What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-08-06 compared with 2020-05-06 · 91 added, 64 removed, 114 unchanged (58% of the section changed)

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We are the only medical device company focused exclusively on providing a comprehensive product offering to the pediatric orthopedic market in order to improve the lives of children with orthopedic conditions.

We design, develop and commercialize innovative orthopedic implants and instruments to meet the specialized needs of pediatric surgeons and their patients, who we believe have been largely

neglected by the orthopedic industry.

We design, develop and commercialize innovative orthopedic implants and instruments to meet the specialized needs of pediatric surgeons and their patients, who we believe have been largely neglected by the orthopedic industry.

We currently serve three of the largest categories in this market.

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As part of the sale, we also executed an exclusive license arrangement with Squadron providing for perpetual access to certain intellectual property.

On March 9, 2020, we purchased all the issued and outstanding membership interest of Telos Partners, LLC ("Telos") for $3.3 million in total consideration.

Telos is a boutique regulatory consulting firm formed in Colorado.

On April 1, 2020, we purchased all of the issued and outstanding shares of stock of Apifix Ltd.

("Apifix") for (a) $2.0 million in cash, and (b) 934,783 shares of the Company’s common stock, $0.00025 par value per share, representing approximately $37.0 million (based on a closing share price of $39.64 on March 31, 2020).

("Apifix") for (a) $2.0 million in cash, and (b) 934,783 shares of the Company’s common stock, $0.00025 par value per share, representing approximately $35.2 million (based on a closing share price of $37.63 on April 1, 2020).

ApiFix, a corporation organized under the laws of Israel, has developed and manufactures a minimally invasive deformity correction system for patients with Adolescent Idiopathic Scoliosis (AIS) (the “ApiFix System”).

The purchase price is subject to a post-closing working capital adjustment.

the Company has also agreed to pay as part of the purchase price the following anniversary payments:

In addition, the Company has also agreed to pay as part of the purchase price the following anniversary payments:

(i) $13.0 million on the second anniversary of the closing date, provided that such payment will be paid earlier if 150 clinical procedures using the ApiFix System are completed in the United States before such anniversary date;

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and (iii) $9.0 million on the fourth anniversary of the closing date.

In addition, to the extent that the product of the Company’s revenues from the ApiFix System for the twelve months ended June 30, 2024 multiplied by 2.25 exceeds the anniversary payments actually made for the third and fourth years (subject to certain limitations), the Company has agreed to pay the selling shareholders a system sales payment in the amount of such excess.

The anniversary payments and the system sales payment may each be made in cash and/or common stock, subject to certain limitations;

provided that the Company may make the determination with respect to anniversary payments and the a representative of the sellers may make the determination with respect to the systems sales payment, if any.

The anniversary payments and the system sales payment may each be made in cash or cash and common stock, subject to certain limitations;

provided that the Company may make the determination with respect to anniversary payments and a representative of the former ApiFix shareholders may make the determination with respect to the system sales payment, if any.

On June 10, 2020, we purchased certain intellectual property assets from Band-Lok, LLC, a North Carolina limited liability company ("Band-Lok"), related to its Tether Clamp and Implantation System ("Tether Clamp System") for approximately $3,400 in total consideration.

We use the Tether Clamp System in connection with our Bandloc 5.5/6.0 System.

We were previously the sole licensee of the purchased assets under a license agreement with Band-Lok.

We believe there are significant opportunities for us to strengthen our position in U.S.

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We have experienced a reduction in revenue as a result of global delays in elective surgeries.

Although there is uncertainty related to the anticipated impact of the recent COVID-19 outbreak on our future results, we believe our business model, our current cash reserves and the recent steps we have taken to strengthen our balance sheet, including our December 2019 equity offering, leave us well-positioned to manage our business through this crisis as it continues to unfold.

taken to strengthen our balance sheet, including our June 2020 and December 2019 equity offerings, leave us well-positioned to manage our business through this crisis as it continues to unfold.

We believe our existing balances of cash and our currently anticipated operating cash flows will be sufficient to meet our cash needs arising in the ordinary course of business for the next twelve months.

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We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we are subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

Summary of Statements of Operations for the Three Months Ended March 31, 2020 and 2019

The following table sets forth our results of operations for the three months ended March 31, 2020 and 2019:

Three Months Ended March 31,

Summary of Statements of Operations for the Three and Six Months Ended June 30, 2020 and 2019

The following table sets forth our results of operations for the three and six months ended June 30, 2020 and 2019:

Three Months Ended June 30, Six Months Ended June 30,

2020 2019 Increase

(Decrease) % 2020 2019 Increase (Decrease) %

Net revenue $ 13,593 $ 18,200 $ (4,607) (25) % $ 29,949 $ 32,856 $ (2,907) (9) %

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Other expenses 2,430 669 1761 263 % 2,878 972 1,906 196 %

Net loss from continuing operations $ (9,447) $ (2,459) $ 6,988 284 % $ (14,392) $ (5,479) $ 8,913 163 %

Net loss from discontinued operations $ — $ (159) $ 159 — % $ — $ (159) $ 159 — %

Net loss $ (9,447) $ (2,618) $ 6,829 261 % $ (14,392) $ (5,638) $ 8,754 155 %

The following tables set forth our net revenue by geography and product category for the three months ended March 31, 2020 and 2019:

Three Months Ended March 31,

The following tables set forth our net revenue by geography and product category for the three and six months ended June 30, 2020 and 2019:

Three Months Ended June 30, Six Months Ended June 30,

Product sales by geographic location:

2020 2019 2020 2019

$ 12,146 $ 13,848 $ 25,530 $ 24,115

International 1,447 4,352 4,419 8,741

Total $ 13,593 $ 18,200 $ 29,949 $ 32,856

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

Product sales by category:

2020 2019 2020 2019

Trauma and deformity $ 9,220 $ 11,887 $ 21,430 $ 21,904

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Total $ 13,593 $ 18,200 $ 29,949 $ 32,856

Net revenue increased $1.7 million, or 12%, from $14.7 million for the three months ended March 31, 2019 to $16.4 million for the three months ended March 31, 2020.

The increase was due to trauma and deformity sales growth of $2.2 million, or 22%, primarily driven by sales of our Ex-Fix products, offset by a reduction in scoliosis of $(0.5) million, or (13)%, primarily driven by sales of our FIREFLY ® Pedicle Screw Navigation Guides.

Nearly all the change in each category was due to an increase in the unit volume sold and not a result of price changes.

Net revenue decreased $4.6 million, or 25%, from $18.2 million for the three months ended June 30, 2019 to $13.6 million for the three months ended June 30, 2020 and decreased $2.9 million, or 9%, from $32.9 million for the six months ended June 30, 2019 to $29.9 million for the six months ended June 30, 2020.

The decrease was due to the global suspension of elective surgeries related to the COVID-19 pandemic.

International revenue decreased at a higher rate than U.S revenue, and international markets continue to be impacted by COVID-19, as there are fewer stand-alone pediatric hospitals internationally and elective procedures have been slower to return.

Trauma and deformity sales declined $2.7 million, or 22%, and $0.5 million, or 2%, during the three and six months ended June 30, 2020, respectively, primarily driven by lower sales of our deformity correction product portfolio, specifically our PNP Femur and two new cannulated screw systems.

Scoliosis sales declined $2.0 million, or 35%, and $2.6 million, or 25%, during the three and six months ended June 30, 2020, respectively, primarily driven by lower sales of our RESPONSE 5.5/6.0 system and FIREFLY ® Pedicle Screw Navigation Guides.

These sales declines were offset by sports medicine / other growth of $0.1 million, or 20%, and $0.1 million, or 17%, during the three and six months ended June 30, 2020, respectively.

Nearly all the change in each category was due to a decrease in the unit volume sold and not a result of price changes.

Cost of Revenue and Gross Margin

Cost of revenue increased $0.1 million, or 4%, from $4.0 million for the three months ended March 31, 2019 to $4.1 million for the three months ended March 31, 2020.

The increase was due primarily to increased sales volume in both the U.S.

and international markets, including instrument sets.

Gross margin was 73% for the three months ended March 31, 2019 and 75% for the three months ended March 31, 2020.

Cost of revenue decreased $1.0 million, or 23%, from $4.6 million for the three months ended June 30, 2019 to $3.5 million for the three months ended June 30, 2020.

Cost of revenue decreased $0.9 million, or 11%, from $8.6 million for the six months ended June 30, 2019 to $7.7 million for the six months ended June 30, 2020.

The decrease was due primarily to decreased sales volume in both the U.S.

and international markets resulting from the suspension of elective surgeries related to the COVID-19 pandemic.

Gross margin was 75% for the three months ended June 30, 2019, 74% for the three months ended June 30, 2020 and 74% for the six months ended June 30, 2019 and June 30, 2020, respectively.

Sales and Marketing Expenses

Sales and marketing expenses increased $1.0 million, or 16%, to $7.6 million for the three months ended March 31, 2020 from $6.5 million for the three months ended March 31, 2019.

The increase for the three months was due primarily to increased sales commission expenses, driven by the increase in unit volume sold.

Sales and marketing expenses decreased $2.0 million, or 26%, to $5.6 million for the three months ended June 30, 2020 from $7.6 million for the three months ended June 30, 2019.

Sales and marketing expenses decreased $1.0 million, or 7%, to $13.2 million for the six months ended June 30, 2020 from $14.2 million for the six months ended June 30, 2019.

The decrease for the three and six month periods

ended June 30, 2020 were due primarily to decreased sales commission expenses, driven by the decrease in unit volume sold, related to the suspension of elective surgeries due to the COVID-19 pandemic.

General and Administrative Expenses

General and administrative expenses increased $2.3 million, or 40%, from $5.6 million for the three months ended March 31, 2019 to $7.9 million for the three months ended March 31, 2020.

The increase for the three months was due primarily to increased resources to support the growth of the business including higher quality and regulatory expenses and increased stock compensation and legal expenses.

Depreciation and amortization expenses increased $0.5 million, or 67%, from $0.8 million for the three months ended March 31, 2019 to $1.4 million for the three months ended March 31, 2020.

The increase for the three months was primarily due to increased investments in consigned surgical instrument sets and amortization of intangible licenses.

General and administrative expenses increased $4.0 million, or 61%, from $6.6 million for the three months ended June 30, 2019 to $10.6 million for the three months ended June 30, 2020.

General and administrative expenses increased $6.3 million, or 52%, from $12.2 million for the six months ended June 30, 2019 to $18.5 million for the six months ended June 30, 2020.

The increase for the three and six month periods ended June 30, 2020 were due primarily to increased stock compensation of $2.3 million related to a one-time stock grant of $1.3 million to our Chief Executive Officer and the increase of our stock price on new stock grants, increased legal expenses of $0.8 million related to our ongoing litigation and acquisitions, and increased general and administrative expenses associated with the acquisitions of ApiFix and Telos.

Depreciation and amortization expenses increased $0.9 million, or 80%, from $1.1 million for the three months ended June 30, 2019 to $1.9 million for the three months ended June 30, 2020.

Depreciation and amortization expenses increased $1.4 million, or 74%, from $1.9 million for the six months ended June 30, 2019 to $3.3 million for the six months ended June 30, 2020.

The increase for the three and six month periods ended June 30, 2020 were primarily due to increased investments in consigned surgical instrument sets and amortization of intangible assets acquired through the Vilex, Telos and ApiFix acquisitions and the purchase of the Band-Lok intellectual property.

Research and Development Expenses

Research and development expenses increased $0.1 million, or 4%, from $1.2 million for the three months ended March 31, 2019 to $1.3 million for the three months ended March 31, 2020.

The increase for the three months was driven by incremental product development including the addition of personnel and the growth of our business.

Research and development expenses decreased $0.4 million, or 29%, from $1.2 million for the three months ended June 30, 2019 to $0.9 million for the three months ended June 30, 2020.

Research and development expenses decreased $0.3 million, or 12%, from $2.4 million for the six months ended June 30, 2019 to $2.1 million for the six months ended June 30, 2020.The decrease for the three and six month periods ended June 30, 2020 were driven by a reduced investment in research and development project expenses as a result of the sales decline related to the COVID-19 pandemic and the reversal of the Bandloc minimum royalty.

Other Expenses

Other expenses were $0.4 million and $0.3 million for the three months ended March 31, 2020 and 2019, respectively.

Other expenses consist primarily of interest expense on our long-term debt.

Other expenses were $2.4 million and $0.7 million for the three months ended June 30, 2020 and 2019, respectively.

Other expenses were $2.9 million and $1.0 million for the six months ended June 30, 2020 and 2019, respectively.

The increase in other expenses is due to fair value adjustment of $1.8 million related to the ApiFix contingent consideration payment.

Liquidity and Capital Resources

We have incurred operating losses since inception which resulted in negative cash flows for continuing operations from operating activities of $7.0 million and $3.5 million for the three months ended March 31, 2020 and 2019, respectively.

As of March 31, 2020, we had an accumulated deficit of $133.8 million.

We have incurred operating losses since inception which resulted in negative cash flows for continuing operations from operating activities of $14.7 million and $10.8 million for the six months ended June 30, 2020 and 2019, respectively.

As of June 30, 2020, we had an accumulated deficit of $143.2 million.

We anticipate that our losses will continue in the near term as we continue to expand our product portfolio and invest in additional consigned implant and instrument sets to support our expansion into existing and new markets.

Since inception, we have funded our operations primarily with proceeds from the sales of our common and preferred stock, convertible securities and debt, as well as through sales of our products.

At March 31, 2020, we had cash and restricted cash of $54.9 million.

At June 30, 2020, we had cash and restricted cash of $114.4 million.

The following table sets forth our cash flows from operating, investing and financing activities for the periods indicated:

Three Months Ended March 31,

Net cash used in operating activities $ (6,956) $ (3,471)

Net cash used in investing activities (5,623) (4,982)

Net cash (used in) provided by financing activities (4,530) 536

Six Months Ended June 30,

Net cash used in operating activities - continuing operations $ (14,707) $ (10,785)

Net cash provided by operating activities - discontinued operations — 371

Net cash used in investing activities - continuing operations (9,349) (58,610)

Net cash used in investing activities - discontinued operations — (47)

Net cash provided by financing activities 66,427 30,598

Effect of exchange rate changes on cash 17 —

Net decrease in cash $ (17,086) $ (7,917)

Net increase (decrease) in cash $ 42,388 $ (38,473)

Cash Used in Operating Activities

Net cash used in operating activities from continuing operations was $7.0 million and $3.5 million for the three months ended March 31, 2020 and 2019, respectively.

Net cash used in operating activities from continuing operations was $14.7 million and $10.8 million for the six months ended June 30, 2020 and 2019, respectively.

The primary use of this cash was to fund our operations related to the development and commercialization of our products in each of these years.

Net cash used for working capital was $4.3 million and $1.8 million for the three months ended March 31, 2020 and 2019, respectively.

During the three months ended March 31, 2020, the primary driver of working capital cash usage was the increase in inventory of $5.1 million related to our sales growth.

Net cash used for working capital was $8.8 million and $8.2 million for the six months ended June 30, 2020 and 2019, respectively.

During the six months ended June 30, 2020, the primary driver of working capital cash usage was the increase in inventory of $9.6 million related to future sales growth and our acquisitions and new agencies.

Cash Used in Investing Activities

Net cash used in investing activities from continuing operations was $5.6 million and $5.0 million for the three months ended March 31, 2020 and 2019, respectively.

Net cash used in investing activities consisted primarily of the acquisition of Telos of $1.7 million, net of cash received, and the purchases of instrument sets, which were consigned in the United States, United Kingdom, Australia, New Zealand, Belgium and the Netherlands of $4.0 million and $5.0 million for the three months ended March 31, 2020 and 2019, respectively.

Cash (Used in) Provided By Financing Activities

Net cash (used in) provided by financing activities was $(4.5) million and $0.5 million for the three months ended March 31, 2020 and 2019, respectively.

Net cash used in financing activities for the three months ended March 31, 2020 consisted primarily of the payment of $5.0 million of the revolving credit facility with Squadron and the repurchase of $0.2 million of common shares, offset by $0.7 million from the exercise of stock options.

During the three months ended March 31, 2019, net cash provided by financing activities consisted primarily of $0.6 million from the exercise of stock options.

Net cash used in investing activities from continuing operations was $9.3 million and $58.6 million for the six months ended June 30, 2020 and 2019, respectively.

Net cash used in investing activities consisted primarily of the acquisition of Telos of $1.7 million, net of cash received, the acquisition of ApiFix for $1.7 million, net of cash received, the acquisition of the Band-Lok intellectual propoerty of $0.8 million, the acquisition of Vilex and Orthex of $49.9 million, net of cash received, and the purchases of instrument sets, which were consigned in the United States, United Kingdom, Australia, New Zealand, Belgium and the Netherlands of $5.2 million and $8.5 million for the six months ended June 30, 2020 and 2019, respectively.

Cash Provided By Financing Activities

Net cash provided by financing activities was $66.4 million and $30.6 million for the six months ended June 30, 2020 and 2019, respectively.

Net cash provided by financing activities for the six months ended June 30, 2020 consisted primarily of the proceeds from the issuance of common stock of $70.2 million, net of issuance costs and $1.3 million from the exercise of stock options, offset by the payment of $5.0 million of the revolving credit facility with Squadron.

Loan Agreement

On December 31, 2017, we entered into a Fourth Amended and Restated Loan and Security Agreement, or the Loan Agreement, with Squadron Capital LLC, or Squadron, the Company's largest investor.

Under the terms of the Loan Agreement, Squadron provided us a term loan in the principal amount of $20.0 million, represented by a Term Note A, and a revolving loan in an aggregate principal amount to not exceed $15.0 million, represented by a Revolving Note.

Interest on the Term Note A and Revolving Note accrues at the greater of (a) three month LIBOR plus 8.61% and (b) 10.0%, and is payable monthly by us.

The maturity date for each of the Term Note A and Revolving Note is January 31, 2023.

In order to finance a portion of the cash consideration for the acquisition of the Vilex Companies, the Company entered into a first Amendment, or the Amendment, to the Loan Agreement (as so amended, the "Amended Loan Agreement"), with Squadron.

The Amended Loan Agreement provided for a new $30.0 million term loan facility, represented by a Term Note B, in addition to the existing $20.0 million Term Note A and $15.0 million revolving credit facility.

Similar to the other facilities under the Amended Loan Agreement, the Term Note B was subject to interest only payments at an interest rate equal to the greater of (a) three month LIBOR plus 8.61%, and (b) 10.00%.

exceed $15.0 million, represented by a Revolving Note.

Interest on the Term Note A and Revolving Note accrued at the greater of (a) three month LIBOR plus 8.61% and (b) 10.0%.

In order to finance a portion of the cash consideration for the acquisition of the Vilex Companies, the Company entered into a First Amendment, or the First Amendment, to the Loan Agreement (as so amended, the "First Amended Loan Agreement"), with Squadron.

The First Amended Loan Agreement provided for a new $30.0 million term loan facility, represented by a Term Note B, in addition to the existing $20.0 million Term Note A and $15.0 million revolving credit facility.

Similar to the other facilities under the First Amended Loan Agreement, the Term Note B was subject to interest only payments at an interest rate equal to the greater of (a) three month LIBOR plus 8.61%, and (b) 10.00%.

The Term Note B, which would have matured no later than May 31, 2020, was paid in full on December 31, 2019 using $25.0 million received in exchange for the divestiture of the adult product offerings of Vilex and the related Orthex license agreement, and $5.0 million from the available Squadron revolving credit facility.

On January 4, 2020, the Company repaid $5.0 million on the revolving credit facility with Squadron.

At March 31, 2020, we had approximately $19.9 million in outstanding indebtedness under the Amended Loan Agreement.

Borrowings under the Amended Loan Agreement are secured by substantially all of the Company's assets and are unconditionally guaranteed by each of its subsidiaries with the exception of Vilex.

There are no traditional financial covenants associated with the Amended Loan Agreement.

However, there are negative covenants that prohibit us from, among other things, transferring any of our material assets, merging with or acquiring another entity, entering into a transaction that would result in a change of control, incurring additional indebtedness, creating any lien on our property, making investments in third parties and redeeming stock or paying dividends, in each case subject to certain exceptions as further detailed in the Amended Loan Agreement.

The Amended Loan Agreement includes events of default, the occurrence and continuation of any of which provides Squadron with the right to exercise remedies against us and the collateral securing the loans, including cash.

At June 30, 2020, we had approximately $19.9 million in outstanding indebtedness under the First Amended Loan Agreement.

On August 4, 2020, the Company entered into a Second Amendment (the “Second Amendment”) to its First Amended Loan Agreement with Squadron (as so further amended, the “Second Amended Loan Agreement”).

Pursuant to the Second Amendment, the First Amended Loan Agreement’s revolving credit commitment was increased from the previously established $15,000 to $25,000.

The Company has agreed to pay Squadron an unused commitment fee in an amount equal to the per annum rate of 0.50% (computed on the basis of a year of 360 days and the actual number of days elapsed) times the daily unused portion of the revolving credit commitment.

The unused commitment fee is payable quarterly in arrears.

Borrowings under the revolving credit facility will be made under a First Amended and Restated Revolving Note, dated August 4, 2020 (the “Amended Revolving Note”), payable, jointly and severally, by the Company and each of its subsidiaries party thereto.

The Amended Revolving Note will mature at the earlier of:

(i) the date on which any person or persons acquire (x) capital stock of the Company possessing the voting power to elect a majority of the Company’s Board of Directors (whether by merger, consolidation, reorganization, combination, sale or transfer), or (y) all or substantially all of the Company’s assets, determined on a consolidated basis;

and (ii) January 1, 2024.

Prior to the Second Amendment, the revolving credit facility was to have matured on January 31, 2023.

The Second Amended Loan Agreement continues to provide for interest only payments, which are payable monthly, with interest rates equal to the greater of (a) three month LIBOR plus 8.61%, and (b) 10.00%

Borrowings under the Second Amended Loan Agreement are secured by substantially all of the Company's assets and are unconditionally guaranteed by each of its subsidiaries with the exception of Vilex.

There are no traditional financial covenants associated with the Second Amended Loan Agreement.

The Second Amended Loan Agreement includes events of default, the occurrence and continuation of any of which provides Squadron with the right to exercise remedies against us and the collateral securing the loans, including cash.

These events of default include, among other things, the failure to pay amounts due under the credit facilities, insolvency, the occurrence of a material adverse event, which includes a material adverse change in our business, operations or properties (financial or otherwise) or a material impairment of the prospect of repayment of any portion of the obligations, the occurrence of any default under certain other indebtedness and a final judgment against us in an amount greater than $250

The occurrence of a material adverse change could result in the acceleration of payment of the debt.

We are obligated to make monthly interest-only payments on the term loan facilities until the earlier of:

(i) a transaction pursuant to which any person acquires (a) shares of our capital stock possessing the voting power to elect a majority of our board of directors or (b) all or substantially all of our assets on a consolidated basis;

or (ii) January 31, 2023, at which point the term loan credit facilities, plus all accrued, unpaid interest thereon, will become due.

We may prepay the term loan facility in whole or in part without premium or penalty upon ten days’ prior written notice to Squadron.

Mortgage Note

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The mortgage is secured by the related real estate and building.

The mortgage balance was $1.3 million and $1.3 million at March 31, 2020 and December 31, 2019, respectively.

The mortgage balance was $1.2 million and $1.3 million at June 30, 2020 and December 31, 2019, respectively.

Pediatric Orthopedic Business Seasonality

11 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis