10-Q 1 ofix-20240331.htm 10-Q 10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark one)

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

 

For the quarterly period ended March 31, 2024

OR

 

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

 

For the transition period from to .

Commission File Number: 0-19961

 

img222633288_0.jpg 

ORTHOFIX MEDICAL INC.

(Exact name of registrant as specified in its charter)

Delaware

 

98-1340767

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

3451 Plano Parkway,

Lewisville, Texas

 

75056

(Address of principal executive offices)

 

(Zip Code)

(214) 937-2000

(Registrant’s telephone number, including area code)

 

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

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, smaller reporting company, or an 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

Accelerated filer

 

 

 

 

Non-Accelerated filer

Smaller Reporting Company

 

 

 

 

 

 

Emerging Growth Company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

As of May 3, 2024, 37,529,256 shares of common stock were issued and outstanding.

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

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common stock, $0.10 par value per share

 

OFIX

 

Nasdaq Global Select Market

 

 


 

Table of Contents

 

 

 

 

 

 

Page

PART I

 

FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Financial Statements

 

4

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2024, and December 31, 2023

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2024, and 2023

 

5

 

 

 

 

 

 

 

Condensed Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2024, and 2023

 

6

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2024, and 2023

 

7

 

 

 

 

 

 

 

Notes to the Unaudited Condensed Consolidated Financial Statements

 

8

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

21

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

29

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

29

 

 

 

 

 

PART II

 

OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

32

 

 

 

 

 

Item 1A.

 

Risk Factors

 

32

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

32

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

32

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

32

 

 

 

 

 

Item 5.

 

Other Information

 

32

 

 

 

 

 

Item 6.

 

Exhibits

 

32

 

 

 

 

 

SIGNATURES

 

35

 

2


 

Forward-Looking Statements

This Quarterly 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. All statements, other than statements of historical fact, contained in this report, are forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “intends,” “predicts,” “potential,” or “continue” or the negative version of those terms and other similar expressions. Forward-looking statements include, but are not limited to, statements about:

our future operations, sales, expenses, and 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 relationships with customers and distributors;
our manufacturing abilities and the performance of our suppliers;
our ability to achieve market penetration and the success of our expansion efforts;
anticipated trends and challenges in the markets in which we operate; and
the impact of investigations, claims, and litigation.

Forward-looking statements are not guarantees of future performance and involve risks, uncertainties, estimates, and assumptions. 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 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 of our Annual Report on Form 10-K for the year ended December 31, 2023 ("2023 10-K"); Part II, Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations of the 2023 10-K; and elsewhere throughout the 2023 10-K, and in our reports filed with the U.S. Securities and Exchange Commission (the "SEC") subsequent to the date we filed the 2023 10-K with the SEC. You should not place undue reliance on any forward-looking statements. Further, any forward-looking statement in this report speaks only as of the date hereof, unless it is specifically otherwise stated to be made as of a different date. Except as required by law, 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.

Trademarks

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

3


 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ORTHOFIX MEDICAL INC.

Condensed Consolidated Balance Sheets

(U.S. Dollars, in thousands, except par value data)

 

March 31,
2024

 

 

December 31,
2023

 

 

 

(Unaudited)

 

 

 

 

Assets

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

Cash and cash equivalents

 

$

26,964

 

 

$

33,107

 

Restricted cash

 

 

2,500

 

 

 

4,650

 

Accounts receivable, net of allowances of $8,398 and $7,130, respectively

 

 

125,617

 

 

 

128,098

 

Inventories

 

 

219,076

 

 

 

222,166

 

Prepaid expenses and other current assets

 

 

24,821

 

 

 

32,422

 

Total current assets

 

 

398,978

 

 

 

420,443

 

Property, plant, and equipment, net

 

 

158,132

 

 

 

159,060

 

Intangible assets, net

 

 

112,761

 

 

 

117,490

 

Goodwill

 

 

194,934

 

 

 

194,934

 

Other long-term assets

 

 

41,245

 

 

 

33,388

 

Total assets

 

$

906,050

 

 

$

925,315

 

 

 

 

 

 

 

 

Liabilities and shareholders’ equity

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

Accounts payable

 

$

57,147

 

 

$

58,357

 

Current portion of long-term debt

 

 

3,125

 

 

 

1,250

 

Current portion of finance lease liability

 

 

724

 

 

 

708

 

Other current liabilities

 

 

89,625

 

 

 

104,908

 

Total current liabilities

 

 

150,621

 

 

 

165,223

 

Long-term debt

 

 

115,071

 

 

 

93,107

 

Long-term portion of finance lease liability

 

 

18,345

 

 

 

18,532

 

Other long-term liabilities

 

 

51,698

 

 

 

49,723

 

Total liabilities

 

 

335,735

 

 

 

326,585

 

Contingencies (Note 8)

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

 

Common shares $0.10 par value; 100,000 shares authorized;
    
37,410 and 37,165 issued and outstanding as of March 31,
    2024 and December 31, 2023, respectively

 

 

3,741

 

 

 

3,717

 

Additional paid-in capital

 

 

753,398

 

 

 

746,450

 

Accumulated deficit

 

 

(186,164

)

 

 

(150,144

)

Accumulated other comprehensive loss

 

 

(660

)

 

 

(1,293

)

Total shareholders’ equity

 

 

570,315

 

 

 

598,730

 

Total liabilities and shareholders’ equity

 

$

906,050

 

 

$

925,315

 

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

4


 

ORTHOFIX MEDICAL INC.

Condensed Consolidated Statements of Operations and Comprehensive Loss

 

 

Three Months Ended
March 31,

 

(Unaudited, U.S. Dollars, in thousands, except per share data)

 

2024

 

 

2023

 

Net sales

 

$

188,608

 

 

$

175,204

 

Cost of sales

 

 

61,366

 

 

 

64,875

 

Gross profit

 

 

127,242

 

 

 

110,329

 

Sales and marketing

 

 

100,043

 

 

 

93,791

 

General and administrative

 

 

31,648

 

 

 

48,811

 

Research and development

 

 

19,492

 

 

 

23,307

 

Acquisition-related amortization and remeasurement (Note 12)

 

 

5,396

 

 

 

4,134

 

Operating loss

 

 

(29,337

)

 

 

(59,714

)

Interest expense, net

 

 

(4,558

)

 

 

(1,289

)

Other income (expense), net

 

 

(1,274

)

 

 

676

 

Loss before income taxes

 

 

(35,169

)

 

 

(60,327

)

Income tax expense

 

 

(851

)

 

 

(611

)

Net loss

 

$

(36,020

)

 

$

(60,938

)

 

 

 

 

 

 

 

Net loss per common share:

 

 

 

 

 

 

Basic

 

$

(0.95

)

 

$

(1.71

)

Diluted

 

 

(0.95

)

 

 

(1.71

)

Weighted average number of common shares:

 

 

 

 

 

 

Basic

 

 

37,741

 

 

 

35,734

 

Diluted

 

 

37,741

 

 

 

35,734

 

 

 

 

 

 

 

 

Other comprehensive income (loss), before tax

 

 

 

 

 

 

Unrealized gain (loss) on debt securities

 

 

1,671

 

 

 

(63

)

Currency translation adjustment

 

 

(1,038

)

 

 

493

 

Other comprehensive income, before tax

 

 

633

 

 

 

430

 

Income tax benefit (expense) related to other comprehensive income

 

 

 

 

 

 

Other comprehensive income, net of tax

 

 

633

 

 

 

430

 

Comprehensive loss

 

$

(35,387

)

 

$

(60,508

)

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

5


 

ORTHOFIX MEDICAL INC.

Condensed Consolidated Statements of Changes in Shareholders’ Equity

 

(Unaudited, U.S. Dollars, in thousands)

 

Number of
Common
Shares
Outstanding

 

 

Common
Shares

 

 

Additional
Paid-in
Capital

 

 

Accumulated Deficit

 

 

Accumulated
Other
Comprehensive Income (Loss)

 

 

Total
Shareholders’
Equity

 

At December 31, 2023

 

 

37,165

 

 

$

3,717

 

 

$

746,450

 

 

$

(150,144

)

 

$

(1,293

)

 

$

598,730

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(36,020

)

 

 

 

 

 

(36,020

)

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

633

 

 

 

633

 

Share-based compensation expense

 

 

 

 

 

 

 

 

8,800

 

 

 

 

 

 

 

 

 

8,800

 

Common shares issued, net

 

 

245

 

 

 

24

 

 

 

(1,852

)

 

 

 

 

 

 

 

 

(1,828

)

At March 31, 2024

 

 

37,410

 

 

$

3,741

 

 

$

753,398

 

 

$

(186,164

)

 

$

(660

)

 

$

570,315

 

 

 

(Unaudited, U.S. Dollars, in thousands)

 

Number of
Common
Shares
Outstanding

 

 

Common
Shares

 

 

Additional
Paid-in
Capital

 

 

Retained
Earnings (Accumulated Deficit)

 

 

Accumulated
Other
Comprehensive
Loss

 

 

Total
Shareholders’
Equity

 

At December 31, 2022

 

 

20,162

 

 

$

2,016

 

 

$

334,969

 

 

$

1,251

 

 

 

(1,376

)

 

$

336,860

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(60,938

)

 

 

 

 

 

(60,938

)

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

430

 

 

 

430

 

Share-based compensation expense

 

 

 

 

 

 

 

 

13,020

 

 

 

 

 

 

 

 

 

13,020

 

Common shares issued in connection with SeaSpine merger

 

 

16,047

 

 

 

1,605

 

 

 

375,140

 

 

 

 

 

 

 

 

 

376,745

 

Common shares issued, net

 

 

254

 

 

 

26

 

 

 

(1,984

)

 

 

 

 

 

 

 

 

(1,958

)

At March 31, 2023

 

 

36,463

 

 

$

3,647

 

 

$

721,145

 

 

$

(59,687

)

 

$

(946

)

 

$

664,159

 

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

6


 

ORTHOFIX MEDICAL INC.

Condensed Consolidated Statements of Cash Flows

 

 

Three Months Ended
March 31,

 

(Unaudited, U.S. Dollars, in thousands)

 

2024

 

 

2023

 

Cash flows from operating activities

 

 

 

 

 

 

Net loss

 

$

(36,020

)

 

$

(60,938

)

Adjustments to reconcile net loss to net cash from operating activities

 

 

 

 

 

 

Depreciation and amortization

 

 

14,862

 

 

 

12,670

 

Inventory reserve expenses

 

 

6,350

 

 

 

7,412

 

Amortization of inventory fair value step up

 

 

3,047

 

 

 

11,636

 

Amortization of operating lease assets, debt costs, and other assets

 

 

1,478

 

 

 

1,696

 

Provision for expected credit losses

 

 

1,376

 

 

 

208

 

Deferred income taxes

 

 

408

 

 

 

379

 

Share-based compensation expense

 

 

8,800

 

 

 

13,020

 

Change in valuation of investment securities

 

 

314

 

 

 

(207

)

Change in fair value of contingent consideration

 

 

1,170

 

 

 

 

Other

 

 

944

 

 

 

(383

)

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

 

 

 

 

 

 

Accounts receivable

 

 

813

 

 

 

4,792

 

Inventories

 

 

(6,936

)

 

 

(16,781

)

Prepaid expenses and other current assets

 

 

2,749

 

 

 

2,225

 

Accounts payable

 

 

(820

)

 

 

(3,560

)

Other current liabilities

 

 

(14,856

)

 

 

(5,842

)

Other long-term assets and liabilities

 

 

(2,274

)

 

 

(347

)

Net cash used in operating activities

 

 

(18,595

)

 

 

(34,020

)

Cash flows from investing activities

 

 

 

 

 

 

Capital expenditures for property, plant, and equipment

 

 

(10,543

)

 

 

(11,472

)

Capital expenditures for intangible assets

 

 

(274

)

 

 

(363

)

Contingent consideration payments related to asset acquisitions

 

 

 

 

 

 

Cash acquired in the SeaSpine merger

 

 

 

 

 

29,419

 

Other investing activities

 

 

(50

)

 

 

(500

)

Net cash provided by (used in) investing activities

 

 

(10,867

)

 

 

17,084

 

Cash flows from financing activities

 

 

 

 

 

 

Proceeds from issuance of common shares

 

 

 

 

 

 

Payments related to tax withholdings for share-based compensation

 

 

(1,828

)

 

 

(1,958

)

Payments related to finance lease obligation

 

 

(172

)

 

 

(160

)

Borrowings under credit facility

 

 

40,000

 

 

 

45,000

 

Repayment of borrowings from credit facility

 

 

(15,000

)

 

 

 

Payment of debt acquired from SeaSpine merger

 

 

 

 

 

(26,899

)

Payment of debt issuance costs and other financing activities

 

 

(1,547

)

 

 

 

Net cash provided by financing activities

 

 

21,453

 

 

 

15,983

 

Effect of exchange rate changes on cash

 

 

(284

)

 

 

221

 

Net change in cash and cash equivalents

 

 

(8,293

)

 

 

(732

)

Cash, cash equivalents, and restricted cash at the beginning of period

 

 

37,757

 

 

 

50,700

 

Cash, cash equivalents, and restricted cash at the end of period

 

$

29,464

 

 

$

49,968

 

 

 

 

 

 

 

 

Components of cash and cash equivalents at the end of period

 

 

 

 

 

 

Cash and cash equivalents

 

$

26,964

 

 

$

49,968

 

Restricted cash

 

$

2,500

 

 

 

 

Cash and cash equivalents at the end of period

 

$

29,464

 

 

$

49,968

 

 

 

 

 

 

 

 

Noncash investing activities - Purchase of intangible assets

 

$

50

 

 

$

 

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

7


 

ORTHOFIX MEDICAL INC.

Notes to the Unaudited Condensed Consolidated Financial Statements

1. Business and basis of presentation

Description of the Business

Orthofix Medical Inc. (the “Company” or "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, 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, Maidenhead, UK, Munich, Germany, Paris, France, and São Paulo, Brazil.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Pursuant to these rules and regulations, certain information and note disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for a fair statement have been included. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in the Company’s Form 10-K for the year ended December 31, 2023. Operating results for the three months ended March 31, 2024, are not necessarily indicative of the results that may be expected for other interim periods or the year ending December 31, 2024.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, the Company evaluates its estimates, including those related to revenue recognition; contractual allowances; allowances for expected credit losses; inventories; valuation of intangible assets; goodwill; fair value measurements, including contingent consideration; litigation and contingent liabilities; tax matters; and share-based compensation. Actual results could differ from these estimates.

2. Recently adopted accounting standards, recently issued accounting pronouncements

Adoption of Accounting Standards Update ("ASU") 2022-03 - Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions

In June 2022, the Financial Accounting Standards Board ("FASB") issued ASU 2022-03, which 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 and to introduce new disclosure requirements. The Company adopted this standard effective January 1, 2024, on a prospective basis. Adoption of this standard did not have a material impact to the Company's consolidated balance sheet, statements of operations, or cash flows, but did modify the Company's disclosures related to certain investments. Refer to Note 7 for the Company's updated disclosures on investments in equity securities subject to capital sale restrictions.

Adoption of ASU 2023-07 - Improvements to Reportable Segment Disclosures

In November 2023, the FASB issued ASU 2023-07, which enhances and improves disclosures about operating segment's revenues, measures of profit/loss, and expenses to enable investors to better understand an entity's overall performance and assess potential future cash flows. The amendment requires that an entity disclose (i) significant expenses that are regularly provided to the Chief Operating Decision Maker ("CODM"), (ii) other segment items by reportable segment including a description of its composition, (iii) all annual disclosures required by Topic 280 in interim periods, (iv) additional measures of a segment's profit or loss used by the CODM in assessing segment performance and allocation of resources, and (v) title and position of the CODM and an explanation of how the CODM uses the reported measure(s) of segment profit or loss. The Company adopted this standard effective January 1, 2024, on a prospective basis. Refer to Note 11 for the Company's updated business segment disclosures.

8


 

Recently Issued Accounting Pronouncements

Topic

 

Description of Guidance

 

Effective Date

 

Status of Company's Evaluation

Disclosure Improvements - Codification Amendments in Response to the SEC's Disclosure Update and Simplification Initiative (ASU 2023-06)

 

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.

 

Various

 

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

Improvements to Income Tax Disclosures (ASU 2023-09)

 

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.

 

January 1, 2025

 

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

Other recently issued ASUs, excluding those ASUs which have already been disclosed as adopted or described above, were assessed and determined not applicable, or are expected to have minimal impact on the Company's condensed consolidated financial statements.

3. 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.

9


 

During the fourth quarter of 2023, the Company finalized its valuation of assets acquired and liabilities assumed. The following table summarizes the fair value of assets acquired and liabilities assumed at the acquisition date:

(U.S. Dollars, in thousands)

 

Final Acquisition Date Fair Value

 

 

Assigned Useful Life

Assets acquired:

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

29,419

 

 

 

Accounts receivable, net

 

 

35,313

 

 

 

Inventories

 

 

132,636

 

 

 

Prepaid expenses and other current assets

 

 

4,590

 

 

 

Total current assets

 

 

201,958

 

 

 

Property, plant, and equipment, net

 

 

68,863

 

 

 

Customer relationships

 

 

33,100

 

 

13 years

Developed technology

 

 

47,200

 

 

6 - 8 years

In-process research and development ("IPR&D")

 

 

5,750

 

 

Indefinite

Other long-term assets

 

 

20,501

 

 

 

Total identifiable assets acquired

 

$

377,372

 

 

 

 

 

 

 

 

 

Liabilities assumed:

 

 

 

 

 

Current liabilities

 

 

 

 

 

Accounts payable

 

$

21,602

 

 

 

Other current liabilities

 

 

43,521

 

 

 

Total current liabilities

 

 

65,123

 

 

 

Long-term borrowings under SeaSpine credit facility

 

 

26,298

 

 

 

Other long-term liabilities

 

 

32,823

 

 

 

Total liabilities assumed

 

 

124,244

 

 

 

Net identifiable assets acquired

 

$

253,128

 

 

 

Total fair value of consideration transferred

 

 

376,745

 

 

 

Residual goodwill

 

$

123,617

 

 

 

The Company recognized $0.1 million and $6.5 million in direct acquisition-related costs, which exclude integration-related activities, that were expensed during the three months ended March 31, 2024, and 2023, respectively. These costs are included in the condensed consolidated statements of operations and comprehensive loss, primarily within general and administrative expenses. The Company's results of operations included $70.5 million of net sales and a net loss of $14.3 million from SeaSpine for the three months ended March 31, 2024 compared to $60.9 million of net sales and a net loss of $27.9 million for the three months ended March 31, 2023 in the condensed consolidated statements of operations and comprehensive loss.

Due to the completion of the Merger on January 5, 2023, all SeaSpine financial results for fiscal year 2023, except for the first four days of January, were included in the Company's condensed consolidated statement of operations and comprehensive loss. Therefore, the Company did not prepare unaudited pro forma financial information for the three months ended March 31, 2024, and 2023, on the basis that the Merger was completed on January 1, 2023.

4. Inventories

Inventories were as follows:

(U.S. Dollars, in thousands)

 

March 31,
2024

 

 

December 31,
2023

 

 

 

(Unaudited)

 

 

 

 

Raw materials

 

$

30,903

 

 

$

28,390

 

Work-in-process

 

 

56,193

 

 

 

53,510

 

Finished products

 

 

131,980

 

 

 

140,266

 

Inventories

 

$

219,076

 

 

$

222,166

 

 

10


 

 

5. Leases

A summary of the Company's lease portfolio as of March 31, 2024, and December 31, 2023, is presented in the table below:

(U.S. Dollars, in thousands)

 

Classification

 

March 31,
2024

 

 

December 31,
2023

 

 

 

 

 

(Unaudited)

 

 

 

 

Right-of-use assets ("ROU assets")

 

 

 

 

 

 

Operating leases

 

Other long-term assets

 

$

19,116

 

 

$

19,869

 

Finance leases

 

Property, plant and equipment, net

 

 

16,092

 

 

 

16,345

 

Total ROU assets

 

 

 

$

35,208

 

 

$

36,214

 

 

 

 

 

 

 

 

 

 

Lease Liabilities

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

 

 

 

Operating leases

 

Other current liabilities

 

$

3,534

 

 

$

3,477

 

Finance leases

 

Current portion of finance lease liability

 

 

724

 

 

 

708

 

Long-term

 

 

 

 

 

 

 

 

Operating leases

 

Other long-term liabilities

 

 

16,372

 

 

 

17,125

 

Finance leases

 

Long-term portion of finance lease liability

 

 

18,345

 

 

 

18,532

 

Total lease liabilities

 

 

 

$

38,975

 

 

$

39,842

 

Supplemental cash flow information related to leases was as follows:

(Unaudited, U.S. Dollars, in thousands)

 

Three Months Ended
March 31, 2024

 

 

Three Months Ended
March 31, 2023

 

Cash paid for amounts included in the measurement of lease liabilities

 

 

 

 

 

 

Operating cash flows from operating leases

 

$

2,162

 

 

$

1,674

 

Operating cash flows from finance leases

 

 

210

 

 

 

214

 

Financing cash flows from finance leases

 

 

172

 

 

 

160

 

ROU assets obtained in exchange for lease obligations

 

 

 

 

 

 

Operating leases

 

 

462

 

 

 

15,316

 

Finance leases

 

 

 

 

 

 

 

6. Long-term debt

The carrying values of the Company's outstanding debt obligations as of March 31, 2024, and December 31, 2023, were as follows:

(U.S. Dollars, in thousands)

 

March 31,
2024

 

 

December 31,
2023

 

 

 

(Unaudited)

 

 

 

 

Initial Term Loan and Delayed Draw Term Loan

 

 

 

 

 

 

Principal amount

 

$

125,000

 

 

$

100,000

 

Unamortized original debt discount

 

 

(4,050

)

 

 

(4,331

)

Unamortized debt issuance costs and lenders fees

 

 

(2,754

)

 

 

(1,312

)

Total indebtedness from initial term loan and delayed draw term loan

 

 

118,196

 

 

 

94,357

 

 

 

 

 

 

 

 

Revolving Credit Facilities

 

 

 

 

 

 

Principal amount outstanding

 

 

 

 

 

 

Total indebtedness outstanding

 

$

118,196

 

 

$

94,357

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

3,125

 

 

$

1,250

 

Long-term debt

 

 

115,071

 

 

 

93,107

 

Total indebtedness outstanding

 

$

118,196

 

 

$

94,357

 

On January 10, 2024, the Company borrowed $15.0 million under its senior secured revolving credit facility (the "Revolving Credit Facility") as part of its Financing Agreement with Blue Torch Finance LLC. On March 22, 2024, the secured delayed draw term loan

11


 

facility (the "Delayed Draw Term Loan") of $25.0 million was fully funded and the proceeds were used to repay the $15.0 million outstanding under the Revolving Credit Facility.

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). As of March 31, 2024, the Company was in compliance with all required financial covenants.

On March 15, 2024, the Company entered into Amendment No.1 to the Financing Agreement with Blue Torch Finance LLC (the "First Amendment"). Under the terms of the First Amendment, the parties agreed to reduce the number of business days to submit a notice of borrowing for the Delayed Draw Term Loan, and redefine certain terms within the asset coverage financial covenant. The maturity date remains November 6, 2027, for each of the Initial Term Loan, Delayed Draw Term Loan, and Revolving Credit Facility.

As of March 31, 2024, the Company had no borrowings on its available lines of credit in Italy, which provide up to an aggregate amount of €5.5 million ($5.9 million).

 

7. Fair value measurements and investments

The fair value measurements of the Company’s financial assets and liabilities measured on a recurring basis were as follows:

 

 

March 31,
2024

 

 

December 31,
2023

 

(Unaudited, U.S. Dollars, in thousands)

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Neo Medical convertible loan agreements

 

$

 

 

$

8,355

 

 

$

 

 

$

8,355

 

 

$

6,760

 

Neo Medical preferred equity securities

 

 

 

 

 

4,951

 

 

 

 

 

 

4,951

 

 

 

4,951

 

Other investments

 

 

 

 

 

 

 

 

1,331

 

 

 

1,331

 

 

 

1,309

 

Total

 

$

 

 

$

13,306

 

 

$

1,331

 

 

$

14,637

 

 

$

13,020

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lattus contingent consideration

 

$

 

 

$

 

 

 

(9,670

)

 

$

(9,670

)

 

$

(8,500

)

Deferred compensation plan

 

 

 

 

 

(1,604

)

 

 

 

 

 

(1,604

)

 

 

(1,674

)

Total

 

$

 

 

$

(1,604

)

 

$

(9,670

)

 

$

(11,274

)

 

$

(10,174

)

Neo Medical Convertible Loan Agreements and Equity Investment

Since October 2020, the Company has held preferred equity securities of Neo Medical SA, a privately held Swiss-based company developing a new generation of products for spinal surgery ("Neo Medical") and a Convertible Loan Agreement, pursuant to which the Company loaned Neo Medical CHF 4.6 million, or $5.0 million, at the date of issuance (the “Convertible Loan”).

The preferred 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.

The Company's equity investment with Neo Medical is subject to certain sales restrictions, such as right of first refusal, tag-along provisions, and drag-along provisions. Permitted transfers include (i) sales of shares to an affiliate of such shareholder, (ii) transfer of shares as part of a compensation package offered to employees, or (iii) Neo Medical may repurchase shares at a price no greater than that originally paid by the shareholder.

The table below presents a reconciliation of the beginning and ending balances of the Company’s investment in Neo Medical preferred equity securities:

(Unaudited, U.S. Dollars, in thousands)

 

2024

 

 

2023

 

Fair value of Neo Medical preferred equity securities at January 1

 

$

4,951

 

 

$

6,084

 

Conversion of loan into preferred equity securities

 

 

 

 

 

 

Foreign currency remeasurement recognized in other income (expense), net

 

 

 

 

 

 

Unrealized loss recognized in other income (expense), net

 

 

 

 

 

 

Fair value of Neo Medical preferred equity securities at March 31

 

$

4,951

 

 

$

6,084

 

Cumulative unrealized gain (loss) on Neo Medical preferred equity securities

 

$

(720

)

 

$

413

 

The Convertible Loan is recorded in other long-term assets as an available for sale debt security as of March 31, 2024. In April 2024, the Company and Neo Medical agreed to convert the Convertible Loan into shares of Neo Medical preferred equity securities, with

12


 

such conversion occurring on April 19, 2024. As such, the Company estimated the fair value of the Convertible Loan based upon the estimated fair value of equivalent preferred shares as of March 31, 2024. Therefore, as this fair value estimate is based upon a valuation method using observable market inputs, the Company has now classified this investment as a Level 2 financial asset. The following table provides a reconciliation of the beginning and ending balances of the Convertible Loans, which was measured at fair value using significant unobservable inputs in 2023:

(Unaudited, U.S. Dollars, in thousands)

 

2024

 

 

2023

 

Fair value of Neo Medical Convertible Loans at January 1

 

$

6,760

 

 

$

7,140

 

Interest recognized in interest income, net

 

 

135

 

 

 

116

 

Foreign currency remeasurement recognized in other income (expense), net

 

 

(471

)

 

 

61

 

Unrealized gain (loss) recognized in other comprehensive loss

 

 

1,671

 

 

 

(137

)

Reversal of expected credit loss recognized in other income (expense), net

 

 

260