What changed in this filing

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Item 1. Business

2021-03-11 compared with 2020-03-05 · 155 added, 110 removed, 537 unchanged (33% of the section changed)

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was converted to a Delaware corporation on November 30, 2007.

We sell our specialized products, including PediLoc ® , PediPlates ® , Cannulated Screws, PediFlex TM nail, PediNail TM , PediLoc ® Tibia, ACL Reconstruction System, Locking Cannulated Blade, Locking Proximal Femur, Spica Tables, RESPONSE Spine, BandLoc, Pediguard, Pediatric Nailing Platform | Femur, Orthex and QuickPack TM , to various hospitals and medical facilities throughout the United States and various international markets.

We sell our specialized products, including PediLoc ® , PediPlates ® , Cannulated Screws, PediFlex TM nail, PediNail TM , PediLoc ® Tibia, ACL Reconstruction System, Locking Cannulated Blade, Locking Proximal Femur, Spica Tables, RESPONSE TM Spine, BandLoc TM , Pediguard, Pediatric Nailing Platform | Femur, Orthex, QuickPack TM and ApiFix ® Mid-C System, to various hospitals and medical facilities throughout the United States and various international markets.

We currently use a contract manufacturing model for the manufacturing of implants and related surgical instrumentation.

In early 2017, we expanded operations and established legal entities in the United Kingdom (UK), Australia and New Zealand, permitting us to sell under an agency model directly to local hospitals in these countries.

Operations began in the United Kingdom on April 3, 2017, in Australia on May 1, 2017 and New Zealand on July 1, 2017.

In September 2018, we further expanded operations in Canada selling directly to local hospitals, and in January 2019 we expanded to Belgium and the Netherlands.

Additionally, in March 2019 we established a holding company and an operating company in the Netherlands that are expected to enhance our operations in Europe.

On June 4, 2019, we purchased all the issued and outstanding shares of stock of Vilex in Tennessee, Inc.

The Company began selling its products in the United States in 2008 and internationally in 2011.

In 2017, we expanded operations and established legal entities in the United Kingdom (UK), Australia and New Zealand, permitting us to sell under an agency model directly to local hospitals in these countries.

We began selling direct to Canada in September 2018, Belgium and the Netherlands in January 2019, Italy in March 2020, and Germany, Switzerland and Austria in January 2021.

Additionally, in March 2019, we established an operating company in the Netherlands in order to further enhance our operations in Europe.

The Company routinely explores opportunities to acquire or invest in complementary products, technologies or businesses.

For example, on June 4, 2019, we purchased all the issued and outstanding shares of stock of Vilex in Tennessee, Inc.

("Vilex") and all the issued and outstanding units of membership interests in Orthex, LLC ("Orthex") for $60 million in total consideration.

Vilex and Orthex (collectively, the "Vilex Companies") are primarily manufacturers of foot and ankle surgical implants, including cannulated screws, fusion devices, surgical staples and bone plates, as well as Orthex Hexapod technology which is used to treat pediatrics congenital deformities and limb length discrepancies.

Vilex and Orthex (collectively, the "Vilex Companies") are primarily manufacturers of foot and ankle surgical implants, including cannulated screws, fusion devices, surgical staples and bone plates, as well as Orthex Hexapod technology which is used to treat pediatric congenital deformities and limb length discrepancies.

On December 31, 2019, we divested substantially all of the assets relating to Vilex's adult product offerings to a wholly-owned subsidiary of Squadron Capital LLC ("Squadron") in exchange for a $25 million reduction in a Term Note owed to Squadron in connection with the initial acquisition.

As part of the sale, we also entered into (i) an exclusive license arrangement with Squadron providing for perpetual access to certain intellectual property and (ii) an exclusive mutual distribution agreement with Squadron permitting both companies to distribute certain of the other's products.

We recognized a loss of $1.0 million on the sale of Vilex.

We recognized a loss of approximately $1 million on the sale of Vilex.

On March 9, 2020, we purchased all the issued and outstanding membership interest of Telos Partners, LLC ("Telos") for $3 million in total consideration.

Telos is a boutique regulatory consulting firm formed in Colorado.

On April 1, 2020, we purchased all the issued and outstanding membership interest of ApiFix, Ltd.

("ApiFix") for (a) $2 million in cash, and (b) 934,783 shares of the Company's common stock, $0.00025 par value per share, representing approximately $35 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 a minimally invasive deformity correction system for patients with adolescent idiopathic scoliosis ("ApiFix System").

In addition, we have also agreed to pay as part of the purchase price the following anniversary payments, subject to certain limitations and adjustments:

(i) approximately $13 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, (ii) $8 million on the third anniversary of the closing date;

and (iii) $9 million on the fourth anniversary of the closing date.

In addition, to the extent that the product of our 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, we have agreed to pay the selling shareholders a system sales payment in the amount of such excess.

The anniversary payments and system sales payment may each be made in cash or cash and common stock.

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 million 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.

In December 2018, the Company completed a follow-on offering of shares of common stock, in which it sold 1,725,000 shares at an offering price of $27.00 per share, raising a total of $43.4 million in net proceeds after deducting underwriting commissions and offering expenses.

In December 2019, the Company completed a follow-on offering of shares of common stock, in which it sold 1,755,500 shares at an offering price of $36.50 per share, raising a total of $60 million in net proceeds after deducting underwriting commissions and offering expenses.

On June 22, 2020, we completed a follow-on offering of our common stock, in which we issued and sold 1,600,000 shares of common stock at a public offering price of $47.00 per share for aggregate gross proceeds of $75.2 million.

We received $70.2 million in net proceeds after deducting $4.5 million of underwriting discounts and commissions and paying $0.5 million in offering costs.

Our largest investor is Squadron, a private investment firm based in Granby, Connecticut.

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As of December 31, 2020, the Company and its subsidiaries had 116 full-time equivalent employees.

A novel strain of the coronavirus disease ("COVID-19") was first identified in Wuhan, China in December 2019, and the related outbreak was subsequently declared a pandemic by the World Health Organization and a national emergency by the President of the United States.

Despite the impact COVID-19 has had on our business, we continued to invest in research and development, invest in our people, and take steps to position ourselves for long-term success.

During 2020, we raised additional capital to solidify our financial foundation.

We continued to train and educate our sales team and our surgeons on our products.

During 2020, we continued to focus on developing innovative solutions, acquired multiple enabling technologies and continued to deploy additional consigned instrument and implant sets in furtherance of our strategy.

AVAILABLE INFORMATION

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Historically, there have been a limited number of implants and instruments specifically designed for the unique needs of children.

As a result, pediatric orthopedic surgeons often improvise with adult implants repurposed for use in children, resort to freehand techniques with adult instruments and use implants that can be difficult to remove after being temporarily implanted.

As a result, pediatric orthopedic surgeons often improvise with adult implants repurposed for

use in children, resort to freehand techniques with adult instruments and use implants that can be difficult to remove after being temporarily implanted.

These improvisations may lead to undue surgical trauma and morbidity.

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Increasingly, these sales agencies are making us the anchor line in their businesses or representing us exclusively.

Sales from such sales agencies represented 76% and 75% of our revenue in 2019 and 2018, respectively.

Outside of the United States, our sales organization consisted of 39 stocking distributors and seven independent sales agencies in 43 countries.

In addition, beginning in 2017, we began to supplement the use of distributors with direct sales programs in select international markets where we work through sales agencies that are paid a commission.

These new arrangements are expected to generate an increase in revenue and gross margin.

Sales from such sales agencies represented 86% and 76% of our global revenue in 2020 and 2019, respectively.

Outside of the United States, our sales organization consisted of 42 independent stocking distributors and 11 independent sales agencies in 44 countries.

In addition, beginning in 2017, we began to supplement the use of stocking distributors with direct sales programs in select international markets where we work through sales agencies that are paid a commission.

These new arrangements have generated an increase in revenue and gross margin.

We collaborate with pediatric orthopedic surgeons in developing new surgical systems that improve the quality of care.

We have an efficient product development process that relies upon teams of engineers, commercial personnel and surgeon advisors.

Since inception, our average clearance time with the U.S.

Food and Drug Administration, or the FDA, has been 93 days, which we believe is less than half of the average approval time for all medical devices over the past five years.

This is due in part to the impact of the Pediatric Medical Device Safety and Improvement Act of 2007, which encourages pediatric medical device research and development and aids the FDA in tracking the number and types of medical devices approved specifically for children.

We believe our products are characterized by stable pricing, few reimbursement issues and attractive gross margins.

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We are a major sponsor of continuing medical education, or CME, courses in pediatric spine and pediatric orthopedics, which are focused on fellows and young surgeons.

In 2019, we conducted more than 230 training workshops.

In 2020, we conducted numerous training workshops.

We believe these workshops help surgeons recognize our commitment to their field.

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This culture allows us to attract and retain talented, high-performing individuals.

We have grown our revenue from approximately $10.2 million for the year ended December 31, 2011 to $72.6 million for the year ended December 31, 2019, reflecting a growth rate each year of at least 20%.

For the years ended December 31, 2019, 2018 and 2017, our revenue was $72.6 million, $57.6 million and $45.6 million, respectively.

We have grown our revenue from approximately $10.2 million for the year ended December 31, 2011 to $71.1 million for the year ended December 31, 2020.

The average annual growth rate for the Company exceeded 20% from 2009 through 2019, partially obtained through strategic acquisitions.

For the years ended December 31,

2020, 2019 and 2018, our revenue was $71.1 million, $72.6 million and $57.6 million, respectively.

As of December 31, 2020, our accumulated deficit was $161.8 million.

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Children Have Unique Skeletal Characteristics

Children are not just small adults.

Their skeletal anatomy and physiology differs significantly from adults, which affects the way in which children with orthopedic conditions are managed surgically.

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in studies that we commissioned) regarding the number of procedures performed in 2015 and our average revenue per procedure or, in the case of smart implants, our estimated average revenue per procedure based on industry data.

We then updated this data in 2019 based on typical industry growth rates and the addition of the external fixation market.

We then updated this data in 2020 based on typical industry growth rates.

Trauma and Deformity Scoliosis Sports Medicine Smart Implants

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Smart Implants

We are developing a new generation of adjustable implant systems, which we refer to as our Active Growing Implants, which will utilize a mechanized motor and are adjustable at the time of implantation and non-invasively over the course of treatment to accommodate the clinical needs of patients with early onset scoliosis and limb length discrepancies, or LLDs, as they heal, grow and age.

over the course of treatment to accommodate the clinical needs of patients with early onset scoliosis and limb length discrepancies, or LLDs, as they heal, grow and age.

Early onset scoliosis refers to severe spinal deformities in skeletally immature patients under the age of ten.

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We believe that this high concentration of pediatric trauma and deformity and scoliosis procedures and our focused sales organization will enable us to address the pediatric orthopedic surgery market in a capital-efficient manner.

In the future, we expect to expand our market opportunity by addressing additional categories of the pediatric orthopedic market, such as craniomaxilloacial, elbow, proximal humerus, pelvis and other sports-related injuries.

In the future, we expect to expand our market opportunity by addressing additional categories of the pediatric orthopedic market, such as craniomaxilloacial, elbow, humerus, pelvis and other sports-related injuries.

Our Exclusive Focus on Pediatric Orthopedic Surgery

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Cumulatively, we donate more than any of our competitors to the five primary pediatric orthopedic surgical societies that conduct pediatric clinical education and research.

In 2019, we conducted more than 230 training workshops focused on fellows and surgeons early in their careers.

In 2020, we conducted numerous training workshops focused on fellows and surgeons early in their careers.

We believe our commitment to clinical education advances pediatric orthopedic surgery and increases our account presence, while promoting familiarity with our products and loyalty among fellows and young surgeons.

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We believe we are the first diversified orthopedic company to focus exclusively on the pediatric market.

Our core competencies are the development and commercialization of innovative products and technologies specifically designed to address the unmet clinical needs of pediatric orthopedic patients and satisfy the demands of the surgeons who treat them.

Our core competencies are the

development and commercialization of innovative products and technologies specifically designed to address the unmet clinical needs of pediatric orthopedic patients and satisfy the demands of the surgeons who treat them.

We have developed and sell the broadest product offering specifically designed for pediatric orthopedic patients.

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We have developed a comprehensive portfolio of implants and instruments specifically designed to treat children with orthopedic conditions.

Last year, we estimate that our products were used in surgeries for 29,400 children.

Last year, we estimate that our products were used in surgeries for 31,400 children, and 196,000 since inception.

We currently market 35 surgical systems consisting of more than 8,100 stock keeping units, which address pediatric trauma and deformity, scoliosis and sports medicine procedures.

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Our broad product offering has made us, within the three categories of the market that we currently serve, the only provider of comprehensive solutions to pediatric orthopedic surgeons, who for the most part are generalists performing a wide range of orthopedic surgeries.

Since inception, our average clearance time with the FDA has been 93 days, which we believe is less than half of the average approval time for all medical devices over the past five years.

• Partnership with Pediatric Orthopedic Surgeons and Pediatric Surgical Societies.

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We believe we are the only orthopedic company with a non-founding former pediatric orthopedic surgeon serving as CMO.

This enables us to engage and collaborate with thought-leading surgeons and academic institutions around the world in order to develop products and technologies specifically designed to meet the needs of pediatric orthopedic surgeons and their

Our dedication to the pediatric orthopedic community is evidenced by our leading support of the five major pediatric orthopedic surgical societies that conduct pediatric clinical education and research.

In 2019, we conducted more than 230 training workshops focused on fellows and surgeons early in their careers.

In 2020, we conducted numerous training workshops focused on fellows and surgeons early in their careers.

We are a major sponsor of CME courses in pediatric spine and pediatric orthopedics.

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sales organization consisted of 36 independent sales agencies employing more than 171 sales representatives.

Outside of the United States, we work with 39 independent distributors and 7 independent sales agencies in 43 countries.

Outside of the United States, we work with 42 independent stocking distributors and 11 independent sales agencies in 44 countries.

We estimate that 62% of U.S.

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Our senior management team provides engaging leadership and believes that the only hierarchy is that of good ideas, which can come from everywhere in our company.

Our Trauma and Deformity and Scoliosis business are each led by a vice president, who chairs a business team composed of representatives from research and development, quality and regulatory, operations, sales and finance functions.

Our Trauma and Deformity and Scoliosis business are each led by a vice president, who chairs a business team composed of representatives from research and development, quality and

regulatory, operations, sales and finance functions.

These teams meet frequently and make decisions regarding new products, inventory builds and promotional activities, thus enhancing our agility and the speed of decision making.

We believe this culture allows us to attract and retain talented, high performing professionals.

For four years we have been named one of the Best Companies to work for in Indiana.

We believe our focus and commitment to pediatric orthopedics has also enhanced our reputation among pediatric orthopedic surgeons as the only diversified orthopedic company focused on their field.

We believe that our exclusive focus on pediatric orthopedic surgery, our comprehesive product portfolio, our collaborations with surgeons, our scalable business model and our engaging culture are all sources of significant competitive advantage.

For five years we have been named one of the Best Companies to work for in Indiana.

We believe our focus and commitment to pediatric orthopedics has also enhanced our reputation among pediatric orthopedic surgeons as the only diversified orthopedic company focused on their specialty.

We believe that our exclusive focus on pediatric orthopedic surgery, our comprehensive product portfolio, our collaborations with surgeons, our scalable business model and our engaging culture are all sources of significant competitive advantage.

We believe these sources of competitive advantage provide us with the means to expand and defend our position as category leader and constitute barriers to entry that would require significant time, focus, and investment for a competitor to overcome.

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We have a track record of introducing innovative products that meet the clinical needs of pediatric orthopedic surgeons and their patients.

We believe many of these products are becoming the

standard of care in pediatric orthopedic surgery, and we intend to increase our investment in research and development of new products to 7-9% of sales.

We believe many of these products are becoming the standard of care in pediatric orthopedic surgery, and we intend to increase our investment in research and development of new products to 7-9% of sales.

We aim to surround our customers with all the important surgical systems they need to do their work, and our product pipeline includes a number of new systems and product line extensions.

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We believe there is significant opportunity for us to leverage our exclusive focus on pediatric orthopedic surgery and expand our market penetration and share.

We intend to continue investing in our global sales and distribution organization by increasing the number and upgrading the quality of our independent sales agencies and distributors through recruitment, adding clinical and sales training programs.

Starting in 2017, we also began to supplement our use of sales agencies with direct sales programs in the United Kingdom, Ireland, Australia and New Zealand.

In 2018, we further expanded our international sales program in Canada, and in January 2019 we expanded to Belgium and the Netherlands.

Additionally, in March 2019 we established a holding company and an operating company in the Netherlands that are expected to enhance our operations in Europe.

We began selling direct to Canada in September 2018, Belgium and the Netherlands in January 2019, Italy in March 2020 and Germany, Switzerland and Austria in January 2021.

Additionally, in March 2019, we established an operating company in the Netherlands to further enhance our operations in Europe.

In these markets, we work through sales agencies that are paid a commission, and we consign sets to hospitals, ship replacement products, bill and collect receivables.

This is expected to generate an increase in revenue and gross margin.

This has generated an increase in revenue and gross margin.

Many experienced sales agencies and distributors have been impacted by ongoing consolidation in the orthopedic industry and, as a result, we believe are eager to adopt new product lines like ours.

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We intend to continue developing this engaging culture of continuous improvement with the goal of building a different kind of orthopedic company:

one that is committed to children, works with distributors as partners and aims to address the market’s unmet needs.

one that is committed to children, works with agencies and distributors as partners and aims to address the market’s unmet needs.

Our Product Portfolio

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Trauma and Deformity Correction

Our trauma and deformity correction product line includes more than 3,044 implants and bone fixation devices for the femur, tibia, upper extremities and external fixation.

Our global revenue from this category for the year ended December 31, 2019 was $49.4 million, or 68% of total revenue, which represented growth of 24% over the prior year.

Our trauma and deformity correction product line includes more than 5,200 implants and bone fixation devices for the femur, tibia, upper and lower extremities and external fixation.

Our global revenue from this category for the year ended December 31, 2020 was $47.7 million, or 67% of total revenue, which represented a reduction of 3% over the prior year.

In December 2020, the Company recorded a $2.7 million revenue reduction due to the repurchase of inventory from a stocking distributor in Germany, Austria and Switzerland that we converted to a sales agency.

Global revenue from this category for the years ended December 31, 2019 and 2018 was $49.4 million and $39.7 million or 68% and 69% of total revenue, respectively.

Our scoliosis product category includes our RESPONSE TM systems for treating spinal deformity in children, the BandLoc 5.5mm/6.0mm sub-laminar banding system, and FIREFLY ® Pedicle Screw Navigation Guides.

Our global revenue from this category for the year ended December 31, 2019 was $21.5 million, or 30% of total revenue, which represented growth of 29% over the prior year.

Our scoliosis product category includes our RESPONSE TM systems for treating spinal deformity in children, the BandLoc TM 5.5mm/6.0mm sub-laminar banding system, FIREFLY ® Pedicle Screw Navigation Guides, and ApiFix ® Mid-C System.

Our global revenue from this category for the year ended December 31, 2020 was $20.7 million, or 29% of total revenue, which represented a reduction of 3% over the prior year.

Global revenue from this category for the years ended December 31, 2019 and 2018 was $21.5 million and $16.7 million or 30% and 29% of total revenue, respectively.

Sports Medicine/Other

Our sports medicine/other product category primarily includes our ACL and MPFL Reconstruction system.

Our sports medicine/other product category primarily includes our ACL, MPFL Reconstruction system and Telos.

Our global revenue from this category for the year ended December 31, 2020 was $2.7 million, or 4% of total revenue, which represented growth of 57% over the prior year.

Global revenue from this category for the years ended December 31, 2018 and 2017 was $1.2 million and $1.2 million or 2% and 3% of total revenue, respectively.

Global revenue from this category for the years

ended December 31, 2019 and 2018 was $1.7 million and $1.2 million or 2% and 2% of total revenue, respectively.

Our revenue is typically higher in the summer months and holiday periods, driven by higher sales of our trauma and deformity and scoliosis products, which is influenced by the higher incidence of pediatric surgeries during these periods due to recovery time provided by breaks in the school year.

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We have three product development objectives:

(i) develop innovative new systems that enable new surgical procedures, advance the field of pediatric orthopedics and allow us to focus on categories of the pediatric orthopedic market we are not currently addressing such as active growing implants for early onset scoliosis and limb length discrepancies, other sports-related injuries, patient-specific templates for spine surgical procedures and other orthopedic trauma and deformity applications;

(ii) build-out our portfolio of current products with line extensions that allow these systems to be used in more types of surgeries;

(i) develop innovative new systems that enable surgeons to advance the field of pediatric orthopedics and allow us to focus on categories of the pediatric orthopedic market we are not currently addressing such as spinal implants used in treating adolescent idiopathic, early onset, and neuromuscular scoliosis, active growing implants for early onset scoliosis and limb length discrepancies, trauma implants and non-surgical devices and limb deformity implants;

(ii) build-out our current portfolio of products with line extensions that allow these systems to be used in more types of surgeries;

and (iii) make improvements to our current implants and instruments that reduce their cost and improve their effectiveness.

We have a large number of new product ideas under development, and we aspire to launch one new surgical system and multiple line extensions and product improvements every year.

We have a large number of new product ideas under development, and we aspire to launch at least one new system and multiple line extensions and product improvements every year.

We have a deep pipeline of new systems that are currently under development, including the following projects.

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This system will consist of a line of implants and enhanced instrumentation to treat this common injury to the ball of the upper femur.

Pediatric Nailing Platform | Tibia

In late 2020, we plan to launch the Pediatric Nailing Platform | Tibia, which will utilize the same enhanced instrumentation in the Pediatric Nailing Platform | Femur system, which was introduced in 2018.

This system will treat deformities and traumatic injuries of the tibia.

RESPONSE TM Neuromuscular

In the first half of 2020, we will launch the RESPONSE TM Neuromuscular system which will provide surgeons with additional implants to our RESPONSE TM systems to treat the complex deformities associated with neuromuscular scoliosis.

In the first half of 2021, we will launch the full complement of RESPONSE TM Neuromuscular system implants which will provide surgeons with additional implants to our RESPONSE TM systems to treat the complex deformities associated with neuromuscular scoliosis.

RESPONSE TM Rib and Pelvic System

Our RESPONSE TM Rib and Pelvic System is designed to aid surgeons in the treatment of early onset scoliosis, a debilitating form of scoliosis that affects very young children.

Osteogenesis Imperfecta Nail System

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This system is currently in late-stage development with the goal of a 510(k) submission to the FDA in 2021.

Pediatric Nailing Platform | Tibia

In late 2022, we plan to launch the Pediatric Nailing Platform | Tibia, which will utilize the same enhanced instrumentation in the Pediatric Nailing Platform | Femur system, which was introduced in 2018.

This system will treat deformities and traumatic injuries of the tibia.

Active Growing Implants

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Our Active Growing Implants will utilize a non-magnetic power source of significantly greater strength and control than the current technology and will be adjustable at the time of implantation and non-invasively over the course of treatment to accommodate the changing clinical needs of patients as they heal, grow and age.

We are developing our Active Growing Implants for the treatment of early onset scoliosis and limb length discrepancies.

We are developing our Active Growing Implants for the treatment of early onset scoliosis and limb length

discrepancies.

We believe these products will be a natural complement to our current product offering.

While we have an active program underway in the development of these systems, the dates of completion, 510(k) submission to the FDA and market introduction are uncertain at this time.

Spine Tethering

Spine tethering is an emerging procedure in which one side of the spine is secured while the other side is able to continue growing, thus enabling the spine’s curvature to self-correct.

This procedure is now being performed using an adult lumbar fixation device.

Because the procedure does not fuse the spine, it is reversible and has been used in patients as young as the age of 10.

We are pursuing technology that is pediatric-specific and will be combined with purpose-built instruments to facilitate placement.

We have an active program underway to develop this technology and instrumentation with the goal of market introduction in 2021.

However, the regulatory requirements of this technology are uncertain at this time.

Research and Product Development

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Increasingly, these sales agencies are making us the anchor line in their businesses or representing us exclusively.

Sales from such agencies represented 76% of our revenue in 2019 and 75% in 2018.

Outside of the United States, our sales organization consisted of 39 independent stocking distributors and seven independent sales agencies in 43 countries, including the largest markets in the European Union, Latin America and the Middle East, as well as South Africa, Australia and Japan.

Sales to customers from such agencies represented 86% of our global revenue in 2020 and 76% in 2019.

Outside of the United States, our sales organization consisted of 42 independent stocking distributors and 11 independent sales agencies in 44 countries, including the largest markets in the European Union, Latin America and the Middle East, as well as South Africa, Australia and Japan.

We believe our distributors are well regarded by pediatric orthopedic surgeons in their respective markets.

To support our international distribution organization, we have hired a number of regional market managers, whose product and clinical expertise deepens our relationships with both surgeons and our distributors.

In the near term, we expect to selectively expand the number of international markets we serve, as well as to deepen our penetration of important existing markets such as Brazil and Japan.

In 2017, we began to supplement our use of independent distributors with direct sales programs in the United Kingdom, Ireland, Australia and New Zealand.

In 2018, we began selling direct in Canada, and in January 2019 we expanded to Belgium and the Netherlands.

Additionally, in March 2019 we established a holding company and an operating company in the Netherlands that are expected to enhance our operations in Europe.

In the near term, we expect to selectively expand the number of international markets we serve, as well as to deepen our penetration of important existing markets such as Brazil and Germany.

In 2017, we began to supplement our use of independent stocking distributors with direct sales programs in the United Kingdom, Ireland, Australia and New Zealand.

We began selling direct to Canada in September 2018, Belgium and the Netherlands in January 2019, Italy in March 2020 and Germany, Switzerland and Austria in January 2021.

Additionally, in March 2019, we established an operating company in the Netherlands in order to enhance our operations in Europe.

In these markets, we work through sales agencies that are paid a commission.

We consign sets to hospitals, ship replacement products, bill and collect receivables.

These new arrangements are expected to generate an increase in revenue and gross margin.

These new arrangements have generated an increase in revenue and gross margin.

We plan to continue to make similar transitions in select international markets that we believe would benefit from a sales agency model.

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We want pediatric orthopedic surgeons throughout the world to view us as their partner in advancing their field.

Therefore, we utilize surgeon input when developing products and clinical education programs.

Therefore, we

utilize surgeon input when developing products and clinical education programs.

These efforts are aided by our CMO, a highly respected former pediatric orthopedic surgeon.

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We support local, regional and national educational courses, intensive hands-on training programs and product-based workshops that enable surgeons to practice surgical procedures using our products.

In 2019, we conducted more than 230 training workshops focused on fellows and surgeons early in their careers.

In 2020, we conducted numerous training workshops focused on fellows and surgeons early in their careers.

We are also a major sponsor of CME courses in pediatric spine and pediatric orthopedics.

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Cumulatively, we are the largest financial contributor to the five primary pediatric orthopedic surgical societies that conduct pediatric clinical education and research:

the Pediatric Orthopaedic Society of North America, the International Pediatric Orthopaedic Symposium, the European Pediatric Orthopaedic Society, the American

Academy for Cerebral Palsy and Developmental Medicine and the Pediatric Research in Sports Medicine Society.

the Pediatric Orthopaedic Society of North America, the International Pediatric Orthopaedic Symposium, the European Pediatric Orthopaedic Society, the American Academy for Cerebral Palsy and Developmental Medicine and the Pediatric Research in Sports Medicine Society.

Additionally, we are a sponsor of the two major spine deformity organizations, the Scoliosis Research Society and the International Meeting on Advanced Spine Techniques.

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We believe this support enhances our reputation as the category leader in pediatric orthopedics.

Additionally, during 2018 and 2019, we funded the OrthoPediatrics Foundation for Education and Research ("Foundation") as a 501(c)3 public charity.

Additionally, during 2018, 2019 and 2020, we funded the The Foundation for Advancing Pediatric Orthopaedics ("Foundation") as a 501(c)3 public charity.

The Foundation is led by the Company's Chief Medical Officer and a board composed of nine eminent pediatric orthopedic educators.

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and international regulatory authorities to ensure compliance with quality regulations.

We do not have long-term supply contracts, nor do our suppliers require guaranteed minimum purchases.

We maintain certain long-term contracts with our key suppliers.

Our suppliers do not require guaranteed minimum purchases.

In most cases, we have redundant manufacturing capabilities for each of our products.

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patent applications and 40 foreign patent applications.

As of December 31, 2019, two of our U.S.

As of December 31, 2020, 8 of our U.S.

issued patents have pending continuation or divisional applications in process which may provide additional intellectual property protection if issued as U.S.

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patents expire between 2024 and 2036, subject to payment of required maintenance fees, annuities and other charges.

As of December 31, 2019, we owned fourteen U.S.

trademark registrations and two pending U.S.

As of December 31, 2020, we owned 16 U.S.

trademark registrations and 3 pending U.S.

trademark applications, as well as 23 registrations in other jurisdictions worldwide.

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We have competitors in each of our three product categories, including the DePuy Synthes Companies (a subsidiary of Johnson & Johnson), Medtronic plc, Smith & Nephew plc and Orthofix.

We believe we have the broadest product offering across these categories relative to these competitors.

We believe we have the broadest pediatric product offering across these categories relative to these competitors.

Our ability to compete successfully will depend on our ability to develop proprietary products that reach the market in a timely manner, are cost effective and are safe and effective.

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Our products and our operations are subject to extensive regulation by the FDA and other federal and state authorities in the United States, as well as comparable authorities in foreign jurisdictions.

Our products are subject to regulation as medical devices under the Federal Food, Drug, and Cosmetic Act ("FDCA"), as implemented and enforced by the FDA.

The FDA regulates the development, design, non-clinical and clinical research, manufacturing, safety, efficacy, labeling, packaging, storage, installation, servicing, recordkeeping, premarket clearance or approval, import, export, adverse event reporting, advertising, promotion, marketing and distribution, and import and export of medical devices to ensure that medical devices distributed domestically are safe and effective for their intended uses and otherwise meet the requirements of the FDCA.

Our products are subject to regulation as medical devices under the Federal Food, Drug, and Cosmetic Act ("FDCA"), as

implemented and enforced by the FDA.

The FDA regulates the development, design, non-clinical and clinical research, manufacturing, safety, efficacy, labeling, packaging, storage, installation, servicing, recordkeeping, premarket clearance or approval, adverse event reporting, advertising, promotion, marketing and distribution, and import and export of medical devices to ensure that medical devices distributed domestically are safe and effective for their intended uses and otherwise meet the requirements of the FDCA.

In addition to U.S.

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Some pre-amendment devices are unclassified, but are subject to the FDA’s premarket notification and clearance process in order to be commercially distributed.

Our currently marketed products are Class I and exempted from premarket notification, or Class II/ or unclassified devices subject to 510(k) clearance.

Our currently marketed products are Class I and exempted from premarket notification, or Class II/ or unclassified devices subject to 510(k) clearance with the exception of the ApiFix Mid-C System which is an unclassified, approved device under the Humanitarian Device Exemption, or HDE, regulation.

Approval under the HDE regulation is contingent upon the submission of periodic reports at intervals of one year (unless otherwise specified) from the date of approval of the original HDE (August 2019).

The purpose of the HDE provision is to encourage the discovery and use of devices intended to benefit patients in the treatment and diagnosis of diseases or conditions that affect not more than 8,000 individuals in the United States per year.

The FDA may grant an HDE, which is an exemption from the effectiveness requirements of sections 514 and 515 of the FDCA Act, if the FDA determines that the device meets certain criteria.

After HDE approval, the medical device may only be used after IRB approval has been obtained.

Under FDA regulations, an IRB is an appropriately constituted group that has been formally designated to review and monitor biomedical research involving human subjects.

In accordance with FDA regulations, an IRB has the authority to approve, require modifications in (to secure approval), or disapprove research.

This group review serves an important role in the protection of the rights, safety and welfare of human research subjects.

The purpose of IRB review is to assure, both in advance and by periodic review, that appropriate steps are taken to protect the rights, safety and welfare of humans participating as subjects in the research.

510(k) Marketing Clearance Pathway

Our current products are subject to premarket notification and clearance under section 510(k) of the FDCA.

Our Class II products are subject to premarket notification and clearance under section 510(k) of the FDCA.

To obtain 510(k) clearance, we must submit to the FDA a premarket notification submission demonstrating that the proposed device is “substantially equivalent” to a predicate device already on the market.

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The FDA requires each manufacturer to determine whether the proposed change requires submission of a 510(k) or a PMA in the first instance, but the FDA can review any such decision and disagree with a manufacturer’s determination.

Many minor modifications today are accomplished by a manufacturer documenting the change in an internal letter-to-file.

The letter-to-file is in lieu of submitting a new 510(k) to obtain clearance for every change.

The FDA can always review these letters to file in an inspection.

Minor modifications may be accomplished by a manufacturer documenting the change in an internal letter-to-file.

The FDA can always review these letters to file during an inspection.

If the FDA disagrees with a manufacturer’s determination, the FDA can require the manufacturer to cease marketing and/or request the recall of the modified device until 510(k) marketing clearance or PMA approval is obtained.

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• QSR requirements, which require manufacturers, including third-party manufacturers, to follow stringent design, testing, control, documentation and other quality assurance procedures during all aspects of the design and manufacturing process;

• labeling and marketing regulations, which require that promotion is truthful, not misleading, fairly balanced and provide adequate directions for use and that all claims are substantiated, and also prohibit the promotion of products for unapproved or “off-label” uses and impose other restrictions

FDA guidance on off-label dissemination of information and responding to unsolicited requests for information;

• the federal Physician Sunshine Act and various state and foreign laws on reporting remunerative relationships with healthcare customers;

• the federal Physician Sunshine Act and various state and foreign laws on reporting remunerative relationships with healthcare providers (HCPs);

• the federal Anti-Kickback Statute (and similar state laws) prohibiting, among other things, soliciting, receiving, offering or providing remuneration intended to induce the purchase or recommendation of an item or service reimbursable under a federal healthcare program, such as Medicare or Medicaid.

A person or entity does not have to have actual knowledge of this statute or specific intent to violate it to have committed a violation;

• the federal False Claims Act (and similar state laws) prohibiting, among other things, knowingly presenting, or causing to be presented, claims for payment or approval to the federal government that are false or fraudulent, knowingly making a false statement material to an obligation to pay or transmit money or property to the federal government or knowingly concealing, or knowingly and improperly avoiding or decreasing, an obligation to pay or transmit money to the federal government.

The government may assert that claim includes items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the false claims statute;

transmit money or property to the federal government or knowingly concealing, or knowingly and improperly avoiding or decreasing, an obligation to pay or transmit money to the federal government.

The government may assert that claim includes items or services resulting from a violation of the federal Anti-Kickback Statute and constitutes a false or fraudulent claim for purposes of the false claims statute;

• clearance or approval of product modifications to 510(k)-cleared devices that could significantly affect safety or effectiveness or that would constitute a major change in intended use of one of our cleared devices;

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Clinical investigations for medical devices usually require the approval of an ethics review board and approval by or notification to the national regulatory authorities.

regulators and ethics committees also require the submission of serious adverse event reports during a study and may request a copy of the final study report.

The Medical Devices Regulation, or MDR, entered into force in May 2017 and becomes applicable three years thereafter.

Both regulators and ethics committees also require the submission of serious adverse event reports during a study and may request a copy of the final study report.

The Medical Devices Regulation, or MDR, entered into force in May 2017 and, due to the COVID-19 pandemic, was postponed from its original application date of May 2020 to May 2021.

The MDR among other things, imposes additional reporting requirements on manufacturers of high risk medical devices, impose an obligation on manufacturers to appoint a “qualified person” responsible for regulatory compliance, and provide for more strict clinical evidence requirements.

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• necessity of testing performed in country by distributors for licensees.

The time required to obtain clearance required by foreign countries may be longer or shorter than that required for FDA clearance, and requirements for licensing a product in a foreign country may differ significantly from FDA requirements.

The time required to obtain clearance by foreign countries may be longer or shorter than that required for FDA clearance, and requirements for licensing a product in a foreign country may differ significantly from FDA requirements.

The MDR includes further controls and requirements on the following activities:

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• increased regulation for non-traditional roles such as importer and distributor.

Regulations in the United Kingdom

Effective January 31, 2020, the United Kingdom of Great Britain and Northern Ireland, or UK, withdrew from the European Union, or EU.

New regulations specific to the UK went into effect beginning January 1, 2021 with a transitional period through June 30, 2023.

These regulations may impact our ability to sell our products in the UK.

During the transition period, devices with CE Markings may continue to be sold within the UK.

Devices sold in Northern Ireland will be required to keep the CE Marking after the transition period ends.

In order to comply with the new regulations and continue selling medical devices in Great Britain (England, Wales and Scotland) following the transition period, the Company must appoint a UK Responsible Person and register the medical devices with the UK's Medicines and Healthcare product Regulatory Agency, or MHRA.

A new conformity assessment must be completed by a UK Approved Body, or UKAB.

The UKAB will audit and examine a

product’s technical dossiers and the manufacturers’ quality system.

If satisfied that the relevant product conforms to the relevant essential requirements, the UKAB issues a certificate of conformity, which the manufacturer uses as a basis for its own declaration of conformity.

The manufacturer may then apply the UKCA Mark to the device, which allows the device to be placed on the market throughout Great Britain.

Once the product has been placed on the market in Great Britain, the manufacturer must comply with requirements for reporting incidents and field safety corrective actions associated with the medical device.

Federal, State and Foreign Fraud and Abuse and Physician Payment Transparency Laws

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The term “remuneration” has been broadly interpreted to include anything of value, including stock, stock options, and the compensation derived through ownership interests.

Recognizing that the federal Anti-Kickback Statute is broad and may prohibit many innocuous or beneficial arrangements within the healthcare industry, the DHHS issued regulations in July 1991, which the Department has referred to as “safe harbors.” These safe harbor regulations set forth certain provisions which, if met in form and substance, will assure medical device manufacturers, healthcare providers and other parties that they will not be prosecuted under the federal Anti-Kickback Statute.

Recognizing that the federal Anti-Kickback Statute is broad and may prohibit many innocuous or beneficial arrangements within the healthcare industry, the DHHS issued regulations in July 1991, which the Department has referred to as “safe harbors.” These safe harbor regulations set forth certain provisions which, if met in form and substance, will assure medical device manufacturers, HCPs and other parties that they will not be prosecuted under the federal Anti-Kickback Statute.

Additional safe harbor provisions providing similar protections have been published intermittently since 1991.

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In addition, private parties may initiate “qui tam” whistleblower lawsuits against any person or entity under the federal civil False Claims Act in the name of the government and share in the proceeds of the lawsuit.

Penalties for federal civil False Claim Act violations include fines for each false claim, plus up to three times the amount of

damages sustained by the federal government and, most critically, may provide the basis for exclusion from the federally funded healthcare program.

Penalties for federal civil False Claim Act violations include fines for each false claim, plus up to three times the amount of damages sustained by the federal government and, most critically, may provide the basis for exclusion from the federally funded healthcare program.

On May 20, 2009, the Fraud Enforcement Recovery Act of 2009, or FERA, was enacted, which modifies and clarifies certain provisions of the federal civil False Claims Act.

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We may also become subject to various federal, state and foreign laws that protect the confidentiality of certain patient health information, including patient medical records, and restrict the use and disclosure of patient health information by healthcare providers, such as HIPAA, as amended by HITECH, in the United States.

Under HIPAA, the DHHS has issued regulations to protect the privacy and security of protected health information used or disclosed by covered entities including certain healthcare providers and their business associates.

HIPAA also regulates standardization of data content, codes and formats used in healthcare transactions and standardization of identifiers for health plans and providers.

HIPAA violations carry civil and

criminal penalties, and, in certain circumstances, criminal penalties.

HIPAA violations carry civil and criminal penalties, and, in certain circumstances, criminal penalties.

State attorneys general can also bring a civil action to enjoin a HIPAA violation or to obtain statutory damages on behalf of residents of his or her state.

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The Affordable Care Act imposed, among other things, a new federal excise tax on the sale of certain medical devices (which was permanently repealed December 20, 2019), provided incentives to programs that increase the federal government’s comparative effectiveness research, and implemented payment system reforms including a national pilot program on payment bundling to encourage hospitals, physicians and other providers to improve the coordination, quality and efficiency of certain healthcare services through bundled payment models.

Additionally, the Affordable Care Act has expanded eligibility criteria for Medicaid programs and created a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research, along with funding for such research.

We do not yet know the full

impact that the Affordable Care Act will have on our business.

Moreover, the Trump Administration and the U.S.

Congress may take further action regarding the Affordable Care Act, including, but not limited to, repeal or replacement.

Additionally, all or a portion of the Affordable Care Act and related subsequent legislation may be modified, repealed or otherwise invalidated through judicial challenge.

Additionally, the Affordable Care Act has expanded eligibility criteria for Medicaid programs and

created a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research, along with funding for such research.

Since its enactment, there have been judicial, Congressional and executive branch challenges to certain aspects of the Affordable Care Act, and we expect there will be additional challenges and amendments to the Affordable Care Act in the future.

While Congress has not passed comprehensive repeal legislation, it has enacted laws that modify certain provisions of the Affordable Care Act such as removing or delaying penalties, starting January 1, 2019, for not complying with the Affordable Care Act’s individual mandate to carry health insurance and delaying the implementation of certain Affordable Care Act-mandated fees.

Additionally, on December 15, 2018, a Texas U.S.

District Court Judge ruled that the Affordable Care Act is unconstitutional in its entirety because the individual mandate was repealed by Congress.

Further, on December 18, 2019, the U.S.

Court of Appeals for the 5th Circuit upheld the District Court ruling that the individual mandate was unconstitutional and remanded the case back to the District Court to determine whether the remaining provisions of the Affordable Care Act are invalid as well.

On March 2, 2020, the United States Supreme Court granted the petitions for writs of certiorari and held oral arguments on November 10, 2020.

Accordingly, we continue to evaluate the effect that the Affordable Care Act has on our business.

In addition, other legislative changes have been proposed and adopted since the Affordable Care Act was enacted.

For example, the Budget Control Act of 2011, among other things, reduced Medicare payments to providers by 2% per fiscal year, effective on April 1, 2013 and, due to subsequent legislative amendments to the statute, will remain in effect through 2030 unless additional Congressional action is taken.

However, the Coronavirus Aid, Relief and Economic Security Act, or CARES Act, which was signed into law in March 2020 and is designed to provide financial support and resources to individuals and businesses affected by the COVID-19 pandemic, suspended the 2% Medicare sequester from May 1, 2020 through December 31, 2020, and extended the sequester by one year, through 2030.

The Consolidated Appropriations Act, 2021, signed into law on December 27, 2020, extends the suspension period to March 31, 2021.

Additionally, the American Taxpayer Relief Act of 2012, among other things, reduced Medicare payments to several providers, including hospitals, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years.

The Medicare Access and CHIP Reauthorization Act of 2015 repealed the formula by which Medicare made annual payment adjustments to physicians and replaced the former formula with fixed annual updates and a new system of incentive payments scheduled to begin in 2019 that are based on various performance measures and physicians’ participation in alternative payment models, such as accountable care organizations.

The Medicare Access and CHIP Reauthorization Act of 2015 repealed the formula by which Medicare made annual payment adjustments to physicians and replaced the former formula with fixed annual updates and a new system of incentive payments beginning January 1, 2020 that are based on various performance measures and physicians’ participation in alternative payment models, such as accountable care organizations.

We expect additional state and federal healthcare reform measures to be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare products and services, which could result in reduced demand for our products or additional pricing pressure.

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In international markets, reimbursement and healthcare payment systems vary significantly by country, and many countries have instituted price ceilings on specific product lines and procedures.

There can be no assurance that procedures using our products will be covered for a specific indication, that our products will be considered cost-effective by third party payors, that an adequate level of reimbursement will be available or that the third-party payors’ reimbursement policies will not adversely affect our ability to sell our products profitably.

the third-party payors’ reimbursement policies will not adversely affect our ability to sell our products profitably.

More and more, local, product specific reimbursement law is applied as an overlay to medical device regulation, which has provided an additional layer of clearance requirement.

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Third-party payors regularly update reimbursement amounts and also from time to time revise the methodologies used to determine reimbursement amounts.

This includes routine updates to payments to physicians, hospitals

and ambulatory surgery centers for procedures during which our products are used.

This includes routine updates to payments to physicians, hospitals and ambulatory surgery centers for procedures during which our products are used.

These updates could directly impact the demand for our products.

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-K

Item 1. Business