# Orthofix Medical Inc.: Form 10-Q for the period ended Sep 30, 2023

- Company: [Orthofix Medical Inc.](/companies/ofix.md) (CIK 884624)
- Form: 10-Q
- Filed: 2023-11-08
- Accepted by EDGAR: Nov 8, 2023, 21:15 ET
- Period: 2023-09-30
- Accession: 0000950170-23-061148
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/884624/000095017023061148/ofix-20230930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/884624/000095017023061148/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-07-01 to 2023-09-30 | $184.0m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2023-01-01 to 2023-09-30 | $546.2m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2023-07-01 to 2023-09-30 | $64.2m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2023-01-01 to 2023-09-30 | $196.6m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2023-07-01 to 2023-09-30 | $119.8m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2023-01-01 to 2023-09-30 | $349.6m | us-gaap:GrossProfit |
| Research and development | 3 months, 2023-07-01 to 2023-09-30 | $18.6m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2023-01-01 to 2023-09-30 | $61.3m | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2023-07-01 to 2023-09-30 | −$24.4m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2023-01-01 to 2023-09-30 | −$120.8m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2023-07-01 to 2023-09-30 | $472.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2023-01-01 to 2023-09-30 | $2.6m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-07-01 to 2023-09-30 | −$28.9m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2023-01-01 to 2023-09-30 | −$129.2m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-07-01 to 2023-09-30 | −$0.77 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2023-01-01 to 2023-09-30 | −$3.53 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-07-01 to 2023-09-30 | −$0.77 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2023-01-01 to 2023-09-30 | −$3.53 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-07-01 to 2023-09-30 | 37,249 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2023-01-01 to 2023-09-30 | 36,588 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2023-01-01 to 2023-09-30 | −$39.1m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2023-01-01 to 2023-09-30 | $45.7m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2023-09-30 | $33.7m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-09-30 | $393.7m | us-gaap:AssetsCurrent |
| Total assets | at 2023-09-30 | $905.7m | us-gaap:Assets |
| Current liabilities | at 2023-09-30 | $152.5m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-09-30 | $290.2m | us-gaap:Liabilities |
| Long-term debt | at 2023-09-30 | $70.0m | us-gaap:LongTermDebtNoncurrent |
| Shareholders' equity | at 2023-09-30 | $615.5m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 38,509 characters.

The following discussion and analysis of Orthofix Medical Inc.’s (sometimes referred to as “we,” “us” or “our”) financial condition and results of operations should be read in conjunction with the discussion under the heading “Forward-Looking Statements” and our condensed consolidated financial statements and related notes thereto appearing elsewhere in this Form 10-Q.

### Executive Summary

Following our merger (the “Merger”) with SeaSpine Holdings Corporation ("SeaSpine"), which was completed in January 2023, the newly merged Orthofix-SeaSpine organization 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. Headquartered in Lewisville, Texas, our spine and orthopedic products are distributed in approximately 68 countries via our sales representatives and distributors. For more information, please visit www.Orthofix.com. Information included on our website is not incorporated into, or otherwise creates a part of, this report.

Notable financial metrics in the third quarter of 2023 and recent achievements include the following:

- Net sales of $184.0 million, an increase of 61% on a reported and 60% on a constant currency basis over prior year, largely as a result of the Merger
- Bone Growth Therapies growth of 15%, marking three consecutive quarters with double-digit net sales increases, with growth coming from both spine and fracture portfolios
- Spinal Implants, Biologics, and Enabling Technologies sales growth of 155% on a reported basis over prior year
- Global Orthopedics net sales increase of 7% on a reported basis over prior year

### Results of Operations

The following table provides certain items in our condensed consolidated statements of operations as a percent of net sales:

*(Unaudited)*

|  | Three Months Ended September 30, 2023 (%) | 2022 (%) | Nine Months Ended September 30, 2023 (%) | 2022 (%) |
| --- | ---: | ---: | ---: | ---: |
| Net sales | 100.0 | 100.0 | 100.0 | 100.0 |
| Cost of sales | 34.9 | 26.8 | 36.0 | 26.7 |
| Gross profit | 65.1 | 73.2 | 64.0 | 73.3 |
| Sales and marketing | 51.7 | 48.7 | 52.7 | 50.1 |
| General and administrative | 14.7 | 16.9 | 20.2 | 16.1 |
| Research and development | 10.1 | 10.5 | 11.2 | 10.6 |
| Acquisition-related amortization and remeasurement | 1.9 | 2.2 | 2.0 | (2.8) |
| Operating loss | (13.3) | (5.1) | (22.1) | (0.7) |
| Net loss | (15.7) | (9.4) | (23.7) | (3.7) |

### Net Sales by Product Category and Reporting Segment

The following tables provide net sales by major product category by reporting segment:

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

|  | Three Months Ended September 30, 2023 | 2022 | Percentage Change Reported | Constant Currency |
| --- | ---: | ---: | ---: | ---: |
| Bone Growth Therapies | $53,359 | $46,531 | 14.7% | 14.7% |
| Spinal Implants, Biologics, and Enabling Technologies | 100,993 | 39,655 | 154.7% | 154.5% |
| Global Spine | 154,352 | 86,186 | 79.1% | 79.0% |
| Global Orthopedics | 29,654 | 27,810 | 6.6% | 0.7% |
| Net sales | $184,006 | $113,996 | 61.4% | 59.9% |

22

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

|  | Nine Months Ended September 30, 2023 | 2022 | Percentage Change Reported | Constant Currency |
| --- | ---: | ---: | ---: | ---: |
| Bone Growth Therapies | $153,735 | $136,244 | 12.8% | 12.8% |
| Spinal Implants, Biologics, and Enabling Technologies | 307,799 | 123,379 | 149.5% | 149.5% |
| Global Spine | 461,534 | 259,623 | 77.8% | 77.8% |
| Global Orthopedics | 84,692 | 78,861 | 7.4% | 6.1% |
| Net sales | $546,226 | $338,484 | 61.4% | 61.1% |

Global Spine

Global Spine offers the following product categories:

- Bone Growth Therapies, which manufactures, distributes, sells, and provides support services for market leading devices used adjunctively in high-risk spinal fusion procedures and to treat both non-union and acute fractures in the orthopedic space. Bone Growth Therapies uses distributors and a direct sales channel to sell its devices and provide associated support services to hospitals, healthcare providers, and patients in the U.S.
- Spinal Implants, Biologics, and Enabling Technologies is comprised of a broad portfolio of spine fixation and motion preservation implant products used in surgical procedures of the spine, one of the most comprehensive biologics portfolios in both the demineralized bone matrix and cellular allograft market segments, and image-guided surgical solutions to facilitate degenerative, minimally invasive, and complex surgical procedures. Spinal Implants, Biologics, and Enabling Technologies products are sold through a network of distributors and sales representatives to hospitals and healthcare providers on a global basis for Spinal Implants and Enabling Technologies, and primarily within the U.S. for Biologics.

#### Three months ended September 30, 2023 compared to 2022

Net sales of $154.4 million, an increase of $68.2 million or 79.1%

- Bone Growth Therapies net sales increased $6.8 million or 14.7%, largely driven by (i) an increase in complex spine procedures, which are typically paired within our CervicalStim and SpinalStim devices, (ii) increased reimbursement rates that were approved by Medicare for 2023, (iii) growth in our spine and fracture sales channels as a result of investments made in the commercial channel in the prior year, and (iv) the launch of AccelStim for the healing of fresh and non-union fractures
- Spinal Implants, Biologics, and Enabling Technologies net sales increased $61.3 million or 154.7%, primarily due to the contribution of SeaSpine net sales in the third quarter of 2023 in addition to growth driven by the onboarding of new, high-volume distribution partners along with multiple recent product launches

#### Nine months ended September 30, 2023 compared to 2022

Net sales of $461.5 million, an increase of $201.9 million or 77.8%

- Bone Growth Therapies net sales increased $17.5 million or 12.8%, largely driven by (i) a continued increase in complex spine procedures, (ii) increased reimbursement rates that were approved by Medicare for 2023, (iii) growth in our spine and fracture sales channels as a result of investments made in the prior year, and (iv) the launch of AccelStim
- Spinal Implants, Biologics, and Enabling Technologies net sales increased $184.4 million or 149.5%, primarily due to the contribution of SeaSpine net sales and growth driven by the onboarding of new, high-volume distribution partners along with multiple recent product launches

Global Orthopedics

Global Orthopedics offers products and solutions that allow physicians to successfully treat a variety of orthopedic conditions specifically related to limb reconstruction and deformity correction unrelated to the spine. Global Orthopedics distributes its products globally through a network of distributors and sales representatives to sell orthopedic products to hospitals and healthcare providers.

#### Three months ended September 30, 2023 compared to 2022

Net sales of $29.7 million, an increase of $1.8 million or 6.6%

- Growth of 13.6% in the U.S., primarily due to recent product launches and commercial execution within our U.S. sales channel
- International growth of 4.5% on a reported basis, largely due to favorable movements in foreign exchange rates, which had a favorable impact on net sales of $1.6 million in the quarter, partially offset by a small decrease in stocking distributor orders and in certain direct international markets as a result of macroeconomic headwinds

#### Nine months ended September 30, 2023 compared to 2022

Net sales of $84.7 million, an increase of $5.8 million or 7.4%

- Growth of 13.4% in the U.S. largely as a result of investments made in recent product launches and commercial execution within our sales channel
- International growth of 3.8% on a constant currency basis, largely due to an increase in stocking distributor orders and as a result of recent product launches
- Increase of $1.0 million due to movement in foreign current exchange rates, which had a favorable impact on net sales in 2023

### Gross Profit

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

|  | Three Months Ended September 30, 2023 | 2022 | % Change | Nine Months Ended September 30, 2023 | 2022 | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $184,006 | $113,996 | 61.4% | $546,226 | $338,484 | 61.4% |
| Cost of sales | 64,243 | 30,573 | 110.1% | 196,583 | 90,491 | 117.2% |
| Gross profit | $119,763 | $83,423 | 43.6% | $349,643 | $247,993 | 41.0% |
| Gross margin | 65.1% | 73.2% | (8.1%) | 64.0% | 73.3% | -9.3% |

#### Three months ended September 30, 2023 compared to 2022

Gross profit increased $36.3 million

- Gross profit largely increased due to the contribution of SeaSpine results in the third quarter of 2023, as SeaSpine contributed approximately $62.9 million in net sales
- Partially offset by $7.9 million in amortization of the inventory fair value step up at acquisition, which is being recognized over the expected sales cycles of the acquired inventory
- Further offset by approximately $1.4 million in inventory-related charges as a result of product rationalization decisions that have been made related to the Merger

#### Nine months ended September 30, 2023 compared to 2022

Gross profit increased $101.7 million

- Gross profit largely increased due to the contribution of SeaSpine results in the third quarter of 2023, as SeaSpine contributed approximately $188.2 million in net sales
- Partially offset by $29.0 million in amortization of the inventory fair value step up at acquisition, which is being recognized over the expected sales cycles of the acquired inventory
- Further offset by approximately $5.7 million in inventory-related charges as a result of product rationalization decisions that have been made related to the Merger

### Sales and Marketing Expense

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

|  | Three Months Ended September 30, 2023 | 2022 | % Change | Nine Months Ended September 30, 2023 | 2022 | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Sales and marketing | $94,947 | $55,461 | 71.2% | $287,987 | $169,486 | 69.9% |
| As a percentage of net sales | 51.5% | 48.7% | 2.8% | 52.7% | 50.1% | 2.6% |

#### Three months ended September 30, 2023 compared to 2022

Sales and marketing expense increased $39.5 million

- Increase largely due to the contribution of SeaSpine results in the third quarter of 2023 and the overall increase in net sales as compared to the prior year period, which resulted in increased variable expenses, such as commissions and bonus expenses associated with the achievement of sales objectives
- Included within sales and marketing expenses for the third quarter of 2023 are integration-related expenses of $1.3 million, which are mainly severance and retention costs

#### Nine months ended September 30, 2023 compared to 2022

Sales and marketing expense increased $118.5 million

- Increase largely due to the contribution of SeaSpine results in the third quarter of 2023 and the overall increase in net sales as compared to the prior year period, which resulted in increased variable expenses, such as commissions and bonus expenses associated with the achievement of sales objectives
- Included within sales and marketing expenses for 2023 are integration-related expenses of $4.3 million, which are mainly related to severance and retention costs

### General and Administrative Expense

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

|  | Three Months Ended September 30, 2023 | 2022 | % Change | Nine Months Ended September 30, 2023 | 2022 | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| General and administrative | $27,136 | $19,322 | 40.4% | $110,124 | $54,496 | 102.1% |
| As a percentage of net sales | 14.7% | 16.9% | (2.2%) | 20.2% | 16.1% | 4.1% |

#### Three months ended September 30, 2023 compared to 2022

General and administrative expense increased $7.8 million

- Increase largely due to the contribution of SeaSpine results in the third quarter of 2023 and resulting integration costs incurred as a result of the Merger
- Increase also driven by approximately $3.4 million in costs associated with the Board of Directors' independent investigation conducted by independent outside legal counsel, which resulted in the termination of three former executives
- Partially offset by a decrease of $2.9 million associated with due diligence efforts and transaction costs incurred in 2022 prior to the closing of the Merger
- Further offset by a $0.5 million decrease in share-based compensation expense resulting from (i) a $1.1 million recognized benefit related to the forfeiture of outstanding equity grants due to executive leadership changes, partially offset by increases from (ii) a larger employee base post-Merger, and (iii) accelerated vesting of certain equity-based awards as a result of the Merger

#### Nine months ended September 30, 2023 compared to 2022

General and administrative expense increased $55.6 million

- Increase largely due to the contribution of SeaSpine results in 2023 and resulting integration costs incurred as a result of the Merger, partially offset by a reduction in due diligence and transaction costs incurred prior to the closing of the Merger
- Included within general and administrative expenses for 2023 are merger and integration related expense of $21.4 million, which are mainly comprised of (i) professional fees totaling $10.8 million, inclusive of a $5.5 million payment to Orthofix's financial advisor for the Merger upon closing of the transaction, and (ii) severance and retention costs totaling $9.9 million
- Increase of $11.6 million in share-based compensation expense as a result of (i) a larger employee base post-Merger and (ii) from accelerated vesting of certain equity-based awards as a result of the Merger, partially offset by a recognized benefit related to the forfeiture of outstanding equity grants due to executive leadership changes
- Increases of approximately $3.4 million in costs associated with the Board of Directors' independent investigation conducted by independent outside legal counsel, which resulted in the termination of three former executives

### Research and Development Expense

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

|  | Three Months Ended September 30, 2023 | 2022 | % Change | Nine Months Ended September 30, 2023 | 2022 | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Research and development | $18,559 | $11,943 | 55.4% | $61,290 | $35,913 | 70.7% |
| As a percentage of net sales | 10.1% | 10.5% | (0.4%) | 11.2% | 10.6% | 0.6% |

#### Three months ended September 30, 2023 compared to 2022

Research and development expense increased $6.6 million

- Increase largely due to the contribution of SeaSpine results in the third quarter of 2023 and resulting integration costs incurred as a result of the Merger
- Included within research and development expenses for the third quarter of 2023 are merger and integration-related expenses of $0.4 million, which are mainly comprised of severance and retention costs
- Partially offset by a decrease of $0.9 million in costs to comply with the European Union Medical Device Regulations

#### Nine months ended September 30, 2023 compared to 2022

Research and development expense increased $25.4 million

- Increase largely due to the contribution of SeaSpine results in 2023 and resulting integration costs incurred as a result of the Merger
- Included within research and development expenses for 2023 are merger and integration-related expenses of $2.4 million, which are mainly comprised of severance and retention costs
- Increase of $0.8 million related to the attainment of a development milestone with MTF Biologics achieved in the first quarter of 2023
- Partially offset by a decrease of $0.7 million in costs to comply with the European Union Medical Device Regulations

### Acquisition-related Amortization and Remeasurement

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

|  | Three Months Ended September 30, 2023 | 2022 | % Change | Nine Months Ended September 30, 2023 | 2022 | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Acquisition-related amortization and remeasurement | $3,570 | $2,484 | 43.7% | $11,037 | $(9,678) | (214.0%) |
| As a percentage of net sales | 1.9% | 2.2% | (0.3%) | 2.0% | (3.0%) | 5.0% |

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 arrangements, and (iii) recognized costs associated with IPR&D assets, which are recognized immediately upon acquisition.

#### Three months ended September 30, 2023 compared to 2022

Acquisition-related amortization and remeasurement increased $1.1 million

- Increase in amortization expense of $2.4 million during the third quarter of 2023 associated with intangible assets recognized as a result of the Merger
- Partially offset by $1.4 million in costs recognized in the third quarter of 2022 associated with the acquisition of in-process research and development assets, recognized immediately upon acquisition, related to our License and Distribution Agreement with CGBio Co., Ltd.

#### Nine months ended September 30, 2023 compared to 2022

Acquisition-related amortization and remeasurement increased $20.7 million

- Increase of $17.2 million related to a benefit recognized in 2022 from the remeasurement of potential revenue-based milestone payments associated with the Spinal Kinetics acquisitions; we did not achieve the remaining milestone prior to April 30, 2023, the end of the measurement period for achieving such milestone
- Increase in amortization expense of $7.1 million during 2023 associated with intangible assets recognized as a result of the Merger
- Partially offset by a benefit of $2.1 million recognized in 2023 associated with the remeasurement of a contingent consideration obligation with Lattus Spine LLC assumed in the Merger

### Non-operating Income and Expense

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

|  | Three Months Ended September 30, 2023 | 2022 | % Change | Nine Months Ended September 30, 2023 | 2022 | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Interest expense, net | $(1,576) | $(277) | 469.0% | $(4,131) | $(1,059) | 290.1% |
| Other income (expense), net | (2,360) | (3,308) | (28.7%) | (1,704) | (7,436) | (77.1%) |

#### Three months ended September 30, 2023 compared to 2022

Interest expense, net increased $1.3 million

- Increase of $1.3 million attributable to an increase in secured revolving credit facility borrowings outstanding in the third quarter of 2023 as no such balance was outstanding in the prior year

#### Nine months ended September 30, 2023 compared to 2022

Interest expense, net increased $3.1 million

- Increase of $2.6 million attributable to an increase in secured revolving credit facility borrowings outstanding in 2023 as no such balance was outstanding in the prior year
- Increase of $0.6 million attributable to an early termination prepayment penalty associated with the payoff of the assumed indebtedness of SeaSpine as of the close of the Merger

#### Three months ended September 30, 2023 compared to 2022

Other income (expense), net increased $0.9 million

- Increase of $1.3 million associated with changes in foreign currency exchange rates, as we recorded a non-cash remeasurement loss of $1.9 million in the third quarter of 2023 compared to a loss of $3.3 million in the third quarter of 2022
- Partially offset by the recognition of a $0.4 million impairment loss on a held-for-sale investment security in the third quarter of 2023

#### Nine months ended September 30, 2023 compared to 2022

Other income (expense), net increased $5.7 million

- Increase of $6.4 million associated with changes in foreign currency exchange rates, as we recorded a non-cash remeasurement loss of $1.1 million in 2023 compared to a loss of $7.5 million in 2022
- Partially offset by the recognition of a $0.4 million impairment loss on a held-for-sale investment security in the third quarter of 2023

### Income Taxes

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

|  | Three Months Ended September 30, 2023 | 2022 | % Change | Nine Months Ended September 30, 2023 | 2022 | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Income tax expense | $472 | $1,344 | (64.9%) | $2,591 | $1,968 | 31.7% |
| Effective tax rate | (1.7%) | (14.3%) | 12.6% | (2.0%) | (18.4%) | 16.4% |

#### Three months ended September 30, 2023 compared to 2022

- Decrease in tax expense compared to the prior year period is attributable to lower cash taxes in the US of $1.3 million partially offset by increased amortization expense on long lived intangible assets of $0.4 million.

#### Nine months ended September 30, 2023 compared to 2022

- Increase in tax expense compared to the prior year period is attributable to increased amortization expense on long lived intangible assets of $1.2 million and higher taxes on foreign earnings of $0.4 million, offset by lower cash taxes in the US of $0.9 million.

### 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 adjusted earnings before interest, tax, depreciation, and amortization (“adjusted EBITDA,” a non-GAAP financial measure) (which is described further in Note 11 to the Notes to the Unaudited Condensed Consolidated Financial Statements contained herein). The following table presents adjusted EBITDA by segment and reconciles consolidated adjusted EBITDA to loss before income taxes:

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

| Adjusted EBITDA by reporting segment | Three Months Ended September 30, 2023 | 2022 | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Global Spine | $22,593 | $16,601 | $58,832 | $45,244 |
| Global Orthopedics | 477 | 2,648 | 386 | 2,624 |
| Corporate | (9,549) | (4,994) | (32,574) | (15,081) |
| **Consolidated adjusted EBITDA** | $13,521 | $14,255 | $26,644 | $32,787 |
| Reconciling items: |  |  |  |  |
| Interest expense, net | $1,576 | $277 | $4,131 | $1,059 |
| Depreciation and amortization | 13,097 | 7,570 | 39,094 | 21,598 |
| Share-based compensation expense | 6,274 | 4,729 | 32,540 | 13,521 |
| Foreign exchange impact | 1,909 | 3,253 | 1,057 | 7,486 |
| SeaSpine merger-related costs | 5,416 | — | 34,362 | — |
| Strategic investments | 913 | 3,390 | 1,883 | 6,184 |
| Acquisition-related fair value adjustments | 7,122 | 419 | 26,907 | (15,795) |
| Legal judgments/settlements | 3,851 | 125 | 5,611 | 466 |
| Medical device regulation | 1,840 | 2,590 | 7,519 | 6,883 |
| Business interruption - COVID-19 | — | 1,215 | — | 1,874 |
| All other | (92) | 59 | 170 | 230 |
| **Loss before income taxes** | $(28,385) | $(9,372) | $(126,630) | $(10,719) |

28

### Liquidity and Capital Resources

Cash and cash equivalents at September 30, 2023, totaled $33.7 million compared to $50.7 million at December 31, 2022. The following table presents the net change in cash and cash equivalents for the nine months ended September 30, 2023, and 2022, respectively:

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

|  | Nine Months Ended September 30, 2023 | 2022 | Change |
| --- | ---: | ---: | ---: |
| Net cash provided by (used in) operating activities | $(39,059) | $(13,886) | $(25,173) |
| Net cash provided by (used in) investing activities | (18,078) | (18,634) | 556 |
| Net cash provided by (used in) financing activities | 40,042 | (1,576) | 41,618 |
| Effect of exchange rate changes on cash | 58 | (2,091) | 2,149 |
| Net change in cash and cash equivalents | $(17,037) | $(36,187) | $19,150 |

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:

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

|  | Nine Months Ended September 30, 2023 | 2022 | Change |
| --- | ---: | ---: | ---: |
| Net cash provided by (used in) operating activities | $(39,059) | $(13,886) | $(25,173) |
| Capital expenditures | (46,997) | (17,260) | (29,737) |
| Free cash flow | $(86,056) | $(31,146) | $(54,910) |

### Operating Activities

Cash flows from operating activities decreased $25.2 million

- Unfavorable change in net loss of $116.9 million
- Favorable change of $96.5 million associated with non-cash gains and losses, largely related to the amortization of the inventory fair value step up at acquisition, share-based compensation expense, changes in fair value of contingent consideration, depreciation and amortization, and inventory reserve expenses
- Unfavorable change of $4.8 million relating to changes in working capital accounts, primarily attributable to changes in inventory levels, partially offset by recoupment activities associated with the CMS Accelerated and Advance Payment Program in prior year and favorable changes in other current liabilities, prepaid expenses and other current assets, and accounts receivable

Two of our primary working capital accounts are accounts receivable and inventory. Days sales in receivables were 57 days at September 30, 2023, compared to 61 days at September 30, 2022. Inventory turns decreased to 1.0 times as of September 30, 2023 compared to 1.2 times as of September 30, 2022.

### Investing Activities

Cash flows from investing activities increased $0.6 million

- Increase of $29.4 million attributable to cash acquired as a result of the Merger
- Increase of $0.9 million associated with the payment of a contingent consideration milestone achieved in 2022 related to a previous asset acquisition
- Partially offset by an increase of $29.5 million in capital expenditures, largely due to the inclusion of SeaSpine's financial results within the 2023 financial results

### Financing Activities

Cash flows from financing activities increased $41.6 million

- Increase of $70.0 million associated with our secured revolving credit facility borrowings for working capital purposes, including to fund certain Merger-related expenses, during 2023
- Increase of $2.0 million related to the conclusion of the FITBONE Contract Manufacturing and Supply Agreement with Wittenstein, resulting in a $2.0 million payment in the first quarter of 2022
- Partially offset by a decrease of $26.9 million associated with the termination and repayment of SeaSpine's credit facility
- Further offset by a decrease in net proceeds of $1.9 million from the issuance of common shares and a decrease in other financing activities of $1.6 million

#### Credit Facilities

On January 3, 2023, we borrowed $30.0 million for working capital purposes, including to fund certain Merger-related expenses under our secured revolving credit facility under the Second Amended and Restated Credit Agreement with JPMorgan Chase Bank, N.A., dated as of October 25, 2019 (as amended by the First Amendment thereto dated March 1, 2023, the "Prior Credit Agreement"), which credit facility had a maturity date of October 25, 2024. Following the completion of the Merger, we terminated SeaSpine's credit facility and all applicable commitments with Wells Fargo Bank, National Association and repaid all outstanding obligations in respect to principal, interest, and fees on January 5, 2023.

Additional borrowings were made under the Prior Credit Agreement subsequent to the closing of the Merger and as of September 30, 2023, we had $70.0 million borrowings outstanding under the Prior Credit Agreement. We borrowed an additional $9.0 million on October 10, 2023.

On November 6, 2023, we, as borrower, and certain of our subsidiaries, as guarantors, entered into a Financing Agreement (the “Financing Agreement”) with Blue Torch Finance LLC, as administrative agent and collateral agent (the “Agent”), and certain lenders party thereto. The Financing Agreement provides for a $100 million senior secured term loan (the “Initial Term Loan”), a $25 million senior secured delayed draw term loan facility (the “Delayed Draw Term Loan”), and a $25 million senior secured revolving credit facility (the “Revolving Credit Facility,” and together with the Initial Term Loan and the Delayed Draw Term Loan, the “Credit Facilities”), each of which mature on November 6, 2027. In connection with entering into the Financing Agreement, we repaid in full amounts outstanding and terminated all commitments under the Prior Credit Agreement. The Initial Term Loan was fully funded on November 6, 2023. As of the date of this filing (November 8, 2023), we had not made any borrowings under the Delayed Draw Term Loan or the Revolving Credit Facility.

Borrowings under the Financing Agreement were and may be used for, among other things, the repayment in full of the Prior Credit Agreement, working capital, and other general corporate purposes. Borrowings under the Credit Facilities bear interest at a floating rate, which will be, at our option, either the three-month SOFR rate (subject to a floor of 3.00% and a credit spread adjustment of 0.26161%) (the “Adjusted Term SOFR Rate”) plus an applicable margin of 7.25%, or a base rate plus an applicable margin of 6.25%. A revolving unused line fee of 2.00% is payable monthly in arrears based on the average amount of the undrawn portion of each lender’s revolving credit commitments under the Revolving Credit Facility for the preceding month. A delayed draw unused fee equal to the Adjusted Term SOFR Rate plus a margin of 1.00% is payable monthly in arrears based on the average amount of the undrawn portion of each lender’s delayed draw term loan commitments in respect of the Delayed Draw Term Loan for the preceding month.

Certain of our existing and future material subsidiaries (collectively, the “Guarantors”) are required to guarantee the repayment of our obligations under the Financing Agreement. Our obligations and each of the Guarantors with respect to the Financing Agreement are secured by a pledge of substantially all of our assets and the assets of each of the Guarantors, including, without limitation, accounts receivables, deposit accounts, intellectual property, investment property, inventory, equipment, and equity interests in their respective subsidiaries.

The Financing Agreement contains customary affirmative and negative covenants, including limitations on our and our subsidiaries' ability to incur additional debt, grant or permit additional liens, make investments and acquisitions, merge or consolidate with others, dispose of assets, pay dividends and distributions, pay subordinated indebtedness, and enter into affiliate transactions. In addition, the Financing Agreement contains financial covenants requiring us to maintain a minimum level of liquidity at all times, a maximum consolidated leverage ratio (measured on a quarterly basis), and a minimum asset coverage ratio (measured on a monthly basis). The Financing Agreement also includes events of default customary for facilities of this type and upon the occurrence of such events of default, subject to customary cure rights, all outstanding loans under the Credit Facilities may be accelerated and/or the lenders’ commitments terminated.

As of September 30, 2023, 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 of our credit facilities as of September 30, 2023.

### Other

For information regarding contingencies, see Note 8 to the Notes to the Unaudited Condensed Consolidated Financial Statements contained herein.

#### 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, with certain payments contingent upon achieving an FDA milestone. As of September 30, 2023, we have a remaining liability under this agreement of $1.0 million which is accrued within other current liabilities.

#### 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 paid CGBio an upfront payment of $1.4 million with additional payments contingent upon the achievement of specified development milestones. This agreement was terminated in the third quarter of 2023. No additional milestones were achieved and/or paid per this agreement.

#### Lattus Spine LLC ("Lattus") Contingent Consideration

In connection with the Merger, we assumed a contingent consideration obligation under a purchase agreement between SeaSpine and Lattus executed in December 2022. Under the terms of the agreement, we may be required to make installment payments at certain dates based on future net sales of certain products (the "Lateral Products"). The estimated fair value of the contingent consideration arrangement as of September 30, 2023, was $9.1 million; however, the actual amount ultimately paid could be higher or lower than the estimated fair value of the contingent consideration. As of September 30, 2023, we classified the remaining contingent consideration liability within other long-term liabilities. For additional discussion of this matter, see Note 7 of the Notes to the Unaudited Condensed Consolidated Financial Statements.

### Off-balance Sheet Arrangements

As of September 30, 2023, we did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, cash flows, liquidity, capital expenditures or capital resources that are material to investors.

### 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, 2022.

### 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 described in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2022. There have been no significant changes to our critical accounting estimates during the quarter covered by this report.

### 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.

### 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 financial measures 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.

#### Adjusted EBITDA

EBITDA is a non-GAAP financial measure defined as earnings before interest income (expense), income taxes, depreciation, and amortization. Adjusted EBITDA is the primary metric used by our Chief Operating Decision Maker in managing the business. Adjusted EBITDA represents earnings before interest income (expense), income taxes, depreciation, and amortization and excludes the impact of: share-based compensation, gains and losses related to changes in foreign exchange rates, SeaSpine Merger-related costs, strategic investments, acquisition-related fair value adjustments, legal judgments and settlements, charges related to initial compliance with regulations set forth by the European Union Medical Device Regulation, and certain other items.

#### 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.

## Market risk

As filed, 123 characters.

There have been no material changes to our market risks as disclosed in our Form 10-K for the year ended December 31, 2022.

## Controls and procedures

As filed, 2,023 characters.

### Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) designed to provide reasonable assurance that the information required to be disclosed in reports filed or submitted under the Exchange Act are recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. These include controls and procedures designed to ensure that this information is accumulated and communicated to management, including our Interim Chief Executive Officer and our Interim Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Management, with the participation of the Interim Chief Executive Officer and the Interim Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2023. Based on this evaluation, our Interim Chief Executive Officer and our Interim Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of September 30, 2023.

On January 5, 2023, the Company completed a merger of equals with SeaSpine, whose financial statements reflect total assets and revenues constituting 52% and 35%, respectively, of the condensed consolidated financial statement amounts as of and for the nine months ended September 30, 2023. As permitted by the rules of the SEC, the Company will exclude SeaSpine from its annual assessment of the effectiveness on internal control over financial reporting for the year ending December 31, 2023, the year of acquisition. Management continues to monitor SeaSpine's internal controls over financial reporting.

### Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting that occurred during the quarterly period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 4,559 characters.

There have been no material changes from the risk factors disclosed in "Part I, Item 1A. Risk Factors” in our Form 10-K for the year ended December 31, 2022, or in "Part II, Item 1A. "Risk Factors" in our Form 10-Qs filed for the three months ended March 31, 2023, and six months ended June 30, 2023, except as follows.

*We maintain a $150 million secured revolving credit facility secured by a pledge of substantially all of our property.*

On November 6, 2023, we, as borrower, and certain of our subsidiaries, as guarantors, entered into a Financing Agreement (the “Financing Agreement”) with Blue Torch Finance LLC, as administrative agent and collateral agent (the “Agent”), and certain lenders party thereto. The Financing Agreement provides for a $100 million senior secured term loan (the “Initial Term Loan”), a $25 million senior secured delayed draw term loan facility (the “Delayed Draw Term Loan”), and a $25 million senior secured revolving credit facility (the “Revolving Credit Facility,” and together with the Initial Term Loan and the Delayed Draw Term Loan, the “Credit Facilities”), each of which mature on November 6, 2027. In connection with entering into the Financing Agreement, we repaid in full amounts outstanding and terminated all commitments under our prior credit agreement (which had a maturity date of October 25, 2024). The Initial Term Loan was fully funded on November 6, 2023. As of the date of this filing (November 8, 2023), we had not made any borrowings under the Delayed Draw Term Loan or the Revolving Credit Facility.

Borrowings under the Financing Agreement were and may be used for, among other things, (i) the repayment in full of amount that we had outstanding under our prior credit agreement, (ii) working capital and (iii) other general corporate purposes. Borrowings under the Credit Facilities bear interest at a floating rate, which will be, at our option, either the three-month SOFR rate (subject to a floor of 3.00% and a credit spread adjustment of 0.26161%) (the “Adjusted Term SOFR Rate”) plus an applicable margin of 7.25%, or a base rate plus an applicable margin of 6.25%. A revolving unused line fee of 2.00% is payable monthly in arrears based on the average amount of the undrawn portion of each lender’s revolving credit commitments under the Revolving Credit Facility for the preceding month. A delayed draw unused fee equal to the Adjusted Term SOFR Rate plus a margin of 1.00% is payable monthly in arrears based on the average amount of the undrawn portion of each lender’s delayed draw term loan commitments in respect of the Delayed Draw Term Loan for the preceding month.

Certain of our existing and future material subsidiaries (collectively, the “Guarantors”) are required to guarantee the repayment of our obligations under the Financing Agreement. Our obligations and each of the Guarantors with respect to the Financing Agreement are secured by a pledge of substantially all of our assets and the assets of each of the Guarantors, including, without limitation, accounts receivables, deposit accounts, intellectual property, investment property, inventory, equipment, and equity interests in their respective subsidiaries.

The Financing Agreement contains customary affirmative and negative covenants, including limitations on our and our subsidiaries' ability to incur additional debt, grant or permit additional liens, make investments and acquisitions, merge or consolidate with others, dispose of assets, pay dividends and distributions, pay subordinated indebtedness, and enter into affiliate transactions. In addition, the Financing Agreement contains financial covenants requiring us to maintain a minimum level of liquidity at all times, a maximum consolidated leverage ratio (measured on a quarterly basis), and a minimum asset coverage ratio (measured on a monthly basis). The Financing Agreement also includes events of default customary for facilities of this type and upon the occurrence of such events of default, subject to customary cure rights, all outstanding loans under the Credit Facilities may be accelerated and/or the lenders’ commitments terminated.

We believe that we will be in compliance with the covenants in future fiscal quarters. However, there can be no assurance that we will be in such compliance, and if we are not, the failure to do so could result in an event of default, which could have a material adverse effect on our financial position in the event that we continue to have significant amounts drawn under the facility at such time.

Filed Nov 8, 2023.
Source: SEC EDGAR, the filing index for accession 0000950170-23-061148. Last ingested by Listed: Oct 24, 2026, 14:59 ET. No prices; not investment advice.