Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of Orthofix Medical Inc.’s (sometimes referred to as “we,” “us” or “our”) financial condition and results of our operations should be read in conjunction with the “Forward-Looking Statements” and our condensed consolidated financial statements and related notes thereto appearing elsewhere in this Form 10-Q.
Executive Summary
We are a global medical device company with a spine and orthopedics focus. Our mission is to deliver innovative, quality-driven solutions as we partner with health care professionals to improve patient mobility. Headquartered in Lewisville, Texas, our spine and orthopedic products are distributed in more than 60 countries via our sales representatives and distributors. For more information, please visit www.Orthofix.com.
Notable financial metrics in the second quarter of 2022 and recent achievements include the following:
•Net sales of $118.1 million, a decrease of 2.7% on a reported basis and flat on a constant currency basis over prior year
•Global Orthopedics net sales growth of 11% on a constant currency basis driven by new products and channel investments
•Executed partnership with CGBio to commercialize Novosis rhBMP-2 growth factor in the U.S. and Canada
•Limited launch of Virtuos Lyograft, a first of its kind, shelf-stable and complete autograft substitute
•Entered into a licensing partnership with LimaCorporate S.p.A. to provide a novel solution for patients with chronic high dislocation of the hip
Results of Operations
The following table provides certain items in our condensed consolidated statements of operations as a percent of net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2022 (%) |
|
|
2021 (%) |
|
|
2022 (%) |
|
|
2021 (%) |
|
Net sales |
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
Cost of sales |
|
|
26.8 |
|
|
|
22.6 |
|
|
|
26.7 |
|
|
|
23.5 |
|
Gross profit |
|
|
73.2 |
|
|
|
77.4 |
|
|
|
73.3 |
|
|
|
76.5 |
|
Sales and marketing |
|
|
50.7 |
|
|
|
47.2 |
|
|
|
50.8 |
|
|
|
47.6 |
|
General and administrative |
|
|
13.4 |
|
|
|
15.1 |
|
|
|
15.7 |
|
|
|
15.3 |
|
Research and development |
|
|
10.8 |
|
|
|
10.8 |
|
|
|
10.7 |
|
|
|
10.6 |
|
Acquisition-related amortization and remeasurement |
|
|
(7.3 |
) |
|
|
0.8 |
|
|
|
(5.5 |
) |
|
|
2.4 |
|
Operating income |
|
|
5.6 |
|
|
|
3.5 |
|
|
|
1.6 |
|
|
|
0.6 |
|
Net income (loss) |
|
|
2.1 |
|
|
|
2.0 |
|
|
|
(0.9 |
) |
|
|
(1.5 |
) |
Net Sales by Product Category and Reporting Segment
The following tables provide net sales by major product category by reporting segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Percentage Change |
|
(U.S. Dollars, in thousands) |
|
2022 |
|
|
2021 |
|
|
Reported |
|
|
Constant Currency |
|
Bone Growth Therapies |
|
$ |
47,765 |
|
|
$ |
49,706 |
|
|
|
-3.9 |
% |
|
|
-3.9 |
% |
Spinal Implants |
|
|
28,222 |
|
|
|
30,092 |
|
|
|
-6.2 |
% |
|
|
-5.4 |
% |
Biologics |
|
|
14,795 |
|
|
|
14,852 |
|
|
|
-0.4 |
% |
|
|
-0.4 |
% |
Global Spine |
|
|
90,782 |
|
|
|
94,650 |
|
|
|
-4.1 |
% |
|
|
-3.8 |
% |
Global Orthopedics |
|
|
27,288 |
|
|
|
26,744 |
|
|
|
2.0 |
% |
|
|
11.4 |
% |
Net sales |
|
$ |
118,070 |
|
|
$ |
121,394 |
|
|
|
-2.7 |
% |
|
|
-0.5 |
% |
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
Percentage Change |
|
(U.S. Dollars, in thousands) |
|
2022 |
|
|
2021 |
|
|
Reported |
|
|
Constant Currency |
|
Bone Growth Therapies |
|
$ |
89,713 |
|
|
$ |
92,653 |
|
|
|
-3.2 |
% |
|
|
-3.2 |
% |
Spinal Implants |
|
|
54,837 |
|
|
|
55,793 |
|
|
|
-1.7 |
% |
|
|
-1.0 |
% |
Biologics |
|
|
28,887 |
|
|
|
28,544 |
|
|
|
1.2 |
% |
|
|
1.2 |
% |
Global Spine |
|
|
173,437 |
|
|
|
176,990 |
|
|
|
-2.0 |
% |
|
|
-1.8 |
% |
Global Orthopedics |
|
|
51,051 |
|
|
|
49,997 |
|
|
|
2.1 |
% |
|
|
9.4 |
% |
Net sales |
|
$ |
224,488 |
|
|
$ |
226,987 |
|
|
|
-1.1 |
% |
|
|
0.7 |
% |
Global Spine
Global Spine offers the following products categories:
-Bone Growth Therapies, which manufactures, distributes, sells, and provides support services for market leading devices that enhance bone fusion. Bone Growth Therapies uses distributors and sales representatives to sell its devices and provide associated services to hospitals, healthcare providers, and patients.
-Spinal Implants, which designs, develops and markets a broad portfolio of motion preservation and spine fixation implant products used in surgical procedures of the spine. Spinal Implants distributes its products globally through a network of distributors and sales representatives to sell spine products to hospitals and healthcare providers.
-Biologics, which provides a portfolio of regenerative products and tissue forms that allow physicians to successfully treat a variety of spinal and orthopedic conditions. Biologics markets its tissues to hospitals and healthcare providers, primarily in the U.S., through a network of employed and independent sales representatives.
Three months ended June 30, 2022 compared to 2021
Net sales decreased $3.9 million or 4.1%
•Bone Growth Therapies net sales decreased $1.9 million or 3.9%, largely as a result of the continued staffing issues and patient caution to seek elective surgery, including complex procedures
•Spinal Implants net sales decreased $1.9 million or 6.2%, primarily due to lower-than-expected complex procedure case volumes in the U.S. for spine fixation and increasing global competitive headwinds in motion preservation
•Biologics net sales were relatively flat as we saw positive trends from recent product introductions, such as FiberFuse, and from new distributors added in the last 12 months, which offset some of the macro headwinds impacting complex elective procedures
Six months ended June 30, 2022 compared to 2021
Net sales decreased $3.6 million or 2.0%
•Bone Growth Therapies net sales decreased $2.9 million or 3.2%, primarily driven by a continued slowdown in complex procedure volumes due to hospital restrictions at the beginning of the year and continued staffing issues, which impacted complex spine procedures
•Spinal Implants net sales decreased $1.0 million or 1.7%, primarily due to lower-than-expected complex procedure case volumes in the U.S. for spine fixation and increasing global competitive headwinds in motion preservation, with these movements partially offset by growth from certain international distributors at the beginning of the year
•Biologics net sales increased $0.3 million or 1.2%, primarily attributable to sales from our new biologics offerings, such as FiberFuse, as we continue to broaden our Biologics portfolio
18
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 globally through a network of distributors and sales representatives to sell orthopedic products to hospitals and healthcare providers.
Three months ended June 30, 2022 compared to 2021
Net sales increased $0.5 million or 2.0%
•Growth in international geographies on a constant currency basis driven by the positive impacts of recent sales force investments and increased orders from international distributors
•In the U.S., we have started to see the positive benefits of the new sales leadership team put in place over the last 12 months
•Partially offset by a decrease of $2.5 million due to changes in foreign currency exchange rates, which had a negative impact on net sales in 2022
Six months ended June 30, 2022 compared to 2021
Net sales increased $1.1 million or 2.1%
•Growth in international geographies on a constant currency basis driven by the positive impacts of recent sales force investments and increased orders from international distributors
•In the U.S., we have started to see the positive benefits of the new sales leadership team put in place over the last 12 months
•Partially offset by a decrease of $3.7 million due to changes in foreign currency exchange rates, which had a negative impact on net sales in 2022
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
(U.S. Dollars, in thousands) |
|
2022 |
|
|
2021 |
|
|
% Change |
|
|
2022 |
|
|
2021 |
|
|
% Change |
|
Net sales |
|
$ |
118,070 |
|
|
$ |
121,394 |
|
|
|
(2.7 |
%) |
|
$ |
224,488 |
|
|
$ |
226,987 |
|
|
|
(1.1 |
%) |
Cost of sales |
|
|
31,600 |
|
|
|
27,439 |
|
|
|
15.2 |
% |
|
|
59,918 |
|
|
|
53,353 |
|
|
|
12.3 |
% |
Gross profit |
|
$ |
86,470 |
|
|
$ |
93,955 |
|
|
|
(8.0 |
%) |
|
$ |
164,570 |
|
|
$ |
173,634 |
|
|
|
(5.2 |
%) |
Gross margin |
|
|
73.2 |
% |
|
|
77.4 |
% |
|
|
(4.2 |
%) |
|
|
73.3 |
% |
|
|
76.5 |
% |
|
|
-3.2 |
% |
Three months ended June 30, 2022 compared to 2021
Gross profit decreased $7.5 million
•Decrease in gross profit primarily driven by changes in our sales mix as well as increased inventory reserves related to set builds for an expanding sales force and increased safety stock requirements driven by the risk of global supply chain disruption
•Also unfavorably impacted by changes in foreign currency exchange rates, which had a negative impact on gross profit
Six months ended June 30, 2022 compared to 2021
Gross profit decreased $9.1 million
•Decrease in gross profit primarily driven by changes in our sales mix as well as increased inventory reserves related to set builds for an expanding sales force and increased safety stock requirements
•Increased component costs resulting from global supply chain disruptions within our Bone Growth Therapies product category
•Also unfavorably impacted by changes in foreign currency exchange rates, which had a negative impact on gross profit
19
Sales and Marketing Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
(U.S. Dollars, in thousands) |
|
2022 |
|
|
2021 |
|
|
% Change |
|
|
2022 |
|
|
2021 |
|
|
% Change |
|
Sales and marketing |
|
$ |
59,888 |
|
|
$ |
57,338 |
|
|
|
4.4 |
% |
|
$ |
114,025 |
|
|
$ |
108,123 |
|
|
|
5.5 |
% |
As a percentage of net sales |
|
|
50.7 |
% |
|
|
47.2 |
% |
|
|
3.5 |
% |
|
|
50.8 |
% |
|
|
47.6 |
% |
|
|
3.2 |
% |
Three months ended June 30, 2022 compared to 2021
Sales and marketing expense increased $2.6 million
•Increase of $2.2 million largely the result of significant increases in travel, sales events, and surgeon and sales education trainings as in-person events have largely resumed in 2022
•Increase of $0.4 million due to an investment in direct reps and sales management
Six months ended June 30, 2022 compared to 2021
Sales and marketing expense increased $5.9 million
•Increase of $4.2 million largely the result of significant increases in travel, sales events, and surgeon and sales education trainings as in-person events have largely resumed in 2022
•Increase also attributable to the hiring of additional sales and marketing headcount to support growth and initiatives across all product lines
General and Administrative Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
(U.S. Dollars, in thousands) |
|
2022 |
|
|
2021 |
|
|
% Change |
|
|
2022 |
|
|
2021 |
|
|
% Change |
|
General and administrative |
|
$ |
15,846 |
|
|
$ |
18,335 |
|
|
|
(13.6 |
%) |
|
$ |
35,174 |
|
|
$ |
34,779 |
|
|
|
1.1 |
% |
As a percentage of net sales |
|
|
13.4 |
% |
|
|
15.1 |
% |
|
|
(1.7 |
%) |
|
|
15.7 |
% |
|
|
15.3 |
% |
|
|
0.4 |
% |
Three months ended June 30, 2022 compared to 2021
General and administrative expense decreased $2.5 million
•Decrease of $0.9 million in professional fees as we reallocate capital into product innovation and differentiation as well as commercial sales expansion
•Decrease of $0.9 million in certain compensation costs, partly stemming from the departure of certain former executives and from macroeconomic pressures on certain variable compensation expenses
•Decrease of $0.3 million in depreciation and amortization
Six months ended June 30, 2022 compared to 2021
General and administrative expense increased $0.4 million
•Increase of $1.0 million in share-based compensation expenses as the tenure of our new management team increases
•Partially offset by a decrease of $0.5 million associated with succession and transition costs related to former executives in 2021 that did not recur in 2022
Research and Development Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
(U.S. Dollars, in thousands) |
|
2022 |
|
|
2021 |
|
|
% Change |
|
|
2022 |
|
|
2021 |
|
|
% Change |
|
Research and development |
|
$ |
12,758 |
|
|
$ |
13,121 |
|
|
|
(2.8 |
%) |
|
$ |
23,970 |
|
|
$ |
24,018 |
|
|
|
(0.2 |
%) |
As a percentage of net sales |
|
|
10.8 |
% |
|
|
10.8 |
% |
|
|
0.0 |
% |
|
|
10.7 |
% |
|
|
10.6 |
% |
|
|
0.1 |
% |
Three months ended June 30, 2022 compared to 2021
Research and development expense decreased $0.4 million
•Decrease of $0.8 million related to the attainment of a development milestone with MTF Biologics achieved in 2021 that did not recur in the second quarter of 2022
•Partially offset by an increase related to costs to comply with the European Union Medical Device Regulations and increases in new product development expenses
20
•Further offset by an increase in costs associated with our ongoing 2-level M6-C artificial cervical disc clinical study
Six months ended June 30, 2022 compared to 2021
Research and development expense remained relatively flat
•Decrease of $0.8 million related to the attainment of a development milestone with MTF Biologics achieved in 2021 that did not recur in 2022
•Partially offset by an increase in expense of $0.5 million related to costs to comply with the European Union Medical Device Regulations
•Further offset by an increase in costs associated with our ongoing 2-level M6-C artificial cervical disc clinical study
Acquisition-related Amortization and Remeasurement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
(U.S. Dollars, in thousands) |
|
2022 |
|
|
2021 |
|
|
% Change |
|
|
2022 |
|
|
2021 |
|
|
% Change |
|
Acquisition-related amortization and remeasurement |
|
$ |
(8,663 |
) |
|
$ |
894 |
|
|
|
(1069.0 |
%) |
|
$ |
(12,162 |
) |
|
$ |
5,363 |
|
|
|
(326.8 |
%) |
As a percentage of net sales |
|
|
(7.3 |
%) |
|
|
0.8 |
% |
|
|
(8.1 |
%) |
|
|
(5.4 |
%) |
|
|
2.4 |
% |
|
|
(7.8 |
%) |
Acquisition-related amortization and remeasurement consists of (i) amortization related to intangible assets acquired through business combinations or asset acquisitions, (ii) remeasurement of any related contingent consideration arrangement, and (iii) recognized costs associated with acquired in-process research and development assets, which are recognized immediately upon acquisition.
Three months ended June 30, 2022 compared to 2021
Acquisition-related amortization and remeasurement decreased $9.6 million
•Decrease of $9.5 million related to the remeasurement of potential revenue-based milestone payments associated with the Spinal Kinetics acquisition reflects the lower likelihood of the Company achieving the remaining revenue-based milestone prior to April 30, 2023 based on current net sales trends
•Decrease of $0.5 million in costs associated with acquired in-process research and development assets, which were recognized immediately upon acquisition in the prior year period
•Partially offset by an increase of $0.4 million associated with the reassessment of contingent consideration associated with the acquisition of a former distributor
Six months ended June 30, 2022 compared to 2021
Acquisition-related amortization and remeasurement decreased $17.5 million
•Decrease of $16.5 million related to the remeasurement of potential revenue-based milestone payments associated with the Spinal Kinetics acquisition reflects the lower likelihood of the Company achieving the remaining revenue-based milestone prior to April 30, 2023
•Decrease of $1.5 million in costs associated with acquired in-process research and development assets, which were recognized immediately upon acquisition in the prior year period
•Partially offset by an increase of $0.4 million associated with the reassessment of contingent consideration associated with the acquisition of a former distributor
Non-operating Income and Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
(U.S. Dollars, in thousands) |
|
2022 |
|
|
2021 |
|
|
% Change |
|
|
2022 |
|
|
2021 |
|
|
% Change |
|
Interest expense, net |
|
$ |
(407 |
) |
|
$ |
(550 |
) |
|
|
(26.0 |
%) |
|
$ |
(782 |
) |
|
$ |
(967 |
) |
|
|
(19.1 |
%) |
Other expense, net |
|
|
(3,192 |
) |
|
|
951 |
|
|
|
(435.6 |
%) |
|
|
(4,128 |
) |
|
|
(1,739 |
) |
|
|
137.4 |
% |
Three months ended June 30, 2022 compared to 2021
Other expense, net decreased $4.1 million
21
•Decrease primarily associated with changes in foreign currency exchange rates and the resulting gains and/or losses recorded in each period, with the change primarily attributable to the strengthening of the U.S. Dollar against the Euro in 2022
Six months ended June 30, 2022 compared to 2021
Other expense, net decreased $2.4 million
•Decrease primarily associated with changes in foreign currency exchange rates and the resulting gains and/or losses recorded in each period, with the change primarily attributable to the strengthening of the U.S. Dollar against the Euro in 2022
Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
(U.S. Dollars, in thousands) |
|
2022 |
|
|
2021 |
|
|
% Change |
|
|
2022 |
|
|
2021 |
|
|
% Change |
|
Income tax expense |
|
$ |
553 |
|
|
$ |
2,248 |
|
|
|
(75.4 |
%) |
|
$ |
624 |
|
|
$ |
2,041 |
|
|
|
(69.4 |
%) |
Effective tax rate |
|
|
18.2 |
% |
|
|
48.2 |
% |
|
|
(30.0 |
%) |
|
|
(46.3 |
%) |
|
|
(150.6 |
%) |
|
|
104.3 |
% |
Three months ended June 30, 2022 compared to 2021
•Decrease in tax expense compared to the prior year period was primarily a result of changes in valuation allowances in the U.S. and Italy, as well as changes in the fair value of the Spinal Kinetics contingent consideration liability
Six months ended June 30, 2022 compared to 2021
•Decrease in tax expense compared to the prior year period was primarily a result of changes in valuation allowances in the U.S. and Italy, as well as changes in the fair value of the Spinal Kinetics contingent consideration liability
Segment Review
Our business is managed through two reporting segments: Global Spine and Global Orthopedics. The primary metric used in managing the business by segment is EBITDA (which is described further in Note 10 to the Notes to the Unaudited Condensed Consolidated Financial Statements contained herein). The following table presents EBITDA by segment and reconciles consolidated EBITDA to income (loss) before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
(U.S. Dollars, in thousands) |
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
Global Spine |
|
$ |
20,766 |
|
|
$ |
19,032 |
|
|
$ |
36,659 |
|
|
$ |
30,927 |
|
Global Orthopedics |
|
|
(2,422 |
) |
|
|
1,775 |
|
|
|
(5,518 |
) |
|
|
(454 |
) |
Corporate |
|
|
(8,383 |
) |
|
|
(8,030 |
) |
|
|
(17,678 |
) |
|
|
(15,859 |
) |
Total EBITDA |
|
$ |
9,961 |
|
|
$ |
12,777 |
|
|
$ |
13,463 |
|
|
$ |
14,614 |
|
Depreciation and amortization |
|
|
(6,512 |
) |
|
|
(7,559 |
) |
|
|
(14,028 |
) |
|
|
(15,002 |
) |
Interest expense, net |
|
|
(407 |
) |
|
|
(550 |
) |
|
|
(782 |
) |
|
|
(967 |
) |
Income (loss) before income taxes |
|
$ |
3,042 |
|
|
$ |
4,668 |
|
|
$ |
(1,347 |
) |
|
$ |
(1,355 |
) |
Liquidity and Capital Resources
Cash and cash equivalents at June 30, 2022, totaled $59.5 million compared to $87.8 million at December 31, 2021.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
(U.S. Dollars, in thousands) |
|
2022 |
|
|
2021 |
|
|
Change |
|
Net cash from operating activities |
|
$ |
(12,622 |
) |
|
$ |
264 |
|
|
$ |
(12,886 |
) |
Net cash from investing activities |
|
|
(13,161 |
) |
|
|
(9,792 |
) |
|
|
(3,369 |
) |
Net cash from financing activities |
|
|
(1,324 |
) |
|
|
(6,528 |
) |
|
|
5,204 |
|
Effect of exchange rate changes on cash |
|
|
(1,204 |
) |
|
|
(243 |
) |
|
|
(961 |
) |
Net change in cash and cash equivalents |
|
$ |
(28,311 |
) |
|
$ |
(16,299 |
) |
|
$ |
(12,012 |
) |
22
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
(U.S. Dollars, in thousands) |
|
2022 |
|
|
2021 |
|
|
Change |
|
Net cash from operating activities |
|
$ |
(12,622 |
) |
|
$ |
264 |
|
|
$ |
(12,886 |
) |
Capital expenditures |
|
|
(11,703 |
) |
|
|
(9,792 |
) |
|
|
(1,911 |
) |
Free cash flow |
|
$ |
(24,325 |
) |
|
$ |
(9,528 |
) |
|
$ |
(14,797 |
) |
Operating Activities
Cash flows from operating activities decreased $12.9 million
•Increase in net income of $1.4 million
•Net decrease of $16.9 million for non-cash gains and losses, largely related to changes in fair value of contingent consideration
•Net increase of $2.6 million relating to changes in working capital accounts, primarily attributable to changes in inventories, accounts payable, prepaid expenses and other current assets, and the payment of a contingent consideration milestone in the prior year
Two of our primary working capital accounts are accounts receivable and inventory. Days sales in receivables were 59 days at June 30, 2022, compared to 55 days at June 30, 2021. Inventory turns remained consistent at 1.3 times as of June 30, 2022 and June 30, 2021.
Investing Activities
Cash flows from investing activities decreased $3.4 million
•Decrease of $1.8 million associated with capital expenditures compared to the prior year period
•Decrease of $1.5 million associated with the payment of a contingent consideration milestone associated related to an asset acquisition in 2022
Financing Activities
Cash flows from financing activities increased $5.2 million
•Increase of $8.4 million associated with cash paid in 2021 for the achievement of a revenue-based milestone associated with the Spinal Kinetics acquisition; the milestone payment totaled $15.0 million with a portion of the payment reflected in both operating and financing activities.
•Decrease of $2.0 million related to the conclusion of the FITBONE Contract Manufacturing and Supply Agreement with Wittenstein
•Decrease in net proceeds of $1.7 million from the issuance of common shares, primarily related to the exercise of stock options in the prior year period
•Partially offset by an increase of $0.7 million attributable to other financing activities
Credit Facilities
As of June 30, 2022, we had no borrowings outstanding under our secured revolving credit facility. In addition, we had no borrowings outstanding under our available lines of credit in Italy, which provide up to an aggregate amount of €5.5 million ($5.8 million). We were in compliance with all required financial covenants as of June 30, 2022.
Other
For information regarding contingencies, see Note 7 to the Notes to the Unaudited Condensed Consolidated Financial Statements contained herein.
23
The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”)
In April 2020, we received $13.9 million in funds from the Centers for Medicare and Medicaid Service ("CMS") Accelerated and Advance Payment Program under the CARES Act. Recoupment of amounts received under the CMS Accelerated and Advance Payment Program was completed in the second quarter of 2022.
Spinal Kinetics Contingent Consideration
As part of the consideration for the Spinal Kinetics acquisition, we agreed to make contingent milestone payments of up to $60.0 million. One milestone payment, which was for $15.0 million, became due upon FDA approval of Spinal Kinetics’ M6-C artificial cervical disc (the “FDA Milestone”). The FDA Milestone was achieved and paid in 2019. A revenue-based milestone payment, totaling $15.0 million, was achieved and paid in 2021 upon meeting certain net sales targets.
The remaining milestone payment is a revenue-based milestone payment of $30.0 million in connection with future sales of the acquired artificial discs. The fair value of the contingent consideration arrangement as of June 30, 2022, was $1.0 million; however, the actual amount ultimately paid, if achieved, could be higher or lower than the fair value of the contingent consideration (ultimate payment will either be $30.0 million or the liability will be fully reversed if the milestone is not met within the required timeline). For additional discussion of this matter, see Note 6 of the Notes to the Unaudited Condensed Consolidated Financial Statements.
Neo Medical Convertible Loan
In October 2020, we entered into a Convertible Loan Agreement (the “Convertible Loan”) with Neo Medical SA, a privately held Swiss-based Medtech company (“Neo Medical”), whereby we loaned CHF 4.6 million ($5.0 million as of the issuance date) to Neo Medical. The loan bears interest at 8.0%, with interest due semi-annually. The Convertible Loan matures in October 2024; however, if a change in control of Neo Medical occurs prior to maturity, the Convertible Loan shall become immediately due upon such event.
Related Party Transaction
In February 2021, we entered into a technology assignment and royalty agreement with a medical device technology company partially owned and controlled by the wife of President and Chief Executive Officer, Jon Serbousek, whereby we acquired the intellectual property rights to certain assets for consideration of up to $10.0 million. Consideration was comprised of $1.0 million due at signing and $9.0 million in contingent consideration, dependent upon multiple milestones, such as receipt of 510(k) clearance or the attainment of certain net sales targets. None of the contingent consideration has been achieved as of June 30, 2022.
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 the second quarter of 2021, with certain payments contingent upon achieving an FDA milestone. We received FDA approval for the AccelStim device in May 2022, triggering an obligation to pay the remaining $3.5 million of consideration, of which $1.5 million was paid as of June 30, 2022. Of the remaining $2.0 million obligation, $1.0 million, which is due to be paid on the first anniversary of FDA approval, is classified within other current liabilities. The remaining $1.0 million, which is due to be paid on the second anniversary of FDA approval, is classified within other long-term liabilities. The License Agreement also includes certain minimum purchase requirements.
CGBio Co., Ltd. Exclusive License and Distribution Agreement
On July 30, 2022, we entered into a long-term strategic License and Distribution Agreement (the “Agreement”) with CGBio Co., Ltd. (“CGBio”), a developer of innovative, synthetic bone grafts. The Agreement grants us the exclusive right to conduct pre-clinical and clinical studies, commercialize, promote, market, and sell the Novosis recombinant human bone morphogenetic protein-2 (rhBMP-2) bone growth materials and other future tissue regenerative solutions in the U.S. and Canada. As consideration, we will pay CGBio an upfront payment of $1.4 million with additional payments contingent upon the achievement of specified development milestones.
Off-balance Sheet Arrangements
As of June 30, 2022, 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.
24
Contractual Obligations
There have been no material changes in any of our material contractual obligations as disclosed in our Form 10-K for the year ended December 31, 2021.
Critical Accounting Estimates
Our discussion of operating results is based upon the condensed consolidated financial statements and accompanying notes. The preparation of these statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Our critical accounting estimates are detailed in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2021. There have been no significant changes to our critical accounting estimates.
Recently Issued Accounting Pronouncements
See Note 2 of the Notes to the Unaudited Condensed Consolidated Financial Statements for detailed information regarding the status of recently issued or adopted accounting pronouncements. As of June 30, 2022, we do not expect any of the issued Accounting Standards Updates to materially affect our condensed consolidated financial statements upon adoption.
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 used to supplement information regarding the performance and underlying trends of our business operations 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 filing 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.
Constant Currency
Constant currency is calculated by using foreign currency rates from the comparable, prior-year period, to present net sales at comparable rates. Constant currency can be presented for numerous GAAP measures, but is most commonly used by management to analyze net sales without the impact of changes in foreign currency rates.
EBITDA
EBITDA is a non-GAAP metric defined as earnings before interest income (expense), income taxes, depreciation, and amortization. EBITDA is the primary metric used by our Chief Operating Decision Maker in managing the business.
Free Cash Flow
Free cash flow is calculated by subtracting capital expenditures from net cash from operating activities. Management uses free cash flow as 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.