Orthofix International's (OFIX) CEO Brad Mason on Q2 2016 Results - Earnings Call Transcript

| About: Orthofix International (OFIX)

Orthofix International N.V. (NASDAQ:OFIX)

Q2 2016 Earnings Conference Call

August 1, 2016 5:00 p.m. ET

Executives

Mark Quick - Director of Business Development and IR

Brad Mason - President & CEO

Doug Rice - CFO

Analysts

Raj Denhoy - Jefferies & Co.

John Gillings - JMP Securities

Jim Sidoti - Sidoti & Co.

Operator

Hello and welcome to the Orthofix Second Quarter 2016 Earnings Conference Call. Today's call is being recorded.

I would now like to turn the call over to Mr. Mark Quick, Director of Business Development and Investor Relations. Please go ahead, sir.

Mark Quick

Thanks, operator, and good afternoon everyone. Welcome to the Orthofix second 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 Safe Harbor Statement and then 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, any statements about our plans, beliefs, strategies, expectations, goals or objectives. Investors are cautioned not to place undue reliance on such forward-looking statements as there is 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, August 1, 2016. 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 risks disclosed under the heading Risk Factors and our 2015 10-K, as well as additional SEC filings we make in the future. If you need copies of these documents, please contact my office at Orthofix in Lewisville, Texas.

In addition, on today's call we will refer to various non-GAAP financial measures in which we exclude certain items from our U.S. GAAP financial results. We believe that in order to properly understand our short-term and long-term financial trends, investors may wish to review these matters as a supplement to financial performance measures determined in accordance with U.S. GAAP. Please refer to today's press release announcing our second quarter 2016 results for reconciliation of these non-GAAP performance measures to our U.S. GAAP financial results.

At this point, I'll turn the call over to Brad.

Brad Mason

Thanks, Mark, and good afternoon everyone. I will start by giving you a summary of our second 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 the rest of the year, before opening it up for Q&A.

The second quarter results continued our trend of demonstrating solid and consistent performance. Overall our results were in line with our expectations. I'll start by walking you through our key financial results for the quarter.

Starting with the top line, our net sales growth for the quarter over prior year was 3.1% on a constant currency basis. A key driver of this growth once again was the outstanding performance of our BioStim strategic business unit, or SBU, which grew net sales 10% over the prior year. The growth was primarily driven by increased order counts from an expanding customer base and our order-to-cash process improvements that increased the overall percentage that we collect on orders. This business significantly outperformed the market growth rate due to the exceptional execution of our strategic priorities by a very seasoned and outstanding team.

This Q2 performance continues to demonstrate the strength and potential of this SBU, which has produced a trailing 12-month growth rate of 10.2%. We expect net sales to remain strong the rest of the year but expect that our growth rates will normalize into the mid-single-digits as we face tougher year-over-year comps in the second half of the year.

Net sales in our Biologics SBU declined 6.7% for the period due to our reduction in Trinity volume, which was primarily a result of an exclusion from a large national hospital account, as well as an increase in competing product offerings. We remain optimistic about this SBU returning to growth in Q3 and Q4 and achieving growth in the low-single-digits for the full year. Our optimism is based on the expected impact of new sales distribution arrangements and on the recent execution of a strategic distribution partnership which significantly expands our opportunity to market Trinity Elite nationally in underserved geographies.

Additionally, we expect to get a very positive reaction in the market to recently published clinical trials supporting the efficacy of Trinity, which I will discuss in a moment.

Our Extremity Fixation business grew net sales by 4.8% on a constant currency trailing 12-month basis, which, when calculated over this extended time period, minimizes the impact of cash collections. The highlight in the quarter for this SBU was the continuing improvement in net sales in the U.S., which was primarily driven by the uptick of TrueLok Hex and the addition of new distributors. We are now seeing the benefits of the work we did in the first half of 2015 to rebuild our U.S. sales management team.

To continue this momentum, we recently acquired the rights to a full line of mid-foot and 4-foot plates and screws to add another important element to our foot-and-ankle portfolio. It is expected that we will launch these products midyear of 2017. Our intention is to offer a complete line of foot-and-ankle internal fixation productions to complement our existing external fixation portfolio and leverage our current U.S. distribution channel. Our expectation for the remainder of the year is to maintain a trailing 12-month growth rate in the mid-single-digits.

Net sales for our Spine Fixation SBU decreased 5.8% year over year in constant currency for the second quarter. This decrease was primarily due to the loss of several key surgeon customers in the U.S., the timing of international cash collections, and an exclusion from a large national hospital account. While the quarterly loss and gain of customers is a normal occurrence that can positively or negatively impact net sales in this business from quarter to quarter, we did see more customer attrition in the second quarter, which will be difficult to make up in the remainder of the year. Year to date our Spine SBU has grown 3.9%. Our current expectation for the full year 2016 is to achieve flat to low-single-digit growth with improving year-over-year margins.

Our adjusted EBITDA as a percent of net sales for the quarter was 18.5%, compared to 17.1% in Q2 of 2015. Our quarterly year-over-year adjusted EBITDA growth of 11.5% versus net sales of 3.1% once again demonstrated our ability to leverage our top-line growth and reduce operating expenses.

To further illustrate our margin expansion progress, as we previously mentioned, one of our key objectives for the year is to expand our margins through improved operational efficiencies in SG&A and the absorption of fixed costs resulting from increasing net sales. Year to date versus prior year, even when excluding SG&A costs related to strategic investments, infrastructure investments and legal judgments, we have reduced the SG&A expenses by 540 basis points.

We ended the second quarter with an adjusted ROIC of 10.5% versus the prior year of 7.1%. As a reminder, ROIC and adjusted EBITDA are the two vesting criteria for the 2015 performance-based management equity grants. As of July 29, 2016, we have purchased a cumulative total of approximately 1.4 million shares of our common stock for $57.5 million, as part of our ongoing $75 million stock repurchase plan, which remains in effect.

I'll now review a few of our key operating accomplishments for the second quarter. In the quarter we launched Firebird and XG, our fourth-generation Firebird pedicle screw system designed for comprehensive posterior, thoracolumbar surgical cases including degenerative disc disease and deformity correction. This platform refines the modular screws, provides a lower-profile body, and simplifies instrumentation, thus improving upon this already versatile system.

Our Spine business also released our second-generation LoneStar cervical standalone system, with serrated radial fixation ribs as well as the StabiLink MIS inerlaminar stabilization system. As I've mentioned in the last few quarters, our product pipeline is very robust, which will be a driver of our top line for the foreseeable future. Whether developed internally or acquired, the introduction of new innovations -- new innovative products is a critical component of our future growth strategy.

Also this quarter, as you may have seen in our recent press release last week, a prospective clinical trial of Trinity Evolution in one level ACDF was published in the European Spine Journal, showing fusion success rates of 93% at 12 months. An additional retrospective study was also published on Trinity Evolution in one and two-level instrumented lumbar posterolateral fusions, which showed fusion success rates at one year of 90%. We are currently enrolling a multicenter prospective Trinity Elite study in this posterolateral model and we'll continue to invest in clinical research, demonstrating the benefits in these challenging procedures of our Trinity tissue forms made available through our partnership with MTF.

We also issued a press release last week highlighting the regulatory approval from the Japanese Ministry of Health, Labor and Welfare of the Phoenix Minimally-Invasive Spinal MIS fixation system. The introduction of Phoenix will set the stage for Orthofix to bring more of its innovative spine technologies to this important market in the near future.

As mentioned on our last call, in the second quarter we also continued our Project Bluecore infrastructure improvements, including going live on our Oracle R12 reimplementation in the U.S. in April, and more recently, in our subsidiary in Verona, Italy the first week of July. We are now in a fine-tuning mode for all of our Bluecore work streams and we'll complete all project by year-end. There will continue to be some modest spending until the end of the year, at which time we will officially close this project.

Lastly, you can see in the 8-K that we filed on July 8 that management recently updated the terms of our equity grants, management agreements, and performance vesting criteria to further align ourselves with our shareholders.

The second quarter results, in both the top and bottom lines, again demonstrated the consistency that we have achieved over the last five quarters in our growth rate, margin expansion and operational performance. After Doug's more detailed comments on our Q2 financial results, I'll discuss what we see ahead for the rest of the year. Doug?

Doug Rice

Thanks, Brad, and good afternoon everyone. Before we get started with the financials, as Mark stated earlier, let me remind you that many of the financial measures covered in today's call are on a non-GAAP basis. Please refer to today's earnings release for further information regarding our non-GAAP measures. I'll start with providing details into our net sales and earnings results and then discuss some of our other financial measures.

Total net sales in the quarter were $104.1 million, up 3.1% on both the reported and constant currency basis from the second quarter 2015 total net sales of $101 million. As Brad mentioned, growth during the quarter was primarily driven by our BioStim and Extremity Fixation SBUs, and partially offset by challenges in our Biologics and Spine Fixation SBUs.

Going through each of our SBUs briefly, BioStim's second quarter 2016 net sales were $44.8 million, up 10% versus the same period in the prior year. Biologics second quarter 2016 net sales were $14.3 million, a decrease of 6.7% versus the same period in the prior year.

Extremity Fixation second quarter 2016 net sales were $26.8 million, an increase of 4.8% on a reported and constant currency basis in comparison to the same period in the prior year. On a constant currency basis, this SBU increased net sales 6.5% for the trailing 12 months. And lastly, Spine Fixation second quarter 2016 net sales were $18.2 million, a decrease of 5.9% in comparison to $19.4 million for the same period in the prior year.

Now I'll move on to the rest of the P&L. Gross margin in the second quarter 2016 was 78.4%, essentially flat when compared with the prior-year period. We continue to expect gross margins to remain at these levels.

Sales and marketing expenses were $46 million or 44.2% of net sales in the second quarter 2016, compared to $42.9 million or 42.5% of net sales in the second quarter of 2015. As Brad mentioned, this year-over-year increase was primarily due to reduced spending in Q2 of 2015 as a result of rebuilding our U.S. Extremity Fixation sales management team. Sales and marketing spending for the second quarter this year was in line with our expectations.

Net margin, which we define as gross profit minus sales and marketing expenses, was $35.5 million or 34.1% of net sales in the second quarter of 2016, down slightly from $36.1 million or 35.8% of net sales in the second quarter of 2015. The decrease as a percent of sales was primarily due to the sales and marketing expense increase that I just mentioned.

General and administrative expenses were $18 million or 17.3% of net sales in the second quarter of 2016, which was down from $22.5 million or 22.3% compared to the prior-year period. When excluding cost related to strategic investments, Bluecore infrastructure investments and legal judgment G&A expenses were 15.8% of sales versus 19.5% in the prior year, driven primarily by a reduction in professional fees related to the remediation of our internal controls and accounting deficiencies and reductions in controllable expenses.

Research and development expenses were $6.8 million or 6.5% of net sales in the second quarter, which was up from $6.5 million or 6.4% of net sales in the prior year.

In the quarter we recorded $12.9 million in charges related to our ongoing settlement discussions with the Division of Enforcement of the SEC, related to the SEC's investigation of our prior accounting review and restatements of financial statements and allegations of improper payments with respect to our Brazil-based subsidiary. For additional details, please see our Form 10-Q for the second quarter ended June 30, 2016. Such discussions remain ongoing and any agreement reached between the SEC and person [ph] staff and Orthofix will be subject to approval by the full commission. No assurance can be given that we will be able to achieve a final definitive resolution with the SEC to resolve these matters on these or other terms. We will continue to evaluate this accrued amount pending final resolution of the matters noting that final liability may be different than the amount accrued.

Adjusted EBITDA during the second quarter increased to $19.2 million or 18.5% of net sales, from $17.2 million or 17.1% of net sales in the prior year. This represented an 11.6% increase in year-over-year adjusted EBITDA at an increase of 3.1% in net sales. This year-over-year increase in adjusted EBITDA is primarily due to the reduction in G&A spending as well as increased gross profit.

Now turning to tax. Income tax expense for the quarter was $3.7 million or 142% of loss before income taxes, as compared to income tax expense of $1.8 million or 30% of income before income taxes in the same period of 2015. This rate was driven primarily by the $12.9 million in charges related to the U.S. government resolutions which are not deductible for tax purposes and the impact of which was fully recognized in the second quarter.

For the second quarter 2016, we reported net loss from continuing operations of $6.3 million or $0.35 per diluted share, as compared to net income of $4.1 million or $0.21 per diluted share for the second quarter 2015. After adjusting for certain expenses, including foreign exchange impacts, strategic investments, restatement and related costs, Bluecore infrastructure investments, charges related to U.S. government resolutions, and for normalizing for tax, adjusted net income from continuing operations was $7.5 million or $0.41 per diluted share, compared to $6.3 million or $0.33 per diluted share in the second quarter of 2015. This 24% growth in adjusted earnings per share was driven primarily by our top-line growth, our margin expansion, and the lower share count as a result of our previously announced share repurchase program.

Moving on to the balance sheet highlights. Days sales outstanding, or DSOs, were 49 days at the end of the second quarter 2016, down from 52 days at the end of the second quarter 2015. We are pleased with the operational improvements in our BioStim order-to-cash process that contributes significantly to this positive DSO trend.

Our inventory turns at the end of the second quarter 2016 were 1.5 times, which are consistent with the prior year, reflect the acceleration of our new product introductions, and increases in inventories due to the purchase of a line of foot-and-ankle internal fixation products which were offset by the gains we made in lowering inventory levels for legacy products.

Cash and cash equivalents at the end of the second quarter decreased to $40.5 million, compared to $63.7 million at the end of 2015, primarily as a result of our share repurchase activity. We continue to have no long-term debt on our books. As of June 30, 2016, the Company had repurchased approximately 1.4 million shares of common stock for $55.5 million under our $75 million share repurchase program.

Cash flow from operations for the six months ended June 30, 2016 was $21.3 million, compared to $9 million during the same prior period. The increase is primarily due to the year-over-year decrease in the 2015 net loss of $1.3 million and the increased contribution from working capital of $8.8 million over the prior year.

Capital expenditures for the six months ended June 30, 2016 were $10.4 million, versus $13.6 million in the prior year. Year to date we've incurred $3.2 million of Project Bluecore related capital expenditures and expect this spending to tail off going forward as we complete Project Bluecore in the fourth quarter.

Free cash flow, defined as cash flow from operations minus capital expenditures, was $10.9 million for the six months ended June 30, 2016, compared to an outflow of $4.6 million for the prior-year period. The year-over-year improvement in free cash flow is primarily driven by our significant operating cash flow increase as well as a $3.2 million year-over-year decrease in capital expenditures. Even when including the cash impact of the U.S. government resolutions that are anticipated later this year, we expect to see our year-over-year cash flow generation continue to improve with the completion of Project Bluecore and our improving operating cash flow.

I will now turn it back to Brad.

Brad Mason

Thanks, Doug. Looking ahead in the second half of 2016, we will continue to focus on executing the three key objectives I outlined previously: grow our top line faster than our markets, expand our margins, and continue to invest in clinical research to support our existing products and drive long-term growth. Our strategies to address all three of these objectives remain unchanged.

Number one, grow our top line by continuing to expand and optimize our sales force, driving market acceptance of our technologies through clinical support and field training, and launching new and innovative products in all four of our SBUs through both internal development and technology licensing and acquisitions.

Number two, expand our margins through improved operational efficiencies in SG&A and the absorption of fixed costs resulting from increasing net sales.

And number three, the execution of our current preclinical and clinical work and the initiation of new studies remains an imperative for us to support both the use and value of our existing products, as well as the potential for new product offerings to drive long-term growth.

Based on our year-to-date performance and current forecast, we are confirming our previous full year guidance of net sales at today's FX rates in the range of $412 million to $416 million. This represents a year-over-year growth rate of 3.9% to 4.9%. This range now includes a modest amount of net sales in Puerto Rico for the balance of the year, which, in addition to our better-than-anticipated net sales in our BioStim business, is expected to offset the softness in our Spine Fixation SBU that I mentioned a few minutes ago.

We expect adjusted EBITDA for the full year to be between $69 million to $72 million. And this would be an increase of 13.7% to 18.6% over 2015.

We expect full year 2016 adjusted diluted earnings per share to be in the range of $1.35 to $1.45 using weighted average shares of $18.7 million to $18.5 million, respectively, and a long-term tax rate of 38%.

We now expect capital expenditures to be in the range of $15 million to $17 million for the year, of which approximately $4 million will be related to our Bluecore initiatives. We have previously estimated our Bluecore capital expenditures to be $5 million for the year and total CapEx to be $15 million to $18 million.

Lastly, we expect to achieve greater than 20% adjusted EBITDA margin for the full year 2017.

There is no change for our strategic investment strategy. We plan to continue our stock repurchase plan while investing in clinical research and the acceleration of new product launches, and we continue to actively look for inorganic opportunities to leverage our strong balance sheet, distribution channels, operational competencies, and management expertise, while remaining mindful of return on invested capital.

Regarding our option to purchase eNeura, the option period ends next month, at which time we will make a decision to exercise that option or not. Based on the information that we have today, it is doubtful that we will exercise that option. As a reminder, we have a $15 million note plus interest due from eNeura, which is secured by the intellectual property of eNeura. The note and accrued interest comes due in March of 2019.

With that, operator, we can open up the lines for questions.

Question-and-Answer Session

Operator

[Operator Instructions]

Our first question comes from Raj Denhoy from Jefferies.

Raj Denhoy

Hi, good afternoon.

Brad Mason

Hey, Raj. How are you today?

Raj Denhoy

Doing great, thanks. If I could start a little bit with the Biologics and Spine performance, both you noted underperformed a little bit. You gave the explanation of a loss of hospital contracts I think in both of them, and on the Spine side you also lost a couple of surgeon customers. So I guess I'm curious if you have any more detail behind that, how short term in nature that will be, how long we could see the effects of that, things like that?

Brad Mason

You know, the hospital account hit us in both of those business, Raj, and we're going to have to try to recover from that. It's going to hurt us for the year, there's no question, not insignificantly. But that said, in the Biologics business, we do have a lot of new distributors that are coming -- just now coming online and we expect that uptick to really contribute as we go through the rest of the year.

We've also recently signed a new national distribution partnership agreement that I won't go into details on, but we're very hopeful about that agreement as well, and I'd like -- hopefully we'd be able to talk to you about that a little more at the next quarter. And then finally also, some of these studies we've gotten some very good reactions from the press releases on our studies, to promote the use and efficacy of our Trinity brand.

So we're still confident that we will grow in Q3 and Q4. We've got a lot of good things happening. We got hit a little bit in the quarter but we expect to recover very well.

Raj Denhoy

Okay. And maybe just a follow-up, it's a bit of broader question sort of related to that, but when you look at the growth in the back half of the year, even this quarter, kind of 3% to 4% is kind of where things are shaking out for you, and my sense is you're probably not satisfied with that level of growth. But you think about the things you can do to accelerate that as you move into next year, yet you still have chosen to buy back stock as opposed to using that capital to perhaps do M&A or do other sorts of things. And so I guess the question is really broad around your plans in a sense to accelerate that growth profile as we look out a couple of years here.

Brad Mason

Sure, Raj. You know, I can assure you, we are very, very active on the business development side. We are shaking the bushes, looking for opportunities to find technologies, to find companies, to find products that fit within our core competencies, within our distribution channels, that makes sense financially, and that's where we run into a bit of trouble. There's a lot of people who are very proud of their businesses these days. So, you know, we understand that organically we're going to be -- we're going to have a limit on how much we can grow. So we are definitely looking outside our front doors to see what we can come up with, and we're going to continue to do that.

In the meantime, with the stock repurchase plan, we're in a very good position on our balance sheet with or without the stock repurchase plan. It's not going to -- the balance that's left on that, the $20 million that's left on that is not going to cause a problem with us doing any deals that we would want to do. So we're going to continue to move forward with that, prudently, as we think the intrinsic value of our stock is less than where we think it should be, then we'll go forward and keep buying. But we're very definitely looking for inorganic opportunities, very much so.

Raj Denhoy

Right, that's helpful. Thank you.

Brad Mason

Okay. You bet, Raj.

Operator

Our next question will come from John Gillings from JMP Securities.

John Gillings

Hey guys. Can you hear me okay?

Brad Mason

We can, John. How are you today?

John Gillings

Doing all right. I'm a little under the weather but I'll try to speak up.

Brad Mason

Okay.

John Gillings

First, I just want to make sure that I'm thinking correctly about the improvements in order-to-cash that you mentioned in BioStim. Is this related to sales that are recognized when cash is collected or are you -- were you able to reduce the percentage you use for calculating doubtful accounts? I just want to understand how that impacts revenue, so, make sure I'm thinking about it the right way.

Brad Mason

Sure. So when we get -- it's a really good question, John. So when we get orders in our BioStim business, we book a contra-revenue. We don't, you know, if we're not going to collect something and we have a pretty good idea that we're not going to collect, we book it as contra-revenue. So that decreases our net sales in that business.

The better we can become at getting the right paperwork, processing the claims, proving the claims upfront, that whole order-to-cash process, the larger percentage of that -- of those orders that we received are we able to turn into revenue, the less contra-revenue that we recognize. So the more effective and efficient we are at getting in good orders, good, quality orders, and processing those well, the more we realize in revenue, if that makes sense to you.

John Gillings

Yeah, that makes sense. And then, so, is -- maybe you can just, in broad-brush strokes, help us understand how much that contributed in the quarter and if it's something that we would think might continue to contribute over the next couple of quarters or if it's sort of stabilized now.

Brad Mason

Sure, John. So if you think about the quarter, there's really three things that drove the growth. We had increased order counts per position, for our existing position. We had increased number of doctor customers, in general, year-to-date we have, and we -- and then we had more revenue from the order-to-cash process. Think of those three elements in pretty much in thirds, that each one contributed about a third of that growth. But there's another element here to think about, and that's our -- that's the program we put in a couple of years ago now, Orthofix Direct, where, instead of a paperwork-dominated process, it's now on mobile devices, on iPads. That does a lot of things for us. It improves our order-to-cash process, it frees up time for our sales reps to move from paper pushing to sales. And eventually, as we complete that Orthofix Direct process improvement, we're going to tie it into the electronic medical record, we're going to make it very easy for our customer surgeons as well. So the Orthofix Direct helps all of those three things that I talked about, but if you think about it, about a third between the increased order count to increased number of physicians and the improvements in our order-to-cash process.

John Gillings

Okay, perfect. That's really helpful. And then just looking at the BioStim market as a whole. We thought of that as kind of a low-single-digit growth type market where you're the leader. But you've been growing significantly faster than that for the last few quarters. And you mentioned there might be some tougher comps ahead. But is there anything other than that? You know, has that market changed at all fundamentally in your view or you're just kind of saying, you know, we've taken back so much share already, we don't want to get too aggressive looking forward.

Brad Mason

You know, I think that it's, you know, the market is under-penetrated overall. Our best estimate is about 40 percent-ish of the patients who should get this treatment modality, actually receive it. So there's a lot of room to expand this market through just penetrating the market better. That's why we're doing -- that's why we're spending the money we are in R&D, in our research efforts, to validate that.

So my personal opinion about this market is that, yes, it is growing about the same pace as the procedure growth probably in Spine more than anywhere else. But it's a very strong market and it's getting stronger and we're helping make that market stronger and we're going to continue to. As we focus on the things that can drive the expanded use of these products, we're going to -- the market's going to grow. And there's plenty of room to grow this market. It's not just going to, you know, just kind of stay in the background, in the lower single-digit range. We think there's opportunity to grow it faster than that.

It's not, you know, it's not short term, it's a long-term plan, but I think you're going to see some things that we'll talk about here in the next, could be weeks, could be months, that will help contribute to that as well.

So we're, you know, if you look at Orthofix at our core, we're a stimulation company, that's a huge part of our revenue, it's a huge part of our core expertise, and that's where we're putting a lot of our effort.

John Gillings

Okay, that's helpful. And then just one last one from me, just a follow-up there. You talked about some of the things you're doing to potentially expand the market in BioStim, and there are three things that we've kind of been keeping an eye on that look really interesting, and I realize that some of these are several years away, but if you could just give us a little color on kind of where things are with odontoid fractures, that's a tough one to say, rotator cuffs, and the knee osteoarthritis, you know, those are three things that we think could be quite interesting ahead.

Brad Mason

Agree. Agree. I'll talk about, the odontoid fracture has been -- study has been very difficult to enroll for a number of reasons. So that one, we have to figure out what we're going to do about that, whether we want to speed that up, if there's a way to speed it up or not. It's a relatively small market. It's only a $20 million market, but we thought it was important because it helped treat an unmet need, which is important to us as a company and important to how we contribute in, you know, from a community standpoint in what we do. And it also helped our physicians who would then have a treatment protocol that would help those people that they don't have today. And it also validates, further validates, the whole BioStim technology. So that one's a slow roll.

The rotator cuff is in preclinical, so we have the animal studies done in behind us. The next step for us is to take that to an IDE and begin to enroll, and I would expect that to happen in the first or second quarter of next year, is what we're targeting right now. We'd -- I'd love these things to go faster, trust me. Unfortunately, they just -- some of these just take time.

And then in terms of the osteoarthritis study, I hope to be able to report something to all of our shareholders very quickly about the enrollment there, enrolling our first patient. We are -- we have our centers open, we're ready, and things should be happening very, very quickly. I mean, within days if not weeks, to get our first enrollments of patients and move it forward quickly.

And that -- and if you think about that study, there's a lot of osteoarthritis patients out there, so we expect to enroll pretty quickly once we get started.

John Gillings

Yeah, I would imagine so. Well, thanks guys and congrats on the quarter.

Brad Mason

Thanks, John. I appreciate it.

Operator

Next we'll take a question from Jim Sidoti from Sidoti & Co.

Jim Sidoti

Good afternoon. Can you hear me?

Brad Mason

I can, Jim. How are you today?

Jim Sidoti

I'm well. I'm well. I'm feeling good.

Brad Mason

Good.

Jim Sidoti

Question. On the charge to the SEC, I just want to make sure I understand this. You've settled the situation in Brazil with the DOJ, you've completed the restatement. So all those costs already in. So now this charge is to settle with the SEC related to those other settlements, is that correct?

Brad Mason

That's generally correct. There's an FCPA issue and there's the restatement issues with the SEC. So these are ongoing discussions with the enforcement arm of the SEC.

Jim Sidoti

Okay. Are there any other negotiations going on with the SEC related to other events?

Brad Mason

No, sir. That's it.

Jim Sidoti

So, assuming these are settled at some point in the next two quarters, you would think that in 2017 you would be past all these one-time charges?

Brad Mason

The only charges that could be left for us that have to do with just indemnification of certain officers and things like that that we have commitments to do. But other than that, you know, if you think about where we are today, Jim, we've got -- we are -- our deferred prosecution agreement has ended. That case has been dismissed in federal court in Eastern Texas today as a matter of fact. The restatement issues are behind us. We've got very, very good dialogue with the SEC on those issues. The -- and then on the issues related to the FCPA action in Brazil, we're nearing completion in those discussions.

We have one year left on our corporate integrity agreement and we are -- we're very happy about where we are with all of these -- the shareholder lawsuit has been settled. You know, all of these things are going to be great to get behind us, get it out of our financials and get it out of our day-to-day life. So we're very, very happy. The team has done an amazing job of getting this company from where it was to where it is, and just couldn't be more proud of what we've done and where we are today.

Jim Sidoti

All right. And then on a similar note, you recorded a $0.07 charge for infrastructure investment, I assume that's Project Bluecore, and you indicated that's winding down. Is that correct?

Brad Mason

That's correct. So that -- we will close out that project by yearend. We have more of the costs associated with Bluecore going to CapEx than OpEx that we expected, but -- so we'll see the depreciation on that over the -- in the years to come. But we're all done.

Here's the good news. So we will end up actually about $1 million under our original budget and it'll be completed ahead of schedule. And we cut out a couple of work streams that ultimately we didn't need. But for this team to take a broken system and reimplement Oracle worldwide and do it for under budget and under time, that's just a remarkable feat, with no adverse impact by our customers whatsoever.

Doug Rice

And Jim, this is Doug. Just to be clear, the Bluecore work streams will all be completed by the end of this year. So there won't be any more in 2017 or beyond.

Jim Sidoti

So when Bluecore is complete and the issue with the SEC is settled and there's no more of these type issues out there, should we -- should 2017 GAAP EPS approach your pro forma numbers?

Doug Rice

We're getting closer at that point. We'll still adjust EBITDA for share-based compensation and FX and some of those things. But the other adjustment items will certainly taper down.

Jim Sidoti

Right. And then last question. If you do not exercise the eNeuro opportunity in the third quarter, will there be an impact on the P&L?

Doug Rice

Say that again?

Brad Mason

Will there be any impact to the P&L in the third quarter if we did not exercise -- no. The answer is no. I mean we're taking an -- we've taken impairments on that note that we have. There could be a positive or negative impact depending on how the modeling comes out for it, but nothing specifically that we would know to talk about today.

Jim Sidoti

All right. Thank you.

Brad Mason

You bet, Jim. Thank you.

Operator

And that does conclude our question-and-answer session for today. And at this time I'd like to turn the conference back over to Brad Mason for any additional or closing remarks.

Brad Mason

Thank you, operator. Thanks for joining us on the call today.

You know, we're very proud of the quarter, we're proud of what we've done year to date, particularly on the margin expansion. We've got some work to do in a few places. But when you think about the core of business, our BioStim business, it's never been stronger and we're very excited about that.

Thanks for joining us today and we'll talk to you if not at Canaccord, then soon. Take care. Bye-bye.

Operator

That does conclude our conference for today. Thank you for your participation.

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