the results of the product testing, allowing our team to perform rapid
iterations of the design-prototype-test development cycle. Our clinical and regulatory personnel work in parallel with our product
engineering personnel to facilitate regulatory clearances of our products. We believe that these product development efforts allow
our team to provide solutions that respond to the needs of our surgeon customers and their patients.
Similar to the spine and orthopedics product development process, our software engineers, product managers, and design surgeons
are working towards the full integration of our spinal implants and biologics product lines with our machine vision 7D FLASH
Navigation System. This includes the design of specific software modules, features and tracked instruments designed to meet the
needs of a wide range of procedures including, degenerative, complex, revision, minimally invasive and deformity spine procedures.
In addition, we are also exploring opportunities to integrate the 7D FLASH Technology into a variety of adult and pediatric
orthopedic applications.
For biologics, we plan to develop line extensions for our innovative biologics technologies that will continue to improve bone
forming potential while addressing specific procedural requirements both in the spine field and in general orthopedic applications.
We are investigating new product formulations in DBM, while continuously looking at process improvements within tissue
processing. Our Biologics research and development team has experience in biomaterial sciences and bringing next generation
technologies to market.
In 2023, 2022, and 2021, we incurred research and development expenses of $80.2 million, $49.1 million, and $49.6 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. Many of our products are covered by patents 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 found by a court to 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 the 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 a 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
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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 March 2023)), the Office of Inspector General (HCCA-
OIG “General Compliance Program Guidance” (November 2023)), 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;
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•
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•
•
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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;
Disciplinary guidelines to enforce compliance and address violations;
Due diligence reviews of high-risk intermediaries and exclusion lists screening of employees and contracted business
associates; and
Risk assessments to identify areas of compliance risk.
Government Regulation
Classification and Approval of Products by the FDA and other Regulatory Authorities
Our research, development, 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 (the “FDCA”) 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, devices deemed 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, classified as class II devices and the instruments used
with these products are generally classified as class I. Our 7D FLASH Navigation System is classified as class II and certain accessories
thereto are classified as class I. Our Bone Growth Therapies products and the M6-C artificial cervical disc are currently classified as
class III, and have been approved for commercial distribution in the U.S. through the PMA process. However, an FDA panel
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 (“MDR”) (Council Regulations 2017/745), which
imposes strict requirements for the marketing and sale of medical devices, including new quality system and post-market
surveillance requirements. The regulation, as amended in March 2023, provides a transition period for all currently approved
medical devices prior to May 2021 (under the European Medical Device Directive) to meet the additional requirements, and for
higher risk devices, this transition period was extended until December 2027 and until December 2028 for medium-and-lower risk
devices. After this transition period, all medical devices marketed in the E.U. will require certification according to these new
requirements. This regulation has required us to incur, and we expect to continue to incur, significant costs through the transition
period and beyond to maintain compliance with the additional requirements. Failure to meet the requirements of the regulation
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could adversely impact our business in the E.U. and other countries that utilize or rely on E.U. requirements for medical device
registrations.
In the E.U., our products that contain human-derived tissue, including demineralized bone material, are not medical devices as
defined in the MDR. They are also not medicinal products as defined in Directive 2001/83/EC of the European Parliament and of the
Council of the E.U. Today, the regulations in the E.U. governing products that contain human-derived tissue, if applicable, vary from
one E.U. member state to the next. Because of the absence of a harmonized regulatory framework and the proposed regulation for
advanced therapy medicinal products in the E.U., the approval process for human-derived cell or tissue-based medical products in
the E.U. may be extensive, lengthy, expensive, and unpredictable.
Certain countries, as well as the E.U., have issued regulations that govern products that contain materials derived from animal
sources. Regulatory authorities are particularly concerned with materials infected with the agent that causes bovine spongiform
encephalopathy ("BSE"). These regulations affect our biomaterial products for the spine, which contain material derived from bovine
tissue. Although we take steps designed to provide that our products are safe and free of agents that can cause disease, products
that contain materials derived from animals, including our products, may become subject to additional regulation, or even be
banned in certain countries, because of concern over the potential for prion transmission. Significant new regulations, a ban of our
products, or a movement away from bovine-derived products because of an outbreak of BSE could have a material and adverse
effect on our business or our ability to expand our business.
Within our Biologics product category, we market tissue for bone repair and reconstruction under the brand name Trinity ELITE, our
allogeneic bone matrix comprised of cancellous bone containing viable cells and a demineralized cortical bone component. In
addition, we provide demineralized cortical fiber technologies under the brand name FiberFuse, structural allografts for spinal
fusion, and an amniotic membrane, which is a natural tissue barrier. These allografts are regulated under the FDA’s Human Cell,
Tissues and Cellular and Tissue-Based Products ("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 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 Opus BA and the Opus MG lines 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 maintain an adequate inventory to avoid disruptions in
product supply.
We also manufacture products derived from human tissue (demineralized bone tissue). Internally produced HCT/Ps may fall within
the definition of a biological product, medical device, or drug regulated under the FDCA. These biologic, device, or drug HCT/Ps must
comply both with the requirements exclusively applicable to HCT/Ps and with requirements applicable to biologics, devices or drugs,
including premarket clearance or approval from the FDA.
Section 361 of the Public Health Service Act authorizes the FDA to issue regulations to prevent the introduction, transmission, or
spread of communicable disease. HCT/Ps regulated as 361 HCT/Ps are subject to requirements relating to registering facilities and
listing products with the FDA, screening and testing for tissue donor eligibility, Good Tissue Practice when processing, storing,
labeling, and distributing HCT/Ps, including required labeling information, stringent record keeping, and adverse event reporting.
The American Association of Tissue Banks ("AATB") has issued operating standards for tissue banking. Accreditation is voluntary, but
compliance with these standards is a requirement to become an AATB-accredited tissue establishment. In addition, some states in
the U.S. have their own tissue banking regulations. We are AATB-accredited and licensed or have permits for tissue banking in
California, Florida, New York, Maryland, and other states that require specific licensing or registration.
Procurement of certain human organs and tissue for transplantation is subject to the restrictions of the National Organ Transplant
Act ("NOTA"), which prohibits the transfer of certain human organs, including skin and related tissue for valuable consideration, but
permits the reasonable payment associated with the removal, transportation, implantation, processing, preservation, quality
control, and storage of human tissue and skin. We reimburse tissue banks for their expenses associated with the recovery, storage,
and transportation of donated human tissue they provide to us for processing. We include in our pricing structure amounts paid to
tissue banks to reimburse them for their expenses associated with the recovery and transportation of the tissue, in addition to
certain costs associated with the processing, preservation, quality control and storage of the tissue, marketing and medical
education expenses, and costs associated with development of tissue processing technologies. NOTA payment allowances may be
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interpreted to limit the amount of costs and expenses that we may recover in our pricing for our products, thereby reducing our
future revenue and profitability.
For a further description of some of the risks associated with matters described above, 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. 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 the risks associated with the regulatory requirements described above, 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 9001:2015 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
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.
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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 each 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 were effective for payments reported in
2022, with payment tracking beginning in 2021. Non-compliance with the Sunshine Act or SUPPORT Act is subject to civil monetary
penalties.
In addition to the Sunshine Act, as expanded by the SUPPORT Act, we seek to comply with other international and individual state
transparency laws, such as the transparency laws of Massachusetts and Vermont.
Sales, Marketing and Distribution
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. Our products are distributed
in more than 60 countries worldwide.
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Reporting Segments and Product Categories
Orthofix manages the business by two reporting segments, Global Spine and Global Orthopedics, which account for 85% and 15%,
respectively, of our total net sales in 2023.
Sales Network
Our U.S. sales network is generally comprised of a mix of direct sales representatives and independent distributors, dependent upon
each product category. An increasing number of these independent distributors sell products for more than one product category.
Our Bone Growth Therapies product category is largely supported by a hybrid distribution network of direct sales representatives
and independent distributors, whereas our Spinal Implants, Biologics, and Orthopedics sales organizations primarily consist of
regional and territory business managers who oversee a broad network of independent distributors and sales agents.
We market our Enabling Technologies portfolio through a direct sales force in the U.S. who collaborate with our independent sales
agents to generate either a capital sale or to place systems and components in an account in a capital efficient manner in return for
a long-term revenue commitment for our Spinal Implants and/or Biologics products.
In the U.S., we typically consign our Biologics products and consign or loan our Spinal Implants and Orthopedics implant sets to
hospitals and independent sales agents, who in turn deliver them to the hospital for a single surgical procedure. In other instances,
we leave sets with hospitals that are high volume users for use in multiple procedures. These sets typically contain the instruments,
including disposables, and implants required to complete a surgery. Our Orthopedics business provides a wide array of single use
pack procedural solutions, alleviating the burden of instrument sets.
We focus on entering distribution relationships in territories with a high potential for growth, where our partner will carry our
products exclusively, except with respect to clinical markets that our products do not address. We believe these more exclusive
relationships allow us to grow faster and in a more cost-effective manner in these territories over the long term. We also plan to
continue to invest in additional instrument sets and marketing and education efforts to support the expansion of our independent
sales agent footprint.
Outside the U.S., we employ direct sales representatives in certain markets and also contract with independent stocking distributors,
who purchase our products directly from us and independently sell them. 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.
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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 and sales expansion efforts through comprehensive and specialized training workshops for physicians
and sales specialists 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. To
this end, we leverage the capacity of our hands-on cadaveric training laboratories located at our Lewisville, Texas, Carlsbad,
California, and Wayne, Pennsylvania facilities to increase the number of training opportunities for surgeons and sales agents. In-
person trainings are also held at our facility in Verona, Italy, and in various locations in Latin America. We believe training and
education will help surgeons become adept with our products and techniques, thereby improving outcomes for their patients. 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.
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.
Competition
The global spine, biologics, orthopedics, and image guided surgery markets are highly competitive. We face significant competition
in these markets from the spine and orthopedic divisions of large multinational medical device companies, established companies
focused solely or primarily on spine and orthopedics, and from smaller, emerging companies focused on product innovation. These
competitors are focused on bringing new technologies to market and acquiring technologies and technology licenses that directly
compete with our products or that have potential product advantages that could render our products obsolete or noncompetitive.
Our Bone Growth Therapies product category competes principally with similar products marketed by Zimmer Biomet, DJO Global,
and Bioventus. Our primary competitors in the Biologics, Enabling Technologies, and Spinal Implants markets include Alphatec Spine,
Baxter, B. Braun, Brainlab, Bioventus, Cerapedics, DePuy Synthes Spine (a Johnson & Johnson company), Globus Medical, Medtronic,
Stryker, XTANT Medical, ZimVie and various smaller public and private companies. For Global Orthopedics devices, our principal
competitors include DePuy Synthes, Stryker, Smith & Nephew, Globus Medical, Enovis, Paragon 28, and OrthoPediatrics.
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
In general, raw materials essential to our businesses are readily available from multiple sources. For reasons of quality assurance,
availability, or cost effectiveness, certain components and raw materials are available only from one supplier. Our relationships with
suppliers that cannot be replaced without a material expense or delay are governed by written contracts, which are generally supply
agreements. These agreements set forth the process by which we order components or raw materials, as applicable, from such
suppliers (which process is either on a purchase order basis or based on quarterly or annual forecasts and in some cases require us
to purchase minimum amounts) and the related fees for purchasing such components or raw materials. These agreements outline
the rights of each party with respect to quality assurance, inspection, and compliance with applicable law and contain what we
believe to be customary indemnification provisions for commercial agreements. Each of these agreements is entered into in the
ordinary course of our business, is immaterial in amount and significance, and not a contract upon which our business is
substantially dependent. In addition, we endeavor to maintain sufficient inventory of components and raw materials so that our
production will not be significantly disrupted even if a particular component or material is not available for a period of time.
Bone Growth Therapies, Spinal Implants, Enabling Technologies, and Global Orthopedic Products
We generally design, develop, assemble, test, and package our Bone Growth Therapies, Spinal Implants, Enabling Technologies, and
Global Orthopedic products, and subcontract the manufacturing of a substantial portion of the component parts and instruments.
Although certain aspects of our key raw materials are obtained from a single source, we believe alternate sources for these
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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.
Our products are currently manufactured and assembled in the U.S., Canada, Germany, Spain, China, 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.
Biologics
Most of our Biologics products contain material derived from human or bovine tissue. We only source our raw materials from tissue
banks registered with the FDA and accredited by the AATB. The donors are screened, tested, and processed by the tissue banks in
accordance with FDA and AATB requirements. Additionally, each donor must pass FDA-specified bacterial and viral testing before
raw material is distributed to us for further processing. We receive with each donor lot a certification of the safety of the raw
material from the tissue bank’s medical director. As an added safety assurance, each lot of bone is released into the manufacturing
process only after our quality assurance microbiologists screen the incoming bone and serology test records. During our
manufacturing process, the bone particles are subjected to our proprietary process and terminally sterilized. This process is designed
to support the safety and effectiveness of our DBM products.
The collagen used in our collagen ceramic matrix products is derived only from the deep flexor tendon of cattle less than 24 months
old from New Zealand. The World Health Organization classifies different types of cattle tissue for relative risk of BSE transmission.
Deep flexor tendon is in the lowest-risk category for BSE transmission (the same category as milk, for example) and is therefore
considered to have a negligible risk of containing the agent that causes BSE (an improperly folded protein known as a prion).
We also 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.
Our partnership with MTF allows us to exclusively market the Virtuos Lyograph, Trinity ELITE, FiberFuse and FiberFuse Strip, and
certain other tissue forms and we have a non-exclusive marketing rights for our Opus BA and Opus MG Set synthetic, biologic
offerings.
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
As of December 31, 2023, we had 1,634 employees worldwide. Of these, 1,271 were employed in the U.S. and 363 were employed
at other non-U.S. locations. Our relations with our Italian employees, who numbered 221 at December 31, 2023, 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 agreements.
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 of 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, a Company-provided basic life
insurance and disability benefits, a corporate wellness program, an onsite fitness center for certain locations, 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 have developed a robust onboarding program for our newly hired associates that provides a comprehensive overview
of our product portfolio and company history. 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
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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 2023, we launched the second cohort of our Leadership Excellence and Acceleration Program ("LEAP")
dedicated to fostering a culture of excellence and innovation through continued development of our key talent. All of our employees
are encouraged to work with their managers to create individual plans to guide their career progression, taking advantage of
learning curriculum and training opportunities to support their growth and continued success.
Diversity and Inclusion
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, Mental Health and Awareness Month, Diwali, Ramadan, Kwanzaa, Juneteenth, and
Hispanic and Native American Heritage Months among others. 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, we incorporate into our new hire orientation, a training titled, “Hiring, Leading and Fostering
Diverse and Inclusive Teams” for all hiring managers, leaders, and interviewers.
Health and Safety
Promoting and protecting the health and safety of our workforce is a top priority. Health and safety matters are responsibilities that
we share throughout our organization. Employees' safety risks vary depending on the roles they perform, and we seek to tailor our
safety efforts accordingly. Key areas of focus include corporate compliance with responsible hazardous waste management,
recycling, emergency preparedness, and other safety programs aimed at reducing and eliminating serious injuries. We periodically
measure employee sentiment through engagement surveys and share results and action plans with employees.
Community
We support a variety of charitable organizations through monetary and product donations, fundraising efforts, educational
partnerships with colleges and universities, and local community development. Over the years, we have raised funds and awareness
for disaster response organizations, veteran support groups, food and shelter insecurity groups, and health-related institutions
among others. In 2023, we continued our corporate objective to measure our community outreach as part of our annual incentive
program to encourage volunteerism. Under our “Orthofix Gives Back” initiative, our employees contributed 2,755 hours to
programs, which exceeded our communicated goal. We proudly supported Steps2Walk, Ronald McDonald House, American Red
Cross Disaster Relief, The Trevor Project, Boys & Girls Club, Toys for Tots, Meals on Wheels, Texas Scottish Rite Hospital for Children,
SickKids Hospital, and various blood drives, food pantries and other charitable initiatives in the communities we live and work in
around the world.
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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. The disclosures in this Item 1A of this Annual Report under the
heading “Risk Factors” relate to the combined company subsequent to the merger unless otherwise noted.
Summary of Risk Factors
The section provides a summary of many of the risks we are exposed to in the normal course of our business activities. The summary
does not contain all of the information that may be important to you, and you should read the summary together with the more
detailed discussion of risks set forth following this section as well as elsewhere in this report.
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Integration of the Orthofix and SeaSpine businesses is expected to be expensive and time-intensive and we may not be
able to successfully integrate the businesses and/or realize anticipated synergies and benefits in a timely manner, if at
all.
We are subject to a wide range of requirements, regulations, and laws due to our international operations and related to
the medical device industry in which we operate, the violation of any of which could subject us to adverse
consequences.
Ongoing healthcare reform initiatives and changes in third-party reimbursement policies and in the healthcare industry
aimed at cost containment may adversely impact our business.
We and certain of our suppliers are subject to extensive government regulation that increases our costs and could limit
our ability to market or sell our products.
Oversight of the medical device industry might affect the way we sell medical devices and compete in the marketplace.
A FDA panel 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 are subject to requirements relating to hazardous materials which may impose significant compliance or other costs
on us.
The COVID-19 pandemic or other such global events, and the related effects thereof, could materially adversely affect,
our operations, supply chain, manufacturing, product demand, product distribution, customers, and other business
activities.
Our business may be adversely affected if consolidation in the healthcare industry leads to demand for price concessions
or if a GPO or similar entity excludes us from being a supplier.
The industry in which we operate is highly competitive. New product developments and improvements by our
competitors could make our products or technologies non-competitive or obsolete. Similarly, unless clinical studies
demonstrate the safety and efficacy of our products, alone and relative to competitive products, our sales may be
adversely affected.
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, including physicians, hospitals, and third-party payors.
Clinical development is a lengthy and expensive process with an inherently uncertain outcome. Failure to successfully
complete clinical trials and obtain regulatory approval for our product candidates on our anticipated timelines at
reasonable costs to us, or at all, could have a material adverse effect on our business, operating results, and financial
condition.
If the third parties on which we rely to conduct our clinical studies do not perform as contractually required or expected,
we may not obtain required approvals for or commercialize our products.
Unfavorable negative publicity concerning both alleged improper methods of tissue recovery from donors and disease
transmission from donated tissue could limit widespread acceptance of some of our products.
We may not be able to successfully introduce new products to the market and, if we do, market acceptance or the
market size for our products may not be as we expect.
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There is no guarantee that regulatory authorities, U.S. or foreign, will grant clearance or premarket approval of our
future products.
Our success depends on our ability to successfully educate and train surgeons and their staff on the benefits, safety,
cost-effectiveness, and proper use of our products.
Security breaches, cyber-attacks, loss of data, and other disruptions to our information technology systems could
compromise sensitive information and/or adversely affect our business.
Our business could be harmed if any of our manufacturing, development, or research facilities are damaged and/or our
manufacturing processes are interrupted.
We depend on a limited number of third-party manufacturers and suppliers for manufacturing and processing activities,
components, and raw materials. Failure of these third parties to perform as expected could result in substantial delays,
increased costs or failures of our product development programs, or delayed or unsuccessful commercialization of our
products.
We may not maintain or grow our revenue if we are unable to maintain and expand our network of independent sales
representatives and distributors.
Our success depends on the services of key members of our senior management and other key employees.
Our business is subject to economic, political, regulatory, and other risks associated with international sales and
operations.
Our failure to adequately protect or enforce our intellectual property rights could harm our position in the marketplace
or prevent or impede the commercial protection of our products.
We may be subject to third parties claims for infringement or misappropriation of their intellectual property.
There have been substantial intellectual property disputes in our industry, which are inherently costly, divert significant
time and other resources, and have unpredictable outcomes.
We may have significant product or other liability exposure, some of which may not be covered by insurance, and if
covered by insurance, such coverage may not cover all claims, which could require us to pay substantial sums.
Our efforts to identify, pursue, and implement new business opportunities (including acquisitions) may be unsuccessful.
We have invested in and provided loans to privately-held companies and if they are unsuccessful, we may lose all of our
investment and our loans may not be repaid.
Our sales volumes and our operating results may fluctuate.
Our goodwill, intangible assets, and fixed assets are subject to potential impairment which could adversely affect our
future financial results.
We maintain a $150.0 million financing agreement secured by a pledge of substantially all of our property. Our failure to
comply with the facility’s covenants could result in an event of default, which could adversely affect our future.
We must maintain high levels of inventory, which could consume a significant amount of our resources and reduce our
cash flows.
Our future capital needs are uncertain and we may need to raise additional funds in the future, and such funds may not
be available on acceptable terms or at all.
Our business could be negatively impacted by corporate citizenship and environmental, social, and governance ("ESG")
matters and/or our reporting of such matters.
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Risks Related to our Merger with SeaSpine
The combined company may be unable to successfully integrate the Orthofix and SeaSpine businesses and realize the anticipated
benefits of the merger.
The success of the merger will depend, in part, on our ability to successfully combine and integrate the Orthofix and SeaSpine
businesses, and realize the anticipated benefits, including synergies, cost savings, innovation and technological opportunities, and
operational efficiencies from the merger in a manner that does not materially disrupt existing customer, supplier, and employee
relations and does not result in decreased revenues due to losses of, or decreases in orders by, customers. If we are unable to
achieve these objectives within the anticipated time frame, or at all, the anticipated benefits may not be realized fully or at all, or
may take longer to realize than expected, and the value of our common stock may decline. Integration may result in additional and
unforeseen expenses, and we may fail to realize some or all of the anticipated benefits of the merger on a timely basis or at all.
While we have successfully completed a number of integration activities since the closing of merger, the remainder of our
integration activities may not be completed smoothly or successfully. The integration of the two companies may result in material
challenges, including, without limitation:
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managing a larger, more complex combined medical device business;
maintaining employee morale and retaining key management and other employees;
retaining existing business and operational relationships, including customers, suppliers, and employees and other
counterparties, as may be impacted by contracts containing consent and/or other provisions that may be triggered by
the merger, and attracting new business and operational relationships;
unanticipated issues in integrating the numerous systems involved in operating our businesses, including information
technology, communications, purchasing, accounting, and finance, including integrating different accounting policies,
sales, billing, payroll, employee benefits, regulatory compliance, and other systems;
successfully addressing inconsistencies in standards, controls, procedures, or policies that could affect our ability to
maintain relationships with customers and employees or to achieve the anticipated benefits of the merger;
consolidating corporate and administrative infrastructures and eliminating duplicative operations;
coordinating geographically separate organizations, systems, and facilities and addressing possible differences in
business backgrounds, corporate cultures, and management philosophies; and
unforeseen expenses or delays associated with the merger.
Many of these factors will be outside of our control, and any one of them could result in delays, increased costs, decreases in the
amount of expected revenues, and other adverse impacts, which could materially affect our financial position, results of operations,
and cash flows. In addition, the integration of certain operations requires the dedication of significant management resources, which
may temporarily distract management’s attention from our day-to-day business. Employee uncertainty and lack of focus during the
integration process may also disrupt our business.
Our future results may be adversely impacted if we do not effectively manage our complex operations following the completion of
the merger.
Following the merger, the size of our business has become significantly larger. Our ability to successfully manage this expanded
business will depend, in part, upon our ability to design and implement strategic initiatives that address not only the integration of
the Orthofix and SeaSpine businesses, but also the increased scale and scope of the combined business with its associated increased
costs and complexity. There can be no assurances that we will be successful in integrating the businesses or that we will realize the
expected operating efficiencies, cost savings, and other benefits as originally anticipated from the merger.
We have incurred substantial expenses related to the merger and we expect to incur substantial additional expenses related to the
integration of the Orthofix and SeaSpine businesses.
We incurred substantial expenses in connection with the completion of the merger and we have incurred substantial expenses
related to integration activities performed to date in order to integrate a large number of processes, policies, procedures,
operations, technologies, and systems of Orthofix and SeaSpine. These activities remain ongoing for certain integration areas, thus
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we expect to continue to still incur significant expenses associated with these activities in the future. The substantial majority of
these costs are believed to be non-recurring expenses related to the transaction, our facilities, our personnel, and systems
consolidation costs. We may incur additional costs or suffer loss of business under third-party contracts that are terminated or that
contain change in control or other provisions that may be triggered by the completion of the merger, and/or losses of, or decreases
in orders by, customers, and may also incur costs to (i) retain certain key management personnel and employees or (ii) associated
with restructuring activities following the merger. These incremental transaction-related and integration costs may exceed the
savings the combined company expects to achieve from the elimination of duplicative costs and the realization of other efficiencies
related to the integration of the businesses, particularly in the near term and in the event there are material unanticipated costs.
Factors beyond our control could affect the total amount or timing of these expenses, many of which, by their nature, are difficult to
estimate accurately.
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. Also, previously effective internal controls may become inadequate over time because of changes in
our business or operating structure, and we may fail to take measures to evaluate the adequacy of and update these controls, as
necessary. 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 recently identified a material weakness in our internal control over financial reporting, and our business and stock price may be
adversely affected if our internal control over financial reporting is not effective.
During the financial close for the quarter ended December 31, 2023, we identified a material weakness in our internal controls over
financial reporting related to the operation of certain management review controls pertaining to business combinations and
goodwill. A more complete description of this material weakness is included in Item 9A, "Controls and Procedures" in this Form 10-K.
As previously discussed, 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.
In recent years, both the U.S. and non-U.S. regulators have increased regulation, enforcement, inspections, and governmental
investigations of the medical device industry, including increased U.S. government oversight and enforcement of the FCPA. Despite
implementation of a comprehensive global healthcare compliance program, we may be subject to more regulation, enforcement,
inspections, and investigations by governmental authorities in the future.
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
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individuals, fines and penalties, denial of export privileges, suspension or withdrawal of CE Certificates of Conformity, seizure of
shipments, restrictions on certain business activities, disgorgement and other remedial measures, disruptions of our operations, and
significant management distraction. Also, the failure to comply with applicable legal and regulatory obligations could result in the
disruption of our distribution and sales activities. Any reduction in international sales, or our failure to further develop our
international markets, could have a material adverse effect on our business, results of operations, and financial condition.
We are subject to federal and state healthcare fraud, abuse, and anti-self-referral laws, and could face substantial penalties if we are
determined not to have fully complied with such laws.
Healthcare fraud and abuse regulations by federal and state governments impact our business. Healthcare fraud and abuse laws
potentially applicable to our operations include:
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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.
Federal and state government agencies, as well as private whistleblowers, have significantly increased investigations and
enforcement activity under these laws. Violations of these laws are punishable by 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.
Although we exercise care in structuring our sales and marketing practices, customer discount arrangements, and interactions with
healthcare professionals to comply with these laws and regulations, we cannot provide assurance that government officials will not
assert that our practices are not in compliance or that government regulators or courts will interpret those laws or regulations in a
manner consistent with our interpretation. Even if an investigation is unsuccessful or is not fully pursued, we may spend
considerable time and resources defending ourselves and the adverse publicity surrounding any assertion that we may have
engaged in violative conduct could have a material and adverse effect on our reputation with existing and potential customers and
on our business, financial condition, and results of operations.
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.
Maintaining and growing sales of our products depends on the availability of adequate coverage and reimbursement from third-
party payors, both within and outside the U.S. 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, managed care organizations, and healthcare networks. Major third-party payors for medical services in the U.S. and
internationally continue to work to contain health care costs, are increasingly challenging the policies and the prices charged for
medical products and services, and have or may implement initiatives to limit the growth of healthcare costs, including price
regulation, competitive pricing, coverage and payment policies, comparative effectiveness of therapies, technology assessments,
and managed-care arrangements. 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
continually review and revise their coverage and reimbursement policies for procedures involving the use of our products and can,
without notice, eliminate or reduce coverage or 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.
For example, in the past, a major national third-party insurer in the U.S. reduced coverage (from all or most cases to limited
indications) for biomechanical devices (e.g., spine cages) used in cervical fusion procedures, stating that the devices had not been
shown to be more effective than bone graft. In addition, certain insurers have limited coverage for vertebral fusions in the lumbar
spine and other insurers may adopt similar coverage decisions in the future. 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,
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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, and 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.
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.
With respect to international sales, market acceptance may depend, in part, upon the availability of coverage and reimbursement
within prevailing healthcare payment systems. Reimbursement and healthcare payment systems in international markets vary
significantly by country. As in the U.S., our products may not obtain coverage and reimbursement approvals in a timely manner, if at
all, in a particular international market. In addition, even if we obtain country-specific coverage and reimbursement approvals, we
could incur considerable expense to do so. Our failure to obtain such coverage and approvals would negatively affect market
acceptance of our products in the international markets in which such failure occurs and the expenses incurred in connection with
obtaining such coverage and approvals could outweigh the benefits of obtaining them.
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.
If governmental agencies and other third-party payors reduce coverage of and/or reimbursement for procedures using our products,
our business, results of operations, and financial condition could be materially and adversely affected. Further, we cannot be certain
that, under current and future payment systems, the cost of our products will be adequately incorporated into the overall cost of
the procedure and, accordingly, we cannot be certain that the procedures performed with our products will be reimbursed at a cost-
effective level, or at all.
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 must engage in extensive recordkeeping and reporting. For example, the Federal Medical Device Reporting
regulation requires us to provide information to the FDA whenever there is evidence that reasonably suggests that a device may
have caused or contributed to a death or serious injury or that a malfunction occurred that would be likely to cause or contribute to
a death or serious injury upon recurrence.
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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. Allegations may be made against us or against our suppliers, including donor
recovery groups or tissue banks, claiming that the acquisition or processing of biomaterials products does not comply with
applicable FDA regulations or other relevant statutes and regulations. Allegations like these could cause regulators or other
authorities to investigate or take other action against us or our suppliers, or could cause negative publicity for us or our industry
generally. If the FDA were to investigate us, because of an allegation or otherwise, and if the FDA were to conclude that we are not
in compliance with applicable laws or regulations, or that any of our medical devices are ineffective or pose an unreasonable health
risk, 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. The FDA may also recommend
prosecution to the U.S. DOJ. Any notice or communication from the FDA regarding a failure to comply with applicable requirements,
or negative publicity or product liability claims resulting from any adverse regulatory action, could have a material adverse effect on
our development of new laboratory tests, business strategy, financial condition, results of operations, or cash flows.
We have little control over the ongoing compliance of our suppliers with applicable regulations. Their failure to comply may expose
us to regulatory action and other liability, including fines and civil penalties, suspension of production, suspension or delay in new
product approval or clearance, product seizure or recall, or withdrawal of product approval or clearance.
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.
In addition, until a completed mutual recognition agreement exists between Switzerland and the E.U., Switzerland will be considered
a Third Country. The company has, however, pursued registration of certain key products in Switzerland under their new laws.
Similar activities have been pursued in the United Kingdom in relation to Brexit.
Oversight of the medical device industry might affect the way we sell medical devices and compete in the marketplace.
The FDA, the U.S. Office of the Inspector General for the U.S. Department of Health and Human Services, the U.S. DOJ, and other
regulatory agencies actively enforce regulations prohibiting the promotion of a medical device for a use that has not been cleared or
approved by the FDA. Use of a device outside its cleared or approved indications is known as “off-label” use. Physicians may
prescribe our products for off-label uses, as the FDA does not restrict or regulate a physician’s choice of treatment within the
practice of medicine. However, if a regulatory agency determines that our promotional materials, training, or activities constitute
improper promotion of an off-label use, the regulatory agency could request that we modify our promotional materials, training, or
activities, or subject us to regulatory enforcement actions, including the issuance of a warning letter, injunction, seizure, civil fine,
and/or criminal penalties. Although our policy is to refrain from statements and activities that could be considered off-label
promotion of our products, any regulatory agency could disagree and conclude that we have engaged in off-label promotion and,
potentially, caused the submission of false claims. Moreover, the off-label use of our products may increase the risk of injury to
patients, and, in turn, the risk of product liability claims. In addition, we may be subject to compliance actions, penalties, or
injunctions if the FDA challenges one or more of our determinations that a product modification did not require new approval or
clearance by the FDA.
A FDA panel 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 as the only company to provide both PEMF and LIPUS bone healing
solutions. 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 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.
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In September 2020, the FDA’s Orthopedic 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:
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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. Persisting uncertainty with respect
to the scope and effect of certain provisions of the ACA have made compliance costly. Any future changes to the ACA or other such
legislation, depending on their nature, could affect rebates, prices, or the rate of price increases for health care products and
services, or required reporting and disclosure, and could have an adverse effect on our ability to maintain or increase sales of any of
our products and achieve profitability. We cannot predict the timing or impact of any future rulemaking or changes in the law.
However, any changes that have the effect of reducing reimbursements for our products or reducing medical procedure volumes
could have a material and adverse effect on our business, financial condition, and results of operations.
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. Foreign governmental
regulations have become increasingly stringent and more common, and we may become subject to even more rigorous regulation
by foreign governmental authorities. Numerous laws restrict, and in some cases prohibit, U.S. companies from directly or indirectly
selling goods, technology, or services to people or entities in certain countries. In addition, these laws require that we exercise care
in structuring our sales and marketing practices and effecting product registrations in foreign countries. Compliance with these
regulations is costly.
The import and export of our products 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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The sales and marketing practices of our industry have been the subject of increased scrutiny from federal and state government
agencies.
AdvaMed (U.S.), MedTech Europe (Europe), MEDEC and MedTech Canada (Canada), and MTAA (Australia), some of the principal
trade associations for the medical device industry, have promulgated model codes of ethics that set forth standards by which its
members should (and non-member companies may) abide in the promotion of their products in various regions. We have
implemented policies and procedures for compliance consistent with the standards promulgated by these associations, and we train
our sales and marketing personnel on our policies regarding sales and marketing practices. Nevertheless, the sales and marketing
practices of our industry have been the subject of increased scrutiny from federal and state government agencies. We believe this
trend will continue and that it could affect our ability to retain customers and other relationships important to our business.
For example, prosecutorial scrutiny and governmental oversight, at both the state and federal levels, over some major device
companies regarding the retention of healthcare professionals have limited how medical device companies may retain healthcare
professionals as consultants. Various hospital organizations, medical societies, and trade associations are establishing their own
practices that may require detailed disclosures of relationships between healthcare professionals and medical device companies, or
ban or restrict certain marketing and sales practices, such as gifts and business meals. In addition, the ACA, as well as certain state
laws, require detailed disclosure of expenses incurred on behalf of and remuneration made to certain healthcare professionals and
teaching hospitals, the publicity surrounding which could have a negative impact on our relationships with our customers and ability
to seek input on product design or involvement in research. As a result of laws, rules, and regulations, or our own or third-party
policies that prohibit or restrict interactions, or the growing perception that any interaction between healthcare professionals and
industry are tainted, we may be unable to engage with our healthcare professional customers in the same manner or to the same
degree, or at all, as would otherwise be the case, which may adversely affect our ability to understand our customer’s needs and to
incorporate into our development programs feedback that addresses these needs. If we are unable to develop and commercialize
new products that address the needs of our physician customers and their patients, our products may not be broadly accepted in
the marketplace, or at all, which would have a negative effect on our business, results of operations, and financial condition.
We are subject to requirements relating to hazardous materials which may impose significant compliance or other costs on us.
Our research, development, and manufacturing processes involve the controlled use of certain hazardous materials. For example,
our allograft bone tissue processing may generate waste materials that in the U.S. are classified as medical waste. In addition, we
lease facilities at which hazardous materials could have been used. Because of the foregoing, we are subject to federal, state,
foreign, and local laws and regulations governing the use, manufacture, storage, handling, treatment, remediation, and disposal of
hazardous materials and certain waste products.
Although we believe that our procedures for handling and disposing of hazardous materials comply with applicable laws as currently
in effect, we cannot eliminate the risk of accidental contamination or injury from these materials. In addition, under some
environmental laws and regulations, we could also be held responsible for all of the costs relating to any contamination at our past
or present facilities and at third-party waste disposal sites, even if such contamination was not caused by us. If an accident occurs,
state or federal or other applicable authorities may curtail our use of these materials and interrupt our business operations. In
addition, if an accident or environmental discharge occurs, or if we discover contamination caused by prior operations, including by
prior owners and operators of properties we acquire, we could be liable for cleanup obligations, damages, and fines. Any related
liability could exceed our resources. If such unexpected costs are substantial, this could significantly harm our financial condition and
results of operations. We carry no insurance specifically covering environmental claims relating to the use of hazardous materials.
Risks Related to our Business and Industry
The COVID-19 pandemic and related supply chain and raw material disruptions previously had material adverse impacts to our global
operations and financial condition. Other such global events could similarly have a 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 temporarily led to a global shortage of semiconductor chips, which are used in certain of our
products. This shortage was primarily caused by manufacturers experiencing shutdowns or slowdowns during the pandemic, and it
took several fiscal quarters for normalized capacity to return. In addition, limitations in key raw material supplies could also cause
semiconductor chip and other component shortages potentially in the future. To the extent such shortages are experienced,
particularly on a longer-term basis, this could adversely affect our ability to procure key components and manufacture certain of our
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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 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 trend toward healthcare cost
containment through aggregating purchasing decisions and industry consolidation, along with the growth of managed care
organizations, all of which has placed increased emphasis on the delivery of more cost-effective medical therapies. For example:
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There has been consolidation among healthcare facilities and purchasers of medical devices, particularly in the U.S. One
of the results of such consolidation is that GPOs, IDNs, and large single accounts use their market power to consolidate
purchasing decisions, which intensifies competition to provide products and services to healthcare providers and other
industry participants, resulting in greater pricing pressures and the exclusion of certain suppliers from important market
segments. For example, some GPOs negotiate pricing for its member hospitals and require us to discount, or limit our
ability to increase, prices for certain of our products. In particular, certain of our DBM products are priced at a premium
to competitors' DBM products and a significant price reduction could result in a material adverse effect on our
profitability.
Physicians increasingly have moved from independent, out-patient practice settings toward employment by hospitals
and other larger healthcare organizations, which align physicians’ product choices with their employers’ price
sensitivities and adds to pricing pressures. Hospitals have introduced and may continue to introduce new pricing
structures into their contracts to contain healthcare costs, including fixed price formulas and capitated and construct
pricing.
Certain hospitals provide financial incentives to doctors for reducing hospital costs (known as gainsharing), rewarding
physician efficiency (known as physician profiling), and encouraging partnerships with healthcare service and goods
providers to reduce prices.
Existing and proposed laws, regulations, and industry policies, in both domestic and international markets, regulate or
seek to increase regulation of sales and marketing practices and the pricing and profitability of companies in the
healthcare industry.
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, IDNs, 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.
In addition, the largest device companies with multiple product franchises have increased their effort to leverage and contract
broadly with customers across franchises by providing volume discounts and multi-year arrangements that could prevent our access
to these customers or make it difficult (or impossible) to compete on price.
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. Our competitors may also have: stronger intellectual
property portfolios; broader spine surgery product offerings and products supported by more extensive clinical data; more
established distribution networks; entrenched relationships with physicians; significantly greater name recognition and more
recognizable trademarks for products similar to the products we sell; more established relationships with healthcare providers and
payors; greater experience in obtaining and maintaining FDA and other regulatory clearances or approvals for products and product
enhancement; and greater experience in launching, marketing, and selling products than we do. Many of our competitors specialize
in a specific product or focus on a particular market segment, making it more difficult for us to increase our overall market position.
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The frequent introduction by competitors of products that are, or claim to be, superior to our products, or that are alternatives to
our existing or planned products may also create market confusion that may make it difficult to differentiate the benefits of our
products over competing products. In addition, the entry of multiple new products and competitors may lead some of our
competitors to employ pricing strategies that could adversely affect the pricing of our products and pricing in the spine market
generally.
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. Market acceptance for any of
our products requires, among other things, that we timely secure regulatory clearance and/or approval; demonstrate the value of
our products, both to our physician customers and payors, which may require that we collect clinical data and/or conduct clinical
studies; effectively educate and train our physician customers and their staff on the proper use of our products; obtain and maintain
coverage and adequate reimbursement for our products, both within and outside the U.S., including under Medicare and Medicaid
and from private payors; attract and retain a network of independent sales agents and stocking distributors focused on
neurophysicians and orthopedic spine physicians; develop and execute effective marketing strategies; protect the proprietary
positions of our products, including through patent protection; and consistently produce quality products in sufficient quantities to
meet demand. Significant risks are associated with each of these activities and other activities required to achieve market
acceptance of both our current and future products, including risks inherent in collaborations, or use of nascent manufacturing or
imaging techniques, such as additive processing (more commonly known as 3D printing) or advanced optical technologies and
machine version-based registration algorithms. 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.
Clinical studies are expensive and subject to extensive regulation and their results may not support our product candidate claims or
may result in the discovery of adverse effects.
In developing new products or new indications for, or modifications to, existing products, we may conduct or sponsor pre-clinical
testing, clinical studies, or other clinical research. We are conducting post-market clinical studies of some of our products to gather
information about their performance or optimal use. The data collected from these clinical studies may ultimately be used to
support additional market clearance or approval for these products or future products. If any of our new products require premarket
clinical studies, these studies are expensive, the outcomes are inherently uncertain, and they are subject to extensive regulation and
review by numerous governmental authorities, both in the U.S. and abroad, including by the FDA and, if federal funds are involved
or if an investigator or site has signed a federal assurance, are subject to further regulation by the Office for Human Research
Protections and the National Institutes of Health. For example, clinical studies must be conducted in compliance with FDA
regulations, local regulations, and according to principles and standards collectively called “Good Clinical Practices.” Failure to
comply with applicable regulations could result in regulatory and legal enforcement action, including fines, penalties, suspension of
studies, and also could invalidate the data and make it unusable to support an FDA submission. Even if any of our future premarket
clinical studies are completed as planned, we cannot be certain that their results will support our product candidates and/or
proposed claims or that the FDA or foreign authorities and Notified Bodies will agree with our interpretation and conclusions
regarding the data they generate. Success in pre-clinical studies and early clinical studies does not ensure that later clinical studies
will succeed, and we cannot be sure that the results of later studies will replicate those of earlier or prior studies. The clinical study
process may fail to demonstrate that our product candidates are safe and effective for the proposed indicated uses, which could
cause us to abandon a product candidate and may delay development of others. Any delay or termination of our clinical studies will
delay the filing of our product submissions and, ultimately, our ability to commercialize our product candidates and generate
revenues. It is also possible that patient subjects enrolled in our clinical studies of our marketed products will experience adverse
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side effects that are not currently part of the product candidate’s profile and, if so, these findings may result in lower market
acceptance, which could have a material and adverse effect on our business, results of operations, and financial condition.
If the third parties on which we rely to conduct our clinical studies and to assist us with pre-clinical development do not perform as
contractually required or expected, we may not obtain regulatory clearance, approval, or a CE Certificate of Conformity for our
products or be able to successfully commercialize our products.
We often must rely on third parties, such as contract research organizations, medical institutions, clinical investigators, and contract
laboratories, to assist in conducting our clinical studies and other development activities. If these third parties do not successfully
carry out their contractual duties, comply with applicable regulatory obligations, or meet expected deadlines, or if these third parties
need to be replaced, or if the quality or accuracy of the data they obtain is compromised due to failing to adhere to clinical
protocols, to applicable regulatory requirements or otherwise, our pre-clinical development activities and clinical studies may be
extended, delayed, suspended, or terminated. Under these circumstances, we may not be able to obtain regulatory
clearance/approval or a CE Certificate of Conformity for our products or be able to successfully commercialize our products on a
timely basis, if at all, and our business, operating results, and prospects may be materially and adversely affected.
Our allograft and cellular bone allografts could expose us to certain risks that could disrupt our business.
A portion of 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.
In addition, procurement of certain human organs and tissue for transplantation is subject to the NOTA, which prohibits the transfer
of certain human organs, including skin and related tissue, for valuable consideration, but permits the reasonable payment
associated with the removal, transportation, implantation, processing, preservation, quality control, and storage of human tissue
and skin. If we were to be found to have violated NOTA’s prohibition on the sale or transfer of human tissue for valuable
consideration, we would potentially be subject to criminal enforcement sanctions, which could materially and adversely affect our
results of operations.
Because of the absence of a harmonized regulatory framework and the proposed regulation for advanced therapy medicinal
products in the E.U., as well as for other countries, the approval process in the E.U. for human-derived cell or tissue-based medical
products could be extensive, lengthy, expensive, and unpredictable. Among others, some of our Biologics products are subject to
E.U. member states’ regulations that govern the donation, procurement, testing, coding, traceability, processing, preservation,
storage, and distribution of HCT/Ps. These E.U. member states’ regulations include requirements for registration, listing, labeling,
adverse-event reporting, and inspection and enforcement. Some E.U. member states have their own tissue banking regulations,
including new requirements related to COVID-19 and donor screening. Non-compliance with various regulations governing our
products in any E.U. member state could result in the banning of our products in such member state or enforcement actions being
brought against us, which could have a material and adverse effect on our business, results of operations, and financial condition.
Unfavorable media reports or other negative publicity concerning both alleged improper methods of tissue recovery from donors and
disease transmission from donated tissue could limit widespread acceptance of some of our products.
Unfavorable reports of improper or illegal tissue recovery practices, both in the U.S. and internationally, as well as incidents of
improperly processed tissue leading to the transmission of disease, may affect the rate of future tissue donation and market
acceptance of technologies incorporating human tissue. In addition, negative publicity could cause the families of potential donors
to become reluctant to donate tissue to for-profit tissue processors. For example, the media has reported examples of alleged illegal
harvesting of body parts from cadavers and resulting recalls conducted by certain companies selling human tissue-based products
affected by the alleged illegal harvesting. These reports and others could have a negative effect on our tissue regeneration business.
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.
To be and remain competitive, we need to continue to make improvements in our products, develop new products, introduce our
products into new markets, and successfully respond to technological advances. Doing so is technologically challenging and involves
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significant risks and uncertainty. Despite our planning, the process of developing and introducing new products (including product
enhancements) is inherently complex, uncertain, and involves risks. The success of any of our new product offerings or
enhancement or modification to our existing products will depend on several factors, including our ability to:
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properly identify and anticipate physician and patient needs;
develop new products, enhancements, or modifications in a timely manner;
obtain regulatory clearance and/or approvals for new products or product enhancements or modifications in a timely
manner;
achieve timely alpha and/or full commercial launches of new products;
provide adequate training to potential users of new products and product enhancements or modifications;
receive adequate reimbursement approval of third-party payors such as Medicaid, Medicare, and private insurers;
gain broad market acceptance (including by physicians); and
develop an effective marketing and distribution network.
In addition, competitors could develop products that are more effective, less expensive to manufacture, priced more competitively,
or that are ready for commercial introduction before our products. The introduction of new products by our competitors may lead
us to reduce the prices of our products, result in reduced margins or loss of market share, and/or render our products obsolete or
noncompetitive.
These risks make it inherently difficult to forecast and predict the future net sales of our products. If we cannot develop technically
and commercially viable new products and enhancements or modifications to our existing products on a consistent basis and before
our competitors, our prospects could be materially and adversely affected. In addition, 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.
It is also important that we carefully manage our introduction of new products and enhancements or modifications to our existing
products. If potential customers delay purchases until new or enhanced or modified products are available, it could negatively
impact our sales. In addition, to the extent we have excess or obsolete inventory as we transition to new or enhanced or modified
products, it would result in margin reducing write-offs for obsolete inventory, and our results of operations may suffer.
There is no guarantee that the FDA will grant 510(k) clearance or premarket approval, or that equivalent foreign regulatory
authorities will grant the foreign equivalent, of our future products, and failure to obtain necessary clearances or approvals for our
future products would adversely affect our ability to grow our business.
In general, unless an exemption applies, a medical device and modifications to the device or its indications must receive either
premarket approval or premarket clearance from the FDA before it can be marketed in the U.S. While in the past we have received
such clearances, we may not succeed in the future in receiving approvals and clearances in a timely manner, or at all. The process of
obtaining approval or clearance from the FDA and comparable foreign regulatory agencies for new products, or for enhancements or
modifications to existing products, could:
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take significant time;
require the expenditure of substantial resources;
involve rigorous and expensive pre-clinical and clinical testing, as well as post-market surveillance;
involve modifications, repairs, or replacements of our products; and
result in limitations on the indicated uses of our products.
Some of our new products will require FDA 510(k) clearance or approval of a PMA prior to being marketed. Any modification to a
510(k)-cleared device that could significantly affect its safety or effectiveness, including significant design and manufacturing
changes, or that would constitute a major change in its intended use, design, or manufacture, requires a new 510(k) clearance or,
possibly, approval of a PMA. Similarly, modifications to PMA-approved products may require submission and approval of a PMA
supplement. The FDA requires every manufacturer to determine whether a new 510(k) or PMA is needed in the first instance, and
the FDA has issued guidance on assessing modifications to 510(k)-cleared and PMA-approved devices to assist manufacturers with
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making these determinations. However, the FDA may review any such determination and the FDA may not agree with our
determinations regarding whether new clearances or approvals are necessary. We have modified some of our 510(k)-cleared
products and have determined, based on our understanding of FDA guidance, that certain changes did not require new 510(k)
clearances. If the FDA disagrees with our determination and requires us to seek new 510(k) clearances, or PMA approval, for
modifications to our cleared products, we may have to stop marketing or distributing our products, we may need to recall the
modified product until we obtain clearance or approval, and we may be subject to significant regulatory fines or penalties.
Significant delays in receiving clearance or approval, or failing to receive clearance or approval for our new products would have a
material and adverse effect on our ability to expand our business.
Outside the U.S., clearance or approval procedures can vary among countries and can involve additional product testing and
validation and additional administrative review periods. The time required to obtain clearance or approval in other countries might
differ from that required to obtain FDA clearance or approval. The regulatory process in other countries may include all of the risks
to which we are exposed in the U.S., as well as other risks. Favorable regulatory action in one country does not ensure favorable
regulatory action in another, but a failure or delay in obtaining regulatory clearance or approval in one country may have a negative
effect on the regulatory process in others. Failure to obtain clearance or approval in other countries or any delay or setback in
obtaining such clearance or approval have a material and adverse effect on our business, including that our products may not be
cleared or approved for all indications requested, which could limit the uses of our products and have an adverse effect on product
sales.
In the European Economic Area (“EEA”), we must inform the Notified Body that carried out the conformity assessment of the
medical devices we market or sell in the EEA of any planned substantial change to our quality system or any significant change to our
devices. The Notified Body will then assess the change and verify whether it affects the products’ conformity with the Essential
Requirements or the conditions for the use of the device. If the assessment is favorable, the Notified Body may issue a new CE
Certificate of Conformity or an addendum to the existing CE Certificate of Conformity. If it is not, we may not be able to continue to
market and sell the applicable product in the EEA, which could have a material and adverse effect on our business, results of
operations and financial condition.
We cannot be certain that we will receive required approval or clearance from the FDA and foreign regulatory agencies for new
products, including modifications to existing products, on a timely basis, or at all. Failing to receive approval or clearance for new
products on a timely basis would have a material and adverse effect on our financial condition and results of operations.
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 physicians 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
physicians, consistent with the AdvaMed Code and the MedTech Code, we organize regular multilingual teaching seminars in
multiple locations. However, convincing physicians to dedicate the time and energy necessary for adequate training is challenging,
and we may not be successful in our efforts to educate the medical community and properly train physicians. Physicians who do not
use our products may be hesitant to do so for the following or other reasons:
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lack of experience with our products, techniques, or technologies, or with the equipment necessary to use any of the
foregoing;
existing relationships with those who sell competitive products;
the time required for physician and medical staff education and training on new products, techniques, and equipment
and technologies;
lack or perceived lack of clinical evidence supporting patient benefit relative to competing products;
our products not being included on hospital formularies, in IDNs, or on GPO preferred vendor lists;
less attractive coverage and/or reimbursement within healthcare payment systems for our products and procedures
compared to other products and procedures;
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other costs associated with introducing new products and the equipment necessary to use new products; and
perceived risk of liability that could be associated with the use of new products, techniques, or technologies.
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.
In addition, we believe recommendations and support of our products by influential physicians are essential for market acceptance
and adoption. If we do not receive support from such physicians or long-term data does not show the benefits of using our products,
physicians may not use our products. If we are not successful in convincing physicians of the merits of our products, we may not
maintain or grow our sales or achieve or sustain profitability.
Relatedly, although we believe our training methods for physicians are conducted in compliance with FDA and other applicable
regulations developed both nationally and in third countries, if the FDA or other regulatory agency determines that our training
constitutes promotion of an unapproved use or promotion of an intended purpose not covered by the CE mark affixed to our
products or FDA approved labeling, they could request that we modify our training or subject us to regulatory enforcement actions,
including the issuance of a warning letter, injunction, seizure, civil fine, and/or criminal penalty.
Sales of, or the price at which we sell, our products may be adversely affected unless the safety and efficacy of our products, alone
and relative to competitive products, is demonstrated in clinical studies.
Generally, we have obtained 510(k) clearance to manufacture, market, and sell the products we market in the U.S. and the right to
affix the CE mark to the products we market in the EEA. To date, we have not been required to generate new clinical data to support
our 510(k) clearances, CE marks, or product registrations in other countries. However, the E.U. Medical Device Regulations, which
replaced the prior medical device directives in May 2021, require submission of certain pre- and post-market data to maintain our
CE marks. Additionally, we recently completed an analysis of which of our product systems will require submission of clinical data
pursuant to MEDDEV 2.7.1 rev 4, which sets forth the EC’s guidance on the clinical evaluation of medical devices. Accordingly, and in
line with our vision to deliver clinical value, we have commenced clinical data collection activities for certain of our marketed
products as more fully described elsewhere in this "Risk Factors" section.
In part due to the increased emphasis on the delivery of more cost-effective treatments, purchasing decisions of our customers
increasingly will be based on clinical data that demonstrates the value of our products or the effectiveness of our products relative
to others. Conducting clinical studies is expensive and time-consuming and outcomes are uncertain. See “Clinical studies are
expensive and subject to extensive regulation and their results may not support our product candidate claims or may result in the
discovery of adverse effects,” above. We may elect not to, or may be unable to, fund the clinical studies necessary to generate the
data required for all of our products to compete effectively, in part due to the breadth of our product portfolio. Currently, we do not
expect to undertake such clinical studies for all of our products and only expect to do so where we anticipate the benefits will
outweigh the costs on a risk-adjusted basis. However, even when we elect and are able to fund such clinical studies on one or more
of our products, such studies may not succeed. Data we generate may not be consistent with our existing data and may demonstrate
less favorable safety or efficacy, which could reduce demand for our products and negatively impact future sales. Neurophysicians
and orthopedic spine physicians may be less likely to use our products if more robust, or any, clinical data supporting the safety and
efficacy of competing products is available. If we are unable to or unwilling to generate clinical data supporting the safety and
effectiveness of our products, our business, results of operations and financial condition could be materially and adversely affected.
Further, future patient studies or clinical experience may indicate that treatment with our products does not improve patient
outcomes.
With the passage of the American Recovery and Reinvestment Act of 2009, funds have been appropriated for the U.S. Department
of Health and Human Services’ Healthcare Research and Quality to conduct comparative effectiveness research to determine the
effectiveness of different drugs, medical devices, and procedures in treating certain conditions and diseases. Some of our products
or procedures performed with our products could become the subject of such research. It is unknown what effect, if any, this
research may have on our business. Further, future research or experience may indicate that treatment with our products does not
improve patient outcomes or improves patient outcomes less than we initially expected. Such results would reduce demand for our
products, affect sustainable reimbursement from third-party payors, significantly reduce our ability to achieve expected revenue,
and could cause us to withdraw our products from the market and could prevent us from sustaining or increasing profitability.
Moreover, if future results and experience indicate that our products cause unexpected or serious complications or other
unforeseen negative effects, we could be subject to significant legal liability, negative publicity, and damage to our reputation, and
we could experience a dramatic reduction in sales of our products, all of which would have a material adverse effect on our
business, financial condition, and results of operations. The spine medical device market has been particularly prone to potential
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product liability claims that are inherent in the testing, manufacture, and sale of medical devices and products for spine surgery
procedures.
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, fill and ship customer orders on a timely basis,
coordinate our sales activities across all of our products and services, and 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 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 internet. There can be no assurance that such delays, problems, or costs will not have a material adverse effect on our
cash flows, operating results, and financial condition.
As our operations grow in both size and scope, we will continuously need to improve and upgrade our information technology
systems and infrastructure while maintaining the reliability and integrity of our information technology systems and infrastructure.
An expansion of our information technology 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 information technology 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 integrating such upgrades or new
technology. 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 and
could have a material adverse effect on our business, financial condition, and results of 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 the greater of 20 million Euros or 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
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that data. We are also subject to the California Consumer Privacy Act (the “CCPA”), which went into effect in January 2020. In
November 2020, California passed the California Privacy Rights Act (the “CPRA”), which builds on the CCPA and expands consumer
privacy rights to more closely align with the GDPR. The CPRA went into effect on January 1, 2023, and applies to information
collected on or after January 1, 2022. The CCPA and CPRA, among other things, create new data privacy obligations for covered
companies and provides new privacy rights to California residents, including the right to opt out of certain disclosures of their
information. The CCPA also created a private right of action with statutory damages for certain data breaches, thereby potentially
increasing risks associated with a data breach. It remains unclear what, if any, additional modifications will be made to the CPRA by
the California legislature or how it will be interpreted. 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 have seen 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.
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 hospitals 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.
If any of our manufacturing, development, or research facilities are damaged and/or if our manufacturing processes are interrupted,
we could experience supply disruptions and/or lost revenues and our business could be seriously harmed.
Damage to our manufacturing, development, or research facilities, or disruption to our business operations for any reason, including
due to natural disaster (such as earthquake, wildfires, and other fires or extreme weather), power loss, communications failure,
unauthorized entry, or other events, such as a flu or other health epidemic (such as the result of the COVID-19 pandemic), could
cause us to discontinue development and/or manufacturing of some or all of our products for an undetermined period of time. The
property damage and business interruption insurance coverage on these facilities that we maintain might not cover all losses under
such circumstances, and we may not be able to renew or obtain such insurance in the future on acceptable terms with adequate
coverage or at reasonable costs. If our facilities were damaged, they could be difficult to replace and could require substantial lead
time to repair or replace. In particular, we manufacture certain of our biologics products in one facility in Irvine, California, and any
damage to that facility could adversely affect our ability to timely satisfy demand for those products. Out of an abundance of
caution, in October 2020, we relocated part of our Biologics finished goods inventory from our Irvine facility to our Carlsbad office
due to the threat of the Silverado Fire that was causing evacuations throughout Orange County, California. Disruptions to our
business operations may result from damage to the facilities of, or disruption to the business operations of our suppliers. For
example, if we are unable to obtain disposables or other materials required to maintain “clean room” sterility in our Irvine facility,
we may be unable to continue to manufacture products at that facility, which products accounts for a significant amount of our total
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revenue. Any significant disruption to our manufacturing operations and to our ability to meet market demand likely would have an
adverse impact on our sales and revenues as key stakeholders, including our independent sales agents and stocking distributors and
physician customers, transition to what they perceive as more reliable sources of products.
We depend 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.
We depend on a limited number of third-party suppliers for processing activities, components and raw materials and losing any of
these suppliers, or their inability to provide us with an adequate supply of materials that meet our quality and other requirements,
could harm our business.
Outside suppliers, some of whom are sole-source suppliers, provide us with products, raw materials, and components used in
manufacturing our products. We strive to maintain sufficient inventory of products, raw materials, and components so that our
production will not be significantly disrupted if a particular product, raw material, or component is not available to us for a period of
time, including as a result of a supplier's loss of its ISO or other certification or as a result of any of the disruptions described below
under the risk factor titled “If any of our manufacturing, development, or research facilities are damaged and/or if our
manufacturing processes are interrupted, we could experience supply disruptions and/or lost revenues and our business could be
seriously harmed.” For example, a certain number of our products require titanium, which is sourced from third party suppliers.
While the titanium required for such products is not directly sourced from Russia, the current geopolitical events involving Russia
and Ukraine is negatively impacting the wider titanium supply chain and such geopolitical events and factors relating thereto or
resulting therefrom, including the imposition of sanctions, may negatively impact the ability of our local supply sources to timely
supply titanium to us. In addition, some of our suppliers may choose to discontinue making their products available in the E.U. rather
than follow MDR, which would require us to identify alternate supply sources for those products. Any such disruption in our
production could harm our reputation, business, financial condition, and results of operations.
Although we believe there are alternative supply sources, replacing our suppliers may be impractical or difficult in many instances.
For example, we could have difficulty obtaining similar services or products from other suppliers that are acceptable to the FDA or
other foreign regulatory authorities and who are able to provide the appropriate supply volumes at an acceptable cost. In addition, if
we are required to transition to new suppliers for certain services or components of our products, the use of services, components,
or materials furnished by these alternative suppliers could require us to alter our operations, and if we are required to change the
manufacturer of a critical component of our products, we will have to verify that the new manufacturer maintains facilities,
procedures, and operations that comply with our quality and applicable regulatory requirements, which could further impede our
ability to manufacture our products in a timely manner. Transitioning to a new supplier could be time-consuming and expensive,
may result in interruptions in our operations and product delivery, could affect the performance specifications of our products, or
could require that we modify the design of those systems.
If we are unable to obtain sufficient quantities of products, raw materials, or components that meet our quality and other
requirements on a timely basis for any reason, we may not produce sufficient quantities of our products to meet market demand
until a new or alternative supply source is identified and qualified and, as a result, we could lose customers, our reputation could be
harmed and our business could suffer. Furthermore, an uncorrected defect or supplier’s variation in a component or raw material
that is incompatible with our manufacturing, or unknown to us, could harm our ability to manufacture products.
Further, under the Food and Drug Administration Safety and Innovation Act ("FDASIA"), which includes the Medical Device User Fee
Amendments of 2012, as well as other medical device provisions, all U.S. and foreign manufacturers must have a FDA Establishment
Registration and complete Medical Device listings for sales in the U.S. While we believe that our facilities materially comply with
these requirements, we also source products from foreign contract manufacturers. It is possible that some of our foreign contract
manufacturers will not comply with applicable requirements and choose not to register with the FDA. In such an event, we will need
to determine if there are alternative foreign contract manufacturers who comply with the applicable requirements. If such a foreign
contract manufacturer is a sole supplier of one of our products, there is a risk that we may not be able to source another supplier.
Furthermore, we rely on a small number of tissue banks accredited by the AATB for the supply of human tissue, a crucial component
of our biologics products that serve as bone graft substitutes. Any failure to obtain tissue from these sources or to have the tissue
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processed by these sources for us in a timely manner will interfere with our ability to meet demand for our biologics products
effectively. The processing of human tissue into biologics products is labor intensive and maintaining a steady supply stream is
challenging. In addition, due to seasonal changes in mortality rates, some scarce tissues used for our biologics products are at times
in particularly short supply. If governments require additional donor testing due to COVID-19, this could also strain the supply of
tissue. We cannot be certain that our supply of human tissue from our suppliers will be available at current levels or will meet our
needs or that we will be able to successfully negotiate commercially reasonable terms with other accredited tissue banks.
If we are unable to maintain and expand our network of independent sales representatives and distributors, we may not maintain or
grow our revenue.
We sell our products in many countries through independent sales representatives and distributors. Frequently, our independent
sales representatives and our distributors have the exclusive right to sell our products in their respective territories. If any of our
independent sales representatives or distributors fail to adequately promote, market, and sell our products, our sales could
significantly decrease. The terms of our agreements with our independent sales representatives and distributors 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.
Further, we face significant challenges and risks in managing our geographically dispersed distribution network and retaining the
independent sales representatives and distributors who make up that network, and as we launch new products and increase our
marketing efforts with respect to existing products, we plan to expand the reach of our marketing and sales efforts and may need to
hire new independent sales representatives and distributors. Independent sales representatives and distributors require significant
technical expertise in various areas such as spinal care practices, spine injuries and disease, and spinal health and they require
training and time to achieve full productivity. We may not attract or retain qualified independent sales representatives and
distributors or enter into agreements with them on favorable or commercially reasonable terms, if at all. This could be due to a
number of factors, including, but not limited to, perceived deficiencies, or gaps, in our existing product portfolio, intense
competition for services of independent sales representatives and distributors, or because of the disruption associated with
restrictive covenants to which representatives or distributors may be subject and potential litigation and expense associated
therewith. We may also experience unforeseen disengagement from independent sales representatives and distributors who have
worked with us for many years. Even if we enter into agreements with additional qualified independent sales representatives or
distributors, it often takes 6 to 12 months for new sales representatives or distributors to reach full operational effectiveness and
they may not generate revenue as quickly as we expect them to, commit the necessary resources to effectively market and sell our
products, or ultimately succeed in selling our products. Our success will depend largely on our ability to continue to hire, train,
retain, and motivate qualified independent sales representatives and distributors. If we cannot expand our sales and marketing
capabilities domestically and internationally, if we fail to train new independent sales representatives and distributors adequately,
or if we experience high turnover in our sales network, we may not commercialize our products adequately, or at all, which would
adversely affect our business, results of operations and financial condition.
Moreover, because our independent sales representatives and distributors are not our employees, we have limited control over
their activities and, generally, we do not enter into exclusive relationships with them. If one or more of them were to be retained by
a competitor, whether or an exclusive or non-exclusive basis, they may divert business from us to our competitor, which could
materially and adversely affect our sales.
In order to compete, we must attract, retain, and motivate executives and 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,
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.
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Moreover, replacing key employees may be a difficult, costly, and protracted process, and we may not have other personnel with
the capacity to assume all of the responsibilities of a departing employee. Competition for qualified personnel, particularly for key
positions, is intense among companies in our industry, and many of the organizations against which we compete for qualified
personnel have greater financial and other resources and different risk profiles than us, which may make them more attractive
employers. All of our employees, including our management personnel, may terminate their employment with us at any time
without notice. If we cannot attract and retain highly qualified personnel, as needed, we may not achieve our financial and other
goals.
To attract, retain, and motivate qualified executives and key employees, 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 and/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.
In addition, future internal growth could impose significant added responsibilities on our management, and we will need to identify,
recruit, maintain, motivate, and integrate additional employees to manage growth effectively. If we do not effectively manage such
growth, our expenses may increase more than expected, we may not achieve our goals, and our ability to generate and/or grow
revenue could be diminished.
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:
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changes in a specific country’s or region’s political, social, or economic conditions;
difficulties in staffing and managing widespread operations;
having to comply with export control laws, including, but not limited to, the Export Administration Regulations and trade
sanctions against embargoed countries, which are administered by the Office of Foreign Assets Control within the
Department of the Treasury, as well as the laws and regulations administered by the Department of Commerce;
complex data privacy requirements, including, but not limited to, the GDPR;
differing regulatory requirements for obtaining clearances or approvals to market our products, and unexpected changes in
regulatory requirements;
changes in, or uncertainties relating to, foreign rules and regulations that may impact our ability to sell our products,
perform services or repatriate profits to the U.S.;
tariffs, trade barriers, export regulations, and other regulatory and contractual limitations that may adversely impact our
ability to sell our products in certain foreign markets, the scope and consequences of which are subject to changing
agendas of political, business, and environmental groups;
consequences from changes in tax or customs laws;
fluctuations in foreign currency exchange rates;
limitations on or increase of withholding and other taxes on remittances and other payments by foreign subsidiaries or joint
ventures;
differing multiple payor reimbursement regimes, government payors, or patient self-pay systems;
differing labor laws and standards;
an inability, or reduced ability, to protect our intellectual property, including any effect of compulsory licensing imposed by
government action;
availability of government subsidies or other incentives that benefit competitors in their local markets that are not available
to us; and
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having to comply with various U.S. and international laws, including the FCPA and anti-money laundering laws, and violation
by our independent sales representatives or distributors of such 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. Further, there is a substantial backlog of patent applications at the U.S.
Patent and Trademark Office, and the approval or rejection of patent applications may take several years. 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. Moreover, 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.
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.
In addition to contractual measures, we try to protect the confidential nature of our proprietary information using physical and
technological security measures. Such measures may not, for example, in the case of misappropriation of a trade secret by an
employee or third party with authorized access, adequately protect our proprietary information. Our security measures may not
prevent an employee or consultant from misappropriating our trade secrets and providing them to a competitor, and recourse we
take against such misconduct may not provide an adequate remedy to protect our interests fully. Unauthorized parties may also
attempt to copy or reverse engineer certain aspects of our products that we consider proprietary. Enforcing a claim that a party
illegally disclosed or misappropriated a trade secret can be difficult, expensive, and time-consuming, and the outcome is
unpredictable.
We may face claims by third parties that our agreements with employees, consultants, or advisors obligating them to assign
intellectual property to us are ineffective or in conflict with prior or competing contractual obligations of assignment, which could
result in ownership disputes regarding intellectual property we have developed or will develop and interfere with our ability to
capture the commercial value of such intellectual property. Litigation may be necessary to resolve an ownership dispute, and if we
are unsuccessful, we may be precluded from using certain intellectual property or may lose our exclusive rights in that intellectual
property. Either outcome could harm our business and competitive position.
Furthermore, the laws of some foreign countries may not protect our intellectual property rights to the same extent as the laws of
the U.S., if at all. Since certain of our issued patents and pending patent applications are for the U.S. only, we lack a corresponding
scope of patent protection in other countries. Thus, we may not be able to stop a competitor from marketing products in other
countries that are similar to some of our products.
If we are unable to obtain, protect, and enforce patents on our technology and to protect our trade secrets, such inability could have
a material and adverse effect on our business, results of operations, and financial condition.
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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.
Our success will depend in part on our ability, both in the U.S. and in foreign countries, to operate without infringing upon the
patents and proprietary rights of others, and to obtain appropriate licenses to patents or proprietary rights held by third parties if
infringement would otherwise occur.
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:
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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. Accordingly, an adverse determination in a judicial or administrative proceeding, or a failure to
obtain necessary assignments or licenses, could result in us having to pay substantial damages (which may be increased up to three
times of awarded damages) and/or substantial royalties, and could prevent us from manufacturing or selling some products or
increase our costs to market these products unless we obtain a license or are able to redesign our products to avoid infringement.
Any such license may not be available on reasonable terms, if at all, and there can be no assurance that we would be able to
redesign our products in a way that would not infringe the intellectual property rights of others. If we fail to obtain any required
licenses or make any necessary changes to our products or technologies, we may have to withdraw existing products from the
market or may be unable to commercialize one or more of our products, all of which could have a material adverse effect on our
business, results of operations, and financial condition.
In addition, we generally indemnify our customers and sales representatives with respect to infringement by our products of the
proprietary rights of third parties. Third parties may assert infringement claims against our customers or sales representatives. These
claims may require us to initiate or defend protracted and costly litigation on behalf of our customers or sales representatives,
regardless of the merits of these claims. If any of these claims succeed, we may be forced to indemnify, or pay damages on behalf of,
our customers or sales representatives or may have to obtain licenses for the products they use. If we cannot obtain all necessary
licenses on commercially reasonable terms, our customers may be forced to stop using our products.
If we seek to protect or enforce our intellectual property rights through litigation or other proceedings, it could require us to spend
significant time and money, the results of which are uncertain.
To protect or enforce our intellectual property rights, we may have to initiate or defend litigation against or by third parties, such as
infringement suits, opposition proceedings, or seeking a court declaration that we do not infringe the proprietary rights of others or
that their rights are invalid or unenforceable. We may not have sufficient resources to enforce our intellectual property rights or to
defend our intellectual property rights against a challenge. Even if we prevail, the cost of litigation, including the diversion of
management and other resources, could affect our profitability and could place a significant strain on our financial resources.
Our ability to enforce our intellectual property rights depends on our ability to detect infringement. It may be difficult to detect
infringers who do not advertise the components used in their products. Moreover, it may be difficult or impossible to obtain
evidence of infringement in a competitor’s or potential competitor’s product. The medical device industry is characterized by the
existence of a large number of patents and frequent litigation based on allegations of patent infringement. It is not unusual for
parties to exchange letters surrounding allegations of intellectual property infringement and licensing arrangements. In addition, the
patent positions of medical device companies, including our patent position, may involve complex legal and factual questions, and,
therefore, the scope, validity, and enforceability of any patent claims we have or may obtain cannot be predicted with certainty.
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We may be subject to claims that we, our employees, or our independent sales agents or stocking distributors have wrongfully used
or disclosed alleged trade secrets of our competitors or are in breach of non-competition or non-solicitation agreements with our
competitors.
Many of our employees were employed at other medical device companies, including our competitors or potential competitors, and
in some cases, were employed at such medical device companies immediately prior to joining us. In addition, many of our
independent sales representatives and distributors sell, or in the past have sold, products of our competitors. We may be subject to
claims that we, our employees, or our independent sales representatives or distributors intentionally, inadvertently, or otherwise
used or disclosed trade secrets or other proprietary information of former employers or competitors. In addition, we have been and
may in the future be subject to claims that we caused an employee, or encouraged/assisted an independent sales agent, to breach
the terms of his or her non-competition or non-solicitation agreement. Litigation may be necessary to defend against these claims.
Litigation is expensive and time-consuming, and could divert management attention and resources away from our business. Even if
we prevail, the cost of litigation could affect our profitability. If we do not prevail, in addition to any damages we might have to pay,
we may lose valuable intellectual property rights or employees, independent sales representatives, or distributors. There can be no
assurance that this type of litigation or the threat thereof will not adversely affect our ability to engage and retain key employees,
sales representatives, or distributors.
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.
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. Spine surgery involves significant risk of serious complications, including bleeding, nerve injury, paralysis
and even death. In addition, if neurosurgeons and orthopedic spine surgeons are not sufficiently trained in the use of our products,
they may misuse or ineffectively use our products, which may result in unsatisfactory patient outcomes or patient injury. We could
become the subject of product liability lawsuits alleging that component failures, malfunctions, manufacturing flaws, design defects,
or inadequate disclosure of product-related risks or product-related information resulted in an unsafe condition or injury to patients.
In addition, the development of allograft implants and technologies for human tissue repair and treatment may entail particular risk
of transmitting diseases to human recipients, and any such transmission could result in the assertion of product liability claims
against us.
Product liability claims are expensive to defend, divert our management’s attention and, if we are not successful in defending the
claim, can result in substantial monetary awards against us or costly settlements. Further, successful product liability claims made
against one or more of our competitors could cause claims to be made against us or expose us to a perception that we are
vulnerable to similar claims. Any product liability claim brought against us, with or without merit and regardless of the outcome or
whether it is fully pursued, may result in: decreased demand for our products, injury to our reputation, significant litigation costs,
product recalls, loss of revenue, the inability to commercialize new products or product candidates, and adverse publicity regarding
our products. Any of these may have a material and adverse effect on our reputation with existing and potential customers and on
our business, financial condition, and results of operations. In addition, a recall of some of our products, whether or not the result of
a product liability claim, could result in significant costs and loss of customers.
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, a recall of some of our products, whether or not the result of a product liability claim, could result in
significant costs and loss of customers.
Our insurance policies are expensive and protect us only from some risks, which will leave us exposed to significant uninsured
liabilities.
We do not carry insurance for all categories of risk to which our business is or may be exposed. Some of the policies we maintain
include product liability insurance, directors’ and officers’ liability insurance, property insurance, cybersecurity insurance, general
liability insurance, and workers’ compensation insurance. We do not know, however, if we will be able to maintain insurance
coverage at a reasonable cost or in sufficient amounts or scope to protect us against losses. If the costs of maintaining adequate
insurance coverage should increase significantly in the future, our operating results could be materially adversely impacted. Even if
we have insurance, a claim could exceed the amount of our insurance coverage or it may be excluded from coverage under the
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terms of the policy. Any significant uninsured liability may require us to pay substantial amounts, which would adversely affect our
cash position and results of operations.
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 stockholders. Even if we
are able to identify acceptable business opportunities, we may not be able to pursue or implement such business opportunities (or,
in the case of acquisitions or other transactions, complete such acquisitions or other transactions) in a timely manner or on a cost-
effective basis (or at all), and we may not realize the expected benefits of such business opportunities. If we are not able to identify,
pursue, and implement new business opportunities, it will adversely affect our ability to grow our business.
In addition, pursuing and implementing new business opportunities (particularly acquisitions) may involve significant costs and entail
risks, uncertainties, and disruptions to our business, especially where we have limited experience as a company developing or
marketing a particular product or technology or operating in a particular geographic region. We may be unable to integrate a new
business, product, or technology effectively, or we may incur significant charges related to an acquisition or other business
opportunity (for example, amortization of acquired assets or asset impairment charges), which may adversely affect our business,
financial condition, and results of operations. Newly acquired technology or products may require additional development efforts
prior to commercial sale, including clinical testing and approval by the FDA and applicable foreign regulatory authorities; such
additional development efforts may involve significant expense and ultimately be unsuccessful. Any cross-border acquisitions or
transactions may involve unique risks in addition to those mentioned above, including those related to integration of operations
across different cultures and languages, currency risks, and the particular economic, political, and regulatory risks associated with
specific countries. To the extent we issue additional equity in connection with acquisitions, this may dilute our existing stockholders.
Furthermore, as a result of acquisitions of other healthcare businesses, we may be subject to the risk of unanticipated business
uncertainties, regulatory and other compliance matters, or legal liabilities relating to those acquired businesses for which the sellers
of the acquired businesses may not indemnify us, for which we may not be able to obtain insurance (or adequate insurance) or for
which the indemnification may not be sufficient to cover the ultimate liabilities.
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 ASCs. 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. In October
2021, the Company entered into an additional Convertible Loan Agreement (the “Additional Convertible Loan”), pursuant to which
the Company loaned Neo Medical an additional CHF 0.6 million ($0.7 million as of the issuance date). In January 2022, the Company
elected to convert the Additional Convertible Loan into shares of Neo Medical’s preferred stock.
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.
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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, many of which are outside our control. Such factors
include:
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economic conditions worldwide, which could affect the ability of hospitals and other customers to purchase our
products and could result in a reduction in elective and non-reimbursed operative procedures;
increased competition;
market acceptance of our existing products, as well as products in development, and the demand for, and pricing of, our
products and the products of our competitors;
costs, benefits, and timing of new product introductions;
the timing of or failure to obtain regulatory clearances or approvals for new products;
lost sales and other expenses resulting from stoppages in our production or from third parties supplying our business,
including as a result of product recalls or field corrective actions;
the availability and cost of components and materials, including raw materials such as human tissue;
accurate predictions of product demand and production capabilities sufficient to meet that demand;
our ability to realize expected yield improvements and scrap reduction initiatives that we have undertaken;
higher than anticipated independent sales representatives and distributors commissions;
our ability to purchase or manufacture and ship our products efficiently and in sufficient quantities to meet sales
demands;
the timing of our research and development expenditures;
expenditures for major initiatives;
the timing and level of reimbursement, changes in reimbursement or denials in coverage for our products by third-party
payors, such as Medicare, Medicaid, private and public health insurers, and foreign governmental health systems;
the ability of our independent sales representatives and distributors to achieve expected sales targets and for new
agents and stocking distributors to become familiar with our products in a timely manner;
the timing of and our ability to successfully onboard and/or hire new sales agents and distributors;
the loss of certain customers, sales agents, or distributors, or the removal of our contractual ability to sell to certain
customers, hospitals, or healthcare providers;
peer-reviewed publications discussing the clinical effectiveness of our products;
inspections of our manufacturing facilities for compliance with the FDA’s Quality System Regulations (Good
Manufacturing Practices), which could result in Form 483 observations, warning letters, injunctions, or other adverse
findings from the FDA or equivalent foreign regulatory bodies, and corrective actions, procedural changes, and other
actions, including product recalls, that we determine are necessary or appropriate to address the results of those
inspections, any of which may affect production and our ability to supply our customers with our products;
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the costs to comply with new regulations from the FDA or equivalent foreign regulatory bodies, such as the
requirements to establish a unique device identification system to adequately identify medical devices through their
distribution and use;
the increased regulatory scrutiny of certain of our products, including products we manufacture for others, which could
result in them being removed from the market;
fluctuations in foreign currency exchange rates; and
the impact of acquisitions, including the impact of goodwill and intangible asset impairment charges, if future operating
results of the acquired businesses are significantly less than the results anticipated at the time of the acquisitions.
In addition, we may experience meaningful variability in our sales and gross profit among quarters, as well as within each quarter, as
a result of several factors, including but not limited to (and in addition to those listed above):
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the number of products sold in the quarter;
the unpredictability of sales of full sets of spinal implants and instruments to our international stocking distributors; and
the number of selling days in the quarter.
Our goodwill, intangible assets, and fixed assets are subject to potential impairment; we have recorded significant goodwill
impairment charges in the past 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
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 2023 had a favorable impact of $2.3
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.
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In addition, for those foreign customers who purchase our products in U.S. Dollars, currency exchange rate fluctuations between the
U.S. Dollar and the currencies in which those customers do business may have a negative effect on the demand for our products in
foreign countries where the U.S. Dollar has increased in value compared to the local currency. Converting our earnings from
international operations to U.S. Dollars for use in the U.S. can also raise challenges, including problems moving funds out of the
countries in which the funds were earned and difficulties in collecting accounts receivable in foreign countries where the usual
accounts receivable payment cycle is longer.
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, vesting of equity
awards at a price below the original valuation, historical entity classification elections, and the resolution of matters arising from tax
audits.
Beginning in 2022, the Tax Cuts and Jobs Act of 2017 eliminated the option to deduct research and development expenditures
immediately in the year incurred and requires taxpayers to amortize such expenditures over five years, or 15 years for such
expenditures incurred outside of the U.S. This requirement may have a significant impact on our cash tax liability and our effective
tax rate as we perform research and development in the U.S., Italy, and Canada.
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 and operating cash flow.
We maintain a $150.0 million financing agreement secured by a pledge of substantially all of our property.
On November 6, 2023, we, as borrower, and certain of our subsidiaries, as guarantors, entered into a Financing Agreement (the
“Financing Agreement”) with Blue Torch Finance LLC, as administrative agent and collateral agent, and certain lenders party thereto.
The Financing Agreement provides for a $100.0 million senior secured term loan (the “Initial Term Loan”), a $25.0 million senior
secured delayed draw term loan facility (the “Delayed Draw Term Loan”), and a $25.0 million senior secured revolving credit facility
(the “Revolving Credit Facility,” and together with the Initial Term Loan and the Delayed Draw Term Loan, the “Credit Facilities”),
each of which mature on November 6, 2027. In connection with entering into the Financing Agreement, we repaid in full amounts
outstanding and terminated all commitments under our prior credit agreement (which had a maturity date of October 25, 2024).
The Initial Term Loan was fully funded on November 6, 2023. As of the date of this filing (March 5, 2024), we had not made any
borrowings under the Delayed Draw Term Loan, but had borrowed $15.0 million under the Revolving Credit Facility.
Borrowings under the Financing Agreement were and may be used for, among other things, (i) the repayment in full of amount that
we had outstanding under our prior credit agreement, (ii) working capital and (iii) other general corporate purposes. Borrowings
under the Credit Facilities bear interest at a floating rate, which will be, at our option, either the three-month SOFR rate (subject to a
floor of 3.00% and a credit spread adjustment of 0.26161%) (the “Adjusted Term SOFR Rate”) plus an applicable margin of 7.25%, or
a base rate plus an applicable margin of 6.25%. A revolving unused line fee of 2.00% is payable monthly in arrears based on the
average amount of the undrawn portion of each lender’s revolving credit commitments under the Revolving Credit Facility for the
preceding month. A delayed draw unused fee equal to the Adjusted Term SOFR Rate plus a margin of 1.00% is payable monthly in
arrears based on the average amount of the undrawn portion of each lender’s delayed draw term loan commitments in respect of
the Delayed Draw Term Loan for the preceding month. Certain of our existing and future material subsidiaries (collectively, the
“Guarantors”) are required to guarantee the repayment of our obligations under the Financing Agreement. Our obligations and each
of the Guarantors with respect to the Financing Agreement are secured by a pledge of substantially all of our assets and the assets of
each of the Guarantors, including, without limitation, accounts receivables, deposit accounts, intellectual property, investment
property, inventory, equipment, and equity interests in their respective subsidiaries.
The Financing Agreement contains customary affirmative and negative covenants, including limitations on our and our 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 Financing Agreement contains financial covenants requiring us to maintain a minimum level of liquidity at all times, a
maximum consolidated leverage ratio (measured on a quarterly basis), and a minimum asset coverage ratio (measured on a monthly
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basis). The Financing 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 Credit Facilities may be accelerated and/or the
lenders’ commitments terminated.
We believe that we will be in compliance with the covenants in future fiscal quarters. However, there can be no assurance that we
will be in such compliance, and if we are not, the failure to do so could result in an event of default, which could have a material
adverse effect on our financial position in the event that we continue to have significant amounts drawn under the facility at such
time.
We must maintain high levels of inventory, which could consume a significant amount of our resources and reduce our cash flows.
Because we maintain substantial inventory levels to meet the needs of our customers, we are subject to the risk of inventory excess,
obsolescence, and shelf-life expiration. Many of our spinal implant products come in sets. Each set includes a significant number of
components in various sizes so that the physician may select the appropriate spinal implant based on the patient’s needs. In a typical
surgery, not all of the implants in the set are used, and therefore certain sizes of implants placed in the set or that we purchase for
replenishment inventory may become obsolete before they can be used. In addition, to market our products effectively, we often
must provide hospitals and independent sales agents with consigned sets that typically consist of spinal implants and instruments,
including products to ensure redundancy and products of different sizes. Further, our biologics products have expiration dates,
which range from one to five years, and these products may expire before they can be used. If a substantial portion of our inventory
is deemed excess, becomes obsolete, or expires, it could have a material adverse effect on our earnings and cash flows due to the
resulting costs associated with the inventory impairment charges and costs required to replace such inventory. Further, as we
increasingly launch new products and product systems, we may cannibalize older products and product systems, which could
exacerbate excess and obsolete charges.
We may need additional financing in the future to meet our capital needs or to make opportunistic acquisitions, and such financing
may not be available on favorable terms, if at all.
We may need additional financing in the future to meet our capital needs or to make opportunistic acquisitions. The capital and
credit markets may experience extreme volatility and disruption, which may lead to uncertainty and liquidity issues for both
borrowers and investors, and we may be unable to obtain any desired additional financing on favorable terms, if at all. If adequate
funds are not available to us on acceptable terms, we may be unable to successfully develop or enhance products, or respond to
competitive pressures, any of which could negatively affect our business, results of operations, and financial condition. If we raise
capital by issuing debt or entering into credit facilities, we may be subject to limitations on our operations due to restrictive
covenants.
We hold our cash and cash equivalents that we use to meet our working capital and operating expense needs in deposit accounts
that could be adversely affected if the financial institutions holding such funds fail.
We hold our cash and cash equivalents used to meet our working capital and operating expense needs in deposit accounts at
multiple financial institutions. The balance held in these accounts typically exceeds the Federal Deposit Insurance Corporation
("FDIC") standard deposit insurance limit or similar government guarantee schemes. If a financial institution in which we hold such
funds fails or is subject to significant adverse conditions in the financial or credit markets, we could be subject to a risk of loss of all
or a portion of such uninsured funds or be subject to a delay in accessing all or a portion of such uninsured funds. Any such loss or
lack of access to these funds could adversely impact our short-term liquidity and ability to meet our operating expense obligations.
For example, on March 10, 2023, Silicon Valley Bank ("SVB"), and Signature Bank, were closed by state regulators and the FDIC was
appointed receiver for each bank. The FDIC created successor bridge banks and all deposits of SVB and Signature Bank were
transferred to the bridge banks under a systemic risk exception approved by the United States Department of Treasury, the Federal
Reserve, and the FDIC. If financial institutions in which we hold funds for working capital and operating expenses were to fail, we
cannot provide any assurances that such governmental agencies would take action to protect our uninsured deposits in a similar
manner.
General Risks
Our stock price has fluctuated and may continue to fluctuate, which may make future prices of our stock difficult to predict.
Investors should not rely on recent or historical trends to predict future stock prices, financial condition, results of operations, or
cash flows. Our stock price, like that of other medical device companies, can be volatile and can be affected by, among other things:
speculation, coverage, or sentiment in the media or the investment community; the announcement of new, planned or
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contemplated products, services, technological innovations, acquisitions, divestitures, or other significant transactions by us or our
competitors; our quarterly financial results and comparisons to estimates by the investment community or financial outlook
provided by us; the financial results and business strategies of our competitors; publication of research reports about us or our
industry or changes in recommendations or withdrawal of research coverage by securities analysts; changes in laws or regulations
affecting our business, including tax legislation; changes in accounting standards, policies, guidance, interpretations, or principles;
threatened or actual litigation or governmental investigations; and inflation; market volatility or downturns caused by outbreaks,
epidemics, pandemics, geopolitical tensions or conflicts, or other macroeconomic dynamics. General or industry specific market
conditions or stock market performance or domestic or international macroeconomic and geopolitical factors unrelated to our
performance also may affect the price of our stock.
In addition, the stock market in general, and the stocks of medical device companies in particular, have experienced extreme price
and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. This
could limit or prevent investors from readily selling their shares and may otherwise negatively affect the liquidity of our common
stock. Securities class action litigation has often been instituted against companies following periods of volatility in the overall
market and in the market price of a company’s securities. This litigation, if instituted against us, could result in very substantial costs,
divert our management’s attention and resources, and harm our business, financial condition, and results of operations.
We expend substantial resources to comply with laws and regulations relating to public companies, and any failure to maintain
compliance could subject us to regulatory scrutiny and cause investors to lose confidence in our company, which could harm our
business and have a material adverse effect on our stock price.
Laws and regulations affecting public companies, including provisions of the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010 and the Sarbanes-Oxley Act of 2002, and the related rules and regulations adopted by the SEC, and by the
Nasdaq Stock Market increase our accounting, legal, and financial compliance costs and make some activities more time-consuming
and costly. We cannot predict or estimate with any reasonable accuracy the total amount or timing of the costs we may incur to
comply with these laws and regulations.
We are also subject to SEC regulations that require us to determine whether our products contain certain specified minerals,
referred to under the regulations as “conflict minerals,” and, if so, to perform an extensive inquiry into our supply chain, to
determine whether such conflict minerals originate from the Democratic Republic of Congo or an adjoining country. Compliance
with these regulations has increased our costs and has been time-consuming for our management and our supply chain personnel
(and time-consuming for our suppliers), and we expect that continued compliance will continue to require significant money and
time. In addition, to the extent any of our disclosures are perceived by the market to be “negative,” it may cause customers to
refuse to purchase our products. Further, if we determine to make any changes to products, processes, or sources of supply, it may
result in additional costs, which may adversely affect our business, financial condition, and results of operations.
Our amended and restated bylaws designates certain courts as the sole and exclusive forum for certain litigation that may be
initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us.
Our amended and restated bylaws provide that, unless we consent in writing to the selection of an alternative forum, to the fullest
extent permitted by applicable law: (A) the Court of Chancery of the State of Delaware (or, if the Court of Chancery of the State of
Delaware lacks subject matter jurisdiction, the Superior Court of the State of Delaware, or, if both the Court of Chancery of the State
of Delaware and the Superior Court of the State of Delaware lack subject matter jurisdiction, the United States District Court for the
District of Delaware) and any state (or, if applicable, federal) appellate court therefrom shall be the sole and exclusive forum for (i)
any derivative action, suit, or proceeding brought on behalf of our company, (ii) any action, suit, or proceeding asserting a claim of
breach of fiduciary duty owed by any current or former director, officer, or other employee, or stockholder of ours to our company
or our stockholders or any action asserting a claim for aiding and abetting any such breach of fiduciary duty, (iii) any action, suit, or
proceeding asserting a claim against us or any of our directors, officers, or other employees arising pursuant to, or seeking to
enforce any right, obligation, or remedy under, any provision of the General Corporation Law of Delaware (the “DGCL”) or our
(certificate of incorporation or bylaws, (iv) any action, suit, or proceeding as to which the DGCL confers jurisdiction on the Court of
Chancery of the State of Delaware, or (v) any action, suit, or proceeding asserting a claim against us or our current or former
directors, officers, employees, or stockholders governed by the internal affairs doctrine, in all cases subject to the court’s having
personal jurisdiction over the indispensable parties named as defendants (including personal jurisdiction by reason of any such
indispensable party’s consent to personal jurisdiction in the State of Delaware or such court); and (B) the federal district courts of
the United States shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the
Securities Act of 1933, as amended. These provisions may limit a stockholder’s ability to obtain a judicial forum that such
stockholder may prefer for disputes governed by these provisions.
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Environmental, social, and corporate governance (“ESG”) regulations, policies and provisions may make our supply chain more
complex and may adversely affect our relationships with customers.
There is an increasing focus on the governance of environmental and social risks. A number of our customers who are payors or
distributors have adopted, or may adopt, procurement policies that include ESG provisions that their suppliers or manufacturers
must comply with, or they may seek to include such provisions in their terms and conditions. An increasing number of participants in
the medical device industry are also joining voluntary ESG groups or organizations, such as the Responsible Business Alliance. These
ESG provisions and initiatives are subject to change, can be unpredictable, and may be difficult and expensive for us to comply with,
given the complexity of our supply chain and the outsourced manufacturing of certain components of our products. If we are unable
to comply, or are unable to cause our suppliers to comply, with such policies or provisions, a customer may stop purchasing products
from us, and may take legal action against us, which could harm our reputation, revenue, and results of operations.
Our business could be negatively impacted by corporate citizenship and ESG matters and/or our reporting of such matters.
There is an increasing focus from certain investors, customers, consumers, and other stakeholders concerning corporate citizenship
and sustainability matters. We could be perceived as not acting responsibly in connection with these matters. Our business could be
negatively impacted by such matters. Any such matters, or related corporate citizenship and sustainability matters, could have a
material adverse effect on our business.
Item 1B.
Unresolved Staff Comments
None.
Item 1C.
Cybersecurity
Risk Management and Strategy
We have implemented cybersecurity programs designed to maintain and protect our information technology systems and the
confidentiality, integrity, and availability of our data. These programs serve to maintain compliance with applicable laws and
regulations governing ethical business practices, including our relationships with suppliers, customers, and business partners.
We maintain formal processes for our cybersecurity program and incident response procedures, which are updated at least annually
and reviewed by external legal and cybersecurity advisors. These processes include, among other things, detailed steps on how we
assess cyber risks, identify threats, and determine the materiality of cyber incidents. These processes also designate certain roles
within the company to execute these policies and certain leadership roles to manage material risk escalation. These processes
endeavor to follow the National Institute of Standards and Technology ("NIST") Cybersecurity Framework and are tested at least
annually.
Our Information Security team uses automated technology, third-party partners, and direct review of system indicators to monitor
and implement the prevention, detection, mitigation, and remediation of cybersecurity incidents, and to stay current with the
changing threat landscape. We also leverage encryption technologies and other measures to safeguard systems. We engage third
parties as part of our cyber program, including external security firms that provide security technology, conduct regular security
audits, and conduct penetration testing. We also engage third parties to conduct regular drills, such as tabletop exercises, to help
with our overall preparedness.
We also engage third-party service providers to assist with managing various other aspects of our business. We have implemented
processes designed to both assess and maintain oversight of third-party service providers with regards to cybersecurity risks. These
service providers are subject to due diligence reviews of their information security programs during our vendor evaluation process.
Our employees are responsible for complying with our data security standards and are required to complete annual training to
understand the behaviors and technical requirements necessary to keep data secure. We also require that cybersecurity training be
part of the onboarding process for new hires.
As of December 31, 2023, cybersecurity risks have not materially affected our business strategy, results of operations, or financial
condition.
Governance
Cybersecurity is an important component of our enterprise risk management program. While the full Board of Directors has primary
responsibility for risk oversight, the Board of Directors utilizes its committees, as appropriate, to monitor and address the risks that
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may be within the scope of a particular committee’s expertise or charter. The Board of Directors receives updates at quarterly board
meetings on committee activities from each committee Chair.
The Audit and Finance Committee has oversight over and regularly reviews our cybersecurity, including IT risks, controls,
procedures, and plans to mitigate cybersecurity risks and respond to security incidents. The Audit and Finance Committee receives
reports on at least a quarterly basis from the Chief Information Officer and the Vice President, Information Security, on, among
other issues, our cyber risks and threats, the status of projects, management’s strategies to strengthen our IT systems, assessments
of our security program, third-party assessments and testing, our emerging threat landscape, and the review of our cybersecurity
insurance policy. Pursuant to our incident response procedures, material cyber incidents will be reported to the Chair of the Audit
and Finance Committee upon a determination of material status. Due to the importance of cybersecurity, the full Board of Directors
also receives updates on cybersecurity matters from management at least annually.
Management is responsible for our company’s day-to-day risk management activities. Our cybersecurity program is led by our Chief
Information Officer, who is responsible for assessing and managing cybersecurity risks. He has 25 years of experience in both military
and corporate leadership roles, including 12 years of experience in CIO-level leadership roles, including consulting with major firms,
covering technology and security operations responsibility.
Our Vice President, Information Security, who reports to our Chief Information Officer, is responsible for cybersecurity program
execution, risk management, and oversight of information security staff and consultants. She has 20 years of experience in IT roles,
including 13 years in IT leadership roles and 5 years in cybersecurity program execution and oversight of information security.
Our Manager, Information Security, who reports to our Vice President, Information Security, is responsible for managing our security
analyst team and the tactical execution of security operations. He has nine years of experience in security roles, including seven
years in technical system administration roles. He also has the following certifications: ISC2 CCSP, ISC2 SSCP, CompTIA Security+, EC-
Council Certified Encryption Specialist ("ECES"), EC-Council Certified Incident Handler ("ECCIH").
As cybersecurity risks arise, our Information Security team executes the incident response procedure and communicates the
appropriate details to management in alignment with the escalation steps in the procedure. In addition, our Chief Information
Officer, Vice President, Information Security, and Manager, Information Security, conduct monthly cybersecurity program status
reviews with the Information Security team that includes KPI tracking, risk assessment, escalation actions, and project status.
Item 2.
Properties
We lease or own real property to support our business. The following lists those properties that we believe are material to our
business. We believe that our facilities meet our current needs and that we will be able to renew any such leases when needed on
acceptable terms or find alternative facilities.
Facility
Manufacturing, warehousing, distribution, research and development, location
of a cadaveric training laboratory, and administrative facility for corporate
functions and all reporting segments
Design, development, marketing, and inspection for biologics and spinal implant
products, distribution of certain Spinal Implant products, location of a cadaveric
training laboratory, and administrative facility
Manufacturing and distribution for certain Biologics products
Manufacturing, warehousing, distribution, research and development, and
administrative facility for Motion Preservation
Design of Spinal Implants and location of a cadaveric training laboratory
Design, development, and marketing for Enabling Technologies products
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 Orthopedics products
Mechanical workshop for Orthopedics 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
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Location
Approx.
Square
Feet
Ownership
Lewisville, TX
140,000
Leased
Carlsbad, CA
Irvine, CA
Sunnyvale, CA
Wayne, PA
Toronto, Canada
Verona, Italy
Verona, Italy
Verona, Italy
Maidenhead, England
São Paulo, Brazil
Arcueil, France
Munich, Germany
82,000
70,000
25,000
3,700
9,200
38,000
18,000
9,000
5,580
22,000
8,500
18,300
Leased
Leased
Leased
Leased
Leased
Owned
Leased
Leased
Leased
Leased
Leased
Leased
Our manufacturing facilities are registered with the FDA. Our facilities are subject to FDA inspection to ensure compliance with its
Quality System Regulations. For further information regarding the status of FDA inspections, see the "Item 1. Business - Government
Regulation."
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.
56
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 March 1, 2024, we had 456 holders
of record of our common stock. A substantially greater number of holders of our common stock are “street name” or beneficial
holders, whose shares are held by banks, brokers and other financial institutions. The closing price of our common stock on March 1,
2024, was $13.00. The following table shows the high and low sales prices for our common stock for each of the two most recent
fiscal years.
2022
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2023
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Dividends
$
$
High
Low
$
$
36.13
35.34
26.35
21.12
23.19
20.65
21.60
14.39
28.66
23.17
18.97
13.76
15.09
16.27
12.25
9.57
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
Financing 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.
Equity Compensation Plan Information
Information about our equity compensation plan is incorporated herein by reference to Part III, Item 12 of this report.
Recent Sales of Unregistered Securities
During the fourth quarter of 2023, we did not issue any securities that were not registered under the Securities Act of 1933, as
amended (the "Securities Act").
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.
57
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, 2018, 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.
Item 6.
Reserved
58
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 2023 and 2022 financial results, including comparisons of our year-over-
year performance between these years. Discussion and analysis of our 2021 fiscal year specifically, as well as the year-over-year
comparison of our 2022 financial performance to 2021, 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, 2022, filed
with the SEC on March 6, 2023, which is available on our website at www.orthofix.com and the SEC’s website at www.sec.gov.
Executive Summary
Orthofix is a leading global spine and orthopedics company with a comprehensive portfolio of biologics, innovative spinal hardware,
bone growth therapies, specialized orthopedic solutions and a leading surgical navigation system. Its products are distributed in
more than 60 countries worldwide.
We are headquartered in Lewisville, Texas, and have primary offices in Carlsbad, CA, with a focus on spine and biologics product
innovation and surgeon education, and Verona, Italy, with an emphasis on product innovation, production, and medical education
for orthopedics. Our global R&D, commercial and manufacturing footprint also includes facilities and offices in Irvine, CA, Toronto,
Canada, Sunnyvale, CA, Wayne, PA, Olive Branch, MS, Maidenhead, UK, Munich, Germany, Paris, France, and São Paulo, Brazil.
The merger with SeaSpine was completed on January 5, 2023, with SeaSpine continuing as a wholly-owned subsidiary of Orthofix
following the transaction. For additional discussion of the merger with SeaSpine, see Note 4 of the Notes to the Consolidated
Financial Statements in Item 8 of this Annual Report. The shares of common stock of Orthofix, as the corporate parent entity in the
combined company structure, continue to trade on NASDAQ under the symbol "OFIX".
Notable financial results in 2023 include the following:
•
•
•
•
•
Net sales were $746.6 million, an increase of 62.1% on a reported basis and 61.6% on a constant currency basis
Bone Growth Therapies growth of 13.5%, with of each the last four consecutive quarters exhibiting double-digit net sales
growth
U.S. Spinal Implants, Biologics, and Enabling Technologies growth of 7.6% on a pro forma basis over 2022
Global Orthopedics net sales growth of 7.2% on a reported basis and 5.2% on a constant currency basis
Adjusted EBITDA of $46.3 million compared to pro forma adjusted EBITDA in 2022 of $27.4 million
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 loss
Net loss
Year ended December 31,
2023
(%)
2022
(%)
2021
(%)
100.0
34.9
65.1
51.7
19.4
10.7
1.9
(18.6)
(20.3)
100.0
26.8
73.2
49.7
17.4
10.6
(1.6)
(2.9)
(4.3)
100.0
24.7
75.3
47.6
14.9
10.7
3.9
(1.8)
(8.3)
59
Net Sales by Reporting Segment
The following table provides net sales by major product category by reporting segment:
2023
$ 212,530
2022
$ 187,247
2021
$ 187,448
Percentage Change
2023/2022
Reported
2023/2022
Constant
Currency
2022/2021
Reported
2022/2021
Constant
Currency
13.5%
13.5%
-0.1%
-0.1%
418,789
631,319
115,322
$ 746,641
165,927
353,174
107,539
$ 460,713
171,515
358,963
105,516
$ 464,479
152.4%
78.8%
7.2%
62.1%
152.4%
78.7%
5.2%
61.6%
-3.3%
-1.6%
1.9%
-0.8%
-2.7%
-1.4%
11.0%
1.5%
(U.S. Dollars, in thousands)
Bone Growth Therapies
Spinal Implants, Biologics, and
Enabling Technologies
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
used adjunctively in high-risk spinal fusion procedures and to treat both nonunion and acute fractures in the orthopedic
space. Bone Growth Therapies uses distributors and a direct sales channel to sell its devices and provide associated support
services to hospitals, healthcare providers, and patients in the U.S.
Spinal Implants, Biologics, and Enabling Technologies is comprised of a broad portfolio of spine fixation and motion
preservation implant products used in surgical procedures of the spine, one of the most comprehensive biologics portfolios
in both the demineralized bone matrix and cellular allograft market segments, and image-guided surgical solutions to
facilitate degenerative, minimally invasive, and complex surgical procedures. Spinal Implants, Biologics, and Enabling
Technologies products are sold through a network of distributors and sales representatives to hospitals and healthcare
providers on a global basis for Spinal Implants and Enabling Technologies, primarily within the U.S. for Biologics.
2023 Compared to 2022
Net sales increased $278.1 million or 78.8%
•
•
Bone Growth Therapies net sales increased $25.3 million or 13.5%, with above market performance in both the spine and
fracture channels, largely driven by (i) an increase in complex spine procedures, which are typically paired within our
CervicalStim and SpinalStim devices, (ii) increased reimbursement rates that Medicare approved for 2023, (iii) growth in our
spine and fracture sales channels as a result of investments made in the commercial channel in the prior year, and (iv) the
launch of AccelStim for the healing of fresh and nonunion fractures
Spinal Implants, Biologics, and Enabling Technologies net sales increased $252.9 million or 152.4%, primarily due to the
contribution of SeaSpine net sales and growth driven by the onboarding of new, high-volume distribution partners along
with multiple recent product launches
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.
2023 Compared to 2022
Net sales increased $7.8 million, or 7.2% on a reported basis and 5.2% on a constant currency basis
•
U.S. growth of 11.1% largely due to investments made in recent product launches, commercial execution within our sales
channel, and from our best in class surgeon education programs
60
•
•
International growth of 3.3% on a constant currency basis, largely due to an increase in stocking distributor orders and as a
result of recent product launches
Increase of $2.2 million due to movement in foreign current exchange rates, which had a favorable impact on net sales in
2023
Gross Profit
(U.S. Dollars, in thousands)
Net sales
Cost of sales
Gross profit
Gross margin
2023 Compared to 2022
2023
$ 746,641
260,368
$ 486,273
2022
$ 460,713
123,544
$ 337,169
2021
$ 464,479
114,914
$ 349,565
65.1%
73.2%
75.3%
Percentage Change
2023/2022
2022/2021
62.1%
110.7%
44.2%
-8.1%
-0.8%
7.5%
-3.5%
-2.1%
Gross profit increased $149.1 million, or 44.2%
•
•
•
Gross profit largely increased due to the contribution of SeaSpine results in 2023, as SeaSpine contributed approximately
$258.9 million in net sales
Partially offset by $36.0 million in amortization of the inventory fair value step up at acquisition, which is being recognized
over the expected sales cycles of the acquired inventory
Further offset by approximately $6.0 million in charges due to inventory rationalization decisions related to the Merger
Sales and Marketing Expense
(U.S. Dollars, in thousands)
Sales and marketing
As a percentage of net sales
2023 Compared to 2022
2023
$ 385,736
2022
$ 228,810
2021
$ 221,318
51.7%
49.7%
47.6%
Percentage Change
2023/2022
2022/2021
68.6%
2.0%
3.4%
2.1%
Sales and marketing expense increased $156.9 million
•
•
Increase largely due to the contribution of SeaSpine results in 2023 and the overall increase in net sales as compared to the
prior year period, which resulted in increased variable expenses, such as commissions and bonus expenses associated with
the achievement of certain sales objectives
Included within sales and marketing expenses for 2023 are integration-related expenses of $4.5 million, which are mainly
related to severance and retention costs
General and Administrative Expense
(U.S. Dollars, in thousands)
General and administrative
As a percentage of net sales
2023 Compared to 2022
2023
$ 144,659
2022
79,966
$
2021
$ 69,353
19.4%
17.4%
14.9%
Percentage Change
2023/2022
2022/2021
80.9%
2.0%
15.3%
2.5%
General and administrative expense increased $64.7 million
•
•
•
Increase largely due to the contribution of SeaSpine results in 2023 and resulting integration costs incurred as a result of
the Merger, partially offset by a reduction in due diligence and transaction costs incurred prior to the closing of the Merger
Included within general and administrative expenses for 2023 are merger and integration related expense of $22.7 million,
which are mainly comprised of (i) professional fees totaling $11.5 million, inclusive of a $5.5 million payment to Orthofix's
financial advisor for the Merger upon closing of the transaction, and (ii) severance and retention costs totaling $10.5 million
Increase of $8.8 million in share-based compensation expense as a result of a larger employee base post-Merger and from
accelerated vesting of certain equity-based awards as a result of the Merger, partially offset by a recognized benefit related
to the forfeiture of outstanding equity grants due to executive leadership changes
61
•
Increases of approximately $10.0 million in costs associated with the Board of Directors' independent investigation
conducted by independent outside legal counsel, which resulted in the termination of three former executives, and other
resulting activities
Research and Development Expense
(U.S. Dollars, in thousands)
Research and development
As a percentage of net sales
2023 Compared to 2022
2023
80,231
$
2022
49,065
$
2021
$ 49,621
10.7%
10.6%
10.7%
Percentage Change
2023/2022
2022/2021
63.5%
0.1%
-1.1%
-0.1%
Research and development expense increased $31.2 million
•
•
•
•
Increase largely due to the contribution of SeaSpine results in 2023 and resulting integration costs incurred as a result of
the Merger
Included within research and development expenses for 2023 are merger and integration-related expenses of $2.8 million,
which are mainly comprised of severance and retention costs
Increase of $0.8 million related to the attainment of a development milestone with MTF Biologics achieved in the first
quarter of 2023
Partially offset by a decrease of $1.5 million in costs to comply with the European Union Medical Device Regulations
Acquisition-related Amortization and Remeasurement
(U.S. Dollars, in thousands)
Acquisition-related amortization and
remeasurement
As a percentage of net sales
2023 Compared to 2022
2023
2022
2021
2023/2022
2022/2021
Percentage Change
$
14,757
$
1.9%
(7,404)
-1.6%
$ 17,588
3.9%
-299.3%
3.5%
-142.1%
-5.5%
Acquisition-related amortization and remeasurement increased $22.2 million
•
•
•
•
Increase of $17.2 million related to a benefit recognized in 2022 from the remeasurement of potential revenue-based
milestone payments associated with the Spinal Kinetics acquisition; we did not achieve the remaining milestone prior to
April 30, 2023, the end of the measurement period for achieving such milestone
Increase in amortization expense of $9.4 million during 2023 associated with intangible assets recognized as a result of the
Merger
Partially offset by a benefit of $2.7 million recognized in 2023 associated with the remeasurement of a contingent
consideration obligation with Lattus Spine LLC assumed in the Merger
Further offset by $1.6 million in costs recognized in 2022 associated with the acquisition of in-process research and
development assets, recognized immediately upon acquisition
Non-operating Income (Expense)
(U.S. Dollars, in thousands)
Interest expense, net
Other expense, net
2023
2022
2021
2023/2022
2022/2021
$
(8,631)
(938)
$
(1,288)
(3,150)
$
(1,837)
(3,343)
570.1%
-70.2%
-29.9%
-5.8%
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.
62
2023 Compared to 2022
Interest expense, net, increased $7.3 million
•
•
•
•
Increase of $5.0 million attributable to an increase in outstanding indebtedness in 2023, either under our prior Credit
Agreement or in relation to our new Financing Agreement, as no such balance was outstanding in the prior year
Increase of $2.2 million associated with the amortization of capitalized debt issuance costs and lenders fees
Increase of $0.6 million attributable to an early termination prepayment penalty associated with the payoff of the assumed
indebtedness of SeaSpine as of the close of the Merger
Partially offset by $0.6 million of interest income recognized on third-party notes receivable
Other expense, net, decreased $2.2 million
•
•
Favorable change of $4.9 million associated with changes in foreign currency exchange rates, as we recorded a non-cash
remeasurement gain of $1.6 million in 2023 compared to a loss of $3.3 million in 2022
Partially offset by an increase in impairment losses on held-for-sale investment securities of $2.0 million as compared to the
prior year
Income Tax Expense
(U.S. Dollars, in thousands)
Income tax expense
Effective tax rate
2023 Compared to 2022
Income tax expense increased by $0.7 million
2023
2022
$
2,716
$
-1.8%
2,043
-11.5%
2021
$ 24,884
-184.4%
Percentage Change
2023/2022
2022/2021
32.9%
9.7%
-91.8%
172.9%
•
•
•
Increase of $8.4 million associated with financial statement expenses not deductible for tax, including executive
compensation and Merger-related deal costs
Increase of $1.3 million associated with foreign income inclusion, largely driven by research and development expenses
outside of the U.S.
Decrease of $10.1 million associated with higher financial statement losses offset by valuation allowances
2022 Compared to 2021
•
•
•
Decrease of $20.2 million related to changes in valuation allowances recorded in 2021 versus 2022
Decrease of $2.7 million related to the change in fair value of contingent consideration
Partially offset by $1.0 million U.S. tax expense on foreign income inclusion
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
The Company has two reporting segments: Global Spine and Global Orthopedics. The primary metric used in managing the Company
is adjusted earnings before interest, tax, depreciation, and amortization ("Adjusted EBITDA", a non-GAAP financial measure) (which
is described further in Note 16 to the Notes to the Consolidated Financial Statements contained in Item 8 of this Annual Report).
63
The following table presents adjusted EBITDA by segment and reconciles consolidated adjusted EBITDA to loss before income taxes:
(U.S. Dollars, in thousands)
Adjusted EBITDA by reporting segment
Global Spine
Global Orthopedics
Corporate
Consolidated adjusted EBITDA
Reconciling items:
Interest expense, net
Depreciation and amortization
Share-based compensation expense
Foreign exchange impact
SeaSpine merger-related costs
Strategic investments
Acquisition-related fair value adjustments
(Gain) loss on investments
Litigation and investigation costs
Medical device regulation
Business interruption - COVID-19
Succession charges
Loss before income taxes
Liquidity and Capital Resources
2023
2022
2021
Year Ended December 31,
$
$
$
$
91,115
442
(45,272)
46,285
8,631
53,063
35,707
(1,581)
36,623
2,272
33,393
1,781
14,453
9,446
—
1,176
(148,679)
$
$
$
$
62,692
5,267
(19,406)
48,553
1,288
29,019
18,443
3,291
12,010
4,018
(15,595)
187
803
10,261
2,387
147
(17,706)
$
$
$
$
71,086
9,260
(19,084)
61,262
1,837
41,355
15,432
3,981
—
5,700
(2,014)
(644)
33
8,018
320
739
(13,495)
Cash, cash equivalents, and restricted cash at December 31, 2023, was $37.8 million compared to $50.7 million at December 31,
2022.
(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,
2023
2022
Change
$
$
(45,753)
(33,131)
65,322
619
(12,943)
$
$
(11,538)
(24,534)
(78)
(997)
(37,147)
$
$
(34,215)
(8,597)
65,400
1,616
24,204
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,
2023
2022
Change
$
$
(45,753)
(62,050)
(107,803)
$
$
(11,538)
(23,160)
(34,698)
$
$
(34,215)
(38,890)
(73,105)
Cash flows from operating activities decreased $34.2 million
•
•
Unfavorable change in net loss of $24.4 million, excluding the impact of non-cash adjustments to net loss
Unfavorable change of $9.8 million relating to changes in working capital accounts, primarily attributable to changes in
inventory levels, partially offset by recoupment activities associated with the CMS Accelerated and Advance Payment
Program in prior year and favorable changes in accounts payable and other current liabilities
64
Two of our primary working capital accounts are accounts receivable and inventory. Day’s sales in receivables were 59 days at
December 31, 2023, compared to 62 days at December 31, 2022 (calculated using fourth quarter net sales and ending accounts
receivable). Inventory turns were consistent at 1.2 times as of December 31, 2023, and December 31, 2022, respectively.
Investing Activities
Cash flows from investing activities decreased $8.6 million
•
•
•
Primarily driven by an increase of $38.9 million in capital expenditures, largely due to the inclusion of SeaSpine's financial
results within the 2023 financial results
Partially offset by an increase of $29.4 million attributable to cash acquired as a result of the Merger
Further offset by a favorable change of $0.9 million associated with certain asset acquisitions and other investing activities
Financing Activities
Cash flows from financing activities increased $65.4 million
•
•
•
•
Increase of $95.5 million in net borrowings associated with proceeds from our new Financing Agreement during 2023,
borrowings made under our Prior Credit Agreement, and the repayment of our Prior Credit Agreement upon execution of
the Financing Agreement
Increase of $2.0 million related to the conclusion of the Fitbone Contract Manufacturing and Supple Agreement with
Wittenstein in 2022, which was accounted for as a finance lease obligation
Partially offset by a decrease of $26.9 million associated with the termination and repayment of SeaSpine's credit facility
Further offset by a decrease of $2.7 million for tax withholdings obligations from shares traded and a decrease in other
financing activities of $2.3 million
Credit Facilities
On November 6, 2023, we entered into a Financing Agreement (the "Financing Agreement") with Blue Torch Finance LLC and certain
lenders party thereto, which provides for a $100.0 million senior secured term loan (the "Initial Term Loan"), a $25.0 million senior
secured delayed draw term loan facility (the "Delayed Draw Term Loan") which, subject to certain conditions specified in the
Financing Agreement, may be drawn on or prior to March 30, 2024, and a $25.0 million senior secured revolving credit facility (the
"Revolving Credit Facility", and together with the Initial Term Loan and the Delayed Draw Term Loan, the "Credit Facilities"), each of
which mature on November 6, 2027. In connection with entering into the Financing Agreement, we repaid in full amounts
outstanding and terminated all commitments under the prior $175.0 million senior secured revolving credit facility evidenced by
that certain Second Amended and Restated Credit Agreement (the "Prior Credit Agreement"), dated as of October 25, 2019.
Borrowings under the Financing Agreement were and may be used for, among other things, the repayment in full of the Prior Credit
Agreement, working capital and other general corporate purposes of the Company.
As of December 31, 2023, we have $100.0 million outstanding borrowings under the Financing Agreement related to the Initial Term
Loan. As of December 31, 2023, we have not made any borrowings under the Delayed Draw Term Loan or the Revolving Credit
Facility. However, on January 10, 2024, we borrowed $15.0 million under the $25.0 million secured revolving credit facility for
working capital purposes. In addition, we intend to utilize the Delayed Draw Term Loan following the completion of the audit of
financial statements for the year ended December 31, 2023. 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.
We have no outstanding borrowings on our Italian line of credit of €5.5 million ($6.1 million) as of December 31, 2023. 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.
Lattus Spine LLC ("Lattus") Contingent Consideration
In connection with the Merger, we assumed a contingent consideration obligation under a purchase agreement between SeaSpine
and Lattus executed in December 2022. Under the terms of the agreement, we may be required to make installment payments at
65
certain dates based on future net sales of certain products (the "Lateral Products"). The estimated fair value of the contingent
consideration arrangement as of December 31, 2023, was $8.5 million; however, the actual amount ultimately paid could be higher
or lower than the estimated fair value of the contingent consideration. As of December 31, 2023, we classified the remaining
contingent consideration liability within other long-term liabilities. For additional discussion of this matter, see Note 12 of the Notes
to the Consolidated Financial Statements in Item 8 of this Annual Report.
Legion Innovations, LLC Asset Acquisition
On December 29, 2022, we entered into a technology assignment and royalty agreement with Legion Innovations, LLC, a U.S.-based
medical device technology company, whereby we acquired intellectual property rights to certain assets. As consideration, we paid
$0.2 million in January 2023, with additional payments contingent upon reaching future commercialization and revenue-based
milestones.
IGEA S.p.A Exclusive License and Distribution Agreement
In April 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 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.
In May 2022, we achieved FDA approval pertaining to the acquired technology, triggering a contingent consideration milestone
obligation of $3.5 million. Of this amount, $1.5 million was paid in 2022, $1.0 million was paid in May 2023, and $1.0 million was
accrued within other current liabilities as of December 31, 2023.
Unremitted Foreign Earnings
Unremitted foreign earnings were $33.6 million as of December 31, 2023. 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.
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 under a purchase agreement
between SeaSpine and Lattus assumed in the Merger, (ii) contingent consideration arrangements associated with certain asset
acquisitions or business combinations, of which material obligations are described above, (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 12 and 17), lease obligations (Note 9), and uncertain tax positions (Note 20).
Off-balance Sheet Arrangements
As of December 31, 2023, 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.
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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, adjusted 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 Bone Growth Therapies
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 Therapies products 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 mostly processed from within our Irvine facility. In addition, we have a
long-standing collaborative arrangement with MTF that provides exclusive global marketing rights to MTF's Trinity and FiberFuse
product families. We receive marketing fees from MTF based on sales of products covered under the collaborative arrangement.
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.
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. 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, 2023, would result in an increase or decrease to sales and marketing expense of $0.7 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, 2023, 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, adjusted EBITDA, net income, and accounts receivable.
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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, adjusted 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.
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 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
and net income.
In the fourth quarter of 2021, we performed a quantitative assessment for our annual goodwill impairment analysis. Upon
estimating the fair value of each of reporting unit, 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
was reflected within Acquisition-related amortization and remeasurement for the year ended December 31, 2021. The assessment
concluded there were no indicators of impairment for the Global Spine goodwill.
In the fourth quarter of 2022, we performed a qualitative assessment for our annual goodwill impairment analysis, which did not
result in an 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.
In the third quarter of 2023, we announced the termination of the former President and Chief Executive Officer, former Chief
Financial Officer, and former Chief Legal Officer, from their respective roles. Immediately following the announcement, our market
capitalization decreased by approximately 30%, indicating that an impairment may exist. As a result, we performed an interim
quantitative assessment of our goodwill as of September 30, 2023. Upon performing our assessment, we determined the Global
Spine reporting unit's fair value exceeded its carrying value as of September 30, 2023.
In the fourth quarter of 2023, we performed a qualitative assessment for our goodwill impairment analysis, which did not result in
an impairment charge. This quantitative 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.
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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 impaired.
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, 2023, and 2022, include (i) contingent
consideration attributable to Lattus and (ii) our convertible loan agreements with Neo Medical.
The contingent consideration obligation consists of future installment payments at certain dates based on future net sales of Lateral
Products. The estimated fair value of the contingent consideration arrangement as of December 31, 2023, was $8.5 million;
however, the actual amount ultimately paid could be higher or lower than the estimated fair value of the contingent consideration.
The estimated fair value of the Lattus contingent consideration is determined using a Monte Carlo simulation and a discounted cash
flow model requiring significant inputs which are not observable in the market. The significant inputs include assumptions related to
the timing and probability of certain product launch dates, estimated future sales of the products, revenue risk-adjusted discount
rate, revenue volatility, and discount rates matched to the timing of payments.
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 of
the present value factor by 5% would have resulted in a decrease in the fair value of the convertible loan of $0.5 million, whereas a
decrease of the present value factor by 5% would have resulted in an increase in the fair value of the convertible loan by $0.2
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 and net income.
Other Fair Value Measurements Utilized in Purchase Accounting
Assets acquired and liabilities assumed in a business combination or asset acquisition are recorded at fair value as of the date of
acquisition. Common adjustments to historical carrying values recognized for such assets or liabilities include (i) adjusting the basis
of acquired inventory from net realizable value to fair value, (ii) adjusting acquired plant, property, and equipment, net of any
historical accumulated depreciation, to the asset’s estimated fair value, and (iii) the remeasurement of right-of-use assets and
assumed lease liabilities. The determination of the acquisition date fair value of the assets acquired and liabilities assumed requires
management's judgment and involves the use of significant estimates and assumptions, especially with respect to future expected
cash flows, useful lives, and discount rates.
As part of the Merger, we acquired SeaSpine's inventory, including raw materials, work-in-process ("WIP"), and finished goods. Raw
materials had not been subjected to any manufacturing processes that would add additional value, therefore we determined book
value is representative of fair value. We assessed the fair value of the WIP and finished goods inventory using the comparative sales
method. The estimated step-up in fair value on acquired inventory recognized in connection with the Merger was $48.2 million. As
of December 31, 2023, the unamortized step-up in fair value on acquired inventory remaining was $12.2 million.
We estimated the fair value of the various classes of property, plant, and equipment acquired using the income approach, sales
comparison approach, and the cost approach. The estimated fair value of property, plant, and equipment acquired in connection
with the Merger was $68.9 million.
Intangible assets primarily included customer relationships, developed technology, and in-process research and development.
Determining the fair value of intangible assets acquired as part of purchase accounting requires us to make significant estimates.
These estimates include the amount and timing of projected future cash flows, royalty savings, and the discount rate used to
discount those cash flows to present value.
We estimated the fair value of acquired right-of-use assets and assumed lease liabilities acquired in connection with the Merger
using the yield capitalization method of the income approach. Acquired right-of-use assets and assumed lease liabilities are
measured based on the remaining lease payments over the remaining portion of the lease term. As our leases do not provide an
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implicit rate, our incremental borrowing rate is used as a discount rate, based on the information available as of the acquisition date,
in determining the present value of lease payments.
These 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 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,
adjusted EBITDA, and net income.
Tax Matters
We and each of our subsidiaries are taxed at the rates applicable within each of their respective jurisdictions. Our income tax
expense, effective tax rate, deferred tax assets, and deferred tax liabilities will vary according to the jurisdiction in which profits
arise. Further, certain of our subsidiaries sell products directly to our other subsidiaries or provide administrative, marketing, and
support services to our other subsidiaries. These intercompany sales and support services involve subsidiaries operating in
jurisdictions with differing tax rates. The tax authorities in such jurisdictions may challenge our 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.
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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, with any discounts
for post-vesting restrictions estimated using the Chaffe Model. 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 units is calculated based upon (i) the closing stock price at the date of grant and
(ii) the number of stock units expected to vest at the conclusion of the performance period. 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 financial results metrics or applicable milestones associated with the grant and requires significant
judgment.
As part of the Merger, our Board of Directors determined to treat the transaction as a "Change in Control" under applicable
agreements and equity plans. As a result, all outstanding and previously granted performance-based and market-based restricted
stock units were converted to time-based restricted stock units. We used the Monte Carlo valuation methodology to calculate the
fair value of the performance-based and market-based restricted stock units. The value is recognized as expense over the requisite
service period and adjusted for forfeitures as they occur.
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, 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 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.
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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.
Adjusted EBITDA
Adjusted EBITDA represents earnings before interest income (expense), income taxes, depreciation, and amortization and excludes
the impact of share-based compensation, gains and losses related to changes in foreign exchange rates, charges related to the
SeaSpine merger and other strategic investments, acquisition-related fair value adjustments, interest and gains and losses on
investments, litigation and investigation costs, charges related to initial compliance with regulations set forth by the European Union
Medical Device Regulation, charges related to business interruption resulting from the COVID-19 pandemic, and succession charges.
Adjusted 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 the outstanding debt related to our Initial Term Loan, which bears interest at
floating rates based on a three-month Secured Overnight Financing Rate, or SOFR, plus an applicable borrowing margin or at a base
rate (as defined in the Financing 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.
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 Dollar, Swiss Franc, British Pound, or Canadian Dollar. 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, 2023, we recorded a foreign currency gain of $1.6 million on the statement of operations and
comprehensive loss resulting from gains and losses in foreign currency transactions.
We are also 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 year ended December 31, 2023, and unfavorably impacted during the year ended December 31, 2022, by
monthly foreign currency exchange rate fluctuations of the U.S. Dollar against all of the foreign functional currencies for our
international operations. As we continue to distribute and manufacture our products in selected foreign countries, we expect that
future sales and costs associated with our activities in these markets will continue to be denominated in the applicable foreign
currencies, which could cause currency fluctuations to materially impact our operating results. An analysis was performed to
determine the sensitivity of our current year net sales and operating income to changes in foreign currency exchange rates. We
determined that if the U.S. Dollar decreased in value by 10% relative to all foreign currencies of our international operations it would
result in an increase in net sales of $9.4 million and an increase in operating income of $0.6 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 $9.4 million
and a decrease in operating income of $0.6 million.
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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 not effective due to a material weakness in the Company's internal control over financial
reporting related to management's review activities for business combinations and goodwill as disclosed below.
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, 2023, 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 our internal control over financial reporting was not effective as of December 31, 2023, due
to a material weakness in the design and operation of certain management review controls pertaining to business combinations and
assessing recoverability of goodwill, resulting from insufficient evidence supporting the precision over the determination of certain
estimates and insufficient evidence supporting the operating effectiveness of the associated review controls. This material weakness
did not result in any misstatements to the consolidated financial statements or disclosures.
Notwithstanding the material weaknesses, management has concluded that the financial statements included elsewhere in this
Annual Report present fairly, in all material respects, our financial position, results of operations, and cash flows in conformity with
GAAP.
As permitted by the SEC Staff interpretive guidance for recently acquired businesses, management's assessment and conclusion on
the effectiveness of the Company's disclosure controls and procedures as of December 31, 2023, excludes an assessment of the
internal control over financial reporting of the SeaSpine business acquired on January 5, 2023. SeaSpine represents approximately
52% of consolidated total assets and approximately 35% of consolidated revenues as of and for the year ended December 31, 2023.
Ernst & Young LLP, an independent registered public accounting firm, has issued an audit report on the effectiveness of our internal
control over financial reporting as of December 31, 2023, which follows this report.
73
Plan to Remediate Material Weakness
In order to address and resolve the identified material weakness, management, with oversight from our Audit Committee, is in
process of developing a detailed plan for remediation, which will include:
•
•
•
Evaluating skill set gaps and hiring additional accounting, finance, and/or financial reporting personnel, as needed, with
relevant public company accounting and financial reporting experience to develop and implement additional policies,
procedures, and controls as it pertains to business combinations, asset acquisitions, and/or other processes heavily
dependent on the usage of prospective financial information;
Providing ongoing training for key personnel responsible for internal control over financial reporting; and
Enhancing or designing and implementing controls over the completeness and accuracy of information used in financial
reporting and forecasted financial results, particularly as it relates to the accounting for business combinations and
goodwill.
We are committed to remediating the material weaknesses and we are making progress in that effort. The actions we are taking are
subject to ongoing senior management review, as well as oversight from the Audit Committee. When fully implemented and
operational, we believe the measures described above will remediate the underlying causes of the control deficiencies that gave rise
to the material weakness and will strengthen our internal control over financial reporting. However, remediation efforts are
expected to continue beyond the fiscal year ending December 31, 2023. Further, we will not be able to fully remediate this material
weakness until these steps have been completed and have been operating effectively for a sufficient period of time. We may also
identify additional measures that may be required to remediate the material weakness in our internal control over financial
reporting, necessitating further action.
Changes in Internal Control over Financial Reporting
We are working towards implementing processes and procedures to address the material weakness noted above. However, none of
these efforts have resulted in the remediation of the material weaknesses noted above as of December 31, 2023. There have been
no changes in our internal control over financial reporting during the fourth quarter of 2023 other than the identification of the
material weakness and the remediation plan disclosed above that have materially affected, or that are reasonably likely to materially
affect, our internal control over financial reporting.
74
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, 2023, 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, because of the effect of the material weakness described below on
the achievement of the objectives of the control criteria, Orthofix Medical Inc. (the Company) has not maintained effective internal
control over financial reporting as of December 31, 2023, based on the COSO criteria.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a
reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or
detected on a timely basis. The following material weakness has been identified and included in management’s assessment.
Management identified a material weakness in its review controls over business combinations and assessment of the recoverability
of goodwill.
As indicated in the accompanying Management’s Annual Report on Internal Control over Financial Reporting, management’s
assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of
SeaSpine Holdings Corporation, which is included in the 2023 consolidated financial statements of the Company and constituted 52%
of total assets as of December 31, 2023 and 35% of revenues for the year then ended. Our audit of internal control over financial
reporting of the Company also did not include an evaluation of the internal control over financial reporting of SeaSpine Holdings
Corporation.
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, 2023, and 2022, 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, 2023, and the related notes. This material weakness was considered in determining the nature, timing and extent
of audit tests applied in our audit of the 2023 consolidated financial statements, and this report does not affect our report dated
March 5, 2024, which 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
75
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
March 5, 2024
Item 9B.
Other Information
None.
Item 9C.
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
None.
76
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.
77
PART IV
Item 15.
Exhibits, Financial Statement Schedule
(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
Description
2.1
2.2
3.1
3.2
4.1
4.2
10.1
10.2†
10.3†
10.4
Agreement and Plan of Merger, dated as of October 10, 2022, by and among Orthofix Medical Inc., Orca Merger Sub Inc.
and SeaSpine Holdings Corporation (filed as an exhibit to the Company's Current Report on Form 8-K dated October 11,
2022 and incorporated herein by reference).
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).
Amended and Restated Certificate of Incorporation (filed as an exhibit to the Company's Current Report on Form 8-K
dated June 20, 2023 and incorporated herein by reference).
Amended and Restated Bylaws, as amended (filed as an exhibit to the Company's Current Report on Form 8-K dated
June 20, 2023 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).
Financing Agreement, dated as of November 6, 2023, among Orthofix Medical Inc., certain subsidiaries of Orthofix
Medical Inc. from time to time party thereto as guarantors, the lenders from time to time party thereto, and Blue Torch
Finance LLC, as administrative agent and collateral agent (filed as an exhibit to the Company's Current Report on Form 8-
K dated November 8, 2023 and incorporated herein by reference).
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. (filed as an exhibit to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2022 and incorporated herein by reference).
Supply Agreement between SeaSpine Orthopedics Corporation and PcoMed, LLC, dated March 1, 2021 (filed as an
exhibit to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2021 by SeaSpine Holdings Corporation
and incorporated herein by reference).
Lease Agreement between AR Industrial No. 1 Ltd. and Orthofix Inc. dated February 10, 2009 (filed as an exhibit to the
Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2022 and incorporated herein by
reference).
78
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
First Amendment to the Lease Agreement between AR Industrial No. 1 Ltd. and Orthofix Inc. dated April 13, 2009 (filed
as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2022 and
incorporated herein by reference).
Second Amendment to the Lease Agreement between AR Industrial No. 1 Ltd. and Orthofix Inc. dated May 12, 2010
(filed as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2022 and
incorporated herein by reference).
Third Amendment to the Lease Agreement between AR Industrial No. 1 Ltd. and Orthofix Inc. dated December 21, 2017
(filed as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2022 and
incorporated herein by reference).
Fourth Amendment to the Lease Agreement between AR Industrial No. 1 Ltd. and Orthofix Inc. dated March 13, 2018
(filed as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2022 and
incorporated herein by reference).
Fifth Amendment to the Lease Agreement between AR Industrial No. 1 Ltd. and Orthofix Inc. dated January 3, 2019 (filed
as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2022 and
incorporated herein by reference).
Standard Lease Agreement between Lake Midas LLC and Spinal Kinetics, Inc. dated April 16, 2015 (filed as an exhibit to
the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2022 and incorporated herein by
reference).
First Amendment to the Standard Lease Agreement between Lake Midas LLC and Spinal Kinetics LLC (formerly known as
Spinal Kinetics, Inc.) dated March 4, 2022 (filed as an exhibit to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2022 and incorporated herein by reference).
Sublease Agreement between SeaSpine Orthopedics Corporation and SkinMedica, Inc., dated July 8, 2015 (filed as an
exhibit to the Current Report on Form 8-K dated September 8, 2015 by SeaSpine Holdings Corporation and incorporated
herein by reference).
Standard Industrial/Commercial Single-Tenant Lease–NET between Monarch RRC Properties, LP and Isotis
Orthobiologics, Inc., dated June 1, 2022 (filed as an exhibit to the Quarterly Report on Form 10-Q for the quarter ended
June 30, 2022 by SeaSpine Holdings Corporation and incorporated herein by reference).
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).
10.16*
Amendment No. 3 to the Orthofix Medical Inc. Second Amended and Restated Stock Purchase Plan.
10.17
10.18
10.19
10.20
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).
Amendment No. 3 to 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 June 7, 2022 and incorporated by reference).
10.21*
Amendment No. 4 to the Orthofix Medical Inc. Amended and Restated 2012 Long-Term Incentive Plan.
10.22
Form of Employee Performance Stock Unit Agreement (2022 grant) 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, 2022 and incorporated herein by reference).
79
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32
10.33
10.34
10.35
10.36
10.37
10.38
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).
Form of Time-Based Vesting Employee Restricted Stock Unit Grant Agreement (2023 grant) 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).
Form of Time-Based Vesting Employee Restricted Stock Unit Grant Agreement (2018 – 2022 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 fiscal year ended December 31, 2022 and incorporated herein by reference).
Form of Time-Based Vesting Employee Non-Qualified Stock Option Agreement (2023 grant) 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).
Form of Time-Based Vesting Employee Non-Qualified Stock Option Agreement (July 2016 – 2022 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 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 Non-Employee Director Restricted Stock Unit Agreement (2023 grant) 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, 2022 and incorporated herein by reference).
Form of Non-Employee Director Restricted Stock Unit Agreement (2017 - 2022 grants) 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).
Form of Time-Based Vesting Employee Restricted Stock Unit Grant Agreement (October 2023 grant) under the Orthofix
Medical Inc. Amended and Restated 2012 Long-Term Incentive Plan (filed as an exhibit to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 2023 and incorporated herein by reference).
Form of Time-Based Vesting Employee Restricted Stock Unit Grant Agreement (October 2023 Cathy Burzik grant) under
the Orthofix Medical Inc. Amended and Restated 2012 Long-Term Incentive Plan (filed as an exhibit to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 2023 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).
Orthofix Medical Inc. Inducement Plan for SeaSpine Employees (filed as exhibit 4.3 to the Company's Registration
Statement on Form S-8 (Registration No. 333-269116) filed January 4, 2023 and incorporated herein by reference).
Orthofix Medical Inc. Inducement Plan for SeaSpine Employees – Stock Unit Grant Agreement (filed as exhibit 4.4 to the
Company's Registration Statement on Form S-8 (Registration No. 333-269116) filed January 4, 2023 and incorporated
herein by reference).
Orthofix Medical Inc. Inducement Plan for SeaSpine Employees – Nonqualified Stock Option Grant Agreement (filed as
Exhibit 4.5 to the Company's Registration Statement on Form S-8 (Registration No. 333-269116) filed January 4, 2023
and incorporated herein by reference).
80
10.39
10.40
10.41
10.42
10.43
10.44
10.45
10.46
10.47
10.48
10.49
10.50
10.51
10.52
10.53
SeaSpine Holdings Corporation Amended and Restated 2015 Incentive Award Plan (As Amended and Restated as of
March 30, 2016) (filed as an exhibit to the Company’s Form S-8 filed on January 10, 2023 and incorporated herein by
reference).
First Amendment to the SeaSpine Holdings Corporation Amended and Restated 2015 Incentive Award Plan (filed as an
exhibit to the Company’s Form S-8 filed on January 10, 2023 and incorporated herein by reference).
Second Amendment to the SeaSpine Holdings Corporation Amended and Restated 2015 Incentive Award Plan (filed as an
exhibit to the Company’s Form S-8 filed on January 10, 2023 and incorporated herein by reference).
Amendment to the SeaSpine Holdings Corporation Amended and Restated 2015 Incentive Award Plan (filed as an exhibit
to the Company’s Form S-8 filed on January 10, 2023 and incorporated herein by reference).
Form of Stock Option Grant Notice and Stock Option Agreement under SeaSpine Holdings Corporation 2015 Incentive
Award Plan (three-month exercise period post-termination) (filed as an exhibit to the Registration Statement on Form S-
8 filed with the Commission on June 7, 2016 by SeaSpine Holdings Corporation and incorporated herein by reference).
Form of Stock Option Grant Notice and Stock Option Agreement under SeaSpine Holdings Corporation 2015 Incentive
Award Plan (one-year exercise period post-termination) (filed as an exhibit to Amendment No. 2 to Form 10 filed with
the Commission on June 1, 2015 by SeaSpine Holdings Corporation and incorporated herein by reference).
Form of Restricted Stock Unit Award Grant Notice and Restricted Stock Unit Award Agreement under SeaSpine Holdings
Corporation 2015 Incentive Award Plan (grants awarded after January 1, 2020) (filed as an exhibit to the Annual Report
on Form 10-K for the year ended December 31, 2019 by SeaSpine Holdings Corporation and incorporated herein by
reference).
Form of Stock Option Grant Notice and Stock Option Agreement under SeaSpine Holdings Corporation 2015 Incentive
Award Plan (grants to Senior Leadership Team Members awarded after June 6, 2018) (filed as an exhibit to the Quarterly
Report on Form 10-Q for the quarter ended June 30, 2018 by SeaSpine Holdings Corporation and incorporated herein by
reference).
Form of Stock Option Grant Notice and Stock Option Agreement under SeaSpine Holdings Corporation 2015 Incentive
Award Plan (grants to Non-Senior Leadership Team Members awarded after June 6, 2018) (filed as an exhibit to the
Quarterly Report on Form 10-Q for the quarter ended June 30, 2018 by SeaSpine Holdings Corporation and incorporated
herein by reference).
SeaSpine Holdings Corporation 2018 Employment Inducement Incentive Award Plan (filed as an exhibit to the Company’s
Form S-8 filed on January 10, 2023 and incorporated herein by reference).
Form of Restricted Stock Unit Award Grant Notice and Restricted Stock Unit Award Agreement under SeaSpine Holdings
Corporation 2018 Employment Inducement Incentive Award Plan (filed as an exhibit to the Quarterly Report on Form 10-
Q for the quarter ended June 30, 2018 by SeaSpine Holdings Corporation and incorporated herein by reference).
Form of Stock Option Grant Notice and Stock Option Agreement under SeaSpine Holdings Corporation 2018 Employment
Inducement Incentive Award Plan (grants to Senior Leadership Team Members) (filed as an exhibit to the Quarterly
Report on Form 10-Q for the quarter ended June 30, 2018 by SeaSpine Holdings Corporation and incorporated herein by
reference).
Form of Stock Option Grant Notice and Stock Option Agreement under SeaSpine Holdings Corporation 2018 Employment
Inducement Incentive Award Plan (grants to Non-Senior Leadership Team Members) (filed as an exhibit to the Quarterly
Report on Form 10-Q for the quarter ended June 30, 2018 by SeaSpine Holdings Corporation and incorporated herein by
reference).
SeaSpine Holdings Corporation 2020 Employment Inducement Incentive Award Plan (filed as an exhibit to the Company’s
Form S-8 filed on January 10, 2023 and incorporated herein by reference).
Form of Restricted Stock Unit Award Grant Notice and Restricted Stock Unit Award Agreement under SeaSpine Holdings
Corporation 2020 Employment Inducement Incentive Award Plan (filed as an exhibit to the Quarterly Report on Form 10-
Q for the quarter ended June 30, 2020 by SeaSpine Holdings Corporation and incorporated herein by reference).
81
10.54
10.55
10.56
10.57
10.58
10.59
10.60
10.61
10.62
10.63
10.64
10.65
10.66
10.67
10.68
10.69
10.70
10.71
Form of Stock Option Grant Notice and Stock Option Agreement under SeaSpine Holdings Corporation 2020 Employment
Inducement Incentive Award Plan (grants to Senior Leadership Team Members) (filed as an exhibit to the Quarterly
Report on Form 10-Q for the quarter ended June 30, 2020 by SeaSpine Holdings Corporation and incorporated herein by
reference).
Form of Stock Option Grant Notice and Stock Option Agreement under SeaSpine Holdings Corporation 2020 Employment
Inducement Incentive Award Plan (grants to Non-Senior Leadership Team Members) (filed as an exhibit to the Quarterly
Report on Form 10-Q for the quarter ended June 30, 2020 by SeaSpine Holdings Corporation and incorporated herein by
reference).
Form of Indemnification Agreement between Orthofix Medical Inc. and its directors and officers (filed as an exhibit to
the Company's Current Report on Form 8-K filed January 5, 2023 and incorporated herein by reference).
Form of Indemnification Agreement between Orthofix Medical Inc. and its directors and officers (filed as an exhibit to
the Company’s Registration Statement on Form S-4 (Registration No. 333-224407) filed April 23, 2018).
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).
Transition Agreement, dated March 3, 2023, between Orthofix Medical Inc. and Jon Serbousek (filed as an exhibit to the
Company's Annual Report on Form 10-K for the year ended December 31, 2022 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 April 4, 2023, between the Company and Kevin Kenny (filed as an exhibit to the Company's
Current Report on Form 8-K dated April 4, 2023 and incorporated herein by reference).
Change in Control and Severance Agreement, date June 19, 2023, between the Company and Kevin Kenny (filed as an
exhibit to the Company's Current Report on Form 8-K dated June 21, 2023 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).
Transition Agreement, dated March 3, 2023, between Orthofix Medical Inc. and Doug Rice (filed as an exhibit to the
Company's Annual Report on Form 10-K for the year ended December 31, 2022 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).
Change in Control and Severance Agreement, date June 19, 2023, between the Company and Kimberley A. Elting (filed as
an exhibit to the Company's Current Report on Form 8-K dated June 21, 2023 and incorporated herein by reference).
Offer Letter between the Company and Keith C. Valentine (filed as an exhibit to the Company's Current Report on Form
8-K filed on January 5, 2023 and incorporated herein by reference).
Change in Control and Severance Agreement, dated June 19, 2023, between the Company and Keith C. Valentine (filed
as an exhibit to the Company's Current Report on Form 8-K dated June 21, 2023 and incorporated herein by reference).
Offer Letter between the Company and John J. Bostjancic (filed as an exhibit to the Company's Current Report on Form
8-K filed on January 5, 2023 and incorporated herein by reference).
Change in Control and Severance Agreement, dated June 19, 2023, between the Company and John J. Bostjancic (filed as
an exhibit to the Company's Current Report on Form 8-K dated June 21, 2023 and incorporated herein by reference).
Offer Letter between the Company and Patrick L. Keran (filed as an exhibit to the Company's Current Report on Form 8-K
filed on January 5, 2023 and incorporated herein by reference).
82
10.72
10.73
10.74
10.75
10.76
10.77
10.78
10.79
10.80
10.81
10.82
10.83
10.84
10.85
10.86
21.1*
23.1*
31.1*
31.2*
Change in Control and Severance Agreement, dated June 19, 2023, between the Company and Patrick L. Keran (filed as
an exhibit to the Company's Current Report on Form 8-K dated June 21, 2023 and incorporated herein by reference).
Change in Control and Severance Agreement, dated October 2, 2023, between Orthofix Medical Inc. and Geoffrey
Gillespie (filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2023
and incorporated herein by reference).
Letter agreement, entered into on November 27, 2023, between Orthofix Medical Inc. and Massimo Calafiore (filed as an
exhibit to the Company's Current Report on Form 8-K dated December 1, 2023 and incorporated herein by reference).
Orthofix Medical Inc. 2024 CEO Inducement Plan (filed as Exhibit 4.2 to the Company’s Registration Statement on Form
S-8 (Registration no. 333-276433) filed January 8, 2024 and incorporated herein by reference).
Orthofix Medical Inc. 2024 CEO Inducement Plan – Performance Stock Unit Grant Agreement (filed as Exhibit 4.3 to the
Company’s Registration Statement on Form S-8 (Registration no. 333-276433) filed January 8, 2024 and incorporated
herein by reference).
Orthofix Medical Inc. 2024 CEO Inducement Plan – Stock Unit Grant Agreement (filed as Exhibit 4.4 to the Company’s
Registration Statement on Form S-8 (Registration no. 333-276433) filed January 8, 2024 and incorporated herein by
reference).
Orthofix Medical Inc. 2024 CEO Inducement Plan – Nonqualified Stock Option Grant Agreement (filed as Exhibit 4.5 to
the Company’s Registration Statement on Form S-8 (Registration no. 333-276433) filed January 8, 2024 and incorporated
herein by reference).
Change in Control and Severance Agreement, dated as of January 8, 2024, between Orthofix Medical Inc. and Massimo
Calafiore (filed as an exhibit to the Company's Current Report on Form 8-K dated January 9, 2024 and incorporated
herein by reference).
Letter agreement, dated as of January 4, 2024, between Orthofix Medical Inc. and Julie Andrews (filed as an exhibit to
the Company's Current Report on Form 8-K dated January 9, 2024 and incorporated herein by reference).
Orthofix Medical Inc. 2024 CFO Inducement Plan (filed as Exhibit 4.2 to the Company’s Registration Statement on Form
S-8 (Registration no. 333-276506) filed January 8, 2024 and incorporated herein by reference).
Orthofix Medical Inc. 2024 CFO Inducement Plan – Performance Stock Unit Grant Agreement (filed as Exhibit 4.3 to the
Company’s Registration Statement on Form S-8 (Registration no. 333-276506) filed January 8, 2024 and incorporated
herein by reference).
Orthofix Medical Inc. 2024 CFO Inducement Plan – Stock Unit Grant Agreement (filed as Exhibit 4.4 to the Company’s
Registration Statement on Form S-8 (Registration no. 333-276506) filed January 8, 2024 and incorporated herein by
reference).
Orthofix Medical Inc. 2024 CFO Inducement Plan – Nonqualified Stock Option Grant Agreement (filed as Exhibit 4.5 to
the Company’s Registration Statement on Form S-8 (Registration no. 333-276506) filed January 8, 2024 and incorporated
herein by reference).
Change in Control and Severance Agreement, dated as of January 15, 2024, between Orthofix Medical Inc. and Julie
Andrews (filed as an exhibit to the Company's Current Report on Form 8-K dated January 17, 2024 and incorporated
herein by reference).
Cooperation Agreement, dated December 11, 2023, by and among Orthofix Medical Inc. Engine Capital, L.P., Engine Jet
Capital, L.P., Engine Lift Capital LP, Engine Capital Management, LP, Engine Capital Management GP, LLC, Engine
Investments, LLC, Engine Investments II, LLC and Arnaud Ajdler (filed as an exhibit to the Company's Current Report on
Form 8-K dated December 15, 2023 and incorporated herein by reference).
List of Subsidiaries.
Consent of Independent Registered Public Accounting Firm.
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
83
32.1*
97.1*
101.INS
Section 1350 Certification of Chief Executive Officer and Certification of Chief Financial Officer.
Incentive Compensation Recovery Policy
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.
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
84
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: March 5, 2024
Dated: March 5, 2024
ORTHOFIX MEDICAL INC.
By:
Name:
Title:
By:
Name:
Title:
/s/ MASSIMO CALAFIORE
Massimo Calafiore
President and Chief Executive Officer, Director
/s/ JULIE ANDREWS
Julie Andrews
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/ MASSIMO CALAFIORE
Massimo Calafiore
President and Chief Executive Officer, Director
(Principal Executive Officer)
/s/ JULIE ANDREWS
Julie Andrews
/s/ CATHERINE BURZIK
Catherine Burzik
/s/ ALAN BAZAAR
Alan Bazaar
/s/ WAYNE BURRIS
Wayne Burris
/s/ STUART ESSIG
Stuart Essig
/s/ MICHAEL FINEGAN
Michael Finegan
/s/ JASON HANNON
Jason Hannon
/s/ JOHN HENNEMAN, III
John Henneman, III
/s/ JAMES HINRICHS
James Hinrichs
/s/ CHARLES KUMMETH
Charles Kummeth
March 5, 2024
March 5, 2024
Chief Financial Officer
(Principal Financial and Accounting Officer)
Director, Chair of the Board
March 5, 2024
Director
Director
Director
Director
Director
Director
Director
Director
85
March 5, 2024
March 5, 2024
March 5, 2024
March 5, 2024
March 5, 2024
March 5, 2024
March 5, 2024
March 5, 2024
/s/ SHWETA SINGH MANIAR
Shweta Singh Maniar
/s/ MIKE PAOLUCCI
Mike Paolucci
Director
Director
March 5, 2024
March 5, 2024
86
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
Massimo Calafiore
President and Chief Executive Officer, Director
Julie Andrews
Chief Financial Officer
87
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, 2023 and 2022................................................................................................
Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2023, 2022, and 2021 ..
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2023, 2022, and 2021 .........
Consolidated Statements of Cash Flows for the years ended December 31, 2023, 2022, and 2021 ...........................................
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, 2023
and 2022, 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, 2023, 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, 2023 and 2022, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2023, 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, 2023, 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 March 5, 2024 expressed an adverse 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 the 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 a separate opinion on the critical audit
matters or on the accounts or disclosures to which they relate.
F-2
Inventory Excess and Obsolescence Reserves
Description of
the Matter
At December 31, 2023, the Company’s inventory balance was $222.2 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 to determine the appropriate inventory reserves and
to make corresponding adjustments to the carrying value of these inventories to reflect them at 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 estimated 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
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.
Accounting for business combination
Description of
the Matter
As discussed in Note 4 to the consolidated financial statements, the Company completed a significant
acquisition during 2023 for a total purchase price of $376.7 million. The transaction was accounted for as a
business combination.
Auditing the Company's acquisition accounting was complex due to the significant size of the transaction and
significant estimations used by management in determining the fair values of intangible assets, which utilized
prospective financial information. The Company valued customer relationships using the multi-period excess
earnings method and valued developed technologies using the relief from royalty method. The significant
assumptions used in these models included weighted average cost of capital and certain assumptions that
form the basis of the forecasted results (i.e. revenue growth rates, EBITDA margin and cost synergies). The
significant assumptions used in the valuation of intangible assets are forward-looking and could be affected by
future economic and market conditions.
How We
Addressed the
Matter in Our
Audit
To test the estimated fair value of intangible assets, we performed audit procedures assisted by our valuation
specialists that included, among others, evaluating the Company’s selection of the valuation methodologies,
evaluating the significant assumptions used in the Company’s valuation calculations and evaluating the
completeness and accuracy of the underlying data supporting the significant assumptions. For example, we
performed sensitivity analyses and compared significant assumptions to historical results of the acquired
business and to other guideline public companies within the same industry. We also evaluated the Company’s
F-3
acquisition and related purchase accounting disclosures included in Note 4 to the consolidated financial
statements.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2002.
Dallas, Texas
March 5, 2024
F-4
ORTHOFIX MEDICAL INC.
Consolidated Balance Sheets as of December 31, 2023 and 2022
(U.S. Dollars, in thousands, except par value data)
Assets
Current assets
Cash and cash equivalents
Restricted cash
Accounts receivable, net of allowances of $7,130 and $6,419, respectively
Inventories
Prepaid expenses and other current assets
Total current assets
Property, plant and equipment, net
Intangible assets, net
Goodwill
Other long-term assets
Total assets
Liabilities and shareholders’ equity
Current liabilities
Accounts payable
Current portion of long-term debt
Current portion of finance lease liability
Other current liabilities
Total current liabilities
Long-term debt
Long-term portion of finance lease liability
Other long-term liabilities
Total liabilities
Contingencies (Note 13)
Shareholders’ equity
Common shares $0.10 par value; 100,000 shares authorized;
37,165 and 20,162 issued and outstanding as of December 31,
2023 and 2022, respectively
Additional paid-in capital
Retained earnings (accumulated deficit)
Accumulated other comprehensive loss
Total shareholders’ equity
Total liabilities and shareholders’ equity
The accompanying notes form an integral part of these consolidated financial statements.
2023
2022
$
$
$
$
33,107
4,650
128,098
222,166
32,422
420,443
159,060
117,490
194,934
33,388
925,315
58,357
1,250
708
104,908
165,223
93,107
18,532
49,723
326,585
3,717
746,450
(150,144)
(1,293)
598,730
925,315
$
$
$
$
50,700
—
82,857
100,150
22,283
255,990
58,229
47,388
71,317
25,705
458,629
27,598
—
652
55,374
83,624
—
19,239
18,906
121,769
2,016
334,969
1,251
(1,376)
336,860
458,629
F-5
ORTHOFIX MEDICAL INC.
Consolidated Statements of Operations and Comprehensive Loss
For the years ended December 31, 2023, 2022, and 2021
(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 (Note 17)
Operating loss
Interest expense, net
Other expense, net
Loss before income taxes
Income tax expense
Net loss
Net 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
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 loss
2023
2022
2021
$
746,641
260,368
486,273
385,736
144,659
80,231
14,757
(139,110)
(8,631)
(938)
(148,679)
(2,716)
(151,395) $
$
460,713
123,544
337,169
228,810
79,966
49,065
(7,404)
(13,268)
(1,288)
(3,150)
(17,706)
(2,043)
(19,749) $
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)
(4.12) $
(4.12)
(0.98) $
(0.98)
(1.95)
(1.95)
36,729,258
36,729,258
20,053,548
20,053,548
19,690,593
19,690,593
(1,334)
1,417
83
—
83
(151,312) $
395
(1,771)
(1,376)
—
(1,376)
(21,125) $
(942)
(2,544)
(3,486)
234
(3,252)
(41,631)
$
$
$
$
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, 2023, 2022, and 2021
(U.S. Dollars, in thousands)
At December 31, 2020
Net loss
Other comprehensive loss, net of tax
Share-based compensation expense
Common shares issued, net
At December 31, 2021
Net loss
Other comprehensive loss, net of tax
Share-based compensation expense
Common shares issued, net
At December 31, 2022
Net loss
Other comprehensive income, net of tax
Share-based compensation expense
Common shares issued in connection with SeaSpine
Merger
Common shares issued, net
At December 31, 2023
Number of
Common
Shares
Outstanding
Common
Shares
Additional
Paid-in
Capital
Retained
Earnings
(Accumulated
Deficit)
Accumulated
Other
Comprehensive
Income (Loss)
Total
Shareholders’
Equity
19,424 $
—
—
—
413
19,837 $
—
—
—
325
20,162 $
—
—
—
16,047
956
37,165 $
1,942 $ 292,291 $
—
—
—
41
—
—
15,432
6,228
1,983 $ 313,951 $
—
—
—
33
—
—
18,443
2,575
2,016 $ 334,969 $
59,379 $
(38,379)
—
—
—
21,000 $
(19,749)
—
—
—
1,251 $
—
—
—
—
—
35,707
(151,395)
—
—
3,252 $ 356,864
(38,379)
—
(3,252)
(3,252)
15,432
—
—
6,269
— $ 336,934
(19,749)
—
(1,376)
(1,376)
18,443
—
2,608
—
(1,376) $ 336,860
(151,395)
83
35,707
—
83
—
1,605
96
375,140
634
—
—
3,717 $ 746,450 $ (150,144) $
—
—
376,745
730
(1,293) $ 598,730
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, 2023, 2022, and 2021
(U.S. Dollars, in thousands)
Cash flows from operating activities
Net loss
Adjustments to reconcile net loss to net cash from operating activities
Depreciation and amortization
Inventory reserve expenses
Amortization of inventory fair value step up
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
Capital expenditures for property, plant and equipment
Capital expenditures for intangible assets
Contingent consideration payments related to asset acquisitions
Purchase of investment securities
Cash acquired in SeaSpine merger
Other investing activities
Net cash from investing activities
Cash flows from financing activities
Proceeds from credit facilities
Repayment of borrowings from credit facilities
Payment of debt acquired from SeaSpine merger
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
The accompanying notes form an integral part of these consolidated financial statements
$
$
33,107
4,650
37,757
F-8
2023
2022
2021
$
(151,395)
$
(19,749)
$
(38,379)
53,063
27,576
36,044
—
7,498
820
579
35,707
596
(2,700)
423
(10,411)
(58,051)
1,760
8,642
4,069
—
—
27
(45,753)
(60,256)
(1,794)
—
—
29,419
(500)
(33,131)
174,500
(79,000)
(26,899)
5,127
(4,397)
(1,000)
(652)
(2,357)
65,322
619
(12,943)
50,700
37,757
29,019
14,907
—
—
3,056
2,095
314
18,443
(308)
(17,200)
2,027
(6,735)
(33,040)
(874)
2,282
627
(4,791)
—
(1,611)
(11,538)
(21,364)
(1,796)
(1,500)
—
—
126
(24,534)
—
—
—
4,337
(1,729)
—
(2,594)
(92)
(78)
(997)
(37,147)
87,847
50,700
50,700
—
50,700
$
$
$
29,599
10,826
—
11,756
3,496
444
24,482
15,432
(1,146)
(3,575)
1,064
(7,049)
(10,207)
(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
$
$
$
ORTHOFIX MEDICAL INC.
Notes to the Consolidated Financial Statements
1.
Business and basis of presentation
Description of the Business
Orthofix Medical Inc. and its Subsidiaries (the “Company” or "Orthofix") merged with SeaSpine Holdings Corporation ("SeaSpine") in
January 2023 to form a leading global spine and orthopedics company with a comprehensive portfolio of biologics, innovative spinal
hardware, bone growth therapies, specialized orthopedic solutions, and a leading surgical navigation system. Its products are
distributed in more than 60 countries worldwide.
The Company is headquartered in Lewisville, Texas, where it conducts general business, product development, medical education
and manufacturing, and has primary offices in Carlsbad, CA, with a focus on spine and biologics product innovation and surgeon
education, and Verona, Italy, with an emphasis on product innovation, production, and medical education for orthopedics. The
combined company’s global research and development, commercial and manufacturing footprint also includes facilities and offices
in Irvine, CA, Toronto, Canada, Sunnyvale, CA, Wayne, PA, Olive Branch, MS, Maidenhead, UK, Munich, Germany, Paris, France, and
São Paulo, Brazil.
The merger with SeaSpine was completed on January 5, 2023, with SeaSpine continuing as a wholly-owned subsidiary of Orthofix
following the transaction. For additional discussion of the merger with SeaSpine, see Note 4. The shares of common stock of
Orthofix, as the corporate parent entity in the combined company structure, continue to trade on NASDAQ under the symbol
"OFIX".
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 and basis of presentation
Significant accounting policies
Recently adopted accounting standards and recently issued accounting pronouncements
Mergers and acquisitions
Inventories
Property, plant, and equipment
Intangible assets
Goodwill
Leases
Other current liabilities
Indebtedness
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
Changes in Presentation of Consolidated Financial Statements
Certain prior year balances have been reclassified in the consolidated financial statements to conform to current period
presentation.
F-9
Footnote
Reference
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
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 (including fair
value measurements associated with business combinations and/or asset acquisitions), 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 may 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 respective 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 exchange rates 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 income (expense), net and was a gain of $1.6 million, a loss of $3.3 million, and a loss of $4.0 million for the years
ended December 31, 2023, 2022, and 2021, respectively.
Financial instruments and concentration of credit risk
Financial instruments that could subject the Company to a concentration of credit risk consist primarily of cash, cash equivalents,
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 November 2023, following the termination of the Second Amended and Restated Credit Agreement with JPMorgan Chase Bank,
N.A., as Administrative Agent, and certain lender parties thereto, Bank of America required collateral of approximately $4.7 million
of the Company’s cash as a banking service obligation. This cash has been reclassified to restricted cash as of December 31, 2023.
Investing activities that did not result in cash receipts or cash payments during the years ended December 31, 2023, 2022, and 2021
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:
Intangible assets acquired in asset acquisitions
2023
2022
2021
$
— $
2,000
$
—
F-10
Advertising costs
Advertising costs are expensed as incurred. Advertising costs are included within sales and marketing expense and totaled $0.5
million for each of the years ended December 31, 2023, 2022, and 2021, respectively.
Research and development costs, including collaborative arrangements
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, less than $0.1 million, and $0.8 million in research and development expense for the years ended December 31, 2023, 2022,
and 2021, respectively.
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 totaled $0.1 million, $0.5 million, and $0.6 million for the years ended December 31, 2023, 2022, and
2021, respectively.
3.
Recently adopted accounting standards and recently issued accounting pronouncements
Recently Adopted Accounting Standards
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 Coronavirus Aid, Relief, and Economic Security Act ("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 Accounting Standards Codification ("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 consolidated balance sheet, statements of operations, or cash flows.
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 the London Inter-Bank Offered Rate. 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
consolidated balance sheet, statements of operations, or cash flows.
Adoption of ASU 2021-08, Accounting for Contract Assets and Contract Liabilities with Contracts with Customers
In October 2021, the FASB issued ASU 2021-08, which aims to address diversity in practice and inconsistency related to the
accounting for acquired revenue contracts with customers in a business combination. The amendments require that an entity
recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606,
Revenue from Contracts with Customers. Adoption of this standard resulted in the recognition of $2.2 million in contract liabilities
associated with acquired revenue contracts as a result of the Company’s merger with SeaSpine, which closed on January 5, 2023.
F-11
Recently Issued Accounting Pronouncements
Topic
Fair Value Measurement
of Equity Securities
Subject to Contractual
Sale Restrictions (ASU
2022-03)
Disclosure Improvements
- Codification
Amendments in Response
to the SEC's Disclosure
Update and
Simplification Initiative
(ASU 2023-06)
Improvements to
Reportable Segment
Disclosures (ASU 2023-
07)
Description of Guidance
Clarifies the guidance in Topic 820, Fair Value
Measurement, when measuring the fair value
of an equity security subject to contractual
restrictions that prohibit the sale of an equity
security and introduces new disclosure
requirements for equity securities subject to
contractual sale restrictions. Certain of the
provisions are to be applied retrospectively
with other provisions applied prospectively.
Adds interim and annual disclosure
requirements to a variety of subtopics in the
Accounting Standards Codification, including
those focusing on accounting changes,
earnings per share, debt and repurchase
agreements. The guidance will be applied
prospectively. The effective date will be the
date when the SEC's removal of the related
disclosure requirement becomes effective,
with early adoption prohibited.
Improve financial reporting by requiring
disclosure of incremental segment
information on an annual and interim basis
for all public entities to enable investors to
develop more decision-useful financial
analyses. Provisions are to be applied
retrospectively to all prior periods presented
in financial statements.
Effective Date
January 1,
2024
Status of Company's Evaluation
The Company is currently evaluating the
impact this ASU may have on its
consolidated financial statements, but does
not expect this ASU to have a material
impact on disclosures within the Company's
consolidated financial statements.
Various
The Company is currently evaluating the
impact this ASU may have on its
consolidated financial statements.
January 1,
2024
The Company is currently evaluating the
impact this ASU may have on its
consolidated financial statements; however,
the Company expects to disclose additional
information in regards to its reportable
segments as a result of this ASU, including (i)
significant segment expenses regularly
provided to the Company's chief operating
decision maker ("CODM"), (ii) disclosure of
other segment items by reportable segment,
and (iii) disclosure of the title and position of
the Company's CODM, among other
disclosure requirements.
The Company is currently evaluating the
impact this ASU may have on its
consolidated financial statements.
Improvements to Income
Tax Disclosures (ASU
2023-09)
January 1,
2025
Enhance the transparency and decision
usefulness of income tax disclosures to
better assess how an entity’s operations and
related tax risks and tax planning and
operational opportunities affect its tax rate
and
prospects for future cash flows. The
amendments are to be applied prospectively,
but retrospective application is permitted.
4. Mergers and acquisitions
Merger with SeaSpine
On January 5, 2023, the Company and SeaSpine completed an all-stock merger of equals (the "Merger") to create a leading global
spine and orthopedics company with highly complementary portfolios of biologics, innovative spinal hardware, bone growth
therapies, specialized orthopedic solutions, and a leading surgical navigation system. As a result of the Merger, each share of
SeaSpine common stock issued and outstanding immediately prior to the closing of the Merger was converted into the right to
receive 0.4163 shares of Orthofix common stock.
F-12
The Merger is being accounted for as an acquisition of SeaSpine by Orthofix under the acquisition method of accounting for business
combinations in accordance with U.S. GAAP. Therefore, Orthofix is treated as the acquirer for accounting purposes. In identifying the
acquirer, Orthofix and SeaSpine considered the structure of the transaction and other actions contemplated by the merger
agreement (the "Merger Agreement"), relative outstanding share ownership, market values, the composition of the combined
company's Board of Directors, and the relative size of Orthofix and SeaSpine. Under the acquisition method of accounting, the assets
and liabilities of SeaSpine and its subsidiaries have been recorded at their respective fair values as of the acquisition date.
The total estimated fair value of consideration associated with the Merger as of the acquisition date was comprised of:
(U.S. Dollars, in thousands, except shares and price per share)
Share Consideration:
Orthofix common shares to be issued in exchange for SeaSpine common shares
Orthofix closing price per share as of January 4, 2023
Estimated fair value of shares issued in exchange for SeaSpine common shares
Estimated fair value of Orthofix stock options and RSUs issued in exchange for outstanding SeaSpine
equity awards
Total estimated fair value of consideration
16,047,315
22.76
365,237
11,508
376,745
$
$
$
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date. The
Company finalized its valuation of assets acquired and liabilities assumed during the fourth quarter of 2023. Certain acquired assets
and liabilities assumed were valued utilizing Level 3 inputs and assumptions.
(U.S. Dollars, in thousands)
Assets acquired:
Current assets
Cash and cash equivalents
Accounts receivable, net
Inventories
Prepaid expenses and other current assets
Total current assets
Property, plant, and equipment, net
Customer relationships
Developed technology
In-process research and development ("IPR&D")
Other long-term assets
Total identifiable assets acquired
Liabilities assumed:
Current liabilities
Accounts payable
Other current liabilities
Total current liabilities
Long-term borrowings under SeaSpine credit facility
Other long-term liabilities
Total liabilities assumed
Net identifiable assets acquired
Total fair value of consideration transferred
Residual goodwill
Previously
Reported
Adjustments
Final Acquisition
Date Fair Value
Assigned Useful
Life
13 years
6 - 8 years
Indefinite
$
$
$
$
$
29,419
35,313
132,636
4,590
201,958
68,863
33,100
47,200
5,750
20,501
377,372
21,602
43,344
64,946
26,298
32,833
124,077
253,295
376,745
123,450
$
$
$
$
$
— $
—
—
—
—
—
—
—
—
—
— $
— $
177
177
—
(10)
167
(167) $
—
167
$
29,419
35,313
132,636
4,590
201,958
68,863
33,100
47,200
5,750
20,501
377,372
21,602
43,521
65,123
26,298
32,823
124,244
253,128
376,745
123,617
The purchase price exceeded the fair value of the net tangible and identifiable intangible assets acquired in the Merger. As of
December 31, 2023, the Company recorded goodwill totaling $123.6 million, which was assigned to the Global Spine reporting
segment. Specifically, the goodwill includes the assembled workforce and synergies associated with the combined entity. The
goodwill is not deductible for tax purposes.
F-13
The Company recognized $9.9 million in direct acquisition-related costs, which exclude integration-related activities, that were
expensed during the year ended December 31, 2023. These costs are included in the consolidated statements of operations and
comprehensive income (loss), primarily within general and administrative expenses. The Company's results of operations included
$258.9 million of net sales from SeaSpine for the year ended December 31, 2023, and a net loss attributable to SeaSpine of $84.0
million for the year ended December 31, 2023.
Unaudited Pro Forma Financial Information
Due to the Merger closing on January 5, 2023, all SeaSpine financial results for fiscal year 2023, except for the first four days of
January, are included in Orthofix's consolidated statement of operations and comprehensive loss. The following unaudited pro
forma financial information for the year ended December 31, 2023, is based on the Company's historical consolidated financial
statements adjusted to reflect as if the Merger closed as of January 1, 2022.
The unaudited pro-forma information makes certain adjustments to depreciation and amortization expense to reflect the fair value
recognized in the purchase price allocation and to remove one-time transaction-related costs. The unaudited pro forma financial
information is presented for informational purposes only and is not necessarily indicative of the results of operations that would
have been achieved if the Merger closed as of January 1, 2022.
(U.S. Dollars, in millions)
Net sales
Net loss
Integration and Restructuring Activities
For the Year Ended December 31,
2023
2022
$
$
746.6
(116.4)
$
$
698.2
(129.2)
The Company has incurred significant integration and restructuring costs in connection with the Merger. The following table
summarizes integration costs incurred for the year ended December 31, 2023, and 2022.
(U.S. Dollars, in millions)
Compensation-related integration costs
International spine restructuring
Fee paid to financial advisor to the Merger
Professional fees / consulting fees
Product rationalization charges
Other costs to complete
Total
For the Year Ended December 31,
2023
2022
$
$
17.7
1.3
5.5
5.8
6.0
1.4
37.7
$
$
—
—
—
—
—
—
—
In the first quarter of 2023, the Company approved and initiated certain restructuring activities to streamline costs and to better
align talent with operational needs following the consummation of the Merger. This program was expanded in the third quarter of
2023 to include further restructuring activities related to the Company's international spine business. The Company expects to incur
total pre-tax expenses of approximately $18.2 million associated with the restructuring activities, which will be recognized within
operating expenses. The table below provides a summary of restructuring costs incurred during the period and the resulting
liabilities as of December 31, 2023, which are recognized within other current liabilities.
(U.S. Dollars, in millions)
U.S. Severance costs
U.S. Retention costs
U.S. Payroll taxes
International spine restructuring
severance
Total
$
$
Balance as of
December 31, 2022
Charges Incurred
Payments Made /
Currency Translation
Adjustment
Balance as of
December 31, 2023
11.2
5.3
0.7
1.0
18.2
$
$
(10.2)
(0.3)
(0.4)
(0.3)
(11.2)
$
$
1.0
5.0
0.3
0.7
7.0
— $
—
—
—
— $
F-14
5.
Inventories
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 the Company's 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 the Company's 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 by management, at
least annually or more often, in the event circumstances indicate a change in cost has occurred.
Work-in-process and finished products include material, labor, and production overhead costs. Field and consignment inventory,
which 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, is included within finished products.
(U.S. Dollars, in thousands)
Raw materials
Work-in-process
Finished products
Inventories
December 31,
2023
2022
28,390
53,510
140,266
222,166
$
$
17,035
19,243
63,872
100,150
$
$
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 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.
6.
Property, plant, and equipment
Property, plant, and equipment is stated at cost or estimated fair value when acquired as part of a business combination, less
accumulated depreciation. Costs include all expenditures necessary to place the asset in service, generally including freight and sales
and use taxes. Property, plant, and equipment also 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 $34.2 million, $19.6 million, and $20.2 million for the years ended December 31, 2023,
2022, and 2021, 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.
F-15
(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,
2023
2022
4,103
70,252
154,192
43,040
11,010
41,751
23,337
347,685
(188,625)
159,060
$
$
3,867
48,358
92,607
40,685
7,917
4,515
23,276
221,225
(162,996)
58,229
$
$
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, which generally ranges from 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 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.
7.
Intangible assets
Intangible assets are recorded at cost, or when acquired as a part of a business combination, at estimated fair value, less
accumulated amortization. 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
Developed technology
Patents
IPR&D
Customer relationships
License and other
Trademarks—finite lived
Accumulated amortization
Developed technology
Patents
Customer relationships
License and other
Trademarks—finite lived
Intangible assets, net
Weighted Average
Amortization Period
December 31,
2023
2022
7.9 years
10.0 years
Indefinite
12.1 years
9.6 years
10.0 years
9.5 years
$
$
$
92,416
43,262
4,674
49,197
24,584
1,797
215,930
(28,898)
(40,494)
(11,988)
(16,240)
(820)
(98,440)
117,490
$
$
$
43,699
40,108
300
15,572
23,295
1,875
124,849
(17,830)
(37,506)
(6,938)
(14,386)
(801)
(77,461)
47,388
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
F-16
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 assets 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 reclassified to developed technology and are amortized over an assigned useful life that best reflects the
economic benefits provided by these assets.
Amortization expense for intangible assets was $18.9 million, $9.4 million, and $9.4 million for the years ended December 31, 2023,
December 31, 2022, and 2021, respectively. Future amortization expense for intangible assets is estimated as follows:
(U.S. Dollars, in thousands)
2024
2025
2026
2027
2028
Thereafter
Total finite-lived intangible assets, net
Indefinite-lived intangible assets, net
Intangible assets, net
8.
Goodwill
Amortization
20,948
19,849
18,810
18,426
14,890
19,893
112,816
4,674
117,490
$
$
$
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.
The following table presents the net carrying value of goodwill as of December 31, 2023, and 2022, and a rollforward of such
balances from December 31, 2022, by reportable segment:
(U.S. Dollars, in thousands)
Global Spine - Gross
Global Spine - Accumulated Impairment Loss
Global Spine - Net
Balance as of
December 31,
2022
71,317
—
71,317
$
$
Goodwill
Acquired in
the Merger
with SeaSpine
123,617
$
—
123,617
$
Currency
translation
adjustment
Balance as of
December 31,
2023
194,934
—
194,934
— $
— $
— $
— $
—
— $
Impairment
$
$
Global Orthopedics - Gross
Global Orthopedics - Accumulated Impairment Loss
Global Orthopedics - Net
Goodwill, net of accumulated impairment losses
$
$
$
11,130
(11,130)
$
— $
— $
—
— $
— $
—
— $
347
$
(347) $
— $
11,477
(11,477)
—
71,317
$
123,617
$
— $
— $
194,934
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
F-17
impairment of the Global Orthopedics goodwill of $11.8 million, which was reflected within Acquisition-related amortization and
remeasurement. The assessment concluded there were no indicators of impairment for the Global Spine goodwill.
In the fourth quarter of 2022, the Company performed a qualitative assessment for its annual goodwill impairment analysis, which
did not result in an 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.
In the third quarter of 2023, the Company announced the termination of its former President and Chief Executive Officer, former
Chief Financial Officer, and former Chief Legal Officer, from their respective roles. Immediately following the announcement, the
Company’s market capitalization decreased by approximately 30%, indicating that an impairment may exist. As a result, the
Company performed an interim quantitative assessment of its goodwill as of September 30, 2023. The Company estimated the fair
value of each reporting unit using a weighted average of the fair value derived from both an income approach and a market
approach (all Level 3 fair value measurements). Upon performing its assessment, the Company determined its Global Spine
reporting unit's fair value exceed its carrying value of net assets as of September 30, 2023.
In the fourth quarter of 2023, the Company performed a qualitative assessment for its annual goodwill impairment analysis, which
did not result in an 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.
9.
Leases
The Company determines if a contractual arrangement qualifies as a lease at inception. The Company’s leases primarily relate to
facilities, vehicles, equipment, and certain contract manufacturing agreements. Lease assets represent the Company’s right to use
an underlying asset for the lease term, while 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 the impact of any lease incentives.
The Company does not recognize lease liabilities or lease assets on the balance sheet for short-term leases (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 the Company's short-term
lease commitments.
For all classifications of leases, the Company combines lease and non-lease 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.
F-18
A summary of the Company’s lease portfolio as of December 31, 2023, and 2022, 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
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
Classification
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
December 31,
2023
December 31,
2022
$
$
$
$
19,869
16,345
36,214
3,477
708
17,125
18,532
39,842
$
$
$
$
6,788
17,360
24,148
1,638
652
5,376
19,239
26,905
6.2 years
16.6 years
4.5 years
17.6 years
7.3%
4.4%
4.0%
4.4%
For the Year Ended
December 31, 2023
For the Year Ended
December 31, 2022
For the Year Ended
December 31, 2021
$
$
1,013
857
5,015
313
1,883
9,081
$
$
1,238
890
2,126
152
932
5,338
$
$
2,049
933
2,234
213
815
6,244
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, 2023
For the Year Ended
December 31, 2022
For the Year Ended
December 31, 2021
$
$
7,682
857
652
16,688
—
$
3,805
885
2,594
5,603
—
4,627
907
537
589
149
F-19
A summary of the Company’s remaining lease liabilities as of December 31, 2023, is included below:
(U.S. Dollars, in thousands)
2024
2025
2026
2027
2028
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, employee commissions, and related taxes payable
Accrued distributor commissions
Accrued litigation and investigation costs
Short-term operating lease liability
Non-income taxes payable
Other payables
Other current liabilities
Operating
Leases
Finance
Leases
$
$
$
$
$
$
4,861
4,788
4,607
3,441
1,785
6,766
26,248
(5,646)
20,602
3,477
17,125
20,602
$
$
$
$
December 31,
2023
2022
12,189
38,826
22,602
12,077
3,477
7,585
8,152
104,908
$
$
11.
Indebtedness
The carrying values of the Company’s outstanding debt obligations as of December 31, 2023, and 2022, were as follows:
(U.S. Dollars, in thousands)
Initial Term Loan
Principal amount
Unamortized original debt discount
Unamortized debt issuance costs and lenders fees
Total indebtedness from initial term loan
Revolving Credit Facilities
Principal amount outstanding
Total indebtedness outstanding
Current portion of long-term debt
Long-term debt
Total indebtedness outstanding
December 31,
2023
2022
$
$
$
$
100,000
(4,331)
(1,312)
94,357
—
94,357
1,250
93,107
94,357
$
$
$
$
The Company paid cash related to interest of $5.8 million, $1.4 million, and $1.5 million for the years ended December 31, 2023,
2022, and 2021, respectively.
F-20
1,538
1,543
1,562
1,593
1,624
19,396
27,256
(8,016)
19,240
708
18,532
19,240
9,611
18,531
10,483
3,891
1,638
6,586
4,634
55,374
—
—
—
—
—
—
—
—
—
Financing Agreement
On November 6, 2023, the Company, as borrower, and certain subsidiaries of the Company as guarantors, entered into a Financing
Agreement (the “Financing Agreement”) with Blue Torch Finance LLC, as administrative agent and collateral agent (the “Agent”), and
certain lenders party thereto. The Financing Agreement provides for a $100.0 million senior secured term loan (the “Initial Term
Loan”), a $25.0 million senior secured delayed draw term loan facility (the “Delayed Draw Term Loan”) which, subject to certain
conditions specified in the Financing Agreement, may be drawn on or prior to March 30, 2024, and a $25.0 million senior secured
revolving credit facility (the “Revolving Credit Facility,” and together with the Initial Term Loan and the Delayed Draw Term Loan, the
“Credit Facilities”), each of which mature on November 6, 2027. In connection with entering into the Financing Agreement, the
Company repaid in full amounts outstanding and terminated all commitments under the Company’s prior $175 million senior
secured revolving credit facility evidenced by that certain Second Amended and Restated Credit Agreement, dated as of October 25,
2019, among the Company, certain subsidiaries of the Company as borrowers and guarantors, JPMorgan Chase Bank, N.A., as
administrative agent, and the lenders party thereto (as amended, supplemented or otherwise modified, the “Prior Credit
Agreement”). The Initial Term Loan was fully funded on the effective date of November 6, 2023. As of December 31, 2023, the
Company had not made any borrowings under the Delayed Draw Term Loan or the Revolving Credit Facility. However, on January
10, 2024, the Company borrowed $15.0 million under the Revolving Credit Facility, which remains outstanding as of the date of this
filing.
Borrowings under the Financing Agreement were and may be used for, among other things, the repayment in full of the Prior Credit
Agreement, working capital and other general corporate purposes of the Company. Borrowings under the Credit Facilities bear
interest at a floating rate, which will be, at the Company’s option, either the three-month SOFR rate (subject to a floor of 3.00% and
a credit spread adjustment of 0.26161%) (the “Adjusted Term SOFR Rate”) plus an applicable margin of 7.25%, or a base rate plus an
applicable margin of 6.25%. A revolving unused line fee of 2.00% is payable monthly in arrears based on the average amount of the
undrawn portion of each lender’s revolving credit commitments under the Revolving Credit Facility for the preceding month. A
delayed draw unused fee equal to the Adjusted Term SOFR Rate plus a margin of 1.00% is payable monthly in arrears based on the
average amount of the undrawn portion of each lender’s delayed draw term loan commitments in respect of the Delayed Draw
Term Loan for the preceding month.
Certain of the Company’s existing and future material subsidiaries (collectively, the “Guarantors”) are required to guarantee the
repayment of the Company’s obligations under the Financing Agreement. The obligations of the Company and each of the
Guarantors with respect to the Financing Agreement are secured by a pledge of substantially all assets of the Company and each of
the Guarantors, including, without limitation, accounts receivables, deposit accounts, intellectual property, investment property,
inventory, equipment and equity interests in their respective subsidiaries.
The Financing 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 Financing Agreement contains financial covenants requiring the Company to maintain a minimum level
of liquidity at all times, a maximum consolidated leverage ratio (measured on a quarterly basis), and a minimum asset coverage ratio
(measured on a monthly basis). The Financing 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 Credit Facilities may
be accelerated and/or the lenders’ commitments terminated.
The Financing Agreement contains customary representations and warranties of the Company and the Guarantors. These
representations and warranties have been made solely for the benefit of the Agent and the lenders party to the Financing
Agreement and such representations and warranties should not be relied on by any other person, including investors. In addition,
such representations and warranties (i) have been qualified by disclosures made to the Agent and the lenders in connection with the
agreement, (ii) are subject to the materiality standards contained in the agreement which may differ from what may be viewed as
material by investors and (iii) were made only as of the date of the agreement or such other date as is specified in the agreement.
In conjunction with obtaining the Financing Agreement, the Company paid $2.0 million in debt issuance costs and lenders fees.
These costs have been allocated amongst each of the Initial Term Loan, Delayed Draw Term Loan, and Revolving Credit Facility and
are being amortized over the life of the Financing Agreement. Capitalized debt issuance costs attributable to the Delayed Draw Term
Loan and Revolving Credit Facility are included in other long-term assets, net of accumulated amortization, whereas capitalized debt
issuance costs associated with the Initial Term Loan are recognized as a direct reduction of the outstanding indebtedness. As of
December 31, 2023, and December 31, 2022, debt issuance costs associated with all credit facilities (whether the Financing
Agreement or the Prior Credit Agreement), net of accumulated amortization, were $1.9 million and $0.7 million, respectively. Debt
issuance costs amortized or expensed totaled $1.3 million, $0.4 million, and $0.4 million for each of the years ended December 31,
2023, 2022, and 2021, respectively.
F-21
Prior Credit Agreement
As disclosed above, 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 the Prior Credit
Agreement with JPMorgan Chase Bank, N.A. (“JPMorgan”), as Administrative Agent, and certain lender parties thereto. The Prior
Credit Agreement provided for a $300.0 million secured revolving credit facility, amending and restating the revolving credit facility
that previously existed with such lenders. The Prior Credit Agreement had a maturity date of October 25, 2024. On March 1, 2023,
the Amended Credit Agreement and the Facility were amended to replace London Inter-Bank Offered Rate ("LIBOR")-based pricing
with Secured Overnight Financing Rate ("SOFR")-based pricing.
On June 13, 2023, the Company entered into a Limited Consent, Limited Waiver and Second Amendment to the Original Credit
Agreement (the "Consent and Amendment"). Under the terms of the Consent and Amendment, the parties agreed to reduce the size
of the secured revolving credit facility, off of which certain fees are based, from $300.0 million to $175.0 million, and to increase the
applicable interest rate in certain circumstances.
On January 3, 2023, the Company borrowed $30.0 million for working capital purposes, including to fund certain Merger-related
expenses, under the Prior Credit Agreement. Subsequently, the Company borrowed an additional $49.0 million to fund working
capital needs whereby, as of the effective date of the Financing Agreement, the Company had $79.0 million in principal amount of
borrowings outstanding under the Prior Credit Agreement. In connection with entering into the Financing Agreement, the Company
repaid in full all amounts outstanding and terminated all commitments under the Prior Credit Agreement.
Italian Line of Credit
The Company has an unused available Italian line of credit of €5.5 million ($6.1 million and $5.9 million) at December 31, 2023, and
2022, 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.
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, 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, accounts receivable, and accounts payable approximate fair value due to the short-term maturities of
these instruments. The Company’s secured term loan carries a floating rate of interest; therefore, the carrying value of long-term
debt is considered to approximate the fair value.
F-22
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 agreement
Neo Medical preferred equity securities
Bone Biologics equity securities
Other investments
Total
Liabilities
Lattus contingent consideration
Spinal Kinetics contingent consideration
Deferred compensation plan
Total
(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
Deferred compensation plan
Total
Level 1
Level 2
Level 3
Balance
December 31,
2023
— $
—
—
—
— $
— $
—
—
— $
— $
4,951
—
—
4,951
$
— $
—
(1,674)
(1,674) $
6,760
—
—
1,309
8,069
$
$
(8,500) $
—
—
— $
6,760
4,951
—
1,309
13,020
(8,500)
—
(1,674)
(10,174)
Level 1
Level 2
Level 3
Balance
December 31,
2022
— $
—
—
—
— $
— $
—
— $
— $
6,084
—
—
6,084
$
— $
(1,515)
(1,515) $
7,140
—
—
1,726
7,140
$
$
— $
—
— $
7,140
6,084
—
1,726
14,950
—
(1,515)
(1,515)
$
$
$
$
$
$
$
$
The fair value of the Company’s deferred compensation plan liabilities is 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.
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 (the “Convertible Loan”) pursuant to which Orthofix loaned Neo Medical CHF 4.6 million, or $5.0
million at the date of issuance. The Convertible 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.
In October 2021, the Company entered into an additional Convertible Loan Agreement (the “Additional Convertible Loan”), pursuant
to which the Company loaned Neo Medical an additional CHF 0.6 million ($0.7 million as of the issuance date). In January 2022, the
Company elected to convert the Additional Convertible Loan into shares of Neo Medical’s preferred stock.
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.
F-23
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, 2023, and 2022:
(U.S. Dollars, in thousands)
Fair value of Neo Medical preferred equity securities at January 1
Conversion of loan into preferred equity securities
Foreign currency remeasurement recognized in other income, net
Unrealized loss recognized in other income (expense), net
Fair value of Neo Medical preferred equity securities at December 31
Cumulative unrealized gain (loss) on Neo Medical preferred equity securities
2023
2022
$
$
$
$
6,084
—
388
(1,521)
4,951
(720)
5,413
671
—
—
6,084
413
The Convertible Loan is recorded in other current assets as an available for sale debt security as of December 31, 2023, while as of
December 31, 2022, this balance was classified within other long-term assets. The Convertible Loan is recorded at fair value, with
applicable interest recorded in interest income. The fair value of the Convertible Loan 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 this asset as a Level 3
financial asset.
Some of the more significant unobservable inputs used in the fair value measurement of the Convertible Loan 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 Loan. If the amortized cost of the Convertible Loan exceeds its estimated
fair value, the security is 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, 2023, the Company has recognized $0.3 million in credit losses related to
the Convertible Loan.
The following table provides a reconciliation of the beginning and ending balances of the Convertible Loan(s), measured at fair value
using significant unobservable inputs (Level 3):
(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)
Expected credit loss recognized in other income (expense), net
Conversion of Additional Convertible Loan into preferred equity securities
Fair value of Neo Medical Convertible Loans at December 31
Contractual value of Neo Medical Convertible Loans at December 31
Allowance for credit loss recognized in other income (expense), net
Amortized cost basis of Neo Medical Convertible Loans at December 31
2023
2022
$
$
$
$
7,140
—
496
617
(1,233)
(260)
—
6,760
7,020
(260)
6,760
$
$
$
$
7,148
—
436
(67)
294
—
(671)
7,140
5,907
—
5,907
The following table provides quantitative information related to certain key assumptions utilized within the valuation of the
Convertible Loan as of December 31, 2023:
(U.S. Dollars, in thousands)
Neo Medical Convertible Loan
Fair Value as of
December 31, 2023
$
6,760
Unobservable inputs
Cost of equity discount rate
Present value factor
Implied volatility
Estimate
19.3%
15.3%
81.1%
F-24
Bone Biologics Equity Securities
Until August of 2022, the Company held 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 had very limited trading volumes. As such, the Company measured the investments at cost, less any
impairments, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar
investment of the same issuer.
In 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, Bone Biologics’ common stock became 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 subsequently had quoted prices in active markets for identical assets. As such, the Company recorded the
investment at fair value, with changes in fair value recorded within other income (expense), net, subsequent to the public offering.
The following table presents the changes in fair value recognized for each of the years ended December 31, 2023, 2022, and 2021:
(U.S. Dollars, in thousands)
Bone Biologics equity securities at January 1
Fair value adjustments and impairments recognized in other income
(expense), net
Proceeds from the disposition of equity securities
Bone Biologics equity securities at December 31
2023
2022
2021
— $
—
—
— $
309
$
(183)
(126)
— $
—
309
—
309
$
$
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 is 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. This balance is classified within other current assets as of December 31, 2023, and was
classified in other long-term assets as of December 31, 2022.
Spinal Kinetics Contingent Consideration
The Company recognized a contingent consideration obligation in connection with the acquisition of Spinal Kinetics in 2018. The fair
value of the remaining Spinal Kinetics contingent consideration, attributable to a revenue-based milestone, was concluded to be
zero as the Company did not achieve the milestone prior to April 30, 2023, the end of the measurement period for achieving such
milestone.
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
2023
— $
—
—
— $
2022
17,200
(17,200)
—
—
$
$
Lattus Contingent Consideration
In connection with the Merger, the Company assumed a contingent consideration obligation under a purchase agreement between
SeaSpine and Lattus Spine LLC ("Lattus") executed in December 2022. Under the terms of the agreement, the Company may be
required to make installment payments at certain dates based on future net sales of certain products (the "Lateral Products").
The estimated fair value of the Lattus contingent consideration is determined using a Monte Carlo simulation and a discounted cash
flow model requiring significant inputs which are not observable in the market. The significant inputs include assumptions related to
the timing and probability of certain product launch dates, estimated future sales of Lateral Products, revenue risk-adjusted discount
rate, revenue volatility, and discount rates matched to the timing of payments. The following table provides a reconciliation of the
F-25
beginning and ending balances for the Lattus contingent consideration measured at estimated fair value using significant
unobservable inputs (Level 3):
(U.S. Dollars, in thousands)
Lattus contingent consideration estimated fair value at January 5
Decrease in fair value recognized in acquisition-related amortization and
remeasurement
Lattus contingent consideration estimated fair value at December 31
2023
2022
$
$
11,200
(2,700)
8,500
$
$
—
—
—
The following table provides quantitative information related to certain key assumptions utilized within the valuation as of
December 31, 2023:
(U.S. Dollars, in thousands)
Lattus Contingent Consideration
Fair Value as of
December 31, 2023
$
8,500
Unobservable inputs
Counterparty discount rate
Revenue risk-adjusted discount rate
Estimate
14.0%
6.5%
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
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.
Arbitration claims with former executives
In September 2023, the Company’s Board of Directors terminated the employment of Keith Valentine, John Bostjancic and Patrick
Keran, who had served respectively as the Company’s President and Chief Executive Officer, Chief Financial Officer and Chief Legal
Officer. The Board’s decision followed an investigation conducted by independent outside legal counsel and directed and overseen
by the Company’s independent directors. As a result of the investigation, the Board determined that each of these executives
engaged in repeated inappropriate and offensive conduct that violated multiple code of conduct requirements and was inconsistent
with the Company’s values and culture. The Company notified each of Messrs. Valentine, Bostjancic and Keran that their respective
terminations were being made for “Cause,” as defined in applicable employment-related agreements (including each executive’s
respective Change in Control and Severance Agreement, dated June 19, 2023). The Company also notified each of Messrs. Valentine,
Bostjancic and Keran that it did not believe it was required to make any further payments to them, other than payment of salary
through September 12, 2023. The Board also requested that Mr. Valentine resign as a director, which he did in October 2023.
In January 2024, the Company received written notices of arbitration claims from counsel to Messrs. Valentine, Bostjancic and
Keran. Each of the arbitration claims asserts that the respective former executive was wrongfully terminated for “Cause” because
the former executive’s conduct did not meet the contractually applicable definition of “Cause.” The claims seek relief for, among
other things, alleged breach of contract, defamation, false light invasion of privacy, deceit, as well as indemnification and
advancement for attorneys’ fees. The three former executives seek severance payments, as well as the value of forfeited equity
grants, under applicable change in control and severance agreements and further damages as a result of purported defamatory
statements. The Company disagrees with many of the assertions contained in the written notices of arbitration claims and intends to
F-26
vigorously defend the asserted claims. Due in part to the preliminary nature of this matter, the Company currently cannot
reasonably estimate a possible loss, or range of loss, that may arise from the arbitration claims.
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.
In the third quarter of 2022, the Italian Ministry of Health provided guidelines to the Italian regions and provinces on seeking
payback of expenditure overruns relating to the years ended December 31, 2015, through December 31, 2018. Since receiving the
guidelines, several regions and provinces have requested payment from affected medical device companies, including the Company.
The Company has taken legal action to dispute the legality of such measures.
The Company accounts for the estimated cost of the IMDP as sales and marketing expense and periodically reassesses the liability
based upon current facts and circumstances. As a result, the Company recorded expense of $1.3 million for the year ended
December 31, 2023, expense of $1.2 million for the year ended December 31, 2022, and a benefit of $1.2 million for the year ended
December 31, 2021, as a result of certain temporary relief provided by the Italian National Healthcare System in response to the
COVID-19 pandemic. As of December 31, 2023, the Company has accrued $7.6 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 all legal
proceedings are resolved and upon further clarification of the IMDP by the Italian authorities for more recent fiscal years.
Commitments
The Company is party to certain agreements with distributor partners that provide the Company with an option to purchase, and/or
an option for those partners to require the Company to purchase, the distribution business of those partners at specified future
dates. At such time, the Company or distributor may (in certain cases, subject to satisfying certain conditions) submit written notice
to the other of its intention to exercise its rights and initiate or require the purchase. Upon the receipt of the written notice, the
Company and the distributor will work in good faith to consummate the purchase. Under certain of these agreements, the purchase
price would be paid in shares of the Company's common stock whereas for others, the purchase price can be paid in cash or shares
at the Company’s option. Based on the closing price of the Company's common stock as of December 31, 2023, assuming all criteria
are met and that the options under all the relevant agreements were exercised, the estimated total number of shares the Company
would issue under these agreements was approximately 1.6 million shares for agreements that must be settled in shares of the
Company’s stock. The Company has received notification from one such distributor, who has notified the Company of its decision to
exercise its buyout option. The Company is currently in negotiations with this distributor in regard to the consummation of the
potential acquisition.
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 Financing 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.
F-27
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, 2020
Other comprehensive loss
Income taxes
Balance at December 31, 2021
Other comprehensive income (loss)
Income taxes
Balance at December 31, 2022
Other comprehensive income (loss)
Income taxes
Balance at December 31, 2023
Currency
Translation
Adjustments
Neo Medical
Convertible
Loans
Other
Investments
Accumulated Other
Comprehensive
Income (Loss)
$
$
$
$
$
1,833
(2,544)
—
(711) $
(1,771)
—
(2,482) $
1,417
—
(1,065) $
$
$
1,419
(942)
234
711
294
—
1,005
(1,233)
—
(228) $
$
— $
—
—
— $
$
101
—
101
(101)
—
— $
3,252
(3,486)
234
—
(1,376)
—
(1,376)
83
—
(1,293)
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 to 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 mostly processed from within our Irvine facility. In addition, we have a long
standing collaborative arrangement with MTF that provides exclusive global marketing rights to MTF’s Trinity and FiberFuse product
F-28
families. 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 received marketing fees from MTF based on sales of products covered under the collaborative
arrangement. MTF is considered the principal 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
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 for revenue recognition is estimated based upon
the Company’s historical collection experience with the stocking distributor.
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, 2023, 2022, and 2021.
(U.S. Dollars, in thousands)
Product sales
Marketing service fees
Net sales
For the year ended December 31,
2022
2021
2023
$
$
693,345
53,296
746,641
$
$
405,437
55,276
460,713
$
$
409,554
54,925
464,479
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, whereas product sales primarily consist of the sale of Bone Growth Therapies,
Spinal Implants, non-MTF sourced Biologics, Enabling Technologies, and Global Orthopedics products. Marketing service fees
received from MTF were $53.3 million, or approximately 32% of total Biologics revenues, for the year ended December 31, 2023. As
MTF is the single supplier for certain 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 $9.5 million, $4.2 million, and $3.5 million for the years ended
December 31, 2023, 2022, and 2021, 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.
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 certain 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
F-29
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, 2023, and 2022:
(U.S. Dollars, in thousands)
Allowance for expected credit losses beginning balance
Addition resulting from the Merger with SeaSpine
Current period provision for expected credit losses
Write-offs 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,
2023
2022
6,419
137
820
(381)
135
7,130
$
$
4,944
—
2,095
(450)
(170)
6,419
$
$
The Company will generally sell receivables from certain Italian public hospitals each year to accelerate cash collections. During
2023, 2022, and 2021, the Company sold €9.2 million, €9.2 million, and €8.4 million ($10.0 million, $9.6 million, and $9.9 million) of
receivables, respectively. The related fees for 2023, 2022, and 2021, were $0.4 million, $0.3 million, and $0.2 million, respectively,
which were recorded as interest expense. Accounts receivables sold without recourse are removed from the balance sheet at the
time of sale.
Contract Liabilities
The Company’s contract liabilities largely related to a prepayment of $13.9 million received in 2020 from the Centers for Medicare
and Medicaid Services ("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. In April 2021, Medicare began to recoup 25% of Medicare payments otherwise
owed to the provider or supplier for submitted claims. Recoupment then increased to 50% of Medicare payments in March 2022.
Thus, during these time periods, rather than receiving the full amount of payment for newly submitted claims, the Company’s
outstanding balance under the Accelerated and Advance Payment Program was reduced by the recoupment amount until the full
balance had been repaid.
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, 2023, and 2022:
(U.S. Dollars, in thousands)
Contract liability beginning balance
Recoupment recognized in net sales
Contract liability ending balance
Other Contract Assets
For the Year Ended December 31,
2023
2022
$
$
— $
—
— $
4,791
(4,791)
—
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 $0.3 million and
$1.1 million as of December 31, 2023, and 2022, respectively.
Other Contract Assets are amortized on a straight-line basis over the term of the related contract. For the year ended December 31,
2023, the Company recorded $0.4 million in impairment charges related to the termination of certain distribution agreements. No
impairments were incurred for other contract assets 2022. 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.
F-30
16.
Business segment information
The Company's operations are managed through two reporting segments: Global Spine and Global Orthopedics. These reporting
segments represent the operating segments for which the Chief Executive Officer, who is also the CODM, reviews financial
information and makes resource allocation decisions among businesses. The primary metric used by the CODM in managing the
Company is adjusted earnings before interest, tax, depreciation, and amortization (“adjusted EBITDA”, a non-GAAP financial
measure). Adjusted EBITDA represents earnings before interest income (expense), income taxes, depreciation, and amortization,
and excludes the impact of share-based compensation, gains and losses related to changes in foreign exchange rates, charges
related to the SeaSpine merger and other strategic investments, acquisition-related fair value adjustments, gains and/or losses on
investments, litigation and investigation charges, charges related to initial compliance with regulations set forth by the European
Union Medical Device Regulation, gains and/or losses related to the realized effects the COVID-19 pandemic has had on the
Company's business operations, and succession charges.
Corporate activities are comprised of operating expenses not directly identifiable within the two reporting segments, such as human
resources, finance, legal, and information technology functions. The Company neither discretely allocates assets, other than
goodwill, to its operating segments nor evaluates the operating segments using discrete asset information.
Global Spine
The Global Spine reporting segment offers two primary product categories: (i) Bone Growth Therapies and (ii) Spinal Implants,
Biologics, and Enabling Technologies.
The Bone Growth Therapies product category manufactures, distributes, sells, and provides support services for market leading
devices used adjunctively in high-risk spinal fusion procedures and to treat both nonunion and acute fractures in the orthopedic
space. 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 acute and nonunion fractures. This product category uses
distributors and a direct sales channel to sell its devices to hospitals, healthcare providers, and patients, in the U.S.
Spinal Implants, Biologics, and Enabling Technologies is comprised of (i) a broad portfolio of spine fixation and motion preservation
implant products used in surgical procedures of the spine, (ii) one of the most comprehensive biologics portfolios in both the
demineralized bone matrix and cellular allograft market segments, and (iii) image-guided surgical solutions to facilitate
degenerative, minimally invasive, and complex surgical procedures. Spinal Implants, Biologics, and Enabling Technologies products
are sold through a network of distributors and sales representatives to hospitals and healthcare providers on a global basis for Spinal
Implants and Enabling Technologies, and primarily within the U.S. for Biologics.
Global Orthopedics
The Global Orthopedics reporting segment offers products and solutions for limb deformity correction and complex limb
reconstruction with a focus on use in trauma, adult and pediatric limb reconstruction, and foot and ankle procedures. This reporting
segment specializes in the design, development, and marketing of external and internal fixation orthopedic products that are
coupled with enabling digital technologies to serve the complete patient treatment pathway. We sell these products through a
global network of distributors and sales representatives to hospitals, healthcare organizations, 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:
2023
(U.S. Dollars, in thousands)
Bone Growth Therapies
Spinal Implants, Biologics, and Enabling Technologies
Global Spine
Global Orthopedics
Net sales
Net Sales
$ 212,530
418,789
631,319
115,322
$ 746,641
Year Ended December 31,
2022
Percent of
Total Net
Sales
Net Sales
Percent of
Total Net
Sales
2021
Percent of
Total Net
Sales
Net Sales
28.5% $ 187,247
165,927
56.1%
353,174
84.6%
107,539
15.4%
100.0% $ 460,713
40.7% $ 187,448
171,515
36.0%
358,963
76.7%
105,516
23.3%
100.0% $ 464,479
40.4%
36.9%
77.3%
22.7%
100.0%
F-31
The following table presents adjusted EBITDA, the primary metric used in managing the Company, by reporting segment:
(U.S. Dollars, in thousands)
Adjusted EBITDA by reporting segment
Global Spine
Global Orthopedics
Corporate
Consolidated adjusted EBITDA
Reconciling items:
Interest expense, net
Depreciation and amortization
Share-based compensation expense
Foreign exchange impact
SeaSpine merger-related costs
Strategic investments
Acquisition-related fair value adjustments
(Gain) loss on investments
Litigation and investigation costs
Medical device regulation
Business interruption - COVID-19
Succession charges
Loss before income taxes
2023
2022
2021
Year Ended December 31,
$
$
$
$
91,115
442
(45,272)
46,285
8,631
53,063
35,707
(1,581)
36,623
2,272
33,393
1,781
14,453
9,446
—
1,176
(148,679)
$
$
$
$
62,692
5,267
(19,406)
48,553
1,288
29,019
18,443
3,291
12,010
4,018
(15,595)
187
803
10,261
2,387
147
(17,706)
$
$
$
$
71,086
9,260
(19,084)
61,262
1,837
41,355
15,432
3,981
—
5,700
(2,014)
(644)
33
8,018
320
739
(13,495)
The following table presents depreciation and amortization by reporting segment:
(U.S. Dollars, in thousands)
Global Spine
Global Orthopedics
Corporate
Total
Geographical information
2023
Year Ended December 31,
2022
2021
$
$
41,213
7,158
4,692
53,063
$
$
18,213
6,696
4,110
29,019
$
$
17,548
8,233
3,818
29,599
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
2023
Year Ended December 31,
2022
2021
$
$
$
$
591,937
39,382
631,319
$
332,846
20,328
353,174
28,892
86,430
115,322
25,997
81,542
107,539
620,829
125,812
746,641
$
358,843
101,870
460,713
$
337,455
21,508
358,963
24,490
81,026
105,516
361,945
102,534
464,479
F-32
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
2023
Year Ended December 31,
2022
2021
$
$
620,829
20,060
11,467
10,910
11,096
6,452
65,827
746,641
$
$
358,843
19,098
11,569
10,171
10,377
5,668
44,987
460,713
$
$
The following data includes property, plant, and equipment by geographic area:
(U.S. Dollars, in thousands)
U.S.
Italy
Germany
Others
Total
2023
2022
$
$
142,727
10,187
3,030
3,116
159,060
$
$
361,945
20,187
13,716
10,552
10,475
5,108
42,496
464,479
44,802
8,535
3,115
1,777
58,229
17. Acquisition-related amortization and remeasurement
Acquisition-related amortization and remeasurement consists of (i) the remeasurement of any related contingent consideration
arrangement, (ii) amortization related to intangible assets acquired through business combinations or asset acquisitions, (iii)
recognized costs associated with acquired 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, 2023, 2022, and 2021, 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
Legion Innovations, LLC Asset Acquisition
2023
Year Ended December 31,
2022
2021
(2,700)
17,408
49
—
14,757
$
$
(17,200) $
8,196
1,600
—
(7,404) $
(3,575)
7,907
1,500
11,756
17,588
$
$
On December 29, 2022, the Company entered into a technology assignment and royalty agreement with Legion Innovations, LLC, a
U.S.-based medical device technology company, whereby the Company acquired intellectual property rights to certain assets. As
consideration, the Company agreed to pay $0.2 million in January 2023, with additional payments contingent upon reaching future
commercialization and revenue-based milestones. The Company accounted for this transaction as an asset acquisition. As the
transaction was 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. The $0.2 million
initial payment was accrued as of December 31, 2022, and was recognized as acquired IPR&D costs, which was then immediately
expensed.
IGEA S.p.A Asset Acquisition
In April 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 Company accounted for this transaction as an asset acquisition. As the transaction was classified as an
F-33
asset acquisition, the value of the consideration associated with the contingent milestones are be recognized at the time that
applicable contingencies are resolved and consideration is paid or becomes payable. The License Agreement also includes certain
minimum purchase requirements.
In May 2022, the Company achieved FDA approval pertaining to the acquired technology, triggering a contingent consideration
milestone obligation of $3.5 million. Of this amount, $1.5 million was paid in 2022 and $1.0 million was paid in 2023. The remaining
$1.0 million is accrued within other current liabilities as of December 31, 2023.
18.
Share-based compensation
At December 31, 2023, and 2022, the Company had stock option and award plans, and a stock purchase plan.
Merger with SeaSpine
Pursuant to the Merger Agreement, the equity awards of SeaSpine (including stock options and restricted stock units) outstanding as
of immediately prior to the closing of the Merger were converted into equity awards denominated in shares of Orthofix common
stock. The Company issued options to purchase 1.9 million shares of Orthofix common stock and 0.5 million shares of time-based
vesting restricted stock in connection with the conversion of such awards. The estimated fair value of the portion of the SeaSpine
equity awards for which the required service period had been completed at the time of the closing of the Merger was treated as
purchase consideration. The remaining estimated fair value is recorded as compensation expense over the remainder of the service
period associated with the awards.
In addition, as part of the Merger, the Board of Directors determined to treat the transaction as a “Change in Control” under
applicable agreements and equity plans. Thus, in January 2023, all outstanding and previously granted performance-based and
market-based restricted stock units were converted to time-based restricted stock units.
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, 2023, the Company reserves a total of 11.3 million shares of common stock for issuance pursuant to the 2012 LTIP,
subject to certain adjustments set forth in the 2012 LTIP. At December 31, 2023, there were 1.6 million options outstanding under
the 2012 LTIP, of which 0.7 million were exercisable. In addition, there were 1.6 million restricted stock units outstanding, some of
which contain performance-based vesting conditions, under the 2012 LTIP as of December 31, 2023.
SeaSpine 2015 Plan
Pursuant to the Merger Agreement, the Company assumed awards outstanding under the SeaSpine Holdings Corporation Amended
and Restated 2015 Incentive Award Plan Award Plan (the “SeaSpine 2015 Plan”). The SeaSpine 2015 Plan 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 SeaSpine 2015 Plan. 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 SeaSpine 2015 Plan. At December 31, 2023, the Company reserves a total of
3.0 million shares of common stock for issuance pursuant to the SeaSpine 2015 Plan, subject to certain adjustments set forth in the
SeaSpine 2015 Plan. At December 31, 2023, there were 1.0 million options outstanding under the SeaSpine 2015 Plan, of which 0.9
million were exercisable. In addition, there were 0.2 million restricted stock units outstanding, some of which contain performance-
based vesting conditions, under the SeaSpine 2015 Plan as of December 31, 2023.
Inducement Plans
In August 2019, the Company appointed a new President of Global Spine, who was then subsequently promoted to President and
Chief Executive Officer, a position held until the closing of the merger with SeaSpine on January 5, 2023. As an inducement to accept
employment with the Company, the individual was awarded a grant of stock options to acquire up to less than 51 thousand shares
F-34
of common stock and an award of 15 thousand restricted stock units. As of December 31, 2023, there were 51 thousand options
outstanding under this inducement, all of which were exercisable.
Pursuant to the Merger Agreement, the Company assumed awards outstanding under the SeaSpine 2018 Employment Inducement
Incentive Award Plan and the SeaSpine 2020 Employment Inducement Incentive Award Plan. As of December 31, 2023, there were
0.3 million options outstanding under these inducements, 0.2 million of which were exercisable, and 17 thousand unvested
restricted stock units outstanding.
In January 2023, the Company granted options to acquire up to 0.9 million shares of common stock and awarded 0.5 million
restricted stock units to SeaSpine employees as an inducement to continue employment with the Company. As of December 31,
2023, there were 0.3 million options outstanding under this inducement, none of which were exercisable, and 0.2 million 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, 2023, the aggregate number of shares reserved for issuance under
the Stock Purchase Plan is 3.6 million. As of December 31, 2023, a total of 2.8 million 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, 2023, 2022, and 2021:
(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 / Market-based restricted stock units
Stock purchase plan
Total
2023
Year Ended December 31,
2022
2021
$
$
$
$
1,901
8,174
21,743
3,889
35,707
$
$
826
3,865
12,917
835
18,443
2023
Year Ended December 31,
2022
6,130
27,290
227
2,060
35,707
$
$
1,114
9,452
6,425
1,452
18,443
$
$
$
$
779
3,385
10,289
979
15,432
1,893
7,437
4,414
1,688
15,432
2021
The income tax benefit related to this expense was $5.8 million, $3.3 million, and $3.1 million for the years ended December 31,
2023, 2022, and 2021, respectively.
F-35
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 three to 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 each of the years ended December 31, 2023,
2022, and 2021, is shown in the following table. The Company did not grant any time-based stock options in 2022.
Assumptions:
Expected term (in years)
Expected volatility
Risk free interest rate
Dividend yield
Weighted average grant date fair value
$
Year Ended December 31,
2023
2022
2021
6.0
36.8% – 42.3%
3.38% – 4.61%
—
8.43
$
—
—
—
—
— $
6.0
34.4% – 34.8%
0.83% – 1.25%
—
12.33
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, 2023, and 2022, and changes during the year
ended December 31, 2023, are presented below:
(In thousands)
Outstanding at December 31, 2022
Assumed SeaSpine awards
Granted
Exercised
Forfeited or expired
Outstanding at December 31, 2023
Vested and expected to vest at December 31, 2023
Exercisable at December 31, 2023
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term (Years)
39.29
36.05
19.92
-
31.62
30.64
30.64
36.78
4.97
4.97
2.68
Options
1,299
1,890
1,837
-
(1,803)
3,223
3,223
1,828
$
$
$
$
$
$
$
$
As of December 31, 2023, the unamortized compensation expense relating to options granted and expected to be recognized was
$4.8 million. This amount is expected to be recognized through December 2027 over a weighted average period of approximately
1.2 years. The total intrinsic value of options exercised was $0.0 million, $0.0 million, and $0.6 million for the years ended
December 31, 2023, 2022, and 2021, respectively. For the year ended December 31, 2023, we did not receive any cash from stock
option exercises, and thus did not realize any tax benefit for the tax deductions from stock option exercises. The aggregate intrinsic
value of options outstanding and options exercisable as of December 31, 2023, 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
$13.48, the closing price of the Company’s stock on December 31, 2023. The aggregate intrinsic value of options outstanding was
$0.1 million as of December 31, 2023. The aggregate intrinsic value of options exercisable was $0.0 million as of that date.
Time-based Restricted Stock Awards and Stock Units
Compensation expense for time-based restricted stock awards and stock units, 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
three to four years, net of actual forfeitures.
The aggregate fair value of time-based restricted stock awards and stock units that vested during the years ended December 31,
2023, 2022, and 2021, was $17.2 million, $5.2 million, and $9.0 million, respectively. Unamortized compensation expense related to
time-based restricted stock awards and stock units amounted to $22.6 million at December 31, 2023. This amount is expected to be
F-36
recognized through December 2026 over a weighted average period of approximately 1.6 years. The aggregate intrinsic value of
time-based restricted stock awards and stock units outstanding was $27.5 million as of December 31, 2023.
Performance-based and Market-based Restricted Stock Units
Certain of the Company's outstanding restricted stock units contain performance-based vested conditions or market-based vesting
conditions. As previously discussed, all outstanding performance-based and market-based restricted stock units were converted to
time-based restricted stock units in January 2023 upon completion of the Merger based on the Board of Directors' determination to
treat the transaction as a "Change in Control" under applicable agreements and equity plans.
The fair value of performance-based restricted stock units is calculated based upon the closing stock price at the date of grant. Such
value is recognized as expense over the 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 financial metrics or applicable milestones associated
with the applicable grant.
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 fair value of performance-based and/or market-based restricted stock units that vested and settled during the years ended
December 31, 2023, 2022, and 2021, totaled $0.0 million, $0.0 million, and $0.0 million, respectively. Unamortized compensation
expense for performance-based and/or market-based restricted stock units totaled less than $0.1 million at December 31, 2023, and
is expected to be recognized over a weighted average period of approximately 1.0 years. The aggregate intrinsic value of
performance-based restricted stock units outstanding was $0.1 million as of December 31, 2023.
A summary of the status of our time-based and performance-based and/or market-based restricted stock units as of December 31,
2023, and 2022, and changes during the year ended December 31, 2023, are presented below:
Time-based Restricted Stock
Awards and Stock Units
Performance-based and/or
Market-based
Restricted Stock Units
Weighted
Average Grant
Date Fair
Value
Shares
Weighted
Average Grant
Date Fair
Value
Shares
847
490
$
$
$
516
1,496
$
(749) $
(560) $
$
2,040
34.18
22.76
40.29
18.51
29.04
21.12
26.96
516
$
— $
(516) $
13
$
(4) $
— $
$
9
40.29
—
40.29
20.10
22.76
—
22.69
(In thousands)
Outstanding at December 31, 2022
Assumed SeaSpine awards
Conversion of performance-based and market-based stock units to time-
based stock units
Granted
Vested and settled
Cancelled
Outstanding at December 31, 2023
19. Defined contribution plans and deferred compensation
Defined Contribution Plans
Orthofix 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, 2023, 2022, and 2021, expenses incurred relating to the 401(k)
Plan, including matching contributions, were approximately $4.6 million, $3.3 million, and $2.8 million, respectively.
The Company also operates defined contribution plans for its international employees meeting minimum service requirements. The
Company’s expenses for such contributions during each of the years ended December 31, 2023, 2022, and 2021, were $1.1 million,
$1.1 million, and $1.2 million, respectively.
F-37
Effective February 1, 2024, Orthofix amended the 401(k) Plan to allow participants to contribute up to 90% of their pre-tax
compensation, subject to certain limitations, with the Company matching 100% of the first 4% of the employee's base
compensation.
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 4% of total commissions earned from the Company. The Company’s
relations with its Italian employees, who represent 14% of total employees at December 31, 2023, 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, 2023, and 2022 was $1.7 million and $1.5 million, respectively, and represents the amount that would be
payable if all the employees and agents had terminated employment at that date.
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)
$
$
$
$
2023
(154,794)
6,115
(148,679)
Year Ended December 31,
2022
$
$
(22,318)
4,612
(17,706)
2023
Year Ended December 31,
2022
17
1,160
1,177
2,120
(581)
1,539
2,716
$
$
1,151
67
1,218
578
247
825
2,043
2021
(5,987)
(7,508)
(13,495)
2021
(607)
24,292
23,685
1,009
190
1,199
24,884
$
$
$
$
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, 2023, 2022, and 2021, consist of the following:
2023
2022
2021
(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
Foreign income inclusions, net
Research credits
Unrecognized tax benefits, net of settlements
Equity compensation
Executive compensation
Contingent consideration
Other, net
Income tax expense (benefit) /effective rate
Amount
$ (31,222)
(3,452)
(738)
28,322
2,333
(1,219)
71
4,210
3,030
—
1,381
2,716
$
Percent
Amount
Percent
Amount
Percent
21.0% $
2.3
0.5
(19.0)
(1.6)
0.8
—
(2.8)
(2.0)
—
(0.9)
(1.8)% $
(3,718)
(1,312)
475
7,638
1,018
(750)
(599)
1,441
697
(3,316)
469
2,043
21.0% $
7.4
(2.7)
(43.1)
(5.7)
4.2
3.4
(8.1)
(3.9)
18.7
(2.6)
(2,834)
(24)
480
27,819
—
(537)
(1,363)
1,091
456
(640)
436
(11.5)% $ 24,884
21.0%
0.2
(3.6)
(206.1)
—
4.0
10.1
(8.1)
(3.4)
4.7
(3.2)
(184.4)%
F-38
The Company paid (received or was refunded) cash relating to taxes totaling $0.9 million, ($0.9) million, and $4.8 million for the
years ended December 31, 2023, 2022, and 2021, respectively.
The Company’s deferred tax assets and liabilities are as follows:
(U.S. Dollars, in thousands)
Intangible assets and goodwill
Inventories and related reserves
Deferred revenue and cost of goods sold
Other accruals and reserves
Accrued compensation
Provision for expected credit losses
Accrued interest
Net operating loss and tax credit carryforwards
Research and development capitalization
Lease liabilities
Other, net
Total deferred tax assets
Valuation allowance
Deferred tax asset, net of valuation allowance
Intangible assets and goodwill
Withholding taxes
Property, plant, and equipment
Right-of-use lease assets
Deferred tax liability
Net deferred tax assets (liabilities)
Reported as:
Deferred income tax assets (classified within other long-term assets)
Deferred income tax liabilities (classified within other long-term liabilities)
Net deferred tax assets (liabilities)
December 31,
2023
2022
$
— $
33,122
4,409
5,382
14,861
1,821
1,227
123,210
15,174
9,632
5,429
214,267
(200,192)
14,075
(1,662)
(10)
(5,737)
(8,755)
(16,164)
(2,089)
2,081
(4,170)
(2,089)
$
$
$
$
$
$
$
$
$
$
$
$
5,807
17,819
3,642
2,756
8,795
1,253
—
40,676
4,353
6,440
3,767
95,308
(83,797)
11,511
—
(10)
(5,516)
(5,771)
(11,297)
214
1,470
(1,256)
214
The Company historically presented deferred income tax assets as a separate and discrete line item on its consolidated balance
sheet; however, as the significance of the asset has decreased as a result of the recognition of valuation allowances, the Company
has reclassified this balance to be included within other long-term assets. Deferred income tax liabilities is included in Other Long
Term Liabilities.
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 $116.4 million during the year principally relates to the
existing valuation allowance against the SeaSpine deferred tax assets at the time of the merger. The remaining activity is related to
recognizing a full valuation allowance against the net deferred tax asset within the Company’s U.S. and Italy operations. 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 2024 due
to further losses in certain jurisdictions, offset by decreases related to the expiration of foreign net operating losses.
F-39
The Company has federal net operating loss carryforwards of $331.7 million and federal research and development credits of $4.7
million, including amounts from the acquisitions of SeaSpine and Spinal Kinetics. The increase in the current year is primarily related
to U.S. Federal net operating loss carryforwards belonging to SeaSpine at the time of the Merger as well as research and
development credit carryforwards. These federal carryforwards are subject to limitation under the provisions of Internal Revenue
Code Section 382 and will begin to expire in 2026. The Company has state net operating loss carryforwards of approximately $221.4
million, principally related to California, Illinois, Michigan, and New York. Of this amount, $157.9 relates to SeaSpine and $20.6
million relates to Spinal Kinetics. The increase in state net operating loss carryforwards is primarily due to existing losses acquired
from SeaSpine. The SeaSpine state losses begin to expire in 2024 and the Spinal Kinetics state losses begin to expire in 2027. These
carryforwards are subject to limitation under various provisions implemented by each specific state jurisdiction. Additionally, the
Company has net operating loss carryforwards in various foreign jurisdictions of approximately $129.0 million, which mainly relate
to the Company’s Netherlands, Brazil, and Canada operations. The majority of the foreign net operating losses do not expire. The
Company also has research and development credits in Canada of $0.9 million which begin to expire in 2041.
Unremitted foreign earnings were $33.6 million as of December 31, 2023. 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. Quantification of the deferred tax liability, if any, associated with indefinitely
reinvested earnings of foreign subsidiaries is not practicable.
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 $3.0 million and $1.7 million for the years ended December 31, 2023, and 2022,
respectively. The Company recorded net interest and penalties expense (benefit) on unrecognized tax benefits of $0.2 million, $0.1
million, and $(0.4) million for the years ended December 31, 2023, 2022, and 2021, respectively, and had approximately $1.1 million
and $0.9 million accrued for payment of interest and penalties as of December 31, 2023, and 2022, respectively. Approximately $0.4
million would unfavorably 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 $1.2 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, 2023,
and 2022, 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,
2023
2022
1,743
416
815
—
—
2,974
$
$
3,462
46
16
(144)
(1,637)
1,743
$
$
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 2019. The statute of limitations with respect to the major foreign tax filing
jurisdictions is closed for years prior to 2018. 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.
F-40
21.
Earnings per share (EPS)
For periods in which non-vested restricted stock awards with nonforfeitable rights to dividends or dividend equivalents (referred to
as participating securities) were outstanding, the Company used the two-class method of computing basic and diluted EPS. In other
periods, the Company used the treasury stock method of computing basic and diluted EPS.
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 (if other participating
securities were outstanding). 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).
For each of the three years ended December 31, 2023, 2022, and 2021, 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:
(In thousands)
Weighted average common shares-basic
Effect of diluted securities:
Unexercised stock options and employee stock purchase plan
Unvested time-based restricted stock units
Weighted average common shares-diluted
2023
Year Ended December 31,
2022
2021
36,729
—
—
36,729
20,054
—
—
20,054
19,691
—
—
19,691
There were 6.5 million, 2.3 million and 1.7 million weighted average outstanding options, time-based restricted stock awards and
stock units, performance-based stock units, and market-based stock units not included in the diluted earnings per share
computation for the years ended December 31, 2023, 2022, and 2021, respectively, because inclusion of these awards was anti-
dilutive or, for performance-based stock units and market-based stock units, all necessary conditions had not been satisfied by the
end of the respective period.
F-41