Mark Quick - Director of Business Development and Investor Relations Bradley Mason - President and Chief Executive Officer Doug Rice - Chief Financial Officer Brad Niemann - President of BioStim Mike Finegan - Chief Strategy Officer.

Anthony Petrone - Jefferies John Gillings - JMP Securities Jim Sidoti - Sidoti & Company Ryan Zimmerman - BTIG Jennie Tsai - Gabelli & Company.

Welcome to the Orthofix Fourth Quarter 2016 Earnings Call. Today's call is being recorded. At this time, I'd like to turn the conference over to today's host, Mr. Mark Quick, Director of Business Development and Investor Relations. Please go ahead, sir..

Thanks, operator. Good afternoon, everyone. Welcome to the Orthofix fourth quarter 2016 earnings call. Joining me on the call today are President And Chief Executive Officer, Brad Mason, Chief Financial Officer, Doug Rice, and Chief Strategy Officer, Mike Finegan. I'll start with our statements and pass over to Brad.

During this call we'll be making forward-looking statements that involve risks and uncertainties. All statements other than those of historical fact are forward looking statements including any earnings guidance we provide or any statements about our plans, beliefs, strategies, expectations, goals or objectives.

Investors are cautioned not to place undue reliance on forward-looking statements as there's no assurance the matters contained in such statements will occur. The forward-looking statements we make on today's call are based on our beliefs and expectations as of today February 27, 2017.

We do not undertake any obligation to revise or update such forward-looking statements.

Some factors that could cause actual results to be materially different from the forward-looking statements made by us on the call include the risk disclosed under the heading risk factors in our 410-K for the Fiscal Year 2016 as well as additional SEC filings we make in the future.

If you need copies, contact my office at Orthofix in Lewisville, Texas. In addition, on today’s call we'll refer to various non-GAAP financial measures. In order to understand our short-term and long term financial trends, investors may wish to review these measures as a supplement to financial measures determined in accordance with U.S. GAAP.

Please refer to today’s press release announcing our fourth quarter 2016 results for reconciliations of these non-GAAP financial measures to our U.S. GAAP financial results. At this point, I'll turn the call over to Brad..

Thanks, Mark. Good afternoon, everyone. I will start by giving you a summary of our fourth quarter 2016 performance after which Doug will walk you through the financial results that we reported today. I will then follow up with a few thoughts about our expectations for 2017 and beyond before opening up it for Q&A.

Our fourth quarter results were strong across all key financial metrics. Starting with the top line, our fourth quarter came in at $108.5 million which was an increase of 4.2% over prior year in constant currency terms. This increase was driven by both our BioStim and extremity fixations strategic business units or SBUs.

Looking at each of these SBUs, BioStim grew 6.2% over the prior year quarter. These results exceeded our expectations and highlight the continued strong momentum we have in this market. But we believe we have over 50% market share in spinal and cervical stimulation.

We also believe that we are well positioned to continue to grow faster than the market given the tailwinds from mass positive coverage recommendations and the launch of our next generation devices which I'll talk about in a bit. Moving on to Biologics, net sales declined 4.6% for the period which was inline with our expectations.

As we have mentioned, this business has been impacted by both increased competition and the reorganization of one of our sales regions.

Considering our three consecutive quarters of sequential growth, the completion of the sales region reorganization and the impending launch of our MIS delivery system, we expect to return to year over year within the next several quarters.

In Extremity Fixation, net sales were up 14.3% in constant currency for the period and grew 9.6% on a constant currency trailing 12 month basis which minimizes the variability of cash collections worldwide our market leading deformity correction portfolio supplemented by our procedure specific trauma products continue to drive sales growth. The U.S.

business in particular performed extremely well as it continues to capitalize on the strong market adoption of our TrueLok Hex product line. Net sales for our spine fixation SBU decreased 5.6% year over year in the fourth quarter as we expected. In the quarter, the U.S.

business was still impacted by the loss of several key customers in a National Hospital Group earlier in the year. However, we did see an improving trajectory as we exited the year.

In a moment, I'm going to discuss a number of ongoing product launches that combined with increasing distributor engagement positions this SBUs to return to growth in the second half of 2017.

Moving on to our bottom line performance, we're pleased to report that adjusted EBITDA as a percent of net sales for the quarter was 19.4% compared to 18.4% in Q4 of 2015 and adjusted earnings per share was $0.42 compared d to $0.40 for the prior year. Doug will discuss this performance in more detail in a few minutes.

As of the end of the fourth quarter, we had a trailing 12 month adjusted ROIC of 10.6% versus the prior year of 8.5%. Free cash flow for the year was $26.4 million compared to $15.7 million in 2015, an increase of 68%. Our team has done an outstanding job of focusing on the key operational changes that are driving these improvements.

Making this free cash flow performance more impressive, there were a number of nonrecurring expenses that negatively impacted free cash flow during the year, including $7.4 million in Bluecore infrastructure improvements and $14.4 million for the SEC settlement. Our cash balance as of 12/31/16 was approximately $40 million.

Considering the $63 million stock repurchases that we made during the year and the other non-recurring cash outflows that I just mentioned we are very pleased with where we stand at the end of the year. I'll now spend a few minutes reviewing recent product launches and our product pipeline.

In our BioStim business in early January we announced FDA and CE mark approval for the next generation of spinal and cervical spinal fusion therapy devices. These products will be phased in during the year and ultimately replace our existing products.

In addition to having many new patient comfort and convenience features, these devices also feature Bluetooth connectivity to mobile devices and an app called Stem on Track [ph] which is designed to facilitate patient compliance and improve spinal fusion outcomes.

None of our competitors offer this feature, and we believe patients will like treatment reminders and surgeons will appreciate the ability to track utilization by their patients. This is the first significant upgrade to these products in 12 years and we're very excited about the competitive advantages this gives us.

In addition, we expect the Physio-Stim next generation bone healing therapy device to be approved and available in early 2018. For our Biologic’s SBU, in the first half of the year we plan to introduce a novel disposable delivery system for our trinity tissues. One of the challenges that surgeons can have is introducing Biologics into confined spaces.

We expect this system will be particularly to physicians for minimally invasive surgeries but also provide more precise delivery in all open and small procedures.

Moving on to our Extremity Fixation business, we continue to roll out addition components to augment our TrueLok and TrueLok Hex products as well as complete our Galaxy Unyco damage control limb fixation portfolio. Additionally the limited market release of our new hip fracture system in Europe is going very well.

This system competes with a market leading systems and features a number of advantages in procedure simplification. This product will further bolster our trauma portfolio of products sold outside the U.S. Finally we're still on track to launch a comprehensive foot and ankle plating and screw system in mid-2017 in the U.S.

Of note, we have strong relationships with our distributors who sell our external fixation products in the U.S. and have a good opportunity to leverage these distributor and physician relationships with the introduction of these new internal fixation products to increase our presence in the foot and ankle market.

Lastly, our spine fixation SBU is rolling out PTC pillar SA anterior lumbar standalone interbody implant. This product utilizes our propriety porous titanium-end plates and PEEK composite technology that was introduced last year in our FORZA interbody line.

The other big launches for this SBU are in competitive anterior cervical plate and an expandable interbody product line. In January, we launched [indiscernible] the anterior cervical plate and expect to release our expandable interbody line of products in mid-2017.

In summary, we are pleased with what we've accomplished in the fourth quarter and the way we finished the year. After Doug's more detailed comments on our fourth quarter financial results, I'll discuss our outlook for 2017 and beyond.

Doug?.

Thanks, Brad and good afternoon, everyone. I will now provide details about our net sales and earnings results for the quarter and then discuss some of our other financial measures. Total net sales in the quarter were $108.5 million up 3.7% on a reported basis and 4.2% on a constant currency basis.

As Brad mentioned, the increase during the quarter was primarily driven by strong performance from our BioStim and extremity fixation SBUs. Gross margin in 2016 was 78.5 %, a 100 basis point decrease from 79.5% in the prior year period. This reduction was primarily due to two factors.

An increase in the mix of net sales from our extremity fixation SBU which had lower margins than our regenerative products and a 50 basis point decrease [indiscernible] charges related to our restructuring in Brazil and Puerto Rico.

Sales to marketing expenses were $48.7 million or 44.9% of net sales in the fourth quarter of 2016 compared to 44.7 million or 42.7% of net sales in the prior year period. This year over year increase was primarily due to higher commission expenses from overachievement to quota in our BioStim SBU.

The addition of new distributors in our spine fixation and Biologics SBUs and a higher proportion of U.S. generated revenue and our extremity fixation SBU. General and administrative expenses were $21.1 million or 19.4% of net sales in the fourth quarter of 2016, a decrease from $23.7 million or 22.7% compared to the prior year period.

The change in reported G&A this quarter was due to a decrease in legal settlements and professional fees partially offset by an increase in share based compensation.

A quick comment on our share based compensation for the full year of 2016 because that was not considered probable at the time, we did not recognize any expense in 2014 or 2015 for the performance share awards granted in those years because the vesting of those shares was determined to be probable in Q3 and Q4 of 2016.

At that time, we recorded the portion of expenses related to those previous periods. Approximately $2.6 million of the share base compensation recognized for the full year 2016 related to prior year service periods for the 2014 and 2015 performance grants.

Research and development expenses were $7.5 million or 6.9% of net sales in the fourth quarter down slightly from $7.6 million or 7.2% of net sales in the prior period. Adjusted EBITDA during the fourth quarter increased to $21.1 million or 19.4% of net sales from $19.3 million or 18.4% of net sales in the prior year.

This represents 2.5 times leverage on sales growth, primarily due to a decrease in G&A expenses partially offset by an increase in sales and marketing expenses.

Now turning to tax, we had income tax expenses for the quarter of $8.8 million or 238% of income before income taxes as compared to income tax expense of $5 million or 70.5% of income before income taxes in the same period of 2015.

The primary factors impacting our effective tax rate this quarter were low pretax book income and losses in jurisdictions where we currently do not receive a tax benefit. A quick note on taxes, over the past year, we've invested in simplifying our legal entity structure and addressing our current and historical tax positions.

As a result of those efforts we had a number of one-time tax consequences in 2016.

Additionally, our 82% effective tax rate for the full year was negatively impacted by approximately 30 points due to the non-deductibility of the SEC settlement costs and another 10 points due to losses of jurisdictions where we have evaluation allowances and do not receive a tax benefit.

As we look to 2017, we will continue to implement changes to improve our tax efficiency and focus on increasing profitability in all our tax jurisdictions. Because of these factors, we continue to expect our long-term tax rate to approximately 38 % and will continue to use this rate to adjust our in non-GAAP earnings.

For the fourth quarter 2016, we reported net loss from continuing operations of $5.1 million or $0.29 per share as compared to net income of $2.1 million or $0.11 per share for the fourth quarter 2015.

Adjusting for certain expenses and normalizing for tax using a long-term rate of 38%, adjusted net income from continuing operations was $7.7 million or $0.42 per share compared to $7.6 million or $0.40 per share in the prior year period.

The increase in adjusted earnings per share was driven primarily by the lower share count as a result of our recently completed share repurchase program partially offset by increased share based compensation. Moving on to the balance sheet highlights.

Day sales outstanding or DSOs were 49 days at the end of the fourth quarter 2016 down from 53 days at the end of the fourth quarter 2015 as we continue to drive order to cash improvements in our BioStim SBU.

Our inventory terms at the end of the fourth quarter 2016 were 1.4 times compared to 1.5 times in the prior year, reflecting the acceleration of our new product introductions and resulting in increases in inventories including the purchase of the line of foot and ankle internal fixation products that Brad mentioned.

Cash and cash equivalents at the end of 2016 was $39.6 million compared to $63.7 million at the end of 2015. This decrease was primarily the result of our share repurchase activity and the funding of a $14.4 million payment to the SEC which was classified as restricted cash offset by an increasing cash flow from operations.

We continue to have no long-term debt on our books. Cash flow from operations for the year was $44.7 million compared to $43.6 million during 2015. The increase is primarily due to the year-over-year increase in net income of $5.9 million offset by certain changes in operating assets and liabilities including inventory.

Capital expenditures for 2016 decreased $18.3 million compared to $27.9 million in the prior year due primarily to a reduction in project Bluecore capital spending. For the full year 2016, we incurred $3.8 million for Project Bluecore related capital expenditures compared to $14.8 million in the prior year.

Also of note in the fourth quarter we capitalized additional instrument sets in preparation for the anticipated launch of new products in our spine fixation SBU. As Brad previously mentioned free cash flow defined as cash flow from operations less capital expenditures was $26.4 million in 2016 compared to $15.7 million in the prior year.

The year-over-year improvement in free cash flow was primarily driven by $9.6 million year over year decrease in capital expenditures. I will now turn it back to Brad..

Thanks, Doug. Looking back at 2016, I am very proud of our many accomplishments and the significant value we created for our shareholders.

I'd like to point out a few of these, from the top line perspective, for the full year, we grew BioStim, our largest and most profitable SBU had extremity fixation at rates significantly above market growth rates and are well-positioned going forward.

We also made the necessary investments in Biologics and spine fixation to get those SBUs back on track and growing in 2017. From a margin perspective, adjusted EBITDA margins expanded 410 basis points to 19.4% in 2016 from 15.3% in 2015.

With our current structure, we believe this adjusted EBITDA margin, in general is the appropriate level that balances top line and bottom line performance. From a capital allocation standpoint, we completed our $75 million share repurchase program at a price we believe is meaningful lower than intrinsic value of the company.

We're evaluating all of our strategic opportunities going forward including another share purchase program, if the stock remains at current levels. Our adjusted ROIC year over year improvement of 216 basis points highlights the value of our discipline in capital deployment, and commitment to improving this important metric.

From an infrastructure standpoint, our improvements were finished on schedule and below budget and with this overhaul complete, we expect only maintenance like investments will be needed for the foreseeable future.

Finally, I want to discuss the strides we made in the future pulse electromagnetic field technology and clinical research to find new indications of new use and improve patient outcomes. We currently have two IDE studies underway to evaluate the safety and efficacy of our PEMF devices on the deltoid fractures and osteoarthritis of the knee.

Additionally, we expect to receive our third IDE approval later this year for a study determining the safety and efficacy of PEMF used as adjunct to rotator cuff surgery. As demonstrated by our investments in these IEDs we believe we're just scratching the surface in the utilization of the PEMF technology in treating muscular skeletal disorders.

As the market leader in the company driving clinical research, we also believe we are best positioned to identify and address these and other clinical needs.

Looking ahead to 2017 and beyond, the company is exited an era of heavy investment with the rebuilt infrastructure of robust compliance program, rigorous financial controls, a strong balance sheet, an excellent free cash flow.

So what is the next chapter for Orthofix look like? Organically, we're going to leverage our significantly expanded distribution footprint and new product pipeline to accelerate our growth in each of our SBUs.

Most notably in our BioStim SBU, we plan to expand patient access to our BioStim products by driving increased coverage by payers and acceptance by surgeons while positioning ourselves for the future by developing new indications for our PEMF technologies.

We estimate that only one third of patients who are on label for usage as an adjunct to spinal fusion are currently receiving this proven therapy. We expect the mass positive coverage recommendation, along with our next generation spinal stimulation and cervical stimulation devices will help increase patient access to this therapy.

Finally as a company, we will continue to grow and grow adjusted EBITDA, free cash flow and ROIC. In terms of our inorganic opportunities, we're focusing on three broad areas. First, we are in the process of evaluating our current portfolio of businesses in order to identify opportunities to maximize shareholder value.

Second, we continually look to acquire tuck-in products to leverage our distribution channels and drive sales in our existing businesses. And third, we are opportunistically pursuing more substantial and value accretive acquisitions to leverage our market leading positions.

And to us value accretive means the deal must first be a strong strategic fit to strengthen our businesses, have an ROIC at least equal to our weighted average cost to capital in the planning period, be accretive to EPS in the relative near term, and have a risk commensurate with a strategic and financial opportunity.

Now looking at 2017 more specifically, I will walk you through our guidance for the year. Starting with reported net sales, we expect to finish 2017 between $407 million and $411 million based on our current foreign currency exchange rates.

In our Extremity Fixation SBU, we anticipate a combined $10 million negative impact in 2017 to net sales from foreign currency movement, a planned distribution restructuring Brazil and Puerto Rico and the wind down of the non-core business. We are normalizing for this impact, the overall company growth rate is expected to be between 1.7% and 2.7%.

Looking at the growth contribution from each SBU, despite the difficult year over year comparisons, we expect BioStim to continue grow in the mid-single digit range which is above market growth rates.

As for Biologics, as we resolve some of the issues that impacted growth in 2016 we expect to get this business back to year over year growth within the next several quarters.

Extremity Fixation growth as just noted will be impacted by a number of headwinds in a planned restructuring that will result in this business being down slightly for the year, but it is still expected to be in the mid-single digit growth range when excluding these items.

Finally, for Spine Fixation, with improving distributor engagement and the numerous new products we launched last year and plan to launch this year, we expect this SBU to return to year over year growth in the next few quarters.

For your modelling purposes, I'd like to mention that due to the timing to our return to growth in the Biologics and Spine Fixation SBUs and our anticipated international cash collections in Extremity Fixation we do expect the first two quarters on a consolidated basis to be flat to slightly down year over year on a reported basis.

Moving on to the P&L, our current adjusted EBITDA margin level in general strikes the appropriate balance between top line growth and bottom line profitability as we 're currently structured. We expected adjusted EBITDA for the full year 2017 to be in the range of $76 million to $79 million.

We expect capital expenditures to be in the range of $13 million to $16 million for the year. Lastly, we expect full year of 2017 adjusted earnings per share to be in the range of $1.48 to $1.58 using weighted average shares of $18.4 million and a long-term tax rate of 38%.

That concludes our prepared remarks, Operator will you please open up the line for questions?.

[Operator Instructions]. And we will take our first question from Anthony Petrone with Jefferies. Please go ahead..

Maybe to start out with extremities in terms of growth and maybe the divisional net margin posted in 4Q.

So growth accelerated sequentially by quite a bit but I noticed the net margin dropped off, so I am just wondering the push and pull on volumes and pricing there and is this sort margin profile that we should expect into 2017 and then I have a few follow-ups..

With regards to the margin pressure, we saw one unusual item this quarter that I mentioned in my script around our restructuring charges as it relates to impacted inventory. We expect some mixed changes in Brazil as a result of our distribution strategies changing and so that's the most pressure on our margins for FY ’16..

Okay.

And then, you know, just shifting over to -- so, there's looking ahead, so that should normalize out in other words, we should get back to the average for the first nine months or?.

Yes, we don't expect that to recur..

In terms of, you know, shifting over to BioStim, so the FDA clearance in early January, I'm just wondering what is baked in for those two products in 2017, and then what is the initial margin profile of those products, I guess specifically what level of sales in marketing investment will be put toward, what seems to be two launches both in Europe and the U.S.

simultaneously and so how does that play out versus the BioStim net margin of 43% for 2016?.

The products launched in the first part of the year, they are essentially the same gross margin profile as our previous products, we do have some additional spending for the launches but it's not an extraordinary amount. So you should see generally the same sort of net margins in that business by year end.

Our launches internationally will be very limited, very specific markets after we've already completed some very intensive research on where to launch and when and what, what that might look like, but that won't happen quickly. We are not baking a lot into our top line guidance for that.

But, no, you should see the net margins in that business stay reasonably the same as they have in the past through 2017 and beyond..

And then, last from me, I'll hop back in. It's just, maybe just a little bit more on the NAAS coverage guidelines here announced late last year, how long do you think this takes to play out, I know it was October last year, so you had a little bit couple months in the back end of ‘16, that's certainly extended here into 2017.

So what is the approach as it relates to the guidelines and at what point do you expect this to actually have an impact at BioStim? Thanks..

I can tell you it had an impact from day one.

We got calls from physicians who were not our customers at that point who were interested in the product because of the guidelines, but realistically, the benefit is long-term, it's not a spike that we expect and when you look at what that message is to the physicians out there who are not currently utilizing this technology is they are peer selling you should be.

So it gives us another arrow in the quiver for utilization and it also gives us another arrow in the quiver for reimbursement. So if there's a long-term benefit to that that plays out over a multitude of years..

We will take our next question from John Gillings with JMP Securities. Please go ahead..

So I want to start out with one on spine and then probably follow up a little bit on the BioStim side as well. So in Spine Fixation, one of the things that I noticed this quarter is it looks like you're down significantly less than last quarter and I know you had some turnover of key customers and that sort of thing.

And I guess I had assumed that it might take a little bit longer to turn that around. Make you can give us give us a little color how that started to bounce back maybe a little faster than we thought..

I think there's two things, John. One was Q3 was abnormal. We had lower cash collections in our international business that drove that down. I think as I recall, we talked about that business on a more normalized rate it was down probably 8% or 9% for the quarter.

So the spike that you saw was not necessarily representative of the health of the business.

Additionally, all the things that we've been working on, [indiscernible] who runs that business, really put in a lot of things to change the trajectory of that business including not only new products but reengaging the distributors, which is really the most important thing we can do and he's done a tremendous job of that and just getting those guys reengaged to bringing on even more importantly than bringing on new distributors is engaging the distributors we have, who are not exclusive to us so that they will pull our products out of the bag first.

So that has gone very, very well. They're just seeing different things from Orthofix Spine than they've seen in the past, things that support them in the field, through education and the new product pipeline that really gets them energized.

So I wasn't surprised at all by the fourth quarter performance and I also wouldn't be surprised if we return to growth, quickly. So, we exited the year with a lot of momentum and that's continued in to the first part of this year..

And then, just a couple of on the BioStim side. So Anthony asked about the impact of the NAAS recommendation and you guys have talked about that before as being a slow burn and you reiterated that. But again, that business was another one that came in a little bit ahead of what we expected this quarter.

Was there anything sort of one time in the quarter, was that NAAS recommendation maybe giving you a little bit more of the tail wind than you thought? Just any color there would be great..

Yes, there was no onetime benefit from the quarter. I'm happy to report with that kind of growth rate. As I said, that exceeded our expectations.

Now, it's really hard to quantify what percentage of, let's say the overachievement from our expectations was attributable to the NAAS guidelines but certainly they are having an impact and we expect that to continue.

It's also an exciting time for the distributors in that business with the two new products we just launched with the NAAS guidelines, there's just a lot of momentum in the culture and the enthusiasm that the business is enjoying right now, is really driving the business. They've done a great job in that business..

Okay. And then, turning to the trial, I appreciate the color you gave on the BioStim trials.

But, maybe you could talk just a little bit about, you know, what you expect to be the factors that will impact enrolment in each of those three and specifically, if I remember, right, I think either last quarter or the quarter before we talked about the odontoid trial being a little challenging to enrol, so just any color there would be great and then just one more after that..

On the odontoid fracture study, that is challenging to enrol, we're making progress but it continues to be reasonably slow. It's also seasonal and so we deal with that. But we'll continue to press forward, it's a really good indication, it's an unmet clinical need and we view it as important for our customers. So we'll continue to make progress there.

On knee OA we expect that to be different and to go much more quickly. We started rolling as you know, enrolment is going well and we would expect that to enrol reasonably quickly.

So we think that by the end of the year, we should be pretty well through enrolment and then last but not least, with the rotator cuff, we think that will be more similar to knee osteoarthritis, not similar to OA, so easier to enrol and again that's also a huge unmet clinical need, it should be pretty good on the enrolment side..

And then, just the last one, looking at the regulatory pathway in Stim, that's, as far as I understand it, it has been and still at this point a PMA pathway.

But there was noise back in December about some potential changes to that and the last time that came up, there was a lot of push back from physicians saying, this needs to be something with rigorous trials, the specific waveform matters, and if we don't get it right, we could actually end up doing more damage than good.

Just wanted to see if there had been any commentary there, any color that you could give on that and that's it for me, thanks a lot ..

I'm going to go a little long on this answer, if that's all right. This is an important topic for us, it's an important business for us. And, you know, we feel strongly about it. So, I'll take a few minutes.

So our BGS devices have been classified as class three all the way back to 1986 and just to give a little bit of background, John, I think you've got it but others may not. Down classification, the BGS devices, it's not a new issue.

This came up in 2006 when the FDA was considering down classing on that time and the advisory committee recommend against down classification and the FDA agreed. To your point, we had a lot of good arguments then. We feel even better arguments today, but between then and 2015, this was just a dormant issue, it was gone.

In April of 2015, the FDA published a list of 21 class three devices as candidates were possible down classification to class two. This was part of the effort by the FDA to just simplify and reduce the regulatory burden that they have and on the industry and this is something that they typically do, this not unusual, they do it periodically.

Orthofix is a member of the bone growth stimulation coalition which is basically the bone growth stimulator manufacturers. This was formed back in 2006 and together, with the other manufacturers our coalitions submitted a comment letter to reiterating the points made in 2006 as to why these devices are clearly not candidates for down classification.

You know, there's simply, I mean simply put, there's no one set of standards that can be applied to this technology to ensure safety and efficacy as a class two device. The comment letter, by the way, the comment letter is publicly available at regulations.gov, there's no secrets here. This is all out in the open and has been all along.

To-date, the FDA has not responded to our comment letter and it doesn't appear that they're going to do anything very quickly. Only one of the device categories in the list of 21 has been down classified to-date and that was on a fast track.

And you know, additionally, if the FDA were to propose down classification, they're required to provide a public notice in the federal register, which we would see it and everybody would see and if that were to happen we would go through the same exercise we did in 2006.

We believe these devices are not appropriate candidates for down classification and we're very confident in that position. So I went a little long on that but it's an important topic. So I appreciate you bringing it up ..

We will take our next question from Jim Sidoti with Sidoti and Company. Please go ahead..

I took some details on the quarter. The reconciliation table, you had $0.15 in the strategic investments between, you know, the GAAP number and the adjusted number.

Can you just remind me what that is?.

The strategic investments for 2016 includes primarily our investment in [indiscernible] and some accounting that we had in Q4 specifically, Jim, you know, based on an updated forecasted performance, we saw a decrease in the fair value of that investment, and so at that time also determined that we believe there's some credit risk and so you saw some charges run through our P&L related to the mark to mark on that investment.

So, that's the primary nature..

Okay. And then when I look at the 2017 reconciliation, I see some additional charges there.

Is that still, is that the same thing?.

No, probably a little bit broader. I think that's just us being anticipatory in terms of evaluating inorganic opportunities and other strategic opportunities and anticipating some cost related to that..

Okay. And then, you did have some restatement costs I believe in 2017.

At that point, when do you think that will be finished?.

Right. So, as part of the restatement and the SEC resolution that we had last month we announced we will be getting an engaging compliance consultant for the next 12 months and so as a part of that, this estimate is to recognize the costs for that and any other legal and wrap up costs related to those initiatives..

So, do you think by 2018 you should be through all that?.

We sure hope so..

The independent compliance consultant will be on board for a year and they should start within the next 45 to 60 days or so. So a bit of it could extend in to 2018 but the total, you know, if that's the only cost we're talking about at this point..

All right.

But in general, it's good to see that that number approaching the adjusted number, much closer in 2017 than it was in 2016?.

We like that too, absolutely..

And then my last question was going to be on potential data classification, but I think Brad did a good job of answering that already. I think that's it for me..

Thanks, Jim..

Thank you..

And our next question comes from Ryan Zimmerman with BTIG. Please go ahead..

So not to beat a dead horse on Anthony's question on the NAAS recommendation, but just curious to get your thoughts around whether the NAAS tailwinds are allowing you to take some share or if its new surgeons coming in the fold, just a little color between that dynamic there would be helpful..

You know, the NAAS guidelines were not equally beneficial to all companies in the bone growth stimulation market. So we certainly benefitted more than certain of our other competitors. So, you know, there might be an advantage from that perspective. Ryan, we really haven't done a huge marketing effort on those guidelines yet.

We have money in the budget this year to do that in a way that’s the proper way in getting the word out. So, what we're seeing so far is not, it's not driven by the NAAS guidelines. NAAS guidelines are just, they're certainly contributing but it's a part of an overall culture and energy with that division.

I tell you what you get sales reps energized and they just make it happen. You know, that's what's driving us more than anything else..

Okay. That's fair. And then just lastly for me, the [indiscernible] guidelines for next year with the combined $10 million impact, just a little bit on the cadence of that.

You had some planned restriction restructuring, is there any seasonality or cadence we should be think about that for that business?.

Ryan, let me get back to you on that one because there will be a little bit of a cadence, that's a question that I hadn't anticipated on the rollout of that restructuring.

It's a really a question of when we transition from in-house sales reps in Brazil to stocking distributors and I would need to talk to [indiscernible] about how he sees the timing of that. So that one we can have offline..

Yes, we will take that offline, yes..

Yes..

Our next question comes from Jennie Tsai with Gabelli & Company. Please go ahead..

So in 2017, you're going to be introducing several new products in each of your SBUs and then you talked about spine and how you expect that to return to growth, maybe in second half of '18 by reengaging the distributors.

What about Biologics? You know, what else can we do to improve the sales performance there?.

So, there's a number of things in Biologics. So, first of all, Biologics is grown their distribution footprint significantly by adding a number of distributors in the last year and it does take a while for them to come up to speed to get the tissue approved in the hospital and all those sorts of things. So that will be an ongoing opportunity.

We still have a tailwind from the published studies that we'll use as well. And then, you know, we have a delivery system that we will be putting out in the first half of the year that is unique and we think it will give us a strategic advantage as well. And additionally, we're also looking at other Orthomarkets.

I think people are recognizing who have tried the competitive process that have come on to the markets they are recognizing the benefits that come with not only their partnership with Orthofix but equally as important frankly is their partnership with MTF. MTF is the gold standard and it really makes a big difference in how we go to market.

So, we have a lot of really good exciting things happening in that business that feel really good. I just need to see them turn in to sales and I'm assured they will and I believe that they will..

And just, an update on your sales force, specifically is there any specific SBUs that may have some changes in '17? BioStim or anything that might have some additions or just changes you think?.

I think in the U.S. market, certainly Biologics will be adding more distributors, or sales agents, frankly. It will be adding faster than the other SBUs. But we always look to not only augment our current sales force but to turn over the ones who are not performing.

So it will always be some change but there is nothing unusual that we're forecasting for 2017 in answer to that question..

And we'll take a follow up question from John Gillings with JMP Securities. Please go ahead..

Just one quick follow up for me. And this maybe is something I should've looked in to ahead of the call.

But you talked about the new products coming out with the Bluetooth technology.Is that sort of ubiquitous in the market now, is that something you guys will have as an advantage for awhile? Just seems like obviously something that's pretty critical for any device where compliance is so important to clinical outcomes?.

No, it is unique in the market place, it's the only one we'll have the only products that have that technology. There are other products that you can get compliance information, but not real time compliance information like this will.

The Stim On Track app is really, really slick when you look at it, both from a physician standpoint as well the patient standpoint. It reminds them that they need their treatment for that day, keeps track of it for them, sends that information back to the physician.

It's a pretty significant differentiator, no question no nobody else in the market has anything like it..

It appears there are no further questions at this time. I will turn the conference call back over to Brad Mason, Chief Executive Officer for any additional or closing remarks..

Thank you, Operator. Appreciate the questions today and everybody joining us on the call and we're looking forward to starting the year strong and continuing throughout and talking to you again soon. Take care, thanks for joining us. .

That does conclude today's presentation. Thank you for your participation. You may now disconnect..