# Orthofix Medical Inc.: Form 10-Q for the period ended Mar 31, 2024

- Company: [Orthofix Medical Inc.](/companies/ofix.md) (CIK 884624)
- Form: 10-Q
- Filed: 2024-05-07
- Accepted by EDGAR: May 7, 2024, 08:06 ET
- Period: 2024-03-31
- Accession: 0000950170-24-053966
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/884624/000095017024053966/ofix-20240331.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/884624/000095017024053966/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2024-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2024-01-01 to 2024-03-31 | $188.6m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2024-01-01 to 2024-03-31 | $61.4m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2024-01-01 to 2024-03-31 | $127.2m | us-gaap:GrossProfit |
| Research and development | 3 months, 2024-01-01 to 2024-03-31 | $19.5m | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2024-01-01 to 2024-03-31 | −$29.3m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2024-01-01 to 2024-03-31 | $851.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2024-01-01 to 2024-03-31 | −$36.0m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2024-01-01 to 2024-03-31 | −$0.95 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2024-01-01 to 2024-03-31 | −$0.95 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2024-01-01 to 2024-03-31 | 37,741 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2024-01-01 to 2024-03-31 | −$18.6m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2024-01-01 to 2024-03-31 | $10.5m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2024-03-31 | $27.0m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2024-03-31 | $399.0m | us-gaap:AssetsCurrent |
| Total assets | at 2024-03-31 | $906.0m | us-gaap:Assets |
| Current liabilities | at 2024-03-31 | $150.6m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2024-03-31 | $335.7m | us-gaap:Liabilities |
| Long-term debt | at 2024-03-31 | $115.1m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2024-03-31 | $3.1m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2024-03-31 | $570.3m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 24,725 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, we are 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 more than 60 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 first quarter of 2024 and recent achievements include the following:

- Net sales of $188.6 million, an increase of 7.7% on a reported and 7.5% on a constant currency basis over prior year
- Bone Growth Therapies net sales growth of 10.0%, marking five consecutive quarters with double-digit net sales increases
- U.S. Spine Fixation net sales growth of 16%, driven by distribution expansion and further penetration in existing accounts
- Global Orthopedics net sales growth of 5% on a reported basis, primarily driven by U.S. Orthopedic net sales growth of 23%
- First quarter net loss of $36 million; Non-GAAP adjusted EBITDA of $8 million, an increase of $4.5 million, a 220 basis point expansion 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 March 31, 2024 (%) | 2023 (%) |
| --- | ---: | ---: |
| Net sales | 100.0 | 100.0 |
| Cost of sales | 32.5 | 37.0 |
| Gross profit | 67.5 | 63.0 |
| Sales and marketing | 53.0 | 53.5 |
| General and administrative | 16.8 | 27.9 |
| Research and development | 10.3 | 13.3 |
| Acquisition-related amortization and remeasurement | 2.9 | 2.4 |
| Operating loss | (15.6) | (34.1) |
| Net loss | (19.1) | (34.8) |

### 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 March 31, 2024 | 2023 | Percentage Change Reported | Constant Currency |
| --- | ---: | ---: | ---: | ---: |
| Bone Growth Therapies | $52,477 | $47,714 | 10.0% | 10.0% |
| Spinal Implants, Biologics, and Enabling Technologies | 108,816 | 101,492 | 7.2% | 7.2% |
| Global Spine | 161,293 | 149,206 | 8.1% | 8.1% |
| Global Orthopedics | 27,315 | 25,998 | 5.1% | 3.8% |
| Net sales | $188,608 | $175,204 | 7.7% | 7.5% |

21

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

#### Three months ended March 31, 2024 compared to 2023

Net sales of $161.3 million, an increase of $12.1 million or 8.1%

- Bone Growth Therapies net sales increased $4.8 million, or 10.0%, largely driven by (i) an increase in gross order volumes resulting from our continued investment in our direct sales channel for both the spine and fracture markets and (ii) continued growth and adoption of our AccelStim, which is used in the healing of fresh and nonunion fractures
- Spinal Implants, Biologics, and Enabling Technologies net sales increased $7.3 million, or 7.2%, primarily due to increased sales growth from new and existing high-volume distribution partners, particularly within Spinal Implants, which saw growth in each of our cervical, interbody, and thoracolumbar franchises

Global Orthopedics

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

#### Three months ended March 31, 2024 compared to 2023

Net sales of $27.3 million, an increase of $1.3 million or 5.1%

- U.S. growth of $1.5 million or 22.9%, largely due to investments made in recent product launches, commercial execution within our sales channel, and from our comprehensive surgeon education program
- International sales were flat compared to prior year due to healthcare provider strikes in the UK and timing of certain stocking distributors' orders
- Increase of $0.3 million due to movement in foreign currency exchange rates, which had a favorable impact on net sales in 2024

### Gross Profit

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

|  | Three Months Ended March 31, 2024 | 2023 | % Change |
| --- | ---: | ---: | ---: |
| Net sales | $188,608 | $175,204 | 7.7% |
| Cost of sales | 61,366 | 64,875 | (5.4%) |
| Gross profit | $127,242 | $110,329 | 15.3% |
| Gross margin | 67.5% | 63.0% | 4.5% |

#### Three months ended March 31, 2024 compared to 2023

Gross profit increased $16.9 million

- Increase in gross profit driven primarily by net sales growth across all principal product categories
- Increase of $8.6 million driven by a reduction of amortization of the inventory fair value step-up recognized in the Merger, which is being amortized over the expected sales cycles of the acquired inventory

### Sales and Marketing Expense

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

|  | Three Months Ended March 31, 2024 | 2023 | % Change |
| --- | ---: | ---: | ---: |
| Sales and marketing | $100,043 | $93,791 | 6.7% |
| As a percentage of net sales | 52.9% | 53.5% | (0.6%) |

#### Three months ended March 31, 2024 compared to 2023

Sales and marketing expense increased $6.3 million

- Increase of $3.4 million in variable compensation expenses, including commissions, largely resulting from changes in sales volume and sales mix; this increase was partially offset by realization of synergies achieved following the Merger
- Increase of $2.9 million in depreciation expense related to an increase in deployed instrumentation to support increased sales demand

### General and Administrative Expense

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

|  | Three Months Ended March 31, 2024 | 2023 | % Change |
| --- | ---: | ---: | ---: |
| General and administrative | $31,648 | $48,811 | (35.2%) |
| As a percentage of net sales | 16.8% | 27.9% | (11.1%) |

#### Three months ended March 31, 2024 compared to 2023

General and administrative expense decreased $17.2 million

- Decrease in integration-related expenses of $16.2 million compared to prior year comprised professional and advisor fees and severance and retention costs. In addition, general and administrative expenses were further reduced by the realization of Merger-related synergies
- Decrease of $3.6 million in share-based compensation expense primarily due to accelerated vesting of certain equity-based awards as a result of the Merger recorded in 2023
- Partially offset by an increase of $2.2 million in succession charges as a result of recent changes in executive leadership positions

### Research and Development Expense

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

|  | Three Months Ended March 31, 2024 | 2023 | % Change |
| --- | ---: | ---: | ---: |
| Research and development | $19,492 | $23,307 | (16.4%) |
| As a percentage of net sales | 10.3% | 13.3% | (3.0%) |

#### Three months ended March 31, 2024 compared to 2023

Research and development expense decreased $3.8 million

- Decrease of $2.3 million in costs to comply with the European Union Medical Device Regulations
- Decrease of $1.4 million related to merger and integration-related expenses, primarily related to severance and retention costs. In addition, research and development expenses were further reduced by the realization of Merger-related synergies. This was partially offset by an increase in our clinical spend related to the ongoing clinical study for the M6-C artificial disc

### Acquisition-related Amortization and Remeasurement

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

|  | Three Months Ended March 31, 2024 | 2023 | % Change |
| --- | ---: | ---: | ---: |
| Acquisition-related amortization and remeasurement | $5,396 | $4,134 | 30.5% |
| As a percentage of net sales | 2.9% | 2.4% | 0.5% |

Acquisition-related amortization and remeasurement consists of (i) amortization related to intangible assets acquired through business combinations or asset acquisitions and (ii) remeasurement of related contingent consideration arrangements, which are recognized immediately upon acquisition.

#### Three months ended March 31, 2024 compared to 2023

Acquisition-related amortization and remeasurement increased $1.3 million

- Increase of $1.2 million recognized in 2024 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 March 31, 2024 | 2023 | % Change |
| --- | ---: | ---: | ---: |
| Interest expense, net | $(4,558) | $(1,289) | 253.6% |
| Other income (expense), net | (1,274) | 676 | (288.5%) |

#### Three months ended March 31, 2024 compared to 2023

Interest expense, net increased $3.3 million

- Increase of $3.6 million attributable to an increase in outstanding indebtedness as part of our Financing Agreement in 2024 compared to prior year
- Offset by a decrease 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 recorded in 2023

Other income (expense), net decreased $2.0 million

- Decrease of $2.2 million associated with changes in foreign currency exchange rates, as we recorded a non-cash remeasurement loss of ($1.6 million) in 2024 compared to a gain of $0.6 million in 2023
- Partially offset by a $0.3 million increase associated with the reversal of expected credit loss recognized on the Neo Medical convertible loan

### Income Taxes

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

|  | Three Months Ended March 31, 2024 | 2023 | % Change |
| --- | ---: | ---: | ---: |
| Income tax expense | $851 | $611 | 39.3% |
| Effective tax rate | (2.4%) | (1.0%) | (1.4%) |

#### Three months ended March 31, 2024 compared to 2023

- The increase in tax expense compared to the prior year period was primarily a result of changes in valuation allowances and tax amortization on certain acquired intangibles
- The primary factor affecting our tax expense for the first quarter of 2024 was tax amortization on certain acquired intangibles

### Segment Review

The Company has two reporting segments: Global Spine and Global Orthopedics. The primary metric used in managing the Company is adjusted earnings before interest, tax, depreciation, and amortization ("Adjusted EBITDA", a non-GAAP financial measure) (which is described further in Note 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 March 31, 2024 | 2023 |
| --- | ---: | ---: |
| Global Spine | $19,890 | $14,981 |
| Global Orthopedics | (1,492) | 44 |
| Corporate | (10,733) | (11,821) |
| **Consolidated adjusted EBITDA** | $7,665 | $3,204 |
| Reconciling items: |  |  |
| Interest expense, net | $4,558 | $1,289 |
| Depreciation and amortization | 14,862 | 12,670 |
| Share-based compensation expense | 8,800 | 13,020 |
| Foreign exchange impact | 1,588 | (583) |
| SeaSpine merger-related costs | 4,520 | 20,740 |
| Strategic investments | 120 | 661 |
| Acquisition-related fair value adjustments | 4,217 | 11,636 |
| Interest and loss on investments | (260) | — |
| Litigation and investigation costs | 2,260 | 469 |
| Succession charges | 2,210 | — |
| Medical device regulation | — | 3,629 |
| All other | (41) | — |
| **Loss before income taxes** | $(35,169) | $(60,327) |

### Liquidity and Capital Resources

Cash, cash equivalents, and restricted cash at March 31, 2024, totaled $29.5 million compared to $37.8 million at December 31, 2023. The following table presents the net change in cash, cash equivalents, and restricted cash for the three months ended March 31, 2024, and 2023, respectively:

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

|  | Three Months Ended March 31, 2024 | 2023 | Change |
| --- | ---: | ---: | ---: |
| Net cash used in operating activities | $(18,595) | $(34,020) | $15,425 |
| Net cash provided by (used in) investing activities | (10,867) | 17,084 | (27,951) |
| Net cash provided by financing activities | 21,453 | 15,983 | 5,470 |
| Effect of exchange rate changes on cash | (284) | 221 | (505) |
| Net change in cash and cash equivalents | $(8,293) | $(732) | $(7,561) |

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)*

|  | Three Months Ended March 31, 2024 | 2023 | Change |
| --- | ---: | ---: | ---: |
| Net cash used in operating activities | $(18,595) | $(34,020) | $15,425 |
| Capital expenditures | (10,817) | (11,835) | 1,018 |
| Free cash flow | $(29,412) | $(45,855) | $16,443 |

26

### Operating Activities

Cash flows from operating activities increased $15.4 million

- Favorable change in net loss of $24.9 million
- Unfavorable change of $7.7 million associated with non-cash gains and losses, largely related to amortization of the inventory fair value step up recognized in the Merger, share-based compensation expense, depreciation and amortization expenses, changes in the fair value of contingent consideration, provisions for expected credit losses, and inventory reserve expenses
- Unfavorable change of $1.8 million relating to changes in working capital accounts, primarily attributable to changes in inventories, accounts receivable, and other current liabilities

Two of our primary working capital accounts are accounts receivable and inventory. Days sales in receivables were 61 days at March 31, 2024, compared to 58 days at March 31, 2023 (calculated using first quarter net sales and ending accounts receivable). Inventory turns improved to 1.2 times as of March 31, 2024 compared to 0.7 times as of March 31, 2023.

### Investing Activities

Cash flows from investing activities decreased $28.0 million

- Decrease of $29.4 million attributable to cash acquired as a result of the Merger in 2023
- Partially offset by a decrease in spend of $1.0 million in capital expenditures and $0.5 million in other investing activities in 2024 compared to 2023

### Financing Activities

Cash flows from financing activities increased $5.5 million

- Increase of $6.9 million associated with net borrowing activities related to our credit facilities and from our assumption of SeaSpine's outstanding indebtedness at the time of the Merger
- Partially offset by $1.5 million in debt issuance costs and other financing activities

#### Credit Facilities

On November 6, 2023, we entered into a Financing Agreement (the “Financing Agreement”) with Blue Torch Finance LLC and certain lenders party thereto. The Financing Agreement provides for a $100.0 million senior secured term loan (the “Initial Term Loan”), a $25.0 million senior secured delayed draw term loan facility (the “Delayed Draw Term Loan”), and a $25.0 million senior secured revolving credit facility (the “Revolving Credit Facility,” and together with the Initial Term Loan and the Delayed Draw Term Loan, the “Credit Facilities”), each of which mature on November 6, 2027. As of March 31, 2024, we had $100.0 million outstanding under the Initial Term Loan and $25.0 million outstanding under the Delayed Draw Term Loan.

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). As of March 31, 2024, we were in compliance with all required financial covenants.

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

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

### Other

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

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

Under the terms of a contingent consideration obligation in a purchase agreement assumed in the Merger, 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 March 31, 2024, was $9.7 million; however, the actual amount ultimately paid could be higher or lower than the estimated fair value of the contingent consideration. As of March 31, 2024, 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.

#### Legion Innovations, LLC Asset Acquisition

On December 29, 2022, we entered into a technology assignment and royalty agreement with Legion Innovations, LLC, a U.S.-based medical device technology company, whereby we acquired intellectual property rights to certain assets. As consideration, we paid $0.2 million in January 2023, with additional payments contingent upon reaching future commercialization and revenue-based milestones.

#### IGEA S.p.A Exclusive License and Distribution Agreement

In April 2021, we entered into an Exclusive License and Distribution Agreement (the “License Agreement”) with IGEA S.p.A (“IGEA”), an Italian manufacturer and distributor of bone and cartilage stimulation systems. As consideration for the License Agreement, we agreed to pay up to $4.0 million, of which $0.5 million was paid in 2021, with certain payments contingent upon achieving an FDA milestone.

In May 2022, we achieved FDA approval pertaining to the acquired technology, triggering a contingent consideration milestone obligation of $3.5 million. Of this amount, $1.5 million was paid in 2022, $1.0 million was paid in May 2023, and $1.0 million was accrued within other current liabilities as of March 31, 2024.

### Off-balance Sheet Arrangements

As of March 31, 2024, 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, 2023.

### 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, 2023. 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 U.S. 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 U.S. 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 U.S. GAAP measures, but is most commonly used by management to analyze net sales without the impact of changes in foreign currency rates.

#### Adjusted EBITDA

Adjusted EBITDA represents earnings before interest income (expense), income taxes, depreciation, and amortization and excludes the impact of share-based compensation, gains and losses related to changes in foreign exchange rates, charges related to the SeaSpine merger and other strategic investments, acquisition-related fair value adjustments, interest and gains and losses on investments, litigation and investigation costs, charges related to initial compliance with regulations set forth by the European Union Medical Device Regulation, and succession charges. Adjusted EBITDA is the primary metric used by our Chief Operating Decision Maker in managing the business.

#### Free Cash Flow

Free cash flow is 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, 2023.

## Controls and procedures

As filed, 7,946 characters.

### Evaluation of Disclosure Controls and Procedures

At the end of the period covered by this report, under the supervision and with the participation of our management, including our President and Chief Executive Officer and our Chief Financial Officer, we performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. As described below, as of December 31, 2023, management identified a material weakness in our internal control over financial reporting, which is an integral component of our disclosure controls and procedures. Our remediation efforts with respect to this material weakness are continuing, and we have determined that this material weakness is continuing as of March 31, 2024, as there have been no further control instances as of this date to conclude that the applicable controls have been remediated. As a result, our President and Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as of March 31, 2024.

### Material Weakness in Internal Control over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in the Exchange Act Rule 13a-15(f)). The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding the prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Internal control over financial reporting is designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the preparation of reliable financial statements for external purposes in accordance with U.S. GAAP. Because of the inherent limitations in any internal control, no matter how well designed, misstatements may occur and not be prevented or detected. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation. Further, the evaluation of the effectiveness of internal control over financial reporting was made as of a specific date, and continued effectiveness in future periods is subject to the risks that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies and procedures may decline.

In connection with the preparation and filing of the Annual Report for the year ended December 31, 2023 (the “2023 Annual Report”), the Company’s management, including our President and Chief Executive Officer and our Chief Financial Officer, conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2023, based on the framework set forth in “Internal Control—Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Based on its evaluation, the Company’s management concluded that our internal control over financial reporting was not effective as of December 31, 2023, due to a material weakness in the design and operation of certain management review controls pertaining to business combinations and assessing recoverability of goodwill, resulting from insufficient evidence supporting the precision over the determination of certain estimates and insufficient evidence supporting the operating effectiveness of the associated review controls. This material weakness did not result in any misstatements to the consolidated financial statements or disclosures.

Notwithstanding the material weakness, management has concluded that the financial statements included elsewhere in the 2023 Annual Report presented fairly, in all material respects, our financial position, results of operations, and cash flows in conformity with U.S. GAAP.

### Remediation of the Material Weakness

Our management has worked, and continues to work, to strengthen our disclosure controls and procedures and internal control over financial reporting in connection with the material weakness described above. Subsequent to the identification of the material weakness, the Company has better aligned its current finance department staff to enhance the review and oversight of the accounting and finance functions. The Company has also added several key positions in its finance department, including a new Chief Financial Officer, a Senior Vice President of Finance and Strategy, and other supporting roles with backgrounds in financial reporting, technical accounting, and financial planning and analysis. The Company continues to implement the remediation efforts described herein. These remediation efforts are being undertaken under the supervision of the Audit and Finance Committee of our Board of Directors.

We are in the process of implementing and continuing to refine the plan for remediation of the ineffective internal control over financial reporting described above. In addition, we have designed and are implementing the specific remediation initiatives described below:

- Evaluating skill set gaps and hiring additional accounting, finance, and/or financial reporting personnel, as needed, with relevant public company accounting and financial reporting experience to develop and implement additional policies, procedures, and controls as it pertains to business combinations, asset acquisitions, and/or other processes heavily dependent on the usage of prospective financial information;
- Providing ongoing training for key personnel responsible for internal control over financial reporting; and
- Enhancing or designing and implementing controls over the completeness and accuracy of information used in financial reporting and forecasted financial results, particularly as it relates to the accounting for business combinations and goodwill impairment assessment.

We believe the remediation steps outlined above have improved and will continue to improve the effectiveness of our internal control over financial reporting. We are committed to remediating the material weakness and we are making progress in that effort. The actions we are taking are subject to ongoing senior management review, as well as oversight from the Audit and Finance Committee. When fully implemented and operational, we believe the measures described above will remediate the underlying causes of the control deficiencies that gave rise to the material weakness and will strengthen our internal control over financial reporting. However, remediation efforts are expected to continue beyond the quarter ended March 31, 2024. Further, we will not be able to fully remediate this material weakness until these steps have been completed and have been operating effectively for a sufficient period of time. We may also identify additional measures that may be required to remediate the material weakness in our internal control over financial reporting, necessitating further action.

### Changes in Internal Control over Financial Reporting

Other than the remediation activities described above, there have not been any changes in our internal control over financial reporting during the quarterly period covered by this report that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 157 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, 2023.

Filed May 7, 2024.
Source: SEC EDGAR, the filing index for accession 0000950170-24-053966. Last ingested by Listed: Nov 4, 2026, 16:35 ET. No prices; not investment advice.