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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-K

 

☒

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

For the fiscal year ended December 31, 2021

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)

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

 

Common Stock, $0.10 par value

 

OFIX

 

Nasdaq Global Select Market

(Title of Class)

 

(Trading Symbol)

 

(Name of Exchange on Which Registered)

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☒    No  ☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ☐    No  ☒

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, a smaller reporting company, or 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

 

☐

 

Emerging Growth Company

 

☐

Non-accelerated filer

 

☐

  

Smaller reporting 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. §7262(b)) by the registered public accounting firm that prepared or issued its audit report.     ☒

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

The aggregate market value of registrant’s common stock held by non-affiliates, based upon the closing price of the common stock on the last business day of the fiscal quarter ended June 30, 2021, as reported by the Nasdaq Global Select Market, was approximately $788.9 million.

As of February 22, 2022, 19,852,951 shares of common stock were issued and outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

Certain sections of the registrant’s definitive proxy statement to be filed with the Commission in connection with the Orthofix Medical Inc. 2021 Annual General Meeting of Shareholders are incorporated by reference in Part III of this Annual Report.

 

 

 

 

 

 

Orthofix Medical Inc.

Form 10-K for the Year Ended December 31, 2021

Table of Contents

 

 

  

 

  

Page

PART I

  

 

  

 

Item 1.

  

Business

  

4

Item 1A.

  

Risk Factors

  

20

Item 1B.

  

Unresolved Staff Comments

  

33

Item 2.

  

Properties

  

33

Item 3.

  

Legal Proceedings

  

33

Item 4.

  

Mine Safety Disclosure

  

34

PART II

  

 

  

 

Item 5.

  

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

  

35

Item 6.

  

Selected Financial Data

  

36

Item 7.

  

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

  

37

Item 7A.

  

Quantitative and Qualitative Disclosures About Market Risk

  

50

Item 8.

  

Financial Statements and Supplementary Data

  

51

Item 9.

  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

  

51

Item 9A.

  

Controls and Procedures

  

51

Item 9B.

  

Other Information

  

54

Item 9C.

 

Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

  

54

PART III

  

 

  

 

Item 10.

  

Directors, Executive Officers and Corporate Governance

  

54

Item 11.

  

Executive Compensation

  

54

Item 12.

  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

  

54

Item 13.

  

Certain Relationships and Related Transactions, and Director Independence

  

54

Item 14.

  

Principal Accountant Fees and Services

  

54

PART IV

  

 

  

 

Item 15.

  

Exhibits and Financial Statement Schedules

  

55

Item 16.

 

Form 10-K Summary

 

58

 

 

 

 

 

 

Forward-Looking Statements

This Annual 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. Forward-looking statements include, but are not limited to, statements about:

 

•

our intentions, beliefs, and expectations regarding our operations, sales, expenses, and future financial performance;

 

•

our operating results;

 

•

our plans for future products and enhancements of existing products;

 

•

anticipated growth and trends in our business;

 

•

the timing of and our ability to maintain and obtain regulatory clearances or approvals;

 

•

our belief that our cash and cash equivalents, investments, and access to our revolving line of credit will be sufficient to satisfy our anticipated cash requirements;

 

•

our expectations regarding our revenues, customers, and distributors;

 

•

our expectations regarding our costs, suppliers, and manufacturing abilities;

 

•

our beliefs and expectations regarding our market penetration and expansion efforts;

 

•

our expectations regarding the benefits and integration of acquired businesses and/or products and our ability to make future acquisitions and successfully integrate any such future-acquired businesses;

 

•

our anticipated trends and challenges in the markets in which we operate;

 

•

the continuing and/or future effects of the COVID-19 pandemic on our sales and business operations; and

 

•

our expectations and beliefs regarding and the impact of investigations, claims and litigation.

These forward-looking statements are not guarantees of future performance and involve risks, uncertainties, estimates, and assumptions that are difficult to predict. Any or all forward-looking statements that we make may turn out to be wrong (due to inaccurate assumptions that we make or otherwise) and our actual outcomes and results may differ materially from those expressed in these forward-looking statements. Potential risks and uncertainties that could cause actual results to differ materially include, but are not limited to, those set forth in Part I, Item 1A under the heading “Risk Factors”, Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere throughout this Annual Report and in any other documents incorporated by reference to this Annual Report. 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 update, and expressly disclaim any duty to update, our forward-looking statements, whether as a result of circumstances or events that arise after the date hereof, new information, or otherwise.

Trademarks

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

 

 

 

 

 

 

PART I

Item 1.

Business

In this Annual Report, the terms “we,” “us,” “our,” “Orthofix,” and “the Company” refer to the combined operations of Orthofix Medical Inc. and its consolidated subsidiaries and affiliates, unless the context requires otherwise.

Company Overview

We are a global medical device company with a spine and orthopedics focus. Our mission is to deliver innovative, quality-driven solutions as we partner with health care professionals to improve patient mobility. Headquartered in Lewisville, Texas, our spine and orthopedic products are distributed in more than 60 countries via our sales representatives and distributors.

We have administrative and training facilities in the United States (“U.S.”), Italy, Brazil, the United Kingdom (“U.K.”), France, and Germany, and manufacturing facilities in the U.S. and Italy. We directly distribute products in the U.S., Italy, the U.K., Germany, and France. In several of these and other markets, we also distribute our products through independent distributors.

The Company originally was formed in 1987 in Curaçao as “Orthofix International N.V.” In 2018, the Company completed a change in its jurisdiction of organization from Curaçao to the State of Delaware (the “Domestication”) and changed its name to “Orthofix Medical Inc.” As a result, it is now a corporation existing under the laws of the State of Delaware.

Available Information and Orthofix Website

Our filings with the Securities and Exchange Commission (“SEC”), including our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements for Meetings of Shareholders, any registration statements, and amendments to those reports, are available free of charge on our website as soon as reasonably practicable after they are filed with, or furnished to, the SEC. Information on our website or connected to our website is not incorporated by reference into this Annual Report. Our website is located at www.orthofix.com. Our SEC filings are also available on the SEC website at www.sec.gov.

COVID-19 Update and Outlook

Refer to Part II, Item 7 of this Annual Report under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” for a discussion of the effects of the global COVID-19 pandemic on our business in 2021 and of its expected impact in 2022 and beyond.

Business Segments

We manage our business by our two reporting segments, Global Spine and Global Orthopedics, which account for 77% and 23%, respectively, of our total net sales in 2021. The chart below presents net sales, which includes product sales and marketing service fees, by reporting segment for each of the years ended December 31, 2021, 2020, and 2019.

4

 

 

Financial information regarding our reportable business segments and certain geographic information is included in Part II, Item 7 of this Annual Report under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Note 16 of the Notes to the Consolidated Financial Statements in Item 8 of this Annual Report.

Global Spine

Within the Global Spine segment, we provide implantable medical devices, biologics, and other regenerative solutions which aim to restore the quality of life of patients suffering from diseases and traumas of the spine. We offer a variety of treatment solutions that uniquely incorporate multiple treatment modalities, such as mechanical, biological, and electromagnetic modes, to achieve desired clinical outcomes.

Global Spine Strategy

Our strategy for the Global Spine segment is to drive business growth through organic and inorganic innovation, physician collaboration, global market expansion, and partnerships with dedicated and high-performing commercial sales channels. Growth initiatives include:

 

•

Continued expansion of our presence in the U.S cervical disc replacement market through surgeon training, publication of clinical evidence, patient education, and sales channel support

 

•

A regular cadence of new product launches supporting our spine implant,  biologics, and bone growth therapies portfolios

 

•

Ongoing, global sales channel optimization

 

•

Reinforcement of our bone growth stimulation business through the collection and dissemination of clinical evidence, and the delivery of new and novel value-added services

 

•

Conducting clinical research to support and broaden our spine implant, biologics, and bone growth stimulation portfolios

 

•

Acquiring or licensing products, technologies, and companies to further expand the spine portfolio

 

•

Attracting, developing, and retaining key talent

Global Spine Principal Products

The Global Spine reporting segment is largely represented by three principal product categories, i) Bone Growth Therapies, ii) Spinal Implants, and iii) Biologics. Each of these product categories are further described below:

Bone Growth Therapies

Within the Bone Growth Therapies product category, we manufacture, distribute, and provide support services for market-leading bone growth stimulation devices that enhance bone fusion. These class III medical devices are indicated as an adjunctive, noninvasive treatment to improve fusion success rates in the cervical and lumbar spine as well as a therapeutic treatment for non-spinal, appendicular fractures that have not healed (nonunions). These devices utilize our patented pulsed electromagnetic field (“PEMF”) technology, the safety and efficacy of which is supported by basic mechanism of action data in the scientific literature, as well as published data from level one randomized controlled clinical trials. We sell these products almost exclusively in the U.S. using distributors and direct sales representatives to provide our devices to healthcare providers and their patients.

Spinal Implants

Within the Spinal Implants product category, we design, develop, and market a portfolio of motion preservation and fixation implant products used in surgical procedures of the spine. We distribute these products globally through a network of distributors and sales representatives to sell spine products to facilities that conduct spine care to include hospitals, ambulatory surgery centers, out-patient facilities (“spine care facilities”) and to surgeons who treat patients in need.

Biologics

Within the Biologics product category, we offer a portfolio of products and tissue forms that allow physicians to successfully treat a variety of spinal and orthopedic conditions. We market tissue forms provided by MTF Biologics (“MTF”) to spine care facilities and surgeons, primarily in the U.S., through a network of independent distributors and sales representatives. Our partnership with MTF allows us to exclusively market the Trinity ELITE, Trinity Evolution, fiberFUSE, and fiberFUSE Strip tissue forms for musculoskeletal defects to enhance bony fusion.

5

 

In addition, we market regenerative non-tissue biologic solutions derived from synthetic materials. Our Opus MG Set is our current synthetic, biologic offering.

The following table and discussion identifies our principal Global Spine products by trade name and describes their primary applications:

 

Product

  

Primary Application

 

 

Bone Growth Therapies Products

 

 

 

 

 

CervicalStim Spinal Fusion Therapy

  

PEMF non-invasive cervical spinal fusion therapy used to enhance bone growth

 

 

SpinalStim Spinal Fusion Therapy

  

PEMF non-invasive lumbar spinal fusion therapy used to enhance bone growth

 

 

PhysioStim Bone Healing Therapy

  

PEMF non-invasive appendicular skeleton healing therapy used to enhance bone growth in nonunion fractures

 

 

 

AccelStim

  

LIPUS healing therapy used to enhance bone growth in fresh, long-bone fractures

 

 

 

Spinal Implants Products

 

 

 

 

 

M6-C Artificial Cervical Disc

  

A next-generation artificial disc developed to replace an intervertebral disc damaged by cervical disc degeneration; the only artificial cervical disc that mimics the anatomic structure of a natural disc by incorporating an artificial viscoelastic nucleus and fiber annulus into its design

 

 

 

M6-L Artificial Lumbar Disc

  

A next-generation artificial disc developed to replace an intervertebral disc damaged by lumbar disc degeneration; the only artificial lumbar disc that mimics the anatomic structure of a natural disc by incorporating an artificial viscoelastic nucleus and fiber annulus into its design

 

 

 

FIREBIRD / FIREBIRD NXG Spinal Fixation System

  

A system of rods, crossbars, and modular pedicle screws designed to be implanted during a posterior lumbar spine fusion procedure

 

 

 

FORZA XP Expandable Spacer System

  

A titanium expandable spacer system for posterior lumbar interbody fusion (“PLIF”) and transforaminal lumbar interbody fusion (“TLIF”) procedures featuring a large graft window with the ability to pack post expansion in situ

 

 

 

FORZA PEEK / Titanium Composite (“PTC”) Spacer System

  

A posterior lumbar interbody with 3D printed porous titanium end plates that may promote bone ingrowth and a polyetheretherketones (“PEEK”) core to maintain imaging characteristics

 

 

 

FORZA Spacer System

 

PEEK interbody devices for PLIF and TLIF procedures

 

 

 

FORZA Ti Spacer System

 

Fully 3D printed titanium devices for PLIF and TLIF procedures

 

 

 

CENTURION Posterior Occipital Cervico-Thoracic (“POCT”) System

 

A multiple component system comprised of a variety of non-sterile, single use components made of titanium alloy or cobalt chrome that allow the surgeon to build a spinal implant construct

 

 

PHOENIX Minimally Invasive Spinal Fixation System

 

A multi-axial extended reduction screw body used with the Firebird Spinal Fixation System designed to be implanted during a posterior thoracolumbar spine fusion procedure

 

 

 

CONSTRUX Mini PTC Spacer System

  

An anterior cervical interbody with 3D printed porous titanium end plates that may promote bone ingrowth and a PEEK core to maintain imaging characteristics

 

 

 

CONSTRUX Mini Ti Spacer System

 

Fully 3D printed titanium anterior cervical interbody spacer system

 

 

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Product

  

Primary Application

CETRA Anterior Cervical Plate System

  

An anterior cervical plate system offering a low profile plate with an intuitive locking mechanism, large graft windows, a high degree of screw angulation, and simplified instrumentation

 

 

JANUS Midline Fixation Screw

  

An addition to the Firebird Spinal Fixation System designed to achieve more cortical bone purchase in the medial to lateral trajectory, when compared to traditional pedicle screws, and that provides surgeons with the option of a midline approach

 

 

 

LONESTAR Cervical Stand Alone

  

A stand-alone spacer system designed to provide the biomechanical strength to a traditional or minimal invasive anterior cervical discectomy and fusion procedure with less disruption of patient anatomy and to preserve the anatomical profile

 

 

PILLAR SA PTC PEEK Spacer System

  

A standalone anterior lumbar interbody fusion lumbar interbody with 3D printed porous titanium end plates that may promote bone ingrowth and a PEEK core to maintain imaging characteristics

 

 

 

SKYHAWK Lateral Interbody Fusion System & Lateral Plate System

 

Provides a complete solution for the surgeon to perform a lateral lumbar interbody fusion, an approach to spinal fusion in which the surgeon accesses the intervertebral disc space using a surgical approach from the patient’s side that disturbs fewer structures and tissues

 

 

 

FIREBIRD SI

  

A minimally invasive screw system that is intended for fixation of sacroiliac joint disruptions in skeletally mature patients

 

 

 

Biologics Technologies

 

 

 

 

 

Trinity ELITE

  

A fully moldable allograft with viable cells used during surgery that is designed to aid in the success of a spinal fusion or bone fusion procedure

 

 

Trinity Evolution

  

An allograft with viable cells used during surgery that is designed to aid in the success of a spinal fusion or bone fusion procedure

 

 

AlloQuent Structural Allografts (“AlloQuent”)

  

Interbody devices made of cortical bone (or cortical-cancellous grafts) that are designed to restore the space that has been lost between two or more vertebrae due to a degenerated disc during a spinal fusion procedure

 

 

Collage Synthetic Osteoconductive Scaffold

  

An osteoconductive scaffold and a bone graft substitute product comprised of beta tri-calcium phosphate and type 1 bovine collagen, available in both putty and strip formulations

 

 

fiberFUSE

  

An allograft comprised of a mixture of cancellous bone and demineralized cortical bone that creates a natural scaffold for revascularization, cellular ingrowth, and new bone formation

 

 

O-Genesis Graft Delivery

  

A complete bone graft delivery system designed to deliver allograft, autograft, or synthetic bone graft to all orthopedic sites, which is provided in a sterile, single-use form

 

 

VersaShield

  

A thin hydrophilic amniotic membrane designed to serve as a wound or tissue covering for a variety of surgical demands

 

 

 

Opus Mg

  

Injectable, modable, and biocompatible bone void filler

Bone Growth Therapies — Spinal Therapy

Our bone growth therapy devices used in spinal applications are designed to enhance bone growth and the success rate of certain spinal fusions by stimulating the body’s own natural healing mechanism post-surgically. These non-invasive portable devices are intended to be used as part of a home treatment program prescribed by a physician.

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We offer two spinal fusion therapy devices: the SpinalStim and CervicalStim devices. Our stimulation products use a PEMF technology designed to enhance the growth of bone tissue following surgery and are placed externally over the site to be healed. Research data shows that our PEMF signal induces mineralization and results in a process that stimulates new regeneration at the spinal fusion site. Some spine fusion patients are at greater risk of not achieving a solid fusion of new bone around the fusion site. These patients typically have one or more risk factors such as smoking, obesity, or diabetes, or their surgery involves the revision of a failed fusion or the fusion of multiple levels of vertebrae in one procedure. For these patients, post-surgical bone growth therapy has been shown to significantly increase the probability of fusion success.

The SpinalStim device is a non-invasive spinal fusion stimulator system designed for the treatment of the lumbar region of the spine. The device uses proprietary technology and a wavelength to generate a PEMF signal. The U.S. Food and Drug Administration (the “FDA”) has approved the SpinalStim system as a spinal fusion adjunct to increase the probability of fusion success and as a non-operative treatment for salvage of failed spinal fusion at least nine months post-operatively.

Our CervicalStim product remains the only FDA-approved bone growth stimulator on the market indicated for use as an adjunct to cervical spine fusion surgery. It is indicated for patients at high-risk for non-fusion.

The SpinalStim and CervicalStim systems are accompanied by an application for mobile devices called STIM onTrack. The mobile app includes a first-to-market feature that enables physicians to remotely view patient adherence to prescribed treatment protocols and patient reported outcome measures. Designed for use with smartphones and other mobile devices, the STIM onTrack tool helps patients follow their prescription with daily treatment reminders and a device usage calendar. The app is free and available through the iTunes App Store.

Bone Growth Therapies — Orthopedic Therapy

Our PhysioStim bone healing therapy products use PEMF technology similar to that used in our spine stimulators. The primary difference is that the PhysioStim devices are designed for use on the appendicular skeleton.

A bone’s regenerative power results in most fractures healing naturally within a few months. However, in the presence of certain risk factors, some fractures do not heal or heal slowly, resulting in “nonunions.” Traditionally, orthopedists have treated such nonunion conditions surgically, often by means of a bone graft with fracture fixation devices, such as bone plates, screws, or intramedullary rods. These are examples of “invasive” treatments. Our patented PhysioStim bone healing therapy products are designed to use a low level of PEMF signals to noninvasively activate the body’s natural healing process. The devices are anatomically designed, allowing ease of placement, patient mobility, and the ability to cover a large treatment area.

Similar to our SpinalStim and CervicalStim systems, the PhysioStim device is also accompanied by the STIM onTrack mobile app, enabling physicians treating patients with nonunion fractures to remotely view and assess patient adherence to prescribed treatment protocols and patient reported outcome measures.

Spinal Implants — Motion Preservation Solutions

In 2018, we acquired Spinal Kinetics Inc., a privately held developer and manufacturer of artificial cervical and lumbar discs, namely the M6-C cervical and M6-L lumbar artificial discs, which are used to treat patients suffering from degenerative disc disease of the spine. The M6 discs are the only FDA-approved artificial discs that mimic the anatomic structure of a natural disc by incorporating an artificial viscoelastic nucleus and fiber annulus into their design. Like a natural disc, this unique construct allows for shock absorption at the implanted level, as well as provides a controlled range of motion when the spine transitions in its combined complex movements. Both discs have European Commission CE mark approval and prior to 2019, had historically been exclusively distributed outside the U.S. In February 2019, we received FDA approval of the M6-C artificial cervical disc to treat patients with a single-level cervical disc degeneration. We released the M6-C artificial cervical disc in the U.S. in 2019 through a controlled market launch accompanied by an extensive training and education curriculum for surgeons. The M6-C disc has become our leading spinal implant device and contributed significantly to our growth in 2021. In addition, we have initiated a U.S. 2-level investigational device exemption (“IDE”) study for the M6-C artificial cervical disc.

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Spinal Implants — Spinal Repair Solutions

We provide a wide array of implants designed for use primarily in cervical, thoracic, and lumbar fusion surgeries. These implants are made of either metal or a thermoplastic compound called PEEK. The majority of the implants that we offer are made of titanium metal. The Firebird Spinal Fixation System, the Phoenix Minimally Invasive Spinal Fixation System, and the Centurion POCT Systems are sets of rods, cross connectors, and screws that are implanted during posterior fusion procedures. The Firebird Modular and pre-assembled Spinal Fixation Systems are designed to be used in either open or minimally-invasive posterior lumbar fusion procedures with our ProView MAP System. To complement our plates, rods, and screw fixation options, we offer an entire portfolio of cervical and thoracolumbar PEEK interbody devices within our Pillar and Forza product lines.  This interbody portfolio includes two stand-alone devices, Lonestar and Pillar SA, as well as the Construx Mini PTC system, a novel titanium composite spacer, which offers a superior alternative to other plasma spray coated options currently available on the market.  We also offer specialty plates and screws that are used in less common procedures, and as such, are not manufactured by many device makers.  

Biologics — Regenerative Solutions

The premier biologics tissues we market include the Trinity ELITE and Trinity Evolution tissue forms, which are cortical cancellous allografts that retain the inherent growth factors and viable cells found in bone. They are used during surgery in the treatment of musculoskeletal defects for bone reconstruction and repair. These allografts are intended to offer a viable alternative to an autograft procedure, as harvesting autograft has been shown to add risk of an additional surgical procedure and related patient discomfort in conjunction with a repair surgery.

The fiberFUSE tissue is the newest biologics tissue form with handling characteristics analogous to the Trinity ELITE product without compromising bone content. It provides an advanced demineralized bone offering that leverages fiber technology with the advantages of ingrowth that cancellous bone provides and expands the offering to address a broader scope of surgical applications. This tissue offering was developed by MTF in close collaboration with Orthofix to expand our portfolio and provides an opportunity to serve a great number of clinical indications addressed by surgeons.

We receive marketing fees through our collaboration with MTF for the Trinity ELITE, Trinity Evolution, fiberFUSE, AlloQuent, and VersaShield tissues. MTF processes the tissues, maintains inventory, and invoices hospitals, surgery centers, and other points of care for service fees, which are submitted by customers via purchase orders. We have exclusive worldwide rights to market the Trinity ELITE and Trinity Evolution tissue forms and exclusive rights to market the fiberFUSE and AlloQuent tissues in the U.S. We market the VersaShield tissue under a private label brand via a non-exclusive marketing agreement for the tissue form.

To date, our Biologics products are offered primarily in the U.S. market due in part to restrictions on providing U.S. human donor tissue in other countries.

Future Product Applications

We remain very active with multiple internal developments to support future, new technology commercialization efforts. These new technologies will apply to both the cervical and thoracolumbar spinal anatomy. In addition, we remain active in evaluating external licensing and acquisition opportunities to add implant, biologics, and other emerging technologies to our spine portfolio. We expect that the contribution of new, internally developed technologies and undefined external acquisitions will be the primary driver of future growth.

Regarding our Bone Growth Therapy business, we have sponsored research at the University of Pennsylvania, Cleveland Clinic, New York University, and University of California San Francisco, where scientists conducted animal and cellular studies to identify the mechanisms of action of our PEMF signals on bone and tendon and efficacy of healing. From these efforts, many studies have been published in peer-reviewed journals. Among other insights, the studies illustrate positive effects of PEMF on callus formation and bone strength as well as proliferation and differentiation of cells involved in regeneration and healing. Furthermore, we believe that the research work with Cleveland Clinic and the University of Pennsylvania, allowing for characterization and visualization of the Orthofix PEMF waveform, is paving the way for signal optimization for a variety of new applications and indications. This collection of pre-clinical data, along with additional clinical data, could represent new clinical indication opportunities for our regenerative stimulation solutions. In addition, we currently have research and a clinical study underway to identify potential clinical indications for treating rotator cuff tears and we also have initiated a U.S. 2-Level IDE study for the M6-C artificial cervical disc.

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Global Orthopedics

The Global Orthopedics reporting segment offers products and solutions that allow physicians to successfully treat a variety of orthopedic conditions unrelated to the spine. This reporting segment specializes in the design, development, and marketing of orthopedic products used in fracture repair, deformity correction, and bone reconstruction procedures. We distribute these products through a global network of distributors and sales representatives to sell our orthopedic products to hospitals and healthcare providers.

Global Orthopedics Strategy

Our strategy for the Global Orthopedics reporting segment is to continue to offer pioneering solutions to the most complex reconstructive problems related to trauma, adult and pediatric limb reconstruction and extremities along the entire treatment pathway.

Our key strategies in this segment are:

 

•

Global market and product focus on:

 

o

Adult and pediatric limb reconstruction

 

o

Adult and Pediatric deformity correction

 

o

Complex periarticular fracture reconstruction

 

•

Expand our position as the worldwide leader in complex deformity and limb reconstruction, including both internal and external solutions, through a patient-centric approach and digital treatment journey

 

•

Promote the advantages of our JuniOrtho family of pediatric product portfolio and support tools

 

•

Leverage our cross product digital platform, a uniquely developed pre and post planning digital platform called OrthoNext to allow our clinicians to pre-plan surgery for patients before surgery to save time, dose, and start surgeries with a greater degree of confidence, and follow up post operatively to evaluate their chosen surgical plan success

 

•

Leverage the market appeal and acceptance of our software platforms: HEX-ray and OrthoNext

 

•

Build on our historical position as a company highly focused on complex and challenging conditions to be at the forefront of innovation in helping surgeons and patients alike in the management of the Charcot foot and ankle

 

•

Within the orthopedic trauma segment, focus on open and complex fracture management with additional attention to joint pathologies, like dislocations, of upper and lower limbs; we aim to develop new international business opportunities within trauma, becoming a trusted partner of Non-governmental Organizations (“NGOs”) and Military Medicine Organizations

 

•

Collaborate with physicians and healthcare partners to improve patients’ live through technology, digital transformation, clinical evidence, and our industry-leading medical education programs, such as Orthofix Academy

 

•

Continue the strong pace of new product launches

 

•

Acquire or license products, technologies, and companies to support these market opportunities.

Global Orthopedics Focus Products

Global Orthopedics offers a comprehensive line of limb reconstruction and complex deformity correction technologies. We provide innovative and minimally invasive extremity solutions to help surgeons improve their patient’s quality of life, which are designed to address the lifelong bone and joint health needs of patients of all ages. In addition, our well-rounded product lines offer internal and external fixation solutions for pediatrics, limb reconstruction, trauma, and foot & ankle specialties.

Our fracture repair solutions comprise a wide range of devices designed for specific anatomical areas. The philosophy underlying these devices is to provide adequate stability and to allow for early functional recovery, thereby improving patients’ quality of life. Our goal is to offer devices that enable a simple, standardized approach for reproducible results.

Our trauma products consist of a comprehensive portfolio of ready-to-use, sterile, dedicated implant kits designed for a wide range of anatomical sites.

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The following table and discussion identifies the principal Global Orthopedics products by trade name and describes their primary applications:

 

Product

  

Primary Application

 

 

TrueLok

  

A surgeon-designed, lightweight external fixation system for trauma, limb lengthening, and deformity correction, which consists of circular rings and semi-circular external supports centered on the patient’s limb and secured to the bone by crossed, tensioned wires, and half pins

 

 

 

TrueLok Hexapod System (“TL-HEX”)

  

A hexapod external fixation system for trauma and deformity correction with associated software, designed as a three-dimensional bone segment reposition module to augment the previously developed TrueLok frame. The system consists of circular and semi-circular external supports, secured to the bones by wires and half pins and interconnected by six struts, which allows multi-planar adjustment of the external supports. The rings’ positions are adjusted either rapidly or gradually in precise increments to perform bone segment repositioning in three-dimensional space

 

 

 

FITBONE Intramedullary Limb-Lengthening System

  

An intramedullary lengthening system intended for limb lengthening of the femur and tibia, surgically implanted in the bone through a minimally invasive procedure; it includes an external telemetry control set that manages the distraction process

 

 

 

JuniOrtho Pediatric Portfolio

  

A brand identity for extremity fixation pediatric products. JuniOrtho is a range of products and resources dedicated to pediatrics and young adults with bone fractures and deformities that brings together our expertise and products in the pediatric space. It consists of a 360° approach to the patient journey with dedicated tools to treat all stages of the healing process: collaterals, educational games, software applications, and patient apps for post-operative management

Our JuniOtho portfolio includes, among the others:

- A complete line of nailing systems for trauma and limb reconstruction, including our elastic nail, MJ-FLEX, and our rigid intramedullary nail for adolescents, Agile Nail;

- The Galaxy Fixation Pediatric System;

- The eight-Plate Guided Growth System (“eight-Plate”) and the eight-Plate Guided Growth System+ (“eight-Plate Plus”);

- The JuniOrtho Plating System

 

 

 

Galaxy Fixation System

  

A pin-to-bar system for temporary and definitive fracture fixation, in the upper and lower limbs. The system incorporates a streamlined combination of clamps, with both pin-to-bar and bar-to-bar coupling capabilities, offering a complete range of applications, including specific anatomic units for the shoulder, elbow and wrist

 

 

 

Galaxy Fixation Shoulder

  

A unique solution for the treatment of proximal humeral fractures

 

 

 

Ankle Hindfoot Nail (“AHN”)

  

A differentiated solution for hindfoot fusions

 

 

 

G-BEAM Fusion Beaming System

 

A system designed to address the specific demands of advanced deformity and trauma reconstructions of foot and ankle applications, such as Charcot, requiring fusion of the medial and/or lateral columns, with or without corrective osteotomies as well as for joint fusions within the mid- and hindfoot

 

 

 

OSCAR

  

An ultrasonic powered surgical system for revision arthroplasty

 

 

 

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Product

  

Primary Application

 

 

External Fixators

  

External fixation, including our limb-lengthening systems, ProCallus, XCaliber, Pennig, Radiolucent Wrist Fixators, and Calcaneal Fixator

 

 

eight-Plate and eight-Plate Plus

  

The first and a market-leading system for gradual correction of the growth plate in pediatric patients

 

 

LRS advanced Limb Reconstruction System

 

An external fixation for limb lengthening and corrections of deformity, which uses callus distraction to lengthen bone in a variety of procedures, including monofocal lengthening and corrections of deformity; its multifocal procedures include bone transport, simultaneous compression and distraction at different sites, bifocal lengthening, and correction of deformities with shortening

 

 

 

OrthoNext Digital Platform

  

A digital platform software developed specifically for use with the JuniOrtho Plating System, which enables the surgeon to accurately plan the osteotomy position to visualize the implant in relation to the anatomy

 

 

 

-HEX-ray Module

  

Part of the OrthoNext offering, an innovative software designed to facilitate pre-operative planning and post-operative monitoring with the TL-HEX software. It allows a unique and realistic representation of the case using x-rays and providing accurate and user-friendly management of the surgery

 

 

-myHEXplan and mySuperheroAcademy Module

 

Part of the OrthoNext offering, mobile apps developed to support patients treated with TrueLok and TL-HEX, which are designed to improve communication and connection with hospital staff (myHEXplan) or to help patients learn by playing a virtual game (mySuperheroAcademy)

We provide internal and external fixation solutions for extremity repair and deformity correction, both for adults and children. Our fracture repair products consist of fixation devices designed to stabilize a broken bone until it can heal. With these devices, we can treat simple and complex fracture patterns, along with achieving deformity corrections.

External Fixation

External fixation devices are used to stabilize fractures and offer an ideal treatment for complex fractures, fractures near the joints, and in patients with known risk factors or co-morbidities. The treatment is minimally invasive and allows external manipulation of the bone to obtain and maintain final bone alignment (reduction). The bone is fixed in this way until healing occurs. External fixation allows small degrees of micromotion (dynamization), which promotes blood flow at the fracture site, and accelerates the bone healing process. External fixation devices may also be used temporarily in complex trauma cases to stabilize the fracture prior to treating it definitively. In these situations, the device offers rapid fracture stabilization, which is important in life-saving as well as limb salvage procedures.

We offer most of our products in sterile packaging, which fulfills the need of a streamlined and ready-to-use set of products, particularly in trauma applications where timing is crucial.

Examples of our external fixation devices include the TrueLok, TL-HEX, the Galaxy Fixation System, and the LRS Advanced Limb Reconstruction System.

Internal Fixation

Internal fixation devices consist of either long rods, commonly referred to as nails, or plates that are attached to the bone with the use of screws. Nails and plates come in various sizes, depending on the bone that requires treatment. A nail is inserted into the medullary canal of a fractured long bone of the human arm or leg (e.g., humerus, femur, or tibia). Alternatively, a plate is attached by screws to an area such as a broken wrist, hip, or foot. Examples of our internal fixation devices include Chimaera, AHN, and the G-BEAM Fusion Beaming System.

Acquired in March 2020, the FITBONE intramedullary lengthening nail provides an internal option for limb lengthening of the femur and tibia and provides Orthofix with the most complete limb reconstruction portfolio on the market. Over 3,500 cases have been performed with the FITBONE system in more than 15 countries.

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In addition to treating bone fractures, we also design, manufacture and distribute devices intended to treat congenital bone conditions, such as angular deformities (e.g., bowed legs in children), degenerative diseases, and conditions resulting from a previous trauma. An example of a product offered in this area is the eight-Plate Plus.

Product Development

Our primary research and development facilities are located in Lewisville, Texas and Verona, Italy. We work with leading hospital research institutions, as well as with MTF Biologics, surgeons, and other consultants, on the long-term scientific planning and evolution of our products and therapies. Several of the products that we market have been developed through these collaborations. In addition, we periodically receive suggestions for new products and product enhancements from the scientific and medical community, some of which result in us entering into assignment or license agreements with physicians and third parties.

In 2021, 2020, and 2019, we incurred research and development expenses of $49.6 million, $39.1 million, and $34.6 million, respectively.

Patents, Trade Secrets, Assignments and Licenses

We rely on a combination of patents, trade secrets, assignment and license agreements, and non-disclosure agreements to protect our proprietary intellectual property. We possess numerous U.S. and foreign patents, have numerous pending patent applications, and have license rights under patents held by third parties. Our primary products are patented in the major markets in which they are sold. We do not believe that the expiration of any single patent is likely to significantly affect our intellectual property position. The medical device industry is characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement. Patent litigation can involve complex factual and legal questions and its outcome is uncertain. Our success is dependent, in part, on us not infringing upon patents issued to others, including our competitors and potential competitors. While we make extensive efforts to ensure that our products do not infringe other parties’ patents and proprietary rights, our products and methods may be covered by patents held by our competitors. For a further discussion of these risks, please see Item 1A of this Annual Report under the heading “Risk Factors.”

We rely on confidentiality and non-disclosure agreements with employees, consultants, and other parties to protect, in part, trade secrets and other proprietary technology.

We obtain assignments or licenses of varying durations for certain of our products from third parties. We typically acquire rights under such assignments or licenses in exchange for lump-sum payments or arrangements under which we pay a percentage of sales to the licensor. However, while assignments or licenses to us generally are irrevocable, no assurance can be given that these arrangements will continue to be made available to us on terms that are acceptable to us, or at all. The terms of our license and assignment agreements vary in length from a specified number of years, to the life of product patents, or for the economic life of the product. These agreements generally provide for royalty payments and termination rights in the event of a material breach.

Compliance and Ethics Program

It is our fundamental policy to conduct business in accordance with the highest ethical and legal standards. We have a comprehensive compliance and ethics program, which is overseen by our Chief Ethics and Compliance Officer, who reports directly to our Chief Executive Officer and the Compliance Committee of the Board of Directors. The program is intended to promote lawful and ethical business practices throughout our domestic and international businesses. It is designed to prevent and detect violations of applicable federal, state, and local laws in accordance with the standards set forth in guidance issued by the U.S. Department of Justice (“U.S. DOJ”) (“Evaluation of Corporate Compliance Programs” (updated June 2020)), the Office of Inspector General (HCCA-OIG “Measuring Compliance Program Effectiveness: A Resource Guide” (March 2017)), and the U.S. Sentencing Commission (“Effective Compliance and Ethics Programs” (November 2014)). Key elements of the program include:  

 

●

Organizational oversight by senior-level personnel responsible for the compliance function within the Company

 

●

Written standards and procedures, including a Corporate Code of Conduct

 

●

Methods for communicating compliance concerns, including anonymous reporting mechanisms

 

●

Investigation and remediation measures to ensure a prompt response to reported matters and timely corrective action

 

●

Compliance education and training for employees and contracted business associates

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●

Auditing and monitoring controls to promote compliance with applicable laws and to assess program effectiveness

 

●

Disciplinary guidelines to enforce compliance and address violations

 

●

Due diligence reviews of high risk intermediaries and exclusion lists screening of employees and contracted business associates

 

●

Risk assessments to identify areas of compliance risk.

Government Regulation

Classification and Approval of Products by the FDA and other Regulatory Authorities

Our research, development, and clinical programs, and our manufacturing and marketing operations, are subject to extensive regulation in the U.S. and other countries. Most notably, all of our products sold in the U.S. are subject to the Federal Food, Drug, and Cosmetic Act and the Public Health Services Act as implemented and enforced by the FDA. The regulations that cover our products and facilities vary widely from country to country. The amount of time required to obtain approvals or clearances from regulatory authorities also differs from country to country.

Unless an exemption applies, each medical device we commercially distribute in the U.S. is covered by premarket notification (“510(k)”) clearance, letter to file, approval of a premarket approval application (“PMA”), or some other approval from the FDA. The FDA classifies medical devices into one of three classes, which generally determine the type of FDA approval required. Devices deemed to pose low risk are placed in class I, while devices that are considered to pose moderate risk are placed in class II, and devices deemed to pose the greatest risks, requiring more regulatory controls to provide a reasonable assurance of safety and effectiveness, or devices deemed not substantially equivalent to a device that previously received 510(k) clearance (as described below), are placed in class III. Our Spinal Implants and Global Orthopedics products are, for the most part, class II devices and the instruments used in conjunction with these products are generally class I. Our Bone Growth Therapies products and the M6-C artificial cervical disc are currently classified as class III by the FDA, and have been approved for commercial distribution in the U.S. through the PMA process. However, an FDA panel recently recommended that bone growth stimulator devices be reclassified by the FDA from Class III to Class II devices with special controls. For additional discussion of this development, see Item 1A of this Annual Report under the heading “Risk Factors.”

The medical devices we develop, manufacture, distribute, and market are subject to rigorous regulation by the FDA and numerous other federal, state, and foreign governmental authorities. The process of obtaining FDA clearance and other regulatory approvals to develop and market a medical device, particularly from the FDA, can be costly and time-consuming, and there can be no assurance such approvals will be granted on a timely basis, if at all. While we believe we have obtained all necessary clearances and approvals for the manufacture and sale of our products and that they are in material compliance with applicable FDA and other material regulatory requirements, there can be no assurance that we will be able to continue such compliance.

 

In 2017, the European Union (“E.U.”) adopted the E.U. Medical Device Regulation (Council Regulations 2017/745) which imposes stricter requirements for the marketing and sale of medical devices, including new quality system and post-market surveillance requirements. The regulation provided a transition period that went into effect on May 2021 for all currently-approved medical devices prior to May 2021 (under the European Medical Device Directive) to meet the additional requirements and for certain devices this transition period was extended until May 2024. After this transition period, all medical devices marketed in the E.U. will require certification according to these new requirements. Compliance with this new regulation has required us to incur significant costs over the transition period and we expect to continue to incur significant costs associated with this effort through May 2024. Failure to meet the requirements of the regulation could adversely impact our business in the E.U. and other countries that utilize or rely on E.U. requirements for medical device registrations.

Within our Biologics product category, we market tissue for bone repair and reconstruction under the brand names Trinity ELITE and Trinity Evolution, our allogeneic bone matrices comprised of cancellous bone containing viable stem cells and a demineralized cortical bone component. In addition, we provide structural allografts for spinal fusion under the brand name AlloQuent, demineralized cortical fiber technologies under the brand name fiberFUSE, and an amniotic membrane, VersaShield, which is a natural tissue barrier. These allografts are regulated under the FDA’s Human Cell, Tissues and Cellular and Tissue-Based Products, or HCT/P, regulatory paradigm and not as a medical device, biologic, or a drug. These tissues are regulated by the FDA as minimally-manipulated tissue and are covered by the FDA’s “Good Tissues Practices” regulations, which cover all stages of allograft processing. There can be no assurance our suppliers will continue to meet applicable regulatory requirements or that those requirements will not be changed in ways that could adversely affect our business. Further, there can be no assurance these products will continue to

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be made available to us or that applicable regulatory standards will be met or remain unchanged. Moreover, products derived from human tissue or bones are from time to time subject to recall for certain administrative or safety reasons and we may be affected by one or more such recalls.

In addition to our allograft solutions (HCT/Ps), we market and distribute additional biologics products that are synthetic in nature and are regulated by the FDA as medical devices, specifically Collage Synthetic Osteoconductive Matrix and the Opus MG line of synthetic grafts. We also provide ancillary technologies regulated by the FDA as medical devices that aid in the delivery of our bone grafting options clinically. These products are sourced from third party manufacturers, which we believe adequate inventory supply is maintained to avoid product flow disruptions.

For a further description of some of these risks, see Item 1A of this Annual Report under the heading “Risk Factors.”

Certain Other Product and Manufacturing Regulations

After a device is placed in the market, numerous regulatory requirements continue to apply. These regulatory requirements include: product listing and establishment registration; Quality System Regulation (“QSR”), which requires manufacturers, including third-party manufacturers, to follow stringent design, testing, control, documentation, and other quality assurance procedures during all aspects of the manufacturing process; labeling regulations and governmental prohibitions against the promotion of products for uncleared, unapproved, or off-label uses or indications; clearance of product modifications that could significantly affect safety or efficacy or that would constitute a major change in intended use of one of our cleared devices; approval of product modifications that affect the safety or effectiveness of one of our PMA approved devices; Medical Device Adverse Event Reporting regulations, which require that manufacturers report to the FDA and other foreign governmental agencies if their device may have caused or contributed to a death or serious injury, or has malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction of the device or a similar device were to recur; post-approval restrictions or conditions, including post-approval study commitments; post-market surveillance regulations, which apply when necessary to protect the public health or to provide additional safety and effectiveness data for the device; the FDA’s recall authority, whereby it can ask, or under certain conditions, order device manufacturers to recall a product from the market that is in violation of governing laws and regulations; regulations pertaining to voluntary recalls; and notices of corrections or removals.

We and certain of our suppliers also are subject to announced and unannounced inspections by the FDA and European Notified Bodies to determine our compliance with the FDA’s QSR and other international regulations. If the FDA were to find that we or certain of our suppliers have failed to comply with applicable regulations, the agency could institute a wide variety of enforcement actions, ranging from a public warning letter to more severe sanctions, such as fines and civil penalties against us, our officers, our employees, or our suppliers; delays in clearing or approving, or refusal to clear or approve our products; withdrawal or suspension of approval of our products or those of our third-party suppliers by the FDA or other regulatory bodies; product recall or seizure; interruption of production; operating restrictions; injunctions; and criminal prosecution. In addition to FDA inspections, all of our manufacturing facilities are subject to annual Notified Body inspections.

Moreover, governmental authorities outside the U.S. have become increasingly stringent in their regulation of medical devices. Our products may become subject to more rigorous regulation by non-U.S. governmental authorities in the future. Such additional regulation, whether in the U.S. or internationally, may have a material adverse effect on our business and operations. For a description of some of these risks, see Item 1A of this Annual Report under the heading “Risk Factors.”

Accreditation Requirements

Our subsidiary, Orthofix US LLC, has been accredited by the Accreditation Commission for Health Care, Inc. (“ACHC”) for medical supply provider services with respect to durable medical equipment, prosthetics, orthotics, and supplies (“DMEPOS”). ACHC, a private, not-for-profit corporation, which is certified to ISO 9001:2000 standards, was developed by home care and community-based providers to help companies improve business operations and quality of patient care. Although accreditation is generally a voluntary activity, where healthcare organizations submit to peer review their internal policies, processes, and patient care delivery against national standards, the Centers for Medicare and Medicaid Services (“CMS”) required DMEPOS suppliers to become accredited. We believe that by attaining accreditation, Orthofix US LLC has demonstrated its commitment to maintain a higher level of competency and a willingness to strive for excellence in its products, services, and customer satisfaction.

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Third-Party Payor Requirements

Our products may be reimbursed by third-party payors, such as government programs, including Medicare, Medicaid, and Tricare, or private insurance plans and healthcare networks. Third-party payors may deny reimbursement if they determine that a device provided to a patient or used in a procedure does not meet applicable payment criteria or if the policyholder’s healthcare insurance benefits are limited. Also, non-government third-party payors are increasingly challenging the medical necessity and prices paid for our products and services. The Medicare program is expected to continue to implement a new payment mechanism for certain DMEPOS items via the implementation of its competitive bidding program. Bone growth therapy devices are currently exempt from this competitive bidding process.

Laws Regulating Healthcare Fraud and Abuse; State Healthcare Laws

Our sales and marketing practices are also subject to a number of U.S. laws regulating healthcare fraud and abuse such as the federal Anti-Kickback Statute and the federal Physician Self-Referral Law (known as the “Stark Law”), the Civil False Claims Act, and the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), as well as numerous state laws regulating healthcare and insurance. These laws are enforced by the Office of Inspector General within the U.S. Department of Health and Human Services (“HHS”), the U.S. DOJ, and other federal, state, and local agencies. Among other things, these laws and others generally (i) prohibit the provision of anything of value in exchange for the referral of patients or for the purchase, order, or recommendation of any item or service reimbursed by a federal healthcare program, (including Medicare and Medicaid); (ii) require that claims for payment submitted to federal healthcare programs be truthful; (iii) prohibit the transmission of protected healthcare information to persons not authorized to receive that information; and (iv) require the maintenance of certain government licenses and permits.

Laws Protecting the Confidentiality of Health Information

U.S. federal and state laws protect the confidentiality of certain health information, in particular individually identifiable information such as medical records, and restrict the use and disclosure of that protected information. At the federal level, the HHS promulgates health information privacy and security rules under HIPAA. These rules protect health information by regulating its use and disclosure, including for research and other purposes. Failure of a HIPAA “covered entity” to comply with HIPAA regarding such “protected health information” could constitute a violation of federal law, subject to civil and criminal penalties. Covered entities include healthcare providers (including certain of those that sell devices or equipment) that engage in particular electronic transactions, including, as we do, the transmission of claims to health plans. Consequently, health information that we access, collect, analyze, and otherwise use and/or disclose includes protected health information that is subject to HIPAA. As noted above, many state laws also pertain to the confidentiality of health information. Such laws are not necessarily preempted by HIPAA, in particular those state laws that afford greater privacy protection to the individual than HIPAA. These state laws typically have their own penalty provisions, which could be applied in the event of an unlawful action affecting health information.

In the E.U., the General Data Protection Regulation (“GDPR”), includes, among other things, a requirement for prompt notice of data breaches to data subjects and supervisory authorities in certain circumstances and significant fines for non-compliance. Internationally, some countries have also passed laws that require individually identifiable data on their citizens to be maintained on local servers and that may restrict transfer or processing of that data.

These laws and regulations impact the ways in which we use and manage personal data, protected health information, and our information technology systems. They also impact our ability to move, store, and access data across geographic boundaries. Compliance with these requirements may require changes in business practices, complicate our operations, and add complexity and additional management and oversight needs. They also may complicate our clinical research activities, as well as product offerings that involve transmission or use of clinical data.

Physician Payments Sunshine Provision of the Affordable Care Act

The Physician Payments Sunshine Provision of the Affordable Care Act (Section 6002) (the “Sunshine Act”), requires public disclosure to the U.S. government of payments to physicians and teaching hospitals, including in-kind transfers of value, such as gifts or meals. The Sunshine Act also provides penalties for non-compliance. The Sunshine Act requires that we file an annual report on March 31st of a calendar year for the transfers of value incurred for the prior calendar year.

In 2018, the Substance Use-Disorder Prevention that Promotes Opioid Recovery and Treatment for Patients and Communities Act (the “SUPPORT Act”) was signed into law. The SUPPORT Act expands the reporting obligation under the Sunshine Act to include

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payments and other transfers of value made to physician assistants, nurse practitioners, clinical nurse specialists, certified registered nurse anesthetists, and certified nurse midwives. These expanded reporting obligations are effective for payments reported in 2022, with payment tracking beginning in 2021. Non-compliance with the Sunshine Act or SUPPORT Act is subject to civil monetary penalties.

In addition to the Sunshine Act, as expanded by the SUPPORT Act, we seek to comply with other international and individual state transparency laws, such as Massachusetts and Vermont.

Sales, Marketing and Distribution

General Trends

We believe that demographic trends, principally in the form of a better informed, more active, and aging population in the major healthcare markets of the U.S., Western Europe, and Japan, together with opportunities in emerging markets such as the Asia-Pacific Region and Latin America, as well as our focus on innovative products, will continue to have a positive effect on the demand for our products.

Reporting Segments and Product Categories

Our revenues are generated from the sales of products in our two reporting segments, Global Spine and Global Orthopedics. Further, our Global Spine reporting segment is comprised of three primary product categories: Bone Growth Therapies, Spinal Implants, and Biologics. See the following chart for the distribution of sales between each of our reporting segments and product categories for each of the years ended December 31, 2021, 2020, and 2019.

Sales Network

We have a broad sales network comprised of direct sales representatives, sales agents, and distributors. This established sales network provides us with a platform to introduce new products and expand sales of existing products. We distribute our products worldwide in more than 60 countries.

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In our largest market, the U.S., our sales network is generally comprised of four sales forces, each addressing one of our primary product categories; however, an increasing number of independent distributors sell products for more than one of our product categories. Within our Global Spine reporting segment, a hybrid distribution network of direct sales representatives and independent distributors sells products in our Bone Growth Therapies product category, while primarily independent distributors sell products in our Spinal Implants and Biologics product categories. In the U.S., our Global Orthopedics reporting segment products are primarily sold by independent distributors.

Outside the U.S., we employ direct sales representatives and contract with independent distributors. In order to provide support to our independent sales network, we have sales and product specialists who regularly visit independent distributors to provide training and product support.

Marketing and Product Education

We market and sell our products principally to physicians, hospitals, ambulatory surgery centers, integrated health delivery systems, and other purchasing organizations.

We support our sales force through specialized training workshops in which physicians and sales specialists participate. We also produce marketing and training materials, including materials outlining surgical procedures, for our customers, sales force, and distributors in a variety of languages using printed, video, and multimedia formats. We require all of our sales force, direct and independent, to undergo extensive product, policy, and compliance training to ensure adherence to our standards, policies, and applicable law.

To provide additional advanced training for physicians, consistent with the AdvaMed Code of Ethics (“AdvaMed Code”) and the MedTech Europe Code of Ethical Business Practice (“MedTech Code”), we organize regular multilingual teaching seminars in multiple locations and also virtually. In person training locations include our facility in Verona, Italy, various locations in Latin America, and our corporate headquarters in Lewisville, Texas. In recent years, thousands of surgeons from around the world have attended these in person and virtual product education seminars, which have included a variety of lectures from specialists, as well as demonstrations and hands-on workshops. In response to the COVID-19 pandemic, our sales and training teams also offered virtual training opportunities and we have participated in numerous virtual sales conferences. We plan to continue to utilize these virtual training platforms into the future.

Competition

Our Bone Growth Therapies product category competes principally with similar products marketed by Zimmer Biomet, Inc.; DJO, LLC; and Bioventus LLC. The Biologics HCT/P and Spinal Implants products we market compete with products marketed by Medtronic, Inc.; DePuy Synthes, a division of Johnson and Johnson; Stryker Corp.; Zimmer Biomet, Inc.; NuVasive, Inc.; Globus Medical Inc.; and various smaller public and private companies. For Global Orthopedics devices, our principal competitors include DePuy Synthes; Zimmer Biomet, Inc.; Stryker Corp.; Smith & Nephew plc; and OrthoPediatrics Corp.

We believe that we enhance our competitive position by focusing on product features such as ease of use, versatility, cost, and patient acceptability, together with value-added services, such as the STIM onTrack mobile app, HEX RAY software, OrthoNEXT preoperative planning, and our medical education services. We attempt to avoid competing based solely on price. Overall cost and medical effectiveness, innovation, reliability, value-added service, and training are the most prevalent methods of competition in the markets for our products, and we believe we compete effectively.  

Manufacturing and Sources of Supply

We generally design, develop, assemble, test, and package our bone growth stimulation, motion preservation, orthopedic, and spinal implant products, and subcontract the manufacturing of a substantial portion of the component parts and instruments. Although certain of our key raw materials are obtained from a single source, we believe alternate sources for these materials are available. Further, we believe an adequate inventory supply is maintained to avoid product flow interruptions. Historically, we have not experienced difficulty in obtaining the materials necessary to meet our production schedules.

We partner with MTF Biologics to provide our customers allograft solutions (HCT/Ps) for various spine, orthopedic and other bone repair needs. MTF Biologics provides donor screening, processing, and quality standards that are expected by our customers. We are the exclusive marketing representative for the Trinity ELITE, Trinity Evolution, fiberFUSE, and AlloQuent HCT/Ps and have a non-exclusive marketing agreement for our Versashield amniotic membrane.

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Our products are currently manufactured and assembled in the U.S. and Italy. We believe our plants comply in all material respects with the requirements of the FDA and all relevant regulatory authorities outside the U.S. For a description of the laws to which we are subject, see Item 1, “Business”, under the subheadings “Corporate Compliance and Ethics Program” and “Government Regulation.” We actively monitor each of our subcontractors in order to maintain manufacturing and quality standards and product specification conformity.

Human Capital Resources

Our key human capital objectives in managing our business include attracting, developing, and retaining top talent while integrating diversity, equity, and inclusion principles and practices into our core values.

Employees

At December 31, 2021, we had 1,087 employees worldwide. Of these, 786 were employed in the U.S. and 301 were employed at other non-U.S. locations. Our relations with our Italian employees, who numbered 208 at December 31, 2021, are governed by the provisions of a National Collective Labor Agreement setting forth mandatory minimum standards for labor relations in the metal mechanic workers industry. We are not a party to any other collective bargaining agreement.

Compensation and Benefits

Because attracting, developing, and retaining high-level talent is a key component of our human capital objectives, we seek to provide competitive compensation and benefits packages, and to prioritize the health and wellness our employees. In addition to the comprehensive and competitive health plans that we offer, our employees receive access to the following benefits: a 401(k) retirement plan with a Company match, an employee stock purchase plan, virtual physician consults, an employee health advocate, a Company-provided basic life insurance and disability benefits corporate wellness program, an onsite fitness center, paid parental leave, an employee assistance program, a flexible spending account, health savings accounts, and local employee discounts programs.

Talent Development

We believe that success comes from investing in our people and ensuring our workforce is aligned with our mission and values. To achieve this goal, we devote time and resources to assist our employees in being familiar with our business, industry, and product offerings. We put an emphasis on training our employees and sales representatives to understand our business, including the underlying medical conditions that our products treat. In addition, we strive to support our teams in the areas of development, mentoring, engagement, and health and wellness, enabling them to do their best work as they grow their careers. In 2021, we launched an internship program with a diversity, equity, and inclusion focus and a global mentorship program to employees across all departments.

Diversity and Inclusion

The Company’s mission is to deliver innovative, quality-driven solutions as we partner with health care professionals to improve patient mobility. It is our corporate values and the diverse individuals who bring these values to life that make our high-achieving capabilities a reality. We are committed to fostering, cultivating, and preserving a culture that promotes diversity, equity, and inclusion. We seek to demonstrate our commitment to providing equal and equitable opportunities to all employees through programs such as our Moving 4ward initiative, a program created to embrace the value of diversity and reflect the communities where we live and work. Additionally, we proudly support the Orthofix Women’s Network, a program that provides opportunities for women to learn from each other and grow within our company and our industry. Throughout the year, we promote a variety of diverse voices to our employees by recognizing events such as Black History Month, Martin Luther King Jr. Day, Women’s History Month, Asian Pacific American Heritage Month, LGBTQ Pride Month, Juneteenth, and Hispanic Heritage Month. We seek to embrace and encourage our employees’ differences and know that diversity, equity and inclusion help build a truly global, transformative business and will continue to be a source of our strength. Building on this belief, all employees participated in an unconscious bias training in 2021 to increase awareness and promote equity and inclusion amongst employees.

Health and Safety

Promoting and protecting the safety of our workforce is a top priority. Health and safety is a responsibility that we share throughout our organization and it is a responsibility that has evolved during the last two years to meet the needs of our workforce during the

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COVID-19 pandemic. Employees’ safety risks vary depending on the roles they perform, and we seek to tailor our safety efforts accordingly.

Community

We support a variety of charitable organizations through donations, fundraising efforts, educational partnerships with colleges and universities, and local community development. Over the years, we have raised funds and awareness for veteran support groups, food and homebuilding organizations, and health-related institutions. In 2020, we initiated a global food drive in response to food shortages caused by the pandemic. Through employee donations and matching funds we provided meaningful support to 20 food banks around the world. Orthofix also partners with Donate Life America, a U.S.-based nonprofit organization that promotes the importance of organ, eye, and tissue donation. Additionally, we have an ongoing engineering partnership with the University of Texas, Dallas, enabling students to work on real life healthcare solutions as we invest in the next generation of engineers and business leaders.

Item 1A.

Risk Factors

In addition to the other information contained in this Annual Report and the exhibits hereto, you should carefully consider the risks described below. These risks are not the only ones that we may face. Additional risks not presently known to us or that we currently consider immaterial may also impair our business operations. This Annual Report also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the risks faced by us described below or elsewhere in this Annual Report. Investing in our common stock involves a high degree of risk and if any of these risks or uncertainties occur, the trading price of our common stock could decline and you could lose part or all of your investment.

Risks Related to our Legal and Regulatory Environment

If we fail to maintain an effective system of internal controls or discover material weaknesses in our internal control over financial reporting, we may not be able to report our financial results accurately or detect fraud, which could harm our business and the trading price of our common stock.

Effective internal controls are necessary for us to produce reliable financial reports and are important in our effort to prevent financial fraud. We are required to periodically evaluate the effectiveness of the design and operation of our internal controls. As has occurred in several years prior, these evaluations may result in the conclusion that enhancements, modifications, or changes to our internal controls are necessary or desirable. While management evaluates the effectiveness of our internal controls on a regular basis, these controls may not always be effective. There are inherent limitations on the effectiveness of internal controls, including collusion, management override, and failure of human judgment. Because of this, control procedures are designed to reduce rather than eliminate business risks. If we fail to maintain an effective system of internal controls or if management or our independent registered public accounting firm were to discover material weaknesses in our internal controls, we may be unable to produce reliable financial reports or prevent fraud, which could harm our financial condition and operating results, and could result in a loss of investor confidence and a decline in our stock price.

We are subject to the Foreign Corrupt Practices Act (the “FCPA”) and other similar anti-bribery laws and any violations of such laws could subject us to adverse consequences.

The FCPA and similar anti-bribery laws in non-U.S. jurisdictions generally prohibit companies and their intermediaries from making improper payments to foreign government officials for the purpose of obtaining or retaining business. The FCPA also imposes accounting standards and requirements on U.S. publicly traded entities and their foreign affiliates, which are intended to prevent the diversion of corporate funds to the payment of bribes and other improper payments. Because of the predominance of government-sponsored healthcare systems around the world, many of our customer relationships outside of the U.S. are with governmental entities and are therefore subject to such anti-bribery laws.

Any failure to comply with applicable legal and regulatory obligations in the U.S. or abroad could adversely affect us in a variety of ways that include, but are not limited to, significant criminal, civil, and administrative penalties, including imprisonment of individuals, fines and penalties, denial of export privileges, seizure of shipments, restrictions on certain business activities, disgorgement and other remedial measures, disruptions of our operations, and significant management distraction. Also, the failure

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to comply with applicable legal and regulatory obligations could result in the disruption of our distribution and sales activities. Any reduction in international sales, or our failure to further develop our international markets, could have a material adverse effect on our business, results of operations, and financial condition.

We are subject to federal and state healthcare fraud, abuse, and anti-self-referral laws, and could face substantial penalties if we are determined not to have fully complied with such laws.

Healthcare fraud and abuse regulations by federal and state governments impact our business. Healthcare fraud and abuse laws potentially applicable to our operations include:

 

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The federal Anti-Kickback Statute, which prohibits knowingly and willfully soliciting, receiving, offering, or paying remuneration, directly or indirectly, in exchange for or to induce the purchase or recommendation of an item or service reimbursable under a federal healthcare program (such as the Medicare or Medicaid programs);

 

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The federal Stark law, which prohibits physician self-referral, specifically a referral by a physician of a Medicare or Medicaid patient to an entity providing designated health services if the physician or an immediate family member has a financial relationship with that entity;

 

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Federal false claims laws, which prohibit, among other things, knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other federal government payors that are false or fraudulent; and

 

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State and non-U.S. laws analogous to each of the above federal laws, such as anti-kickback and false claims laws that may apply to items or services reimbursed by non-governmental or non-U.S. governmental third-party payors, including commercial insurers.

Due to the breadth of some of these laws, there can be no assurance that we will not be found to be in violation of any such laws. As a result, we may be subject to penalties, including civil and criminal penalties, damages, fines, the curtailment or restructuring of our operations, or the exclusion from participation in federal, non-U.S., or state healthcare programs. In addition, any penalties could adversely affect our ability to operate our business and our financial results. Any action against us for violation of these laws, even if we successfully defend against them, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business.

Reimbursement policies of third parties, cost containment measures, and healthcare reform could adversely affect the demand for our products and limit our ability to sell our products.

Our products are sold either directly by us or by independent sales representatives to customers or to our independent distributors and purchased by hospitals, healthcare providers, and patients. These products may be reimbursed by third-party payors, such as government programs, including Medicare, Medicaid, and Tricare, or private insurance plans and healthcare networks. Major third-party payors for medical services in the U.S. and internationally continue to work to contain health care costs and are increasingly challenging the policies and the prices charged for medical products and services. Any medical policy developments that eliminate, reduce, or materially modify coverage of our reimbursement rates for our products could have an impact on our ability to sell our products. In addition, third-party payors may deny reimbursement if they determine that a device or product provided to a patient or used in a procedure does not meet applicable payment criteria or if the policyholder’s healthcare insurance benefits are limited. These policies and criteria may be revised from time-to-time.

Limits put on reimbursement could make it more difficult to buy our products and substantially reduce, or possibly eliminate, patient access to our products. In addition, should governmental authorities continue to enact legislation or adopt regulations that affect third-party coverage and reimbursement, access to our products and coverage by private or public insurers may be reduced with a consequential material adverse effect on our sales and profitability.

CMS, in its ongoing implementation of the Medicare program, periodically reviews medical study literature to determine how the literature addresses certain procedures and therapies in the Medicare population. The impact that this information could have on Medicare coverage policy for our products is currently unknown, but we cannot provide assurances that the resulting actions will not restrict Medicare coverage for our products.  There can be no assurance that we or our distributors will not experience significant reimbursement problems in the future related to these or other proceedings. Globally, our products are sold in many countries, such as the U.K., Germany, France, and Italy, which have publicly funded healthcare systems. The ability of hospitals supported by such systems to purchase our products is dependent, in part, upon public budgetary constraints. Any increase in such constraints may have a material adverse effect on our sales and collection of accounts receivable from such sales.

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As required by law, CMS has continued efforts to implement a competitive bidding program for selected DMEPOS items paid for by the Medicare program. In this program, Medicare rates are based on bid amounts for certain products in designated geographic areas, rather than the Medicare fee schedule amount. Bone growth stimulation products are currently exempt from this competitive bidding process. We cannot predict which products from any of our businesses may ultimately be affected or whether or when the competitive bidding process may be extended to our businesses. There can be no assurance that the implementation of the competitive bidding program will not have an adverse impact on the sales of some of our products.

We and certain of our suppliers may be subject to extensive government regulation that increases our costs and could limit our ability to market or sell our products.

The medical devices we manufacture and market are subject to rigorous regulation by the FDA and numerous other federal, state, and foreign governmental authorities. These authorities regulate the development, approval, classification, testing, manufacturing, labeling, marketing, and sale of medical devices. Likewise, our use and disclosure of certain categories of health information may be subject to federal and state laws, implemented and enforced by governmental authorities that protect health information privacy and security. For a description of these regulations, see Item 1, “Business,” under the subheading “Government Regulation.”

The approval or clearance by governmental authorities, including the FDA in the U.S., is generally required before any medical devices may be marketed in the U.S. or other countries. We cannot predict whether, in the future, the U.S. or foreign governments may impose regulations that have a material adverse effect on our business, financial condition, results of operations, or cash flows.

The process of obtaining FDA clearance and approvals to develop and market a medical device can be costly, time-consuming, and subject to the risk that such clearances or approvals will not be granted on a timely basis, if at all. The regulatory process may delay or prohibit the marketing of new products and impose substantial additional costs if the FDA lengthens review times for new devices. Further, the FDA has the ability to change the regulatory classification of a cleared or approved device from a higher to a lower regulatory classification, or to reclassify an HCT/P, either of which could materially adversely impact our ability to market or sell our devices.

In addition, we may be subject to compliance actions, penalties, or injunctions if we are determined to be promoting the use of our products for unapproved or off-label uses, or if the FDA challenges one or more of our determinations that a product modification did not require new approval or clearance by the FDA. Device manufacturers are permitted to promote products solely for the uses and indications set forth in the approved product labeling. A number of enforcement actions have been taken against manufacturers that promote products for “off-label” uses, including actions alleging that federal health care program reimbursement of products promoted for “off-label” uses are false and fraudulent claims to the government. The failure to comply with “off-label” promotion restrictions can result in significant administrative obligations and costs, and potential penalties from, and/or agreements with, the federal government.

We and certain of our suppliers also are subject to announced and unannounced inspections by the FDA to determine our compliance with FDA’s QSR and other regulations. If the FDA were to find that we or certain of our suppliers have failed to comply with applicable regulations, the agency could institute a wide variety of enforcement actions, ranging from a public warning letter to more severe sanctions such as fines and civil penalties against us, our officers, our employees, or our suppliers; unanticipated expenditures to address or defend such actions; delays in clearing or approving, or refusal to clear or approve, our products; withdrawal or suspension of approval of our products or those of our third-party suppliers by the FDA or other regulatory bodies; product recall or seizure; interruption of production; operating restrictions; injunctions; and criminal prosecution. The FDA also has the authority to request repair, replacement, or refund of the cost of any medical device manufactured or distributed by us. Any of the foregoing actions could have a material adverse effect on our development of new laboratory tests, business strategy, financial condition, results of operations, or cash flows.

Moreover, governmental authorities outside the U.S. have become increasingly stringent in their regulation of medical devices, and our products may become subject to more rigorous regulation by non-U.S. governmental authorities in the future. U.S. or non-U.S. government regulations may be imposed in the future that may have a material adverse effect on our business and operations. The European Commission (“EC”) has harmonized national regulations for the control of medical devices through European Medical Device Directives with which manufacturers must comply. Under these new regulations, manufacturing plants must have received a full Quality Assurance Certification from a “Notified Body” in order to be able to sell products within the member states of the E.U. This Certification allows manufacturers to stamp the products of certified plants with a “CE” mark. Products covered by the EC regulations that do not bear the CE mark cannot be sold or distributed within the E.U. We have received certification for all currently existing manufacturing facilities.

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An FDA panel recently recommended that bone growth stimulator devices be reclassified by the FDA from Class III to Class II devices, which could increase future competition for us in this product category and negatively affect our future sales of such products.

We have the market-leading bone growth stimulation platform with the only cervical spine indication granted by the FDA, and the only mobile device app accessory designed to help patients adhere to their prescriptions and improve their clinical outcomes, STIM onTrack 2.1. We also are investing in IDE studies to expand indications for use in areas such as rotator cuff tears. Our bone growth therapy products currently are designated as Class III devices. Class III devices are subject to the FDA’s most rigorous pathway to approval for medical devices in the U.S. The FDA may change classification of a device only if the proposed new class has sufficient regulatory controls to provide reasonable assurances of safety and effectiveness.

In September 2020, the FDA’s Orthopaedic and Rehabilitation Devices Panel recommended that bone growth stimulator devices be reclassified from Class III to Class II devices with “special controls” to ensure patient safety and therapy efficacy. These proposed special controls include the condition that such devices be subject to rigorous clinical studies and post market surveillance for any new products. This would be in addition to other special controls and the Class II general requirement that any new products show “substantial equivalence” to already-cleared or approved devices.

We believe that the panel’s recommendation correctly recognizes the importance of PMA-like clinical data for these devices, so that manufacturers will continue to be required to submit robust clinical data under the approval or clearance process to ensure the safety and efficacy of these devices for patients. We, along with other bone growth stimulation manufacturers, submitted comments in response to the FDA’s proposed rulemaking to underscore the panel’s recommendation of the need for robust clinical data prior to approval or clearance of bone growth stimulator products, together with post market surveillance requirements.

In the long-term, the recommended reclassification could enhance the ability of competitors to enter the market if they are able to create technologies with comparable efficacy to our devices, which could result in our products facing additional competition, thereby negatively affecting our future sales of these products.

We continue to be affected by U.S. healthcare reform initiatives.

The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (or collectively the “ACA”), has caused a number of substantial changes to occur in recent years in the way healthcare is financed by both governmental and private insurers. The ACA is far-reaching and is intended to expand access to health insurance coverage, improve quality, and reduce costs over time. Among other things, the ACA:

 

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Established a Patient-Centered Outcomes Research Institute to oversee and identify priorities in comparative clinical effectiveness research in an effort to coordinate and develop such research; and

 

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Implemented payment system reforms including a national pilot program on payment bundling to encourage hospitals, physicians, and other providers to improve the coordination, quality, and efficiency of certain healthcare services through bundled payment models.

U.S. government agencies continue efforts to modify provisions of the ACA. For example, CMS began permitting states to impose work requirements on persons covered by Medicaid expansion plans, certain federal subsidies to insurers have ended, and certain short-term insurance plans not offering the full array of ACA benefits have been allowed to extend in duration. Some of these changes are being challenged in U.S. courts and so their long-term impact remains uncertain. This changing federal landscape has both positive and negative impacts on the U.S. healthcare industry, with much remaining uncertain as to how various provisions of federal law, and potential modification or repeal of these laws, will ultimately affect the industry. Any future changes to the ACA or other such legislation, depending on their nature, could have an adverse effect on our ability to maintain or increase sales of any of our products and achieve profitability.

We are subject to differing customs and import/export rules in several jurisdictions in which we operate.

We import and export our products to and from a number of different countries around the world. These product movements involve subsidiaries and third parties operating in jurisdictions with different customs and import/export rules and regulations. Customs authorities in such jurisdictions may challenge our treatment of customs and import/export rules relating to product shipments under aspects of their respective customs laws and treaties. If we are unsuccessful in defending our treatment of customs and import/export classifications, we may be subject to additional customs duties, fines, or penalties that could adversely affect our profitability.

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In addition, changes in U.S. or foreign policies regarding international trade could also negatively impact our business. The enactment of or increases in tariffs, or other such charges, on specific products that we sell or with which our products compete, may have an adverse effect on our business or on our results of operations.

Risks Related to our Business and Industry

The COVID-19 pandemic has materially adversely affected, and could continue to materially adversely affect, our operations, supply chain, manufacturing, product demand, product distribution, customers and other business activities.

The novel coronavirus discovered in late 2019, and the disease it causes, known as COVID-19, has led to significant disruptions in the healthcare market and the United States and international economies that may continue for a prolonged duration. The rapid spread of the coronavirus in 2020 and variants of the virus in 2021, the persistence of the resulting pandemic, the measures governments and private parties have implemented in order to stem the spread of this pandemic, and the general concern about the virus, have had, and are continuing to have, a negative effect on the demand for many of our products compared to historical levels, and consequently upon our business. In particular, many of our products are particularly sensitive to reductions in elective medical procedures. Elective medical procedures were suspended or reduced at various times in 2020 and 2021 in many of the markets where our products are marketed and sold, which negatively affected our business, cash flows, financial condition and results of operations.

The reduction in elective procedure volumes began suddenly in March 2020 when shelter in place and social distancing instructions were instituted in the U.S. and many of our other sales markets, which caused a pronounced reduction in revenue during April 2020 and May 2020, when a significant number of hospitals were either closed for elective procedures or otherwise operating at significantly reduced volumes. Generally, this reduction in procedure volumes dissipated during June 2020 and July 2020, as many regions were able to reopen for elective procedures, with an existing patient backlog. While cases again increased in the Fall of 2021 during the rise of the Delta variant, we did not experience a significant reduction in sales volume during this period, as we believe that the widespread availability of vaccines provided additional comfort to many patients and providers. More recently, the highly transmissible Omicron variant, coupled with a pronounced nursing shortage, placed renewed capacity stress on hospitals between December 2021 and February 2022, which has caused renewed negative pressure on elective surgeries, though these effects have somewhat dissipated in the past several weeks as case counts and hospitalizations have declined.  

The future trajectory of the COVID-19 pandemic remains uncertain, both in the U.S. and in other markets, particularly due to the uncertainty as to the nature of future variants, and whether vaccines will protect against severe illness with respect to such future variants.

Given these various uncertainties, it is unclear the extent to which lingering slowdowns in elective procedures will continue to affect our business in 2022 and beyond. We expect that the effects of COVID-19 on our business will depend on various factors including (i) the magnitude, length and virulence of additional case waves and future variants, (ii) the continued distribution, efficacy, refinement, and public acceptance of COVID-19 vaccines, (iii) the comfort level of patients in visiting clinics and hospitals, and (iv) the extent to which further elective surgery slowdowns occur during periods when hospital capacity is stretched because of the need to treat COVID-19 patients.

In addition to its effect on elective surgeries, the pandemic could also negatively affect our ability, and the ability of our third-party suppliers, manufacturers, distributors and customers, to retain key employees and ensure the continued service and availability of skilled personnel necessary to run our, and their, complex operations. To the extent our management or other personnel, or the management or other personnel of our third-party suppliers, manufacturers, distributors and customers, are negatively affected by the pandemic and are not available to perform their job duties, we could experience delays in, or the suspension of, our manufacturing operations, sales activities, research and product development activities, regulatory work streams, clinical development programs and other important commercial and corporate functions. Moreover, our relationships with our employees may be disrupted due to measures implemented in response to the COVID-19 pandemic. We have observed an overall tightening and increasingly competitive labor market due to labor shortages caused in part by the COVID-19 pandemic and responsive measures, which has included increased wages offered by other employers and voluntary attrition of employees in the industry, including at third-party suppliers, manufacturers, distributors and customers.

All of these factors, collectively, could materially adversely affect our business, financial condition and results of operations.

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The COVID-19 pandemic and related supply chain and raw material disruptions could have a continuing material impact on our global operations and the operations of our supply chain, which could adversely impact our business results and financial condition.

We rely on a limited number of suppliers to manufacture or supply certain products or components. In the event of interruption within our supply chain, or global shortages of key supplies or components, we may not be able to increase capacity from other sources or develop alternative or secondary sources without incurring significant additional costs and/or substantial delays. For example, the COVID-19 pandemic has led to a global shortage of semiconductor chips, which are used in certain of our products. This shortage appears primarily to have been caused by manufacturers experiencing shutdowns or slowdowns during the pandemic, and it may take several fiscal quarters or longer for normalized capacity to return. In addition, limitations in key raw material supplies could also cause semiconductor chip and other component shortages to continue. To the extent it continues, or more shortages are experienced, particularly on a longer term basis, this could adversely affect our ability to procure such components and manufacture certain of our products or it could require us to redesign any affected products in order to incorporate more readily available components, which may require additional regulatory testing and approvals. Thus, our business could be adversely affected in a significant manner if one or more of our suppliers are impacted by any interruption at a particular location or in relation to a particular material or component.

Our business may be adversely affected if consolidation in the healthcare industry leads to demand for price concessions or if a group purchasing organization (“GPO”) or similar entity excludes us from being a supplier.

Because healthcare costs have risen significantly over the past decade, numerous initiatives and reforms have been launched by legislators, regulators, and third-party payors to curb these costs. As a result, there has been a consolidation trend in the healthcare industry to create larger companies, including medical device companies and hospitals, each with greater market power. As the healthcare industry consolidates, competition to provide products and services to industry participants has become and may continue to become more intense. This has resulted and may continue to result in greater pricing pressures and the exclusion of certain suppliers from important markets as GPOs, independent delivery networks, and large single accounts continue to use their market power to consolidate purchasing decisions and as larger manufacturers use their broad offerings to secure exclusive arrangements. If a GPO were to exclude us from their supplier list, our net sales could be adversely impacted. We expect that market demand, government regulation, third-party reimbursement policies, and societal pressures will continue to change the worldwide healthcare industry, which may exert further downward pressure on the prices of our products.

The industry in which we operate is highly competitive. New developments by others could make our products or technologies non-competitive or obsolete.

The medical devices industry is highly competitive. We compete with a large number of companies, many of which have significantly greater financial, manufacturing, marketing, distribution, and technical resources than we do. Many of our competitors may be able to develop products and processes competitive with, or superior to, our own. Furthermore, we may not be able to successfully develop or introduce new products that are less costly or offer better performance than those of our competitors, or offer purchasers of our products payment and other commercial terms as favorable as those offered by our competitors. For more information regarding our competitors, see Item 1, “Business,” under the subheading “Competition.”

In addition, the spine and orthopedic medical device industry in which we compete is undergoing, and is characterized by, rapid and significant technological change. We expect competition to intensify as technological advances are made. New technologies and products developed by other companies are regularly introduced into the market, which may render our products or technologies non-competitive or obsolete.

Our ability to market products successfully depends, in part, upon the acceptance of the products not only by consumers, but also by independent third parties.

Our ability to market our products successfully depends, in part, on the acceptance of the products by independent third parties (including hospitals, physicians, other healthcare providers, and third-party payors) as well as patients. Unanticipated side effects or unfavorable publicity concerning any of our products could have an adverse effect on our ability to maintain hospital approvals or achieve acceptance by prescribing physicians, managed care providers and other retailers, customers, and patients.

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Our allograft and cellular bone allografts could expose us to certain risks that could disrupt our business.

Our Biologics business markets allograft tissues that are derived from human cadaveric donors, and our ability to market the tissues depends on our supplier continuing to have access to donated human cadaveric tissue, as well as the maintenance of high standards by the supplier in its processing methodology. The supply of such donors is inherently unpredictable and can fluctuate over time. The allograft tissues are regulated under the FDA’s HCT/P regulatory paradigm and not as a medical device, biologic, or drug. There can be no assurance that the FDA will not at some future date re-classify the allograft tissues, and the reclassification of this product from a human tissue to a medical device could have adverse consequences for us or for the supplier of this product and make it more difficult or expensive for us to conduct this business by requiring premarket clearance or approval, as well as compliance with additional post-market regulatory requirements.

We may not be able to successfully introduce new products to the market and market opportunities that we expect to develop for our products may not be as large as we expect.

We plan to continue to make improvements in our products, to develop new products, and to introduce our products into new markets. Despite our planning, the process of developing and introducing new products (including product enhancements) is inherently complex and uncertain, and involves risks, including the ability of such new products to satisfy customer needs, gain broad market acceptance (including by physicians), and obtain regulatory approvals. These events can depend on the product achieving broad clinical acceptance, the level of third-party reimbursement, and the introduction of competing technologies, among other things. In addition, these risks make it inherently difficult to forecast and predict the future net sales of our products. If the market opportunities that we expect to develop for our products, including new products, are not as large as we expect, it could adversely affect our ability to grow our business.

Growing our business requires that we properly educate and train physicians regarding the distinctive characteristics, benefits, safety, clinical efficacy, and cost-effectiveness of our products.

Acceptance of our products depends in part on our ability to (i) educate the medical community as to the distinctive characteristics, benefits, safety, clinical efficacy, and cost-effectiveness of our products compared to alternative products, procedures, and therapies, and (ii) train physicians in the proper use and implementation of our products. This is particularly true in instances of newly launched products or in the introduction of a product into a new market, such as our launch of the M6-C artificial cervical disc within the U.S. We support our sales force and distributors through specialized training workshops in which surgeons and sales specialists participate. We also produce marketing materials, including materials outlining surgical procedures, for our sales force and distributors in a variety of languages using printed, video, and multimedia formats. To provide additional advanced training for surgeons, consistent with the AdvaMed Code and the MedTech Code, we organize regular multilingual teaching seminars in multiple locations. However, we may not be successful in our efforts to educate the medical community and properly train physicians. If physicians are not properly trained, they may misuse or ineffectively use our products, which may result in unsatisfactory patient outcomes, patient injury, negative publicity, or lawsuits against us. In addition, a failure to educate the medical community regarding our products may impair our ability to achieve market acceptance of our products.

We may be adversely affected by any disruption in our information technology systems, which could adversely affect our cash flows, operating results, and financial condition.

Our operations are dependent upon our information technology systems, which encompass all of our major business functions. We rely upon such information technology systems to manage and replenish inventory, to fill and ship customer orders on a timely basis, to coordinate our sales activities across all of our products and services, and to coordinate our administrative activities. A substantial disruption in our information technology systems for any prolonged time period (arising from, for example, system capacity limits from unexpected increases in our volume of business, outages, or delays in our service) could result in delays in receiving inventory and supplies or filling customer orders and adversely affect our customer service and relationships. Our systems might be damaged or interrupted by natural or man-made events, or by computer viruses, physical or electronic break-ins, and similar disruptions affecting the global internet. There can be no assurance that such delays, problems, or costs will not have a material adverse effect on our cash flows, operating results, and financial condition.

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As our operations grow in both size and scope, we will continuously need to improve and upgrade our systems and infrastructure while maintaining the reliability and integrity of our systems and infrastructure. An expansion of our systems and infrastructure may require us to commit substantial financial, operational, and technical resources before the volume of our business increases, with no assurance that the volume of business will increase. Any such upgrades to our systems and information technology, or new technology, now and in the future, require that our management and resources be diverted from our core business to assist in compliance with those requirements. There can be no assurance that the time and resources our management will need to devote to these upgrades, service outages, or delays due to the installation of any new or upgraded technology (and customer issues therewith), or the impact on the reliability of our data from any new or upgraded technology, will not have a material adverse effect on our cash flows, operating results, and financial condition.

A significant portion of our operations run on a single Enterprise Resource Planning (“ERP”) platform. To manage our international operations efficiently and effectively, we rely heavily on our ERP system, internal electronic information and communications systems, and on systems or support services from third parties. Any of these systems are subject to electrical or telecommunications outages, computer hacking, or other general system failure. It is also possible that future acquisitions will operate on different ERP systems and that we could face difficulties in integrating operational and accounting functions of new acquisitions. Difficulties in upgrading or expanding our ERP system or system-wide or local failures that affect our information processing could adversely affect our cash flows, operating results, and financial condition.

We may be adversely affected by a failure or compromise from a cyber-attack, data breach or ransomware attack, which could have an adverse effect on our business

We rely on information technology systems to perform our business operations, including processing, transmitting, and storing electronic information, and interacting with customers, suppliers, healthcare payors, and other third parties. Like other medical device companies, the size and complexity of our information technology systems make them vulnerable to a cyber-attack, malicious intrusion, breakdown, destruction, loss of data privacy, ransomware attack, or other significant disruption. Our information systems require an ongoing commitment of significant resources to maintain, protect, and enhance existing systems and develop new systems to keep pace with continuing changes in information processing technology, evolving systems and regulatory standards, the increasing need to protect financial or personal information related to patients and customers, and changing customer patterns.

For example, third parties may attempt to hack into our products to obtain data relating to patients, disrupt the performance of our products, or access our proprietary information. We could also be subject to a ransomware attack, which is a type of malicious software that infects a computer and restricts users' access to it until a ransom is paid to unlock it. Any failure by us to maintain or protect our information technology systems and data integrity, including from cyber-attacks, intrusions, or other breaches, could result in the unauthorized access to patient data and personally identifiable information, theft of intellectual property, or other misappropriation of assets, or otherwise compromise our confidential or proprietary information and disrupt our operations. In the U.S., Federal and State privacy and security laws require certain of our operations to protect the confidentiality of personal information including patient medical records and other health information. In Europe, the Data Protection Directive requires us to manage individually identifiable information in the E.U. and, the GDPR may impose fines of up to four percent of our global revenue in the event of violations. Internationally, some countries have also passed laws that require individually identifiable data on their citizens to be maintained on local servers and that may restrict the transfer or processing of that data. We believe that we meet the expectations of applicable regulations and that the ongoing costs of compliance with such rules are not material to our business but could become material due to new regulations. There is no guarantee that we will be able to comply with these regulations, or otherwise avoid the negative reputational and other effects that might ensue from a significant data breach or failure to comply with applicable data privacy regulations, each of which could have significant adverse effects on our business, financial condition, or results of operations.

In recent years, companies around the world are seeing a surge in wire transfer “phishing” attacks that attempt to trick employees into wiring money from company bank accounts to criminals’ bank accounts. In some cases, companies have lost millions of dollars to such relatively simple attacks, and these funds often are not recovered. While we take efforts to train employees to be cognizant of these types of attacks and take appropriate precautions, the level of technological sophistication used by attackers has increased in recent years, and a successful attack against us could lead to the loss of significant funds.

Although we possess insurance against the risk of cyber-attacks, there can be no assurance that the liability related to any such events will not exceed or insurance coverage limits or that such insurance will continue to be available on reasonable, commercially acceptable terms, or at all. If the costs of maintaining adequate insurance coverage should increase significantly in the future, our operating results could be materially adversely impacted.

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The physical effects of climate change or legal, regulatory or market measures intended to address climate change could adversely affect our operations and operating results.

Shifts in weather patterns caused by climate change are expected over time to increase the frequency, severity or duration of certain adverse weather conditions and natural disasters, such as hurricanes, tornadoes, earthquakes, wildfires, droughts, extreme temperatures or flooding, each of which could cause more significant business and supply chain interruptions, damage to our products and facilities as well as the infrastructure of hospitals, medical care facilities and other customers, reduced workforce availability, and increased costs of raw materials and components. While we do not expect climate change to materially affect the demand for our products, or the amount of persons with medical conditions we treat, climate change could also contribute to collateral effects such as increased transmission of viruses or airborne illnesses, which could contribute to unpredictable events, such as putting stress on hospital and other medical facilities and/or supply chains, and thus disrupting the elective surgery market in which we do business. In addition, increased public concern over climate change could result in new legal or regulatory requirements designed to mitigate the effects of climate change, which could include the adoption of more stringent environmental laws and regulations or stricter enforcement of existing laws and regulations. Such developments could result in increased compliance costs and adverse impacts on raw material sourcing, manufacturing operations and the distribution of our products, which could adversely affect our operations and operating results.

We are dependent on third-party manufacturers for many of our products.

We contract with third-party manufacturers to produce many of our products like many other companies in the medical device industry. If we or any such manufacturer fail to meet production and delivery schedules, it can have an adverse impact on our ability to sell such products. Further, whether we directly manufacture a product or utilize a third-party manufacturer, shortages and spoilage of materials, labor stoppages, product recalls, manufacturing defects, and other similar events can delay production and inhibit our ability to bring a new product to market in timely fashion. For example, the supply of the Trinity ELITE and Trinity Evolution allografts are derived from human cadaveric donors, and our ability to market the tissues depends on MTF continuing to have access to donated human cadaveric tissue and their continued maintenance of high standards in their processing methodology.

Termination of our existing relationships with our independent sales representatives or distributors could have an adverse effect on our business.

We sell our products in many countries through independent distributors. Frequently, our independent sales representatives and our distributors have the exclusive right to sell our products in their respective territories. The terms of these agreements vary in length, generally from one to ten years. Under the terms of our standard distribution agreements, each party has the right to terminate in the event of a material breach by the other party and we generally have the right to terminate if the distributor does not meet agreed sales targets or fails to make payments on time. Any termination of our existing relationships with independent sales representatives or distributors could have an adverse effect on our business unless and until commercially acceptable alternative distribution arrangements are put in place. In addition, we operate in areas of the world that have been or may be disproportionately affected by recessions or disasters and we bear risk that existing or future accounts receivable may be uncollected if these distributors or hospitals experience disruptions to their business that cause them to discontinue paying ongoing accounts payable or become insolvent.

We depend on our senior management team.

Our success depends upon the skill, experience, and performance of members of our senior management team, who have been critical to the management of our operations and the implementation of our business strategy. We do not have key man insurance on our senior management team, and the loss of one or more key executive officers could have a material adverse effect on our operations. Further, any turnover in our senior management team could adversely affect our operating results and cash flows.

In order to compete, we must attract, retain, and motivate key employees, and our failure to do so could have an adverse effect on our results of operations.

In order to compete, we must attract, retain, and motivate executives and other key employees, including those in managerial, technical, sales, marketing, research, development, finance, information and technology, and other support positions representing diverse backgrounds, experiences, and skill sets. Hiring and retaining qualified executives, engineers, technical staff, and sales representatives is critical to our business, and competition for experienced employees in the medical device industry can be intense. Maintaining our brand and reputation, as well as a diverse and inclusive work environment that enables all our employees to thrive,

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are important to our ability to recruit and retain employees. If we are less successful in our recruiting efforts, or if we cannot retain highly skilled workers and key leaders, our ability to develop and deliver successful products and services may be adversely affected.

To attract, retain, and motivate qualified executives and key employees, we offer flexible working arrangements, such as remote and hybrid models. Offering a practical solution to the workforce allows our employees to balance their many commitments, providing our business a competitive edge in attracting and retaining talented employees. In addition, we utilize stock-based incentive awards, such as employee stock options, and restricted stock units. Certain awards vest based upon the passage of time while others vest upon the achievement of certain performance-based or market-based conditions. If the value of such stock awards does not appreciate, as measured by the performance of the price of our common stock, and ceases to be viewed as a valuable benefit, our ability to attract, retain, and motivate our employees could be adversely impacted, which could negatively affect our results of operations and/or require us to increase the amount we expend on cash and other forms of compensation.

Our business is subject to economic, political, regulatory, and other risks associated with international sales and operations.

Because we sell our products in many different countries, our business is subject to risks associated with conducting business internationally. We anticipate that net sales from international operations will continue to represent a substantial portion of our total net sales. In addition, certain of our manufacturing facilities and suppliers are located outside the U.S. Accordingly, our future results could be harmed by a variety of factors, including:

 

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Changes in a specific country’s or region’s political or economic conditions;

 

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Trade protection measures and import or export licensing requirements or other restrictive actions by foreign governments;

 

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Tariff increases and import or export restrictions;

 

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Consequences from changes in tax or customs laws;

 

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Difficulty in staffing and managing widespread operations;

 

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Differing labor regulations;

 

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Differing protection of intellectual property;

 

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Unexpected changes in regulatory requirements; and

 

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Violation by our independent agents of the FCPA or other anti-bribery or anti-corruption laws.

Risks Related to our Intellectual Property

We depend on our ability to protect our intellectual property and proprietary rights, but we may not be able to maintain the confidentiality of these assets or assure their protection.

Our success depends, in large part, on our ability to protect our current and future technologies and products and to defend our intellectual property rights. If we fail to protect our intellectual property adequately, competitors may manufacture and market products that are similar to, or that compete directly with, our products. Numerous patents covering our technologies have been issued to us and we have filed, and expect to continue to file, patent applications seeking to protect newly developed technologies and products in various countries, including the U.S. Some patent applications in the U.S. are maintained in secrecy until the patent is issued. Because the publication of discoveries tends to follow their actual discovery by several months, we may not be the first to invent or file patent applications on any of our discoveries. Patents may not be issued with respect to any of our patent applications and existing or future patents issued to or licensed by us and may not provide adequate protection or competitive advantages for our products. Patents that are issued may be challenged, invalidated, or circumvented by our competitors. Furthermore, our patent rights may not prevent our competitors from developing, using, or commercializing products that are similar or functionally equivalent to our products.

We also rely on trade secrets, unpatented proprietary expertise, and continuing technological innovation that we protect, in part, by entering into confidentiality agreements with assignors, licensees, suppliers, employees, and consultants. These agreements may be breached and there may not be adequate remedies in the event of a breach. Disputes may arise concerning the ownership of intellectual property or the applicability or enforceability of confidentiality agreements. Moreover, our trade secrets and proprietary technology may otherwise become known or be independently developed by our competitors. If patents are not issued with respect to our products arising from research, we may not be able to maintain the confidentiality of information relating to these products. In addition, if a patent relating to any of our products lapses or is invalidated, we may experience greater competition arising from new market entrants.

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Third parties may claim that we infringe on their proprietary rights and may prevent us from manufacturing and selling certain of our products.

There has been substantial litigation in the medical device industry with respect to the manufacture, use, and sale of new products. These lawsuits relate to the validity and infringement of patents or proprietary rights of third parties. We may be required to defend against allegations relating to the infringement of patent or proprietary rights of third parties. Any such litigation could, among other things:

 

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Require us to incur substantial expense, even if we are successful in the litigation;

 

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Require us to divert significant time and effort of our technical and management personnel;

 

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Result in the loss of our rights to develop or make certain products; and

 

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Require us to pay substantial monetary damages or royalties in order to license proprietary rights from third parties or to satisfy judgments or to settle actual or threatened litigation.

Although patent and intellectual property disputes within the medical devices industry have often been settled through assignments, licensing, or similar arrangements, costs associated with these arrangements may be substantial and could include the long-term payment of royalties. Furthermore, the required assignments or licenses may not be made available to us on acceptable terms. Accordingly, an adverse determination in a judicial or administrative proceeding, or a failure to obtain necessary assignments or licenses, could prevent us from manufacturing and selling some products or increase our costs to market these products.

Risks Related to Litigation and Product Liability Matters

We may be subject to product and other liability claims that may not be covered by insurance and could require us to pay substantial sums. Moreover, fluctuations in insurance expense could adversely affect our profitability.

We are subject to an inherent risk of, and adverse publicity associated with, product liability and other liability claims, whether or not such claims are valid. We maintain product liability insurance coverage in amounts and scope that we believe are reasonable and adequate. There can be no assurance, however, that product liability or other claims will not exceed our insurance coverage limits or that such insurance will continue to be available on reasonable, commercially acceptable terms, or at all. A successful product liability claim that exceeds our insurance coverage limits could require us to pay substantial sums and could have a material adverse effect on our financial condition.

In addition to product liability insurance coverage, we hold a number of other insurance policies, including directors’ and officers’ liability insurance, property insurance, and workers’ compensation insurance. If the costs of maintaining adequate insurance coverage should increase significantly in the future, our operating results could be materially adversely impacted.

Risks Related to Potential Acquisitions, Investments, and Divestitures

Our efforts to identify, pursue, and implement new business opportunities (including acquisitions) may be unsuccessful and may have an adverse effect on our business.

Our growth depends, in large part, on our ability to identify, pursue, and implement new business opportunities that expand our product offerings, capabilities, and geographic presence, and we compete with other medical device companies for these opportunities.  Our efforts to identify such opportunities focus primarily on potential acquisitions of new businesses, products or technologies, licensing arrangements, commercialization arrangements, and other transactions with third parties.  We may not be able to identify business opportunities that meet our strategic criteria or that are acceptable to us or our shareholders.  Even if we are able to identify acceptable business opportunities, we may not be able to pursue or implement such business opportunities (or, in the case of acquisitions or other transactions, complete such acquisitions or other transactions) in a timely manner or on a cost-effective basis (or at all), and we may not realize the expected benefits of such business opportunities.  If we are not able to identify, pursue, and implement new business opportunities, it will adversely affect our ability to grow our business.    

In addition, pursuing and implementing new business opportunities (particularly acquisitions) may involve significant costs and entail risks, uncertainties, and disruptions to our business, especially where we have limited experience as a company developing or marketing a particular product or technology or operating in a particular geographic region.  We may be unable to integrate a new business, product, or technology effectively, or we may incur significant charges related to an acquisition or other business opportunity (for example, amortization of acquired assets or asset impairment charges), which may adversely affect our business,

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financial condition, and results of operations. Newly acquired technology or products may require additional development efforts prior to commercial sale, including clinical testing and approval by the FDA and applicable foreign regulatory authorities; such additional development efforts may involve significant expense and ultimately be unsuccessful.  Any cross-border acquisitions or transactions may involve unique risks in addition to those mentioned above, including those related to integration of operations across different cultures and languages, currency risks, and the particular economic, political, and regulatory risks associated with specific countries.  To the extent we issue additional equity in connection with acquisitions, this may dilute our existing shareholders.

We have provided over $10.0 million in investments and loans to a privately-held company in Switzerland and may not be able to recoup our investment.

In October 2020, we entered into agreements with Neo Medical SA, a privately-held Swiss-based medical technology company developing a new generation of products for spinal surgery (“Neo Medical”). Our collaboration with Neo Medical focuses on co-developing with them a cervical platform and deploying single-use, sterile-packed procedure solutions designed to increase operating room efficiencies, reduce procedural times and costs, improve patient outcomes through novel device designs and techniques, and reduce infection rates. These instruments are designed for surgical settings including acute care hospitals, outpatient hospitals, and also ambulatory surgery centers. Under our agreements with Neo Medical, we will also exclusively distribute Neo Medical’s thoracolumbar procedure solutions to certain U.S. accounts.

In connection with these arrangements, we purchased $5.0 million of Neo Medical’s preferred stock, and loaned CHF 4.6 million ($5.0 million as of the issuance date) to Neo Medical pursuant to a convertible loan agreement. The loan accrues interest at an annual rate of 8% and is convertible by either party into additional shares of Neo Medical’s preferred stock. If not otherwise converted to preferred stock in the interim, the loan and all accrued interest become due and payable in October 2024. We then made an additional investment of $0.7 million in 2021 in the form of a convertible loan. We made the election to convert the additional investment into shares of Neo Medical’s preferred stock in January 2022.

Neo Medical is using the proceeds of our preferred stock purchase and loans to fund its ongoing operations. However, no assurance can be made that Neo Medical’s business ultimately will be successful. As such, we could ultimately be unable to recoup any value for the preferred stock that we purchased and/or unable to recoup the amount of our loan.

We may incur significant costs or retain liabilities associated with disposition activity.

We may from time to time sell, license, assign, or otherwise dispose of or divest assets, the stock of subsidiaries, or individual products, product lines, or technologies, which we determine are no longer desirable for us to own, some of which may be material. Any such activity could result in us incurring costs and expenses from these efforts, some of which could be significant. This may also result in us retaining liabilities related to the assets or properties disposed of even though, for instance, the income-generating assets have been disposed. These costs and expenses may be incurred at any time and may have a material impact on our results of operations.

Risks Related to Our Financial Results and Need for Financing

Our quarterly operating results may fluctuate.

Our quarterly operating results have fluctuated significantly in the past. Our future quarterly operating results may fluctuate significantly and we may experience losses depending on a number of factors, including the extent to which our products continue to gain or maintain market acceptance, the rate and size of expenditures incurred as we expand and/or establish our sales and distribution networks in certain domestic and international markets, the timing and level of reimbursement for our products by third-party payors, the extent to which we are subject to government regulation or enforcement, the valuation of certain assets and liabilities, and other factors, many of which are outside our control.

Our goodwill, intangible assets and fixed assets are subject to potential impairment; we have recorded significant goodwill impairment charges and may be required to record additional charges to future earnings if our remaining goodwill or intangible assets become impaired.

A significant portion of our assets consists of goodwill, intangible assets and fixed assets. The carrying value of these assets may be reduced if we determine that those assets are impaired, including intangible assets from recent acquisitions.

 

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Most of our intangible and fixed assets have finite useful lives and are amortized or depreciated over their useful lives on a straight-line basis. The underlying assumptions regarding the estimated useful lives of these intangible assets are analyzed on at least an annual basis and more often if an event or circumstance occurs making it likely that the carrying value of the assets may not be recoverable. Any such changes are adjusted through accelerated amortization, if necessary. Whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable we test intangible assets for impairment based on estimates of future cash flows. Factors that may be considered a change in circumstances indicating that the carrying value of our intangible assets and/or goodwill may not be recoverable include a decline in stock price and market capitalization, slower growth rates in our industry, the introduction of newer technology or competing products that may cannibalize future sales, or other materially adverse events that have implications on the profitability of our business. When testing for impairment of finite-lived intangible assets held for use, we group assets at the lowest level for which cash flows are separately identifiable. If an intangible asset is considered to be impaired, the amount of the impairment will equal the excess of the carrying value over the fair value of the asset.

 

Goodwill is required to be tested for impairment at least annually. We review our two reporting units for potential goodwill impairment in the fourth fiscal quarter of each year as part of our annual goodwill impairment testing, and more often if an event or circumstance occurs making it likely that impairment exists. During the fourth quarter of 2021, we recorded a full impairment of the Global Orthopedics goodwill. This resulted in an impairment charge of $11.8 million, which is reflected within acquisition-related amortization and remeasurement on the Consolidated Statement of Operations. If actual results differ from the assumptions and estimates used in the goodwill and intangible asset calculations, we could incur future impairment or amortization charges, which could negatively impact our financial condition and results of operations.

We face risks related to foreign currency exchange rates.

Because some of our revenue, operating expenses, assets, and liabilities are denominated in foreign currencies, we are subject to foreign exchange risks that could adversely affect our operations and reported results. To the extent that we incur expenses or recognize net sales in currencies other than the U.S. Dollar, any change in the values of those foreign currencies relative to the U.S. Dollar could cause our profits to decrease or our products to be less competitive against those of our competitors. To the extent that our current assets denominated in foreign currency are greater or less than our current liabilities denominated in foreign currencies, we have potential foreign exchange exposure. The fluctuations of foreign exchange rates during 2021 had a favorable impact of $3.0 million on net sales outside of the U.S. Although we seek to manage our foreign currency exposure by matching non-dollar revenues and expenses, exchange rate fluctuations could have a material adverse effect on our results of operations in the future. To minimize such exposures, we may enter into currency hedges from time to time.

Our global operations may expose us to tax risks

We are subject to taxes in the U.S. and numerous foreign jurisdictions. Significant judgment and interpretation of tax laws are required to estimate our tax liabilities. Tax laws and rates in various jurisdictions may be subject to significant change as a result of political and economic conditions. Our effective income tax rate could be adversely affected by changes in those tax laws, changes in the mix of earnings among tax jurisdictions, changes in the valuation of our deferred tax assets and liabilities, and the resolution of matters arising from tax audits.

Beginning in 2022, the Tax Cuts and Jobs Act of 2017 eliminates the option to deduct research and development expenditures immediately in the year incurred and requires taxpayers to amortize such expenditures over five years. If these provisions are not deferred, modified, or repealed by Congress with retroactive effect to January 1, 2022, we will be subject to additional income tax expense and the resulting cash liability. The impact cannot be reasonably estimated as many factors impact income tax expense and liabilities.

Certain of our subsidiaries sell products directly to other Orthofix subsidiaries or provide marketing and support services to other Orthofix subsidiaries. These intercompany sales and support services involve subsidiaries operating in jurisdictions with differing tax rates and we must determine the appropriate allocation of income to each jurisdiction based on current interpretations of complex income tax regulations. Tax authorities in these jurisdictions may challenge our treatment of such intercompany transactions. If we are unsuccessful in defending our treatment of intercompany transactions, we may be subject to additional tax liability, interest, or penalty, which could adversely affect our profitability.

32

 

We maintain a $300.0 million secured revolving credit facility secured by a pledge of substantially all of our property.

In October 2019, we and certain of our wholly-owned subsidiaries (collectively, the “Borrowers”) entered into a Second Amended and Restated Credit Agreement (the “Amended Credit Agreement”).  The Amended Credit Agreement provides for a $300.0 million secured revolving credit facility maturing on October 25, 2024, and amends and restates the previous $125.0 million secured revolving credit facility.  No amount is currently outstanding on the credit facility as of December 31, 2021, or as of the date hereof, but we may draw on this facility in the future.

 

Certain of our subsidiaries (collectively, the “Guarantors”) are required to guarantee the repayment of any obligations under the Amended Credit Agreement.  The obligations with respect to the Amended Credit Agreement are secured by a pledge of substantially all of the personal property assets of the Borrowers and each of the Guarantors, including accounts receivables, deposit accounts, intellectual property, investment property, and inventory, equipment, and equity interests in their respective subsidiaries.

  

The Amended Credit Agreement contains customary affirmative and negative covenants, including limitations on our 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 Amended Credit Agreement contains financial covenants requiring us to maintain, on a consolidated basis as of the last day of any fiscal quarter, a total net leverage ratio of not more than 3.5 to 1.0 (which ratio can be permitted to increase to 4.0 to 1.0 for no more than 4 fiscal quarters following a material acquisition) and an interest coverage ratio of at least 3.0 to 1.0.  The Amended Credit 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 facility may be accelerated and/or the lenders’ commitments terminated.

We believe that we are in compliance with the covenants, and there were no events of default, at December 31, 2021 (and in prior periods). However, there can be no assurance that we will be able to meet such financial covenants in future fiscal quarters.  The failure to do so could result in an event of default under such agreement, which could have a material adverse effect on our financial position in the event that we have significant amounts drawn under the facility at such time.

Item 1B.

Unresolved Staff Comments

None.

Item 2.

Properties

Our principal facilities as of December 31, 2021 are as follows:

Facility

 

Location

 

Approx.

Square

Feet

 

 

Ownership

   administrative facility for Corporate and all reporting segments

 

Lewisville, TX

 

 

140,000

 

 

Leased

Manufacturing, warehousing, distribution, research and development, and

   administrative facility for motion preservation

 

Sunnyvale, CA

 

 

25,000

 

 

Leased

Research and development, component manufacturing, quality control and

   training facility for orthopedics products and sales management, distribution

   and administrative facility for Italy

 

Verona, Italy

 

 

38,000

 

 

Owned

International distribution center for Orthofix products

 

Verona, Italy

 

 

18,000

 

 

Leased

Mechanical workshop for Orthofix products

 

Verona, Italy

 

 

9,000

 

 

Leased

Sales management, distribution and administrative facility for United Kingdom

 

Maidenhead, England

 

 

5,580

 

 

Leased

Sales management, distribution and administrative facility for Brazil

 

São Paulo, Brazil

 

 

22,000

 

 

Leased

Sales management, distribution and administrative facility for France

 

Arcueil, France

 

 

8,500

 

 

Leased

Sales management, distribution and administrative facility for Germany

 

Ottobrunn, Germany

 

 

18,300

 

 

Leased

33

 

 

 

Item 3.

Legal Proceedings

For a description of material pending legal proceedings, refer to Note 13 of the Notes to the Consolidated Financial Statements in Item 8 of this Annual Report.

Item 4.

Mine Safety Disclosures

Not applicable.

 

 

 

34

 

 

PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market for Our Common Stock

Our common stock is traded on the Nasdaq Global Select Market under the symbol “OFIX.” As of February 22, 2022, we had 265 holders of record of our common stock. The closing price of our common stock on February 22, 2022 was $31.12. The following table shows the high and low sales prices for our common stock for each of the two most recent fiscal years.

 

  

 

 

High

 

 

Low

 

2020

 

 

 

 

 

 

 

 

First Quarter

 

$

47.91

 

 

$

22.11

 

Second Quarter

 

 

39.70

 

 

 

25.23

 

Third Quarter

 

 

36.00

 

 

 

28.03

 

Fourth Quarter

 

 

44.30

 

 

 

30.56

 

2021

 

 

 

 

 

 

 

 

First Quarter

 

$

48.50

 

 

$

39.34

 

Second Quarter

 

 

45.96

 

 

 

39.23

 

Third Quarter

 

 

43.30

 

 

 

36.35

 

Fourth Quarter

 

 

39.98

 

 

 

28.65

 

 

Dividends

We have not paid dividends to holders of our common stock in the past and have no present intention to pay dividends in the foreseeable future. Additionally, we have restrictions on our ability to pay dividends in certain circumstances pursuant to our Amended Credit Agreement. We currently intend to retain all of our consolidated earnings to finance the continued growth of our business.

In the event that we decide to pay a dividend to holders of our common stock in the future with dividends received from our subsidiaries, we may, based on prevailing rates of taxation, be required to pay additional withholding and income tax on such amounts.

Recent Sales of Unregistered Securities

We did not sell any unregistered securities during the fourth quarter of 2021.

Performance Graph

The following performance graph is not deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C or to the liabilities of Section 18 of the Exchange Act. This information will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act, except to the extent we specifically incorporate this information by reference.

35

 

The following graph compares our annual percentage change in cumulative total return on common shares over the past five years with the cumulative total return of companies comprising the NASDAQ Composite Index and the NASDAQ Stocks (SIC 3840-3849 US & Foreign) Surgical, Medical, and Dental Instruments and Supplies Index. This presentation assumes that $100 was invested in shares of the relevant issuers on December 31, 2016, and that dividends received were immediately invested in additional shares. The graph plots the value of the initial $100 investment at one-year intervals for the fiscal years shown. The NASDAQ Composite Index replaces the CRSP NASDAQ Stock Market (US and Foreign Companies) Index in this analysis and going forward, as the CRSP Index data is no longer accessible. The CRSP index has been included with data through 2020.

 

Item 6.

Selected Financial Data

No longer required under Item 301 of Regulation S-K.

 

 


36

 

 

Item 7.

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

The following discussion and analysis of our financial condition and result of operations should be read in conjunction with “Forward-Looking Statements” and our consolidated financial statements and notes thereto appearing elsewhere in this Annual Report. The discussion and analysis below is focused on our 2021 and 2020 financial results, including comparisons of our year-over-year performance between these years. Discussion and analysis of our 2019 fiscal year specifically, as well as the year-over-year comparison of our 2020 financial performance to 2019, is located in Part II, Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed with the SEC on February 26, 2021, which is available on our website at www.orthofix.com and the SEC’s website at www.sec.gov.

Executive Summary

We are a global medical device company with a spine and orthopedics focus. Our mission is to deliver innovative, quality-driven solutions as we partner with health care professionals to improve patient mobility. Headquartered in Lewisville, Texas, our spine and orthopedic products are distributed in over 60 countries via our sales representatives and distributors.

Notable financial results in 2021 include the following:

 

•

Net sales were $464.5 million, an increase of 14.2% on a reported basis and 13.5% on a constant currency basis

 

•

Double-digit net sales growth over the prior year for both Global Spine (11.6%) and Global Orthopedics (24.4%)

 

•

Net sales growth in the U.S. and internationally for both the Global Spine and Global Orthopedics segments

 

•

Generation of net cash flows from operations of $18.5 million

 

COVID-19 Update and Outlook

The global COVID-19 pandemic has significantly affected our hospital and physician customers, patients, communities, employees, and business operations over the last two years. At various points in time, the pandemic has led to the cancellation or deferral of elective surgeries and procedures with certain hospitals, ambulatory surgery centers, and other medical facilities; restrictions on travel; the implementation of physical distancing measures; and the temporary or permanent closure of businesses. At this time, the future trajectory of the COVID-19 pandemic remains uncertain, both in the U.S. and in other markets, particularly due to the uncertainty as to the nature of future variants, and whether vaccines will protect against severe illness with respect to such future variants.

Given these various uncertainties, it is unclear the extent to which lingering slowdowns in elective procedures will affect our business during 2022 and beyond. We expect that the effects of COVID-19 on our business will depend on various factors including (i) the magnitude, length, and virulence of additional case waves and future variants, (ii) the continued distribution, efficacy, refinement, and public acceptance of COVID-19 vaccines, (iii) the comfort level of patients in visiting clinics and hospitals, and (iv) the extent to which further elective surgery slowdowns occur during periods when hospital capacity is stretched because of the need to treat COVID-19 patients.

 

Results of Operations

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

  

 

 

Year ended December 31,

 

 

 

2021

(%)

 

 

2020

(%)

 

 

2019

(%)

 

Net sales

 

 

100.0

 

 

 

100.0

 

 

 

100.0

 

Cost of sales

 

 

24.7

 

 

 

25.1

 

 

 

21.9

 

Gross profit

 

 

75.3

 

 

 

74.9

 

 

 

78.1

 

Sales and marketing

 

 

47.6

 

 

 

50.3

 

 

 

48.6

 

General and administrative

 

 

14.9

 

 

 

16.7

 

 

 

18.6

 

Research and development

 

 

10.7

 

 

 

9.6

 

 

 

7.5

 

Acquisition-related amortization and remeasurement

 

 

3.9

 

 

 

(0.2

)

 

 

7.5

 

Operating income (loss)

 

 

(1.8

)

 

 

(1.5

)

 

 

(4.1

)

Net income (loss)

 

 

(8.3

)

 

 

0.6

 

 

 

(6.2

)

 

37

 

 

 

Net Sales by Reporting Segment

The following table provides net sales by major product category by reporting segment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percentage Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2021/2020

 

 

2021/2020

 

 

2020/2019

 

 

2020/2019

 

(U.S. Dollars, in thousands)

 

2021

 

 

2020

 

 

2019

 

 

Reported

 

 

Constant Currency

 

 

Reported

 

 

Constant Currency

 

Bone Growth Therapies

 

$

187,448

 

 

$

171,396

 

 

$

197,181

 

 

 

9.4

%

 

 

9.4

%

 

 

-13.1

%

 

 

-13.1

%

Spinal Implants

 

 

115,094

 

 

 

94,857

 

 

 

94,544

 

 

 

21.3

%

 

 

20.8

%

 

 

0.3

%

 

 

0.2

%

Biologics

 

 

56,421

 

 

 

55,482

 

 

 

65,496

 

 

 

1.7

%

 

 

1.7

%

 

 

-15.3

%

 

 

-15.3

%

Global Spine

 

 

358,963

 

 

 

321,735

 

 

 

357,221

 

 

 

11.6

%

 

 

11.4

%

 

 

-9.9

%

 

 

-10.0

%

Global Orthopedics

 

 

105,516

 

 

 

84,827

 

 

 

102,734

 

 

 

24.4

%

 

 

21.3

%

 

 

-17.4

%

 

 

-18.2

%

Net sales

 

$

464,479

 

 

$

406,562

 

 

$

459,955

 

 

 

14.2

%

 

 

13.5

%

 

 

-11.6

%

 

 

-11.8

%

 

Global Spine

Global Spine offers the following products categories:

 

-

Bone Growth Therapies, which manufactures, distributes, sells, and provides support services for market leading devices that enhance bone fusion. Bone Growth Therapies uses distributors and sales representatives to sell its devices and provide associated services to hospitals, healthcare providers, and patients.

 

-

Spinal Implants, which designs, develops and markets a broad portfolio of motion preservation and fixation implant products used in surgical procedures of the spine. Spinal Implants distributes its products globally through a network of distributors and sales representatives to sell spine products to hospitals and healthcare providers.

 

-

Biologics, which provides a portfolio of regenerative products and tissue forms that allow physicians to successfully treat a variety of spinal and orthopedic conditions. Biologics markets its tissues to hospitals and healthcare providers, primarily in the U.S., through a network of employed and independent sales representatives.

2021 Compared to 2020

Net sales increased $37.2 million or 11.6%

 

•

Bone Growth Therapies net sales increased $16.1 million or 9.4%, primarily driven by an increase in gross orders across all sales channels as restrictions associated with the COVID-19 pandemic have lessened, particularly when compared to the second quarter of 2020

 

•

Spinal Implants net sales increased $20.2 million or 21.3%, primarily driven by the continued recovery from the effects of the COVID-19 pandemic within our Spine Fixation product line, both in the U.S. and internationally, and from the continued growth and adoption of our Motion Preservation product line in the U.S.

 

•

Biologics net sales increased $0.9 million or 1.7%, primarily driven by the continued recovery from the effects of the COVID-19 pandemic and an increase in revenues from new distributors added over the last 12 months

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.

38

 

2021 Compared to 2020

Net sales increased $20.7 million, or 24.4%

 

•

Increase of $18.1 million, primarily driven by the continued recovery from the effects of the COVID-19 pandemic, coupled with the continued growth of our FITBONE product line, in both the U.S. and international markets

 

•

Increase of $2.6 million due to changes in foreign currency exchange rates, which had a favorable impact on net sales

 

Gross Profit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percentage Change

 

(U.S. Dollars, in thousands)

 

2021

 

 

2020

 

 

2019

 

 

2021/2020

 

 

2020/2019

 

Net sales

 

$

464,479

 

 

$

406,562

 

 

$

459,955

 

 

 

14.2

%

 

 

-11.6

%

Cost of sales

 

 

114,914

 

 

 

101,889

 

 

 

100,607

 

 

 

12.8

%

 

 

1.3

%

Gross profit

 

$

349,565

 

 

$

304,673

 

 

$

359,348

 

 

 

14.7

%

 

 

-15.2

%

Gross margin

 

 

75.3

%

 

 

74.9

%

 

 

78.1

%

 

 

0.4

%

 

 

-3.2

%

2021 Compared to 2020

Gross profit increased $44.9 million, or 14.7%

 

•

Increase in gross profit is primarily due to the continued recovery from the effects of the COVID-19 pandemic as net sales have recovered to levels consistent with periods prior to the COVID-19 pandemic and due to increased absorption of fixed costs when compared to the prior year period

 

•

Increase in gross margin primarily as a result of significant non-cash inventory related charges recorded in the prior year due to lower procedure volumes, largely as a result of COVID-19, and partially offset by unfavorable shifts in product mix, and from a short-term increase in electronic procurement costs caused by a global shortage of semiconductor chips, which are used in certain of our products

 

Sales and Marketing Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percentage Change

 

(U.S. Dollars, in thousands)

 

2021

 

 

2020

 

 

2019

 

 

2021/2020

 

 

2020/2019

 

Sales and marketing

 

$

221,318

 

 

$

204,434

 

 

$

223,676

 

 

 

8.3

%

 

 

-8.6

%

As a percentage of net sales

 

 

47.6

%

 

 

50.3

%

 

 

48.6

%

 

 

-2.7

%

 

 

1.7

%

2021 Compared to 2020

Sales and marketing expense increased $16.9 million

 

•

Increase of $14.0 million in variable compensation expenses as a result of the recovery in net sales

 

•

Increase of $4.6 million as a result of additional headcount, increased benefit costs, and increased travel and professional expenses, as the majority of marketing events and trade shows were virtual in 2020

 

•

Partially offset by a decrease in expense of $2.7 million related to the Italian Medical Device Payback liability, as a result of temporary relief provided by the Italian National Healthcare System in response to the COVID-19 pandemic through a law enacted in December 2021

 

General and Administrative Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percentage Change

 

(U.S. Dollars, in thousands)

 

2021

 

 

2020

 

 

2019

 

 

2021/2020

 

 

2020/2019

 

General and administrative

 

$

69,353

 

 

$

67,948

 

 

$

85,607

 

 

 

2.1

%

 

 

-20.6

%

As a percentage of net sales

 

 

14.9

%

 

 

16.7

%

 

 

18.6

%

 

 

-1.8

%

 

 

-1.9

%

39

 

 

2021 Compared to 2020

General and administrative expense increased $1.4 million

 

•

Increase of $2.9 million a result of savings initiatives executed in 2020 in response to the COVID-19 pandemic, including temporary salary reductions in the U.S., suspension of the 401(k) match, and restrictions on travel and related expenses, which are no longer in place for 2021  

 

•

Offset by a decrease of $1.6 million related to the 2019 CEO transition

Research and Development Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percentage Change

 

(U.S. Dollars, in thousands)

 

2021

 

 

2020

 

 

2019

 

 

2021/2020

 

 

2020/2019

 

Research and development

 

$

49,621

 

 

$

39,056

 

 

$

34,637

 

 

 

27.1

%

 

 

12.8

%

As a percentage of net sales

 

 

10.7

%

 

 

9.6

%

 

 

7.5

%

 

 

1.1

%

 

 

2.1

%

2021 Compared to 2020

Research and development expense increased $10.6 million

 

•

Increase of $4.2 million related directly to our European Union medical device regulation implementation efforts

 

•

Increase of $3.3 million related to increased employee costs as a result of planned headcount increases in 2021

 

•

Increase of $2.5 million to support our development of new, innovative, and differentiated products or indications and the integration of certain acquired products and assets into our business

Acquisition-related Amortization and Remeasurement

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percentage Change

 

(U.S. Dollars, in thousands)

 

2021

 

 

2020

 

 

2019

 

 

2021/2020

 

 

2020/2019

 

Acquisition-related amortization and remeasurement

 

$

17,588

 

 

$

(499

)

 

$

34,212

 

 

 

-3624.6

%

 

 

-101.5

%

As a percentage of net sales

 

 

3.9

%

 

 

-0.2

%

 

 

7.5

%

 

 

4.1

%

 

 

-7.7

%

2021 Compared to 2020

Acquisition-related amortization and remeasurement increased $18.1 million

 

•

Increase of $11.8 million attributable to the impairment of our Global Orthopedics goodwill in 2021 primarily due to current and planned investments in our growth

 

•

Increase of $4.1 million primarily related to the remeasurement of potential future revenue-based milestone payments associated with the Spinal Kinetics acquisition that become due upon achievement of certain revenue targets

 

•

Increase of $1.5 million associated with acquired in-process research and development assets in 2021, which were recognized immediately upon acquisition

 

•

Increase of $1.1 million from amortization of intangible assets acquired through business combinations or asset acquisitions

 

•

Partially offset by a decrease of $0.4 million associated with the reassessment of contingent consideration associated with the acquisition of a former distributor

Non-operating Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percentage Change

 

(U.S. Dollars, in thousands)

 

2021

 

 

2020

 

 

2019

 

 

2021/2020

 

 

2020/2019

 

Interest expense, net

 

$

(1,837

)

 

$

(2,483

)

 

$

(122

)

 

 

-26.0

%

 

 

1935.2

%

Other income (expense)

 

 

(3,343

)

 

 

8,381

 

 

 

(8,143

)

 

 

-139.9

%

 

 

-202.9

%

 

40

 

 

Non-operating income and expense largely consists of interest income and expense, transaction gains and losses from changes in foreign currency exchange rates, changes in fair value related to our equity holdings in certain privately-held companies, and credit losses recognized on certain convertible debt investments. Foreign exchange gains and losses are primarily a result of several of our foreign subsidiaries holding trade and intercompany payables or receivables in currencies (most notably the U.S. Dollar) other than their functional currency.

 

2021 Compared to 2020

Interest expense, net, decreased $0.6 million

 

•

Decrease of $0.8 million associated with interest expense incurred in the prior year on our outstanding indebtedness under the secured revolving credit facility

Other income (expense), net, decreased $11.7 million

 

•

Decrease of $7.9 million associated with changes in foreign currency exchange rates, as we recorded a non-cash remeasurement loss of $4.0 million in 2021 compared to a gain of $3.9 million in 2020

 

•

Decrease of $4.7 million attributable to funds received in the prior year from the U.S. Department of Health and Human Services as part of the Provider Relief Fund included within the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”

 

•

Partially offset by gains recognized in total of $0.6 million associated with our equity investments in Neo Medical and Bone Biologics

Income Tax Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percentage Change

 

(U.S. Dollars, in thousands)

 

2021

 

 

2020

 

 

2019

 

 

2021/2020

 

 

2020/2019

 

Income tax expense (benefit)

 

$

24,884

 

 

$

(2,885

)

 

$

1,413

 

 

 

-962.5

%

 

 

-304.2

%

Effective tax rate

 

 

-184.4

%

 

 

784.0

%

 

 

-5.2

%

 

 

-968.4

%

 

 

789.2

%

2021 Compared to 2020

Net income tax expense increased $27.7 million

 

•

Increase of $16.0 million primarily due to statute expirations on uncertain tax positions that did not recur in 2021

 

•

Increase of $13.3 million for net increase in valuation allowances recognized on domestic and foreign deferred tax assets primarily due to cumulative losses

 

•

Increase of $0.8 million for lower tax benefit on the change in fair value of contingent consideration

 

•

Partially offset by tax benefit driven by lower earnings

 

2020 Compared to 2019

Net income tax expense decreased by $4.3 million

 

•

Decrease of $14.6 million primarily due to statute expirations on uncertain tax positions

 

•

Decrease of $7.1 million due to the net decrease in the fair value of contingent consideration

 

•

Increase of $14.7 million due to net increase in valuation allowance recognized on foreign deferred tax assets primarily due to cumulative losses

 

•

Further offset by tax expense driven by higher earnings

A reconciliation of the effective tax rate for each year is reported in Note 20 to the Notes to the Consolidated Financial Statements contained in Item 8 of this Annual Report.

41

 

Segment Review

Our business is managed through two reporting segments:  Global Spine and Global Orthopedics. The primary metric used in managing the business by segment is EBITDA (which is described further in Note 16 to the Notes to the Consolidated Financial Statements contained in Item 8 of this Annual Report).

The following table reconciles EBITDA to loss before income taxes:

 

 

 

Year Ended December 31,

 

(U.S. Dollars, in thousands)

 

2021

 

 

2020

 

 

2019

 

Global Spine

 

$

58,014

 

 

$

63,036

 

 

$

39,528

 

Global Orthopedics

 

 

3,374

 

 

 

(4,993

)

 

 

7,496

 

Corporate

 

 

(31,691

)

 

 

(25,382

)

 

 

(49,252

)

Total EBITDA

 

 

29,697

 

 

 

32,661

 

 

 

(2,228

)

Depreciation and amortization

 

 

(29,599

)

 

 

(30,546

)

 

 

(24,699

)

Goodwill impairment

 

 

(11,756

)

 

 

—

 

 

 

—

 

Interest expense, net

 

 

(1,837

)

 

 

(2,483

)

 

 

(122

)

Loss before income taxes

 

$

(13,495

)

 

$

(368

)

 

$

(27,049

)

 

Liquidity and Capital Resources

Cash, cash equivalents, and restricted cash at December 31, 2021, was $87.8 million compared to $96.8 million at December 31, 2020.  

 

 

 

Year Ended December, 31,

 

 

 

 

 

(U.S. Dollars, in thousands)

 

2021

 

 

2020

 

 

Change

 

Net cash from operating activities

 

$

18,475

 

 

$

74,272

 

 

$

(55,797

)

Net cash from investing activities

 

 

(23,013

)

 

 

(52,334

)

 

 

29,321

 

Net cash from financing activities

 

 

(3,621

)

 

 

3,245

 

 

 

(6,866

)

Effect of exchange rate changes on cash and restricted cash

 

 

(815

)

 

 

1,235

 

 

 

(2,050

)

Net change in cash, cash equivalents, and restricted cash

 

$

(8,974

)

 

$

26,418

 

 

$

(35,392

)

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.

 

 

 

Year Ended December, 31,

 

 

 

 

 

(U.S. Dollars, in thousands)

 

2021

 

 

2020

 

 

Change

 

Net cash from operating activities

 

$

18,475

 

 

$

74,272

 

 

$

(55,797

)

Capital expenditures

 

 

(19,592

)

 

 

(17,094

)

 

 

(2,498

)

Free cash flow

 

$

(1,117

)

 

$

57,178

 

 

$

(58,295

)

Operating Activities

Cash flows from operating activities decreased $55.8 million

 

•

Decrease in net income (loss) of $40.9 million

 

•

Net increase of $29.5 million in non-cash gains and losses, largely related to our impairment of Global Orthopedics goodwill, deferred income taxes, and changes in fair value of contingent consideration

 

•

Net decrease of $44.4 million relating to changes in working capital accounts, primarily attributable to changes in our contract liability associated with the CMS Accelerated and Advance Payment Program and from changes in accounts receivable

Two of our primary working capital accounts are accounts receivable and inventory. Day’s sales in receivables remained consistent and was 58 days at December 31, 2021, compared to 57 days at December 31, 2020 (calculated using fourth quarter net sales and ending accounts receivable). Inventory turns were 1.4 times as of December 31, 2021, compared to 1.2 times at December 31, 2020,

42

 

primarily resulting from an increase in sales volumes, and thus an increase in cost of sales, as 2020 results were heavily impacted by the COVID-19 pandemic.

Investing Activities

Cash flows from investing activities increased $29.3 million

 

•

Increase of $18.0 million associated with cash paid in March 2020 to acquire assets associated with the FITBONE intramedullary lengthening system for limb lengthening of the femur and tibia bones

 

•

Increase of $7.8 million associated with cash paid for purchases of investment securities, primarily attributable to our investments in Neo Medical SA in the form of preferred stock and convertible loans

 

•

Increase of $6.0 million associated with cash paid for asset acquisitions and other investments

 

•

Partially offset by a decrease in capital expenditures of $2.5 million

Financing Activities

Cash flows from financing activities decreased $6.9 million

 

•

Decrease of $8.4 million associated with cash paid for the achievement of a revenue-based milestone associated with the Spinal Kinetics acquisition; the milestone payment totaled $15.0 million with a portion of the payment reflected in both operating and financing activities

 

•

Partially offset by an increase in net proceeds of $1.2 million from the issuance of common shares

Credit Facilities

On October 25, 2019, we entered into a Second Amended and Restated Credit Agreement (the “Amended Credit Agreement”), which provides for a five year $300 million secured revolving credit facility. The Amended Credit Agreement has a maturity date of October 25, 2024, and amends and restates the previous $125 million secured revolving credit facility.

Borrowings under the Amended Credit Agreement may be used for, among other things, working capital and other general corporate purposes (including share repurchases, permitted acquisitions and permitted payments of dividends and other distributions). Borrowings under the Amended Credit Agreement may be limited based upon EBITDA levels recognized over the preceding 12 months.

As of December 31, 2021, we have no outstanding borrowings under the Amended Credit Agreement. For additional information regarding the credit facility, see Note 11 of the Notes to the Consolidated Financial Statements in Item 8 of this Annual Report.

In addition, we have no borrowings outstanding on our Italian line of credit of €5.5 million ($6.3 million) as of December 31, 2021. This unsecured line of credit provides us the option to borrow amounts in Italy at rates which are determined at the time of borrowing.

Other

For information regarding Contingencies, see Note 13 of the Notes to the Consolidated Financial Statements in Item 8 of this Annual Report.

Impact of COVID-19 and the CARES Act on Liquidity and Capital Resources

In March 2020, the CARES Act entered into U.S. federal law, which provided emergency assistance and health care for individuals, families, and businesses affected by the COVID-19 pandemic.

In April 2020, we received $13.9 million in funds from the CMS Accelerated and Advance Payment Program to increase cash flow to providers of services and suppliers impacted by the COVID-19 pandemic. Starting in April 2021, Medicare began to recoup 25% of Medicare payments otherwise owed to the provider or supplier for submitted claims. Beginning March 2022, recoupment increases to 50% for another six months. Thus, during these time periods, rather than receiving the full amount of payment for newly submitted claims, our outstanding accelerated / advance payment balance will be reduced by the recoupment amount until the full balance has been repaid. As of December 31, 2021, the balance of the liability associated with the Accelerated and Advance Payment Program of the CARES Act totaled $4.8 million, which is classified within other current liabilities based upon our estimates of when such funds will be recouped.

43

 

Given the various uncertainties attributable to the COVID-19 pandemic that remain, both in the U.S. and in other markets, our liquidity may be impacted in the future by the potential of decreases or delays of elective surgical procedures, delays in payments from customers, facility closures, or other reasons related to the COVID-19 pandemic. As of the date of issuance of these consolidated financial statements, the extent to which COVID-19 is likely to materially impact our liquidity in the future remains uncertain.

Spinal Kinetics Acquisition and Contingent Consideration

As part of the consideration for the Spinal Kinetics acquisition, we agreed to make contingent milestone payments of up to $60.0 million. One milestone payment, which was for $15.0 million, became due upon FDA approval of Spinal Kinetics’ M6-C artificial cervical disc (the “FDA Milestone”). The FDA Milestone was achieved and paid in 2019. A second milestone payment, totaling $15.0 million, was achieved and paid in 2021 upon meeting certain net sales targets.

The remaining milestone payment is a revenue-based milestone payment of $30.0 million in connection with future sales of the acquired artificial discs. The fair value of the contingent consideration arrangement as of December 31, 2021, was $17.2 million; however, the actual amount ultimately paid could be higher or lower than the fair value of the contingent consideration (ultimate payment will either be $30.0 million or the liability will be reversed if the milestone is not met within the required timeline). As of December 31, 2021, we classified the remaining contingent consideration liability within other current liabilities, as we expect to pay the revenue-based milestone in the next twelve months. For additional discussion of this matter, see Note 12 of the Notes to the Consolidated Financial Statements in Item 8 of this Annual Report.

Related Party Transaction

On February 2, 2021, we entered into a technology assignment and royalty agreement with a medical device technology company partially owned and controlled by the wife of President and Chief Executive Officer, Jon Serbousek, whereby we acquired the intellectual property rights to certain assets for consideration of up to $10.0 million. Consideration is comprised of $1.0 million, which was paid at signing, and $9.0 million in contingent consideration, dependent upon multiple milestones, such as receipt of 510(k) clearance or the attainment of certain net sales targets. For additional discussion of this transaction, see Note 4 of the Notes to the Consolidated Financial Statements in Item 8 of this Annual Report.

IGEA S.p.A Exclusive License and Distribution Agreement

On April 7, 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 will have the exclusive right to sell IGEA products in the U.S. and Canada. As consideration for the License Agreement, we agreed to pay up to $4.0 million, of which $0.5 million was paid in 2021, with certain payments contingent upon achieving an FDA milestone. The License Agreement also includes certain minimum purchase requirements.

Neo Medical Investment and Convertible Loan

In October 2020, we entered into a Convertible Loan Agreement (the “Convertible Loan”) with Neo Medical SA, a privately held Swiss-based Medtech company (“Neo Medical”), whereby we loaned CHF 4.6 million to Neo Medical ($5.0 million as of the issuance date). The loan bears interest at 8.0%, with interest due semi-annually. The Convertible Loan matures in October 2024; however, if a change in control of Neo Medical occurs prior to maturity, the Convertible Loan shall become immediately due upon such event.

FITBONE Asset Acquisition and Contract Manufacturing and Supply Agreement (“CMSA”)

In February 2020, we entered into an agreement with Wittenstein SE (“Wittenstein”), a privately-held German-based company, to acquire assets associated with the FITBONE intramedullary lengthening system for limb lengthening of the femur and tibia bones. At the time of the acquisition, we also entered into a CMSA with Wittenstein to manufacture the FITBONE product line. The CMSA has an initial term of up to two years. As consideration for the CMSA, we will pay $2.0 million to Wittenstein at the conclusion of the agreement if certain conditions are met. This payment is expected to be made in the first half of 2022.

Unremitted Foreign Earnings

Unremitted foreign earnings decreased from $53.7 million at December 31, 2020, to $50.0 million at December 31, 2021, due to currency translation. As a result of the 2017 Tax Act, current year earnings have been deemed to be repatriated.  Our investment in foreign subsidiaries continues to be indefinite in nature, however, we may periodically repatriate a portion of these earnings to the extent that we do not incur significant additional tax liability.

44

 

Contractual Obligations

As a result of our operations, we are subject to certain contractual obligations with material cash requirements. Our material contractual obligations include, but are not limited to i) our contingent consideration arrangement associated with the Spinal Kinetics acquisition, ii) contingent consideration arrangements associated with certain asset acquisitions, iii) operating lease and finance lease obligations, and iv) uncertain tax positions.

Refer to the Notes to the Consolidated Financial Statements in Item 8 of this Annual Report for a further description of our contingent consideration arrangements (Notes 4, 12, and 17), lease obligations (Note 9), and uncertain tax positions (Note 20).

Off-balance Sheet Arrangements

As of December 31, 2021, 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. In addition, we do not consider the backlog of firm orders to be material.

Critical Accounting Estimates

Our discussion of operating results is based upon the 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 as of the date of the financial statements and the reported amount of revenues and expenses during the reporting period. On an ongoing basis, we evaluate these estimates, which are based on historical experience and various other assumptions that management believe to be reasonable under the circumstances at that point in time.  Actual results may differ, significantly at times, from these estimates.

We believe the estimates described below are the most critical in preparing our consolidated financial statements. We have reviewed these critical accounting estimates with the Audit Committee of the Board of Directors.

Revenue Recognition

The process for recognizing revenue involves significant assumptions and judgments for certain of our revenue streams. Revenue recognition policies are “critical accounting estimates” because changes in the assumptions used to develop the estimates could materially affect key financial measures, including net sales, gross margin, operating income, EBITDA, and net income.

Bone Growth Therapies revenue is largely attributable to the U.S. and is comprised of third-party payor transactions and wholesale revenue.

For revenue derived from third-party payors, including commercial insurance carriers, health maintenance organizations, preferred provider organizations, and governmental payors, such as Medicare, in connection with the sale of our stimulation products, we recognize revenue when the stimulation product is fitted to and accepted by the patient and all applicable documents that are required by the third-party payor have been obtained. Amounts paid by these third-party payors are generally based on fixed or allowable reimbursement rates. These revenues are recorded at the expected or preauthorized reimbursement rates, net of any contractual allowances or adjustments. Certain billings are subject to review by the third-party payors and may be subject to adjustment.

Wholesale revenue is related to the sale of our bone growth stimulators directly to physicians and other healthcare providers. Wholesale revenues are recognized upon shipment and receipt of a confirming purchase order, which is when the customer obtains control of the promised goods.

Biologics revenue is largely attributable to the U.S. and is primarily related to a collaborative arrangement with MTF. We have exclusive global marketing rights and receive marketing fees from MTF based on products distributed by MTF. MTF is considered the principal in these arrangements; therefore, we recognize these marketing service fees on a net basis upon shipment of the product to the customer and receipt of a confirming purchase order.

Spinal Implants and Global Orthopedics products are distributed world-wide, with U.S. sales largely comprised of commercial revenue and international sales derived from commercial sales and through stocking distributor arrangements.

45

 

Commercial revenue is largely related to the sale of our Spinal Implants and Global Orthopedics products to hospital customers. Commercial revenues are recognized when these products have been utilized and a confirming purchase order has been received from the hospital.

Stocking distributors purchase our products and then re-sell them directly to customers, such as hospitals. Revenue derived from stocking distributor arrangements is recognized upon shipment and receipt of a confirming purchase order, which is when the distributor obtains control of the promised goods. The transaction price is estimated based upon our historical collection experience with the stocking distributor. To derive this estimate, we analyze twelve months of historical invoices by stocking distributor and the subsequent collections on those invoices, for a period of up to 24 months subsequent to the invoice date. This percentage, which is specific to each stocking distributor, is then used to calculate the transaction price. Cost of sales is also recorded upon transfer of control of the product to the customer, which is when our performance obligation has been satisfied.

Allowance for Expected Credit Losses and Contractual Allowances

The process for estimating the ultimate collection of accounts receivable involves significant assumptions and judgments. The determination of the contractual life of accounts receivable, the aging of outstanding receivables, as well as the historical collections, write-offs, and payor reimbursement experience over the estimated contractual lives of such receivables, are integral parts of the estimation process related to reserves for expected credit losses and the establishment of contractual allowances. Accounts receivable are analyzed on a quarterly basis to assess the adequacy of both reserves for expected credit losses and contractual allowances. Revisions in allowances for expected credit loss estimates are recorded as an adjustment to bad debt expense within sales and marketing expenses. Revisions to contractual allowances are recorded as an adjustment to net sales. These estimates are periodically tested against actual collection experience. In addition, we analyze our receivables by geography and by customer type, where appropriate, in developing estimates for expected credit losses.

We believe our allowance for credit losses is sufficient to cover customer credit risks; however, a 10% change in our allowance for credit losses as of December 31, 2021, would result in an increase or decrease to sales and marketing expense of $0.5 million. Additionally, we believe our estimate to establish contractual allowances is sufficient to cover customer credit risks; however, a 10% change in our reserve for contractual allowances as of December 31, 2021, would result in an increase or decrease to net sales of $0.4 million. Our allowance for credit losses and estimation of contractual allowances are “critical accounting estimates” because changes in the assumptions used to develop the estimates could materially affect key financial measures, including net sales, gross margin, operating income, EBITDA, net income, and accounts receivable.

Inventory Allowances

Reserves for excess, slow moving, and obsolete inventory are calculated as the difference between the cost of inventory and market value, and are based on assumptions and judgments about new product launch periods, overall product life cycles, forecasted demand, and market conditions. In the event of a decrease in demand for our products, excess product production, or a higher incidence of inventory obsolescence, we could be required to increase our inventory reserves, which would increase cost of sales and decrease gross profit. We regularly evaluate our exposure for inventory write-downs.  If conditions or assumptions used in determining the market value or forecasted demand change, additional inventory adjustments in the future may be necessary. Our inventory allowance is a “critical accounting estimate” because changes in the assumptions used to develop the estimate could materially affect key financial measures, including gross profit, operating income, EBITDA, net income, and inventory.

Valuation of Intangible Assets

Our intangible assets are comprised primarily of patents, acquired or developed technology, in-process research and development (“IPR&D”), customer relationships, trade names, trademarks, and licensing arrangements. We make significant judgments in relation to the valuation of intangible assets resulting from business combinations or asset acquisitions. Intangible assets acquired in a business combination that are used for IPR&D activities are considered to have indefinite lives until the completion or abandonment of the associated project. Upon reaching the end of the relevant project, we will either amortize the acquired IPR&D over its estimated useful life or expense the acquired IPR&D should the project be unsuccessful with no future alternative use.

46

 

Significant judgment is required related to the forecasting of future operating results within our discounted cash flow valuation models to determine the valuation of intangible assets. Key assumptions include the anticipated useful lives of acquired intangibles, the projected cash flows associated with each intangible asset, the estimated probability of success for acquired IPR&D projects, and projected growth rates and discount rates. It is possible that significant changes in plans or assumptions may affect the recoverability of these assets and could potentially result in impairment. Our valuation of intangible assets is a “critical accounting estimate” because changes in the assumptions used to develop these estimates could materially affect key financial measures, including operating income, EBITDA, and net income.

Goodwill

Our goodwill represents the excess of cost over fair value of net assets acquired from business combinations. The determination of the value of goodwill and intangible assets arising from business combinations requires extensive use of accounting estimates and judgments to allocate the purchase price to the fair value of the net tangible and intangible assets acquired.

We test goodwill at least annually for impairment, and between annual tests if indicators of potential impairment exist. These indicators include, among others, significant declines in sales, earnings, or cash flows, or the development of a material adverse change in the business climate. Assessing goodwill impairment involves a high degree of judgment due to the estimates and assumptions used. We believe the estimates and assumptions involved in the impairment assessment to be critical because significant changes in such estimates and assumptions could materially affect key financial measures, including operating income, EBITDA, and net income.

In connection with our change in reporting segments, which occurred during the first quarter of 2019, we performed a quantitative assessment of goodwill immediately prior to and subsequently following the change in reporting segments. The analysis did not result in an impairment. In addition, the net carrying value of goodwill that was previously reported under the prior reporting segments of (i) Bone Growth Therapies, (ii) Spinal Implants, and (iii) Biologics was consolidated and is now included within the Global Spine reporting segment.

In the fourth quarters of 2020 and 2019, we performed qualitative assessments for our annual goodwill impairment analysis, which did not result in any impairment charge. This qualitative analysis considered all relevant factors specific to the reporting units, including macroeconomic conditions, industry and market considerations, overall financial performance, and relevant entity-specific events. As part of our qualitative assessment, we included quantitative factors to assess the likelihood of an impairment and concluded it more likely that not that an impairment has not occurred.

In the fourth quarter of 2021, we performed a quantitative assessment of goodwill as part of our annual goodwill impairment analysis. Upon estimating the fair value of each of its reporting units, we determined the Global Orthopedics reporting unit’s fair value was less than its carrying value of net assets. This resulted in recording a full impairment of the Global Orthopedics goodwill of $11.8 million, which is reflected within Acquisition-related amortization and remeasurement. The assessment concluded there were no indicators of impairment for the Global Spine goodwill.

We estimate the fair value of each reporting unit using a weighted average of fair value derived from both an income approach and a market approach. The fair value measurements are based on significant inputs that are unobservable in the market, with key assumptions including, but not limited to, our forecasted future net sales and expenses, terminal growth rates, discount rates applied, and allocation of corporate-level expenses to each reporting unit. Significant changes in these assumptions could result in a significantly higher or lower fair value, which in turn can affect the ultimate conclusion regarding if goodwill is impared.

Fair Value Measurements

Fair value is defined as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The two most significant items that are or were recorded at fair value as of December 31, 2021, include (i) contingent consideration attributable to the Spinal Kinetics acquisition and (ii) our convertible loan agreements with Neo Medical.

The contingent consideration consists of potential future milestone payments of up to $60.0 million in cash associated with the Spinal Kinetics acquisition, which must be achieved within five years of the acquisition date to be paid. The milestone payments include (i) up to $15.0 million for meeting the FDA Milestone and (ii) revenue-based milestone payments of up to $45.0 million in connection with future sales of the M6-C artificial cervical disc and the M6-L artificial lumbar disc. The FDA milestone was achieved and paid in 2019 and one of the revenue-based milestones, resulting in a payment of $15.0 million, was achieved and paid in 2021.

47

 

Prior to its attainment in 2019, we estimated the fair value of the FDA Milestone using a probability-weighted discounted cash flow model. This fair value was based on significant inputs not observable in the market, with key assumptions including our estimation of the probability of FDA approval for the M6-C artificial cervical disc, the timing of approval, and the discount rate applied. Significant changes in these assumptions could have resulted in a significantly higher or lower fair value prior to obtaining FDA approval.

We estimate the fair value of the remaining revenue-based milestone payment using a Monte Carlo simulation. This fair value measurement is based on significant inputs that are unobservable in the market, with key assumptions including the our forecasted future net sales of Motion Preservation products, discount rates applied, and assumptions for potential volatility of the forecasted revenue. Significant changes in these assumptions could result in a significantly higher or lower fair value. Holding other inputs constant, an increase in our forecasted future revenues by 5% would have resulted in an increase in the fair value of the contingent consideration of $4.8 million, whereas a decrease in our forecasted future revenues by 5% would have resulted in a decrease in the fair value of the contingent consideration by $5.2 million.

We estimate the fair value of our convertible loan agreements with Neo Medical using option-pricing models and a probability-weighted discounted cash flow model. The fair value measurement is based on significant inputs that are unobservable in the market, with significant unobservable inputs including applicable discount rates, implied volatility, the likelihood and projected timing of repayment or conversion, and projected cash flows in support of the estimated enterprise value of Neo Medical. Significant changes in these assumptions could result in a significantly higher or lower fair value. Holding other inputs constant, an increase in the assumed cost of equity discount rate by 2% would have resulted in a decrease in the fair value of the convertible loan of $1.2 million, whereas a decrease the cost of equity discount rate by 2% would have resulted in an increase in the fair value of the convertible loan by $1.7 million.

Our fair value measurements are a “critical accounting estimate” because changes in the assumptions used to develop the estimate could materially affect key financial measures, including operating income, EBITDA, and net income.

Litigation and Contingent Liabilities

From time to time, we are parties to or targets of lawsuits, investigations and proceedings, including product liability, personal injury, patent and intellectual property, health and safety, and employment and healthcare regulatory matters, which are handled and defended in the ordinary course of business. These lawsuits, investigations, or proceedings could involve a substantial number of claims and could also have an adverse impact on our reputation and customer base. Although we maintain various liability insurance programs for liabilities that could result from such lawsuits, investigations, or proceedings, we are self-insured for a significant portion of such liabilities.

We accrue for such claims when it is probable that a liability has been incurred and the amount can be reasonably estimated. The assessments of whether a loss is probable or a reasonable possibility, and whether the loss or range of loss is reasonably estimable, often involve a series of complex judgments about future events. Among the factors that we consider in this assessment are the nature of existing legal proceedings, investigations, and claims, the asserted or possible damages or loss contingency (if reasonably estimable), the progress of the matter, existing law and precedent, the opinions or views of legal counsel and other advisers, the involvement of the U.S. Government and its agencies in such proceedings, our experience in similar matters and the experience of other companies, the facts available to us at the time of assessment, and how we intend to respond, or have responded, to the proceeding, investigation or claim. Our assessment of these factors may change over time as individual proceedings, investigations or claims progress. For matters where we are not currently able to reasonably estimate the range of reasonably possible loss, the factors that have contributed to this determination include the following: (i) the damages sought are indeterminate, or an investigation has not manifested itself in a filed civil or criminal complaint, (ii) the matters are in the early stages, (iii) the matters involve novel or unsettled legal theories or a large or uncertain number of actual or potential cases or parties, and/or (iv) discussions with the government or other parties in matters that may be expected ultimately to be resolved through negotiation and settlement have not reached the point where we believe a reasonable estimate of loss, or range of loss, can be made. In such instances, we believe that there is considerable uncertainty regarding the timing or ultimate resolution of such matters, including a possible eventual loss, fine, penalty or business impact, if any.

Changes in the facts and circumstances associated with a claim could have a material impact on our results of operations and cash flows in the period that reserve estimates are recorded or revised. We believe our insurance coverage and reserves are sufficient to cover currently estimated exposures, but we cannot give any assurance that we will not incur liabilities in excess of recorded reserves or our present insurance coverage. Litigation and contingent liabilities are “critical accounting estimates” because changes

48

 

in the assumptions used to develop the estimates could materially affect key financial measures, including operating income, EBITDA, and net income.

Tax Matters

We and each of our subsidiaries are taxed at the rates applicable within each of their respective jurisdictions. Our income tax expense, effective tax rate, deferred tax assets, and deferred tax liabilities will vary according to the jurisdiction in which profits arise. Further, certain of our subsidiaries sell products directly to our other subsidiaries or provide administrative, marketing and support services to our other subsidiaries. These intercompany sales and support services involve subsidiaries operating in jurisdictions with differing tax rates. The tax authorities in such jurisdictions may challenge our treatment under residency criteria, transfer pricing provisions, or other aspects of their respective tax laws, which could affect our composite tax rate and provisions.

We sometimes engage in transactions in which tax consequences may be subject to uncertainty. We account for these uncertain tax positions in accordance with applicable accounting guidance, which requires significant judgment in assessing the estimated tax consequences of a transaction. We evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that, on an evaluation of the technical merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. We measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. We re-evaluate our income tax positions periodically to consider factors such as changes in facts or circumstances, changes in or interpretations of tax law, effectively settled issues under audit, and new audit activity. Such a change in recognition or measurement would result in recognition of a tax benefit or an additional charge to the tax provision, which could have a material impact to the financial statements.

We establish a valuation allowance when measuring deferred tax assets if it is more likely than not that certain deferred tax assets will not be realized in the foreseeable future. This process requires significant judgment as we must project the current tax liability and estimate the deferred tax assets and liabilities into future periods, including net operating loss and tax credit carry forwards. In assessing the need for a valuation allowance, we consider recent operating results, availability of taxable income in carryback years, future reversals of taxable temporary differences, future taxable income projections (exclusive of reversing temporary differences), and all prudent and feasible tax planning strategies.

Tax matters are “critical accounting estimates” because changes in the assumptions used to develop the estimates could materially affect key financial measures, including net income.

Share-based compensation

We use the Black-Scholes valuation model to calculate the fair value of service-based stock options. The value is recognized as expense over the service period net of actual forfeitures. The expected term of options granted is estimated based on a number of factors, including the vesting and expiration terms of the award, historical employee exercise behavior for both options that are currently outstanding and options that have been exercised or are expired, the historical volatility of our common stock, and an employee’s average length of service. The risk-free interest rate is determined based upon a constant U.S. Treasury security rate with a contractual life that approximates the expected term of the option award. We estimate expected volatility based on the historical volatility of our stock.

We use the Monte Carlo valuation methodology to calculate the fair value of market-based restricted stock units. The value is recognized as expense over the requisite service period and adjusted for forfeitures as they occur. The Monte Carlo methodology that we use to estimate the fair value of the awards incorporates the possibility that the market condition may not be satisfied.

The fair value of performance-based restricted stock awards and stock units is calculated based upon the closing stock price at the date of grant. The value is recognized as expense over the derived requisite service period beginning in the period in which the grants are deemed probable to vest. Vesting probability is assessed based upon forecasted earnings and financial results and requires significant judgment.

Determining the appropriate fair value model and calculating the fair value of employee stock awards requires estimates and judgments. Our share-based compensation is a “critical accounting estimate” because changes in the assumptions used to develop estimates of fair value or the requisite service period could materially affect key financial measures, including gross profit, operating income, EBITDA, and net income.

49

 

Non-GAAP Financial Measures

We believe that providing non-GAAP financial measures that exclude certain items provides investors with greater transparency to the information used by senior management in its financial and operational decision-making. We believe it is important to provide investors with the same non-GAAP metrics that senior management uses to supplement information regarding the performance and underlying trends of our business operations in order 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 Annual Report 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. Similarly, certain non-cash expenses, such as equity compensation expense, do not directly impact cash flows, but are part of total compensation costs accounted for under GAAP.

Constant Currency

Constant currency is a non-GAAP measure, which is calculated by using foreign currency rates from the comparable, prior-year period, to present net sales at comparable rates. Constant currency can be presented for numerous GAAP measures, but is most commonly used by management to analyze net sales without the impact of changes in foreign currency rates.

EBITDA

EBITDA is defined as earnings before interest income (expense), net, income taxes, depreciation, and amortization (including the impacts of any goodwill impairment). EBITDA is the primary metric used by our Chief Operating Decision Maker in managing the business.

Free Cash Flow

Free cash flow is a non-GAAP financial measure, which is calculated by subtracting capital expenditures from net cash from operating activities. Free cash flow is 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.

 

 

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

We are exposed to certain market risks as part of our ongoing business operations. Primary exposures include changes in interest rates and foreign currency fluctuations. These exposures can impact sales, cost of sales, costs of operations, and the cost of financing and yields on cash and short-term investments. We may use derivative financial instruments, where appropriate, to manage these risks. However, our risk management policy does not allow us to hedge positions we do not hold nor do we enter into derivative or other financial investments for trading or speculative purposes.

We are exposed to interest rate risk in connection with our Revolving Credit Facility, which bears interest at floating rates based on LIBOR, or possibly an alternative reference rate to be used in place of LIBOR upon the occurrence of a benchmark transition event, plus an applicable borrowing margin or at a base rate (as defined in the Amended Credit Agreement) plus an applicable borrowing margin. Therefore, interest rate changes generally do not affect the fair market value of the debt, but do impact future earnings and cash flows, assuming other factors are held constant. As we do not have any balance outstanding associated with the Amended Credit Agreement as of December 31, 2021, this risk is currently minimal.

We believe that a concentration of credit risk related to our accounts receivable is limited because our customers are geographically dispersed and the end users are diversified across several industries. It is reasonably possible that changes in global economic conditions and/or local operating and economic conditions in the regions these customers operate, or other factors, could affect the future realization of these accounts receivable balances.

50

 

Our foreign currency exposure results from fluctuating currency exchange rates, primarily the U.S. Dollar against the Euro, Brazilian Real, Australian Dollas, Swiss Franc, or British Pound. We are subject to transactional currency exposures when our subsidiaries (or the Company itself) enter into transactions denominated in a currency other than their functional currency. For the year ended December 31, 2021, we recorded a foreign currency loss of $4.0 million on the statement of operations and comprehensive income (loss) resulting from gains and losses in foreign currency transactions.

We also are subject to currency exposure from translating the results of our global operations into the U.S. Dollar at exchange rates that fluctuate during the period. The U.S. Dollar equivalent of international sales denominated in foreign currencies was favorably impacted during the years ended December 31, 2021, and December 31, 2020, by monthly foreign currency exchange rate fluctuations of the U.S. Dollar against all of the foreign functional currencies for our international operations. As we continue to distribute and manufacture our products in selected foreign countries, we expect that future sales and costs associated with our activities in these markets will continue to be denominated in the applicable foreign currencies, which could cause currency fluctuations to materially impact our operating results. An analysis was performed to determine the sensitivity of our current year net sales and operating income to changes in foreign currency exchange rates. We determined that if the U.S. Dollar decreased in value by 10% relative to all foreign currencies of our international operations it would result in an increase in net sales of $9.1 million and a decrease in operating income of $0.7 million. If the U.S. Dollar increased in value by 10% relative to all foreign currencies of our international operations it would result in a decrease in net sales of $9.1 million and an increase in operating income of $0.7 million.

Item 8.

Financial Statements and Supplementary Data

See “Index to Consolidated Financial Statements” on page F-1 of this Annual Report.

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

 

 

Item 9A.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

At the end of the period covered by this Annual 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. Based upon that evaluation, our President and Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this Annual Report, our disclosure controls and procedures were effective.

Management’s Report on 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.

51

 

In connection with the preparation and filing of this 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, 2021, 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, as of December 31, 2021, the Company’s internal control over financial reporting is effective based on the specified criteria.

Ernst & Young has issued an audit report on the effectiveness of our internal control over financial reporting, which follows this report.

Changes in Internal Control over Financial Reporting

There have not been any changes in our internal control over financial reporting during the fourth quarter of 2021 that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

52

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

To the Shareholders and the Board of Directors of Orthofix Medical Inc.

 

Opinion on Internal Control over Financial Reporting

 

We have audited Orthofix Medical Inc.’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Orthofix Medical Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on the COSO criteria.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2021 and 2020, the related consolidated statements of operations and comprehensive income (loss), changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2021, and the related notes and our report dated February 25, 2022 expressed an unqualified opinion thereon.

 

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding 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.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Ernst & Young LLP

Dallas, Texas

February 25, 2022

 

 

 

53

 

 

Item 9B.

Other Information

None.

 

Item 9C.

Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

None.

 

 

PART III

Information required by Items 10, 11, 12, 13 and 14 of Form 10-K is omitted from this Annual Report and will be filed in a definitive proxy statement or by an amendment to this Annual Report not later than 120 days after the end of the fiscal year covered by this Annual Report.

Item 10.

Directors, Executive Officers and Corporate Governance

We will provide information that is responsive to this Item 10 regarding executive compensation in our definitive proxy statement or in an amendment to this Annual Report not later than 120 days after the end of the fiscal year covered by this Annual Report, in either case under the caption “Information About Directors,” “Section 16 (a) Beneficial Ownership Reporting Compliance” and others possibly elsewhere therein. That information is incorporated in this Item 10 by reference.

Item 11.

Executive Compensation

We will provide information that is responsive to this Item 11 regarding executive compensation in our definitive proxy statement or in an amendment to this Annual Report not later than 120 days after the end of the fiscal year covered by this Annual Report, in either case under the caption “Executive Compensation,” and possibly elsewhere therein. That information is incorporated in this Item 11 by reference.

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

We will provide information that is responsive to this Item 12 regarding ownership of our securities by certain beneficial owners and our directors and executive officers, as well as information with respect to our equity compensation plans, in our definitive proxy statement or in an amendment to this Annual Report not later than 120 days after the end of the fiscal year covered by this Annual Report, in either case under the captions “Security Ownership of Certain Beneficial Owners and Management and Related Stockholders” and “Equity Compensation Plan Information,” and possibly elsewhere therein. That information is incorporated in this Item 12 by reference.

Item 13.

Certain Relationships and Related Transactions, and Director Independence

We will provide information that is responsive to this Item 13 regarding transactions with related parties and director independence in our definitive proxy statement or in an amendment to this Annual Report not later than 120 days after the end of the fiscal year covered by this Annual Report, in either case under the caption “Certain Relationships and Related Transactions,” and “Director Independence” and possibly elsewhere therein. That information is incorporated in this Item 13 by reference.

Item 14.

Principal Accountant Fees and Services

We will provide information that is responsive to this Item 14 regarding principal accountant fees and services in our definitive proxy statement or in an amendment to this Annual Report not later than 120 days after the end of the fiscal year covered by this Annual Report, in either case under the caption “Principal Accountant Fees and Services,” and possibly elsewhere therein. That information is incorporated in this Item 14 by reference.

 

 

 

54

 

 

PART IV

Item 15.

Exhibits, Financial Statement Schedules

(a)

Documents filed as part of report on Form 10-K

The following documents are filed as part of this Annual Report on Form 10-K:

 

1.

Financial Statements

See “Index to Consolidated Financial Statements” on page F-1 of this Form 10-K.  

 

2.

Financial Statement Schedules

No schedules are required because either the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements or the notes thereto.

 

3.

Exhibits

 

Exhibit
Number 

 

Description 

 

 

 

  2.1

 

Agreement and Plan of Merger, entered into March 15, 2018, by and among Blackstone Medical, Inc., Summit Development, Inc., and Spinal Kinetics, Inc. (filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2018 and incorporated herein by reference).

 

 

 

  3.1

 

Orthofix Medical Inc. Certificate of Incorporation (filed as an exhibit to the Company’s Current Report on Form 8-K dated August 1, 2018 and incorporated herein by reference).

 

 

 

  3.2

 

Orthofix Medical Inc. Bylaws (filed as an exhibit to the Company’s Current Report on Form 8-K dated January 28, 2021 and incorporated herein by reference).

 

 

 

  4.1

 

Form of Stock Certificate (filed as an exhibit to the Company’s Current Report on Form 8-K dated August 1, 2018 and incorporated herein by reference).

 

 

 

  4.2

 

Description of the Registrant’s Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934 (filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 and incorporated herein by reference).

 

 

 

10.1

 

Second Amended and Restated Credit Agreement, dated October 25, 2019, among Orthofix Medical Inc., Orthofix Inc., Orthofix Spinal Implants Inc., Orthofix International B.V., Orthofix III B.V., and certain subsidiaries of Orthofix Medical Inc. as guarantors,  the several banks and other financial institutions as may from time to time become parties thereunder as lenders, and JPMorgan Chase, N.A., as administrative agent (filed as an exhibit to the Company’s Current Report on Form 8-K filed on November 1, 2019 and incorporated herein by reference).

 

 

 

10.2*†

 

Amended and Restated Matrix Commercialization Collaboration Agreement, entered into as of February 7, 2022, by and between Orthofix US LLC and Muscoloskeletal Transplant Foundation Inc.

 

 

 

10.3

 

Orthofix Medical Inc. Second Amended and Restated Stock Purchase Plan, as amended by Amendment No. 1 thereto (filed as an exhibit to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020 and incorporated herein by reference).

 

 

 

10.4

 

Amendment No. 2 to the Orthofix Medical Inc. Second Amended and Restated Stock Purchase Plan (filed as an exhibit to the Company's Current Report on Form 8-K filed June 21, 2021 and incorporated by reference).

 

 

 

10.5

 

Orthofix Medical Inc. Amended and Restated 2012 Long-Term Incentive Plan (filed as an exhibit to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018 and incorporated herein by reference).

 

 

 

10.6

 

Amendment No. 1 to Orthofix Medical Inc. Amended and Restated 2012 Long-Term Incentive Plan (filed as an exhibit to the Company’s Current Report on Form 8-K dated June 8, 2020 and incorporated herein by reference).

 

 

 

10.7

 

Amendment No. 2 to Orthofix Medical Inc. Amended and Restated 2012 Long-Term Incentive Plan (filed as an exhibit to the Company's Current Report on Form 8-K filed June 21, 2021 and incorporated by reference).

 

 

 

55

 

Exhibit
Number 

 

Description 

 

 

 

10.8*

 

Form of Employee Performance Stock Unit Agreement (2022 grant) under the Orthofix Medical Inc. Amended and Restated 2012 Long-Term Incentive Plan.

 

 

 

10.9

 

Form of Employee Performance Stock Unit Agreement (2016 – 2021 grants) under the Orthofix Medical Inc. Amended and Restated 2012 Long-Term Incentive Plan (filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 and incorporated herein by reference).

 

 

 

10.10*

 

Form of Time-Based Vesting Employee Restricted Stock Unit Grant Agreement (2018 – 2021 grants) under the Orthofix Medical Inc. Amended and Restated 202 Long-Term Incentive Plan.

 

 

 

10.11

 

Form of Time-Based Vesting Employee Restricted Stock Grant Agreement (pre-2018 grants) under the Orthofix Medical Inc. Amended and Restated 2012 Long-Term Incentive Plan (filed as an exhibit to the Company’s Current Report on Form 8-K filed July 8, 2016 and incorporated here by reference).

 

 

 

10.12

 

Form of Time-Based Vesting Employee Non-Qualified Stock Option Agreement under the Orthofix Medical Inc. Amended and Restated 2012 Long-Term Incentive Plan (filed as an exhibit to the Company’s Current Report on Form 8-K filed July 8, 2016 and incorporated here by reference).

 

 

 

10.13

 

Form of Employee Non-Qualified Stock Option Agreement under the Orthofix Medical Inc. Amended and Restated 2012 Long-Term Incentive Plan – July 2014-June 2016 (Time-Based Vesting) (filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014 and incorporated herein by reference).

 

 

 

10.14

 

Form of Employee Non-Qualified Stock Option Agreement under the Orthofix Medical Inc. Amended and Restated 2012 Long-Term Incentive Plan (pre-2014 grants) (filed as an exhibit to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012 and incorporated herein by reference).

 

 

 

10.15

 

Form of Non-Employee Director Restricted Stock Unit Agreement under the Orthofix Medical Inc. Amended and Restated 2012 Long-Term Incentive Plan (filed as an exhibit to the Company’s Form 10-Q filed on August 7, 2017 and incorporated herein by reference).

 

 

 

10.16

 

Form of Time-Based Vesting Non-Employee Director Non-Qualified Stock Option Agreement under the Orthofix Medical Inc. Amended and Restated 2012 Long-Term Incentive Plan (initial grant) (filed as an exhibit to the Company’s Current Report on Form 8-K filed July 8, 2016 and incorporated here by reference).

 

 

 

10.17

 

Form of Non-Employee Director Non-Qualified Stock Option Agreement under the Orthofix Medical Inc. Amended and Restated 2012 Long-Term Incentive Plan (filed as an exhibit to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012 and incorporated herein by reference).

 

 

 

10.18

 

Employee Inducement Restricted Stock Unit Agreement for Paul Gonsalves (filed as an exhibit to the Company’s Form S-8 filed on September 14, 2020 and incorporated herein by reference).

 

 

 

10.19

 

Employee Inducement Non-Qualified Stock Option Agreement for Paul Gonsalves (filed as an exhibit to the Company’s Form S-8 filed on September 14, 2020 and incorporated herein by reference).

 

 

 

10.20

 

Employee Inducement Restricted Stock Unit Agreement for Jon Serbousek (filed as an exhibit to the Company’s Form S-8 filed on August 5, 2019 and incorporated herein by reference).

 

 

 

10.21

 

Employee Inducement Non-Qualified Stock Option Agreement for Jon Serbousek (filed as an exhibit to the Company’s Form S-8 filed on August 5, 2019 and incorporated herein by reference).

 

 

 

10.22

 

Inducement Plan for Spinal Kinetics Employees (filed as an exhibit to the Company’s Form S-8 filed on April 30, 2018 and incorporated herein by reference).

 

 

 

10.23

 

Form of Inducement Grant Restricted Stock Agreement (filed as an exhibit to the Company’s Form S-8 filed on April 30, 2018 and incorporated herein by reference).

 

 

 

10.24

 

Inducement Grant Non-Qualified Stock Option Agreement, dated March 13, 2013, between Orthofix International N.V. and Bradley R. Mason (filed as an exhibit to the Company’s Current Report on Form 8-K filed March 13, 2013 and incorporated herein by reference).

 

 

 

56

 

Exhibit
Number 

 

Description 

 

 

 

10.25

 

Amended and Restated 2004 Long Term Incentive Plan (filed as an exhibit to the Company’s quarterly report on Form 10-Q for the quarter ended June 30, 2009 and incorporated herein by reference).

 

 

 

10.26

 

Form of Employee Non-Qualified Stock Option Agreement under the Orthofix International N.V. Amended and Restated 2004 Long-Term Incentive Plan (post-2008 grants made under the 2004 Long Term Incentive Plan prior to the adoption of the 2012 Long Term Incentive Plan) (filed as an exhibit to the Company’s Current Report on Form 8-K filed July 7, 2009 and incorporated herein by reference).

 

 

 

10.27

 

Form of Indemnification Agreement between Orthofix Medical Inc. and its directors and officers (incorporated by reference to Exhibit 10.1 to the Company’s Registration Statement on Form S-4 (Registration No. 333-224407) filed April 23, 2018).

 

 

 

10.28

 

Transition and Retirement Agreement, dated February 25, 2019, between Bradley R. Mason and Orthofix Medical Inc. (filed as an exhibit to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018 and incorporated herein by reference).

 

 

 

10.29

 

Change in Control and Severance Agreement, dated November 1, 2019, between Orthofix Medical Inc. and Jon Serbousek (filed as an Exhibit to the Company’s Current Report on Form 8-K filed November 1, 2019 and incorporated herein by reference).

 

 

 

10.30

 

Letter agreement, dated December 4, 2019, between the Company and Kevin Kenny (filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 and incorporated herein by reference).

 

 

 

10.31

 

Change in Control and Severance Agreement, dated November 1, 2019, between Orthofix Medical Inc. and Kevin Kenny (filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 and incorporated herein by reference).

 

 

 

10.32

 

Letter agreement, dated August 21, 2020, between the Company and Paul Gonsalves (filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 and incorporated herein by reference).

 

 

 

10.33

 

Change in Control and Severance Agreement, dated September 11, 2020, between Orthofix Medical Inc. and Paul Gonsalves (filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2020 and incorporated herein by reference).

 

 

 

10.34

 

Amended Change in Control and Severance Agreement, dated November 1, 2016, between Orthofix International N.V. and Doug Rice (filed as an exhibit to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016 and incorporated herein by reference).

 

 

 

10.35

 

Change in Control and Severance Agreement, dated November 1, 2016, between Orthofix International N.V. and Kimberley Elting (filed as an exhibit to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016 and incorporated herein by reference).

 

 

 

21.1*

 

List of Subsidiaries.

 

 

 

23.1*

 

Consent of Independent Registered Public Accounting Firm.

 

 

 

31.1*

 

Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.

 

 

 

31.2*

 

Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.

 

 

 

32.1*

 

Section 1350 Certification of Chief Executive Officer and Certification of Chief Financial Officer.

 

 

 

101.INS

 

Inline XBRL Instance Document – the instance document does not appear in the interactive Data File because its XBRL tags are embedded within the XBRL document.

 

 

 

101.SCH*

 

Inline XBRL Taxonomy Extension Schema Document.

 

 

 

101.CAL*

 

Inline XBRL Taxonomy Calculation Linkbase Document.

 

 

 

101.DEF*

 

Inline XBRL Taxonomy Definition Linkbase Document.

 

 

 

57

 

Exhibit
Number 

 

Description 

 

 

 

101.LAB*

 

Inline XBRL Taxonomy Label Linkbase Document.

 

 

 

101.PRE*

 

Inline XBRL Taxonomy Presentation Linkbase Document.

 

 

 

104

 

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

 

*

Filed with this Form 10-K.

†

Certain private or confidential portions of this exhibit that are not material were omitted by means of redacting a portion of the text and replacing it with a bracketed asterisk.

 

Item 16.

Form 10-K Summary

None

58

 

 

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

 

 

ORTHOFIX MEDICAL INC.

 

 

 

 

 

Dated: February 25, 2022

 

 

 

By:

 

/s/   JON SERBOUSEK

 

 

 

 

Name:

 

Jon Serbousek

 

 

 

 

Title:

 

President and Chief Executive Officer, Director

 

 

 

 

 

 

 

Dated: February 25, 2022

 

 

 

By:

 

/s/   DOUG RICE 

 

 

 

 

Name:

 

Doug Rice

 

 

 

 

Title:

 

Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

 

Name 

 

Title 

 

Date 

 

 

 

 

 

/s/  JON SERBOUSEK 

Jon Serbousek

 

President and Chief Executive Officer, Director

(Principal Executive Officer)

 

February 25, 2022

 

 

 

 

 

/s/  DOUG RICE 

Doug Rice

 

Chief Financial Officer

(Principal Financial and Accounting Officer)

 

February 25, 2022

 

 

 

 

 

/s/ CATHERINE BURZIK  

Catherine Burzik

 

Chair of the Board of Directors

 

February 25, 2022

 

 

 

 

 

/s/  WAYNE BURRIS 

Wayne Burris

 

Director

 

February 25, 2022

 

 

 

 

 

/s/  JASON HANNON  

Jason Hannon

 

Director

 

February 25, 2022

 

 

 

 

 

/s/  JAMES HINRICHS 

James Hinrichs

 

Director

 

February 25, 2022

 

 

 

 

 

/s/  LILLY MARKS 

Lilly Marks

 

Director

 

February 25, 2022

 

 

 

 

 

/s/  MICHAEL PAOLUCCI 

 

Director

 

February 25, 2022

Michael Paolucci

 

 

 

 

 

/s/  JOHN SICARD

 

Director

 

February 25, 2022

John Sicard

 

 

 

 

 

/s/ THOMAS WEST

 

Director

 

February 25, 2022

Thomas West

 

 

 

 

 

 

 

 

 

 

 

 

59

 

 

ORTHOFIX MEDICAL INC.

Statement of Management’s Responsibility for Financial Statements

To the Shareholders of Orthofix Medical Inc.:

Management is responsible for the preparation of the consolidated financial statements and related information that are presented in this Annual Report. The consolidated financial statements, which include amounts based on management’s estimates and judgments, have been prepared in conformity with accounting principles generally accepted in the United States. Other financial information in the report to shareholders is consistent with that in the consolidated financial statements.

The Company maintains accounting and internal control systems to provide reasonable assurance at a reasonable cost that assets are safeguarded against loss from unauthorized use or disposition, and that the financial records are reliable for preparing financial statements and maintaining accountability for assets. These systems are augmented by written policies, an organizational structure providing division of responsibilities, and careful selection and training of qualified personnel.

The Company engaged Ernst & Young LLP, independent registered public accountants, to audit and render an opinion on the consolidated financial statements in accordance with auditing standards of the Public Company Accounting Oversight Board (United States). These standards include an assessment of the systems of internal controls and tests of transactions to the extent considered necessary by them to support their opinion.

The Board of Directors, through its Audit Committee, consisting solely of outside directors of the Company, meets periodically with management and our independent registered public accountants to ensure that each is meeting its responsibilities and to discuss matters concerning internal controls and financial reporting. Ernst & Young LLP has full and free access to the Audit Committee.

James Hinrichs

Chairman of the Audit Committee

Jon Serbousek

President and Chief Executive Officer, Director

Doug Rice

Chief Financial Officer

 

 

 

60

 

 

ORTHOFIX MEDICAL INC.

Index to Consolidated Financial Statements

 

 

Page

 

Index to Consolidated Financial Statements

 

F-1

  

Report of Independent Registered Public Accounting Firm (PCAOB ID: 42)

 

F-2

  

Consolidated Balance Sheets as of December 31, 2021 and 2020

 

F-5

  

Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended December 31, 2021, 2020, and 2019

 

F-6

  

Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2021, 2020, and 2019

 

F-7

  

Consolidated Statements of Cash Flows for the years ended December 31, 2021, 2020, and 2019

 

F-8

  

Notes to the Consolidated Financial Statements

 

F-9

  

 

 

 

F-1

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Shareholders and the Board of Directors of Orthofix Medical Inc.

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Orthofix Medical Inc. (the Company) as of December 31, 2021 and 2020, the related consolidated statements of operations and comprehensive income (loss), changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 25, 2022, expressed an unqualified opinion thereon.

Basis for Opinion

 

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

Critical Audit Matters

 

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.


F-2

 

 

   Contingent Consideration – Spinal Kinetics

Description of the Matter

As described in Note 12 to the consolidated financial statements, the Company’s contingent consideration at the acquisition date of Spinal Kinetics, Inc. consisted of potential milestone payments of $15.0 million for achieving FDA approval and up to $45 million in connection with certain future product sales. At December 31, 2021, the fair value of contingent consideration was $17.2 million.

Auditing the Company’s accounting for the fair value of its contingent consideration involved a high degree of subjectivity in evaluating management’s estimates and the fair value is sensitive to changes in unobservable inputs, such as the forecasted future revenues for the Spinal Kinetics, Inc. products, discount rate applied, and assumptions for potential volatility in the forecasted revenues.

How We Addressed the Matter in Our Audit

We obtained an understanding, evaluated the design and tested the operating effectiveness of controls that address the risks of material misstatement relating to the measurement and valuation of the contingent consideration liability.  For example, we tested controls over the Company’s process to estimate the fair value of the contingent consideration, management’s review of the significant estimation assumptions and methods used to develop the fair value estimate, the accuracy of the calculations included within the fair value model, and the underlying data used in the model.

To test the fair value of the contingent consideration liability, we performed audit procedures that included, among others, assessing the terms of the arrangement, including the criteria required to achieve the contingent consideration, and evaluating the significant assumptions and underlying data used by the Company in the valuation model. In addition, we involved a valuation specialist to assist in evaluating the appropriateness of the valuation model, certain of the valuation model’s assumptions, and to test the model’s computational accuracy. We also tested the completeness and accuracy of the underlying data used in the model.

   Inventory Excess and Obsolescence Reserves

Description of the Matter

At December 31, 2021, the Company’s inventory balance is $83.0 million, which is net of management’s estimate of inventory excess and obsolescence reserves. As described in Note 5 to the consolidated financial statements, management adjusts the value of its inventory to net realizable value to the extent it determines inventory cost cannot be recovered due to obsolescence or other factors. In order to make these determinations, management estimates future demand and sales prices to determine the appropriate inventory reserves and to make corresponding adjustments to the carrying value of these inventories to reflect the lower of cost or net realizable value.

 

Auditing management’s estimate of the inventory excess and obsolescence reserves involved a high degree of subjectivity because the estimate was sensitive to changes in assumptions, including forecasted product demand, length of product life cycles, and the period required to evaluate the level of market acceptance for new products. These assumptions have a significant effect on the measurement of inventory excess and obsolescence reserves.

How We Addressed the Matter in Our Audit

We obtained an understanding, evaluated the design and tested the operating effectiveness of controls that address the risks of material misstatement relating to the measurement and valuation of inventory excess and obsolescence reserves. For example, we tested controls over the Company’s processes to estimate the inventory excess and obsolescence reserves, management’s review and approval of the model used to estimate the inventory excess and obsolescence reserve, including the data inputs and outputs of such model and management’s qualitative adjustments to the model.

To test the inventory excess and obsolescence reserve balance, we performed audit procedures that included, among others, evaluating the significant assumptions and qualitative adjustments described above and the underlying data used by the Company in its analysis. Our audit procedures included testing the completeness and accuracy of the underlying data used in the model and evaluating whether such data was representative of current circumstances.  We assessed the historical accuracy of management’s estimates and performed sensitivity analyses of significant assumptions to evaluate the changes in the inventory excess and obsolescence reserves that would result from changes in the assumptions.

F-3

 

 

 

/s/ Ernst & Young LLP

 

We have served as the Company’s auditor since 2002.

Dallas, Texas

February 25, 2022

 

 

 

F-4

 

 

ORTHOFIX MEDICAL INC.

Consolidated Balance Sheets as of December 31, 2021 and 2020

 

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

 

2021

 

 

2020

 

Assets

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

87,847

 

 

$

96,291

 

Restricted cash

 

 

—

 

 

 

530

 

Accounts receivable, net of allowances of $4,944 and $4,848, respectively

 

 

78,560

 

 

 

72,423

 

Inventories

 

 

82,974

 

 

 

84,635

 

Prepaid expenses and other current assets

 

 

20,141

 

 

 

16,500

 

Total current assets

 

 

269,522

 

 

 

270,379

 

Property, plant and equipment, net

 

 

59,252

 

 

 

63,613

 

Intangible assets, net

 

 

52,666

 

 

 

60,517

 

Goodwill

 

 

71,317

 

 

 

84,018

 

Deferred income taxes

 

 

1,771

 

 

 

25,042

 

Other long-term assets

 

 

22,095

 

 

 

22,292

 

Total assets

 

$

476,623

 

 

$

525,861

 

Liabilities and shareholders’ equity

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

26,459

 

 

$

23,118

 

Current portion of finance lease liability

 

 

2,590

 

 

 

510

 

Other current liabilities

 

 

76,781

 

 

 

80,271

 

Total current liabilities

 

 

105,830

 

 

 

103,899

 

Long-term portion of finance lease liability

 

 

19,890

 

 

 

22,338

 

Other long-term liabilities

 

 

13,969

 

 

 

42,760

 

Total liabilities

 

 

139,689

 

 

 

168,997

 

Contingencies (Note 13)

 

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

 

 

 

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

   19,836,937 and 19,423,874 issued and outstanding as of December 31,

   2021 and 2020, respectively

 

 

1,983

 

 

 

1,942

 

Additional paid-in capital

 

 

313,951

 

 

 

292,291

 

Retained earnings

 

 

21,000

 

 

 

59,379

 

Accumulated other comprehensive income

 

 

—

 

 

 

3,252

 

Total shareholders’ equity

 

 

336,934

 

 

 

356,864

 

Total liabilities and shareholders’ equity

 

$

476,623

 

 

$

525,861

 

 

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

 

 

 

F-5

 

 

ORTHOFIX MEDICAL INC.

Consolidated Statements of Operations and Comprehensive Income (Loss)

For the years ended December 31, 2021, 2020, and 2019  

 

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

 

2021

 

 

2020

 

 

2019

 

Net sales

 

$

464,479

 

 

$

406,562

 

 

$

459,955

 

Cost of sales

 

 

114,914

 

 

 

101,889

 

 

 

100,607

 

Gross profit

 

 

349,565

 

 

 

304,673

 

 

 

359,348

 

Sales and marketing

 

 

221,318

 

 

 

204,434

 

 

 

223,676

 

General and administrative

 

 

69,353

 

 

 

67,948

 

 

 

85,607

 

Research and development

 

 

49,621

 

 

 

39,056

 

 

 

34,637

 

Acquisition-related amortization and remeasurement

 

 

17,588

 

 

 

(499

)

 

 

34,212

 

Operating loss

 

 

(8,315

)

 

 

(6,266

)

 

 

(18,784

)

Interest expense, net

 

 

(1,837

)

 

 

(2,483

)

 

 

(122

)

Other income (expense), net

 

 

(3,343

)

 

 

8,381

 

 

 

(8,143

)

Loss before income taxes

 

 

(13,495

)

 

 

(368

)

 

 

(27,049

)

Income tax benefit (expense)

 

 

(24,884

)

 

 

2,885

 

 

 

(1,413

)

Net income (loss)

 

$

(38,379

)

 

$

2,517

 

 

$

(28,462

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(1.95

)

 

$

0.13

 

 

$

(1.51

)

Diluted

 

 

(1.95

)

 

 

0.13

 

 

 

(1.51

)

Weighted average number of common shares:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

19,690,593

 

 

 

19,267,920

 

 

 

18,903,289

 

Diluted

 

 

19,690,593

 

 

 

19,391,718

 

 

 

18,903,289

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), before tax

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on debt securities

 

 

(942

)

 

 

1,881

 

 

 

(2,593

)

Reclassification adjustment for amortization of historical unrealized gains on debt security

 

 

—

 

 

 

—

 

 

 

(1,034

)

Reclassification adjustment for loss on debt security in net income

 

 

—

 

 

 

—

 

 

 

(5,193

)

Currency translation adjustment

 

 

(2,544

)

 

 

4,872

 

 

 

(653

)

Other comprehensive income (loss), before tax

 

 

(3,486

)

 

 

6,753

 

 

 

(9,473

)

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

 

 

234

 

 

 

(462

)

 

 

2,201

 

Other comprehensive income (loss), net of tax

 

 

(3,252

)

 

 

6,291

 

 

 

(7,272

)

Comprehensive income (loss)

 

$

(41,631

)

 

$

8,808

 

 

$

(35,734

)

 

 

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

 

F-6

 

 

ORTHOFIX MEDICAL INC.

Consolidated Statements of Changes in Shareholders’ Equity

For the years ended December 31, 2021, 2020, and 2019

 

(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 (Loss)

 

 

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

 

 

—

 

 

 

—

 

 

 

—

 

 

 

70

 

 

 

—

 

 

 

70

 

Cumulative effect adjustment from adoption

    of ASU 2018-02

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(937

)

 

 

937

 

 

 

—

 

Net loss

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(28,462

)

 

 

—

 

 

 

(28,462

)

Other comprehensive loss, net of tax

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(7,272

)

 

 

(7,272

)

Share-based compensation expense

 

 

—

 

 

 

—

 

 

 

21,540

 

 

 

—

 

 

 

—

 

 

 

21,540

 

Common shares issued, net

 

 

442,931

 

 

 

44

 

 

 

6,314

 

 

 

—

 

 

 

—

 

 

 

6,358

 

At December 31, 2019

 

 

19,022,619

 

 

$

1,902

 

 

$

271,019

 

 

$

57,749

 

 

$

(3,039

)

 

$

327,631

 

Cumulative effect adjustment from adoption

    of ASU 2016-13

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(887

)

 

 

—

 

 

 

(887

)

Net income

 

 

—

 

 

 

—

 

 

 

—

 

 

 

2,517

 

 

 

—

 

 

 

2,517

 

Other comprehensive income, net of tax

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

6,291

 

 

 

6,291

 

Share-based compensation expense

 

 

—

 

 

 

—

 

 

 

16,207

 

 

 

—

 

 

 

—

 

 

 

16,207

 

Common shares issued, net

 

 

401,255

 

 

 

40

 

 

 

5,065

 

 

 

—

 

 

 

—

 

 

 

5,105

 

At December 31, 2020

 

 

19,423,874

 

 

$

1,942

 

 

$

292,291

 

 

$

59,379

 

 

$

3,252

 

 

$

356,864

 

Net loss

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(38,379

)

 

 

—

 

 

 

(38,379

)

Other comprehensive loss, net of tax

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(3,252

)

 

 

(3,252

)

Share-based compensation expense

 

 

—

 

 

 

—

 

 

 

15,432

 

 

 

—

 

 

 

—

 

 

 

15,432

 

Common shares issued, net

 

 

413,063

 

 

 

41

 

 

 

6,228

 

 

 

—

 

 

 

—

 

 

 

6,269

 

At December 31, 2021

 

 

19,836,937

 

 

$

1,983

 

 

$

313,951

 

 

$

21,000

 

 

$

—

 

 

$

336,934

 

 

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

 

F-7

 

 

ORTHOFIX MEDICAL INC.

Consolidated Statements of Cash Flows

For the years ended December 31, 2021, 2020, and 2019

 

(U.S. Dollars, in thousands)

 

2021

 

 

2020

 

 

2019

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(38,379

)

 

$

2,517

 

 

$

(28,462

)

Adjustments to reconcile net income (loss) to net cash from operating activities

 

Depreciation and amortization

 

 

29,599

 

 

 

30,546

 

 

 

24,699

 

Impairment of goodwill

 

 

11,756

 

 

 

—

 

 

 

—

 

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

 

 

3,496

 

 

 

3,730

 

 

 

3,778

 

Provision for expected credit losses

 

 

444

 

 

 

199

 

 

 

1,891

 

Deferred income taxes

 

 

24,482

 

 

 

10,787

 

 

 

1,393

 

Share-based compensation expense

 

 

15,432

 

 

 

16,207

 

 

 

21,540

 

Interest and (gain) loss on the valuation of investment securities

 

 

(1,146

)

 

 

116

 

 

 

5,000

 

Change in fair value of contingent consideration

 

 

(3,575

)

 

 

(7,300

)

 

 

29,140

 

Other

 

 

1,064

 

 

 

(2,228

)

 

 

2,433

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(7,049

)

 

 

13,283

 

 

 

(11,037

)

Inventories

 

 

619

 

 

 

(873

)

 

 

(5,712

)

Prepaid expenses and other current assets

 

 

(2,834

)

 

 

4,526

 

 

 

(3,698

)

Accounts payable

 

 

4,253

 

 

 

2,532

 

 

 

2,138

 

Other current liabilities

 

 

1,013

 

 

 

5,975

 

 

 

(7,716

)

Contract liability (Note 15)

 

 

(9,060

)

 

 

13,851

 

 

 

—

 

Payment of contingent consideration

 

 

(6,595

)

 

 

—

 

 

 

(1,340

)

Other long-term assets and liabilities

 

 

(5,045

)

 

 

(19,596

)

 

 

(2,014

)

Net cash from operating activities

 

 

18,475

 

 

 

74,272

 

 

 

32,033

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

 

 

 

 

Acquisition of a business

 

 

—

 

 

 

(18,000

)

 

 

—

 

Capital expenditures for property, plant and equipment

 

 

(17,785

)

 

 

(15,485

)

 

 

(18,997

)

Capital expenditures for intangible assets

 

 

(1,807

)

 

 

(1,609

)

 

 

(1,527

)

Purchase of investment securities

 

 

(2,171

)

 

 

(10,000

)

 

 

—

 

Asset acquisitions and other investments

 

 

(1,250

)

 

 

(7,240

)

 

 

(2,400

)

Net cash from investing activities

 

 

(23,013

)

 

 

(52,334

)

 

 

(22,924

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from revolving credit facility

 

 

—

 

 

 

100,000

 

 

 

—

 

Repayment of revolving credit facility

 

 

—

 

 

 

(100,000

)

 

 

—

 

Proceeds from issuance of common shares

 

 

8,824

 

 

 

7,598

 

 

 

11,551

 

Payments related to withholdings for share-based compensation

 

 

(2,555

)

 

 

(2,493

)

 

 

(5,193

)

Payment of contingent consideration

 

 

(8,405

)

 

 

—

 

 

 

(13,660

)

Payments related to finance lease obligation

 

 

(537

)

 

 

(323

)

 

 

(365

)

Payment of debt issuance costs and other financing activities

 

 

(948

)

 

 

(1,537

)

 

 

(3,021

)

Net cash from financing activities

 

 

(3,621

)

 

 

3,245

 

 

 

(10,688

)

Effect of exchange rate changes on cash and restricted cash

 

 

(815

)

 

 

1,235

 

 

 

(207

)

Net change in cash, cash equivalents, and restricted cash

 

 

(8,974

)

 

 

26,418

 

 

 

(1,786

)

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

 

 

96,821

 

 

 

70,403

 

 

 

72,189

 

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

 

$

87,847

 

 

$

96,821

 

 

$

70,403

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

Cash and cash equivalents

 

$

87,847

 

 

$

96,291

 

 

$

69,719

 

Restricted cash

 

 

—

 

 

 

530

 

 

 

684

 

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

 

$

87,847

 

 

$

96,821

 

 

$

70,403

 

 

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

F-8

 

ORTHOFIX MEDICAL INC.

Notes to the Consolidated Financial Statements

1.

Business, basis of presentation, COVID-19 update, and CARES Act

Description of the Business

Orthofix Medical Inc. and its subsidiaries (the “Company”) is a global medical device company with a spine and orthopedics focus. The Company’s mission is to deliver innovative, quality-driven solutions while partnering with health care professionals to improve patient mobility. Headquartered in Lewisville, Texas, the Company’s spine and orthopedic products are distributed in over 60 countries via the Company's sales representatives and distributors.

Basis of Presentation

The consolidated financial statements include the financial statements of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions are eliminated in consolidation. Information on our accounting policies and methods used in the preparation of our consolidated financial statements are included, where applicable, in the respective footnotes that follow.

 

Footnote

 

Footnote Reference

Business, basis of presentation, COVID-19 update, and CARES Act

 

1

Significant accounting policies

 

2

Recently adopted accounting standards and recently issued accounting pronouncements

 

3

Acquisitions

 

4

Inventories

 

5

Property, plant, and equipment

 

6

Intangible assets

 

7

Goodwill

 

8

Leases

 

9

Other current liabilities

 

10

Long-term debt

 

11

Fair value measurements and investments

 

12

Commitments and contingencies

 

13

Shareholders' equity

 

14

Revenue recognition and accounts receivable

 

15

Business segment information

 

16

Acquisition-related amortization and remeasurement

 

17

Share-based compensation

 

18

Defined contribution plans and deferred compensation

 

19

Income taxes

 

20

Earnings per share

 

21

COVID-19 and the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”)

The global Coronavirus Disease 2019 ("COVID-19") pandemic has significantly affected the Company’s hospitals and physician customers, patients, communities, employees, and business operations. At various points in time, the pandemic has led to the cancellation or deferral of elective surgeries and procedures within certain hospitals, ambulatory surgery centers, and other medical facilities; restrictions on travel; the implementation of physical distancing measures; and the temporary or permanent closure of certain businesses. The Company's consolidated financial statements reflect estimates and assumptions made by management as of December 31, 2021. At this time, the future trajectory and duration of the COVID-19 pandemic remains uncertain, both in the U.S. and in other markets.

These matters are also described in Part I, Item 1A of this Form 10-K under the heading Risk Factors.

In March 2020, the CARES Act entered into federal law, which was aimed at providing emergency assistance and health care for individuals, families, and businesses affected by the COVID-19 pandemic and to provide general support to the U.S. economy. The CARES Act, among other things, included provisions relating to the deferment of employer side social security payments and

F-9

 

technical corrections to tax depreciation methods for qualified improvement property. The CARES Act had no impact to the Company’s income tax expense/benefit reported within the consolidated statements of operations for each of the years ended December 31, 2021 and 2020. The CARES Act also provided financial relief to the Company through other various programs, each of which are described in further detail below.

In April 2020, the Company received $13.9 million in funds from the Centers for Medicare & Medicaid Services (“CMS”) Accelerated and Advance Payment Program. For discussion of the Company’s accounting for these funds, see Note 15.

In April 2020, the Company also automatically received $4.7 million in funds from the U.S. Department of Health and Human Services as part of the Provider Relief Fund. The Company recognized this in-substance grant within other income for the year ended December 31, 2020.

In addition, as part of the CARES Act, the Company was permitted to defer all employer social security payroll tax payments for the remainder of the 2020 calendar year subsequent to the CARES Act being signed into federal law, such that 50% of the taxes could be deferred until December 31, 2021, with the remaining 50% deferred until December 31, 2022. As of December 31, 2020, the Company had deferred $0.6 million associated with this program, all of which was classified within other current liabilities. This deferred balance was then voluntarily repaid, in full, in the first quarter of 2021.

Consolidated Appropriations Act of 2021 (the “Consolidated Appropriations Act”)

On December 27, 2020, the Consolidated Appropriations Act entered into federal law. The Consolidated Appropriations Act did not have a material impact to the Company’s income tax provision for the year ended December 31, 2021.

American Rescue Plan Act of 2021 (“the American Rescue Plan”)

On March 11, 2021, the American Rescue Plan entered into federal law. The American Rescue Plan, among other things, included provisions related to the deduction of executive compensation beginning in 2027. The American Rescue Plan had no impact to the Company’s condensed consolidated financial statement for the year ended December 31, 2021.       

2.

Significant accounting policies

The preparation of financial statements in conformity with United States generally accepted accounting principles (“U.S. GAAP”) requires management 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 amounts of revenues and expenses during the reporting period. On an ongoing basis, we evaluate these estimates, including those related to contractual allowances, allowances for expected credit losses, inventories, valuation of intangible assets, goodwill, fair value measurements, litigation and contingent liabilities, income taxes, and share-based compensation. We base our estimates on historical experience, future expectations, and other relevant assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates.

 

The following is a discussion of accounting policies and methods used in our consolidated financial statements that are not presented within other footnotes. 

Market risk

In the ordinary course of business, the Company is exposed to the impact of changes in interest rates and foreign currency fluctuations. The Company’s objective is to limit the impact of such movements on earnings and cash flows. In order to achieve this objective, the Company seeks to balance its non-U.S. Dollar denominated income and expenditures.

The financial statements for operations outside the U.S. are generally maintained in their local currency. All foreign currency denominated balance sheet accounts, except shareholders’ equity, are translated to U.S. Dollars at year end exchange rates, and revenue and expense items are translated at average rates of exchange prevailing during the year. Gains and losses resulting from the translation of foreign currency are recorded in the accumulated other comprehensive income (loss) component of shareholders’ equity. Transactional foreign currency gains and losses, including those generated from intercompany operations, are included in other expense, net and were a loss of $4.0 million, a gain of $3.9 million, and a loss of $1.4 million for the years ended December 31, 2021, 2020, and 2019, respectively.

F-10

 

Financial instruments and concentration of credit risk

Financial instruments that could subject the Company to a concentration of credit risk consist primarily of cash, cash equivalents, and accounts receivable. Generally, cash is held at large financial institutions and cash equivalents consist of highly liquid money market funds. The Company performs ongoing credit evaluations of customers, generally does not require collateral, and maintains a reserve for expected credit losses. The Company believes that a concentration of credit risk related to accounts receivable is limited because customers are geographically dispersed and end users are diversified.  

Cash, cash equivalents, and restricted cash

The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.

In September 2019, approximately $0.5 million (based upon foreign exchange rates as of December 31, 2020) of the Company’s cash in Brazil was frozen upon request to satisfy a judgment related to an ongoing legal dispute with a former Brazilian distributor. In December 2021, the dispute was settled and the cash was disbursed to the former distributor.

Investing activities that did not result in cash receipts or cash payments during the years ended December 31, 2021, 2020, and 2019 consisted of the following, which were not included within cash from investing activities in the Company’s consolidated statements of cash flows:

(U.S. Dollars, in thousands)

 

2021

 

 

2020

 

 

2019

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

 

 

 

 

Noncash investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

Intangible assets acquired in asset acquisitions

 

$

—

 

 

$

1,575

 

 

$

1,600

 

Contingent consideration recognized at acquisition date

 

 

—

 

 

 

375

 

 

 

—

 

 

Advertising costs

Advertising costs are expensed as incurred. Advertising costs are included within sales and marketing expense and totaled $0.5 million, $0.9 million, and $0.8 million for the years ended December 31, 2021, 2020, and 2019, respectively.

Research and development costs, including in-process research and development (“IPR&D”) costs

Expenditures for research and development are expensed as incurred. Expenditures related to the Company’s collaborative arrangement with MTF Biologics (“MTF”) are expensed based on the terms of the related agreement. The Company recognized $0.8 million and $0.8 million in research and development expense for the years ended December 31, 2021 and 2020, respectively, under the collaborative arrangement with MTF and did not recognize any such expenditures for the year ended December 31, 2019.

In October 2020, the Company and Neo Medical SA, a privately held Swiss-based company developing a new generation of products for spinal surgery (“Neo Medical”), entered into a co-development agreement covering the parties’ joint development of single use instruments for cervical spine procedures. In connection with this agreement, the Company is responsible for the payment of variable costs associated with the development of the specified products. Research and development expenses incurred under this collaborative arrangement for the year ended December 31, 2021 totaled $0.6 million and for the year ended December 31, 2020, totaled less than $0.1 million.

In December 2021, the Company and nView medical, a Salt Lake City-based company developing surgical imaging and guidance systems enabled by artificial intelligence (“AI”), entered into an agreement to jointly develop and co-market the innovative nView systems with the Company’s cervical spine and pediatric limb deformity correction procedural solutions. Each party is responsible for payment of its own development and marketing costs incurred in association with the collaborative arrangement. No such costs were incurred for the year ended December 31, 2021. 

F-11

 

3.

Recently adopted accounting standards and recently issued accounting pronouncements

Adoption of Accounting Standards Update (“ASU”) 2021-10—Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance

In November 2021, the Financial Accounting Standards Board (“FASB”) issued ASU 2021-10, which aims to increase the transparency of government assistance by requiring entities to provide information about the nature of the transaction, terms and conditions associated with the transaction, and financial statement line items affected by the transaction. The Company voluntarily elected to early adopt this standard for the year ended December 31, 2021, on a prospective basis. Adoption of this standard did not have a significant impact to the existing disclosures made in relation to government assistance received by the Company in 2020 as part of the CARES Act.

Adoption of ASU 2019-12, Simplifying the accounting for income taxes

In December 2019, the FASB issued ASU 2019-12, which reduces the complexity of accounting for income taxes by eliminating certain exceptions to the general principles in ASC 740, Income Taxes. Additionally, the ASU simplifies U.S. GAAP by amending the requirements related to the accounting for "hybrid" tax regimes and also adding the requirement to evaluate when a step up in the tax basis of goodwill should be considered part of the business combination and when it should be considered a separate transaction. The Company adopted this ASU effective January 1, 2021, with certain provisions applied retrospectively and other provisions applied prospectively. Adoption of this ASU did not have a material impact to the Company’s condensed consolidated balance sheet, statements of operations, or cash flows

Adoption of ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and Subsequent Amendments

In June 2016, the FASB issued ASU 2016-13 (which was then further clarified in subsequent ASUs), which required that credit losses for certain types of financial instruments, including accounts receivable, be estimated based on expected credit losses among other changes. The Company adopted this ASU effective as of January 1, 2020, using a modified retrospective approach. Therefore, results for reporting periods after January 1, 2020, are presented under Topic 326, while prior period amounts are not adjusted and continue to be reported in accordance with the historical accounting guidance. See Note 15 for additional discussion of the Company’s adoption of Topic 326 and its resulting accounting policies. 

Adoption of ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment

In January 2017, the FASB issued ASU 2017-04, which eliminated Step 2 of the previous goodwill impairment test, which required a hypothetical purchase price allocation to measure goodwill impairment. Under ASU 2017-04, a goodwill impairment loss is now measured as the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the recorded amount of goodwill. The Company adopted this ASU effective January 1, 2020, on a prospective basis and followed this guidance to measure the goodwill impairment of $11.8 million recorded in the year ended December 31, 2021.

Adoption of ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement

In August 2018, the FASB issued ASU 2018-13, which eliminated certain disclosures, such as the amount and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, and added new disclosure requirements for Level 3 measurements. The Company adopted this ASU effective January 1, 2020, with certain provisions of the ASU applied retrospectively and other provisions provided prospectively. Adoption of this ASU did not impact the Company’s condensed consolidated balance sheet, statements of operations, or cash flows; however, adoption of the ASU did result in modified disclosures in Note 12.

Adoption of ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract

In August 2018, the FASB issued ASU 2018-15, which aligned 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 was not affected by the amendments in this update. The Company adopted this ASU effective January 1, 2020, on a prospective basis. Adoption of this ASU did not have a material impact to the Company’s condensed consolidated balance sheet, statements of operations, or cash flows, but is expected to impact future cloud computing arrangements.

F-12

 

Adoption of ASU 2020-04, Reference Rate Reform (Topic 848)

In March 2020, the FASB issued ASU 2020-04, which provided temporary optional guidance to ease the potential financial reporting burden of the expected market transition away from LIBOR. The new guidance provided optional expedients and exceptions for applying U.S. GAAP to contract modifications, hedge accounting, and other transactions affected by reference rate reform if certain criteria are met through December 31, 2022. The Company adopted this ASU effective March 12, 2020, the effective date of the ASU, on a prospective basis. Adoption of this ASU did not have a material impact to the Company’s condensed consolidated balance sheet, statements of operations, or cash flows, but is expected to impact the future borrowing rate used for the Company’s secured revolving credit facility.

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

In February 2016, the FASB issued ASU 2016-02, which changed how lessees account for leases, requiring a liability to be recorded on the balance sheet in most cases based on the present value of future lease obligations with a corresponding right-of-use asset. The Company adopted this ASU effective January 1, 2019, using a modified retrospective approach. Upon adoption, the Company elected a package of practical expedients permitted within the new standard. The elected practical expedients allowed 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. See Note 9 for additional discussion of the Company’s adoption of Topic 842 and its lease accounting policies.

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 allowed entities to reclassify stranded tax effects resulting from the Tax Cuts and Jobs Act (the "Tax Act") from accumulated other comprehensive income (loss) to retained earnings. The Company adopted this ASU effective January 1, 2019, using a modified retrospective approach, which resulted in an increase to accumulated other comprehensive income (loss) and a decrease in retained earnings of $0.9 million.

4.

Acquisitions

FITBONE Asset Purchase Agreement

In March 2020, the Company completed an Asset Purchase Agreement (the “Purchase Agreement”) with Wittenstein SE (“Wittenstein”), a privately-held German-based company, to acquire assets associated with the FITBONE intramedullary lengthening system for limb lengthening of the femur and tibia bones for $18.0 million in cash consideration. The Company also entered into a Contract Manufacturing and Supply Aggreement (“CMSA”) with Wittenstein. 

Distributor Acquisition

In July 2020, the Company, acquired certain assets of a medical device distributor for consideration of up to $7.6 million.

Options Medical, LLC Asset Acquisition

In January 2019, the Company acquired certain assets of Options Medical, LLC (“Options Medical”), a medical device distributor based in Florida for $6.4 million. Under the terms of the acquisition, the parties terminated 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.

               

F-13

 

 

Purchase Price Allocations for Acquisitions Completed in 2020 and 2019

 

(U.S. Dollars, in thousands)

 

FITBONE

 

 

Assigned

Useful

Life

 

Distributor Acquisition

 

 

Assigned

Useful

Life

 

Options Medical

 

 

Assigned

Useful

Life

Assets acquired

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inventories

 

$

528

 

 

 

 

$

—

 

 

 

 

$

—

 

 

 

Other long-term assets

 

 

—

 

 

 

 

 

—

 

 

 

 

 

175

 

 

 

Intangible assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

 

800

 

 

15 years

 

 

7,340

 

 

5 years

 

 

5,832

 

 

10 years

Developed technology

 

 

4,500

 

 

8 years

 

 

—

 

 

N/A

 

 

—

 

 

N/A

IPR&D

 

 

300

 

 

Indefinite

 

 

—

 

 

N/A

 

 

—

 

 

N/A

Trade name

 

 

600

 

 

15 years

 

 

—

 

 

N/A

 

 

—

 

 

N/A

Assembled workforce

 

 

—

 

 

N/A

 

 

235

 

 

5 years

 

 

568

 

 

5 years

Total identifiable assets acquired

 

$

6,728

 

 

 

 

$

7,575

 

 

 

 

$

6,575

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities assumed

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other current liabilities

 

$

—

 

 

 

 

$

—

 

 

 

 

$

69

 

 

 

Other long-term liabilities

 

 

—

 

 

 

 

 

—

 

 

 

 

 

106

 

 

 

Total liabilities assumed

 

 

—

 

 

 

 

 

—

 

 

 

 

 

175

 

 

 

Goodwill

 

 

11,272

 

 

 

 

 

—

 

 

 

 

 

—

 

 

 

Total fair value of consideration transferred

 

$

18,000

 

 

 

 

$

7,575

 

 

 

 

$

6,400

 

 

 

 

 

5.

Inventories

Inventories are valued at the lower of cost or estimated net realizable value, after provision for excess, obsolete or impaired items, which is reviewed and updated on a periodic basis by management. For inventory procured or produced, whether internally or through contract manufacturing arrangements, at our manufacturing facility in Italy, cost is determined on a weighted-average basis, which approximates the first-in, first-out (“FIFO”) method. For inventory procured or produced, whether internally or through contract manufacturing arrangements, at our manufacturing facilities in Texas and California, standard cost, which approximates actual cost on the FIFO method, is used to value inventory. Standard costs are reviewed annually by management, or more often in the event circumstances indicate a change in cost has occurred.

Work-in-process, finished products, and field/consignment inventory include material, labor, and production overhead costs. Field/consignment inventory represents immediately saleable finished products inventory that is in the possession of the Company’s independent sales representatives or located at third party customers, such as distributors and hospitals.

 

 

December 31,

 

(U.S. Dollars, in thousands)

 

2021

 

 

2020

 

Raw materials

 

$

9,589

 

 

$

8,442

 

Work-in-process

 

 

15,096

 

 

 

12,149

 

Finished products

 

 

15,149

 

 

 

29,142

 

Field/consignment

 

 

43,140

 

 

 

34,902

 

Inventories

 

$

82,974

 

 

$

84,635

 

 

The Company adjusts the value of its inventory to the extent management determines that the cost cannot be recovered due to obsolescence or other factors. In order to make these determinations, management uses estimates of future demand and sales prices for each product to determine the appropriate inventory reserves and to make corresponding adjustments to the carrying value of these inventories to reflect the lower of cost or estimated net realizable value.

 

F-14

 

 

6.

Property, plant, and equipment

 

Property, plant, and equipment is stated at cost less accumulated depreciation, or when acquired as part of a business combination, at estimated fair value. Costs include all expenditures necessary to place the asset in service, generally including freight and sales and use taxes. Property, plant, and equipment includes instrumentation held by customers, which is generally used to facilitate the implantation of the Company’s products.

The useful lives of these assets are generally as follows:

 

 

 

Years

Buildings

 

25 to 33

Plant and equipment

 

1 to 10

Instrumentation

 

3 to 4

Computer software

 

3 to 7

Furniture and fixtures

 

4 to 8

 

The Company evaluates the useful lives of these assets on an annual basis. Depreciation is computed on a straight-line basis over the useful lives of the assets. Depreciation of leasehold improvements is computed over the shorter of the lease term or the useful life of the asset. Total depreciation expense was $20.2 million, $19.3 million and $17.7 million for the years ended December 31, 2021, 2020, and 2019, respectively.

Expenditures for maintenance and repairs and minor renewals and improvements, which do not extend the lives of the respective assets, are expensed as incurred. All other expenditures for renewals and improvements are capitalized. The assets and related accumulated depreciation are adjusted for property retirements and disposals, with the resulting gain or loss included in earnings. Fully depreciated assets remain in the accounts until retired from service.

 

 

December 31,

 

(U.S. Dollars, in thousands)

 

2021

 

 

2020

 

Cost

 

 

 

 

 

 

 

 

Buildings

 

$

3,925

 

 

$

4,096

 

Plant and equipment

 

 

50,275

 

 

 

50,159

 

Instrumentation

 

 

100,515

 

 

 

93,252

 

Computer software

 

 

53,200

 

 

 

52,565

 

Furniture and fixtures

 

 

8,307

 

 

 

8,024

 

Construction in progress

 

 

2,597

 

 

 

1,628

 

Finance lease assets

 

 

23,397

 

 

 

23,337

 

Property, plant, and equipment, gross

 

 

242,216

 

 

 

233,061

 

Accumulated depreciation

 

 

(182,964

)

 

 

(169,448

)

Property, plant, and equipment, net

 

$

59,252

 

 

$

63,613

 

 

The Company capitalizes system development costs related to internal-use software during the application development stage. Costs related to preliminary project activities and post-implementation activities are expensed as incurred. Internal-use software is amortized on a straight-line basis over its estimated useful life, generally three to seven years.  

 

Long-lived assets are evaluated for impairment annually or whenever events or changes in circumstances have occurred that would indicate impairment. For purposes of the evaluation, the Company groups its long-lived assets with other assets and liabilities at the lowest level of identifiable cash flows if the asset does not generate cash flows independent of other assets and liabilities. If the carrying value of the asset or asset group exceeds the undiscounted cash flows expected to result from the use and eventual disposition of the asset group, the Company will write the carrying value down to the fair value in the period identified.

 

The Company generally determines fair value of long-lived assets as the present value of estimated future cash flows. In determining the estimated future cash flows associated with the assets, the Company uses estimates and assumptions about future revenue contributions, cost structures, and remaining useful lives of the asset group. The use of alternative assumptions, including estimated cash flows, discount rates, and alternative estimated remaining useful lives could result in different calculations of impairment.

 

 

F-15

 

 

7.

Intangible assets

Intangible assets are recorded at cost, or when acquired as a part of a business combination, at estimated fair value, such as for in-process research and development (“IPR&D”) assets. These assets are amortized on a straight-line basis over the useful lives of the assets, which the Company believes is materially consistent with the pattern of economic benefit provided by the assets.

 

 

 

 

 

December 31,

 

(U.S. Dollars, in thousands)

 

Weighted Average Amortization Period

 

2021

 

 

2020

 

Cost

 

 

 

 

 

 

 

 

 

 

Patents

 

10 years

 

$

44,561

 

 

$

50,326

 

Developed technology

 

10 years

 

 

43,979

 

 

 

44,334

 

IPR&D

 

Indefinite

 

 

300

 

 

 

300

 

Customer relationships

 

7 years

 

 

15,621

 

 

 

15,685

 

License and other

 

8 years

 

 

18,924

 

 

 

16,941

 

Trademarks—finite lived

 

10 years

 

 

1,839

 

 

 

1,812

 

 

 

9 years

 

 

125,224

 

 

 

129,398

 

Accumulated amortization

 

 

 

 

 

 

 

 

 

 

Patents

 

 

 

$

(41,408

)

 

$

(46,272

)

Developed technology

 

 

 

 

(13,409

)

 

 

(8,925

)

Customer relationships

 

 

 

 

(4,520

)

 

 

(2,095

)

License and other

 

 

 

 

(12,528

)

 

 

(11,006

)

Trademarks—finite lived

 

 

 

 

(693

)

 

 

(583

)

 

 

 

 

 

(72,558

)

 

 

(68,881

)

Intangible assets, net

 

 

 

$

52,666

 

 

$

60,517

 

 

 

Acquired IPR&D represents the fair value assigned to acquired research and development assets that have not reached technological feasibility. In a business combination, the fair value assigned to acquired IPR&D is determined by estimating the remaining costs to develop the acquired technology into commercially viable products, estimating the resulting revenues from the projects, and discounting the net cash flows to present value. The revenue and cost projections used to value acquired IPR&D are, as applicable, reduced based on the probability of success of developing the asset. Additionally, estimated revenues consider the relevant market sizes and growth factors, expected trends in technology, and the nature and expected timing of new product introductions by the Company and its competitors. The rates utilized to discount the net cash flows to their present value are commensurate with the stage of development of the project and uncertainties in the economic estimates used in the projections. Any future costs to further develop the IPR&D subsequent to acquisition are recorded to research and development expense as incurred.

 

IPR&D assets are considered to be indefinite-lived until the completion or abandonment of the associated research and development efforts. During the period the assets are considered indefinite-lived, they are not amortized but tested for impairment. Impairment testing is performed at least annually or when a triggering event occurs that could indicate a potential impairment. If and when development is complete, which generally occurs when regulatory approval to market a product is obtained, the associated assets are deemed finite-lived and are amortized over a period that best reflects the economic benefits provided by these assets.   

F-16

 

 

Amortization expense for intangible assets was $9.4 million, $11.2 million and $7.0 million for the years ended December 31, 2021, December 31, 2020, and 2019, respectively. Future amortization expense for intangible assets is estimated as follows:

 

(U.S. Dollars, in thousands)

 

Amortization

 

2022

 

$

9,376

 

2023

 

 

8,692

 

2024

 

 

8,254

 

2025

 

 

7,252

 

2026

 

 

6,215

 

Thereafter

 

 

12,577

 

Total finite-lived intangible assets, net

 

$

52,366

 

Indefinite-lived intangible assets, net

 

 

300

 

Intangible assets, net

 

$

52,666

 

 

 

8.

Goodwill

The Company tests goodwill at least annually for impairment. The Company tests more frequently if indicators are present or changes in circumstances suggest that impairment may exist. These indicators include, among others, declines in sales, earnings or cash flows, or the development of a material adverse change in the business climate. The Company assesses goodwill for impairment at the reporting unit level, which is defined as an operating segment or one level below an operating segment.

As part of the change in reporting segments, which occurred during the first quarter of 2019, the Company performed a quantitative assessment of goodwill immediately prior to and subsequently following the change in reporting segments. The analysis did not result in an impairment. In addition, the net carrying value of goodwill that was previously reported under the prior reporting segments of (i) Bone Growth Therapies, (ii) Spinal Implants, and (iii) Biologics has been consolidated and is now included within the Global Spine reporting segment.

In the fourth quarter of 2021, the Company performed a quantitative assessment of its goodwill. The Company estimated the fair value of each reporting unit using a weighted average of fair value derived from both an income approach and a market approach (all Level 3 fair value measurements). Upon estimating the fair value of each of its reporting units, the Company determined its Global Orthopedics reporting unit’s fair value was less than its carrying value of net assets. This resulted in recording a full impairment of the Global Orthopedics goodwill of $11.8 million, which is reflected within Acquisition-related amortization and remeasurement. This amount also represents the total of the Company’s accumulated goodwill impairment losses as of December 31, 2021. The assessment concluded there were no indicators of impairment for the Global Spine goodwill.

The following table presents the net carrying value of goodwill, and a rollforward of such balances from December 31, 2020, by reportable segment:

(U.S. Dollars, in thousands)

 

December 31, 2020

 

 

Impairment

 

 

Currency Translation Adjustment

 

 

December 31, 2021

 

Global Spine

 

$

71,317

 

 

$

—

 

 

$

—

 

 

$

71,317

 

Global Orthopedics

 

 

12,701

 

 

 

(11,756

)

 

 

(945

)

 

 

—

 

Goodwill

 

$

84,018

 

 

$

(11,756

)

 

$

(945

)

 

$

71,317

 

 

9.

Leases

As discussed in Note 3, the Company adopted ASU No. 2016-02—Leases (Topic 842), as of January 1, 2019, using the modified retrospective approach. Adoption of the new standard resulted in the recognition of operating lease assets and lease liabilities of $20.2 million and $20.5 million, respectively. The difference between the lease assets and lease liabilities, net of the deferred tax impact, and the elimination of historical prepaid or deferred rent, was recorded as an adjustment to retained earnings. The standard did not have a material impact to the Company’s consolidated statements of operations and comprehensive income (loss) or cash flows.

 

F-17

 

 

The Company determines if a contractual arrangement qualifies as a lease at inception. The Company’s leases primarily relate to facilities, vehicles, and equipment, and certain contract manufacturing agreements. Lease assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Lease assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As the Company’s leases do not provide an implicit rate, the Company’s incremental borrowing rate is used as a discount rate, based on the information available at the commencement date, in determining the present value of lease payments. Lease assets also include the impact of any prepayments made and are reduced by impact of any lease incentives.

 

The Company does not recognize lease liabilities or lease assets on the balance sheet for short-term (leases with a lease term of twelve months or less as of the commencement date). Rather, any short-term lease payments are recognized as an expense on a straight-line basis over the lease term. The current period short-term lease expense reasonably reflects our short-term lease commitments.

 

For all classifications of leases, the Company combines lease and nonlease components to account for them as a single lease component. Variable lease payments are excluded from the lease liability and recognized in the period in which the obligation is incurred. Additionally, lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise the option.

 

A summary of the Company’s lease portfolio as of December 31, 2021, and 2020, is presented in the table below:

 

(U.S. Dollars, in thousands, except lease term and discount rate)

 

Classification

 

December 31, 2021

 

 

December 31, 2020

 

Assets

 

 

 

 

 

 

 

 

 

 

Operating leases

 

Other long-term assets

 

$

3,155

 

 

$

4,840

 

Finance leases

 

Property, plant and equipment, net

 

 

18,600

 

 

 

20,552

 

Total lease assets

 

 

 

$

21,755

 

 

$

25,392

 

Liabilities

 

 

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

 

 

 

 

 

Operating leases

 

Other current liabilities

 

$

1,834

 

 

$

2,092

 

Finance leases

 

Current portion of finance lease liability

 

 

2,590

 

 

 

510

 

Long-term

 

 

 

 

 

 

 

 

 

 

Operating leases

 

Other long-term liabilities

 

 

1,443

 

 

 

2,946

 

Finance leases

 

Long-term portion of finance lease liability

 

 

19,890

 

 

 

22,338

 

Total lease liabilities

 

 

 

$

25,757

 

 

$

27,886

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average Remaining Lease Term

 

 

 

 

 

 

 

 

 

 

Operating leases

 

 

 

3.3 years

 

 

3.6 years

 

Finance leases

 

 

 

17.0 years

 

 

18.1 years

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average Discount Rate

 

 

 

 

 

 

 

 

 

 

Operating leases

 

 

 

 

2.6

%

 

 

2.4

%

Finance leases

 

 

 

 

4.2

%

 

 

4.2

%

 

F-18

 

 

The components of lease costs were as follows:

 

(U.S. Dollars, in thousands)

 

For the Year Ended December 31, 2021

 

 

For the Year Ended December 31, 2020

 

 

For the Year Ended December 31, 2019

 

Finance lease costs:

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of right-of-use assets

 

$

2,049

 

 

$

1,766

 

 

$

972

 

Interest on finance lease liabilities

 

 

933

 

 

 

940

 

 

 

919

 

Operating lease costs

 

 

2,234

 

 

 

2,235

 

 

 

2,161

 

Short-term lease costs

 

 

213

 

 

 

230

 

 

 

255

 

Variable lease costs

 

 

815

 

 

 

673

 

 

 

749

 

Total lease costs

 

$

6,244

 

 

$

5,844

 

 

$

5,056

 

 

Supplemental cash flow information related to leases was as follows:

 

(U.S. Dollars, in thousands)

 

For the Year Ended December 31, 2021

 

For the Year Ended December 31, 2020

 

For the Year Ended December 31, 2019

 

Cash paid for amounts included in the measurement of lease liabilities

 

 

 

 

 

 

 

 

 

 

Operating cash flows from operating leases

 

$

4,627

 

$

4,299

 

$

4,075

 

Operating cash flows from finance leases

 

 

907

 

 

689

 

 

919

 

Financing cash flows from finance leases

 

 

537

 

 

323

 

 

365

 

Right-of-use assets obtained in exchange for lease obligations

 

 

 

 

 

 

 

 

 

 

Operating leases

 

 

589

 

 

959

 

 

878

 

Finance leases

 

 

149

 

 

1,949

 

 

21,179

 

   

A summary of the Company’s remaining lease liabilities as of December 31, 2021, is included below:

 

(U.S. Dollars, in thousands)

 

Operating

Leases

 

 

Finance

Leases

 

2022

 

$

1,883

 

 

$

3,480

 

2023

 

 

614

 

 

 

1,508

 

2024

 

 

211

 

 

 

1,538

 

2025

 

 

192

 

 

 

1,543

 

2026

 

 

189

 

 

 

1,562

 

Thereafter

 

 

330

 

 

 

22,613

 

Total undiscounted value of lease liabilities

 

 

3,419

 

 

 

32,244

 

Less: Interest

 

 

(142

)

 

 

(9,764

)

Present value of lease liabilities

 

$

3,277

 

 

$

22,480

 

 

 

 

 

 

 

 

 

 

Current portion of lease liabilities

 

$

1,834

 

 

$

2,590

 

Long-term portion of lease liabilities

 

 

1,443

 

 

 

19,890

 

Total lease liabilities

 

$

3,277

 

 

$

22,480

 

 

 

F-19

 

 

10.

Other current liabilities

 

 

December 31,

 

(U.S. Dollars, in thousands)

 

2021

 

 

2020

 

Accrued expenses

 

$

7,151

 

 

$

6,090

 

Salaries, bonuses, commissions and related taxes payable

 

 

23,552

 

 

 

22,362

 

Accrued distributor commissions

 

 

10,787

 

 

 

9,331

 

Accrued legal and settlement expenses

 

 

3,794

 

 

 

5,422

 

Contingent consideration liability

 

 

17,200

 

 

 

14,900

 

Short-term operating lease liability

 

 

1,834

 

 

 

2,092

 

Non-income taxes payable

 

 

4,655

 

 

 

5,509

 

Accelerated and advance payment program

 

 

4,791

 

 

 

9,834

 

Other payables

 

 

3,017

 

 

 

4,731

 

Other current liabilities

 

$

76,781

 

 

$

80,271

 

 

    

11.

Long-term debt

On October 25, 2019, the Company, and certain of its wholly-owned subsidiaries (collectively with the Company, the “Borrowers”), as borrowers, and certain material subsidiaries of the Company as guarantors, entered into a Second Amended and Restated Credit Agreement (the “Amended Credit Agreement”) with JPMorgan Chase Bank, N.A. (“JPMorgan”), as Administrative Agent, and certain lender parties thereto. The Amended Credit Agreement provides for a $300 million secured revolving credit facility (the “Facility”) amending and restating the $125 million secured revolving credit facility that previously existed with such lenders. The Credit Agreement has a maturity date of October 25, 2024.

In April 2020, as a precautionary measure to increase the Company’s cash position and to preserve financial flexibility during the initial uncertainty resulting from the COVID-19 pandemic, the Company completed a borrowing of $100.0 million under the Facility. The Company made payments totaling $100.0 million in the third quarter of 2020 to fully pay down the outstanding balance. The Company had no borrowings outstanding under the Facility at December 31, 2021, and 2020, respectively.

Borrowings under the Amended Credit Agreement may be used for, among other things, working capital and other general corporate purposes of the Company and its subsidiaries (including permitted acquisitions and permitted payments of dividends and other distributions). The Facility is available in U.S. Dollars with up to $150 million of the Facility available to be borrowed in Euros (the “Agreed Currencies”).  The Facility further permits up to $50 million of the Facility to be utilized for the issuance of letters of credit in the Agreed Currencies. The Borrowers have the ability to increase the amount of the Facility, which increases may take the form of increases to the revolving credit commitments or the issuance of new term A loans, by an aggregate amount of up to the greater of $150 million or an incremental amount such that the total amount of the Facility does not exceed 350% of consolidated EBITDA of the Company (as determined for the four fiscal quarter period most recently ended for which financial statements are available), upon satisfaction of customary conditions precedent for such increases or incremental loans and receipt of additional commitments by one or more existing or new lenders.

Borrowings under the Facility bear interest at a floating rate, which is, at the Borrowers’ option, either LIBOR, or possibly an alternative reference rate to be used in place of LIBOR upon the occurrence of a benchmark transition event, plus an applicable margin ranging from 1.25% to 2.25% or a base rate plus an applicable margin ranging from 0.25% to 1.25% (in each case subject to adjustment based on the Company’s total leverage ratio).  An unused fee ranging from 0.15% to 0.25% (subject to adjustment based on the Company’s total leverage ratio) is payable quarterly in arrears based on the daily amount of the undrawn portion of each lender’s revolving credit commitment under the Facility.  Fees are payable on outstanding letters of credit at a rate equal to the applicable margin for LIBOR loans, plus certain customary fees payable solely to the issuer of the letter of credit.  

Certain of the Company’s existing and future material subsidiaries (collectively, the “Guarantors”) are required to guarantee the repayment of the Borrowers’ obligations under the Amended Credit Agreement.  The obligations of the Borrowers and each of the Guarantors with respect to the Amended Credit Agreement are secured by a pledge of substantially all of the personal property assets of the Borrowers and each of the Guarantors, including accounts receivables, deposit accounts, intellectual property, investment property, inventory, equipment, and equity interests in their respective subsidiaries.    

F-20

 

The Amended Credit Agreement contains customary affirmative and negative covenants, including limitations on the Company’s and its 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 Amended Credit Agreement contains financial covenants requiring the Company on a consolidated basis to maintain, as of the last day of any fiscal quarter, a total net leverage ratio of not more than 3.5 to 1.0 (which ratio can be permitted to increase to 4.0 to 1.0 for no more than 4 fiscal quarters following a material acquisition) and an interest coverage ratio of at least 3.0 to 1.0. The Amended Credit 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 Facility may be accelerated and/or the lenders’ commitments terminated. The Company is in compliance with all required financial covenants as of December 31, 2021.

In conjunction with obtaining the Facility, the Company paid $1.5 million in debt issuance costs and has capitalized a total of $1.8 million associated with the Facility (inclusive of certain capitalized costs prior to the most recent amendment). These costs are being amortized over the life of the Facility. The debt issuance costs are included in other long-term assets, net of accumulated amortization. As of December 31, 2021, and December 31, 2020, debt issuance costs, net of accumulated amortization, were $1.0 million and $1.4 million, respectively. Debt issuance costs amortized or expensed totaled $0.4 million, $0.4 million, and $0.4 million for the years ended December 31, 2021, 2020, and 2019, respectively.

The Company has an unused available Italian line of credit of €5.5 million ($6.3 million and $6.7 million) at December 31, 2021, and 2020, respectively. This unsecured line of credit provides the Company the option to borrow amounts in Italy at interest rates determined at the time of borrowing.

The Company paid cash related to interest of $1.5 million, $1.9 million, and $0.8 million for the years ended December 31, 2021, 2020, and 2019, respectively.

 

 

12.

Fair value measurements and investments

Fair value is defined as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Non-financial assets and liabilities of the Company measured at fair value include any long-lived assets that are impaired in a currently reported period or equity securities measured at observable prices in orderly transactions. The authoritative guidance also describes three levels of inputs that may be used to measure fair value:

 

Level 1:

quoted prices in active markets for identical assets and liabilities

 

 

Level 2:

observable inputs other than quoted prices in active markets for identical assets and liabilities

 

 

Level 3:

unobservable inputs in which there is little or no market data available, which require the reporting entity to develop its own assumptions

The Company’s financial instruments include cash equivalents, restricted cash, accounts receivable, accounts payable, long-term secured debt, available for sale debt securities, equity securities, contingent consideration, and deferred compensation plan liabilities. The carrying value of cash equivalents, restricted cash, accounts receivable, and accounts payable approximate fair value due to the short-term maturities of these instruments. The Company’s secured revolving credit facility carries a floating rate of interest, and therefore, the carrying value of long-term debt is considered to approximate the fair value.

F-21

 

The Company’s available for sale debt securities, equity securities, contingent consideration, and deferred compensation plan liabilities are the only financial instruments recorded at fair value on a recurring basis as follows:

(U.S. Dollars, in thousands)

 

Balance

December 31,

2021

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Neo Medical convertible loan agreements

 

$

7,148

 

 

$

—

 

 

$

—

 

 

$

7,148

 

Neo Medical preferred equity securities

 

 

5,413

 

 

 

—

 

 

 

5,413

 

 

 

—

 

Bone Biologics equity securities

 

 

309

 

 

 

309

 

 

 

—

 

 

 

—

 

Other investments

 

 

1,505

 

 

 

—

 

 

 

—

 

 

 

1,505

 

Total

 

$

14,375

 

 

$

309

 

 

$

5,413

 

 

$

8,653

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Spinal Kinetics contingent consideration

 

$

(17,200

)

 

$

—

 

 

$

—

 

 

$

(17,200

)

Other contingent consideration

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Deferred compensation plan

 

 

(1,314

)

 

 

—

 

 

 

(1,314

)

 

 

—

 

Total

 

$

(18,514

)

 

$

—

 

 

$

(1,314

)

 

$

(17,200

)

 

(U.S. Dollars, in thousands)

 

Balance

December 31,

2020

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Neo Medical convertible loan agreement

 

$

7,160

 

 

$

—

 

 

$

—

 

 

$

7,160

 

Neo Medical preferred equity securities

 

 

5,000

 

 

 

—

 

 

 

5,000

 

 

 

—

 

Bone Biologics equity securities

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Total

 

$

12,160

 

 

$

—

 

 

$

5,000

 

 

$

7,160

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Spinal Kinetics contingent consideration

 

$

(35,400

)

 

$

—

 

 

$

—

 

 

$

(35,400

)

Other contingent consideration

 

 

(375

)

 

 

—

 

 

 

—

 

 

 

(375

)

Deferred compensation plan

 

 

(1,441

)

 

 

—

 

 

 

(1,441

)

 

 

—

 

Total

 

$

(37,216

)

 

$

—

 

 

$

(1,441

)

 

$

(35,775

)

 

The fair value of the Company’s deferred compensation plan liabilities are determined based on inputs that are readily available in public markets or that can be derived from information available in publicly quoted markets; therefore, the Company has categorized this liability as a Level 2 financial instrument.

Neo Medical Convertible Loan Agreements and Equity Investment

On October 1, 2020, the Company purchased shares of Neo Medical’s preferred stock for consideration of $5.0 million and entered into a Convertible Loan Agreement pursuant to which Orthofix loaned Neo Medical CHF 4.6 million (the “Convertible Loan”). The loan bears interest at 8.0%, with interest due semi-annually. At each interest payment date, the borrower may elect to capitalize any interest due to the then outstanding principal balance of the loan. The Convertible Loan matures on October 1, 2024. If a change in control of Neo Medical occurs prior to the maturity date, the Convertible Loan shall become immediately due upon such event. The Convertible Loan may be convertible by either party into shares of Neo Medical’s preferred stock. The Company may convert the loan at its own election at any time prior to the full repayment or settlement of the Convertible Loan. Neo Medical may elect to convert the loan only in the event of a qualified financing event, as defined within the agreement. The price per share at which the loan converts is dependent upon i) the party electing conversion and ii) Neo Medical’s price per share in its most recent fundraising activities at the time of conversion, as specified within the agreement.

On October 10, 2021, the Company entered into an additional Convertible Loan Agreement (the “Additional Convertible Loan”), separate and distinct from the investment made in 2020, pursuant to which the Company loaned Neo Medical an additional CHF 0.6 million ($0.7 million as of the issuance date). The Company made the election to convert the Additional Convertible Loan into shares of Neo Medical’s preferred stock in January 2022.

F-22

 

The equity securities are recorded in other long-term assets and are considered an investment that does not have a readily determinable fair value. As such, the Company measures this investment at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer. In November 2021, Neo Medical completed a qualified capital increase. As such, the Company adjusted the carrying amount of its equity investment to reflect the change in observable price and recorded a $0.4 million unrealized gain recognized in other income.

The table below presents a reconciliation of the carrying value of the Company’s investment in Neo Medical preferred equity securities for the years ended December 31, 2021, and 2020:

 

(U.S. Dollars, in thousands)

 

2021

 

 

2020

 

Fair value of Neo Medical preferred equity securities at January 1

 

$

5,000

 

 

$

—

 

Additions

 

 

—

 

 

 

5,000

 

Foreign currency remeasurement recognized in other income, net

 

 

77

 

 

 

—

 

Unrealized gain recognized in other income (expense), net

 

 

336

 

 

 

—

 

Fair value of Neo Medical preferred equity securities at December 31

 

 

5,413

 

 

 

5,000

 

 

Both of the Convertible Loans are recorded in other long-term assets as available for sale debt securities as of December 31, 2021. These Convertible Loans are recorded at fair value, with applicable interest recorded in interest income. The fair value of the Convertible Loans is based upon significant unobservable inputs, including the use of option-pricing models, Monte Carlo simulations for certain periods, and a probability-weighted discounted cash flows model, requiring the Company to develop its own assumptions. Therefore, the Company has categorized these assets as Level 3 financial assets.

Some of the more significant unobservable inputs used in the fair value measurement of the Loans include applicable discount rates, implied volatility, the likelihood and projected timing of repayment or conversion, and projected cash flows in support of the estimated enterprise value of Neo Medical. Holding other inputs constant, changes in these assumptions could result in a significant change in the fair value of the Convertible Loans. If the amortized cost of the Convertible Loans exceeds their estimated fair value, the securities are deemed to be impaired, and must be evaluated for the recognition of credit losses. Impairment resulting from credit losses is recognized within the statement of income, while impairment resulting from other factors is recognized within other comprehensive income (loss). As of December 31, 2021, the Company has not recognized any credit losses related to the Convertible Loans.

The following table provides a reconciliation of the beginning and ending balances of the Convertible Loans, measured at fair value using significant unobservable inputs (Level 3):

 

(U.S. Dollars, in thousands)

 

2021

 

 

2020

 

Fair value of Neo Medical Convertible Loans at January 1

 

$

7,160

 

 

$

—

 

Additions

 

 

671

 

 

 

5,000

 

Interest recognized in interest income, net

 

 

421

 

 

 

103

 

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

 

 

(162

)

 

 

176

 

Unrealized gain (loss) recognized in other comprehensive income (loss)

 

 

(942

)

 

 

1,881

 

Fair value of Neo Medical Convertible Loans at December 31

 

 

7,148

 

 

 

7,160

 

Amortized cost basis of Neo Medical Convertible Loans at December 31

 

 

6,209

 

 

 

5,279

 

The following table provides quantitative information related to certain key assumptions utilized within the valuation of the Convertible Loans as of December 31, 2021:

(U.S. Dollars, in thousands)

 

Fair Value as of December 31, 2021

 

 

Unobservable inputs

 

Estimate

 

Neo Medical Convertible Loans

 

$

7,148

 

 

Cost of equity discount rate

 

 

16.1

%

 

 

 

 

 

 

Implied volatility

 

 

67.8

%

F-23

 

 

Bone Biologics Equity Securities

The Company holds an investment in common stock of Bone Biologics Inc. (“Bone Biologics”), a developer of orthobiologic products. Prior to 2021, the equity securities were considered an investment that did not have a readily determinable fair value as Bone Biologics was privately held. As such, the Company measured these investments at cost, less any impairments, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer. In 2020, the Company recognized an impairment of $0.2 million as a result of concerns over Bone Biologics’ ability to continue as a going concern.

In the fourth quarter of 2021, Bone Biologics completed a public offering of units, with each unit consisting of one share of common stock and one warrant to purchase common shares. As a result of the public offering, Bone Biologics’ common stock is now actively traded on the NASDAQ (ticker BBLG). The Company concluded the investment represented a Level 1 fair value measurement subsequent to the public offering as the common shares now have quoted prices in active markets for identical assets. As such, the Company now records the investment at fair value, with changes in fair value recorded within other income (expense), net.  

The following table presents the changes in fair value recognized for the equity securities for each of the years ended December 31, 2021, 2020, and 2019:

 

(U.S. Dollars, in thousands)

 

2021

 

 

2020

 

 

2019

 

Bone Biologics equity securities at January 1

 

$

—

 

 

$

219

 

 

$

219

 

Fair value adjustments and impairments recognized in other income (expense), net

 

 

309

 

 

 

(219

)

 

 

—

 

Bone Biologics equity securities at December 31

 

$

309

 

 

$

—

 

 

$

219

 

Other investments

Other investments represent other assets and investments recorded at fair value that are not deemed to be material for disclosure on an individual basis. The fair value of these assets are based upon significant unobservable inputs, such as probability-weighted discounted cash flows models, requiring the Company to develop its own assumptions. Therefore, the Company has categorized these assets as Level 3 financial assets. As of December 31, 2021, this balance was classified within other long-term assets.

Contingent Consideration

The Company recognized a contingent consideration obligation in connection with the acquisition of Spinal Kinetics in 2018. The Spinal Kinetics contingent consideration consists of potential future milestone payments of up to $60.0  million in cash. The milestone payments included (i) $15.0  million upon U.S. Food and Drug Administration (“FDA”) approval of the M6-C artificial cervical disc (the “FDA Milestone”) and (ii) revenue-based milestone payments of up to $45.0  million in connection with future sales of the acquired artificial discs. Milestones must be achieved within five years  of April 30, 2018, to trigger applicable payments. The FDA Milestone was achieved and paid in 2019. A second milestone payment, totaling $15.0 million, was achieved and paid in 2021 upon meeting certain net sales targets.

The estimated fair value of the remaining Spinal Kinetics contingent consideration was $17.2  million as of December 31, 2021. The estimated fair value reflects assumptions made by management as of December 31, 2021, such as the expected timing and volume of elective procedures and the impact of these procedures on future revenues. However, the actual amount ultimately paid could be higher or lower than the fair value of the remaining contingent consideration (ultimate payment will either be $30.0 million or the liability will be reversed if the milestone is not met within the required timeline). As of December 31, 2021, the Company has classified the $17.2  million liability within other current liabilities, as the Company currently expects to achieve the remaining milestone in the next twelve months. Any changes in fair value are recorded as an operating expense within acquisition-related amortization and remeasurement.

F-24

 

The following table provides a reconciliation of the beginning and ending balances for the contingent consideration measured at fair value using significant unobservable inputs (Level 3):

 

(U.S. Dollars, in thousands)

 

2021

 

 

2020

 

Spinal Kinetics contingent consideration at January 1

 

$

35,400

 

 

$

42,700

 

Decrease in fair value recognized in acquisition-related amortization and remeasurement

 

 

(3,200

)

 

 

(7,300

)

Payment made

 

 

(15,000

)

 

 

—

 

Spinal Kinetics contingent consideration at December 31

 

$

17,200

 

 

$

35,400

 

 

The Company estimated the fair value of the remaining potential future revenue-based milestone payment using a Monte Carlo simulation and a discounted cash flow model. This fair value measurement is based on significant inputs that are unobservable in the market and thus represents a Level 3 measurement. The key assumptions in applying the valuation model include the Company’s forecasted future revenues for Motion Preservation products, the expected timing of payment, applicable discount rates applied, and assumptions for potential volatility of the Company’s forecasted revenue. Significant changes in these assumptions could result in a significantly higher or lower fair value.

The following table provides a range of key assumptions used within the valuation as of December 31, 2021:

 

(U.S. Dollars, in thousands)

 

Fair Value as of December 31, 2021

 

 

Valuation Technique

 

Unobservable inputs

 

Range

Spinal Kinetics contingent consideration

 

$

17,200

 

 

Discounted cash flow

 

Revenue discount rate

 

7.13% - 7.55%

 

 

 

 

 

 

 

 

Payment discount rate

 

3.38% - 3.81%

 

 

 

 

 

 

 

 

Projected year of achievement

 

2022

 

eNeura Debt Security

Until October of 2019, the Company held a debt security of eNeura, Inc. (“eNeura”), a privately held medical technology company that was developing devices for the treatment of migraines. In October 2019, the Company and eNeura settled the debt security for a $4.0 million cash payment. As such, the Company determined the investment was impaired and adjusted the carrying value of the debt security to its settlement value by recording a net other-than-temporary impairment of $6.5 million in other expense, net, which included a reclassification of the related unrealized gains included in accumulated other comprehensive income (loss) of $5.2 million.

 

 

13.

Commitments and Contingencies

Contingencies policy

The Company records accruals for certain outstanding legal proceedings, investigations, or claims when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. The Company evaluates developments in legal proceedings, investigations, and claims that could affect the amount of any accrual, as well as any developments that would make a loss contingency both probable and reasonably estimable on a quarterly basis. When a loss contingency is not both probable and reasonably estimable, the Company does not accrue the loss. However, if the loss (or an additional loss in excess of the accrual) is at least a reasonable possibility and material, then the Company discloses a reasonable estimate of the possible loss or range of loss, if such reasonable estimate can be made. If the Company cannot make a reasonable estimate of the possible loss, or range of loss, then that is disclosed. In addition, legal fees and other directly related costs are expensed as incurred.

In addition to the matters described in the paragraphs below, in the normal course of its business, the Company is involved in various lawsuits from time to time and may be subject to certain other contingencies. The Company believes any losses related to these matters are individually and collectively immaterial as to a possible loss and range of loss.

Italian Medical Device Payback (“IMDP”)

In 2015, the Italian Parliament introduced rules for entities that supply goods and services to the Italian National Healthcare System. A key provision of the law is a ‘payback’ measure, requiring medical device companies in Italy to make payments to the Italian government if medical device expenditures exceed regional maximum ceilings. Companies are required to make payments equal to a percentage of expenditures exceeding maximum regional caps. There is considerable uncertainty about how the law will operate and what the exact timeline is for finalization. The Company’s current assessment of the IMDP involves significant judgment regarding the expected scope and actual implementation terms of the measure as the latter have not been clarified to date by Italian authorities. The Company accounts for the estimated cost of the IMDP as sales and marketing expense and periodically reassesses this liability based upon current facts and circumstances. As a result of certain temporary relief provided by the Italian National Healthcare System in response to the COVID-19 pandemic through a law enacted on December 30, 2021, the Company recorded a benefit of $1.2 million for the year ended December 31, 2021, and expense of $1.5 million and $1.3 million for the years ended December 31, 2020, and 2019, respectively. As of December 31, 2021, the Company has accrued $5.2 million related to the IMDP, which it has classified within other long-term liabilities; however, the actual liability could be higher or lower than the amount accrued once the law has been clarified by the Italian authorities.

F-25

 

 

14.

Shareholders’ equity

Dividends

The Company has not historically paid dividends to holders of its common stock. Certain subsidiaries of the Company have restrictions on their ability to pay dividends in certain circumstances pursuant to the Amended Credit Agreement. In the event that the Company decides to pay a dividend to holders of its common stock in the future with dividends received from its subsidiaries, the Company may, based on prevailing rates of taxation, be required to pay additional withholding and income tax on such amounts received from its subsidiaries.

Accumulated Other Comprehensive Income (Loss)

Accumulated other comprehensive income (loss) is comprised of foreign currency translation adjustments and unrealized gains (losses) on available for sale debt securities. The Company’s policy is to release income tax effects related to items recognized within accumulated other comprehensive income (loss) using a portfolio approach. The components of and changes in accumulated other comprehensive income (loss) are as follows:

(U.S. Dollars, in thousands)

 

Currency

Translation

Adjustments

 

 

eNeura

Debt Security

 

 

Neo Medical Convertible Loans

 

 

Accumulated Other

Comprehensive

Income (Loss)

 

Balance at December 31, 2018

 

$

(2,386

)

 

$

5,682

 

 

$

—

 

 

$

3,296

 

Cumulative effect adjustment from adoption of ASU 2018-02

 

 

—

 

 

 

937

 

 

 

—

 

 

 

937

 

Other comprehensive loss

 

 

(653

)

 

 

(2,593

)

 

 

—

 

 

 

(3,246

)

Income taxes

 

 

—

 

 

 

642

 

 

 

—

 

 

 

642

 

Reclassification adjustment to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Interest income (expense), net

 

 

—

 

 

 

(1,034

)

 

 

—

 

 

 

(1,034

)

   Other expense, net

 

 

—

 

 

 

(5,193

)

 

 

—

 

 

 

(5,193

)

   Income taxes

 

 

—

 

 

 

1,559

 

 

 

—

 

 

 

1,559

 

Balance at December 31, 2019

 

$

(3,039

)

 

$

—

 

 

$

—

 

 

$

(3,039

)

Other comprehensive income

 

 

4,872

 

 

 

—

 

 

 

1,881

 

 

 

6,753

 

Income taxes

 

 

—

 

 

 

—

 

 

 

(462

)

 

 

(462

)

Balance at December 31, 2020

 

$

1,833

 

 

$

—

 

 

$

1,419

 

 

$

3,252

 

Other comprehensive loss

 

 

(2,544

)

 

 

—

 

 

 

(942

)

 

 

(3,486

)

Income taxes

 

 

—

 

 

 

—

 

 

 

234

 

 

 

234

 

Balance at December 31, 2021

 

$

(711

)

 

$

—

 

 

$

711

 

 

$

—

 

 

15.

Revenue recognition and accounts receivable

Revenue Recognition

The Company accounts for a contract when there is (i) approval and commitment from both parties, (ii) the rights of the parties are identified, (iii) payment terms are identified, (iv) the contract has commercial substance, (v) and collectability of consideration is probable. The Company’s contracts may contain one or more performance obligations. If a contract contains more than one performance obligation, the Company allocates the total transaction price to each of the performance obligations based upon the observable standalone selling price of the promised goods or services underlying each performance obligation. The Company recognizes revenue when control of the promised goods or services is transferred to the customer, which typically occurs at a point

F-26

 

in time upon shipment, delivery, or utilization, in an amount that reflects the consideration which the Company expects to be entitled in exchange for the promised goods or services. The consideration for goods or services reflects any fixed amount stated per the contract and estimates for any variable consideration, such as discounts, to the extent that is it probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved.

The following sections discuss the Company’s revenue recognition policies by significant product category:

Bone Growth Therapies

Bone Growth Therapies revenue is largely attributable to the U.S. and is comprised of third-party payor transactions and wholesale revenue.

The largest portion of Bone Growth Therapies revenue is derived from third-party payors. This includes commercial insurance carriers, health maintenance organizations, preferred provider organizations, and governmental payors, such as Medicare. Revenue is recognized when the product is fitted to and accepted by the patient and all applicable documents required by the third-party payor have been obtained. Amounts paid by third-party payors are generally based on fixed or allowable reimbursement rates. These revenues are recorded at the expected or preauthorized reimbursement rates, net of any contractual allowances or adjustments. Certain billings are subject to review by the third-party payors and may be subject to adjustment.

Wholesale revenue is related to the sale of the Company’s bone growth stimulators directly to durable medical equipment suppliers. Wholesale revenues are typically recognized upon shipment and receipt of a confirming purchase order, which is when the customer obtains control of the promised goods.

Biologics

Biologics revenue is largely attributable to the U.S. and is primarily related to a collaborative arrangement with MTF, which extends through December 31, 2032. Under this arrangement, the Company markets tissue for bone repair and reconstruction under the brand names Trinity Evolution and Trinity ELITE. Per the terms of the agreement, MTF sources the tissue, processes it to create the allografts, packages, and delivers the tissue to the customer. The Company has exclusive global marketing rights for the Trinity Evolution and Trinity ELITE tissues, exclusive rights to market fiberFUSE and AlloQuent tissues in the U.S., non-exclusive marketing rights for certain other products, and receives marketing fees from MTF based on total sales. MTF is considered the primary obligor in these arrangements; therefore, the Company recognizes marketing service fees on a net basis within net sales upon shipment of the product to the customer and receipt of a confirming purchase order.

Spinal Implants and Global Orthopedics

Spinal Implants and Global Orthopedics products are distributed world-wide, with U.S. sales largely comprised of commercial sales and international sales derived from both commercial sales and stocking distributor arrangements.

Commercial revenue is largely related to the sale of the Company’s Spinal Implants and Global Orthopedics products to hospital customers. The customer obtains control and revenues are recognized when these products have been utilized and a confirming purchase order has been received from the hospital.

Other revenues within the Spinal Implants and Global Orthopedics product categories are derived from stocking distributors, who purchase the Company’s products and then re-sell them directly to customers, such as hospitals. For stocking distributor arrangements, it is the Company’s policy to recognize revenue upon shipment and receipt of a confirming purchase order, which is when the distributor obtains control of the promised goods. The transaction price is estimated based upon the Company’s historical collection experience with the stocking distributor. To derive this estimate, the Company analyzes twelve months of historical invoices by stocking distributor and the subsequent collections on those invoices for a period of up to 24 months subsequent to the invoice date. The historical collection percentage, which is specific to each stocking distributor, is then used to calculate the transaction price.

F-27

 

Product Sales and Marketing Service Fees

The table below presents net sales, which includes product sales and marketing service fees, for each of the years ended December 31, 2021, 2020, and 2019.

 

 

For the year ended December 31,

 

(U.S. Dollars, in thousands)

 

2021

 

 

2020

 

 

2019

 

Product sales

 

$

409,554

 

 

$

353,087

 

 

$

397,064

 

Marketing service fees

 

 

54,925

 

 

 

53,475

 

 

 

62,891

 

Net sales

 

$

464,479

 

 

$

406,562

 

 

$

459,955

 

Product sales primarily consists of the sale of Bone Growth Therapies, Spinal Implants, and Global Orthopedics products. Marketing service fees are received from MTF based on total sales of biologics tissues and relates solely to the Biologics product category within the Global Spine reporting segment. Marketing service fees received from MTF were $54.9 million, or approximately 97% of total Biologics revenues, for the year ended December 31, 2021. As MTF is the single supplier for the allografts in the Company’s Biologics portfolio, derived from deceased donors for their bone grafts and living donors for their amnion grafts, any event or circumstance that would impact MTF’s continued access to donors or the Company’s ability to market these tissues may adversely impact the Company’s financial results.

Revenues exclude any value added or other local taxes, intercompany sales, and trade discounts. Shipping and handling costs for products shipped to customers are included in cost of sales, and were $3.5 million, $2.4 million, and $2.8 million for the years ended December 31, 2021, 2020, and 2019, respectively.

 

Accounts receivable and related allowances

Payment terms vary by the type and location of the Company’s customers and the products or services offered. The term between invoicing and when payment is due is not significant.

As discussed in Note 3, the Company adopted ASU No. 2016-13 - Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and subsequent amendments, using a modified retrospective approach. Adoption of the new standard resulted in an increase to the Company’s allowance for expected credit losses of $1.1 million, an increase in deferred income tax assets of $0.2 million, and a decrease in retained earnings of $0.9 million as of January 1, 2020. Subsequent to the adoption of ASU 2016-13, the Company’s allowance for expected credit losses represents the portion of the receivable’s amortized cost basis that an entity does not expect to collect over the receivable’s contractual life, considering past events, current conditions, and reasonable and supportable forecasts of future economic conditions.

The process for estimating the ultimate collection of accounts receivable involves significant assumptions and judgments. The determination of the contractual life of accounts receivable, the aging of outstanding receivables, as well as the historical collections, write-offs, and payor reimbursement experience over the estimated contractual lives of such receivables, are integral parts of the estimation process related to reserves for expected credit losses and the establishment of contractual allowances. Accounts receivable are analyzed on a quarterly basis to assess the adequacy of both reserves for expected credit losses and contractual allowances. Revisions in allowances for expected credit loss estimates are recorded as an adjustment to bad debt expense within sales and marketing expenses. Revisions to contractual allowances are recorded as an adjustment to net sales. These estimates are periodically tested against actual collection experience. In addition, the Company analyzes its receivables by geography and by customer type, where appropriate, in developing estimates for expected credit losses.

The following table provides a detail of changes in the Company’s allowance for expected credit losses for the years ended December 31, 2021, and 2020:

 

 

For the year ended December 31,

 

(U.S. Dollars, in thousands)

 

2021

 

 

2020

 

Allowance for expected credit losses beginning balance

 

$

4,848

 

 

$

3,987

 

Impact of adoption of ASU 2016-13

 

 

—

 

 

 

1,120

 

Current period provision for expected credit losses

 

 

444

 

 

 

199

 

Writeoffs charged against the allowance and other

 

 

(126

)

 

 

(714

)

Effect of changes in foreign exchange rates

 

 

(222

)

 

 

256

 

Allowance for expected credit losses ending balance

 

$

4,944

 

 

$

4,848

 

 

F-28

 

 

The Company will generally sell receivables from certain Italian hospitals each year to accelerate cash collections. During 2021, 2020, and 2019, the Company sold €8.4 million, €8.3 million, and €9.8 million ($9.9 million, $9.6 million, and $10.9 million) of receivables, respectively. The related fees for 2021, 2020, and 2019, were $0.2 million, $0.3 million, and $0.3 million, respectively, which were recorded as interest expense. Accounts receivables sold without recourse are removed from the balance sheet at the time of sale.

Puerto Rico Settlement

In June 2019, the Company received a payment of $1.4 million from the Administration of Medical Services of Puerto Rico, a government-owned corporation, in settlement of approximately $2.5 million of outstanding accounts receivable. This $2.5 million of outstanding accounts receivable had previously been fully reserved between the Company’s allowances for expected credit losses and contractual allowances. As a result of this settlement, and in accordance with the Company’s policy, the Company recorded the resulting adjustment to contractual allowances of $0.4 million within net sales and the recovery of the allowance for expected credit losses as a credit to bad debt expense of $1.0 million.

Contract Liabilities

The Company’s contract liabilities largely relate to a prepayment of $13.9 million received in 2020 from the CMS as part of the Accelerated and Advance Payment Program of the CARES Act.

On October 1, 2020, the President of the United States signed the “Continuing Appropriations Act, 2021 and Other Extensions Act,” which relaxed a number of the Medicare Accelerated and Advance Payment Program’s recoupment terms for providers and suppliers that received funds from the program. Starting in April 2021, Medicare began to recoup 25% of Medicare payments otherwise owed to the provider or supplier for submitted claims. Beginning March 2022, recoupment increases to 50% for another six months. Thus, during these time periods, rather than receiving the full amount of payment for newly submitted claims, the Company’s outstanding accelerated / advance payment balance will be reduced by the recoupment amount until the full balance has been repaid. As of December 31, 2021, the balance of the contract liability associated with the Accelerated and Advance Payment Program totaled $4.8 million. The Company has classified the entire balance of this contract liability within other current liabilities based upon the Company’s estimates of when such funds will be recouped.

   

The following table provides a detail of changes in the Company’s contract liability associated with the Accelerated and Advanced Payment Program for the years ended December 31, 2021, and 2020:

 

 

For the Year Ended December 31,

 

(U.S. Dollars, in thousands)

 

2021

 

 

2020

 

Contract liability beginning balance

 

$

13,851

 

 

$

—

 

Additions

 

 

—

 

 

 

13,851

 

Recoupment recognized in net sales

 

 

(9,060

)

 

 

—

 

Contract liability ending balance

 

$

4,791

 

 

$

13,851

 

Other Contract Assets

The Company’s contract assets, excluding accounts receivable (“Other Contract Assets”), largely consist of payments made to certain distributors to obtain contracts, gain access to customers in certain territories, and to provide the benefit of the exclusive distribution of the Company’s products. Other Contract Assets are included in other long-term assets and totaled $1.4 million and $2.0 million as of December 31, 2021, and 2020, respectively.

Other Contract Assets are amortized on a straight-line basis over the term of the related contract. No impairments were incurred for other contract assets in 2021 or 2020. Further, the Company applies the practical expedient to expense sales commissions when incurred, as the applicable amortization period would be for one year or less.

 

 

F-29

 

 

16.

Business segment information

The Company has two reporting segments: Global Spine and Global Orthopedics. These reporting segments represent the operating segments for which the Chief Executive Officer, who is also Chief Operating Decision Maker (the “CODM”), reviews financial information and makes resource allocation decisions among businesses. The primary metric used by the CODM in managing the Company is earnings before interest, tax, depreciation, and amortization (“EBITDA”). The Company neither discretely allocates assets, other than goodwill, to its operating segments nor evaluates the operating segments using discrete asset information. Accordingly, the reporting segment information has been prepared based on these two reporting segments.

Global Spine

The Global Spine reporting segment offers three primary product categories: Bone Growth Therapies, Spinal Implants, and Biologics.

The Bone Growth Therapies product category manufactures, distributes, and provides support services of market leading bone growth stimulator devices that enhance bone fusion. These Class III medical devices are indicated as an adjunctive, noninvasive treatment to improve fusion success rates in the cervical and lumbar spine as well as a therapeutic treatment for non-spine fractures that have not healed (non-unions). This product category uses distributors and sales representatives to sell its devices to hospitals, healthcare providers, and patients, primarily in the U.S.

The Spinal Implants product category designs, develops, and markets a broad portfolio of motion preservation and fixation implant products used in surgical procedures of the spine. Spinal Implants distributes its products through a global network of distributors and sales representatives to sell spine products to hospitals and healthcare providers.

The Biologics product category provides a portfolio of regenerative products and tissue forms that allow physicians to successfully treat a variety of spinal and orthopedic conditions. This product category specializes in the marketing of the Company’s  regeneration tissue forms and distributes its tissues to hospitals and healthcare providers, primarily in the U.S., through a network of independent distributors and sales representatives. The partnership with MTF allows the Company to exclusively market the Trinity Evolution and Trinity ELITE tissue forms for musculoskeletal defects to enhance bony fusion and also allows the Company to exclusively distribute the Alloquent and fiberFUSE allografts.

Global Orthopedics

The Global Orthopedics reporting segment offers products and solutions that allow physicians to successfully treat a variety of orthopedic conditions unrelated to the spine. This reporting segment specializes in the design, development, and marketing of the Company’s orthopedic products used in fracture repair, deformity correction, and bone reconstruction procedures. Global Orthopedics distributes its products through a global network of distributors and sales representatives to sell orthopedic products to hospitals, and healthcare providers.

Corporate

Corporate activities are comprised of the operating expenses and activities of the Company not necessarily identifiable within the two reporting segments.

The table below presents net sales by major product category by reporting segment: 

 

 

 

Year Ended December 31,

 

 

 

2021

 

 

2020

 

 

2019

 

(U.S. Dollars, in thousands)

 

Net Sales

 

 

Percent of

Total Net

Sales

 

 

Net Sales

 

 

Percent of

Total Net

Sales

 

 

Net Sales

 

 

Percent of

Total Net

Sales

 

Bone Growth Therapies

 

$

187,448

 

 

 

40.4

%

 

$

171,396

 

 

 

42.2

%

 

$

197,181

 

 

 

42.9

%

Spinal Implants

 

 

115,094

 

 

 

24.8

%

 

 

94,857

 

 

 

23.3

%

 

 

94,544

 

 

 

20.6

%

Biologics

 

 

56,421

 

 

 

12.1

%

 

 

55,482

 

 

 

13.6

%

 

 

65,496

 

 

 

14.2

%

Global Spine

 

 

358,963

 

 

 

77.3

%

 

 

321,735

 

 

 

79.1

%

 

 

357,221

 

 

 

77.7

%

Global Orthopedics

 

 

105,516

 

 

 

22.7

%

 

 

84,827

 

 

 

20.9

%

 

 

102,734

 

 

 

22.3

%

Net sales

 

$

464,479

 

 

 

100.0

%

 

$

406,562

 

 

 

100.0

%

 

$

459,955

 

 

 

100.0

%

F-30

 

 

The following table presents EBITDA, the primary metric used in managing the Company, by reporting segment:

 

 

 

Year Ended December 31,

 

(U.S. Dollars, in thousands)

 

2021

 

 

2020

 

 

2019

 

Global Spine

 

$

58,014

 

 

$

63,036

 

 

$

39,528

 

Global Orthopedics

 

 

3,374

 

 

 

(4,993

)

 

 

7,496

 

Corporate

 

 

(31,691

)

 

 

(25,382

)

 

 

(49,252

)

Total EBITDA

 

 

29,697

 

 

 

32,661

 

 

 

(2,228

)

Depreciation and amortization

 

 

(29,599

)

 

 

(30,546

)

 

 

(24,699

)

Goodwill impairment

 

 

(11,756

)

 

 

—

 

 

 

—

 

Interest expense, net

 

 

(1,837

)

 

 

(2,483

)

 

 

(122

)

Loss before income taxes

 

$

(13,495

)

 

$

(368

)

 

$

(27,049

)

The following table presents depreciation and amortization by reporting segment:

  

 

 

Year Ended December 31,

 

(U.S. Dollars, in thousands)

 

2021

 

 

2020

 

 

2019

 

Global Spine

 

$

17,548

 

 

$

18,362

 

 

$

14,329

 

Global Orthopedics

 

 

8,233

 

 

 

7,896

 

 

 

5,575

 

Corporate

 

 

3,818

 

 

 

4,288

 

 

 

4,795

 

Total

 

$

29,599

 

 

$

30,546

 

 

$

24,699

 

Geographical information

The following data includes net sales by geographic destination:

 

 

 

Year Ended December 31,

 

(U.S. Dollars, in thousands)

 

2021

 

 

2020

 

 

2019

 

U.S.

 

$

361,945

 

 

$

327,280

 

 

$

361,939

 

Italy

 

 

20,187

 

 

 

18,733

 

 

 

19,560

 

Germany

 

 

13,716

 

 

 

11,940

 

 

 

12,688

 

United Kingdom

 

 

10,552

 

 

 

7,147

 

 

 

10,090

 

France

 

 

10,475

 

 

 

8,354

 

 

 

8,747

 

Brazil

 

 

5,108

 

 

 

2,347

 

 

 

7,685

 

Others

 

 

42,496

 

 

 

30,761

 

 

 

39,246

 

Net sales

 

$

464,479

 

 

$

406,562

 

 

$

459,955

 

 

F-31

 

 

The table below presents net sales by geographic destination for each reporting segment and for the consolidated Company:

  

 

 

Year Ended December 31,

 

(U.S. Dollars, in thousands)

 

2021

 

 

2020

 

 

2019

 

Global Spine

 

 

 

 

 

 

 

 

 

 

 

 

U.S.

 

$

337,455

 

 

$

304,595

 

 

$

335,410

 

International

 

 

21,508

 

 

 

17,140

 

 

 

21,811

 

Total Global Spine

 

 

358,963

 

 

 

321,735

 

 

 

357,221

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Global Orthopedics

 

 

 

 

 

 

 

 

 

 

 

 

U.S.

 

$

24,490

 

 

 

22,685

 

 

 

26,529

 

International

 

 

81,026

 

 

 

62,142

 

 

 

76,205

 

Total Global Orthopedics

 

 

105,516

 

 

 

84,827

 

 

 

102,734

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

U.S.

 

 

361,945

 

 

 

327,280

 

 

 

361,939

 

International

 

 

102,534

 

 

 

79,282

 

 

 

98,016

 

Net sales

 

$

464,479

 

 

$

406,562

 

 

$

459,955

 

 

The following data includes property, plant, and equipment by geographic area:

 

(U.S. Dollars, in thousands)

 

2021

 

 

2020

 

U.S.

 

$

45,090

 

 

$

47,646

 

Italy

 

 

9,412

 

 

 

10,503

 

Germany

 

 

2,544

 

 

 

2,516

 

United Kingdom

 

 

1,193

 

 

 

1,540

 

Brazil

 

 

91

 

 

 

163

 

Others

 

 

922

 

 

 

1,245

 

Total

 

$

59,252

 

 

$

63,613

 

  

 

17.

Acquisition-related amortization and remeasurement

 

Acquisition-related amortization and remeasurement consists of (i) amortization related to intangible assets acquired through business combinations or asset acquisitions, (ii) the remeasurement of any related contingent consideration arrangement, (iii) recognized costs associated with acquired in-process research and development (“IPR&D”) assets, which are recognized immediately upon acquisition, and (iv) impairments of goodwill related to previously recognized business combinations. Components of acquisition-related amortization and remeasurement for the years ended December 31, 2021, 2020, and 2019, respectively, are as follows:

 

 

Year Ended December 31,

 

(U.S. Dollars, in thousands)

 

2021

 

 

2020

 

 

2019

 

Changes in fair value of contingent consideration

 

$

(3,575

)

 

$

(7,300

)

 

$

29,140

 

Amortization of acquired intangibles

 

 

7,907

 

 

 

6,801

 

 

 

5,072

 

Acquired IPR&D

 

 

1,500

 

 

 

—

 

 

 

—

 

Impairment of Global Orthopedics goodwill

 

 

11,756

 

 

 

—

 

 

 

—

 

Total

 

$

17,588

 

 

$

(499

)

 

$

34,212

 

 

Related Party Asset Acquisition

On February 2, 2021, the Company entered into a technology assignment and royalty agreement with a medical device technology company partially owned and controlled by the wife of President and Chief Executive Officer, Jon Serbousek, whereby the Company acquired the intellectual property rights to certain assets for consideration of up to $10.0 million.

F-32

 

Consideration was comprised of $1.0 million due at signing, which was recognized immediately as acquired IPR&D expense within acquisition-related amortization and remeasurement, and $9.0 million in contingent consideration. The contingent consideration is dependent upon multiple milestones, such as receipt of 510(k) clearance and the attainment of certain net sales targets. The Company accounted for this transaction as an asset acquisition. As the transaction is classified as an asset acquisition, the value of the consideration associated with the contingent milestones will be recognized at the time that applicable contingencies are resolved and consideration is paid or becomes payable. In addition, the Company is obligated to pay a royalty of 2% to 4% on net sales, commencing upon commercialization of the assets.

The transaction was approved by the Company’s Audit and Finance Committee, with the Audit and Finance Committee directly supervising the negotiations of the transaction. Mr. Serbousek was excluded from such discussions and did not participate in the negotiation or evaluation of the transaction. Mr. Serbousek also continues to be excluded from the oversight of the Company’s development and commercialization activities in relation to the acquired technology and all other matters relating to the relationship between the Company and the counterparty

IGEA S.p.A Asset Acquisition

On April 7, 2021, the Company 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, the Company agreed to pay up to $4.0 million, with certain payments contingent upon reaching an FDA milestone. Of this amount, $0.5 million was paid in 2021, which was recognized as acquired IPR&D costs within acquisition-related amortization and remeasurement. The License Agreement also includes certain minimum purchase requirements.

 

18.

Share-based compensation

At December 31, 2021, and 2020, the Company had stock option and award plans, and a stock purchase plan.

2012 Long Term Incentive Plan

The Board of Directors adopted the Amended and Restated 2012 Long-Term Incentive Plan (the “2012 LTIP”) on April 23, 2018, which was subsequently approved by shareholder ratification. The 2012 LTIP provides for the grant of options to purchase shares of the Company’s common stock, stock awards (including restricted stock, unrestricted stock, and stock units), stock appreciation rights, performance-based awards and other equity-based awards. All of the Company’s employees and the employees of the Company’s subsidiaries and affiliates are eligible and may receive awards under the 2012 LTIP. In addition, the Company’s non-employee directors, consultants, and advisors who perform services for the Company and its subsidiaries and affiliates may receive awards under the 2012 LTIP. Awards granted under the 2012 LTIP expire no later than ten years after the date of grant. At December 31, 2021, the Company reserves a total of 7,050,000 shares of common stock for issuance pursuant to the 2012 LTIP, subject to certain adjustments set forth in the 2012 LTIP. At December 31, 2021, there were 1,150,898 options outstanding under the 2012 LTIP, of which 748,539 were exercisable. In addition, there were 13,978 shares of unvested restricted stock awards outstanding and 851,847 restricted stock units outstanding, some of which contain market-based vesting conditions, under the 2012 LTIP as of December 31, 2021.

2004 Long Term Incentive Plan

The 2004 Long Term Incentive Plan (the “2004 LTIP”) reserved 3,100,000 shares for issuance, subject to certain adjustments set forth in the 2004 LTIP. At December 31, 2021, there were 12,500 options outstanding under the 2004 LTIP, all of which were exercisable.  

Inducement Plans

The Inducement Plan for Spinal Kinetics Employees (the “Spinal Kinetics Inducement Plan”) reserved 51,705 shares for issuance to employees of Spinal Kinetics as an inducement to continue employment with the Company. At December 31, 2021, there were no remaining options outstanding under the Spinal Kinetics Inducement Plan and 1,284 shares of unvested restricted stock outstanding.

In August 2019, the Company appointed a new President of Global Spine, who was then subsequently promoted to President and Chief Executive Officer. As an inducement to accept employment with the Company, the individual was awarded a grant of stock options to acquire up to 50,711 shares of common stock and an award of 14,743 restricted stock units. As of December 31, 2021, there were 50,711 options outstanding under this inducement, 25,355 of which were exercisable, and 7,372 unvested restricted stock units outstanding.

F-33

 

In September 2020, the Company appointed a new President of Global Orthopedics. As an inducement to accept employment with the Company, the individual was awarded a grant of stock options to acquire up to 32,945 shares of common stock and an award of 10,624 restricted stock units. As of December 31, 2021, there were 32,945 options outstanding under this inducement, of which 8,236 were exercisable, and 7,968 unvested restricted stock units outstanding.

Stock Purchase Plan

The Second Amended and Restated Stock Purchase Plan, as Amended (the “Stock Purchase Plan”) provides for the issuance of  shares of the Company’s common stock to eligible employees and directors of the Company and its subsidiaries that elect to participate in the plan and acquire shares of common stock through payroll deductions (including executive officers).

During each purchase period, eligible employees may designate between 1% and 25% of their compensation to be deducted for the purchase of common stock under the plan (or such other percentage in order to comply with regulations applicable to employees domiciled in or resident of a member state of the European Union). For eligible directors, the designated percentage will be applied to an amount equal to his or her director compensation paid in cash for the current plan period. The purchase price of the shares under the plan is equal to 85% of the fair market value on the first day of the plan period or, if lower, on the last day of the plan period.

Due to the compensatory nature of such plan, the Company records the related share-based compensation expense in the consolidated statement of operations. Compensation expense is estimated using the Black-Scholes valuation model, with such value recognized as expense over the plan period. As of December 31, 2021, the aggregate number of shares reserved for issuance under the Stock Purchase Plan is 2,850,000. As of December 31, 2021, a total of 2,172,134 shares had been issued pursuant to the Stock Purchase Plan.

Share-Based Compensation Expense

Share-based compensation expense is recorded in the same line of the consolidated statements of operations as the employee’s cash compensation. The following tables present the detail of share-based compensation expense by line item in the consolidated statements of income as well as by award type, for the years ended December 31, 2021, 2020, and 2019:

 

 

 

Year Ended December 31,

 

(U.S. Dollars, in thousands)

 

2021

 

 

2020

 

 

2019

 

Cost of sales

 

$

779

 

 

$

705

 

 

$

715

 

Sales and marketing

 

 

3,385

 

 

 

3,620

 

 

 

2,512

 

General and administrative

 

 

10,289

 

 

 

10,624

 

 

 

16,872

 

Research and development

 

 

979

 

 

 

1,258

 

 

 

1,441

 

Total

 

$

15,432

 

 

$

16,207

 

 

$

21,540

 

 

 

 

Year Ended December 31,

 

(U.S. Dollars, in thousands)

 

2021

 

 

2020

 

 

2019

 

Stock options

 

$

1,893

 

 

$

2,571

 

 

$

4,054

 

Time-based restricted stock awards and stock units

 

 

7,437

 

 

 

8,485

 

 

 

11,084

 

Performance-based restricted stock awards and stock units

 

 

—

 

 

 

—

 

 

 

—

 

Market-based restricted stock units

 

 

4,414

 

 

 

3,509

 

 

 

4,733

 

Stock purchase plan

 

 

1,688

 

 

 

1,642

 

 

 

1,669

 

Total

 

$

15,432

 

 

$

16,207

 

 

$

21,540

 

 

The income tax benefit related to this expense was $3.1 million, $3.2 million, and $3.5 million for the years ended December 31, 2021, 2020, and 2019, respectively.

F-34

 

Stock Options

The fair value of time-based stock options is determined using the Black-Scholes valuation model, with such value recognized as expense over the service period, which is typically four years, net of actual forfeitures. A summary of the Company’s assumptions used in determining the fair value of the stock options granted during the year is shown in the following table.

 

 

Year Ended December 31,

 

 

 

2021

 

 

2020

 

 

2019

 

Assumptions:

 

 

 

 

 

 

 

 

 

 

 

 

Expected term (in years)

 

6.0

 

 

5.5

 

 

5.0

 

Expected volatility

 

34.4% – 34.8%

 

 

30.2% – 35.1%

 

 

29.7% – 31.0%

 

Risk free interest rate

 

0.83% – 1.25%

 

 

0.28% – 1.65%

 

 

1.38% – 2.31%

 

Dividend yield

 

 

—

 

 

 

—

 

 

 

—

 

Weighted average grant date fair value

 

$

12.33

 

 

$

8.74

 

 

$

14.64

 

The expected term of the options granted is estimated based on a number of factors, including the vesting and expiration terms of the award, historical employee exercise behavior for both options that are currently outstanding and options that have been exercised or are expired, and an employee’s average length of service. Expected volatility is based on the historical volatility of the Company’s common stock. The risk-free interest rate is determined based upon a constant U.S. Treasury security rate with a contractual life that approximates the expected term of the option.

Summaries of the status of the Company’s stock option plans as of December 31, 2021, and 2020, and changes during the year ended December 31, 2021, are presented below:   

 

 

Options

 

 

Weighted

Average

Exercise

Price

 

 

Weighted

Average

Remaining

Contractual

Term

 

Outstanding at December 31, 2020

 

 

1,491,019

 

 

$

39.56

 

 

 

 

 

Granted

 

 

72,995

 

 

$

35.59

 

 

 

 

 

Exercised

 

 

(89,151

)

 

$

36.68

 

 

 

 

 

Forfeited or expired

 

 

(77,809

)

 

$

45.49

 

 

 

 

 

Outstanding at December 31, 2021

 

 

1,397,054

 

 

$

39.20

 

 

 

5.04

 

Vested and expected to vest at December 31, 2021

 

 

1,397,054

 

 

$

39.20

 

 

 

5.04

 

Exercisable at December 31, 2021

 

 

944,630

 

 

$

41.10

 

 

 

3.51

 

 

 

As of December 31, 2021, the unamortized compensation expense relating to options granted and expected to be recognized was $2.0 million. This amount is expected to be recognized through December 2025 over a weighted average period of approximately 1.4 years. The total intrinsic value of options exercised was $0.6 million, $0.9 million and $1.4 million for the years ended December 31, 2021, 2020, and 2019, respectively. For the year ended December 31, 2021, we received $3.3 million in cash from stock option exercises, with the tax benefit realized for the tax deductions from these exercises of $0.6 million. The aggregate intrinsic value of options outstanding and options exercisable as of December 31, 2021, is calculated as the difference between the exercise price of the underlying options and the market price of the Company’s common stock for options that had exercise prices lower than $31.09, the closing price of the Company’s stock on December 31, 2021. The aggregate intrinsic value of options outstanding was $1.7 million as of December 31, 2021, whereas the aggregate intrinsic value of options exercisable was $0.5 million as of that date.

Time-based Restricted Stock Awards and Stock Units

During the year ended December 31, 2021, the Company granted to employees and non-employee directors 295,240 shares of time- based restricted stock stock units, which vest at various dates through December 2025. The compensation expense, which represents the fair value of the stock measured at the market price at the date of grant, is recognized on a straight-line basis over the vesting period, which is typically four years, net of actual forfeitures.

F-35

 

Since 2017, the annual grant to non-employee directors has been made in the form of one-year vesting restricted stock units with deferred delivery (“DSUs”), whereby shares are not settled until after the director ceases service as a director. As of December 31, 2021, there were 59,001 DSUs outstanding that are vested but not settled.

The aggregate fair value of time-based restricted stock awards and stock units that vested during the years ended December 31, 2021, 2020, and 2019, was $9.0 million, $6.5 million and $9.5 million, respectively. Unamortized compensation expense related to time-based restricted stock awards and stock units amounted to $15.2 million at December 31, 2021, and is expected to be recognized over a weighted average period of approximately 2.6 years.  The aggregate intrinsic value of time-based restricted stock awards and stock units outstanding was $17.4 million as of December 31, 2021.

Performance-based Restricted Stock Awards and Stock Units

The Company’s performance-based restricted stock awards and stock units contain performance-based vesting conditions.

The fair value of performance-based restricted stock awards and stock units is calculated based upon the closing stock price at the date of grant. Such value is recognized as expense over the derived requisite service period beginning in the period in which they are deemed probable to vest, net of actual forfeitures. Vesting probability is assessed based upon forecasted earnings and financial results. The Company did not grant any performance-based restricted stock awards or stock units to employees during the years ended December 31, 2021, 2020, and 2019.

During the year ended December 31, 2015, the Company granted to employees 110,660 shares of performance-based restricted stock awards, which vested based upon the achievement of certain earnings or return on invested capital targets. No compensation expense was recorded for these awards in 2021, 2020, or 2019, as the performance targets were obtained in prior years. The fair value of performance-based restricted stock awards that vested and settled during the years ended December 31, 2021, 2020, and 2019, were $0.0 million, $0.0 million, and $3.2 million, respectively. No unamortized compensation expense related to performance-based restricted stock awards remains as of December 31, 2021. There was no intrinsic value of performance-based restricted stock awards outstanding as of December 31, 2021 as the awards were fully settled in 2019.

During the year ended December 31, 2015, the Company also granted 55,330 shares of performance-based restricted stock units to employees, which vested based upon the achievement of certain earnings or return on invested capital targets for the year ended December 31, 2018. No compensation expense was recorded for these awards in 2021, 2020, or 2019, as the performance targets were obtained in a prior year. The fair value of performance-based restricted stock units that vested and settled during the years ended December 31, 2021, 2020, and 2019, were $0.0 million, $0.0 million, and $2.7 million, respectively. No unamortized compensation expense remains as of December 31, 2021 related to these 2015 performance-based restricted stock units. There was no intrinsic value of performance-based restricted stock units outstanding as of December 31, 2021, as the stock units were fully settled in 2019.

Market-based Restricted Stock Units

The Company’s market-based restricted stock units contain market-based vesting conditions.

The fair value of market-based restricted stock units is determined at the date of the grant using the Monte Carlo valuation methodology, with any discounts for post-vesting restrictions estimated using the Chaffe Model. The Monte Carlo methodology incorporates into the valuation the possibility that the market condition may not be satisfied. Such value is recognized on a straight-line basis over the vesting period, net of actual forfeitures. The awards, if the market conditions are achieved, will be settled in shares of common stock, with one share of common stock issued per restricted stock unit if targets are achieved at the 100% level. Awards may be achieved at a minimum level of 50% and a maximum of 200%. The market conditions for the awards are based on the Company’s stock achieving certain total shareholder return targets relative to specified index companies during a 3-year performance period beginning on each respective grant date. The fair value of market-based restricted stock units that vested and settled during the years ended December 31, 2021, 2020, and 2019, were $0.0 million, $1.4 million, and $0.0 million, respectively. Unamortized compensation expense for market-based restricted stock units amounted to $8.3 million at December 31, 2021, and is expected to be recognized over a weighted average period of approximately 1.7 years. The aggregate intrinsic value of market-based restricted stock units outstanding was $10.0 million as of December 31, 2021.

F-36

 

A summary of the status of our time-based and market-based restricted stock awards and stock units as of December 31, 2021, and 2020, and changes during the year ended December 31, 2021, are presented below:

 

 

 

Time-based Restricted Stock

Awards and Stock Units

 

 

Market-based

Restricted Stock Units

 

 

 

Shares

 

 

Weighted

Average Grant

Date Fair Value

 

 

Shares

 

 

Weighted

Average Grant

Date Fair Value

 

Outstanding at December 31, 2020

 

 

493,127

 

 

$

41.13

 

 

 

275,338

 

 

$

54.45

 

Granted

 

 

295,240

 

 

$

41.20

 

 

 

152,575

 

 

$

48.53

 

Vested and settled

 

 

(191,082

)

 

$

44.50

 

 

 

—

 

 

$

—

 

Cancelled

 

 

(37,917

)

 

$

41.00

 

 

 

(104,832

)

 

$

63.97

 

Outstanding at December 31, 2021

 

 

559,368

 

 

$

40.03

 

 

 

323,081

 

 

$

48.56

 

 

Retirement of the Company’s Former President and Chief Executive Officer

On February 25, 2019, the Company entered into a Transition and Retirement Agreement (the “Retirement Agreement”) with the Company’s former President and Chief Executive Officer, Brad Mason. As part of the Retirement Agreement, certain time-based stock options and restricted stock awards were modified to vest on the Retirement Date. In addition, stock options were modified to extend the post-termination exercise period from 18 months under a standard qualified retirement to up to four years, dependent upon the remaining contractual terms of the options. The Company did not recognize share-based compensation expense related to the Retirement Agreement for the years ended December 31, 2021 and 2020, and recognized approximately $6.5 million in expense during the year ended December 31, 2019.

 

19.

Defined contribution plans and deferred compensation

Defined Contribution Plans

Orthofix US LLC sponsors a defined contribution plan (the “401(k) Plan”) covering substantially all full time U.S. employees. The 401(k) Plan allows participants to contribute up to 80% of their pre-tax compensation, subject to certain limitations, with the Company matching 100% of the first 2% of the employee’s base compensation and 50% of the next 4% of the employee’s base compensation if contributed to the 401(k) Plan. During the years ended December 31, 2021, 2020, and 2019, expenses incurred relating to the 401(k) Plan, including matching contributions, were approximately $2.8 million, $1.1 million, and $2.7 million, respectively.

In April 2020, as a precautionary measure to increase the Company’s cash position and preserve financial flexibility in response to the initial uncertainty of the COVID-19 pandemic, the Company temporarily suspended the 401(k) match program through the remainder of fiscal year 2020. The 401(k) match program was reinstated in January 2021.

The Company also operates defined contribution plans for its international employees meeting minimum service requirements. The Company’s expenses for such contributions during each of the years ended December 31, 2021, 2020, and 2019, were $1.2 million, $1.1 million, and $1.0 million, respectively.

Deferred Compensation Plans

Under Italian Law, our Italian subsidiary accrues deferred compensation on behalf of its employees, which is paid on termination of employment. The accrual for deferred compensation is based on a percentage of the employee’s current annual remuneration plus an annual charge. Deferred compensation is also accrued for the leaving indemnity payable to agents in case of dismissal, which is regulated by a national contract and is equal to approximately 3.5% of total commissions earned from the Company. The Company’s relations with its Italian employees, who represent 19.1% of total employees at December 31, 2021, are governed by the provisions of a National Collective Labor Agreement setting forth mandatory minimum standards for labor relations in the metal mechanic workers industry. The Company is not a party to any other collective bargaining agreement. The balance in other long-term liabilities as of December 31, 2021, and 2020 was $1.3 million and $1.4 million, respectively, and represents the amount which would be payable if all the employees and agents had terminated employment at that date.

 

F-37

 

 

20.

Income taxes

Income (loss) before provision for income taxes consisted of the following:

 

 

 

Year Ended December 31,

 

(U.S. Dollars, in thousands)

 

2021

 

 

2020

 

 

2019

 

U.S.

 

$

(5,987

)

 

$

5,556

 

 

$

(24,890

)

Non-U.S.

 

 

(7,508

)

 

 

(5,924

)

 

 

(2,159

)

Income (loss) before income taxes

 

$

(13,495

)

 

$

(368

)

 

$

(27,049

)

 

The provision for income taxes consists of the following: 

 

 

 

Year Ended December 31,

 

(U.S. Dollars, in thousands)

 

2021

 

 

2020

 

 

2019

 

U.S.

 

 

 

 

 

 

 

 

 

 

 

 

Current

 

$

(607

)

 

$

(15,054

)

 

$

(1,911

)

Deferred

 

 

24,292

 

 

 

(29

)

 

 

2,008

 

 

 

 

23,685

 

 

 

(15,083

)

 

 

97

 

Non-U.S.

 

 

 

 

 

 

 

 

 

 

 

 

Current

 

 

1,009

 

 

 

1,382

 

 

 

1,931

 

Deferred

 

 

190

 

 

 

10,816

 

 

 

(615

)

 

 

 

1,199

 

 

 

12,198

 

 

 

1,316

 

Income tax expense (benefit)

 

$

24,884

 

 

$

(2,885

)

 

$

1,413

 

 

The differences between the income tax provision at the U.S. federal statutory tax rate and the Company’s effective tax rate for the years ended December 31, 2021, 2020, and 2019, consist of the following:

 

 

 

2021

 

 

2020

 

 

2019

 

(U.S. Dollars, in thousands, except percentages)

 

Amount

 

 

Percent

 

 

Amount

 

 

Percent

 

 

Amount

 

 

Percent

 

Statutory U.S. federal income tax rate

 

$

(2,834

)

 

 

21.0

%

 

$

(77

)

 

 

21.0

%

 

$

(5,680

)

 

 

21.0

%

State taxes, net of U.S. federal benefit

 

 

(24

)

 

 

0.2

 

 

 

1,151

 

 

 

(312.8

)

 

 

1,043

 

 

 

(3.9

)

Foreign rate differential, including withholding taxes

 

 

480

 

 

 

(3.6

)

 

 

(147

)

 

 

39.9

 

 

 

131

 

 

 

(0.5

)

Valuation allowances, net

 

 

27,819

 

 

 

(206.1

)

 

 

14,514

 

 

 

(3,944.0

)

 

 

(165

)

 

 

0.6

 

Research credits

 

 

(537

)

 

 

4.0

 

 

 

(982

)

 

 

266.8

 

 

 

(829

)

 

 

3.1

 

Unrecognized tax benefits, net of settlements

 

 

(1,363

)

 

 

10.1

 

 

 

(17,321

)

 

 

4,706.8

 

 

 

(2,745

)

 

 

10.1

 

Equity compensation

 

 

1,091

 

 

 

(8.1

)

 

 

1,657

 

 

 

(450.3

)

 

 

626

 

 

 

(2.3

)

Executive compensation

 

 

456

 

 

 

(3.4

)

 

 

375

 

 

 

(101.9

)

 

 

1,504

 

 

 

(5.6

)

Contingent consideration

 

 

(640

)

 

 

4.7

 

 

 

(1,460

)

 

 

396.7

 

 

 

5,678

 

 

 

(21.0

)

Other, net

 

 

436

 

 

 

(3.2

)

 

 

(595

)

 

 

161.8

 

 

 

1,850

 

 

 

(6.7

)

Income tax expense (benefit) /effective rate

 

$

24,884

 

 

 

(184.4

)%

 

$

(2,885

)

 

 

784.0

%

 

$

1,413

 

 

 

(5.2

)%

The Company paid cash relating to taxes totaling $4.8 million, less than $0.5 million, and $8.1 million for the years ended December 31, 2021, 2020, and 2019, respectively.

F-38

 

 

The Company’s deferred tax assets and liabilities are as follows:

 

 

 

December 31,

 

(U.S. Dollars, in thousands)

 

2021

 

 

2020

 

Intangible assets and goodwill

 

$

5,245

 

 

$

2,475

 

Inventories and related reserves

 

 

17,097

 

 

 

17,585

 

Deferred revenue and cost of goods sold

 

 

3,888

 

 

 

4,035

 

Other accruals and reserves

 

 

3,082

 

 

 

4,061

 

Accrued compensation

 

 

7,784

 

 

 

8,734

 

Provision for expected credit losses

 

 

1,217

 

 

 

1,178

 

Net operating loss and tax credit carryforwards

 

 

42,546

 

 

 

42,569

 

Lease liabilities

 

 

5,691

 

 

 

6,033

 

Other, net

 

 

1,423

 

 

 

500

 

Total deferred tax assets

 

 

87,973

 

 

 

87,170

 

Valuation allowance

 

 

(76,725

)

 

 

(50,496

)

Deferred tax asset, net of valuation allowance

 

$

11,248

 

 

$

36,674

 

Withholding taxes

 

 

(10

)

 

 

(40

)

Property, plant, and equipment

 

 

(5,380

)

 

 

(5,975

)

Right-of-use lease assets

 

 

(5,165

)

 

 

(5,617

)

Deferred tax liability

 

 

(10,555

)

 

 

(11,632

)

Net deferred tax assets

 

$

693

 

 

$

25,042

 

 

 

 

 

 

 

 

 

 

Reported as:

 

 

 

 

 

 

 

 

Deferred income tax assets

 

 

1,771

 

 

 

25,042

 

Deferred income tax liabilities (classified within other long-term liabilities)

 

 

(1,078

)

 

 

—

 

Net deferred tax assets

 

$

693

 

 

$

25,042

 

The Company accounts for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and income tax basis of assets and liabilities, and for operating losses and credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the years in which those items are expected to be realized. Tax law and rate changes are recorded in the period such changes are enacted. The Company establishes a valuation allowance when it is more likely than not that certain deferred tax assets will not be realized in the foreseeable future.

The valuation allowance is primarily attributable to net operating loss carryforwards and temporary differences in domestic and certain foreign jurisdictions. The net increase in the valuation allowance of $26.2 million during the year principally relates to recognizing a full valuation allowance against the net deferred tax asset within the Company’s U.S. operations as well as an increase in valuation allowance against deferred tax assets within the Company’s Italian manufacturing subsidiary. The Company considered many factors when assessing the likelihood of future realization of these deferred tax assets, including recent cumulative losses experienced by the subsidiary, expectations of future taxable income or loss, the carryforward periods available to the Company for tax reporting purposes, and other relevant factors. That increase was partially offset by a decrease of valuation allowances on net operating loss carryforwards in other foreign jurisdictions due to expiration, statutory rate changes, and changes regarding the realizability of net deferred tax assets. It is reasonably possible that the valuation allowance will increase in 2022 due to further losses in certain jurisdictions, offset by decreases related to the expiration of foreign net operating losses.

The Company has federal net operating loss carryforwards of $17.5 million and research and development credits of $2.2 million, including amounts from the acquisition of Spinal Kinetics. These carryforwards are subject to limitation under the provisions of Section 382 and will begin to expire in 2026. The Company has state net operating loss carryforwards of approximately $32.3 million, of which $20.9 million relates to Spinal Kinetics and begins to expire in 2027. Additionally, the Company has net operating loss carryforwards in various foreign jurisdictions of approximately $125.0 million that begin to expire in 2022, the majority of which relate to the Company’s Italy, Netherlands, and Brazil operations.

F-39

 

Unremitted foreign earnings decreased from $53.7 million at December 31, 2020, to $50.0 million at December 31, 2021. The decrease is due to the impact of currency translation. As a result of the 2017 Tax Act, current year earnings have been deemed to be repatriated. Those foreign subsidiary earnings that are subject to U.S. taxation as a component of Global Intangible Low Taxed Income (GILTI) under the Tax Act are included as a component of current tax expense. The Company’s investment in foreign subsidiaries continues to be indefinite in nature; however, the Company may periodically repatriate a portion of these earnings to the extent that it does not incur significant additional tax liability.

The Company records a benefit for uncertain tax positions when the weight of available evidence indicates that it is more likely than not, based on an evaluation of the technical merits, that the tax position will be sustained on audit. The tax benefit is measured as the largest amount that is more than 50% likely to be realized upon settlement. The Company re-evaluates income tax positions periodically to consider changes in facts or circumstances such as changes in or interpretations of tax law, effectively settled issues under audit, and new audit activity. The Company includes interest and any applicable penalties related to income tax issues as part of income tax expense in its consolidated financial statements.

The Company’s unrecognized tax benefit was $3.5 million and $4.6 million for the years ended December 31, 2021, and 2020, respectively. The Company recorded net interest and penalties expense (benefit) on unrecognized tax benefits of  $(0.4) million, $(5.4) million, and $(0.1) million for the years ended December 31, 2021, 2020, and 2019, respectively, and had approximately $0.8 million and $1.2 million accrued for payment of interest and penalties as of December 31, 2021, and 2020, respectively. The entire amount of unrecognized tax benefits, including interest, would favorably impact the Company’s effective tax rate if recognized. The Company believes it is reasonably possible that, in the next 12 months, the amount of unrecognized tax benefits, exclusive of interest and penalties, related to the resolution of federal, state, and foreign matters could be reduced by $0.4 million to $1.1 million as audits close and statutes expire.

A reconciliation of the gross unrecognized tax benefits (excluding interest and penalties) for the years ended December 31, 2021, and 2020, is shown below:

 

(U.S. Dollars, in thousands)

 

2021

 

 

2020

 

Balance as of January 1,

 

$

4,629

 

 

$

16,904

 

Additions for current year tax positions

 

 

45

 

 

 

568

 

Increases for prior year tax positions

 

 

110

 

 

 

84

 

Settlements of prior year tax positions

 

 

—

 

 

 

(29

)

Expiration of statutes

 

 

(1,322

)

 

 

(12,898

)

Balance as of December 31,

 

$

3,462

 

 

$

4,629

 

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and in certain state and foreign jurisdictions, including Italy, as well as other jurisdictions where the Company maintains operations. The statute of limitations with respect to federal and state tax filings is closed for years prior to 2017. The statute of limitations with respect to the major foreign tax filing jurisdictions is closed for years prior to 2015.

In November 2017, the Company was notified of an examination of its federal income tax return for 2015. In February 2019, the Company reached an agreement and concluded this examination. As a result, the Company recognized a benefit of approximately $1.8 million during 2019. The Company cannot reasonably determine if any state and local or foreign examinations will have a material impact on its financial statements and cannot predict the timing regarding the resolution of these tax examinations.

 

21.

Earnings per share (EPS)

 

The Company uses the two-class method of computing basic EPS due to the existence of non-vested restricted stock awards with nonforfeitable rights to dividends or dividend equivalents (referred to as participating securities). Basic EPS is computed using the weighted average number of common shares outstanding during each of the respective years. Diluted EPS is computed using the weighted average number of common and common equivalent shares outstanding during each of the respective years using the more dilutive of either the treasury stock method or two-class method. The difference between basic and diluted shares, if any, largely results from common equivalent shares, which represents the dilutive effect of the assumed exercise of certain outstanding share options, the assumed vesting of restricted stock granted to employees and directors, or the satisfaction of certain necessary conditions for contingently issuable shares (see Note 18).

F-40

 

For each of the three years ended December 31, 2021, 2020, and 2019, no significant adjustments were made to net income for purposes of calculating basic and diluted EPS. The following is a reconciliation of the weighted average shares used in the diluted EPS computations:

 

 

Year Ended December 31,

 

 

 

2021

 

 

2020

 

 

2019

 

Weighted average common shares-basic

 

 

19,690,593

 

 

 

19,267,920

 

 

 

18,903,289

 

Effect of diluted securities:

 

 

 

 

 

 

 

 

 

 

 

 

Unexercised stock options and employee stock purchase plan

 

 

—

 

 

 

51,951

 

 

 

—

 

Unvested time-based restricted stock units

 

 

—

 

 

 

71,847

 

 

 

—

 

Weighted average common shares-diluted

 

 

19,690,593

 

 

 

19,391,718

 

 

 

18,903,289

 

 

There were 1,711,323; 1,499,630; and 1,704,708 weighted average outstanding options, restricted stock, and market-based units not included in the diluted earnings per share computation for the years ended December 31, 2021, 2020, and 2019, respectively, because inclusion of these awards was anti-dilutive or, for market-based units, all necessary conditions had not been satisfied by the end of the respective period.

 

 

       

F-41

Exhibit 10.2

 

CERTAIN PRIVATE AND CONFIDENTIAL INFORMATION HAS BEEN EXCLUDED FROM THIS EXHIBIT. THE OMITTED PORTIONS HAVE BEEN DENOTED BY AN ASTERIK IN BRACKETS [*].

 

 

 

 

 

 

AMENDED AND RESTATED

MATRIX COMMERCIALIZATION COLLABORATION AGREEMENT

by and between

MUSCULOSKELETAL TRANSPLANT FOUNDATION, INC.

(“MTF”)

and

ORTHOFIX US LLC

(“ORTHOFIX”)

 

 

 

 

 

AMENDED AND RESTATED

MATRIX COMMERCIALIZATION COLLABORATION AGREEMENT

 

THIS AMENDED AND RESTATED MATRIX COMMERCIALIZATION COLLABORATION AGREEMENT (this “Agreement”), by and between Musculoskeletal Transplant Foundation, Inc., a non-profit corporation formed under the laws of the District of Columbia, and having a principal place of business at 125 May Street, Suite 300, Edison, New Jersey 08837 (“MTF”), and Orthofix US LLC, a limited liability corporation organized under the laws of the State of Delaware, and having a principal place of business at 3451 Plano Parkway, Lewisville, Texas 75056 (“Orthofix”) (each individually a “Party” and collectively the “Parties”), is entered into as of February 7, 2022 (the “Effective Date”) and hereby amends and restates in its entirety the Original Matrix Agreement (as defined below).

W I T N E S S E T H:

WHEREAS, the Parties entered into that certain Matrix Commercialization Collaboration Agreement dated as of July 28, 2008 (the “Original Matrix Agreement Effective Date”), as amended by that certain Amendment No. 1 to Matrix Commercialization Collaboration Agreement dated as of December 15, 2010, that certain Amendment No. 2 to Matrix Commercialization Collaboration Agreement dated as of January 9, 2012, that certain Amendment No. 3 to Matrix Commercialization Collaboration Agreement dated as of June 25, 2013, that certain Amendment No. 4 to Matrix Commercialization and Collaboration Agreement dated as of January 1, 2014, that certain Amendment No. 5 to Matrix Commercialization and Collaboration Agreement dated as of March 10, 2016, and that certain Amendment No. 6 to Matrix Commercialization and Collaboration Agreement dated as of December 29, 2017 (collectively, the “Original Matrix Agreement”), pursuant to which the Parties have collaborated with respect to the commercialization of the Matrix;

WHEREAS, the Parties desire to amend and restate the Original Matrix Collaboration Agreement to reflect the terms and conditions of certain amendments previously entered into by the Parties and the terms and conditions applicable to the Parties’ collaboration with respect to the development and commercialization of the Matrix (as defined herein);

WHEREAS, the Parties acknowledge and agree that [*];

WHEREAS, simultaneously with execution of the initial Matrix Commercialization Collaboration Agreement, Orthofix and MTF entered into that certain Matrix Development Collaboration Agreement dated as of July 28, 2008 (the “Development Agreement”), pursuant to which the Parties collaborated on research and development of the Matrix I and further modification of the Matrix I Specifications (and, for purposes hereof, as the same are revised or supplemented from time to time during the Term in accordance with Section 10.4, the “Matrix I Specifications”);

WHEREAS, the Parties acknowledge that, [*];

WHEREAS, the Parties wish, subject to the terms and conditions hereof, to continue to collaborate on the commercialization of the Matrix and, to effectuate that collaboration, wish to give exclusive responsibility to (a) MTF to Process (as defined herein) quantities of the Matrix

1

 

 

using human tissue procured by MTF and fulfill orders for the Matrix submitted to MTF and (b) Orthofix to market the Matrix; and

WHEREAS, in furtherance of the foregoing, the Parties wish, subject to the terms and conditions hereof, to specify which of them will be responsible financially and otherwise for each type of activity related to the commercialization of the Matrix during the Term (as defined herein) and the manner in which the Parties will allocate the Service Fees (as defined herein) resulting from transfers of the Matrix during the Term;

WHEREAS, subject to the terms and conditions hereof (a) MTF wishes to grant to Orthofix certain rights with respect to the Existing MTF Technology and with respect to MTF’s joint ownership interest in the Developed Technology, and (b) Orthofix wishes to grant to MTF certain rights with respect to the Existing Orthofix Technology and with respect to Orthofix’s joint ownership interest in the Developed Technology; and

WHEREAS, this Agreement will become effective on the Effective Date.

NOW, THEREFORE, in consideration of the foregoing premises and mutual covenants and promises set forth herein, the Parties agree as follows:

ARTICLE I
DEFINITIONS

Capitalized terms used herein which are not otherwise defined in the text of this Agreement will have the respective meanings assigned thereto in Addendum 1 attached hereto and incorporated herein by reference, for all purposes of this Agreement (such definitions to be equally applicable to both the singular and the plural forms of the terms defined).  Whenever the context may require, any pronoun will include the corresponding masculine, feminine and neuter forms.  Notwithstanding anything to the contrary herein, the Parties acknowledge and agree that [*].

ARTICLE II
SUPPLY OF MATRIX; APPOINTMENT; FORECASTS; ORDERS; ETC.

2.1Supply of Matrix.

(a)Supply and Distribution of Matrix.  Subject to the provisions of this Agreement and during the Term hereof, Orthofix agrees to use Reasonable Commercial Efforts to market the Matrix and achieve maximum orders therefor, and will have the right to solicit and place with MTF orders for the Matrix (such orders conforming to the provisions of this Agreement, together with any orders placed directly with MTF by Customers and accepted by MTF, collectively referred to herein as the “Authorized Orders”); and, subject to the provisions of this Agreement and during the Term hereof, MTF agrees to use Reasonable Commercial Efforts to Process, supply and distribute the Matrix.  In exchange for MTF’s supply and distribution of the Matrix pursuant to and in accordance with Authorized Orders, MTF will be entitled to the Service Fee established in accordance with Section 4.1 for each delivery of the Matrix and to retain the Service Fee it collects for each transaction less the Marketing Fee payable to Orthofix.  

(b)Obligation to Supply.  Each calendar quarter, MTF will use Reasonable Commercial Efforts to Process, supply and distribute to the recipients identified in the Authorized

2

 

Orders (the “Customers”) such quantities of the Matrix for which Orthofix solicits orders pursuant to the provisions of this Agreement up to the quantity forecasted for such calendar quarter in the most recent Forecast.  MTF will use good faith efforts to Process, supply and distribute to the Customers any quantities of the Matrix for which Orthofix solicits orders pursuant to the provisions of this Agreement, to the extent that such quantities cause total quantities of orders solicited by Orthofix during a calendar quarter to exceed the quantity forecasted for such calendar quarter in the most recent Forecast.  Notwithstanding any provision to the contrary contained in this Agreement, the Parties acknowledge that Orthofix will not be construed as a Customer hereunder and will not purchase Matrix for its own account or for redelivery.  If MTF determines that it is reasonably likely to default in any material respect in its obligation above to deliver such quantities of Matrix in accordance with the terms of this Agreement as called for in any Authorized Order for any calendar quarter, (i) MTF will give Orthofix prompt written notice describing such circumstances, together with a proposed course of action to remedy such failure, including if applicable, any actions described in the Contingency Plan, and (ii) the Steering Committee will determine the priority in which MTF will fulfill Authorized Orders, subject to MTF’s obligations under its agreements with Third Parties.

(c)Exclusive Arrangement.  During the Term (i) MTF may not Process, supply or distribute the Matrix to or on behalf of any Third Party, other than a Customer, (ii) Orthofix may not market or solicit orders for the Matrix except in accordance with ARTICLE V, and (iii) Orthofix may not Process, supply or distribute the Matrix, or procure the Processing, supply or distribution of the Matrix, except pursuant to the provisions of this Agreement with respect to the Collaboration.  

(d)Supply.  Beginning on the Effective Date and at the beginning of each calendar quarter thereafter through the end of the Term, MTF will use Reasonable Commercial Efforts: (x) to maintain in inventory a commercially-saleable quantity of the Matrix that is sufficient to satisfy [*] percent ([*]%) of [*] of Orthofix’s requirements for the Matrix for such calendar quarter as identified in the Forecast submitted by Orthofix for such calendar quarter; and (y) throughout each calendar quarter during the Term, to Process, on a daily basis, sufficient commercially-saleable quantities of the Matrix to enable timely fulfillment of Orthofix’s requirements for the Matrix for the remaining periods covered by such Forecast.  

(e)Failure to Supply.  If at any time MTF is unable, as a result of the circumstances contemplated by the Contingency Plan, in any material respect to fulfill Authorized Orders for the Matrix solicited by Orthofix in accordance with the provisions of this Agreement which do not cause the total quantities of the Matrix for which Orthofix solicits orders pursuant to the provisions of this Agreement during a calendar quarter to exceed the Forecast for such calendar quarter, MTF will be obligated to implement the Contingency Plan to remedy such failure.  If MTF is unable to fulfill Authorized Orders for the Matrix solicited by Orthofix in accordance with the provisions of this Agreement sufficient to meet the Forecast for a period of two (2) consecutive calendar quarters, then Orthofix may elect, by written notice to MTF, to have all Authorized Orders for the Matrix solicited by Orthofix fulfilled by an alternative source of supply pursuant to those standards contained in this Agreement relevant to the Processing and supply of the Matrix, applied mutatis mutandis; provided, however, that upon MTF’s demonstration to Orthofix that it is in compliance with Section 2.1(d) and is able to fulfill Authorized Orders in the amount of Orthofix’s Forecast for the then-current calendar quarter, Orthofix will use Reasonable Commercial Efforts

3

 

to transition fulfillment of Authorized Orders to MTF as promptly as practicable after such demonstration.  

2.2Forecasts.  The Parties acknowledge and agree that the collection of Donor Tissue involves significant procurement lead times and the Parties will cooperate in a mutual effort to predict demand for the Matrix in order to maintain high levels of fulfillment to Customers.  Orthofix will submit to MTF no later than the fifteenth (15th) day of the month preceding the start of every calendar quarter (i.e., December 15, March 15, June 15, and September 15) during the Term, a rolling forecast (a “Forecast”) setting forth orders that Orthofix reasonably believes will be solicited by Orthofix during the four (4) calendar quarters commencing with the beginning of the subsequent calendar quarter.  Each Forecast will amend the prior forecasts for periods covered by the new Forecast.  Orthofix will make all Forecasts in good faith given market and other information available to Orthofix; provided, however, under no circumstances whatsoever will any Forecasts made hereunder be deemed to be an order for the production of the Matrix or otherwise binding on Orthofix or its Affiliates.  The Forecast (and each modification thereof) will be subject to approval by the Steering Committee.    Orthofix shall have submitted to MTF, not later than the thirty (30) days after the date on which the second Matrix IV Development Milestone has been achieved and MTF has delivered to Orthofix the Matrix IV Notice of Achievement with respect thereto, a Forecast setting forth the orders that Orthofix reasonably believes will be solicited by Orthofix during (a) the calendar quarter in which the third Matrix IV Development Milestone is achieved, which will be presented in two (2) individual, consecutive forty-five (45) day periods and (b) the three calendar quarters immediately succeeding (the “Initial Matrix IV Forecast”).  The Initial Matrix IV Forecast may be amended from time to time pursuant to the terms of this Agreement and, as so amended, will be deemed incorporated into each Forecast as aforesaid pertaining to the same calendar quarters.

2.3Orders; Fulfillment.  Each order solicited by Orthofix shall be subject to acceptance in accordance with the MTF’s customary order acceptance procedures with respect to the Matrix, which as currently in effect are set forth in Exhibit A attached hereto and incorporated herein by reference and are subject to change from time to time by MTF; it being acknowledged and agreed that MTF may reject any order in the event of reasonable concerns regarding the creditworthiness of the proposed Customer and the ability of the proposed Customer to pay the Service Fee related to such order.  Any and all orders subject to MTF’s standard terms and conditions, including, without limitation, its standard warranty, with respect to the Matrix.  MTF will use Reasonable Commercial Efforts to supply and deliver the Matrix in accordance with Section 2.1(b) on the delivery dates specified in such Authorized Order, subject to a minimum lead-time of 45 days to fill such Authorized Order assuming donor availability, unless otherwise mutually agreed in writing by MTF and such Customer.  MTF will use good faith efforts to meet any request of Customers for delivery of Matrix in inventory in less than 7 days, and further, MTF will attempt to accommodate any changes requested by any Customer in delivery schedules for the Matrix following MTF’s receipt of Authorized Orders from such Customer.  MTF will provide to Orthofix copies of any Authorized Orders sent directly to MTF by Customers, promptly after the receipt thereof by MTF.  MTF will not be entitled to accept any orders for the Matrix other than Authorized Orders.  

2.4Packaging, Delivery and Shipping Terms.  MTF will use Reasonable Commercial Efforts to package and label all Matrix for shipment as determined by Orthofix subject to the immediately succeeding sentence. Orthofix will determine all trademarks, branding,

4

 

marketing, packaging and labeling to be used in connection with the Matrix; provided, however, that MTF will have the right to consent to all packaging and labeling, which consent will not be unreasonably withheld, conditioned or delayed so long as such packaging and labeling is in compliance with applicable Laws and the Specifications and includes a prominent reference in form approved by MTF and reasonably acceptable to Orthofix that the Matrix is supplied by MTF.  Each Party will provide the other Party with at least thirty (30) days prior written notice of any packaging or labeling changes (including brand names) for approval as aforesaid, and MTF will be entitled to recover, and Orthofix will be responsible to pay to MTF, all reasonable out-of-pocket costs that MTF incurs associated with any packaging and labeling change requested by Orthofix; provided, further, that, after receipt of any change notice from Orthofix, MTF will use Reasonable Commercial Efforts to minimize such costs.  Each shipment of the Matrix will have a unique identification number that identifies the Lot.

2.5Materials and Components.  MTF will use Reasonable Commercial Efforts to provide, at its cost and expense, all materials, including Donor Tissue, equipment, machinery, facilities, components, and other resources required in connection with Processing of the Matrix hereunder.  MTF agrees that it will conduct audits of its suppliers of materials, including Donor Tissue, and components of the Matrix hereunder on such basis as MTF may reasonably determine to monitor whether such suppliers are producing the materials and components in accordance with all applicable Laws and to determine whether such suppliers will continue to be able to supply a sufficient quantity and quality of such materials and components.

2.6Billing and Collection.  MTF will submit invoices in its customary form for each shipment of the Matrix to the Customer simultaneously with shipment.  Customers will be required to remit the total amount of Service Fees identified in such invoice within thirty (30) days of the invoice date.  In the event any such Customer fails to pay the Service Fee in accordance with this Section 2.6, MTF may, in addition to any other remedies available to it, assess interest on all unpaid amounts.  MTF will use Reasonable Commercial Efforts to timely collect all Service Fees.

2.7Customer Support.  MTF will be primarily responsible for providing prompt pre- and post-distribution service for the Matrix.  MTF will use Reasonable Commercial Efforts timely to respond to general questions from Customers, recipients of the Matrix pursuant to Authorized Orders and any physician user or similar clinical personnel user of the Matrix concerning the Matrix, and assist such Persons in the diagnosis and correction of problems encountered in connection with the Matrix.  Each of the Parties will: (a) conduct the Collaboration in a manner that reflects favorably at all times on the Matrix and the good name, good will and reputation of each of MTF and Orthofix; (b) avoid deceptive, misleading or unethical practices that are or might be detrimental to Orthofix, MTF, the Matrix or the public; (c) make no false or misleading representations with regard to 8, MTF or the Matrix; (d) make no representations, warranties or guarantees to Customers or recipients of the Matrix pursuant to Authorized Orders with respect to the Specifications, features or capabilities of the Matrix that are inconsistent with the mutually agreed-upon literature and other marketing materials distributed by Orthofix or that are otherwise prohibited by this Agreement; and (e) not enter into any contract or engage in any practice detrimental to the interests of Orthofix, MTF or the Matrix.  

2.8Marketing Support.  MTF will provide such support of Orthofix’s marketing activities during the Term as Orthofix may reasonably request from time to time.  MTF will use Reasonable Commercial Efforts to answer promptly queries concerning the Matrix or use of the

5

 

Matrix which Orthofix may submit to MTF in connection with Orthofix’s marketing activities under this Agreement.

2.9Subcontracting.  Each Party has the right, exercisable in its sole discretion, to subcontract or delegate any of its responsibilities under this Agreement without the prior written consent of the other Party.  Each Party’s subcontractors will be subject to confidentiality obligations at least as stringent as provided in this Agreement.  All Improvements discovered, made or conceived by each subcontractor in the course of performance of such activities will be assigned to the Subcontracting Party and will be deemed to be Developed Technology for purposes of this Agreement.  Notwithstanding any subcontract hereunder, each Party will be responsible, and will remain liable, for the performance of all of its obligations under this Agreement and for any breach thereof by any of its subcontractors and by any further subcontractor of any of its subcontractors.

ARTICLE III
STEERING COMMITTEE

3.1Membership.  The Parties will maintain throughout the Term, a Steering Committee consisting of an even number of members agreed upon by the Parties, an equal number of whom will be designated by each Party and act as its representatives, to supervise and manage the activities of the Parties under this Agreement and the Collaboration, subject to the provisions of this Agreement.  Steering Committee representatives of each Party will, individually or collectively, have expertise and/or responsibility to such Party in business and/or tissue development.  Subject to the obligation to use good-faith efforts to preserve the continuity of Steering Committee membership, each Party may replace any or all of its representatives on the Steering Committee at any time upon written notice to the other Party, and any member of the Steering Committee may designate a substitute to attend and perform the functions of that member at any meeting of the Steering Committee.  With the prior written consent of the Steering Committee in each case, a representative of a Party on the Steering Committee may invite one or more non-members (subject to the confidentiality provisions set forth in ARTICLE XVI) as deemed necessary to help explore and consider matters before the Steering Committee.

3.2Meetings. The Steering Committee will meet on a monthly basis, in person, or via telephone or video conference, and more frequently as the Steering Committee deems appropriate, on such dates, and at such places and times, as the Steering Committee determines.  Meetings of the Steering Committee that are held in person will alternate between the offices of the Parties, or such other place as the Steering Committee may determine. The members of the Steering Committee also may convene or be polled or consulted from time to time by means of telecommunications, videoconferences, electronic mail or other correspondence, as deemed necessary or appropriate and as the Steering Committee may determine.

3.3Authority. The Steering Committee is authorized to take the following actions:

(a)facilitate the Parties’ exchange of information to be provided under this Agreement concerning the overall strategy and progress of the Collaboration;

(b)ensure open communication between the Parties as related to the Collaboration and as provided under this Agreement;

6

 

(c)approve the Forecasts and any changes thereto;

(d)determine any priorities in fulfilling Authorized Orders in the circumstances described under the last sentence of Section 2.1(b) hereof; and

(e)subject to the terms and provisions of this Agreement, resolve any other issues and questions that may arise under this Agreement that are expressly assigned to the Steering Committee by the terms hereof or by the mutual agreement of the Parties.

For avoidance of doubt, the Steering Committee will not have the power to amend or waive compliance with this Agreement.

3.4Actions.  The Steering Committee will operate by consensus, and the representatives of each Party will have a single collective vote.  If the Steering Committee cannot reach consensus on any matter by the end of the meeting immediately following the meeting during which the Steering Committee first attempted to reach consensus on such matter, the matter will be escalated promptly to the Chief Executive Officer of MTF and the Chief Executive Officer of Orthofix for resolution pursuant to the dispute resolution procedure set forth in ARTICLE XIX.

3.5Expenses. Each Party will be responsible for all travel and related costs and expenses for its members and approved invitees to attend meetings of, and otherwise participate on, the Steering Committee.

ARTICLE IV
SERVICE FEE; AUDIT

4.1Service Fee.

(a)Service Fee.  Orthofix will, in compliance with all applicable Laws, propose the service fees for Processing, marketing and sale of the Matrix pursuant to an Authorized Order (a “Service Fee”) at least annually at the beginning of each calendar year or as market conditions warrant, which shall in each instance be subject to concurrence by MTF in its reasonable discretion.  Notwithstanding anything in this Agreement to the contrary, MTF will be entitled to retain, after payment of applicable Marketing Fees to Orthofix pursuant to Section 5.2, the remainder of the Service Fee which in no event will (unless otherwise agreed upon by the Parties) equate to less than the Minimum Service Fee; provided, however, that such Minimum Service Fee will, unless otherwise agreed upon by the Parties, be increased annually by a percentage equal to the percentage increase in the CPI over the measurement period, and provided, further, that in the event of an increase in actual costs of Processing, supplying and distributing the Matrix demonstrated by MTF or a change in market conditions demonstrated by Orthofix such that continued Processing and Commercialization of the Matrix at the Service Fee and the Marketing Fee, as the same are calculated in accordance with this ARTICLE IV, is no longer commercially reasonable, the Parties will meet promptly to negotiate in good faith for purposes of adjusting the Service Fee and the Marketing Fee in order to maintain the commercial viability of the Matrix.  Any adjustment of the Service Fee will become effective as of the first day of calendar year, if applicable, or as otherwise agreed upon by the Parties.

(b)Statements.  Within forty-five (45) days after the end of each calendar month MTF will provide to Orthofix a written statement (the “Monthly Statement”) which sets

7

 

forth (i) all Service Fees invoiced by MTF (but net of any documented bad debt adjustments, with respect to which MTF has provided reasonable supporting documentation to Orthofix), (ii) the Marketing Fee payable to Orthofix for such month calculated in accordance with Section 5.2, and (iii) a list of all Authorized Orders received during such month, including the name of the Customer identified in each such Authorized Order and the quantity of the Matrix ordered pursuant to each such Authorized Order.

4.2Service Fee Audit.

(a)Performance of Service Fee Audits.  MTF will maintain complete and accurate books and records of all Service Fees as a result of Authorized Orders in accordance with generally accepted accounting principles consistently applied during the Term and for at least two (2) years thereafter.  Orthofix will have the right, not more frequently than one (1) time in any calendar year, during normal business hours upon not less than five (5) days’ prior written notice to MTF, to examine and copy such books and records for the purpose of verifying MTF’s compliance with the terms and conditions of Section 5.2.  The expenses of such Audits will be borne by Orthofix; provided, however, that MTF will be charged for the reasonable expense of any such Audit that establishes an underpayment by five percent (5%) or more of the amounts owed to Orthofix during the audited period.   Within thirty (30) days of completing the results of any Audit hereunder, Orthofix will submit to MTF a written report outlining its findings and/or observations from any such Audit.  Orthofix will provide MTF a written notice identifying any claimed underpayment of Marketing Fees (the “Underpayment Notice”) to Orthofix as a result of such Audit.  

(b)Audit Feedback Dispute.  If MTF objects in good faith to any allegation of underpayment of the Marketing Fees identified in an Underpayment Notice, MTF will provide Orthofix with written notice of such dispute (the “Dispute Notice”) within thirty (30) days after MTF’s receipt of the Underpayment Notice.  The Dispute Notice will set forth in reasonable detail the basis for such disagreement described therein.  Thereafter, Orthofix and MTF will attempt in good faith to resolve any such dispute as promptly as practicable in accordance with the provisions of ARTICLE XIX.  Upon expiration of the thirty (30) day period after delivery of the Underpayment Notice, if no Dispute Notice will have been delivered, or within ten (10) days after the resolution of any disputed items in any Dispute Notice, as the case may be, any payment required by MTF pursuant to this Section 4.2 will be made by wire transfer of immediately available funds to an account designated by Orthofix.  Orthofix may assess interest at a rate of [*] percent ([*]%) per month on all unpaid amounts required under this Section 4.2.

(c)Acknowledgement.  Orthofix’s and/or Orthofix’s representatives’ exercise of the Audit and inspection rights hereunder will in no way waive, modify or diminish MTF’s obligations under this Agreement or limit any other remedy Orthofix has under this Agreement.

4.3Administrative Fees.

(a)The Parties agree that, in the event of sales to integrated delivery networks and/or group purchasing organizations of the Matrix pursuant to this Agreement, MTF shall initially pay the administrative fees payable to such organizations attributable, respectively, to the Matrix. With respect to all such administrative fees actually paid by MTF on sales of the Matrix under its agreements with integrated delivery networks and/or group purchasing organizations (such fees, unless otherwise agreed in writing by the Parties, solely to the extent they do not exceed

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[*] percent ([*]%) of the Service Fees for the applicable units of the Matrix under this Agreement, are referred to as “Administrative Fees”), Orthofix shall reimburse MTF for a percentage of such Administrative Fees so paid with respect to the Matrix, that is equal to the percentage of the applicable Service Fees that is used to calculate the Marketing Fee for the Matrix under Section 5.2 of this Agreement, without regard to any applicable Minimum Service Fee (the “Marketing Fee Percentage”).  Accordingly, together with the last Monthly Statement of each calendar quarter, MTF shall provide a summary of all such Administrative Fees paid by MTF during the immediately preceding calendar quarter, together with reasonable supporting documentation therefor on a product-by-product and payee-by-payee basis. In addition, together with each Monthly Statement, MTF shall provide to Orthofix an invoice for an amount equal to the product obtained by multiplying (x) the amount of such Administrative Fees paid by MTF during the applicable month by (y) the applicable Marketing Fee Percentage. Orthofix shall pay such amount to MTF within forty-five (45) days after receipt of such invoice. In the event Orthofix fails timely to pay any such amounts, MTF may, in addition to any other remedies available to it, assess interest at a rate of [*] percent ([*]%) per month on all such unpaid amounts. MTF shall indemnify, defend, and hold harmless Orthofix from and against all Damages arising out of the payment of any Administrative Fees by MTF to any integrated delivery network and/or group purchasing organization in violation of applicable law, subject to the same procedures applicable to indemnification and limitations thereon as set forth in Article XIV below.

4.4Shipping Charges.

(a)The Parties agree that MTF shall initially pay the cost of shipping charges and courier fees with respect to the Matrix, but if (i) Orthofix has requested in writing that MTF provide expedited delivery or courier service of any shipment of the Matrix and has approved the applicable shipping or courier charges, and (ii) less than the entirety of the shipping and courier charges are invoiced to the applicable customer on sales of the Matrix pursuant to this Agreement, then Orthofix shall reimburse MTF for a percentage of such shipping and courier charges not invoiced to customers that is equal to the applicable Marketing Fee Percentage. Accordingly, together with each Monthly Statement, MTF shall set forth the amount of all such shipping charges with respect to the Matrix that were not invoiced in the amount of the entirety thereof, together with reasonable supporting documentation therefor on a product-by-product basis, and shall provide to Orthofix an invoice for an amount equal to [*]. Orthofix shall pay to MTF within forty-five (45) days after receipt of such invoice. In the event Orthofix fails timely to pay any such amounts, MTF may, in addition to any other remedies available to it, assess interest at a rate of [*] percent ([*]%) per month on all such unpaid amounts.

(b)The Parties agree that Orthofix shall reimburse MTF up to [*] annually, for the actual, documented, out-of-pocket expenses incurred by MTF that arise solely and directly from MTF’s shipment, courier services, storage, fulfillment, and other logistics with respect to orders of the Matrix that originate from the western seaboard of the U.S. from Washington to California. MTF shall provide, with any request for reimbursement under this Section 4.4(b), documentation that is consistent with industry standards and reasonably sufficient for Orthofix to verify the amount and nature of the expenses incurred.

4.5Non-Accountable R&D Charge. Orthofix shall be obligated to pay to MTF a non-accountable annual charge of [*], to be used by MTF, in its sole discretion, to fund research and development activities by MTF with respect to bone growth allograft products containing viable allogeneic stem cells derived from cadavers (the “R&D Charge”).  Any and all products,

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technologies and discoveries, other than the Matrix, developed or discovered as a result of such activities shall constitute “Product Concepts” subject to Section 6.2(a) of this Agreement, and shall be subject to the right of first offer, right of first refusal and other terms and conditions set forth in Section 6.2 below.  As requested by the Steering Committee from time to time, MTF shall provide a summary of and reasonable documentation regarding the activities conducted by MTF pursuant to this Section 4.5 and the results of such activities.  Accordingly, at the beginning of each calendar quarter during the Term of this Agreement, MTF shall submit to Orthofix an invoice for a quarterly payment of [*], and Orthofix shall pay such amount to MTF within forty-five (45) days after receipt of such invoice.  In the event Orthofix fails timely to pay any such amounts, MTF may, in addition to any other remedies available to it, assess interest at a rate of [*] percent ([*]%) per month on all such unpaid amounts.  In the event that MTF has not been able to achieve a Matrix IV Development Milestone due to technical challenges after using commercially reasonable efforts to do so and provided that MTF is without fault in causing such failure or delay in achieving such Matrix IV Development Milestone, MTF may submit a written request to Orthofix to request an increase in the R&D Charge.  The written request shall include a detailed review of MTF’s progress with respect to such Matrix IV Development Milestone and any increase in the R&D Charge shall be mutually agreed by the Parties in writing.

ARTICLE V
MARKETING OBLIGATIONS; MARKETING FEE

5.1Marketing Obligations.  Subject to the terms and conditions of this Agreement, during the Term Orthofix will serve as an exclusive marketing representative with authority to market and solicit orders for the Matrix in the Territory.  Subject to the terms and conditions of this Agreement, all marketing activities for the Matrix during the Term will be the sole responsibility of Orthofix.  Orthofix will prepare and submit to MTF an annual marketing plan for the Matrix (the “Marketing Plan”), consistent with the provisions hereof, for review and approval by MTF (which approval MTF will not unreasonably withhold, condition or delay).  Orthofix will also submit to MTF for review and approval (which approval MTF will not unreasonably withhold, condition or delay) all marketing and promotional materials, consistent with the provisions hereof, that Orthofix intends to utilize for its marketing activities related to the Matrix.  Orthofix will not deviate from or provide information inconsistent with any of the marketing and promotional materials to any Customers or potential Customers or otherwise make representations to such Persons not previously approved by MTF.  Orthofix will use Commercially Reasonable Efforts to market the Matrix in accordance with the Marketing Plan; provided, however, that Orthofix will be entitled to amend the terms of the Marketing Plan from time to time, consistent with the provisions hereof, subject to MTF’s approval which approval MTF will not unreasonably withhold, condition or delay.  All Authorized Orders for the Matrix solicited by Orthofix or its permitted designees will be placed in accordance with MTF’s customary procedures with respect to the Matrix.

5.2Marketing Fee.  As compensation for services performed hereunder, Orthofix will be entitled to receive a monthly fee (a “Marketing Fee”) equal to [*] percent ([*]%) of the total amount of Service Fees invoiced by MTF (but net of any documented bad debt adjustments with respect to which MTF has provided reasonable supporting documentation to Orthofix) during the second previous calendar month pursuant to Authorized Orders, subject in each case to MTF’s right to receive the Minimum Service Fee.  [*].

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ARTICLE VI
FUTURE INITIATIVES

6.1Future Development. From time to time during the Term, the Parties will, without limiting any other term or provision of this Agreement, endeavor to identify new development initiatives, including but not limited to line extensions, enhancements and improvements to the Matrix (other than changes to the Specifications that may be agreed upon by the Steering Committee for development under this Agreement), and if mutually agreed upon by the Parties, will negotiate in good faith for purposes of entering into development agreements with respect to any such initiatives.

6.2Rights of First Offer and First Refusal.

(a)First Offer.  If a concept for a [*] (a “Product Concept”), is developed by either Party, at any time during the Term, the Party developing such concept (the “Offering Party”) will communicate such concept to the other Party (the “Offeree Party”) in reasonable detail (the “First Offer Notice”) and will offer to the Offeree Party for a period of thirty (30) days from the date of the First Offer Notice a right-of-first offer to collaborate in the development and commercialization of such Product Concept in accordance with such terms as may be mutually agreed upon by the Parties.  The Offeree Party will, within such thirty (30) days from receipt of the First Offer Notice, advise the Offering Party that it is not interested in the Product Concept or submit to the Offering Party its proposal for the development and commercialization of the Product Concept (the “Product Concept Proposal”).  In the event that the Product Concept Proposal submitted is unacceptable, in whole or in part, to the Offering Party, the Parties will negotiate in good faith to resolve the outstanding issues.  In the event that the Parties fail to reach a mutual agreement upon a definitive agreement regarding development and commercialization of the Product Concept within one hundred twenty (120) days from receipt of the First Offer Notice, the offer will be deemed to have been rejected, and the Offering Party will be entitled, free from the restrictions of this Section 6.2(a) and Section 16.2 hereof, to develop and commercialize the Product Concept independently or, subject to the provisions of Section 6.2(b), with one or more Third Parties.

(b)First Refusal.  Prior to entering into one or more agreements with one or more Third Parties, at any time during the Term, for development and/or commercialization of a Product Concept of the type required to be submitted by it to the other Party pursuant to Section 6.2(a), either Party (the “Proposing Party”) will communicate to the other Party (the “Receiving Party”) in writing the identity of the Third Party or Third Parties with which the Proposing Party proposes to enter into the agreement(s), any other relevant materials provided by the Third Party or Third Parties, and the terms of the proposed agreement(s) (a “First Refusal Notice”) and will grant to the Receiving Party for a period of thirty (30) days from the date of the First Refusal Notice a right-of-first refusal to develop and/or commercialize such Product Concept on terms which are substantially the same as those terms in the proposed agreement(s).  The Receiving Party will, within such thirty (30) days from receipt of the First Refusal Notice from the Proposing Party, advise the Proposing Party that it is not interested in the Product Concept or submit to the Proposing Party notice of its exercise of the right-of-first refusal and confirm the terms thereof consistent with the foregoing.  In the event that the Receiving Party does not accept the offer in writing within the prescribed thirty (30) day period, the Proposing Party will be entitled, for a period expiring one hundred twenty (120) days after the termination of such thirty-day period, free from the restrictions of this ARTICLE VI and Section 16.2 hereof, to enter into the proposed

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agreement(s) with the proposed Third Party or Third Parties.  In the event of any material change(s) to the terms of the proposed agreement(s) or any change in the identity of the Third Party or Third Parties with which the Proposing Party proposes to enter into the proposed agreement(s), or in the event that the Proposing Party and the identified Third Party or Third Parties have not entered into the proposed agreement(s) prior to the expiration of the one hundred twenty (120) day period as aforesaid, the Receiving Party will, if during the Term, again have a right-of-first refusal with respect to such Product Concept in accordance with the terms of this Section 6.2(b).

(c)No Waiver.  Either Party’s failure to exercise the right-of-first offer under Section 6.2(a) will not result in a waiver of such Party’s right-of-first refusal under Section 6.2(b) and either Party’s failure to exercise the rights-of-first offer and -first refusal contained in this Section 6.2 for any Product Concept will not result in a waiver of either right with respect to any other Product Concept.

(d)The Parties each hereby acknowledge and agree that they have satisfied any obligations under this Section 6.2 with respect to each of the Matrix II, the Matrix III and the Matrix IV as a Product Concept hereunder.  

ARTICLE VI-A

MATRIX DEVELOPMENT COLLABORATION

 

MTF and Orthofix will engage in the Matrix Development Collaboration upon the terms and conditions set forth in this Agreement.  In furtherance of the foregoing, this Agreement will from time to time be deemed amended as hereinafter set forth to attach, under Schedule VI-A, (a) the relevant rights and obligations of the Parties with respect to the Matrix Development Collaboration, (b) the respective Matrix Specifications, (c) the respective Matrix Release Criteria and (d) the respective Matrix Development Plan, if and to the extent determined pursuant to the provisions hereof and subject to revision if and to the extent applicable.

 

ARTICLE VI-B

EDISON FACILITY EXPANSION

 

The Parties acknowledge that on or about the Amendment No. 5 Effective Date, Orthofix paid to MTF One Million Three Hundred Thousand Dollars ($1,300,000) as consideration for MTF’s procurement of certain equipment and technology associated with the expansion of tissue processing and storage of the Matrix at the Facility. MTF represents, warrants and covenants that (i) it has used and, as applicable, is using and will use the preceding funds for the sole purpose of procuring and installing certain equipment and technology as set forth in Schedule 6B hereto (Edison Facility Expansion Equipment and Technology) for the purpose of expanding the Trinity processing and storage capabilities at the Facility; and (ii) any and all equipment procured in connection with such payment has been, is being or will be installed in the Facility and has been, is being and will be used solely to perform obligations under this Agreement. MTF owns all right title and interest in and to the equipment procured pursuant to this ARTICLE VI-B.

 

 

ARTICLE VII
INTELLECTUAL PROPERTY

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7.1Existing Technology.

(a)Existing MTF Technology.  MTF will retain sole and exclusive ownership of all right, title and interest in and to: (x) all of the Existing MTF Technology (subject only to its express license to Orthofix set forth hereunder); and (y) if and to the extent not otherwise provided under this Agreement or the Development Agreement, any and all improvements, enhancements, modifications, purifications, optimizations or further development of or to the Existing MTF Technology.  MTF hereby grants to Orthofix (i) a non-exclusive, worldwide, royalty-free license, together with the right to sublicense, during the Term, under such Existing MTF Technology, to exercise any of Orthofix’s privileges and to perform any of Orthofix’s obligations under this Agreement in connection with the Collaboration, and to perform any of MTF’s obligations under this Agreement in the event that MTF fails to fulfill its obligations under this Agreement, and (ii) a non-exclusive, perpetual, irrevocable, worldwide, royalty-free license, together with the right to sublicense, under such Existing MTF Technology, solely insofar as is necessary to apply the Developed Technology to make, use, sell, offer to sell and import bone-growth allograft products containing viable allogeneic stem cells derived from cadavers, which grant will be exercised by Orthofix only on and after any expiration of this Agreement or any termination of this Agreement by Orthofix pursuant to Section 13.2 and a determination in a final non-appealable decision by a court of competent jurisdiction that MTF has committed, and failed to cure within the permitted cure period, a material breach or material default under this Agreement.

(b)Existing Orthofix Technology.  Orthofix will retain sole and exclusive ownership of all right, title and interest in and to: (x) all of the Existing Orthofix Technology (subject only to its express license to MTF set forth hereunder); and (y) if and to the extent not otherwise provided under this Agreement or the Development Agreement, to any and all improvements, enhancements, modifications, optimizations or further developments of or to the Existing Orthofix Technology.  Orthofix hereby grants to MTF (i) a non-exclusive, worldwide, royalty-free license, together with the right to sublicense, during the Term, under such Existing Orthofix Technology, to exercise any of MTF’s privileges and perform any of MTF’s obligations under this Agreement in connection with the Collaboration, and (ii) a non-exclusive, perpetual, irrevocable, worldwide, royalty-free license, together with the right to sublicense, under such Existing Orthofix Technology, solely insofar as in necessary to apply the Developed Technology to make, use, sell, offer to sell and import bone-growth allograft products containing viable allogeneic stem cells derived from cadavers, which grant will be exercised by MTF only on and after any expiration of this Agreement or any termination of this Agreement  by MTF pursuant to Section 13.2 and a determination in a final non-appealable decision by a court of competent jurisdiction that Orthofix has committed, and failed to cure within the permitted cure period, a material breach or material default under this Agreement.

7.2Developed Technology.

(a)Developed Technology.  Orthofix and MTF will jointly own any and all Developed Technology.  In furtherance of the foregoing, each Party hereby assigns and agrees to assign to the other Party an undivided joint ownership interest in and to all right, title and interest in all Developed Technology, including all intellectual property rights therein, whether developed solely by such Party or its employees, agents or subcontractors, or whether developed jointly by the Parties, their employees, agents or subcontractors under this Agreement.  Each Party will, upon request by the other Party, execute specific assignments and take any action necessary to enable the other Party to secure its joint ownership interest in the Developed Technology or any

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component thereof.  By virtue of their joint ownership, MTF and Orthofix will each enjoy, without limitation, the right to apply the Developed Technology to offer to sell the Matrix and perform services related to the Matrix in accordance with this Agreement, and the right to license such right, during the Term.  By virtue of its joint ownership interest, MTF will enjoy, without limitation, the right to apply the Developed Technology to make, use, sell and import the Matrix and perform services related to the Matrix in accordance with this Agreement, and the right to license such right, during the Term.  Except for purposes of exercising its privileges and performing its obligations under this Agreement in connection with the Collaboration, Orthofix will not exercise or license its right to apply the Developed Technology for purposes of making, using, selling or importing the Matrix during the Term.  For the avoidance of doubt, the Parties acknowledge and agree that all right, title and interest in and to any improvements, enhancements, modifications, purifications, optimizations or further developments of or to the Developed Technology not constituting Improvements hereunder will be owned solely and exclusively by the Party responsible for the discovery, creation or conception thereof.

(b)Conditional Exclusive License Grants.

(i)MTF hereby grants to Orthofix, which grant will be exercised by Orthofix only in the event of any termination of this Agreement by Orthofix pursuant to Section 13.2 and a determination in a final, non-appealable decision by a court of competent jurisdiction that MTF has committed, and failed to cure within the permitted cure period, a material breach or material default under this Agreement, an exclusive, perpetual, irrevocable, worldwide, royalty-free license, with the right to sublicense, under MTF’s undivided joint ownership interest in the Developed Technology to make, use, sell, offer to sell and import the Matrix.

(ii)Orthofix hereby grants to MTF, which grant will be exercised by MTF only in the event of any termination of this Agreement by MTF pursuant to Section 13.2 and a determination in a final, non-appealable decision by a court of competent jurisdiction that Orthofix has committed, and failed to cure within the permitted cure period, a material breach or material default under this Agreement, an exclusive, perpetual, irrevocable, worldwide, royalty-free license, with the right to sublicense, under Orthofix’s undivided joint ownership interest in the Developed Technology to make, use, sell, offer to sell and import the Matrix.

(c)Fourth Phase Developed Technology.  

(i)Notwithstanding anything to the contrary set forth in this Agreement, Sections 7.2(a) and 7.2(b) of this Agreement shall not apply with respect to the Fourth Phase Developed Technology.  With respect to any Fourth Phase Developed Technology only, MTF shall own any and all Fourth Phase Developed Technology (subject to its express license grants to Orthofix set forth in this Section 7.2(c)).  In furtherance of the foregoing Orthofix hereby assigns and agrees to assign to MTF, all right, title and interest, if any, Orthofix may have in all Fourth Phase Developed Technology, including all intellectual property rights therein, whether developed solely by MTF or its employees, agents or subcontractors, or whether developed jointly by the Parties, their employees, agents, or subcontractors under this Agreement.  Orthofix will, upon request by MTF, execute specific assignments and take any action necessary to enable MTF to secure its interest in the Fourth Phase Developed Technology or any component thereof.  

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Notwithstanding the foregoing, during the Term, MTF shall not supply, distribute, or license the Matrix IV to or on behalf of any Third Party other than through Orthofix in accordance with the terms of the Agreement unless Orthofix declines to commercialize and promote the Matrix IV and provides written notice to MTF of such decision by Orthofix.  

(ii)Exclusive License Grant.  Without limiting the foregoing sentence in Section 7.2(c) above, MTF hereby grants to Orthofix, an exclusive, irrevocable, worldwide, royalty-free license, with the right to sublicense, for the Term, under the Fourth Phase Developed Technology, to market, sell, and offer to sell the Matrix IV.  

(iii)Non-Exclusive License Grant.  In addition, MTF hereby grants to Orthofix, (x) a non-exclusive, worldwide, royalty-free license, together with the right to sublicense, during the Term, under such Fourth Phase Developed Technology, to exercise any of Orthofix’s privileges and to perform any of Orthofix’s obligations under this Agreement in connection with the Collaboration, and to perform any of MTF’s obligations under this Agreement in the event that MTF fails to fulfill its obligations under this Agreement and (y) a non-exclusive, perpetual, irrevocable, worldwide, royalty-free license, together with the right to sublicense, under such Fourth Phase Developed Technology to make, use, sell, offer to sell and import bone-growth allograft products containing viable allogeneic stem cells derived from cadavers, which grant will be exercised by Orthofix only on and after any expiration of this Agreement or any termination of this Agreement by Orthofix pursuant to Section 13.2 of this Agreement and a determination in a final non-appealable decision by a court of competent jurisdiction that MTF has committed, and failed to cure within the permitted cure period, a material breach or material default under this Agreement.

(d)Disclosures of Developed Technology.  Each Party will make a complete and prompt written disclosure to the other Party hereto specifically detailing the features and concepts of any and all ideas, designs, discoveries, inventions, improvements, and, in general, all things encompassed within the Developed Technology that are conceived of, reduced to practice, or otherwise developed, solely or jointly by such Party and/or Persons working under such Party’s direction and/or Persons employed or engaged by such Party during the Term and in performance of the activities under this Agreement.  Each Party will require each Person employed or engaged by such Party in connection with the performance of the activities under this Agreement to enter into a written agreement pursuant to which such Person (i) agrees to disclose to such Party promptly in writing all such ideas, designs, discoveries, inventions, improvements, and, in general, all things encompassed within the Developed Technology, and (ii) assigns to such Party all such ideas, designs, discoveries, inventions, improvements and all intellectual property rights therein, and, in general, all things encompassed within the Developed Technology.  Notwithstanding anything to the contrary set forth in this Agreement, Fourth Phase Developed Technology will be treated as Existing MTF Technology, rather than Developed Technology.

7.3Trademark Licenses.

(a)MTF Marks.  MTF hereby grants to Orthofix, during the Term, a non-exclusive, worldwide license, to use and apply the trademark “MTF” and any and all other related trademarks, logos, service marks, slogans and taglines designated by MTF in writing from time to time (the “MTF Marks”) in connection with Orthofix’s promotion and marketing of the Matrix in the Territory, in accordance with the terms of this Agreement.  Any such use in or on labels,

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packages, advertisements, pamphlets or other graphic or aural materials or otherwise hereunder will require prior written approval from MTF, and will in each instance indicate that the MTF Mark belongs to MTF.  Orthofix will regularly provide to MTF samples of all intended uses of the MTF Marks.  Orthofix will comply with all notice and marking requirements, and all additional standards of quality control, as required by MTF for the protection and enforcement of the MTF Marks and the registrations thereof and will not use the MTF Marks in any manner which might dilute or tarnish the MTF Marks or reflect adversely on MTF or any of its Affiliates.  All goodwill associated with the use of the MTF Marks by Orthofix will inure to the benefit of MTF.  MTF shall have no obligation to maintain any MTF Mark and, upon notice by MTF to Orthofix to such effect, Orthofix shall cease further use thereof.  Orthofix shall not have the right to sublicense its rights under this Section 7.3(a) except as otherwise provided under Section 2.9.

(b)Orthofix Marks.  Orthofix hereby grants to MTF, during the Term, a non-exclusive, worldwide license, to use and apply the trademark “Orthofix” and any and all other related trademarks, logos, service marks, slogans and taglines designated by Orthofix in writing from time to time (the “Orthofix Marks”) in connection with packaging, supply and distribution of the Matrix in the Territory, in accordance with the terms of this Agreement.  Any such use in or on labels, packages, advertisements, pamphlets or other graphic or aural materials or otherwise hereunder will require prior written approval from Orthofix, and will in each instance indicate that the Orthofix Mark belongs to Orthofix.  MTF will regularly provide to Orthofix samples of all intended uses of the Orthofix Marks.  MTF will comply with all notice and marking requirements, and all additional standards of quality control, as required by Orthofix for the protection and enforcement of the Orthofix Marks and the registrations thereof and will not use the Orthofix Marks in any manner which might dilute or tarnish the Orthofix Marks or reflect adversely on Orthofix or any of its Affiliates.  All goodwill associated with the use of the Orthofix Marks by MTF will inure to the benefit of Orthofix.  Orthofix shall have no obligation to maintain any Orthofix Mark and, upon notice by Orthofix to MTF to such effect, MTF shall cease further use thereof.  MTF shall not have the rights to sublicense its rights under this Section 7.3(b) except as provided under Section 2.9.

7.4Prosecution of Intellectual Property.

(a)Existing Orthofix Technology.  Subject to Section 7.4(d), Orthofix will have the sole right to file, prosecute and maintain patent applications and other registrations with respect to the Existing Orthofix Technology.  All costs and expenses associated with the filing, prosecution and maintenance of patent applications and other registrations with respect to the Existing Orthofix Technology will be the responsibility of Orthofix; provided, however, that if MTF exercises its right to file, prosecute and maintain a patent application or other registration with respect to the Existing Orthofix Technology as it relates to the Matrix pursuant to Section 7.4(d), the costs of filing, prosecuting and maintaining such patent application or other registration will be the responsibility of MTF.

(b)Existing MTF Technology.  Subject to Section 7.4(d), MTF will have the sole right to file, prosecute and maintain patent applications and other registrations with respect to the Existing MTF Technology.  All costs and expenses associated with the filing, prosecution and maintenance of patent applications and other registrations with respect to the Existing MTF Technology will be the responsibility of MTF; provided, however, that if Orthofix exercises its right to file, prosecute and maintain a patent application or other registration with respect to the Existing MTF Technology as it relates to the Matrix pursuant Section 7.4(d), the costs of filing,

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prosecuting and maintaining such patent application or other registration will be the responsibility of Orthofix.

(c)Developed Technology.  Subject to Section 7.4(d), Orthofix will have the sole right to file, prosecute and maintain patent applications and other registrations with respect to the Developed Technology.  All costs and expenses associated with the filing, prosecution and maintenance of patent applications and other registrations with respect to the Developed Technology will be the responsibility of Orthofix; provided, however, that if MTF exercises its right to file, prosecute or maintain patent applications or other registrations with respect to the Developed Technology pursuant to Section 7.4(d), the costs of filing, prosecuting and maintaining such patent application or other registration will be the responsibility of MTF.

(d)Election Not to File, Prosecute or Maintain.  In the event that a Party elects not to file, prosecute or maintain a patent application or other registration with respect to the Existing Orthofix Technology as it relates to the Matrix or the Existing MTF Technology  as it relates to the Matrix or with respect to the Developed Technology (as applicable), the other Party will be entitled to provide written notice to such Party of the other Party’s intent to file, prosecute or maintain such patent application or other registration, and if such Party fails to notify the other Party within thirty (30) days after such written notice that it has commenced filing, prosecuting or maintaining such patent application or other registration, as the case may be, the other Party will be entitled to file, prosecute and maintain such patent application or other registration in the owning Party’s name.

(e)Cooperation.  Without limiting any obligation under Section 11.1, each Party will cooperate with, and provide all reasonable aid and technical assistance to, the other Party in obtaining any patent or other intellectual property protection or right as it relates to the Matrix as permitted under this Section 7.4, and will keep all books and records, including notebooks, data, opinions, searches, reports, notes, summaries and the like, irrespective of the form, and execute (and require its employees, agents, consultants and contractors to execute) all documents reasonably necessary for purposes of procuring, maintaining, enforcing and defending such intellectual property rights.  In furtherance of the foregoing, each Party shall, during the Term, inform the other Party at reasonable regular intervals, or at such other Party’s reasonable request, about the status of any patent application, patent or other registration as it relates to the Matrix.

7.5Enforcement of Intellectual Property.

(a)Notification of Third-Party Infringement.  Each Party will notify the other Party promptly in writing in the event that any information is brought to its attention regarding any potential infringement by a Third Party of (i) the Existing MTF Technology or the Existing Orthofix Technology, in each case, insofar as relating to the uses licensed hereunder, (ii) the MTF Marks or the Orthofix Marks, in each case, insofar as relating to the uses licensed hereunder, and/or (iii) the Developed Technology.  

(b)Existing Orthofix Technology; Orthofix Marks.  Subject to Section 7.5(e), Orthofix will have the sole power and discretion to enforce and exploit Existing Orthofix Technology and Orthofix Marks against Third Parties by civil lawsuit or licensing, and will control any enforcement action brought by it with respect to any alleged infringement of the Existing Orthofix Technology and Orthofix Marks.  Orthofix will bear the costs and retain any amounts received in connection with such enforcement and exploitation actions.

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(c)Existing MTF Technology; MTF Marks.  Subject to Sections 7.5(d) and (e), MTF will have the sole power and discretion to enforce and exploit Existing MTF Technology and MTF Marks against Third Parties by civil lawsuit or (subject to the rights licensed hereunder) licensing, and will control any enforcement action brought by it with respect to any alleged infringement of the Existing MTF Technology and MTF Marks.  MTF will bear the costs and retain any amounts received in connection with such enforcement and exploitation actions.

(d)Developed Technology.  

(i)Subject to the additional provisions of this Section 7.5(d) and Section 7.5(e), during the Term Orthofix will have the sole power and discretion to enforce and exploit, against Third Parties that offer a product or service that competes with the Matrix, by civil lawsuit or licensing, and will control any enforcement action brought by it against such Third Party with respect to any alleged infringement of, the Developed Technology or the Developed Technology in combination with the Existing MTF Technology licensed hereunder.  Orthofix will pay all costs and fees associated with instituting any such action and will have control over selection of counsel and all strategic decisions relating to the action; provided, however, that any settlement proposed by Orthofix to be entered into will be subject to MTF’s prior written approval (which approval MTF will not unreasonably withhold, condition or delay).  Any amounts received in connection with such enforcement and exploitation actions will be applied as follows:

(A)first, to Orthofix in the amount of its costs and fees associated with instituting and maintaining such action and,

(B)next, to Orthofix in the amount of all costs incurred by Orthofix for filing, prosecution and maintenance of patent applications and other registrations with respect to the Developed Technology, and

(C)next, to MTF in the amount of all costs incurred by MTF for filing, prosecution and maintenance of patent applications and other registrations with respect to the Developed Technology, and

(D)then, [*].

(ii)Subject to the additional provisions of this Section 7.4(d) and Section 7.4(e), during the Term, MTF will have the sole power and discretion to enforce and exploit, against Third Parties that offer a product or service that does not compete with the Matrix, by civil lawsuit or licensing, and will control any enforcement action brought by it against any such Third Party with respect to any alleged infringement of, the Developed Technology or the Developed Technology in combination with any Existing Orthofix Technology licensed hereunder.  MTF will pay all costs and fees associated with instituting any such action and will have control over selection of counsel and all strategic decisions relating to the action; provided, however, that any settlement proposed by MTF to be entered into will be subject to Orthofix’s prior written approval (which approval Orthofix will not unreasonably withhold, condition or delay).  Any amounts received in connection with such enforcement and exploitation actions will be applied as follows:

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(A)first, to MTF in the amount of its costs and fees associated with instituting and maintaining such action, and

(B)next, to MTF in the amount of all costs incurred by MTF for filing, prosecution and maintenance of patent applications and other registrations with respect to the Developed Technology, and

(C)next, to Orthofix in the amount of all costs incurred by Orthofix for filing, prosecution and maintenance of patent applications and other registrations with respect to the Developed Technology, and

(D)then, any remaining amount to be allocated between the Parties in accordance with their respective damages suffered as a result of the circumstances at issue in such action.

(iii)If either Party declines to approve a settlement of an action brought by the other Party to enforce rights in the Developed Technology, the Party that declines to approve the proposed settlement will be fully responsible for, all reasonable costs and fees incurred for maintaining the enforcement action and subsequent settlement efforts relating to the period after the date on which approval of the proposed settlement was declined.

(e)Election Not to Enforce.  Each Party may, from time to time, request that the other Party take action to enforce and exploit the Existing MTF Technology or the Existing Orthofix Technology as it relates to the Matrix or the rights licensed hereunder or the Developed Technology (as applicable).  If the Party with the right to enforce and exploit the Existing MTF Technology or the Existing Orthofix Technology as it relates to the Matrix or the rights licensed hereunder or the Developed Technology (as applicable) elects not to enforce or exploit the applicable Existing Orthofix Technology, Existing MTF Technology, or Developed Technology, the other Party will be entitled to provide written notice to such Party of its intent to enforce and exploit such Existing Orthofix Technology, Existing MTF Technology, or Developed Technology, as applicable and, if such Party fails to notify the other Party within thirty (30) days after such written notice that it has commenced to enforce and exploit the same, the other Party will be entitled to enforce and exploit such Existing Orthofix Technology, Existing MTF Technology, or Developed Technology, as applicable, at its own expense and to retain amounts received in connection with such enforcement and exploitation actions.

(f)Cooperation.  The Parties will at all times cooperate with each other, share material notices and filings in a timely manner and be kept informed of the status of any proceeding under Sections 7.4(b), (c), (d) or (e) with respect to the Matrix or any rights licensed hereunder by the Party undertaking such enforcement.  Without limiting the generality of the foregoing, each Party will provide such reasonable cooperation and assistance as the other Party may reasonably request in any legal action to enforce any rights subject to Sections 7.5(b), (c), (d) or (e) with respect to the Matrix or any rights licensed hereunder, including joining such action as a necessary party, at the enforcing Party’s expense.  

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ARTICLE VIII
REPRESENTATIONS AND WARRANTIES OF MTF

Except for the representations and warranties in Section 8.7(a), Section 8.7(b), Section 8.7(c) and Section 8.8, each of which will be given for the entire Term, MTF hereby represents and warrants to Orthofix as of the Original Matrix Agreement Effective Date, and again as of the Amendment No. 2 Effective Date, the Amendment No. 3 Effective Date, the Amendment No 6. Effective Date and the Effective Date, as follows:

8.1Organization, Good Standing and Authority.  MTF is duly formed, validly existing and in good standing under the laws of the District of Columbia, and is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required except to the extent that such failure to qualify or maintain good standing would not materially adversely affect its ability to perform its obligations under this Agreement.  MTF has full corporate power and authority to own the assets owned by it and to lease the properties and assets held by it under lease, in each case insofar as to be applied hereunder, and to carry on and participate in the Collaboration.

8.2Organizational and Governing Documents; Approval.  This Agreement has been approved by all necessary corporate action of MTF and no other corporate proceedings on the part of MTF are necessary to authorize the execution and delivery of this Agreement, or the consummation of the transactions contemplated hereby, under the District of Columbia Nonprofit Corporation Act, MTF’s organizational documents or otherwise.

8.3Due Execution and Delivery.  MTF has all necessary power and authority to execute, deliver and perform this Agreement.  MTF has duly executed and delivered this Agreement and assuming the due authorization, execution and delivery of this Agreement by Orthofix, this Agreement constitutes the legal, valid and binding obligations of MTF enforceable against it in accordance with its terms, except that such enforcement (a) may be limited by bankruptcy, insolvency, moratorium or similar laws affecting creditors’ rights generally, and (b) is subject to the availability of equitable remedies, as determined in the discretion of the court before which such a proceeding may be brought.

8.4Consents; No Conflict. Except for the approval of MTF’s Board of Directors which has been obtained prior to the date of this Agreement, no material consent, authorization, permit, waiver or approval of or from, or notice to, any Person or any governmental authority is required as a condition to the execution and delivery of this Agreement by MTF or the performance of MTF’s obligations hereunder.  The execution and delivery of this Agreement and the performance of MTF’s obligations hereunder will not give rise to a right of termination of, contravene or constitute a default under, or be an event which with the giving of notice or passage of time or both will become a default under, or give to others any rights of termination or cancellation of, or give rise to a right of acceleration of the performance required by or maturity of, or result in the creation of any lien, charge or encumbrance, claim, cost, tax, losses or loss of any rights with respect to the Collaboration or the Matrix pursuant to any of the terms, conditions or provisions of or under any applicable Law, MTF’s organizational documents or any material written or oral contract or agreement to which MTF is a party or by which its assets are bound.

8.5Litigation and Claims.  There is no claim, suit, proceeding or other investigation pending, or to MTF’s Knowledge, threatened against MTF that would preclude MTF from entering

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into this Agreement or performing its obligations hereunder.  MTF is not in default with respect to any order, writ, injunction or decree of any governmental entity known to or served upon MTF in any manner that would preclude MTF from entering into this Agreement or performing its obligations hereunder.  There is no action or suit by MTF and relating to the Collaboration or the Matrix that is pending, threatened or contemplated against any other Person.

8.6Compliance With Laws.  To MTF’s Knowledge, (a) MTF is not in material violation of or in material default under any Law applicable to MTF with respect to the Collaboration or the Matrix, including the PHSA and relevant sections of the FDCA, the NOTA and 21 C.F.R. Part 1271, Human Cells, Tissues, and Cellular or Tissue-Based Products, in each case as currently applied by the FDA or other Regulatory Authority, (b) all material permits have been issued or granted to MTF (i) pursuant to which MTF currently operates or holds any interest in the property relating to the Collaboration or the Matrix, or (ii) which are required for its participation in the Collaboration as contemplated by this Agreement or the holding of any such interest, and (c) all such permits are in full force and effect and constitute all material permits required to permit MTF to participate in the Collaboration.

8.7Authorizations; Regulatory Compliance.

(a)HCT/P Status.  The Matrix, as marketed in accordance with, and within, labeling approved by MTF, will satisfy the FDA’s definition of an HCT/P subject to regulation solely under Section 361 of the PHSA and the provisions of 21 C.F.R. Part 1271 as currently applied by the FDA, i.e., the Matrix as so marketed, and in such context, will be a 361 HCT/P.  The Matrix, as so marketed, and in such context, will be minimally manipulated, intended for homologous use, will not involve combination with another article (with certain limited exceptions), will not have a systemic effect and is not dependent upon the metabolic activity of living cells for its primary function in order to satisfy the FDA’s requirements (as set forth in 21 C.F.R. 1271.10 and other provisions in 21 C.F.R. Part 1271 as currently applied by the FDA).

(b)Lot Compliance.  All Lots of the Matrix supplied by MTF will comply with the Specifications and all applicable Laws, including the FDA’s requirements in 21 C.F.R. Part 1271 regarding Donor Eligibility (Subpart C), cGTP (Subpart D) and Labeling (21 C.F.R § 1271.370), in each case as currently applied by the FDA or other Regulatory Authority.

(c)Investigation and Reporting.  MTF will investigate and report to the applicable Regulatory Authority adverse reaction reports and HCT/P deviations with respect to the Matrix in accordance with the requirements of 21 C.F.R. Part 1271 Subpart E.

(d)No Violation or Default.  To MTF’s Knowledge, MTF is not under investigation with respect to, has not been threatened to be charged with, nor has been given notice of, any material violation of or material default under any Law that could interfere with or delay the Processing and Commercialization of the Matrix pursuant to this Agreement.

(e)No Enforcement Actions.  In the past twelve (12) months, MTF has not received from the FDA or any other governmental entity, any notice of adverse findings, Form 483s, FDA warning letters, regulatory letters, notices of violations, detentions or seizures of product, suits for injunctive relief or other enforcement actions against MTF that could interfere with or delay in any material respect the Processing of the Matrix pursuant to this Agreement.

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8.8Matrix Warranties.  MTF warrants that all quantities of the Matrix supplied pursuant to any Authorized Orders (a) will conform with the Specifications, will be free from defects in materials or workmanship and will not be adulterated, misbranded, contaminated, tampered with or otherwise altered or mishandled while in the custody or control of MTF; (b) will have been Processed, supplied and distributed in accordance with the Specifications and in compliance in any material respect with all applicable Laws; and (c) will not be Processed, supplied, or distributed in violation of any agreement, judgment, order, or decree to which MTF is a party.

8.9Intellectual Property.  The Existing MTF Technology licensed under this Agreement is Controlled by MTF, and is free and clear of any liens, charges and encumbrances created by MTF.  MTF is not aware of any infringement of a valid claim of an existing Patent, or any other intellectual property right in connection with the Existing MTF Technology licensed under this Agreement, and has disclosed to Orthofix all reasonably relevant information regarding the Existing MTF Technology licensed under this Agreement, including all patent opinions obtained by MTF related thereto.  To MTF’s Knowledge, no Patent included in the Existing MTF Technology licensed under this Agreement is invalid or unenforceable, in whole or in part.

8.10Disclaimer of Warranties.  EXCEPT AS EXPRESSLY SET FORTH IN THIS ARTICLE VIII, MTF MAKES NO REPRESENTATIONS OR WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, IN FACT OR BY OPERATION OF LAW, AND MTF DISCLAIMS, WITHOUT LIMITATION, THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.

ARTICLE IX
REPRESENTATIONS AND WARRANTIES OF ORTHOFIX

Orthofix hereby represents and warrants to MTF as of the Original Matrix Agreement Effective Date, and again as of the Amendment No. 2 Effective Date, the Amendment No. 3 Effective Date, the Amendment 6 Effective Date and the Effective Date, as follows:

9.1Organization, Good Standing and Authority.  Orthofix is duly formed, validly existing and in good standing under the laws of the State of Delaware, and is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required except to the extent that such failure to qualify or maintain good standing would not materially adversely affect its ability to perform its obligations under this Agreement.  Orthofix has full corporate power and authority to own the assets owned by it and to lease the properties and assets held by it under lease, in each case insofar as to be applied hereunder, and to carry on and participate in the Collaboration.

9.2Organizational and Governing Documents; Approval. This Agreement has been approved by all necessary corporate action of Orthofix and no other corporate proceedings on the part of Orthofix are necessary to authorize the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby under the Delaware General Corporation Law, Orthofix’s organizational documents or otherwise.

9.3Due Execution and Delivery.  Orthofix has all necessary power and authority to execute, deliver and perform this Agreement.  Orthofix has duly executed and delivered this Agreement and assuming the due authorization, execution and delivery of this Agreement by MTF,

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this Agreement constitutes the legal, valid and binding obligations of Orthofix enforceable against it in accordance with its terms, except that such enforcement (a) may be limited by bankruptcy, insolvency, moratorium or similar laws affecting creditors’ rights generally, and (b) is subject to the availability of equitable remedies, as determined in the discretion of the court before which such a proceeding may be brought.

9.4Consents; No Conflict.  Except for the approval of Orthofix’s Board of Directors which has been obtained prior to the date of this Agreement, no material consent, authorization, permit, waiver or approval of or from, or notice to, any Person or any governmental authority is required as a condition to the execution and delivery of this Agreement by Orthofix or the performance of Orthofix’s obligations hereunder.  The execution and delivery of this Agreement and the performance of Orthofix’s obligations hereunder will not give rise to a right of termination of, contravene or constitute a default under, or be an event which with the giving of notice or passage of time or both will become a default under, or give to others any rights of termination or cancellation of, or give rise to a right of acceleration of the performance required by or maturity of, or result in the creation of any lien, charge or encumbrance, claim, cost, tax, losses or loss of any rights with respect to the Matrix pursuant to any of the terms, conditions or provisions of or under any applicable Law, Orthofix’s organizational documents or any material written or oral contract or agreement to which Orthofix is a party or by which its assets are bound.

9.5Litigation and Claims.  There is no claim, suit, proceeding or other investigation pending, or, to Orthofix’s Knowledge, threatened against Orthofix that would preclude Orthofix from entering into this Agreement or performing its obligations hereunder.  Orthofix is not in default with respect to any order, writ, injunction or decree of any governmental entity known to or served upon Orthofix in any manner that would preclude Orthofix from entering into this Agreement or performing its obligations hereunder.  There is no action or suit by Orthofix and relating to the Collaboration or the Matrix that is pending, threatened or contemplated against any other Person.

9.6Compliance With Laws.  To Orthofix’s Knowledge, (a) Orthofix is not in material violation of or in material default under any Law applicable to Orthofix with respect to the Collaboration or the Matrix, including the PHSA and relevant sections of the FDCA, the NOTA and 21 C.F.R. Part 1271, Human Cells, Tissues, and Cellular or Tissue-Based Products, in each case as currently applied by the FDA or other Regulatory Authority, (b) all material permits have been issued or granted to Orthofix (i) pursuant to which Orthofix currently operates or holds any interest in the property relating to the Collaboration or the Matrix, or (ii) which are required for its participation in the Collaboration as contemplated by this Agreement or the holding of any such interest, and (c) all such permits are in full force and effect and constitute all material permits required to permit MTF to participate in the Collaboration.

9.7Intellectual Property.  The Existing Orthofix Technology licensed under this Agreement is Controlled by Orthofix, and, except as set forth on Schedule 9.7 attached hereto, is free and clear of any liens, charges and encumbrances created by Orthofix.  Orthofix is not aware of any infringement of a valid claim of an existing patent or any other intellectual property right in connection with the Existing Orthofix Technology licensed under this Agreement, and has disclosed to MTF all reasonably relevant information regarding the Existing Orthofix Technology licensed under this Agreement, including all patent opinions obtained by Orthofix related thereto.  To Orthofix’s Knowledge, no Patent included in the Existing Orthofix Technology licensed under this Agreement is invalid or unenforceable, in whole or in part.

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9.8Disclaimer of Warranties.  EXCEPT AS EXPRESSLY SET FORTH IN THIS ARTICLE IX, ORTHOFIX MAKES NO REPRESENTATIONS OR WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, IN FACT OR BY OPERATION OF LAW, AND ORTHOFIX DISCLAIMS, WITHOUT LIMITATION, THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.

ARTICLE X
SPECIFICATIONS

10.1General. The Parties agree that the Matrix will at all times conform to, comply with, and will be Processed, supplied and distributed in accordance with, the Specifications and applicable Law.  Set forth in Exhibits C and D attached hereto and incorporated herein by reference are, respectively, the Matrix I Specifications and the Matrix I Release Criteria.  The Matrix II Specifications and the Matrix II Release Criteria shall be added to Exhibits C and D, respectively, upon approval of the Steering Committee, and each of the foregoing may be subsequently amended in accordance with Section 6A.1.3 under Schedule VI-A (in the case of the Matrix II Specifications, if prior to the Matrix II Commercialization Date) or in accordance with Section 10.4 (in all other cases).  The Matrix III Specifications and the Matrix III Release Criteria shall be added to Exhibits C and D, respectively, upon approval by the Steering Committee, and each of the foregoing may be subsequently amended in accordance with Section 6A.2.3 under Schedule VI-A (if prior to the Matrix III Commercialization Date) or in accordance with Section 10.4 (in all other cases). The Matrix IV Specifications and the Matrix IV Release Criteria shall be added to Exhibits C and D, respectively, upon approval by the Steering Committee, and each of the foregoing may be subsequently amended in accordance with Section 6A.3.3 under Schedule VI-A (if prior to the Matrix IV Commercialization Date) or in accordance with Section 10.4 (in all other cases).

10.2Certificate of Analysis.  Within fifteen (15) days after the end of each calendar month, MTF will deliver to Orthofix a COA with respect to each Lot from which any Authorized Order was fulfilled during the immediately preceding calendar month.  Set forth in Exhibit E attached hereto and incorporated herein by reference is the form of COA.

10.3Notice of Failure to Meet Specifications.  MTF will notify Orthofix promptly, but in any event within seventy-two (72) hours, after its discovery that any Lot, which has previously been approved in accordance with procedures set forth herein, fails to comply in any material respect with the Specifications.  MTF will notify Orthofix of such fact along with details concerning the nature of any such failure to meet the Specifications.  MTF will make, at its expense, such further internal investigation of any failure to meet the Specifications that it deems appropriate under the circumstances, as required by Law, and otherwise consistent with its obligations hereunder.  MTF will be solely responsible for all costs associated with failure by any Lot to meet the Specifications.

10.4Changes to Specifications and Release Criteria.  Either Party may request a change to the Specifications (including line extensions) or Release Criteria at any time by giving a written request to the other Party.  Any change requested by MTF will describe the requested change and explain the anticipated impact of such change on MTF’s performance of its obligations to Process, supply and distribute the Matrix in accordance with this Agreement; and in response to any change requested by MTF, Orthofix will advise MTF, as promptly as practicable, of the anticipated impact of such change on Orthofix’s performance of its obligations under this Agreement.  Any change requested by Orthofix will describe the requested change and explain the anticipated impact of such change on Orthofix’s performance of its obligations under this

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Agreement; and in response to any change requested by Orthofix, MTF will advise Orthofix, as promptly as practicable, of the anticipated impact of such change on MTF’s performance of its obligations to Process, supply and distribute the Matrix in accordance with this Agreement.  No change to the Specifications or the Release Criteria will become effective unless and until approved by the Steering Committee.

10.5Compliance with Specifications and Release Criteria.  MTF will conduct quality control testing of each Lot prior to shipment to verify that such Lot satisfies the Specifications and the Release Criteria and will retain records pertaining to such testing as required by applicable Laws.  MTF will not ship any Lot hereunder which, as indicated by quality control testing as set forth above, does not satisfy any of the foregoing requirements.

ARTICLE XI
BOOKS AND RECORDS; COMPLIANCE AUDITS
AND RELATED REGULATORY MATTERS

11.1Books and Records; Compliance Audits.

(a)Books and Records.  Each Party will maintain complete and accurate books, records and documentation related to its activities hereunder, including, without limitation, its Processing, supply, distribution and Commercialization (as applicable) of the Matrix hereunder for the longer of (i) five (5) years after shipment of any quantity of the Matrix, or (ii) the period of time required by applicable Laws; provided, however, that each Party will maintain during the Term and for six (6) years after issuance of the last of any Patent(s) issued to such Party for the Developed Technology, complete and accurate books, records, and documentation related to any such Patent(s) and related intellectual property, in sufficient detail and in good scientific manner appropriate for establishing and defending any such Patent(s) and related intellectual property, which will fully and properly reflect in all material respects all work done and results achieved by such Party in connection therewith. No records required by this Agreement will be discarded by either Party without specific prior written notification of such Party’s intent to discard to the other Party.  Those records (or copies of those records) that such Party is unwilling to retain will, at the request of the other Party, be transferred to the other Party for storage.  Without limitation of the foregoing, MTF will maintain, in accordance with all applicable Laws, required records, including records relating to complaints, Donor Eligibility Requirements, cGTP, and reporting to the FDA under 21 C.F.R. Part 1271.

(b)Performance of Audit.  Subject to the provisions of Section 4.2 (which shall apply, exclusively, to the subject matter thereof), each Party will be entitled, at its own expense and in connection with the Collaboration, to Audit any facility, quality systems, books, records and regulatory documentation of the other Party related to the other Party’s activities hereunder, during the Term and, in the case of such books, records and documentation, thereafter for the respective time periods described in Section 11.1(a).  This right of Audit will also accrue to such Party’s representatives designated to inspect on its behalf or in cooperation with such Party, provided that such representatives agree in writing to be bound by the same confidentiality requirements that apply to the auditing Party under this Agreement.  Such Audits will be for the purpose of quality assurance and control and confirming the audited Party’s compliance with applicable Laws and its obligations under this Agreement and exercising any privileges under this

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Agreement.  Upon reasonable prior notice, each Party will provide the other Party and its designated representatives with reasonable access to such Party’s facilities and documentation during normal business hours for the purpose of conducting such Audit.  

(c)Audit Feedback.  Within thirty (30) days after completing the results of any Audit hereunder, an auditing Party will submit to the audited Party a written report outlining its findings and/or observations from any such Audit.  If deficiencies are discovered during an Audit that could, in the auditing Party’s reasonable opinion, prevent the audited Party from satisfying its obligations under this Agreement, then, provided that the audited Party agrees with the auditing Party’s opinion, the audited Party will promptly correct such deficiencies at its own expense and prior to filling new or outstanding Authorized Orders, and will notify the auditing Party in writing when such deficiencies are corrected.  If the audited Party does not agree with the auditing Party’s opinion, the Parties will direct the dispute to the Steering Committee.  

(d)Acknowledgement.  A Party’s or its representative’s exercise of its Audit rights hereunder will in no way waive, modify or diminish the other Party’s obligations under this Agreement.

11.2Regulatory Matters.

(a)Compliance.  Each Party will, during the Term, comply in all material respects with all Laws applicable to the Matrix and to the activities, including Processing and Commercialization (as applicable), undertaken by such Party pursuant to this Agreement.  MTF will Process, supply and distribute the Matrix in compliance in all material respects with the quality control procedures approved under the Development Agreement.  

(b)AATB Standards.  MTF will maintain membership in the AATB during the Term, unless MTF notifies Orthofix to the contrary in writing, and whether or not MTF maintains such membership, MTF will comply in all material respects with the most current voluntary standards adopted by the AATB applicable to its activities undertaken pursuant to this Agreement.

(c)Regulatory Filings; Related Data.  MTF will prepare and submit all regulatory filings, submissions and payments necessary to permit the Processing and Commercialization of the Matrix as contemplated under the Marketing Plan, and will gather and maintain data and records in connection therewith (including for potential submissions or reporting to the FDA and other Regulatory Authorities).  Notwithstanding MTF’s responsibility for regulatory and legal compliance, all material regulatory submissions will be subject to review and approval by the Steering Committee which approval will not be unreasonably withheld, conditioned or delayed.

11.3Complaints.

(a)Records; Notification.  Each of Orthofix and MTF will keep written records of all customer complaints that it receives and promptly advise the other Party in writing or by electronic mail of all such complaints, and will notify the other Party by telephone of all potential adverse reactions involving communicable disease within twenty-four (24) hours of knowledge thereof and in writing or by electronic mail within two (2) business days of receipt of the preliminary details thereof.

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(b)Complaint Handling.  MTF will be responsible for complaint handling, investigations and reports to the FDA and other governmental authorities as required by Law, including the provisions of 21 C.F.R. Part 1271.  Each Party will cooperate fully with the other Party in dealing with customer complaints concerning the Matrix and will take such action to promptly resolve such complaints as may be reasonably requested by the other Party.  Orthofix will reasonably cooperate with MTF to enable MTF to fulfill all applicable governmental investigation and reporting requirements arising from complaints or adverse events or reactions.

11.4Regulatory Correspondence.  During the Term, MTF will notify Orthofix promptly (but in any event within seventy-two (72 hours)) of (a) any establishment inspection observations (including any FDA Form 483), letter, citation, indictment, claim, lawsuit, or enforcement proceeding threatened, issued or instituted by any governmental authority to or against MTF relating to the Processing of the Matrix hereunder, (b) any notice, order, correspondence, or other form of communication threatening or proposing to revoke or suspend or of any communication that revokes any license, registration, authorization, approval, exemption, allowance, or permit held or maintained by MTF relating to the Processing of the Matrix hereunder, or (c) any charge brought against MTF or, to MTF’s Knowledge, any director, officer, employee or consultant of MTF under any Law for any act or omission relating to the development of the Matrix or otherwise relating to regulation of the Matrix under any applicable Law. During the Term, Orthofix will notify MTF promptly (but in any event within seventy-two (72) hours) of any charge brought against Orthofix or, to Orthofix’s Knowledge, against any director, officer, employee or consultant of Orthofix under any Law for any act or omission relating to the development of the Matrix or otherwise relating to regulation of the Matrix under any applicable Law.

11.5Regulatory Inspections.  If MTF or a subcontractor is inspected by any agent of any Regulatory Authority (a “Regulatory Inspection”) in connection with its processing of the Matrix hereunder, MTF will promptly notify Orthofix of the results (and, in any event, will do so within seventy-two (72) hours of completion of the inspection), including any establishment inspection observations (including any FDA Form 483), letter, citation, significant oral comments or observations, written comments or notices received from the AATB or any applicable Regulatory Authority, which relate to the development or Processing of the Matrix hereunder, if applicable.  With respect to the forgoing, each Party will, during the Term, provide to the other Party, promptly upon such other Party’s request, copies of any notice or correspondence from or to any Regulatory Authority that directly relates to the Matrix.  Such notices and correspondence are considered Confidential Information in accordance with this Agreement. The Parties will cooperate in the development and review of responses that are required to be submitted to any Regulatory Authority relating to the development or Processing of the Matrix hereunder prior to submission to the Regulatory Authority.  MTF hereby further agrees to advise Orthofix promptly (and, in any event, within seventy-two (72) hours) of learning of any announced or scheduled Regulatory Inspection of any Facility, or any facility of a subcontractor of MTF, where such Regulatory Inspection is anticipated to be specifically related to the Matrix or its Processing hereunder.  In such cases, MTF agrees to permit, to the extent reasonably practical, one or more representative(s) of Orthofix to be present if requested by Orthofix.

ARTICLE XII
RECALLS

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Either Party who becomes aware of any defect, problem or adverse condition in the Matrix will promptly notify the other Party of such defect, problem or adverse condition.  MTF will have responsibility for determining whether to initiate, and for initiating and conducting, any recall, market withdrawal, field action, removal, correction or field notice (a “Recall”) related to the Matrix.  Orthofix will cooperate with MTF in the conduct of any Recall.  MTF will bear the costs and expenses of any Recall related to the Matrix, including reasonable costs incurred by Orthofix.  Orthofix will have the right to initiate at its own expense any patient testing with respect to the Matrix other than that which is required by Law, and Orthofix’s election to initiate such testing will not affect MTF’s indemnification obligations hereunder.  Nothing contained herein will be construed as restricting the right of either Party to make a timely report of such matters to any Regulatory Authority or take other action that it deems to be appropriate or required by applicable Laws.

ARTICLE XIII
TERM; TERMINATION

13.1Term. Unless sooner terminated pursuant to the terms herein, this Agreement will commence on the Effective Date and will continue until December 31, 2032 (the “Initial Term”).  Thereafter, this Agreement will automatically renew [*] to begin immediately upon the expiration of the then-current term unless a Party provides written notice of termination [*] to the expiration of the Initial Term or any renewal term, as applicable.  

13.2Termination for Default.  Either Party may terminate this Agreement in the event of the material breach or material default by the other Party of the material terms and conditions hereof which is not cured as set forth in this Section 13.2.  In the event of such a material breach or material default, the terminating Party will first give to the defaulting Party written notice of the proposed termination of this Agreement, specifying the grounds therefor.  Upon receipt of such notice, the defaulting Party will have [*] to cure such material breach or material default.  In the event of determination in a final, non-appealable decision by a court of competent jurisdiction that such other Party has committed, and failed to cure, such breach or default within such period, then this Agreement will terminate automatically upon such determination.  Termination of this Agreement pursuant to this Section 13.2 will not affect any other rights or remedies which may be available to the non-defaulting Party.

13.3Termination for Bankruptcy, Insolvency.  A Party may terminate this Agreement upon the occurrence of either of the following:

(a)the entry of a decree or order for relief by a court having jurisdiction in the premises in respect of the other Party in an involuntary case under the United States Bankruptcy Code, as now constituted or hereafter amended (the “Bankruptcy Code”), or any other applicable federal or state insolvency or other similar Law and the continuance of any such decree or order unstayed and in effect for a period of sixty (60) consecutive days; or

(b)the filing by the other Party of a petition for relief under the Bankruptcy Code or any other applicable federal or state insolvency or other similar Law.

All licenses granted by each Party to the other Party in this Agreement are, and will otherwise be deemed to be, for the purpose of Section 365(n) of the Bankruptcy Code, the licenses of rights to “intellectual property” as defined under Section 101 of the Bankruptcy Code.  Each Party, as a

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licensee of intellectual property rights under this Agreement, will retain and may fully exercise all of its rights and elections under the Bankruptcy Code.  The Parties hereto further agree that, in the event that any proceeding will be instituted by or against either Party seeking to adjudicate it as bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief or composition of it or its debts under any Law relating to bankruptcy, insolvency, or reorganization or relief of debtors, or seeking an entry of an order for relief or the appointment of a receiver, trustee or other similar official for it or any substantial part of its property or it will take any action to authorize any of the foregoing actions, the other Party will have the right to retain and enforce its rights in and to such Party’s intellectual property under this Agreement in accordance with Section 365(n) of the Bankruptcy Code.

13.4Catastrophic Business Loss.  

(a)In the event of a Catastrophic Business Loss, MTF shall have the right to provide written notice to Orthofix requesting renegotiation of the terms and/or conditions of this Agreement, and the Parties will use good faith efforts to reach agreement with respect to new terms and/or conditions regarding the Collaboration within [*] after Orthofix’s receipt of written notice requesting renegotiation thereof. If the Parties fail to mutually agree with respect to new terms and/or conditions regarding the Collaboration within [*] after Orthofix’s receipt of MTF’s written notice of a Catastrophic Business Loss, then, MTF shall have the right to convert the exclusive arrangement set forth in Section 2.1(c) to Process, supply, or distribute the Matrix only to Orthofix or a Customer into a non-exclusive arrangement upon written notice of such to Orthofix.

(b)As used herein, a “Catastrophic Business Loss” shall be deemed to have occurred when the end of year total Matrix Revenue generated from the sale of all Matrix products for that year falls below [*], and the cause of the failure to achieve more than [*] is solely and directly attributable to Orthofix’s failure to perform its marketing obligations to market and solicit orders for the Matrix products in the Territory; provided, however, that a Catastrophic Business Loss will not be deemed to have occurred in the event that the failure to achieve more than [*] arises in whole or in part from: [*]

13.5Expiration; Termination; Consequences.

(a)Survival.  The following provisions, in accordance with their respective terms, will survive termination or expiration of this Agreement for any reason:  Section 4.1 (Service Fee) (solely with respect to quantities of the Matrix sold prior to the effective date of such termination or expiration), Section 4.2 (Service Fee Audit), Section 4.3 (Administrative Fees) (solely with respect to quantities of the Matrix sold prior to the effective date of such termination or expiration), Section 4.4 (Shipping Changes) (solely with respect to quantities of the Matrix sold prior to the effective date of such termination or expiration), Section 5.2 (Marketing Fee) (solely with respect to quantities of the Matrix sold prior to the effective date of such termination or expiration), ARTICLE VII (Intellectual Property), Section 8.10 (Disclaimer of Warranties), Section 9.8 (Disclaimer of Warranties), Section 11.1 (Books and Records; Compliance Audits), Section 13.3 (Termination for Bankruptcy, Insolvency), Section 13.5 (Expiration; Termination; Consequences), ARTICLE XIV (Indemnification; Insurance), ARTICLE XV (Disclaimer of Indirect Damages), ARTICLE XVI (Confidentiality; Restrictive Covenants; Publications), Section 17.3(b) [*], ARTICLE XVIII (Press Releases; Use of Names), ARTICLE IX (Dispute Resolution) and ARTICLE XX (Miscellaneous).

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(b)Return of Confidential Information.  Upon termination or expiration of this Agreement, each Party will immediately deliver to the other (and cause its employees, agents, representatives and subcontractors to so deliver), at such Party’s expense, all Confidential Information of the other Party, including any and all copies, duplications, summaries and/or notes thereof or derived therefrom, regardless of the format; provided, however, that each Party will, upon reasonable notice to such Party and during such Party’s normal business hours, provide the other Party with access to Confidential Information as is reasonably necessary for purposes of the requesting Party’s compliance with applicable Laws or in connection with such Party’s defense of any Third-Party claims related thereto.

(c)Accrued Obligations.  Expiration or termination of this Agreement will not relieve the Parties of any obligation accruing prior to the effective date of such expiration or termination, including, with respect to MTF, (i) the fulfillment of any outstanding Authorized Orders received prior to the effective date of expiration or termination of this Agreement and (ii) payment to Orthofix of any Marketing Fees due and payable as a result of Authorized Orders received prior to the effective date of expiration or termination of this Agreement.

ARTICLE XIV
INDEMNIFICATION; INSURANCE

14.1Indemnification by Orthofix.  Orthofix hereby agrees to indemnify, defend, and hold harmless MTF, its Affiliates and their respective directors, officers, employees, agents, successors and permitted assigns (the “MTF Indemnitees”) from and against any and all damages, losses, liabilities, claims, actions, proceedings, and expenses (including reasonable attorneys’ fees and expenses) (collectively, “Damages”) resulting from or arising out of (a) any unauthorized claim made by Orthofix with respect to the Matrix that is inconsistent with the Specifications, with the labeling or materials approved by MTF, (b) Orthofix’s breach of any of its representations, warranties or covenants hereunder, (c) Orthofix’s gross negligence or willful misconduct or the grossly negligent actions or willful misconduct of any of Orthofix’s Affiliates, employees, directors or agents in connection with this Agreement, including, without limitation, any product liability and other claims for personal injury or death caused by the Matrix if resulting from such actions, and (d) any Third-Party claim that the Processing, distribution or supply under this Agreement and for purposes of the Collaboration of the Matrix in accordance with the Specifications and for which Orthofix is paid a Marketing Fee (or which is delivered in furtherance of Orthofix’s marketing efforts or as a result of Orthofix’s introduction regardless of whether a Marketing Fee is paid) violates the intellectual property rights of a Third Party and/or infringes the valid claim of an existing Patent of a Third Party (an “Infringement Claim”), it being understood that a Third-Party Claim regarding the development or Processing of the Matrix independent of the Collaboration shall not be within the definition of “Infringement Claim;” provided, however, that

(i)the provisions of clause (d) immediately preceding shall not extend to, and Orthofix shall have no obligations to MTF under clause (d) immediately preceding with respect to, any Matrix II Infringement Claim, any Matrix III Infringement Claim, or any Matrix IV Infringement Claim; and

(ii)in the event of an Infringement Claim or a reasonable determination by Orthofix that an Infringement Claim is likely to be initiated, Orthofix will have the right to direct MTF, by written notice, to cease Processing, supplying and distributing the

30

 

Matrix during the period beginning upon MTF’s receipt of such notice and continuing until MTF’s receipt of written notice from Orthofix that the Infringement Claim has been satisfactorily resolved in Orthofix’s reasonable determination or is no longer expected to be initiated (the “Cessation Period”), and Orthofix will have no obligation to indemnify or hold harmless MTF or the MTF Indemnitees from or against any Damages attributable to any Processing, supply or distribution of the Matrix during the Cessation Period; and

(iii)Orthofix will not be required to indemnify, defend and hold harmless the MTF Indemnitees from or against any counter-claim or other claim against an enforcement action filed by MTF (in exercising its step-in rights pursuant to Section 6.5(e)) with respect to any alleged infringement of the Existing Orthofix Technology or the Developed Technology.

In the event that Orthofix directs MTF, by written notice, to cease development and Processing of the Matrix based on a reasonable determination that an Infringement Claim is likely to be initiated and MTF complies therewith, Orthofix shall reimburse MTF for fifty percent (50%) of MTF’s actual, documented cost for processing the quantity of the Matrix in MTF’s inventory on the date of such notice and fifty percent (50%) of MTF’s actual documented cost for all Matrix work in process on such date.

14.2Indemnification by MTF.  MTF hereby agrees to indemnify, defend, and hold harmless Orthofix, its Affiliates and their respective directors, officers, employees, agents, successors and permitted assigns from and against any and all Damages, resulting from or arising out of (a) MTF’s breach of any of its representations, warranties, or covenants hereunder; (b) MTF’s gross negligence or willful misconduct or the grossly negligent actions or willful misconduct of any of MTF’s Affiliates, employees, officers, directors or agents in connection with this Agreement; (c) product liability and other claims for personal injury or death caused by the Matrix insofar as Processed and supplied by MTF; (d) subject to delivery of the Matrix II Opinion, any Matrix II Infringement Claim; provided, however, that (i) in the event of a Matrix II Infringement Claim or a reasonable determination by MTF that a Matrix II Infringement Claim is likely to be initiated, MTF will have the right to direct Orthofix, by written notice, to cease marketing the Matrix II during the period beginning upon Orthofix’s receipt of such notice and continuing until Orthofix’s receipt of written notice from MTF that the Matrix II Infringement Claim has been satisfactorily resolved in MTF’s reasonable determination or is no longer expected to be initiated (the “Matrix II Cessation Period”), and MTF will have no obligation to indemnify or hold harmless Orthofix or any other Person otherwise indemnified hereunder from or against any Damages attributable to any development or marketing of the Matrix II during the Matrix II Cessation Period; (e) any Matrix III Infringement Claim; provided, however, that (i) in the event of a Matrix III Infringement Claim or a reasonable determination by MTF that a Matrix III Infringement Claim is likely to be initiated, MTF will have the right to direct Orthofix, by written notice, to cease marketing the Matrix III during the period beginning upon Orthofix’s receipt of such notice and continuing until Orthofix’s receipt of written notice from MTF that the Matrix III Infringement Claim has been satisfactorily resolved in MTF’s reasonable determination or is no longer expected to be initiated (the “Matrix III Cessation Period”), and MTF will have no obligation to indemnify or hold harmless Orthofix or any other Person otherwise indemnified hereunder from or against any Damages attributable to any development or marketing of the Matrix III during the Matrix III Cessation Period; and (f) any Matrix IV Infringement Claim; provided, however, that (i) in the event of a Matrix IV Infringement Claim or a reasonable

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determination by MTF that a Matrix IV Infringement Claim is likely to be initiated, MTF will have the right to direct Orthofix, by written notice, to cease marketing the Matrix IV during the period beginning upon Orthofix’s receipt of such notice and continuing until Orthofix’s receipt of written notice from MTF that the Matrix IV Infringement Claim has been satisfactorily resolved in MTF’s reasonable determination or is no longer expected to be initiated (the “Matrix IV Cessation Period”), (ii) MTF will have no obligation to indemnify or hold harmless Orthofix or any other Person otherwise indemnified hereunder from or against any Damages attributable to any development or marketing of the Matrix IV during the Matrix IV Cessation Period, and (iii) the foregoing obligation in (f) shall not be construed to limit Orthofix’s indemnification obligation with respect to Matrix I pursuant to Section 14.1(d).

14.3Third-Party Claims Procedure.

(a)Notice of Claims.  Each Party indemnified under the provisions of this Agreement, upon receipt of written notice of any claim, or the service of a summons or other initial legal process upon it in any action instituted against it by a Third Party, in respect of any claim for which such Party is entitled to indemnification in accordance with this Agreement, will promptly give written notice of such claim, or the commencement of such action, or threat thereof to the Party from whom indemnity will be sought hereunder; provided, however, the failure to provide such notice will not relieve the indemnifying Party of any of its obligations hereunder except to the extent the indemnifying Party is materially prejudiced by such failure.  The indemnifying Party will be entitled at its own expense to participate in the defense of such claim or action, or, if it will elect, to assume control of such defense, in which event such defense will be conducted by counsel chosen by such indemnifying Party, which counsel may be any counsel reasonably satisfactory to the indemnified Party against whom such claim is asserted, and the indemnified Party will bear all fees and expenses of any additional counsel retained by it.  Notwithstanding the immediately preceding sentence, if the named parties in such action (including impleaded parties) include the indemnified and the indemnifying Parties, and the indemnified Party will have been advised by counsel that there may be a conflict between the positions of the indemnifying Party and the indemnified Party in conducting the defense of such action or that there are legal defenses available to such indemnified Party different from or in addition to those available to the indemnifying Party, then counsel for the indemnified Party will be entitled, if the indemnified Party so elects, to conduct the defense to the extent reasonably determined by such counsel to be necessary to protect the interests of the indemnified Party, at the expense of the indemnifying Party, if it is determined by agreement of the indemnifying Party and the indemnified Party or by a court of competent jurisdiction that the indemnified Party is entitled to indemnification hereunder for the Damages giving rise to such action.  If the indemnifying Party elects not to assume the defense of such claim or action, then such indemnifying Party will reimburse such indemnified Party for the reasonable fees and expenses of any counsel retained by it, and will be bound by the results obtained by the indemnified Party in respect of such claim or action if it is determined by agreement of the indemnifying Party and the indemnified Party or by a court of competent jurisdiction that the indemnified Party is entitled to indemnification hereunder for the Damages giving rise to such action; provided, however, that no such claim or action will be settled without the written consent of the indemnifying Party, which consent will not be unreasonably withheld, conditioned or delayed and provided, further, that an indemnified Party that declines to consent to a proposed settlement will not be entitled to be indemnified against, and will be fully responsible for, (i) the amount, if any, by which any subsequent settlement amount or damages award exceeds the amount of the proposed settlement that was declined, and (ii) all reasonable costs of defense and settlement

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relating to the period after the date on which consent to the proposed the proposed settlement was declined.

(b)Payment Terms.  All amounts payable under this ARTICLE XIV will be paid promptly after receipt by the indemnifying Party of written notice from the indemnified Party stating that such Damages have been incurred, the amount thereof and of the related indemnity payment and substantiation of such amount and such indemnity payment; provided, however, any disputed amounts will be due and payable promptly after such amounts are finally determined by a court of competent jurisdiction or by mutual agreement of the Parties to be owing by the indemnifying Party to the indemnified Party.

14.4Insurance.  Each Party will procure and maintain comprehensive general liability and product liability insurance (or, in the case of MTF, professional liability insurance), in amounts of not less than [*] per incident and [*] in the aggregate annually.  Each Party will maintain such insurance during the Term and for a period of ten (10) years following the end of the Term.  Each Party will cause the other Party to be named as an additional insured under such insurance and will provide the other Party proof of such insurance upon request.  Each Party will give the other Party at least thirty (30) days’ notice of any cancellation, termination or change in such insurance.

ARTICLE XV
DISCLAIMER OF INDIRECT DAMAGES;
LIMITATIONS ON LIABILITY

Notwithstanding any other provision contained in this Agreement:

15.1Indirect Damages.  In no event will either Party be liable to the other Party for incidental, special, consequential or other indirect damages, including any claims for damages based upon lost profits (it being acknowledged and agreed that amounts paid or incurred by a Party to any Third Parties, whether or not constituting indirect damages to such Third Parties, shall not be construed as indirect damages to such Party).  

15.2Maximum Aggregate Liability.  The maximum aggregate liability of MTF hereunder for any and all causes whatsoever, and Orthofix’s remedies, and whether or not MTF is notified of the possibility of Damages to Orthofix, will be limited to [*].  The maximum aggregate liability of Orthofix hereunder for any and all causes whatsoever, and MTF’s remedies, and whether or not Orthofix is notified of the possibility of Damages to MTF, will be limited to [*].  

15.3Exceptions.  The disclaimer and limitations set forth in this ARTICLE XV will not apply to any liability of either Party arising under Section 6.2 (Rights of First Offer and First Refusal), ARTICLE XIV (Indemnification and Insurance), other than under Section 14.1(a), Section 14.1(b), Section 14.2(a) thereof, and ARTICLE XVI (Confidentiality; Restrictive Covenants; Publication).

ARTICLE XVI
CONFIDENTIALITY; RESTRICTIVE COVENANTS; PUBLICATION

16.1Treatment of Confidential Information.

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(a)Obligation; Exceptions.  All Confidential Information disclosed by one Party to the other Party hereunder will be maintained in confidence by the receiving Party and will not be disclosed to any Third Party or used for any purpose except as set forth herein without the prior written consent of the disclosing Party, for a period of ten (10) years from disclosure of such Confidential Information, except to the extent that such Confidential Information:

(i)is known by receiving Party at the time of its receipt, and not through a prior disclosure by the disclosing Party, as documented by the receiving Party’s business records;

(ii)is or becomes part of the public domain through no fault of the receiving Party;

(iii)is subsequently disclosed to the receiving Party by a Third Party who may lawfully do so and is not under an obligation of confidentiality to the disclosing Party;

(iv)is developed by the receiving Party independently of Confidential Information received from the disclosing Party, as documented by the receiving Party’s business records;

(v)is disclosed to a governmental agency (A) in order to obtain Patents with respect to the Matrix, but such disclosure may be made only to the extent reasonably necessary to obtain such Patents, or (B) as part of or in connection with any mandatory filing with a governmental agency; and/or

(vi)is deemed necessary by either Party to be disclosed to its Affiliates, agents, consultants, and/or other Third Parties for the Processing and/or Commercialization of the Matrix and/or in connection with a permitted licensing transaction and/or a permitted assignment under this Agreement, and/or loan, financing or investment and/or acquisition, merger, consolidation or similar transaction (or for such entities to determine their interest in performing such activities) in each case on the condition that any Third Parties to whom such disclosures are made agree to be bound by the confidentiality and non-use obligations contained in this Agreement; provided, however, that the term of confidentiality for such Third Parties will be no less than ten (10) years.

(b)Aggregated Information.  Any combination of features or disclosures will not be deemed to fall within the foregoing exclusions merely because individual features are published or available to the general public or in the rightful possession of the receiving Party unless the combination itself falls within the applicable exclusion.

(c)Required Disclosures.  If a Party is required by judicial or administrative process to disclose Confidential Information that is subject to the non-disclosure provisions of this ARTICLE XVI such Party will promptly inform the other Party of the disclosure that is being sought in order to provide the other Party an opportunity to challenge or limit the disclosure obligations.  Confidential Information that is disclosed by judicial or administrative process will remain otherwise subject to the confidentiality and non-use provisions of this ARTICLE XVI, and the Party disclosing Confidential Information pursuant to law or court order will take all steps

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reasonably necessary, including without limitation obtaining an order of confidentiality, to ensure the continued confidential treatment of such Confidential Information.  

16.2Non-Compete.  Subject to the provisions of Section 6.2(a) and Section 6.2(b), during the Term and for one (1) year thereafter, neither Party will, and will not permit any of its Affiliates to, except as provided in this Agreement, directly or indirectly, as a principal, agent, owner, joint venturer, investor, manager, operator or consultant, engage in the Processing, development, manufacture, sale, marketing, use, import, export, supply, distribution or other Commercialization in the Territory of bone-growth allograft products containing viable allogeneic stem cells derived from cadavers; provided, however, that the Parties acknowledge and agree that (a) Orthofix is a party to the Osiris Agreement under which Orthofix distributes a bone allograft product, under the trademark “Trinity”™, that contains viable allogeneic stem cells derived from cadavers, (b) as of the date hereof, Orthofix has an existing inventory of the Trinity product, (c) Orthofix shall be entitled to exhaust such inventory of the Trinity product, but in no event subsequent to the later of (i) six (6) months after the Effective Date or (ii) October 1, 2009, before placing orders with MTF for the Matrix, (d) Orthofix may fill orders for all or any portion of the quantities set forth in any Forecast from such inventory of the Trinity product before placing orders with MTF for the Matrix, but in no event later than the period described under clause (c) immediately preceding, and (e) proceeding as set forth herein will not be deemed to be a violation by Orthofix of ARTICLE VI, this Section 16.2 or any other provision of this Agreement.  Each Party acknowledges and agrees that the covenants and agreements set forth in this Section 16.2 have been specifically negotiated and are essential and material terms and conditions of this Agreement and a material part of the transactions contemplated by this Agreement and the Development Agreement.

16.3Non-Solicitation.  During the Term and, for a period of one (1) year thereafter, neither Party will directly or indirectly solicit, engage or hire any employee or contractor of the other Party or its Affiliates; provided, however, that nothing herein will prohibit either Party, directly or indirectly (for such Party’s own account or for the account of any other Person), from soliciting for employment, hiring or employing (a) any Person who responds to a general solicitation or advertisement in a newspaper, on the internet, or in some similar medium that is not directed at any individual employee or group of employees of the other Party; (b) any Person whose employment has been terminated without cause by the other Party; or (c) any Person referred by a recruiter, as long as such recruiter is directed to not target or solicit employees of the other Party.

16.4Publications.  Each of Orthofix and MTF will have the right to publish, during the Term or after its expiration or termination, the results of research related to the Matrix that is conducted during the Term, subject in each instance to the prior written approval of the other Party, which approval will not be unreasonably withheld, conditioned or delayed.  The Party seeking to publish any such results will submit the proposed publication to the other Party for review a minimum of sixty (60) days prior to the contemplated publication and the non-publishing Party will have a reasonable opportunity to recommend any changes that it reasonably believes are necessary.  If the non-publishing Party does not object to such publication or recommend any changes in writing within such sixty (60) day period such approval will be deemed granted.

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ARTICLE XVII
FORCE MAJEURE

17.1Effects of Force Majeure.  Neither Party will be held liable or responsible for failure or delay in fulfilling or performing any of its obligations under this Agreement to the extent that such failure or delay is caused or occasioned by acts of God, acts of the public enemy, fire, explosion, flood, drought, pandemic, hurricane, weather conditions, war, riot, sabotage, embargo, strikes or other labor disputes, or an action of any governmental authority including [*] (a “Force Majeure Event”). Notwithstanding the foregoing, no event will be considered a Force Majeure Event if and to the extent the non-performing Party could have prevented or circumvented the event through the use of alternate sources, workaround plans, or other means. In the event of a Force Majeure Event affecting the Processing of the Matrix, MTF will use Reasonable Commercial Efforts to implement the Contingency Plan before it will be entitled to be excused from its obligations under this Agreement pursuant to this Section 17.1.  Such excuse will continue as long as the Force Majeure Event continues.  [*] Upon cessation of such Force Majeure Event, such Party will promptly resume performance hereunder.

17.2Notice of Force Majeure.  Each Party agrees to give the other Party prompt written notice of the occurrence of any Force Majeure Event, the nature thereof, and the extent to which the affected Party will be unable fully to perform its obligations hereunder.  Each Party further agrees to use Reasonable Commercial Efforts to correct the Force Majeure Event as quickly as possible and to give the other Party prompt written notice when it is again fully able to perform such obligations.

17.3[*]

 

17.4Termination.  If a Force Majeure Event lasts for more than sixty (60) calendar days and during such period MTF cannot Process the Matrix (or arrange for the Processing of the Matrix pursuant to the Contingency Plan) as a result of the Force Majeure Event, Orthofix may use an alternative supplier of the Matrix to fulfill Authorized Orders for the shorter of (i) the duration of the Force Majeure Event or (ii) the period (not exceeding [*] beyond the cessation of the Force Majeure Event) necessary to allow Orthofix to honor, on behalf of MTF, the Authorized Orders, if any, to any Customer in effect at the time of cessation.  

ARTICLE XVIII
PRESS RELEASES; USE OF NAMES

18.1Press Releases.  Except as otherwise required by Law or any rule of the NASDAQ Stock Market, any announcement, press release, publicity, or other public statement related to this Agreement or either Party’s performance hereunder prepared by one Party will be submitted to the other Party prior to release for approval, which approval will not be unreasonably withheld, conditioned or delayed by such other Party.

18.2Use of Names.  Except as otherwise required by Law or by the terms of this Agreement or as mutually agreed upon by the Parties, neither Party will make any use of the name of the other Party in any advertising or promotional material, or otherwise, without the prior written

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consent of the other Party, which consent will not be unreasonably withheld, conditioned or delayed by such other Party.

ARTICLE XIX
DISPUTE RESOLUTION

19.1Internal Escalation.  The Parties recognize that a bona fide dispute as to certain matters may from time to time arise during the Term which relates to either Party’s rights and/or obligations hereunder, including without limitation, the inability of the Steering Committee under Section 3.3 to reach a determination on any issue that the Steering Committee is authorized to consider.  Except with respect to any right to injunctive relief for any claims arising from any section of ARTICLE XVI or Section 20.3, in the event of the occurrence of such a dispute, either Party will be required, by written notice to the other Party, to have such dispute referred to the respective chief executive officers of the Parties, for attempted resolution by good faith negotiations within thirty (30) days after such notice is received.

19.2Mediation.  Except with respect to any right to injunctive relief for any claims arising from any section of ARTICLE XVI or Section 20.3, in the event the Parties’ respective chief executive officers are not able to resolve such dispute within the thirty (30) day period set forth in Section 19.1, or such other period of time to which the Parties may mutually agree in writing,  the Parties will endeavor in good faith to resolve the dispute through mediation under the CPR Mediation Procedure in effect on the date of this Agreement.  Unless otherwise mutually agreed to in writing, the parties will select a mediator from the CPR Panels of Distinguished Neutrals.

19.3Legal Process.  In the event that the Parties are not able to resolve such dispute within forty five (45) days after initiation of the mediation procedure set forth in Section 18.2, or such other period of time to which the Parties may mutually agree in writing, each Party will have the right to pursue any and all remedies available at law or in equity.

19.4Venue.  For any court proceeding initiated with respect to this Agreement (i) Orthofix hereby irrevocably and unconditionally consents to the submission to the non-exclusive jurisdiction of the United States District Court for the District of New Jersey, and the courts of the State of New Jersey located within that district, if such court proceeding is initiated by MTF and (ii) MTF hereby irrevocably and unconditionally consents to the submission to the non-exclusive jurisdiction of the United States District Court for the Western District of North Carolina, and the courts of the State of North Carolina located within that district, if such court proceeding is initiated by Orthofix.  Each Party further irrevocably and unconditionally (i) agrees that service of any process, summons, notice or document by registered mail or as otherwise provided in this Agreement shall be effective service of process for any action, suit or proceeding brought against it in any court whose jurisdiction is accepted as aforesaid, (ii) waives any objection to the laying of venue of any action, suit or proceeding arising out of this Agreement in such courts, and (iii) agrees not to plead or claim in any such court that any such action, suit or proceeding brought in any such court has been brought in an inconvenient forum.  

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ARTICLE XX
MISCELLANEOUS

20.1Independent Contractors.  Although the Parties are engaged in a Collaboration to Process and Commercialize the Matrix and have made and will make contributions, financial and otherwise, to such Collaboration, the relationship between Orthofix and MTF is that of independent contractors and nothing herein will be deemed to constitute the relationship of partners, or principal and agent between Orthofix and MTF.  Neither Party will have any express or implied right or authority to assume or create any obligations on behalf of or in the name of the other Party or to bind the other Party to any contract, agreement, or undertaking with any Third Party.

20.2Assignment.  Neither Party may assign this Agreement, in whole or in part, without the prior written consent of the other Party; provided, however, that either Party may assign this Agreement without the prior written consent of the other Party to an Affiliate of such Party or in connection with a merger or sale of all or substantially all of the stock or assets of such Party to a Third Party.  Any permitted assignee will assume in writing all obligations of its assignor under this Agreement.  No assignment will relieve either Party of its responsibility for the performance of its obligations hereunder. This Agreement will be binding upon and will inure to the benefit of the Parties and their respective permitted successors and assigns and nothing in this Agreement is intended to or shall confer any benefits, rights or remedies unto any Person other than the Parties and their respective permitted successors and assigns. Without limiting the generality of the foregoing, and notwithstanding any representation or warranty of MTF provided herein with respect to the Matrix or any other matter, Orthofix acknowledges and agrees that all such representations and warranties are for the exclusive benefit of Orthofix under this Agreement and will not be applicable or transferable to any Customer or any other Person.

20.3Injunctive Relief; Specific Performance.  Notwithstanding anything to the contrary in ARTICLE XIX, the Parties understand and agree that, in view of the uniqueness of the Matrix and the long term Process, supply and distribution of the Matrix contemplated hereunder, each Party will be entitled to specific performance and other forms of injunctive relief in the event that the other Party breaches its obligations hereunder (including, without limitation, under ARTICLE XVI), in addition to any other remedy to which it may entitled, at law or in equity.

20.4Waiver.  No failure or delay on the part of either Party hereto to exercise any right, power, or privilege hereunder or under any instrument executed pursuant hereto will operate as a waiver, nor will any single or partial exercise of any right, power, or privilege preclude any other or further exercise thereof or the exercise of any other right, power, or privilege.

20.5Severability. Both Parties expressly agree and contract that it is not the intention of either Party to violate any public policy, applicable Laws, treaties, or decisions of any government or agency thereof.  If any provision or part thereof contained in this Agreement is declared invalid by any court of competent jurisdiction or a government agency having jurisdiction, such declaration will not affect the remainder of the provision or the other provisions and each will remain in full force and effect.

20.6Headings.  All headings in this Agreement are for convenience of reference only and will not affect the interpretation of this Agreement.

38

 

20.7Interpretation.  The words “include”, “includes” and “including” and words of similar import will be deemed to be followed by the phrase “without limitation” or “but not limited to,” as the context may warrant.  Unless the context requires otherwise (a) any definition of or reference to any agreement, instrument or other document herein will be construed as referring to such agreement, instrument or other document as from time to time amended, supplemented or otherwise modified (subject to any restrictions on such amendments, supplements or modifications set forth herein); (b) any reference herein to any entity will be construed to include the entity’s successors and assigns; (c) the words “herein”, “hereof” and “hereunder”, and words of similar import, will be construed to refer to this Agreement in its entirety and not to any particular provision hereof; and (d) all references herein to Articles, Sections, Addenda, Exhibits or Schedules will be construed to refer to Articles, Sections, Addenda, Exhibits and Schedules of this Agreement.

20.8Notices.  All notices and other communications required or permitted to be given under this Agreement will be in writing and will be delivered personally or sent by (a) registered or certified mail, return receipt requested; (b) a nationally-recognized courier service guaranteeing next-day delivery, charges prepaid; or (c) facsimile (with the original promptly sent by any of the foregoing manners).  Any such notices will be addressed to the receiving Party at such Party’s address set forth below, or at such other address as may from time to time be furnished by similar notice by either Party:

If to MTF:

Musculoskeletal Transplant Foundation, Inc.

125 May Street

Suite 300

Edison, New Jersey  08837

Attention:Bruce W. Stroever

Facsimile No.:  (732) 661-2297

With a copy (which will not constitute notice) to:

McCarter & English, LLP

Four Gateway Center

100 Mulberry Street

Newark, New Jersey 07102

 

Attention:

Howard Kailes, Esq.

Facsimile No.:  (973) 624-7070

If to Orthofix:

Orthofix US LLC

3451 Plano Parkway

Lewisville, TX 75056

 

Attention:

Chief Executive Officer and Chief Legal Officer

Facsimile No.:  (440) 445-0504

With a copy (which will not constitute notice) to:

Hogan Lovells LLP

8350 Broad Street

39

 

17th Floor

Tysons, VA 22102

Attention:  Cullen G. Taylor

Facsimile No.: (703) 610-6200

Any such notice or communication will be effective upon such personal delivery or delivery to such courier, upon transmission by facsimile (with acknowledgement of a complete transmission), or three (3) days after it is sent by such registered or certified mail, as the case may be.  Copies will be sent in the same manner as originals.

20.9Counterparts. This Agreement and any amendment or supplement hereto may be executed in counterparts, each of which will be deemed to be an original, and all of which taken together will constitute one and the same instrument.

20.10Governing Law.  All questions of inventorship, and all other Patent rights of the Parties, will be governed by the laws of jurisdiction from which the Patent in question issued or in which the Patent application was filed.  In all other respects, the validity, interpretation, and performance of this Agreement will be governed and construed in accordance with the laws of the State of Delaware, without regard to the conflicts of laws provisions thereof.

20.11Waiver of Rule of Construction.  Each Party has had the opportunity to consult with counsel in connection with the review, drafting and negotiation of this Agreement.  Accordingly, the rule of construction that any ambiguity in this Agreement will be construed against the drafter will not apply.

20.12Further Assurance. Each Party will duly execute and deliver, or cause to be duly executed and delivered, such further instruments, and do and cause to be done such further acts and things, including the filing of such assignments, agreements, documents and instruments, as may be necessary or as the other Party may reasonably request in connection with this Agreement or to carry out more effectively the provisions and purposes, or to better assure and confirm unto such other Party its rights and remedies under this Agreement.

20.13Entire Agreement.  This Agreement, including all addenda, exhibits and schedules referred to herein, constitute the full understanding of the Parties with respect to the subject matter hereof and a complete and exclusive statement of the terms of their agreement.  This Agreement or any provision hereof cannot be amended, changed, supplemented, or waived except in a writing signed by each of the Parties hereto.  No modification to this Agreement will be effected by the acknowledgment or acceptance of any purchase order or shipping instruction form or similar documents containing terms or conditions at variance with or in addition to those set forth herein.  Any term or condition of any purchase order, sales acknowledgment, or document which is in addition to, different from, or contrary to the terms and conditions of this Agreement will be void.


40

 

IN WITNESS WHEREOF, the Parties have caused this Amended and Restated Matrix Commercialization Collaboration Agreement to be duly executed and delivered as of the date first written above.

MUSCULOSKELETAL TRANSPLANT FOUNDATION, INC.

By:/s/ Joe Yaccarino

Name: Joe Yaccarino

Title:CEO and President

ORTHOFIX US LLC

By:/s/ Kevin Kenny

Name: Kevin Kenny

Title:President of Global Spine

 

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LIST OF ADDENDA AND EXHIBITS

Schedule 6A – Matrix Development Collaboration

Schedule 6B – Edison Facility Expansion Equipment and Technology  

Schedule 9.7 – Intellectual Property

Addendum 1 – Definitions

Exhibit A – MTF Order Acceptance Procedures

Exhibit B – [Intentionally Omitted]

Exhibit C – Specifications

Exhibit D – Release Criteria

Exhibit E – COA

Exhibit F – Contingency Plan

Exhibit G – MTF’s Knowledge

Exhibit H – Orthofix’s Knowledge

[*] Certain confidential information contained in this document, marked with an asterisk in brackets, has been omitted pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

 

 

 

Addendum 1 – Definitions

The following terms, whether used in the singular or plural, will have the meanings assigned to them below for purposes of this Agreement:

“AATB” means the American Association of Tissue Banks.

“Affiliate” means any corporation or non-corporate entity which controls, is controlled by, or is under common control with a Party.  A corporation or non-corporate entity will be regarded as in control of another corporation if it owns or directly or indirectly controls at least fifty percent (50%) of the voting stock of the other corporation or (a) in the absence of the ownership of at least fifty percent (50%) of the voting stock of a corporation or (b) in the case of a non-corporate entity, the power to direct or cause the direction of the management and policies of such corporation or non-corporate entity, as applicable.

“Agreement” means this Matrix Commercialization Collaboration Agreement.

“Amendment No. 2” means that certain Amendment No. 2 to Matrix Commercialization Collaboration Agreement dated January 9, 2012 entered into by the Parties.

“Amendment No. 2 Effective Date” has the meaning set forth in Amendment No. 2.

“Amendment No. 3” means that certain Amendment No. 3 to Matrix Commercialization Collaboration Agreement dated June 25, 2013 entered into by the Parties.  

“Amendment No. 3 Effective Date” has the meaning set forth in Amendment  No. 3.

“Amendment No. 4” means that certain Amendment No. 4 to Matrix Commercialization Collaboration Agreement dated January 1, 2014 entered into by the Parties.  

 

“Amendment No. 5” means that certain Amendment No. 5 to Matrix Commercialization and Collaboration Agreement dated as of March 10, 2016.

 

“Amendment No. 5 Effective Date” means March 10, 2016.

 

“Amendment No. 6” means that certain Amendment No. 6 to Matrix Commercialization Collaboration Agreement dated December 29, 2017 entered into by the Parties.

 

“Amendment No. 6 Effective Date” has the meaning set forth in Amendment No. 6.

 

“Audit” means a reasonable review and/or inspection by either Party or its representatives of Service Fee records in accordance with Section 4.2 and/or facilities, processes, procedures, and documents (or of any subcontractor permitted pursuant to Section 2.9) as described in Section 10.1 of this Agreement.

“Authorized Orders” has the meaning set forth in Section 2.1(a).

 

 

 

“Bankruptcy Code” has the meaning set forth in Section 13.3(a).

“Certificate of Analysis” or “COA” means the certificate for each Lot delivered hereunder confirming compliance with the Specifications.

“Cessation Period” has the meaning set forth in Section 14.1.

“cGTP” means current Good Tissue Practice requirements set forth in 21 C.F.R. Part 1271, Subpart D, as in effect and as may be amended or replaced by the FDA from time to time.

“Collaboration” means the Processing and Commercialization of the Matrix by the Parties pursuant to the terms and conditions of this Agreement, and except for purposes of Section 2.7, the Matrix II Development Collaboration, the Matrix III Development Collaboration, and the Matrix IV Development Collaboration.

“Commercialization” or “Commercialize” means activities directed to obtaining pricing and reimbursement approvals, marketing, promoting, distributing, importing, supplying or transferring the Matrix.

“Confidential Information” means information which is disclosed by a Party (the “Disclosing Party”) to the other Party (the “Receiving Party”) in whatever media, and is marked, identified or otherwise acknowledged to be confidential at the time of disclosure.

“Contingency Plan” means the contingency plan for the Processing and fulfillment of Authorized Orders in the event of any interruption in MTF’s Processing capability as a result of cessation of all or substantially all Processing operations with respect to the Matrix at MTF’s facility located in Edison, New Jersey, set forth in Exhibit F and as it may be subsequently amended from time to time in accordance with the procedures set forth herein and in the Development Agreement.

“Control,” “Controls” or “Controlled by” means, with respect to any item of or right under Patents, Know-How, Technology or Inventions, the possession of (whether by ownership or license, other than pursuant to this Agreement) or the ability of a Party to grant access to, or a license or sublicense of, such items or right as provided for herein without violating the terms of any agreement or other arrangement with any Third Party existing at the time such Party would be required hereunder to grant the other Party such access or license or sublicense.

“CPI” means the “Price for Index for all Urban Consumers, U.S. city average, all items, for the then immediately preceding 12-month period” as published by the U.S. Government.

“Customers” has the meaning set forth in Section 2.1(b).

“Damages” has the meaning set forth in Section 14.1.

“Developed Technology” means the First Phase Developed Technology, the Second Phase Developed Technology, the Third Phase Developed Technology and the Fourth Phase Developed Technology.

 

 

 

“Development Agreement” has the meaning set forth in the Recitals.

“Dispute Notice” has the meaning set forth in Section 4.2(b).

“Donor” means a human tissue donor.

“Donor Eligibility Requirements” means the requirements set forth in 21 C.F.R. Part 1271, subpart C, as in effect and as may be amended or replaced by the FDA from time to time.

“Donor Tissue” means human musculoskeletal tissue, including bone and connective tissue.

“Existing MTF Technology” means (a) for all purposes of this Agreement other than Section 7.1(a)(ii), such Technology, Inventions and Know-How Controlled by MTF (x) in existence as of the date of this Agreement (including without limitation, all Patents), in each case solely insofar as necessary or useful for making, using, selling, offering to sell and importing the Matrix and (y) [*], and (b) solely for purposes of Section 7.1(a)(ii), such Technology, Inventions and Know-How Controlled by MTF (x) in existence as of the Effective Date (including, without limitation, all Patents), [*] and (y) [*].

“Existing Orthofix Technology” means (a) for all purposes of this Agreement other than Section 7.1(b)(ii), such Technology, Inventions and Know-How Controlled by Orthofix (x) in existence as of the date of this Agreement (including, without limitation, all Patents), in each case solely insofar as necessary or useful for making, using, selling, offering to sell and importing the Matrix, and (y) [*], and (b) solely for purposes of Section 7.1(b)(ii), such Technology, Inventions and Know-How Controlled by Orthofix (x) in existence as of the Effective Date (including, without limitation, all Patents), in each case solely insofar as necessary for making, using, selling, offering to sell and importing the Matrix and (y) [*].

“Facility” means MTF’s facility located at 125 May Street, Suite 300, Edison, New Jersey or any other facility of MTF where it performs any of its obligations under this Agreement.

“FDA” means the United States Food and Drug Administration, or any successor entity.

“FDCA” means the United States Federal Food, Drug, and Cosmetic Act, as amended.

“First Offer Notice” has the meaning set forth in Section 6.2(a).

“First Phase Developed Technology” means all Technology, Inventions and Know-How arising between the Effective Date and the beginning of the Matrix II Development Term under or in connection with the activities of the Parties pursuant to the Development Agreement, and all Improvements prior to the beginning of the Matrix II Development Term with respect thereto, including, without limitation, all Patents relating to the foregoing.

“First Refusal Notice” has the meaning set forth in Section 6.2(b).

“Force Majeure Event” has the meaning set forth in Section 17.1.

 

 

 

“Forecast” has the meaning set forth in Section 2.2.

“Fourth Phase Developed Technology” means all Technology, Inventions and Know-How arising during the Matrix IV Development Term under or in connection with the activities of the Parties pursuant to the Matrix IV Development Plan under Section 6A.3 in Schedule 6A hereof, and all Improvements after the beginning of the Matrix IV Development Term and during the remainder of the Term with respect thereto, including without limitation, all Patents relating to the foregoing.

“HCT/P” means a human cells, tissues, or cellular or tissue-based product that the FDA regulates solely under Section 361 of the PHSA and the provisions of 21 C.F.R. Part 1271.

“Improvement” means any enhancement, modification, purification, optimization, or further development made under and pursuant to this Agreement during the Term, whether or not patentable, that results from either (a) a change to the Specifications that is agreed upon by the Steering Committee for development under this Agreement, or (b) a new development initiative with respect to the Matrix that is the subject of a new development agreement mutually agreed upon by the Parties in accordance with Section 6.1.

“Infringement Claim” has the meaning set forth in Section 14.1.

“Initial Matrix II Forecast” has the meaning set forth in Section 2.2.

“Initial Matrix III Forecast” has the meaning set forth in Section 2.2.

“Initial Matrix IV Forecast” has the meaning set forth in Section 2.2.

 

“Initial Term” has the meaning set forth in Section 13.1.

“Invention” means any process, method, composition of matter, article of manufacture, discovery or finding.

“Know-How” means (a) any scientific or technical information, results and data of any type whatsoever, in any tangible or intangible form whatsoever, including databases, practices, methods, techniques, specifications, formulations, formulae, knowledge, know-how, skill, experience, test data including pharmacological, medicinal chemistry, biological, chemical, biochemical, toxicological and clinical test data, analytical and quality control data, stability data, studies and procedures, and manufacturing process and development information, results and data and (b) any biological, chemical or physical materials.

“Laws” means all national, federal, state, provincial and local laws, statute, rules, regulations, ordinances, administrative order, court order, requirements and guidance of any governmental authority or instrumentality, domestic or otherwise, including the PHSA, the NOTA, 21 C.F.R. Parts 1270 and 1271, Human Cells, Tissues, and Cellular or Tissue-Based Products, cGTP, state tissue banking statutes and regulations, Donor Eligibility Requirements, and other rules, regulations, guidance or standards promulgated or issued by any Regulatory Authority or the AATB, as each may be amended from time to time.

 

 

 

“Lot” means a quantity of the Matrix, Processed in accordance with the Specifications, resulting from a single production run traceable to a single Donor.

“Marketing Fee” has the meaning set forth in Section 5.2.

“Marketing Plan” has the meaning set forth in Section 5.1.

“Matrix” means the Matrix I, Matrix II, Matrix III and the Matrix IV, and each of them; provided, however, that, (i) prior to the Matrix II Commercialization Date, each reference to “Matrix” under ARTICLE II (except for Section 2.9), IV, V, X and XII, and under Section 7.3, the proviso under Section 17.1 and under Section 17.3 means the Matrix I; (ii) prior to the Matrix III Commercialization Date, each reference to “Matrix” under ARTICLES 11 (except for Section 2.9), IV, V, X and XII, and under Section 7.3, the proviso under Section 17.1 and under Section 17.3 means the Matrix I and the Matrix II; and (iii) prior to the Matrix IV Commercialization Date, each reference to “Matrix” under ARTICLES II (except for Section 2.9), IV, V, X and XII, and under Section 7.3, the proviso under Section 17.1 and under Section 17.3, means the Matrix I, the Matrix II, and the Matrix III.

“Matrix Development Collaboration” means the Matrix II Development Collaboration, Matrix III Development Collaboration, and Matrix IV Development Collaboration undertaken by the Parties pursuant to the respective terms and conditions of ARTICLE VI-A and Schedule VI-A of this Agreement.

“Matrix I” means the allogeneic cancellous bone matrix containing viable mesenchymal stem cells and/or osteoprogenitor cells and conforming to the Matrix I Specifications.

“Matrix I Release Criteria” means the procedures established pursuant to the Development Agreement for verifications that each Lot of the Matrix I complies with the Matrix I Specifications, as subsequently amended in accordance with the terms of the Development Agreement and the terms hereof.

“Matrix II” means the allogeneic cancellous bone matrix containing mesenchymal stem cells and/or osteoprogenitor cells and conforming to the Matrix II Specifications.

“Matrix II Cessation Period” has the meaning set forth in Section 14.2.

“Matrix II Commercialization Date” means the date of completion of the last Matrix II Development Milestone pursuant to the Matrix II Development Plan.

“Matrix II Development Collaboration” means the development of the Matrix II undertaken by the Parties pursuant to the terms and conditions of Section 6A.1 under Schedule 6A of this Agreement.

“Matrix II Development Milestones” has the meaning set forth in Section 6A.1.6 under Schedule 6A.

 

 

 

“Matrix II Development Plan” means the plan for development of the Matrix II initially determined by the Steering Committee, as subsequently amended from time to time in accordance with the procedures set forth in this Agreement.

“Matrix II Development Term” means the period commencing on January 1, 2011 and continuing until the completion of the last Matrix II Development Milestone.

“Matrix II Infringement Claim” means any Third Party claim that the exploitation of the Matrix II Subject Intellectual Property in the development, Processing, supply or distribution under this Agreement and for purposes of the Collaboration of the Matrix II in accordance with the Matrix II Specifications violates the intellectual property rights of a Third Party and/or infringes the valid claim of an existing Patent of a Third Party; it being understood that a Third Party Claim regarding the development, Processing, supply or distribution of the Matrix II independent of the Collaboration shall not be within the definition of Matrix II Infringement Claim.

“Matrix II Opinion” means an opinion, in form and substance satisfactory to MTF, of patent counsel selected by MTF, that the exploitation of the Matrix II Subject Intellectual Property in the development, Processing, supply and/or distribution under this Agreement and for purposes of the Collaboration of the Matrix II in accordance with the Matrix II Specifications does not violate the intellectual property rights of a Third Party and/or infringe the valid claim of an existing Patent of a Third Party.

“Matrix II Project Manager” has the meaning set forth in Section 6A.1.5 under Schedule 6A.

“Matrix II Release Criteria” means the procedures and release criteria for verification that each Lot of the Matrix II complies with the Matrix II Specifications to be determined initially by the Steering Committee and set forth in Exhibit D attached hereto, as subsequently amended from time to time in accordance with the procedures set forth in this Agreement.

“Matrix II Specifications” means the specifications for the Matrix II to be initially determined by the Steering Committee (based on MTF’s proposal with respect thereto) and set forth in Exhibit C attached hereto, as subsequently amended from time to time in accordance with the procedures set forth in this Agreement.

“Matrix II Subject Intellectual Property” means any intellectual property exploited, in any manner, directly or indirectly, in whole or in part, in connection with the Matrix II and not also exploited in any manner, directly or indirectly, in whole or in part, in connection with the Matrix I.

“Matrix III” means the allogenic cancellous bone matrix containing viable mesenchymal stem cells and/or osteoprogenitor cells and conforming to the Matrix III Specifications.

“Matrix III Cessation Period” has the meaning set forth in Section 14.2.

“Matrix III Commercialization Date” means the date of completion of the last Matrix III Development Milestone pursuant to the Matrix III Development Plan.

 

 

 

“Matrix III Development Collaboration” means the development of the Matrix III undertaken by the Parties pursuant to the terms and conditions of Section 6A.2 under Schedule 6A of this Agreement.

“Matrix III Development Milestones” has the meaning set forth in Section 6A.2.6 under Schedule 6A.

“Matrix III Development Plan” means the plan for development of the Matrix III initially determined by the Steering Committee, as subsequently amended from time to time in accordance with the procedures set forth in this Agreement.

“Matrix III Development Term” means the period commencing on June __, 2013 and continuing until the completion of the last Matrix III Development Milestone.

“Matrix III Infringement Claim” means any Third Party claim that the exploitation of the Matrix III Subject Intellectual Property in the development, Processing, supply or distribution under this Agreement and for purposes of the Collaboration of the Matrix III in accordance with the Matrix III Specifications violates the intellectual property rights of a Third Party and/or infringes the valid claim of an existing Patent of a Third Party; it being understood that a Third Party Claim regarding the development, Processing, supply or distribution of the Matrix III independent of the Collaboration shall not be within the definition of Matrix III Infringement Claim.

“Matrix III Notice of Achievement” has the meaning set forth in Section 6A.2.7(a) under Schedule 6A.

“Matrix III Pre-Clinical Data Package” means the following data, to be obtained in accordance with criteria determined by the Steering Committee consistent with this Agreement, of completed Matrix III [*]: [*]

“Matrix III Project Manager” has the meaning set forth in Section 6A.2.5 under Schedule 6A.

“Matrix III Release Criteria” means the procedures and release criteria for verification that each Lot of the Matrix III complies with the Matrix III Specifications to be determined initially by the Steering Committee and set forth in Exhibit D attached hereto, as subsequently amended from time to time in accordance with the procedures set forth in this Agreement.

“Matrix III Specifications” means the specifications for the Matrix III to be initially determined by the Steering Committee (based on MTF’s proposal with respect thereto) and set forth in Exhibit C attached hereto, as subsequently amended from time to time in accordance with the procedures set forth in this Agreement.

“Matrix III Subject Intellectual Property” means any intellectual property exploited, in any manner, directly or indirectly, in whole or in part, in connection with the  Matrix III and not also exploited in any manner, directly or indirectly, in whole or in part, in connection with the Matrix I or Matrix III.

 

 

 

“Matrix IV” means the version of Trinity ELITE allograft that [*] conforming to the Matrix IV Specifications.

“Matrix IV Cessation Period” has the meaning set forth in Section 14.2.

“Matrix IV Commercialization Date” means the date of completion of the last Matrix IV Development Milestone pursuant to the Matrix IV Development Plan.

“Matrix IV Development Collaboration” means the development of the Matrix IV undertaken by the Parties pursuant to the terms and conditions of Section 6A.3 under Schedule 6A of this Agreement.

“Matrix IV Development Milestones” has the meaning set forth in Section 6A.3.6 under Schedule 6A.

“Matrix IV Development Plan” means the plan for development of the Matrix IV initially determined by the Steering Committee, as subsequently amended from time to time in accordance with the procedures set forth in this Agreement.

“Matrix IV Development Term” means the period commencing on the Amendment No. 6 Effective Date and continuing under the completion of the last Matrix IV Development Milestone.

“Matrix IV Infringement Claim” means any Third Party claim that the exploitation of the Matrix IV Subject Intellectual Property in the development, Processing, supply or distribution under this Agreement and for purposes of the Collaboration of the Matrix IV in accordance with the Matrix IV Specifications violates the intellectual property rights of a Third Party and/or infringes the valid claim of an existing Patent of a Third Party; it being understood that a Third Party Claim regarding the development, Processing, supply or distribution of the Matrix IV independent of the Collaboration shall not be within the definition of Matrix IV Infringement Claim

“Matrix IV Notice of Achievement” has the meaning set forth in Section 6A.3.7 under Schedule 6A.

“Matrix IV Project Manager” has the meaning set forth in Section 6A.3.5 under Schedule 6A.

“Matrix IV Release Criteria” means the procedures and release criteria for verification that each Lot of the Matrix IV complies with the Matrix IV Specifications to be determined initially by the Steering Committee and set forth in Exhibit D attached hereto, as subsequently amended from time to time in accordance with the procedures set forth in this Agreement.

“Matrix IV Specifications” means the specifications from the Matrix IV to be initially determined by the Steering Committee (based on the specifications set forth in Attachment 6A.3.5 hereto (Matrix IV Project Tissue Requirements)) and set forth in Exhibit C attached hereto, as subsequently amended from time to time in accordance with the procedures set forth in this Agreement.

 

 

 

“Matrix IV Subject Intellectual Property” means any intellectual property exploited, in any manner, directly or indirectly, in whole or in part, in connection with the Matrix IV and not also exploited in any manner directly or indirectly, in whole or in part, in connection with the Matrix I, Matrix II, or Matrix III.  

“Minimum Service Fee” means $[*] per cc of the Matrix I, $[*] per cc of the Matrix II, and $[*] per cc of the Matrix IV.

“Monthly Statement” has the meaning set forth in Section 4.1(b).

“MTF” has the meaning set forth in the Preamble.

“MTF Indemnitees” has the meaning set forth in Section 14.1.

“MTF Marks” has the meaning set forth in Section 7.3(a).

“MTF’s Knowledge” and phrases of similar import mean, the actual knowledge of a particular fact of the individuals identified on Exhibit G

“NOTA” means the United States National Organ Transplant Act, 42 U.S.C. Section 274e.

“Notice of Achievement” has the meaning set forth in Section 6A.1.7 under Schedule 6A.

“NuVasive License” has the meaning assigned to such term under the Sublicense Agreement dated December __, 2010 between the Parties (as may from time to time be amended).

“Offeree Party” has the meaning set forth in Section 6.2(a).

“Offering Party” has the meaning set forth in Section 6.2(a).

“Original Matrix Agreement” has the meaning set forth in the Recitals.

“Original Matrix Agreement Effective Date” has the meaning set forth in the Recitals.

“Orthofix” has the meaning set forth in the Preamble.

“Orthofix Marks” has the meaning set forth in Section 7.3(b).

“Orthofix’s Knowledge” and phrases of similar import mean, the actual knowledge of a particular fact of the individuals identified on Exhibit H.

“Osiris Agreement” means the Distribution and Supply Agreement, dated November 10, 2005, between Osiris Therapeutics, Inc. and Orthofix.

“Party” has the meaning set forth in the Preamble.

“Patent(s)” means (a) all patents and patent applications in any country or supranational jurisdiction and (b) any provisionals, substitutions, divisions, continuations, continuations in part,

 

 

 

reissues, renewals, registrations, confirmations, reexaminations, extensions, supplementary protection certificates and the like, of any such patents or patent applications.

“Person” means an individual, corporation, partnership, limited liability company, trust, business trust, association, joint stock company, joint venture, pool, syndicate, sole proprietorship, unincorporated organization, governmental authority or any other form of entity not specifically listed herein.

“PHSA” means the United States Public Health Service Act, 42 U.S.C. §201 et seq.

“Pre-Clinical Data Package” means the following data, to be obtained in accordance with criteria determined by the Steering Committee consistent with this Agreement, of completed Matrix II [*]: [*]

“Process” or “Processing” means any or all of the acts of manufacturing (including procuring materials, and determining suitability of Donor Tissue and Donors for manufacturing), handling, storing, releasing, analyzing, testing, packaging, labeling and preparing for shipment.

“Product Concept” has the meaning set forth in Section 6.2(a).

“Product Concept Proposal” has the meaning set forth in Section 6.2(a).

“Proposing Party” has the meaning set forth in Section 6.2(b).

“Reasonable Commercial Efforts” means with respect to the efforts to be expended by a Party with respect to any objective, reasonable, good faith efforts to accomplish such objective as such Party would normally use to accomplish a similar objective under similar circumstances, it being understood and agreed that with respect to the development of the Matrix II, the development of the Matrix III, development of the Matrix IV and the Processing or Commercialization of the Matrix, such efforts will be similar to those efforts and resources commonly used by a Party for a similar human tissue product owned by it or to which it has rights, which product is at a similar stage in its development or product life and is of similar market potential taking into account efficacy, safety, labeling, the competitiveness of alternative products in the marketplace, the patent and other proprietary position of the product, the likelihood of regulatory approval given the regulatory structure involved, the commercial viability of the product, availability of alternative products and other relevant factors.  Reasonable Commercial Efforts may change over time, reflecting changes in the status of the Matrix and the market needs.

“Recall” has the meaning set forth in ARTICLE XII.

“Receiving Party” has the meaning set forth in Section 6.2(b).

“Regulatory Authority” means any government regulatory authority, domestic or otherwise with jurisdiction over the activities of the Parties pursuant to this Agreement and over the development, Processing, marketing, reimbursement and/or pricing of the Matrix in the Territory, including, in the United States, the FDA.

“Regulatory Inspection” has the meaning set forth in Section 11.5.

 

 

 

“Release Criteria” means the Matrix I Release Criteria, the Matrix II Release Criteria, the Matrix III Release Criteria and the Matrix IV Release Criteria, as the case may be; provided, however, that, (i) prior to the Matrix II Commercialization Date, each reference to “Release Criteria” under ARTICLE X means the Matrix I Release Criteria; (ii) prior to the Matrix III Commercialization Date, each reference to “Release Criteria” under ARTICLE X means the Matrix I Release Criteria and the Matrix II Release Criteria; and (iii) prior to the Matrix IV Commercialization Date, each reference to “Release Criteria” under ARTICLE X means the Matrix I Release Criteria, the Matrix II Release Criteria and the Matrix III Release Criteria.  

 

“Second Phase Developed Technology” means (a) all Technology, Inventions and Know-How arising during the Matrix II Development Term under or in connection with the activities of the Parties pursuant to the Matrix II Development Plan under Section 6A.1 of Schedule 6A hereof, and all Improvements after the beginning of the Matrix II Development Term and prior to the beginning of the Matrix III Development Term with respect thereto, including, without limitation, all Patents relating to the foregoing, and (b) all Improvements to the First Phase Developed Technology made after the beginning of the Matrix II Development Term and prior to the beginning of the Matrix III Development Term, including, without limitation, all Patents relating to the foregoing.

“Service Fee” has the meaning set forth in Section 4.1(a).

“Specifications” means the Matrix I Specifications, the Matrix II Specifications, the Matrix III Specifications and the Matrix IV Specifications, as the case may be; provided, however, that, (i) prior to the Matrix II Commercialization Date, each reference to “Specifications” under ARTICLE X means the Matrix I Specifications; (ii)  prior to the prior to the Matrix III Commercialization Date, each reference to “Specifications” under ARTICLE X means the Matrix I Specifications and the Matrix II Specifications; and (iii) prior to the Matrix IV Commercialization Date, each reference to “Specifications” under ARTICLE X means the Matrix I Specifications, the Matrix II Specifications and the Matrix III Specifications.

“Steering Committee” means the Committee described in greater detail in ARTICLE III that has the authority set forth therein.

“Subcontracting Party” means, with respect to any subcontractor, the Party that has engaged that subcontractor.

“Technology” means all intellectual property rights, including but not limited to such rights with respect to designs, prototypes, processes, drawings, descriptions, data, and inventions, whether patentable or not.

“Term” means the Initial Term as defined in Section 13.1 hereof, and any renewal or extension of this Agreement pursuant to Section 13.1.

“Territory” means all of the countries in the world, and their territories and possessions.

“Third Party” means any party other than Orthofix, MTF, and their respective Affiliates.

 

 

 

“Third Phase Developed Technology” means (a) all Technology, Inventions and Know-How arising during the Matrix III Development Term under or in connection with the activities of the Parties pursuant to the Matrix III Development Plan under Section 6A.2 of Schedule 6A hereof, and all Improvements after the beginning of the Matrix III Development Term and during the remainder of the Term with respect thereto, including, without limitation, all Patents relating to the foregoing, and (b) all Improvements to the First Phase Developed Technology and the Second Phase Developed Technology made after the beginning of the Matrix III Development Term and during the remainder of the Term, including, without limitation, all Patents relating to the foregoing.

“Underpayment Notice” has the meaning set forth in Section 4.2(a).

 

 

Exhibit 10.8

 

ORTHOFIX MEDICAL INC.

AMENDED AND RESTATED 2012 LONG-TERM INCENTIVE PLAN

 

Performance Stock Unit Agreement

COVER SHEET

 

Orthofix Medical Inc., a Delaware corporation (the “Company”), hereby grants performance stock units (the “Performance Stock Units”) relating to shares of the Company’s common stock, par value $0.10 per share (the “Stock”) to the Grantee named below, subject to the achievement of performance goals and vesting conditions set forth below.  Additional terms and conditions of the Performance Stock Units are set forth on this cover sheet and in the attached Performance Stock Unit Agreement (together, the “Agreement”), in the Company’s 2012 Long-Term Incentive Plan (as amended from time to time, the “Plan”), and in the Change in Control and Severance Agreement between you and the Company or, if you have not entered into such Change in Control and Severance Agreement as of the Grant Date, the form of such agreement that was been approved by the Committee on June 28, 2016 (as applicable, the “Severance Agreement”).

 

 

Grant Date:

 

 

 

Name of Grantee:

 

 

 

Employee ID Number:

 

 

 

Target Number of Performance Stock Units:

 

 

 

Maximum Number of Performance Stock Units:

 

250% of Target Number

 

Performance Period:

 

 

Beginning on __________________ and ending on _____________________1

 

 

1 

Performance period end date to be third anniversary of the beginning date (such that total performance period shall be three years).

 

    

 

 

 

You agree to all of the terms and conditions described in this Agreement, in the Plan, and in the Severance Agreement unless you deliver a notice in writing within thirty (30) days of receipt of this Agreement to the Company stating that you do not accept the terms and conditions described in this Agreement and in the Plan.  You acknowledge that you have carefully reviewed the Plan and agree that the Plan will control in the event any provision of this Agreement should appear to be inconsistent.

Attachment
This is not a stock certificate or a negotiable instrument.


ORTHOFIX MEDICAL INC.

AMENDED AND RESTATED 2012 LONG-TERM INCENTIVE PLAN

 

Performance Stock Unit Agreement

 

Performance Stock Units

This Agreement evidences an award of Performance Stock Units in the number set forth on the cover sheet and subject to the terms and conditions set forth in the Agreement and the Plan.

Subject to satisfaction of the time-based vesting requirement set forth below, the number of shares of Stock, if any, that may be issued pursuant to the terms of this Agreement will be calculated based on the attainment, as determined by the Committee, of the performance goals described in Exhibit A to this Agreement (the “Performance Goals”) over the Performance Period set forth on the cover sheet, which number of shares of Stock may be equal to all or a portion, including none, of the Maximum Number of Performance Stock Units set forth on the cover sheet.  If the Performance Goals are not achieved during the Performance Period at a vesting percentage (as described on Exhibit A) in excess of zero, you will forfeit all of your unvested Performance Stock Units as of the end of the Performance Period, except as otherwise provided in this Agreement.  

Performance Stock Unit Transferability

 

Prior to the Settlement Date (as defined below), your Performance Stock Units may not be sold, assigned, transferred, pledged, hypothecated, or otherwise encumbered, whether by operation of law or otherwise, nor may the Performance Stock Units be made subject to execution, attachment, or similar process.  If you attempt to do any of these things, you will immediately and automatically forfeit your Performance Stock Units.

Vesting

Your Performance Stock Units will vest and become non-forfeitable on (A) the date the Committee certifies the achievement of the Performance Goals following the close of the Performance Period or, (B) in the event of a Change in Control consummated prior to the end of the Performance Period, the last day of the Performance Period (in each case, the “Vesting Date”), and subject to your continued Service from the Grant Date through the Vesting Date, but only to the extent and in the vesting percentage that the Performance Goals have been satisfied.  (By way of illustration, if your service continues through the Vesting Date and the Committee certifies the Performance Goals at a vesting percentage equal to 100%, the Target Number of your Performance Stock Units would vest, whereas if your service continues through the Vesting Date and the Committee certifies the Performance Goals at a vesting percentage equal to 250%, the Maximum Number of your Performance Stock Units would vest.)  Promptly following the completion of the Performance Period (and no later than thirty (30) days following the end of the Performance Period) or, in the event of a Change in Control consummated prior to the end of the Performance Period, within 30 calendar days of such Change in Control, the Committee will review and certify in writing (i) whether, and to what extent, the Performance Goals for the Performance Period have been achieved and (ii) the number of Performance Stock Units that will vest (based on the applicable vesting percentage determined in accordance with Exhibit A).  Such certification will be final, conclusive, and binding.    

You will forfeit to the Company all of the unvested Performance Stock Units to the extent the specified Performance Goals have not been achieved, as determined by the Committee, effective as of the Vesting Date.

2

 

Vesting upon Termination of Service Prior to a Change in Control

Death or Disability.  If, prior to a Change in Control, your Service terminates during the Performance Period as a result of your death or Disability, your Performance Stock Units will vest as to the Target Number of Performance Stock Units set forth on the cover sheet on the effective date of your termination of Service.  If your Service terminates following the end of the Performance Period but prior to the Vesting Date as a result of your death or Disability, your Performance Stock Units will vest to the extent and in the vesting percentage that the Performance Goals have been satisfied as if your Service had not terminated, effective as of the Vesting Date.

Certain Terminations without Cause or for Good Reason.  If, prior to a Change in Control, your Service terminates more than 6 months after the Grant Date but prior to the Vesting Date because of your involuntary termination of Service by the Company without Cause or your voluntary termination for Good Reason, you will remain eligible to vest on the Vesting Date (to the extent and in the vesting percentage that the Performance Goals are satisfied) with respect to a pro rata portion of the Performance Stock Units as if your Service had not terminated, which pro rata portion will be calculated by multiplying the total number of the Performance Stock Units that would vest based on actual performance (i.e., the Target Number of Performance Share Units multiplied by the applicable vesting percentage determined in accordance with Exhibit A) by a fraction, the numerator of which equals the number of days that you provided Service during the Performance Period and the denominator of which equals the total number of days in the Performance Period, effective as of the Vesting Date.

Other Terminations.  If, prior to the Vesting Date, your Service terminates (i) because of your involuntary termination of Service by the Company for Cause, or (ii) because of your voluntary termination other than for Good Reason or Disability, you will forfeit to the Company all of the unvested portion of the Performance Stock Units on the date of your termination of Service.

3

 

Change in Control

Notwithstanding the vesting schedule set forth above, upon the consummation of a Change in Control during the Performance Period, the Performance Goals will be deemed achieved at the greater of (i) a percentage of 100% (i.e., the Target Number) or (ii) the percentage that would be determined pursuant to the methodology set forth on Exhibit A assuming that the TSR Period ended on the last trading date preceding the consummation of such Change in Control. If the Performance Stock Units are assumed or continued in connection with such Change in Control, such Performance Stock Units shall thereafter become a time-based award and shall vest and become non-forfeitable, at the percentage determined pursuant to the preceding sentence, on the earlier to occur of (i) your continued status as a Service Provider through the last day of the Performance Period or (ii) your termination of Service during the period following the consummation of such Change in Control and prior to full vesting as a result of (A) death, (B) Disability, (C) your involuntary termination of Service by the Company without Cause, or (D) your voluntary termination for Good Reason. If the Performance Stock Units are assumed or continued in connection with the Change in Control and your Service terminates prior to end of the Performance Period (x) because of your involuntary termination of Service by the Company for Cause, (y) because of your voluntary termination other than for Good Reason or Disability, you will forfeit to the Company all of the Performance Stock Units on the date of such termination of Service.

Settlement of Performance Stock Units

Your rights to receive the shares of Stock represented by your vested Performance Stock Units will become non-forfeitable on the Vesting Date, and the Performance Stock Units will be settled, converted into shares of Stock and delivered on, or within thirty (30) days following, such date (the “Settlement Date”), subject to any reduction required in accordance with any “clawback” or recoupment policy, as described below). On the date on which shares of Stock are delivered to you (or your beneficiary or, if none, your estate in the event of your death) under this paragraph, the Company shall also deliver to you (or your beneficiary or, if none, your estate in the event of your death) the number of additional shares of Stock, the number of any other securities of the Company and the amount of any other property (in the case of cash dividends, assuming such dividends had been reinvested in shares of Stock as of the ex-dividend date thereof), in each case that the Company distributed per share of Stock to holders generally during the period commencing on the first day of the Performance Period  and ending on the delivery date, multiplied by the number of shares of Stock that are being delivered to you under this paragraph, without interest, and less any tax withholding amount applicable to such distribution.  To the extent that the Performance Stock Units are forfeited prior to vesting, the right to receive such distributions shall also be forfeited.]

Evidence of Issuance

The issuance of the shares of Stock with respect to the Performance Stock Units will be evidenced in such a manner as the Company, in its discretion, deems appropriate, including, without limitation, book-entry, registration, or issuance of one or more share certificates.

4

 

Withholding

In the event that the Company or any Affiliate determines that any federal, state, local, or foreign tax or withholding payment is required relating to the Performance Stock Units, or the issuance of shares of Stock with respect to the Performance Stock Units, the Company or any Affiliate will have the right to (i) require you to tender a cash payment, (ii) deduct from payments of any kind otherwise due to you, (iii) permit or require you to enter into a “same day sale” commitment with a broker-dealer that is a member of the Financial Industry Regulatory Authority (a “FINRA Dealer”) whereby you irrevocably elect to sell a portion of the shares of Stock to be delivered in connection with the Performance Stock Units to satisfy withholding obligations and whereby the FINRA Dealer irrevocably commits to forward the proceeds necessary to satisfy the withholding obligations directly to the Company or any Affiliate, or (iv) withhold the delivery of vested shares of Stock otherwise deliverable under this Agreement to meet such obligations; provided, however, that (x) the shares of Stock so withheld will have an aggregate Fair Market Value not exceeding the minimum amount of tax required to be withheld by Applicable Law and (y) in the event that you are subject to any tax withholding on a date prior to the Settlement Date, clauses (iii) and (iv) shall not be available as a means of satisfying such tax withholding obligations.

Retention Rights

This Agreement and the Performance Stock Units evidenced by this Agreement do not give you the right to be retained by the Company or any Affiliate in any capacity.  The Company or any Affiliate, as applicable, reserves the right to terminate your Service with the Company or an Affiliate at any time and for any reason.

Shareholder Rights

You have no rights as a shareholder with respect to the Performance Stock Units unless and until the Stock relating to the Performance Stock Units has been delivered to you.  No adjustments are made for dividends, distributions, or other rights if the applicable record date occurs before your certificate is issued (or an appropriate book entry is made), except as described in the Plan.

Clawback

The Performance Stock Units are subject to mandatory repayment by you to the Company to the extent you are or in the future become subject to any Company “clawback” or recoupment policy or Applicable Laws that require the repayment by you to the Company of compensation paid by the Company to you in the event that you fail to comply with, or violate, the terms or requirements of such policy or Applicable Laws.

 

Applicable Law

This Agreement will be interpreted and enforced under the laws of the State of Delaware, other than any conflicts or choice of law rule or principle that might otherwise refer construction or interpretation of this Agreement to the substantive law of another jurisdiction.

5

 

Definitions

For purposes of this Agreement, “Cause” and “Good Reason” will be as defined in the Severance Agreement.  Any other capitalized terms used in this Agreement other than the foregoing (and other than those defined and used in Exhibit A hereto) shall have the meanings set forth in the Plan.

The Plan

The text of the Plan is incorporated in this Agreement by reference.

This Agreement, the Plan, and the Severance Agreement constitute the entire understanding between you and the Company regarding the Performance Stock Units.  Any prior agreements, commitments, or negotiations concerning the Performance Stock Units are superseded.

Data Privacy

To administer the Plan, the Company may process personal data about you.  Such data includes, but is not limited to, information provided in this Agreement and any changes thereto, other appropriate personal and financial data about you, such as your contact information, payroll information, and any other information that might be deemed appropriate by the Company to facilitate the administration of the Plan.  By accepting the Performance Stock Units, you give explicit consent to the Company to process any such personal data.

Disclaimer of Rights

The grant of Performance Stock Units under this Agreement will in no way be interpreted to require the Company to transfer any amounts to a third party trustee or otherwise hold any amounts in trust or escrow for payment to you.  You will have no rights under this Agreement or the Plan other than those of a general unsecured creditor of the Company.  Performance Stock Units represent unfunded and unsecured obligations of the Company, subject to the terms and conditions of the Plan and this Agreement.

Electronic Delivery

By accepting the Performance Stock Units, you consent to receive documents related to the Performance Stock Units by electronic delivery and, if requested, agree to participate in the Plan through an on-line or electronic system established and maintained by the Company or another third party designated by the Company, and your consent shall remain in effect throughout your term of Service and thereafter until you withdraw such consent in writing to the Company.

Code Section 409A

The grant of Performance Stock Units under this Agreement is intended to comply with Section 409A” to the extent subject thereto, and, accordingly, to the maximum extent permitted, this Agreement will be interpreted and administered to be in compliance with Section 409A.  Notwithstanding anything to the contrary in the Plan or this Agreement, neither the Company, its Affiliates, the Board, nor the Committee will have any obligation to take any action to prevent the assessment of any excise tax or penalty on you under Section 409A, and neither the Company, its Affiliates, the Board, nor the Committee will have any liability to you for such tax or penalty.

To the extent that the Performance Share Units constitute “deferred compensation” under Section 409A, a termination of Service occurs only upon an event that would be a Separation from Service within the meaning of Section 409A.  If, at the time of your Separation from Service, (1) you are a “specified employee” within the meaning of Section 409A, and (2) the Company makes a good faith determination that an amount payable on account of your Separation from Service constitutes deferred compensation (within the meaning of Section 409A), the payment of which is required to be delayed pursuant to the six (6)-month delay rule set forth in Section 409A to avoid taxes or penalties under Section 409A (the “Delay Period”), then the Company will not pay such amount on the otherwise scheduled payment date but will instead pay it in a lump sum on the first business day after the Delay Period (or upon your death, if earlier), without interest.  Each installment of Performance Share Units that vest under this Agreement (if there is more than one installment) will be considered one of a series of separate payments for purposes of Section 409A.

6

 

 

By accepting this Agreement, you agree to all of the terms and conditions described above and in the Plan.  In the event that any term of this Agreement conflicts with the terms of the Severance Agreement, the terms of the Severance Agreement shall supersede the conflicting terms herein.

 

 


7

 

Exhibit A

Performance Stock Unit Agreement

Performance Goals

The Performance Stock Units may be earned based on the magnitude of the [    ]2 FY Product Revenue, as modified by the TSR Modifier, in each case as described in this Exhibit A.

The table on Annex A sets forth the “Product Revenue Vesting Percentage” that will be achieved based on the applicable level of [    ]2 FY Product Revenue that is achieved. The Committee shall determine the [    ]2 FY Product Revenue and the Product Revenue Vesting Percentage that is achieved following the end of the fiscal quarter ending December 31, [    ]2. For purposes of the foregoing, “[    ]2 FY Product Revenue” means the Company’s product revenue for the fiscal year ended December 31, [    ]2.

If the Product Revenue Vesting Percentage is achieved at or above the threshold level, such Product Revenue Vesting Percentage shall be multiplied by the “TSR Modifier”, which shall be determined based on the Company’s Relative Total Stockholder Return for the period between [          ]3 and [          ]4 (“the TSR Period”), as set forth on Annex B. If the Company’s Relative Total Stockholder Return is in the top percentile quartile, the TSR Modifier shall be 1.25. If Company’s Relative Total Stockholder Return is in the second or third percentile quartile, the TSR Modifier shall be 1.00. If Company’s Relative Total Stockholder Return is in the bottom percentile quartile, the TSR Modifier shall be 0.75. The Committee shall determine the TSR Modifier following the end of the TSR Period.  

The number of Performance Stock Units that shall become earned shall be equal to the product of (i) the Target Number of Performance Stock Units set forth on the cover sheet, (ii) the Product Revenue Vesting Percentage and (iii) the TSR Modifier, as determined by the Committee in its sole discretion, rounded down to the nearest whole unit. For the avoidance of doubt, in no event shall greater than 250% of the Target Number of Performance Stock Units set forth on the cover sheet become earned or vested hereunder.

 

 

2 

Insert specified year for product revenue target.

3 

Insert performance period beginning date.

4 

Insert performance period end date.

 

    

 

 

 

Annex A

 

[    ]2 FY Product
Revenue ($M)*

Product Revenue Vesting Percentage

Less than [    ]5*

0%

[    ]5*

50% (Threshold)

[    ]5*

60%

[    ]5*

70%

[    ]5*

80%

[    ]5*

90%

[    ]5*

100% (Target)

[    ]5*

120%

[    ]5*

140%

[    ]5*

160%

[    ]5*

180%

[    ]5* or Greater

200% (Maximum)

 

* The product revenue targets shall be adjusted to reflect these amounts as computed on a constant currency basis using currency rates in effect for the fiscal year ended December 31, [    ]6, as if such currency rates had been in effect for the fiscal year ended December 31, [    ]2.

 

In the event the [    ]2 FY Product Revenue falls between any of the amounts set forth above (to the extent greater than the Threshold and lower than the Maximum), the applicable Product Revenue Vesting Percentage shall be determined by linear interpolation between such amounts.

 

 

 

5 

Insert applicable revenue targets as specified within the grant agreement.

6 

Insert baseline foreign currency exchange rate date.

 

    

 

 

 

Annex B

•

“Relative Total Stockholder Return” means the Company’s TSR relative to the TSR of the Peer Companies. Relative Total Shareholder Return will be determined by ranking the Company and the Peer Companies from highest to lowest according to their respective TSRs. After this ranking, the percentile performance of the Company relative to the Peer Companies will be determined as follows:

 

P = 1 – ((R-1)/(N-1))

 

where:  “P” represents the percentile performance which will be rounded, if necessary, to the nearest whole percentile by application of regular rounding.

“N” represents the remaining number of Peer Companies, plus the Company.

“R” represents Company’s ranking among the Peer Companies (including the Company).

 

Example:

If there were 30 remaining Peer Companies, and the Company ranked 16th, the performance would be at the 50th percentile: .50 = 1 – ((16-1)/(31-1)).

 

 

•

“TSR” means a company’s total stockholder return as measured by dividing (A) the sum of the cumulative amount of dividends for the TSR Period, assuming dividend reinvestment, and the difference between the Average Stock Price determined as of the first day of the TSR Period and the Average Stock Price determined as of the last day of the TSR Period, by (B) the Average Stock Price determined as of the first day of the TSR Period.

 

 

•

“Average Stock Price” means the average of the closing transaction prices of the share of common stock of a company, as reported on the principal national stock exchange on which such common stock is traded, over the twenty consecutive trading days immediately preceding the date for which the Average Stock Price is being determined.

 

 

•

“Peer Companies” means those companies listed below:

 

Alphatech Holdings, Inc.

LinaNova PLC

AngioDynamics, Inc.

Meridian Bioscience, Inc.

AtriCure, Inc.

Merit Medical Systems, Inc.

Avanos Medical, Inc.

Mesa Laboratories, Inc.

Cardiovascular Systems, Inc.

Natus Medical Incorporated

CONMED Corporation

Nevro Corp.

CryoLife, Inc.

NuVasive, Inc.

Cutera, Inc.

OraSure Technologies, Inc.

Glaukos Corporation

OrthoPediatrics Corp.

Haemonetics Corporation

SeaSpine Holdings Corporation

Heska Corporation

SI-BONE, Inc.

 

    

 

 

Inogen, Inc.

Surmodics, Inc.

Integer Holdings Corporation

Tactile Systems Technology, Inc.

Invacare Corporation

Varex Imaging Corporation

Lantheus Holdings, Inc.

Zynex, Inc.

LeMaitre Vascular, Inc.

 

•

The Peer Companies may be changed as follows:

 

 

(i)

In the event of a merger, acquisition or business combination transaction of a Peer Company with or by another Peer Company, the surviving entity shall remain a Peer Company.

 

 

(ii)

In the event of a merger of a Peer Company with an entity that is not a Peer Company, or the acquisition or business combination transaction by or with a Peer Company, or with an entity that is not a Peer Company, in each case where the Peer Company is the surviving entity and remains publicly traded, the surviving entity shall remain a Peer Company.

 

 

(iii)

In the event of a merger or acquisition or business combination transaction of a Peer Company by or with an entity that is not a Peer Company, a “going private” transaction involving a Peer Company or the liquidation of a Peer Company, where the Peer Company is not the surviving entity or is otherwise no longer publicly traded, the company shall no longer be a Peer Company for the entire performance period.

 

 

(iv)

In the event of a bankruptcy of a Peer Company, such company shall remain a Peer Company.

 

 

(v)

In the event of a stock distribution from a Peer Company consisting of the shares of a new publicly-traded company (a “spin-off”), the Peer Company shall remain a Peer Company and the stock distribution shall be treated as a dividend from the Peer Company based on the closing price of the shares of the spun-off company on its first day of trading (with the amount of such dividend deemed reinvested in additional shares of the Peer Company at the closing price of the shares of the Peer Company on the same date).  The performance of the shares of the spun-off company shall not thereafter be tracked for purposes of calculating Relative Total Stockholder Return.

 

    

 

Exhibit 10.10

 

ORTHOFIX MEDICAL INC.

AMENDED AND RESTATED 2012 LONG-TERM INCENTIVE PLAN

 

Stock Unit Grant Agreement

COVER SHEET

 

Orthofix Medical Inc., a Delaware corporation (the “Company”), hereby grants to the Award Recipient named below, on the Grant Date set forth below, the specified number of Stock Units relating to shares of the Company’s common stock, par value $0.10 per share (the “Stock”) under the Plan, subject to the vesting schedule and terms and conditions set forth below (the “Award”).  Additional terms and conditions of the Stock Units are set forth on this cover sheet, in the attached Stock Unit Grant Agreement (together, the “Agreement”), and in the Company’s Amended and Restated 2012 Long-Term Incentive Plan (as amended from time to time, the “Plan”). Capitalized terms used and not otherwise defined herein shall have the meanings attributed thereto in the Plan.

 

 

Grant Date:

 

 

 

Name of Award Recipient:

 

 

 

Employee ID Number:

 

 

 

Number of Shares of Stock Underlying Stock Units:

 

 

 

You agree to all of the terms and conditions described in this Agreement and in the Plan, unless you deliver a notice in writing within thirty (30) days of receipt of this Agreement to the Company stating that you do not accept the terms and conditions described in this Agreement and in the Plan.  You acknowledge that you have carefully reviewed the Plan and agree that the Plan will control in the event any provision of this Agreement should appear to be inconsistent.

 

Attachment
This is not a stock certificate or a negotiable instrument.


Exhibit 10.10

 

 

 

ORTHOFIX MEDICAL INC.

AMENDED AND RESTATED 2012 LONG-TERM INCENTIVE PLAN

 

Stock Unit Grant Agreement

Attachment

 

 

1.Grant of Stock Units.

(a)Vesting.  Subject to earlier termination in accordance with the Plan or this Agreement and the terms and conditions herein, Stock Units granted under this Agreement shall vest with respect to 25% of the shares of Stock covered hereby on each of the first, second, third and fourth anniversaries of the Grant Date (each, a “Vesting Date”) provided that Award Recipient continues in Service and has not had a Separation from Service on each such date; provided further, however, for the avoidance of doubt, that there shall be no proportionate or partial vesting in the periods prior to or between each Vesting Date unless otherwise provided under this Agreement or the Plan; provided further, that for the avoidance of doubt, following Award Recipient’s Separation from Service, no additional Stock Units shall vest.

(b)Additional Documents.  The Award Recipient agrees to execute such additional documents and complete and execute such forms as the Company may require for purposes of this Agreement.

(c)Issuance of Stock.  The shares of Stock underlying the Award Recipient’s vested Stock Units will be issued as soon as practicable following the earlier of (i) the date that the Stock Units vest pursuant to the vesting schedule, or (ii) the date of the Award Recipient’s termination of Service, but in no event later than March 15 of the calendar year that immediately follows the first of such events (the date or dates such shares of Stock are delivered, the “Settlement Date”).  The issuance of shares of Stock under this grant shall be evidenced in such a manner as the Company, in its discretion, will deem appropriate, including, without limitation, book-entry registration or issuance of one or more stock certificates.  On the Settlement Date, the Company shall also deliver to the Award Recipient the number of additional shares of Stock, the number of any other securities of the Company and the amount of any other property (in the case of cash dividends, assuming such dividends had been reinvested in shares of Stock as of the ex-dividend date thereof), in each case that the Company distributed per share of Stock to holders generally during the period commencing on the Grant Date and ending on the applicable Settlement Date, multiplied by the number of shares of Stock that are being delivered to the Award Recipient under this paragraph, without interest, and less any tax withholding amount applicable to such distribution.  To the extent that the Stock Units are forfeited prior to vesting, the right to receive such distributions shall also be forfeited.

(d)Shareholder Rights.  The Award Recipient has no rights as a shareholder with respect to the shares of Stock underlying the Stock Units unless and until the Stock relating to the Stock Units has been delivered.  No adjustments are made for dividends, distributions, or other rights if the applicable record date occurs before the certificate is issued (or appropriate book entry is made), except as described above.  

2.Incorporation of Plan. The Award Recipient acknowledges receipt of the Plan, a copy of which is annexed hereto, and represents that he is familiar with its terms and provisions and hereby accepts this grant of Stock Units subject to all of the terms and provisions of the Plan and all interpretations, amendments, rules and regulations which may, from time to time, be promulgated and adopted pursuant to the Plan. The Plan is incorporated herein by reference. In the event of any conflict or inconsistency between the Plan and this Agreement, the Plan shall govern and this Agreement shall be interpreted to minimize or eliminate any such conflict or inconsistency.

3.Restrictions on Transfer.  To the extent not yet vested, the Stock Units may not be sold, transferred, assigned, transferred, pledged, hypothecated, or otherwise encumbered or disposed of, whether by operation of law or otherwise, nor may the Stock Units be made subject to execution, attachment, or similar process.  If the Award Recipient attempts to do any of these things, he will immediately and automatically forfeit the Stock Units.

Exhibit 10.10

 

4.Termination of Service; Corporate Transaction.

(a)Certain Terminations of Service.  If, prior to vesting, the Award Recipient’s Service is terminated for any reason other than (i) death, (ii) Disability, (iii) a Qualified Retirement occurring no less than six months after the Grant Date or (iv) a circumstance providing for accelerated vesting pursuant Section 4(d) hereof, the unvested portion of the Stock Units shall be forfeited by the Award Recipient and cancelled by the Company as of the date of the Award Recipient’s termination of Service, and the Award Recipient shall have no further right or interest therein unless the Committee in its sole discretion shall determine otherwise.

(b)Termination of Service for Death or Disability. If the Award Recipient’s Service terminates by reason of death or Disability, the Stock Units shall automatically vest in full as of the date of the Award Recipient’s termination of Service.

(c)Termination of Service for Certain Qualified Retirements. If the Award Recipient’s Service terminates by reason of a Qualified Retirement occurring no less than six months after the Grant Date but prior to the second anniversary of the Grant Date, the Stock Units shall be considered vested as of the date of such Qualified Retirement with respect to the aggregate number of shares of Stock as to which the Stock Units would have been vested as of such second anniversary of the Grant Date.  If the Award Recipient’s Service terminates by reason of a Qualified Retirement after the second anniversary of the Grant Date but before the third anniversary of the Grant Date, the Stock Units shall be considered vested as of the date of such Qualified Retirement with respect to the aggregate number of shares of Stock as to which the Stock Units would have been vested as of the third anniversary of the Grant Date. In each of the circumstances described in the preceding two sentences, the portion of the Stock Units that shall not be considered vested as of the date of such Qualified Retirement shall be forfeited by the Award Recipient and cancelled by the Company as of the date of such Qualified Retirement. If the Award Recipient’s Service terminates by reason of a Qualified Retirement after the third anniversary of the Grant Date but before the fourth anniversary of the Grant Date, the remaining unvested Stock Units shall automatically vest in full as of the date of such Qualified Retirement.

(d)Certain Additional Corporate Transaction Circumstances. In the event that the unvested portion of this Award is assumed or continued, or substituted for new restricted stock units or another equity-based Award of a successor entity, or parent or subsidiary thereof (with appropriate adjustments as to the number of shares), in each case upon the occurrence of any Corporate Transaction (or in the case of an Award Recipient who is party to a Change in Control and Severance Agreement, upon the consummation of any Change in Control (as defined in the Change in Control and Severance Agreement)), and the employment of the Award Recipient with the Company or an Affiliate is terminated within 24 months following the occurrence of such Corporate Transaction (or in the case of an Award Recipient who is party to a Change in Control and Severance Agreement, upon the consummation of such Change in Control (as defined in the Change in Control and Severance Agreement)) by the employer without Cause or by the Award Recipient for Good Reason, the unvested portion of the Stock Units shall be fully vested on the date of such termination of employment with the Company. (Nothing in the preceding sentence shall limit or alter the Award Recipient’s rights under Section 4(c) hereof in the event that Award Recipient instead terminates his or her Service by reason of a Qualified Retirement.) In the event a Corporate Transaction occurs (or in the case of an Award Recipient who is party to a Change in Control and Severance Agreement, in the event that a Change in Control (as defined in the Change in Control and Severance Agreement) occurs) in which this Award is not being assumed, continued or substituted (as contemplated by the preceding sentence), the unvested portion of the Award shall be treated in accordance with the default rules applicable under Section 17.3 of the Plan.

5.Effect of Section 6 of Change in Control and Severance Agreements.  The Company and the Award Recipient agree that this Agreement and the Stock Units granted hereunder are not subject to Section 6 of the Change in Control and Severance Agreement, and the Stock Units granted hereunder do not constitute Time-Based Restricted Stock as defined in such Change in Control and Severance Agreement.

6.Withholding.

The Company shall have the right to require the Award Recipient to remit to the Company any and all amounts sufficient to satisfy any withholding or other taxes that may be due as a result of the issuance of shares of Stock subject to the Stock Units.  At the time of the Settlement Date (or, in the event that tax withholding is required

Exhibit 10.10

 

as of an earlier date, then such earlier date), the Award Recipient shall pay in cash to the Company any amount that the Company may reasonably determine to be necessary to satisfy such withholding or other tax obligation. The Company shall have the right, but not the obligation, to permit or require the Award Recipient to satisfy, in whole or in part, such obligation to remit withholding or other taxes, (a) by directing the Company to withhold shares of Stock that would otherwise become vested, or (b) by entering into a “same day sale” commitment with a broker-dealer that is a member of the Financial Industry Regulatory Authority (a “FINRA Dealer”) whereby Award Recipient irrevocably elects to sell a portion of the shares of Stock to be delivered in connection with the Stock Units to satisfy withholding obligations and whereby the FINRA Dealer irrevocably commits to forward the proceeds necessary to satisfy the withholding obligations directly to the Company or any Affiliate in each case pursuant to such rules as the Committee may establish from time to time.  The Company, in its sole discretion, may also permit, the Award Recipient to satisfy, in whole or in part, such obligation to remit withholding or other taxes, by delivering to the Company shares of Stock already owned by the Award Recipient and not then subject to any repurchase, forfeiture, unfulfilled vesting, or similar requirements.  The Company shall also have the right to deduct from all cash payments made pursuant to, or in connection with, the Stock Units, the federal, state, or local taxes required to be withheld with respect to such payments.  The maximum number of shares of Stock that may be withheld to satisfy any federal, state, or local tax requirements may not exceed such number of shares of Stock having a Fair Market Value equal to the minimum statutory amount required by the Company to be withheld and paid to any such federal, state, or local taxing authority with respect to such vesting or payment; provided, however, for so long as Accounting Standards Update 2016-09 or a similar rule remains in effect, the Committee has full discretion to choose, or to allow the Award Recipient to elect, to withhold a number of shares of Stock having an aggregate Fair Market Value that is greater than the applicable minimum required statutory withholding obligation (but such withholding may in no event be in excess of the maximum required statutory withholding obligation in such Award Recipient’s relevant tax jurisdiction).  

7.No Employment or Other Rights.  This Award does not confer upon the Award Recipient any right to be continued in the employment of, or otherwise provide Services to, the Company or any Subsidiary or other affiliate thereof, or interfere with or limit in any way the right of the Company or any Subsidiary or other affiliate thereof to terminate such Award Recipient’s employment or other service relationship at any time.  For purposes of this Agreement only, the term “employment” shall include circumstances under which Award Recipient provides consulting or other Services to the Company or any of its Subsidiaries as an independent contractor, but such Award Recipient is not, nor shall be considered, an employee; provided, however, nothing in this Section 7 or this Agreement shall create an employment relationship between such person and the Company or its applicable Subsidiary, as the usages described in this Section are for convenience only.

8.Adjustment of and Changes in Shares of Stock. In the event of any merger, consolidation, recapitalization, reclassification, stock dividend, extraordinary dividend, or other event or change in corporate structure affecting the shares of Stock, the Committee shall make such adjustments, if any, as it deems appropriate in the number and class of shares subject to the Stock Units. The foregoing adjustments shall be determined by the Committee in its sole discretion.

9.Discretionary Nature of Plan.  The Plan is discretionary in nature, and the Company may suspend, modify, amend or terminate the Plan in its sole discretion at any time, subject to the terms of the Plan and any applicable limitations imposed by law.  This Stock Unit grant under the Plan is a one-time benefit and does not create any contractual or other right to receive additional Stock Units or other benefits in lieu of Stock Units in the future.  Future grants, if any, will be at the sole discretion of the Committee, including, but not limited to, the timing of any grant, the number of Stock Units granted, and the vesting provisions.

10.Section 409A.   The grant of Stock Units under this Agreement is intended to comply with Code Section 409A to the extent subject thereto, and, accordingly, to the maximum extent permitted, this Agreement will be interpreted and administered to be in compliance with Code Section 409A.  Notwithstanding anything to the contrary in the Plan or this Agreement, neither the Company, its Affiliates, the Board, nor the Committee will have any obligation to take any action to prevent the assessment of any excise tax or penalty on Award Recipient under Code Section 409A, and neither the Company, its Affiliates, the Board, nor the Committee will have any liability to Award Recipient for such tax or penalty.  For purposes of this Agreement, a termination of Service occurs only upon an event that would be a Separation from Service within the meaning of Section 409A.  If, at the time of Award Recipient’s Separation from Service, (1) Award Recipient is a “specified employee” within the

Exhibit 10.10

 

meaning of Code Section 409A, and (2) the Company makes a good faith determination that an amount payable on account of Award Recipient’s Separation from Service constitutes deferred compensation (within the meaning of Code Section 409A), the payment of which is required to be delayed pursuant to the six (6)-month delay rule set forth in Code Section 409A to avoid taxes or penalties under Code Section 409A (the “Delay Period”), then the Company will not pay such amount on the otherwise scheduled payment date but will instead pay it in a lump sum on the first business day after the Delay Period (or upon Award Recipient’s death, if earlier), without interest.  Each installment of Stock Units that vest under this Agreement (if there is more than one installment) will be considered one of a series of separate payments for purposes of Code Section 409A.  

11.Miscellaneous Provisions.

(a)Applicable Law.  The validity, construction, interpretation and effect of this instrument will be governed by and construed in accordance with the laws of the State of Delaware, without giving effect to the conflicts of law provisions thereof.

(b)Notice.  Any notice required by the terms of this Agreement shall be delivered or made electronically, over the Internet or otherwise (with request for assurance of recipient in a manner typical with respect to communications of that type), or given in writing.  Any notice given in writing shall be deemed effective upon personal delivery or upon deposit with the United States Postal Service, by registered or certified mail, with postage and fees prepaid, and shall be addressed to the Company at its principal executive office and to the Award Recipient at the address that he or she has most recently provided to the Company.  Any notice given electronically shall be deemed effective on the date of transmission.

(c)Headings. The headings of sections and subsections are included solely for convenience of reference and shall not affect the meaning of the provisions of this Agreement.

(d)Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument.

(e)Amendments. The Board and the Committee shall have the power to alter or amend the terms of the grant of Stock Units as set forth herein from time to time, in any manner consistent with the provisions of the Plan, and any alteration or amendment of the terms of this grant of Stock Units by the Board or the Committee shall, upon adoption, become and be binding on all persons affected thereby without requirement for consent or other action with respect thereto by any such person. The Committee shall give notice to the Award Recipient of any such alteration or amendment as promptly as practicable after the adoption thereof. The foregoing shall not restrict the ability of the Award Recipient and the Board or the Committee by mutual written consent to alter or amend the terms of this grant of Stock Units in any manner which is consistent with the Plan.

(f)Binding Effect. This Agreement shall be binding upon the heirs, executors, administrators and successors of the Award Recipient and the Company.

(g)Entire Agreement.  This Agreement and the Plan constitute the entire agreement between the Award Recipient and the Company regarding the grant of Stock Units and supersede all prior arrangements or understandings (whether oral or written and whether express or implied) with respect thereto.  

12.Definitions. For purposes of this Agreement, the following capitalized words shall have the meanings set forth below.

“Cause” shall mean (i) if the Award Recipient is party to a Change in Control and Severance Agreement that defines “Cause,” the definition of “Cause” contained in such Change in Control and Severance Agreement, and (ii) if the Award Recipient is not party to a Change in Control and Severance Agreement that defines “Cause,” the definition of “Cause” contained in the Plan.

“Change in Control and Severance Agreement” shall mean a written change in control and severance agreement between the Award Recipient and the Company.

Exhibit 10.10

 

“Good Reason” shall mean (i) if the Award Recipient is party to a Change in Control and Severance Agreement that defines “Good Reason,” the definition of “Good Reason” contained in such Change in Control and Severance Agreement, and (ii) if the Award Recipient is not party to a Change in Control and Severance Agreement that defines “Good Reason,” the Award Recipient voluntarily terminating his employment, following a Corporate Transaction, after the occurrence of any of the following circumstances (in each case, after notice by the Award Recipient to employer of the circumstance, and failure by the employer to cure and eliminate such circumstance within 15 calendar days of such notice):  (x) a requirement that the Award Recipient work principally from a location that is more than fifty (50) miles from his principal place of employment immediately prior to such Corporate Transaction, or (y) a ten percent or greater reduction in Award Recipient’s Total Compensation from the amount of such Total Compensation immediately prior to such Corporate Transaction.

“Qualified Retirement” shall mean a retirement from Service by the Award Recipient in which, at the time of such retirement, the sum of the Award Recipient’s age and aggregate 12-month completed periods of Service (whether or not such completed 12-month periods are consecutive), in each case without giving credit for any partial years, equals or exceeds 75.  For the avoidance of doubt, if Award Recipient is terminated by the Company with or without Cause he shall not be eligible to retire pursuant to a Qualified Retirement.

“Separation from Service” shall have the meaning given such term in Code Section 409A.

“Total Compensation” shall mean aggregate of base salary, target bonus opportunity, employee benefits (retirement plan, welfare plans, and fringe benefits), and grant date fair value of equity-based compensation, but excluding for the avoidance of doubt any reductions caused by the failure to achieve performance targets) taken as a whole.

(Remainder of page intentionally left blank)

Exhibit 21.1

The following is a list of our significant subsidiaries:

 

Company

  

Country of Incorporation

 

Ultimate Ownership by Parent

Orthofix Australia Pty. Ltd.

  

Australia

 

100%

Orthofix do Brasil Ltda.

  

Brazil

 

100%

Orthofix S.A.

  

France

 

100%

Orthofix GmbH

  

Germany

 

100%

Orthofix Spine GmbH

  

Germany

 

100%

Orthofix S.r.l.

  

Italy

 

100%

Orthofix Netherlands B.V.

  

Netherlands

 

100%

Implantes y Sistemas Medicos, Inc.

  

Puerto Rico

 

100%

Orthofix AG

 

Switzerland

 

100%

Orthofix Limited

  

UK

 

100%

Orthofix US LLC

  

US

 

100%

Spinal Kinetics, LLC

  

US

 

100%

Spinal Kinetics GmbH

  

Germany

 

100%

 

 

 

 

 

 

 

 

 

 

 

 

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in the following Registration Statements:

 

 

(1)

Form S-8 No. 333-153389 pertaining to the Orthofix Medical Inc. (formerly Orthofix International N.V.) Amended and Restated 2004 Long-Term Incentive Plan and the Orthofix Medical Inc. (formerly Orthofix International N.V.) Amended and Restated Stock Purchase Plan;

 

(2)

Form S-8 No. 333-226504 pertaining to the Orthofix Medical Inc. (formerly Orthofix International N.V.) Second Amended and Restated Stock Purchase Plan, as amended;

 

(3)

Form S-8 No. 333-172697 pertaining to the Orthofix Medical Inc. (formerly Orthofix International N.V.) Amended and Restated Stock Purchase Plan, as amended;

 

(4)

Form S-8 No. 333-226503 pertaining to the Orthofix Medical Inc. (formerly Orthofix International N.V.) Amended and Restated 2012 Long-Term Incentive Plan;

 

(5)

Form S-8 No. 333-195797 pertaining to the Inducement Grant Non-Qualified Stock Option Agreement between Orthofix Medical Inc. (formerly Orthofix International N.V.) and Bradley R. Mason, the Inducement Grant Non-Qualified Stock Option Agreement between Orthofix Medical Inc. (formerly Orthofix International N.V.) and Mark A. Heggestad and the Inducement Grant Restricted Stock Agreement between Orthofix Medical Inc. (formerly Orthofix International N.V.) and Mark A. Heggestad;

 

(6)

Form S-8 No. 333-206098 pertaining to the Orthofix Medical Inc. (formerly Orthofix International N.V.) 2012 Long-Term Incentive Plan;

 

(7)

Registration Statement (Form S-8 No. 333-224548) pertaining to the Orthofix Medical Inc. (formerly Orthofix International N.V.) Inducement Plan for Spinal Kinetics Employees;

 

(8)

Form S-8 No. 333-233031 pertaining to the Orthofix Medical Inc. Employee Inducement Non-Qualified Stock Option Agreement for Jon Serbousek and Employee Inducement Restricted Stock Unit Agreement for Jon Serbousek;

 

(9)

Form S-8 No. 333-239090 pertaining to the Orthofix Medical Inc. Amended and Restated 2012 Long-Term Incentive Plan, as amended; and

 

(10)

Form S-8 No. 333-248769 pertaining to the Orthofix Medical Inc. Employee Inducement Non-Qualified Stock Option Agreement for Paul Gonsalves and the Employee Inducement Restricted Stock Unit Agreement for Paul Gonsalves of Orthofix Medical Inc.

 

(11)

Form S-8 No. 333-258569 pertaining to the Orthofix Medical Inc. Second Amended and Restated Stock Purchase Plan, as amended; and

 

(12)

Form S-8 No. 333-258571 pertaining to the Orthofix Medical Inc. Amended and Restated 2012 Long-Term Incentive Plan, as amended.

of our reports dated February 25, 2022, with respect to the consolidated financial statements of Orthofix Medical Inc. and the effectiveness of internal control over financial reporting of Orthofix Medical Inc. included in this Annual Report (Form 10-K) of Orthofix Medical Inc. for the year ended December 31, 2021.

 

/s/ Ernst & Young LLP

Dallas, Texas

February 25, 2022

 

Exhibit 31.1

CERTIFICATION

I, Jon Serbousek, certify that:

 

1.

I have reviewed this annual report on Form 10-K of Orthofix Medical Inc.;

 

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

 

a.

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

 

b.

designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

 

c.

evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

 

d.

disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has material affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.

The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

 

a.

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

 

b.

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Dated: February 25, 2022

 

 

 

By:

 

/s/ JON SERBOUSEK

 

 

 

 

 

 

Name:  Jon Serbousek

 

 

 

 

 

 

Title:    President and Chief Executive Officer, Director

 

 

Exhibit 31.2

CERTIFICATION

I, Doug Rice, certify that:

 

1.

I have reviewed this annual report on Form 10-K of Orthofix Medical Inc.;

 

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

 

a.

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

 

b.

designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

 

c.

evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

 

d.

disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has material affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.

The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

 

a.

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

 

b.

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

 

 

 

 

 

 

 

Dated: February 25, 2022

 

 

 

By:

 

/s/ DOUG RICE

 

 

 

 

 

 

Name:   Doug Rice

 

 

 

 

 

 

Title:     Chief Financial Officer

 

 

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Orthofix Medical Inc. (“Orthofix”) on Form 10-K for the period ended December 31, 2021, (the “Report”), as filed with the Securities and Exchange Commission on the date hereof, Jon Serbousek, Chief Executive Officer and President of Orthofix, and Doug Rice, Chief Financial Officer, each certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to his knowledge:

 

1.

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

2.

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Orthofix.

 

Dated: February 25, 2022

 

 

 

 

 

/s/ JON SERBOUSEK

 

 

 

 

 

 

Name: Jon Serbousek

 

 

 

 

 

 

Title:   President and Chief Executive Officer, Director

 

Dated: February 25, 2022

 

 

 

 

 

/s/ DOUG RICE

 

 

 

 

 

 

Name:  Doug Rice

 

 

 

 

 

 

Title:    Chief Financial Officer