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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, 2019

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

 

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, 2019, 19,066,984 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

 

OFIX

 

NASDAQ

 

 

 


 

 Table of Contents

 

 

 

 

 

 

Page

PART I

 

FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Financial Statements

 

4

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2019, and December 31, 2018

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three months ended  March 31, 2019, and 2018

 

5

 

 

 

 

 

 

 

Condensed Consolidated Statements of Changes in Shareholders’ Equity

 

6

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018

 

7

 

 

 

 

 

 

 

Notes to the Unaudited Condensed Consolidated Financial Statements

 

8

 

 

 

 

 

Item 2.

 

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

 

22

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

29

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

29

 

 

 

 

 

PART II

 

OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

31

 

 

 

 

 

Item 1A.

 

Risk Factors

 

31

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

31

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

31

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

31

 

 

 

 

 

Item 5.

 

Other Information

 

31

 

 

 

 

 

Item 6.

 

Exhibits

 

32

 

 

 

 

 

SIGNATURES

 

33

2


 

Forward-Looking Statements

This report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (“the Exchange Act”), and Section 27A of the Securities Act of 1933, as amended, relating to our business and financial outlook, which are based on our current beliefs, assumptions, expectations, estimates, forecasts and projections. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “intends,” “predicts,” “potential,” or “continue” or other comparable terminology. These forward-looking statements are not guarantees of our future performance and involve risks, uncertainties, estimates and assumptions that are difficult to predict, including the risks described Part I, Item 1A under the heading Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2018 (the “2018 Form 10-K”) and other Securities and Exchange Commission (“SEC”) filings. Therefore, our actual outcomes and results may differ materially from those expressed in these forward-looking statements. You should not place undue reliance on any of these forward-looking statements. Further, any forward-looking statement speaks only as of the date hereof, unless it is specifically otherwise stated to be made as of a different date. We undertake no obligation to further update any such statement, or the risk factors described in the 2018 Form 10-K and other SEC filings, to reflect new information, the occurrence of future events or circumstances 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 share data)

 

March 31,

2019

 

 

December 31,

2018

 

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

46,668

 

 

$

69,623

 

Restricted cash

 

 

2,540

 

 

 

2,566

 

Trade accounts receivable, net of allowances of $7,448 and $7,463, respectively

 

 

79,615

 

 

 

77,747

 

Inventories

 

 

79,128

 

 

 

76,847

 

Prepaid expenses and other current assets

 

 

16,387

 

 

 

17,856

 

Total current assets

 

 

224,338

 

 

 

244,639

 

Property, plant and equipment, net

 

 

63,727

 

 

 

42,835

 

Intangible assets, net

 

 

56,764

 

 

 

51,897

 

Goodwill

 

 

71,177

 

 

 

72,401

 

Deferred income taxes

 

 

36,575

 

 

 

33,228

 

Other long-term assets

 

 

26,735

 

 

 

21,641

 

Total assets

 

$

479,316

 

 

$

466,641

 

Liabilities and shareholders’ equity

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

19,643

 

 

$

17,989

 

Current portion of finance lease liability

 

 

359

 

 

 

 

Other current liabilities

 

 

43,652

 

 

 

67,919

 

Total current liabilities

 

 

63,654

 

 

 

85,908

 

Long-term portion of finance lease liability

 

 

20,879

 

 

 

 

Other long-term liabilities

 

 

51,101

 

 

 

45,336

 

Total liabilities

 

 

135,634

 

 

 

131,244

 

Contingencies (Note 9)

 

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

 

 

 

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

   18,790,769 and 18,579,688 issued and outstanding as of March 31,

   2019 and December 31, 2018, respectively

 

 

1,879

 

 

 

1,858

 

Additional paid-in capital

 

 

252,862

 

 

 

243,165

 

Retained earnings

 

 

87,108

 

 

 

87,078

 

Accumulated other comprehensive income

 

 

1,833

 

 

 

3,296

 

Total shareholders’ equity

 

 

343,682

 

 

 

335,397

 

Total liabilities and shareholders’ equity

 

$

479,316

 

 

$

466,641

 

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

4


 

ORTHOFIX MEDICAL INC.

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

 

 

 

Three Months Ended

March 31,

 

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

 

2019

 

 

2018

 

Net sales

 

$

109,112

 

 

$

108,709

 

Cost of sales

 

 

23,708

 

 

 

24,147

 

Gross profit

 

 

85,404

 

 

 

84,562

 

Sales and marketing

 

 

53,694

 

 

 

50,268

 

General and administrative

 

 

20,472

 

 

 

19,424

 

Research and development

 

 

9,229

 

 

 

6,937

 

Acquisition-related amortization and remeasurement (Note 13)

 

 

6,457

 

 

 

63

 

Operating income (loss)

 

 

(4,448

)

 

 

7,870

 

Interest expense, net

 

 

(257

)

 

 

(183

)

Other income (expense), net

 

 

(404

)

 

 

2,912

 

Income (loss) before income taxes

 

 

(5,109

)

 

 

10,599

 

Income tax benefit (expense)

 

 

6,006

 

 

 

(5,373

)

Net income

 

$

897

 

 

$

5,226

 

 

 

 

 

 

 

 

 

 

Net income per common share:

 

 

 

 

 

 

 

 

Basic

 

$

0.05

 

 

$

0.28

 

Diluted

 

 

0.05

 

 

 

0.27

 

Weighted average number of common shares:

 

 

 

 

 

 

 

 

Basic

 

 

18,750,184

 

 

 

18,404,856

 

Diluted

 

 

19,191,146

 

 

 

18,874,591

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), before tax

 

 

 

 

 

 

 

 

Unrealized loss on debt securities

 

 

(2,593

)

 

 

 

Currency translation adjustment

 

 

(449

)

 

 

697

 

Other comprehensive income (loss) before tax

 

 

(3,042

)

 

 

697

 

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

 

 

641

 

 

 

 

Other comprehensive income (loss), net of tax

 

 

(2,401

)

 

 

697

 

Comprehensive income (loss)

 

$

(1,504

)

 

$

5,923

 

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, except share data)

 

Number of

Common

Shares

Outstanding

 

 

Common

Shares

 

 

Additional

Paid-in

Capital

 

 

Retained

Earnings

 

 

Accumulated

Other

Comprehensive

Income

 

 

Total

Shareholders’

Equity

 

At December 31, 2018

 

 

18,579,688

 

 

$

1,858

 

 

$

243,165

 

 

$

87,078

 

 

$

3,296

 

 

$

335,397

 

Cumulative effect adjustment from adoption of ASU 2016-02

 

 

 

 

 

 

 

 

 

 

 

71

 

 

 

 

 

 

71

 

Cumulative effect adjustment from adoption of ASU 2018-02

 

 

 

 

 

 

 

 

 

 

 

(938

)

 

 

938

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

897

 

 

 

 

 

 

897

 

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,401

)

 

 

(2,401

)

Share-based compensation

 

 

 

 

 

 

 

 

5,685

 

 

 

 

 

 

 

 

 

5,685

 

Common shares issued, net

 

 

211,081

 

 

 

21

 

 

 

4,012

 

 

 

 

 

 

 

 

 

4,033

 

At March 31, 2019

 

 

18,790,769

 

 

$

1,879

 

 

$

252,862

 

 

$

87,108

 

 

$

1,833

 

 

$

343,682

 

 

 

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

 

Number of

Common

Shares

Outstanding

 

 

Common

Shares

 

 

Additional

Paid-in

Capital

 

 

Retained

Earnings

 

 

Accumulated

Other

Comprehensive

Income

 

 

Total

Shareholders’

Equity

 

At December 31, 2017

 

 

18,278,833

 

 

$

1,828

 

 

$

220,591

 

 

$

70,402

 

 

$

3,787

 

 

$

296,608

 

Cumulative effect adjustment from adoption of ASU 2014-09

 

 

 

 

 

 

 

 

 

 

 

4,761

 

 

 

 

 

 

4,761

 

Cumulative effect adjustment from adoption of ASU 2016-16

 

 

 

 

 

 

 

 

 

 

 

(1,896

)

 

 

 

 

 

(1,896

)

Net income

 

 

 

 

 

 

 

 

 

 

 

5,226

 

 

 

 

 

 

5,226

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

697

 

 

 

697

 

Share-based compensation

 

 

 

 

 

 

 

 

3,916

 

 

 

 

 

 

 

 

 

3,916

 

Common shares issued, net

 

 

126,511

 

 

 

13

 

 

 

3,849

 

 

 

 

 

 

 

 

 

3,862

 

At March 31, 2018

 

 

18,405,344

 

 

$

1,841

 

 

$

228,356

 

 

$

78,493

 

 

$

4,484

 

 

$

313,174

 

 

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)

 

2019

 

 

2018

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income

 

$

897

 

 

$

5,226

 

Adjustments to reconcile net income to net cash from operating activities

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

5,727

 

 

 

4,369

 

Amortization of operating lease assets, debt costs and other assets

 

 

773

 

 

 

375

 

Provision for doubtful accounts

 

 

46

 

 

 

(35

)

Deferred income taxes

 

 

(1,582

)

 

 

277

 

Share-based compensation

 

 

5,685

 

 

 

3,916

 

Interest and gain on valuation of investment securities

 

 

(593

)

 

 

(1,629

)

Change in fair value of contingent consideration

 

 

5,400

 

 

 

 

Other

 

 

586

 

 

 

208

 

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

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(2,027

)

 

 

(4,925

)

Inventories

 

 

(2,477

)

 

 

1,664

 

Prepaid expenses and other current assets

 

 

1,427

 

 

 

2,166

 

Accounts payable

 

 

1,883

 

 

 

(4,459

)

Other current liabilities

 

 

(12,439

)

 

 

(11,310

)

Payment of contingent consideration

 

 

(1,340

)

 

 

 

Other long-term assets and liabilities

 

 

(3,005

)

 

 

597

 

Net cash from operating activities

 

 

(1,039

)

 

 

(3,560

)

Cash flows from investing activities

 

 

 

 

 

 

 

 

Capital expenditures for property, plant and equipment

 

 

(4,643

)

 

 

(2,831

)

Capital expenditures for intangible assets

 

 

(273

)

 

 

(607

)

Asset acquisitions and other investments

 

 

(6,400

)

 

 

(1,217

)

Net cash from investing activities

 

 

(11,316

)

 

 

(4,655

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Proceeds from issuance of common shares

 

 

6,331

 

 

 

4,378

 

Payments related to withholdings for share-based compensation

 

 

(2,298

)

 

 

(516

)

Payment of contingent consideration

 

 

(13,660

)

 

 

 

Payments related to finance lease obligation

 

 

(99

)

 

 

 

Other financing activities

 

 

(670

)

 

 

(165

)

Net cash from financing activities

 

 

(10,396

)

 

 

3,697

 

Effect of exchange rate changes on cash

 

 

(230

)

 

 

417

 

Net change in cash, cash equivalents, and restricted cash

 

 

(22,981

)

 

 

(4,101

)

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

 

 

72,189

 

 

 

81,157

 

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

 

$

49,208

 

 

$

77,056

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

46,668

 

 

$

77,056

 

Restricted cash

 

 

2,540

 

 

 

 

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

 

$

49,208

 

 

$

77,056

 

 

 

 

 

 

 

 

 

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

 

 

 

Noncash investing activities:

 

 

 

 

 

 

 

 

Purchase of intangible assets

 

$

 

 

$

1,181

 

 

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

Orthofix Medical Inc., together with its subsidiaries (the “Company” or “Orthofix”) is a global medical device company focused on musculoskeletal products and therapies. Headquartered in Lewisville, Texas, the Company has two reporting segments: Global Spine and Global Extremities.

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, 2018. Operating results for the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for other interim periods or the year ending December 31, 2019.

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; allowance for doubtful accounts; 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.

Prior period reclassifications

Certain amortization expense related to intangible assets previously reported in general and administrative expenses have been reclassified to acquisition-related amortization and remeasurement based on use of the underlying intangible asset. This reclassification resulted in a decrease to general and administrative expenses of $0.1 million and an increase in acquisition related amortization and remeasurement expense of $0.1 million for the three months ended March 31, 2018.

Change in Reporting Segments

The Company has changed its reportable business segments beginning with the first quarter of 2019, to align with changes in how the Company manages its business, reviews operating performance and allocates resources.  The Company now reports results under two reportable segments: Global Spine and Global Extremities, and measures operating performance of these two reportable segments based on EBITDA. For additional discussion regarding segments, see Note 12.

 

2. Recently adopted accounting standards and recently issued accounting pronouncements

 

Adoption of ASU 2016-02, Leases (Topic 842)

In February 2016 the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, which changes how lessees account for leases. For most leases, a liability will be recorded on the balance sheet based on the present value of future lease obligations with a corresponding right-of-use asset. For leases classified as operating leases, the Company will recognize lease costs on a straight-line basis based on the combined amortization of the lease obligation and the right-of-use asset. Other leases will be accounted for as finance leases similar to capital leases under the previous accounting standard.  Effective January 1, 2019, the Company adopted ASU 2016-02 using a modified retrospective approach. Upon adoption, the Company elected a package of practical expedients permitted within the new standard. The practical expedients adopted allow the Company to carry forward its historical lease classification and to not separate and allocate the consideration paid between lease and non-lease components included within a contract. The Company also adopted an optional transition method that waives the requirement to apply the ASU to the comparative periods presented within the financial statements in the year of adoption. Therefore, results for reporting periods beginning after January 1, 2019 are presented under Topic 842, while prior period amounts are not adjusted and continue to be reported in accordance with the Company’s historic accounting policies under Topic 840. See Note 5 for additional discussion of the Company’s adoption of Topic 842 and its lease accounting policies.

 

8


 

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

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

Other recently adopted accounting guidance

In August 2018, the Securities and Exchange Commission (the “SEC” or the “Commission”) issued SEC Final Rule Release No. 33-10532, Disclosure Update and Simplification, which amends certain of the Commission’s disclosure requirements that have become redundant, duplicative, overlapping, outdated, or superseded, in light of other Commission disclosure requirements, U.S. GAAP, or changes in the information environment. However, in certain instances, the amendments expanded disclosure requirements, including those related to interim disclosures about changes in shareholders’ equity. As amended in the final rule, registrants must now analyze changes in shareholders’ equity, in the form of a reconciliation for the current year-to-date interim periods, with subtotals for each interim period. The Company adopted Release No. 33-10532 during the first quarter of 2019, which resulted in changes in shareholders’ equity presented within the Condensed Consolidated Statements of Changes in Shareholders’ Equity.

Recently issued accounting pronouncements

 

Topic

 

Description of Guidance

 

Effective Date

 

Status of Company's Evaluation

Financial Instruments - Credit Losses (ASU 2016-13)

 

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

 

January 1, 2020

 

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

Goodwill

(ASU 2017-04)

 

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

 

January 1, 2020

 

The Company is currently evaluating the impact this ASU may have on its consolidated financial statements. However, the Company does not expect this ASU to have a significant impact on its financial statements or disclosures.

Fair value measurement (ASU 2018-13)

 

Eliminates such disclosures as the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy and adds new disclosure requirements for Level 3 measurements. Certain of the provisions are to be applied retrospectively with other provisions  applied prospectively.

 

January 1, 2020

 

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

9


 

Topic

 

Description of Guidance

 

Effective Date

 

Status of Company's Evaluation

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

 

Aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this update. Applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption.

 

January 1, 2020

 

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

 

 

3. Acquisitions

Acquisition of Spinal Kinetics, Inc.

On April 30, 2018, the Company completed the acquisition of Spinal Kinetics Inc. (“Spinal Kinetics”), a privately held developer and manufacturer of artificial cervical and lumbar discs for $45.0 million in net cash, subject to certain adjustments, plus potential milestone payments of up to $60.0 million in cash. The acquisition date fair value of the consideration transferred was $76.6 million. The results of operations for Spinal Kinetics have been included in the Company’s financial results since the acquisition date, April 30, 2018. For additional discussion regarding the valuation of the contingent consideration, see Note 7.

 

The following table summarizes the fair values of assets acquired and liabilities assumed at the acquisition date. During the first quarter of 2019, the Company finalized its valuation of assets acquired and liabilities assumed, which resulted in an adjustment between deferred income taxes and goodwill.

 

(U.S. Dollars, in thousands)

 

Preliminary Acquisition Date Fair Value as Previously Reported

 

 

Adjustments

 

 

Final Acquisition Date Fair Value

 

 

Assigned Useful Life

Assets acquired

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

6,785

 

 

$

 

 

$

6,785

 

 

 

Restricted cash

 

 

30

 

 

 

 

 

 

30

 

 

 

Accounts receivable

 

 

1,705

 

 

 

 

 

 

1,705

 

 

 

Inventories

 

 

8,175

 

 

 

 

 

 

8,175

 

 

 

Prepaid expenses and other current assets

 

 

315

 

 

 

 

 

 

315

 

 

 

Property, plant and equipment

 

 

2,285

 

 

 

 

 

 

2,285

 

 

 

Other long-term assets

 

 

320

 

 

 

 

 

 

320

 

 

 

Developed technology

 

 

12,400

 

 

 

 

 

 

12,400

 

 

10 years

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

 

 

26,800

 

 

 

 

 

 

26,800

 

 

10 years

Tradename

 

 

100

 

 

 

 

 

 

100

 

 

2 years

Deferred income taxes

 

 

2,374

 

 

 

1,220

 

 

 

3,594

 

 

 

Total identifiable assets acquired

 

$

61,289

 

 

$

1,220

 

 

$

62,509

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities assumed

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

351

 

 

$

 

 

$

351

 

 

 

Other current liabilities

 

 

2,873

 

 

 

(4

)

 

 

2,869

 

 

 

Other long-term liabilities

 

 

301

 

 

 

 

 

 

301

 

 

 

Total liabilities assumed

 

$

3,525

 

 

$

(4

)

 

$

3,521

 

 

 

Goodwill

 

 

18,836

 

 

 

(1,224

)

 

 

17,612

 

 

 

Total fair value of consideration transferred

 

$

76,600

 

 

$

 

 

$

76,600

 

 

 

10


 

 

On February 6, 2019, the Company obtained U.S. Food and Drug Administration (“FDA”) approval of the M6-C artificial cervical disc for patients suffering from cervical disease degeneration and started amortizing IPR&D. The $17.6 million of goodwill recognized was assigned to the Global Spine reporting segment.

The Company did not recognize any acquisition related costs during the three months ended March 31, 2019 and recorded $1.5 million of acquisition related costs during the three months ended March 31, 2018. These costs are included in the condensed consolidated statements of operations and comprehensive income (loss) within general and administrative expenses. The Company’s results of operations included revenues of $3.1 million and net loss of $4.0 million from Spinal Kinetics for the three months ended March 31, 2019 in the condensed consolidated statements of operations and comprehensive income (loss).

The following table presents the unaudited pro forma results for the three months ended March 31, 2019 and 2018, which combines the historical results of operations of Orthofix and Spinal Kinetics as though the companies had been combined as of January 1, 2018. The unaudited pro forma information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at such time.

 

 

 

Three Months Ended  March 31,

 

(U.S. Dollars, in thousands)

 

2019

 

 

2018

 

 

 

(unaudited)

 

 

(unaudited)

 

Net sales

 

$

109,112

 

 

$

112,455

 

Net income

 

 

897

 

 

 

4,899

 

 

 

Options Medical, LLC Asset Acquisition

On January 31, 2019, the Company acquired certain assets of Options Medical, LLC, (“Options Medical”) a medical device distributor based in Florida. Under the terms of the acquisition, the parties agreed to terminate an existing exclusive sales representative agreement, employees of Options Medical became employees of the Company and the Company acquired all customer lists and customer information related to the sale of the Company’s products. As consideration for the assets acquired, the Company paid $6.4 million. Additionally, as an inducement to enter into employment with the Company, the Company provided 25,478 restricted stock units (“RSUs”), with a fair value of $1.4 million, to the Options Medical founder. These RSUs will vest in one-third annual increments beginning on the first anniversary of the grant date and are contingent upon continued employment. The following table summarizes the fair values of assets acquired and liabilities assumed at the acquisition date.

 

(U.S. Dollars, in thousands)

 

Fair Value

 

 

Balance Sheet Classification

 

Assigned Useful Life

Assets acquired