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Item 1A. Risk Factors

2021-03-11 compared with 2020-03-05 · 156 added, 109 removed, 901 unchanged (23% of the section changed)

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Risks Related to Our Financial Condition and Capital Requirements

The ongoing COVID-19 pandemic and measures intended to prevent its spread have adversely impacted our business and financial results, and the continued impact will depend on future developments, which are highly uncertain and cannot be predicted, including the severity and duration of the pandemic and further actions taken by governmental authorities and other third parties to contain and treat the virus.

The outbreak of COVID-19 was first identified in Wuhan, China in December 2019, and subsequently declared a pandemic by the World Health Organization.

On March 12, 2020, the President of the United States declared the COVID-19 outbreak in the United States a national emergency.

As a result of the pandemic, we have experienced significant business disruption.

For example, in order to meet the demand for COVID-19-related hospitalizations, various governments, governmental agencies and hospital administrators required certain hospitals to postpone some elective procedures.

As a majority of our products are utilized in elective surgeries or procedures, the deferrals of such surgeries and procedures have had, and may continue to have, a significant negative impact on our business and results of operations.

The COVID-19 outbreak has also resulted in governmental authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in place or total lock-down orders, social distancing requirements, and business limitations and shutdowns.

While these measures have negatively impacted the ability of our sales professionals to reach physicians, such measures have not yet had any significant impacts on our product supply chain.

However, any negative impacts on the production and delivery of our products in the future may result in a decline in sales, an increase in accounts receivable reserves, lower gross margins, and greater challenges in forecasting business results and making business decisions.

The COVID-19 pandemic has adversely impacted, and may continue to adversely impact, the economies and financial markets of many countries, which may result in a period of regional, national or global economic slowdown or regional, national or global recessions.

The extent to which the pandemic continues to impact our business, results of operations and financial condition will depend on future developments, which are highly uncertain and are difficult to predict, including, but not limited to, the duration and continued spread of the outbreak, its severity, actions taken by governmental authorities and other third parties to contain and treat the virus, and how quickly and to what extent normal economic and operating conditions can resume.

Moreover, the effects of the COVID-19 pandemic may heighten many of the other risks identified within this Annual Report for year ended December 31, 2020.

Depending on the continued severity and ultimate duration of COVID-19, the negative effects on our business, results of operations and financial condition could be material.

We have incurred losses in the past and may be unable to achieve or sustain profitability in the future.

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We expect to continue to incur significant product development, clinical and regulatory, sales and marketing and other expenses.

In addition, our general and administrative expenses have increased following our initial public offering due to the additional costs associated with being a public company.

The net losses we incur may fluctuate significantly from quarter to quarter.

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We may need to raise additional capital to fund our existing commercial operations, develop and commercialize new products and expand our operations.

Based on our current business plan, we believe our current cash, borrowing capacity under our loan agreements, cash receipts from sales of our products and net proceeds from our December 2019 and 2018 follow-on offerings of common stock will be sufficient to meet our anticipated cash requirements for at least the next 12 months.

preferred equity or convertible debt securities, enter into an additional credit facility or another form of third-party funding or seek other debt financing.

Based on our current business plan, we believe our current cash, borrowing capacity under our loan agreements, cash receipts from sales of our products and net proceeds from our June 2020, December 2019 and December 2018 follow-on offerings of common stock will be sufficient to meet our anticipated cash requirements for at least the next 12 months.

If our available cash balances, borrowing capacity, net proceeds from prior stock offerings and anticipated cash flow from operations are insufficient to satisfy our liquidity requirements, including because of lower demand for our products as a result of the risks described in this Annual Report on Form 10-K, we may seek to sell common or preferred equity or convertible debt securities, enter into an additional credit facility or another form of third-party funding or seek other debt financing.

We may consider raising additional capital in the future to expand our business, to pursue strategic investments, to take advantage of financing opportunities or for other reasons, including to:

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Our loan and security agreement with Squadron Capital LLC contains covenants that may restrict our business and financing activities.

On December 31 2017, we entered into a Fourth Amended and Restated Loan and Security agreement with Squadron Capital LLC ("Squadron"), which was further amended in May 2019 (as amended, the "Amended Loan Agreement").

The Amended Loan Agreement currently provides for a $20.0 million term loan and a $15.0 million revolving credit facility.

As of December 31, 2019, we had approximately $24.9 million in outstanding indebtedness under the Amended Loan Agreement.

The Amended Loan Agreement restricts our ability to, among other things:

On December 31, 2017, we entered into a Fourth Amended and Restated Loan and Security agreement with Squadron Capital LLC ("Squadron"), which was further amended in May 2019 and August 2020 (as amended, the "Second Amended Loan Agreement").

The Second Amended Loan Agreement currently provides for a $25.0 million revolving credit facility.

As of December 31, 2020, we have no outstanding indebtedness under the Second Amended Loan Agreement.

The Second Amended Loan Agreement restricts our ability to, among other things:

• dispose of or sell our assets;

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• make investments.

The covenants in the Amended Loan Agreement, as well as any future financing agreements into which we may enter, may restrict our ability to finance our operations and engage in, expand or otherwise pursue our business activities and strategies.

Our ability to comply with these covenants may be affected by events beyond our control, and future breaches of any of these covenants could result in a default under the Amended Loan Agreement.

If not waived, future defaults could cause all of the outstanding indebtedness under the Amended Loan Agreement to become immediately due and payable and terminate all commitments to extend further credit.

The covenants in the Second Amended Loan Agreement, as well as any future financing agreements into which we may enter, may restrict our ability to finance our operations and engage in, expand or otherwise pursue our business activities and strategies.

Our ability to comply with these covenants may be affected by events beyond our control, and future breaches of any of these covenants could result in a default under the Second Amended Loan Agreement.

If not waived, future defaults could cause all of the outstanding indebtedness under the Second Amended Loan Agreement to become immediately due and payable and terminate all commitments to extend further credit.

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Indebtedness — Loan Agreement.”

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states and territories, as well as certain countries outside the U.S.

As a result, our effective tax rate is derived from a combination of applicable tax rates in the various places that we operate.

As a result, our effective tax rate is derived from a combination of applicable tax rates in the various tax jurisdictions that we operate.

In preparing our financial statements, we estimate the amount of tax that will become payable in each of such places.

Nevertheless, our effective tax rate may be different than experienced in the past due to numerous factors, including passage of the newly enacted U.S.

federal income tax law, changes in the mix of our profitability from jurisdiction to jurisdiction, the results of examinations and audits of our tax filings, our inability to secure or sustain acceptable agreements with tax authorities, changes in accounting for income taxes and changes in tax laws.

changes in tax laws.

Any of these factors could cause us to experience an effective tax rate significantly different from previous periods or our current expectations and may result in tax obligations in excess of amounts accrued in our financial statements.

Our ability to use net operating losses to offset future taxable income may be subject to limitations.

As of December 31, 2019, we had federal net operating loss carryforwards of $86.8 million and state net operating loss carryforwards of $64.0 million.

The federal and state net operating loss carryforwards will begin to expire, if not utilized, beginning in 2028.

The deferred tax assets were fully offset by a valuation allowance as of December 31, 2019 and 2018, and no income tax benefit has been recognized in continuing operations.

As of December 31, 2020, we had federal, state and foreign net operating loss carryforwards, or NOLs, of $98.9 million, $68.9 million and $16.9 million, respectively.

The federal, state and foreign net operating loss carryforwards will begin to expire, if not utilized, beginning in 2028.

The deferred tax assets, except for those recorded in Israel, were fully offset by a valuation allowance as of December 31, 2020 and 2019, and no income tax benefit has been recognized in continuing operations.

Under the newly enacted federal income tax law, federal net operating losses incurred in years beginning after December 31, 2017 may be carried forward indefinitely;

but the deductibility of such federal net operating losses is limited.

Each state jurisdiction has its own net operating loss carryforward and carryback rules with varying conformity to the newly enacted federal tax law.

Each state and foreign jurisdiction has its own net operating loss carryforward and carryback rules with varying conformity to the newly enacted federal tax law.

In addition, under Section 382 of the Internal Revenue Code of 1986, as amended, and corresponding provisions of state law, if a corporation undergoes an “ownership change,” which is generally defined as a greater than 50% change, by value, in its equity ownership over a three-year period, the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes to offset its post-change income or taxes may be limited.

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New technologies, techniques or products could emerge that might offer better combinations of price and performance than our products.

It is important that we anticipate changes in technology and market demand, as well as physician, hospital and healthcare provider practices to

successfully develop, obtain clearance or approval, if required, and successfully introduce new, enhanced and competitive technologies to meet our prospective customers’ needs on a timely and cost-effective basis.

It is important that we anticipate changes in technology and market demand, as well as physician, hospital and healthcare provider practices to successfully develop, obtain clearance or approval, if required, and successfully introduce new, enhanced and competitive technologies to meet our prospective customers’ needs on a timely and cost-effective basis.

We might be unable to successfully commercialize our current products with domestic or international regulatory clearances or approvals or develop or obtain regulatory clearances or approvals to market new products.

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The frequent introduction by competitors of products that are or claim to be superior to our products or that are alternatives to our existing or planned products may also create market confusion that may make it difficult to differentiate the benefits of our products over competing products.

In addition, the entry of multiple new products and competitors may lead some of our competitors to employ pricing strategies that could adversely affect the pricing of our products and pricing in the orthopedic surgery market generally.

In addition, the entry of multiple new products and competitors may lead some of our

competitors to employ pricing strategies that could adversely affect the pricing of our products and pricing in the orthopedic surgery market generally.

We also face a particular challenge of overcoming the long-standing practices by some orthopedic surgeons of using the products of our larger, more established competitors.

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In addition, we compete with our competitors to engage the services of independent sales agencies and distributors, both those presently working with us and those with whom we hope to work as we expand.

We provide implant and instrument sets for nearly all surgeries performed using our products, and maintaining sufficient levels of inventory could consume a significant amount of our resources, reduce our cash flows and lead to inventory impairment charges.

We provide implant and instrument sets for the majority of surgeries performed using our products, and maintaining sufficient levels of inventory could consume a significant amount of our resources, reduce our cash flows and lead to inventory impairment charges.

We are required to maintain significant levels of implant and instrument sets for consignment to our customers.

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The provision of these instruments at no charge to our customers may implicate certain federal and state fraud and abuse laws.

Because the provision of loaned instrument sets may result in a benefit to our customers, the government could view this practice as a prohibited transfer of value

intended to induce customers to purchase our products that are used in procedures reimbursed by a federal healthcare program.

Because the provision of loaned instrument sets may result in a benefit to our customers, the government could view this practice as a prohibited transfer of value intended to induce customers to purchase our products that are used in procedures reimbursed by a federal healthcare program.

For further discussion of these laws, see “Risks Related to Regulatory Matters."

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If the price of our common stock is low or volatile, we may be unable to consummate any acquisitions, investments or strategic alliances using our stock as consideration.

As discussed above, acquisitions of, or investments in, new or complementary businesses, products or technologies are inherently risky.

We cannot guarantee that any acquisition or investment will be successful or will not have a material unfavorable impact on us.

We also cannot be certain that the businesses, products or technologies we acquire or invest in will become or remain profitable.

We may be unable to gain the support of leading hospitals and key opinion leaders, which may make it difficult to establish our products as a standard of care and achieve market acceptance.

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If these hospitals and key opinion leaders determine that alternative technologies are more effective or that the benefits offered by our products are not sufficient to justify their higher cost, or if we encounter difficulty promoting adoption or establishing these systems as a standard of care, our ability to achieve market acceptance of the products we introduce could be significantly limited.

We may be unable to maintain adequate working relationships with healthcare professionals.

We seek to maintain close working relationships with respected orthopedic surgeons and medical personnel in hospitals and other healthcare organizations who assist in product research and development.

We rely on these professionals to assist us in the development and improvement of our proprietary products.

As a result of the COVID-19 pandemic, our access to these professionals has been limited as hospitals have restricted access for non-patients, including our research and development specialists and other employees, and governmental authorities have imposed travel restrictions, shutdowns or similar measures, which has adversely affected our ability to develop, market and sell products.

If we are unable to maintain these relationships, our ability to develop, market and sell new and improved products could be further adversely affected.

We may be unable to successfully demonstrate to orthopedic surgeons the merits of our products compared to those of our competitors.

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This may also result in unsatisfactory patient outcomes, patient injury, negative publicity or lawsuits against us.

If we are unable to successfully identify orthopedic surgeon customers who will be able to successfully deploy our products, we may be unable to achieve our expected growth.

If we are unable to successfully identify

orthopedic surgeon customers who will be able to successfully deploy our products, we may be unable to achieve our expected growth.

There is a learning process involved for orthopedic surgeons to become proficient in the use of our products.

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We began selling our products in the United States in 2008 and internationally in 2011.

As of December 31, 2019, our sales organization consisted of 39 independent stocking distributors and seven independent sales agencies in 43 countries.

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 to sell 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 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 to further enhance our operations in Europe.

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

Our operating results are directly dependent upon the sales and marketing efforts of our independent sales agencies and distributors.

As of December 31, 2020, our international sales organization consisted of 42 independent stocking distributors and 11 independent sales agencies in 44 countries.Our operating results are directly dependent upon the sales and marketing efforts of our independent sales agencies and distributors.

If our independent sales agencies or distributors fail to adequately promote, market and sell our products, our sales could significantly decrease.

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We lack published long-term data supporting superior clinical outcomes enabled by our products.

For this reason, orthopedic surgeons and other clinicians may be slow to adopt our products, we may not have comparative data that our competitors have or are generating, and we may be subject to greater regulatory

and product liability risks.

Further, future patient studies or clinical experience may indicate that treatment with our products does not improve patient outcomes.

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Many foreign markets have government-managed healthcare systems that govern reimbursement for orthopedic implants and procedures.

Additionally, some foreign reimbursement systems provide for limited payments in a given period and therefore

result in extended payment periods.

Additionally, some foreign reimbursement systems provide for limited payments in a given period and therefore result in extended payment periods.

If adequate levels of reimbursement from third-party payors outside of the United States are not obtained, international sales of our products may decline.

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Even if favorable coverage and reimbursement status is attained, less favorable coverage policies and reimbursement rates may be implemented in the future.

Our employees, consultants, independent sales agencies and distributors and other commercial partners may engage in misconduct or other improper activities, including non-compliance with regulatory standards and requirements.

Our employees, consultants, independent sales agencies, stocking distributors or other commercial partners may engage in misconduct or other improper activities, including non-compliance with regulatory standards and requirements.

We are exposed to the risk that our employees, consultants, independent sales agencies and distributors and other commercial partners may engage in fraudulent or illegal activity.

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Physician-owned distributorships, or PODs, are product distributors that are owned, directly or indirectly, by physicians.

own patients at hospitals and other facilities that purchase from or through the POD, or otherwise generate revenue based directly or indirectly on product orders arranged for by physician-owners.

PODs derive a portion, or substantially all, of their revenue from selling, or arranging for the sale of, products ordered by the physician-owners for use in procedures the physician-owners perform on their own patients at hospitals and other facilities that purchase from or through the POD, or otherwise generate revenue based directly or indirectly on product orders arranged for by physician-owners.

On March 26, 2013, the Office of Inspector General of the U.S.

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We also face competition from universities and public and private research institutions in recruiting and retaining highly qualified scientific personnel.

Recruiting and retention difficulties can limit our ability to support our commercial, supply chain and research and development programs.

Recruiting and retention difficulties can limit our

ability to support our commercial, supply chain and research and development programs.

All of our employees are at-will, which means that either we or the employee may terminate his or her employment at any time.

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We are subject to the risk that we, our U.S.

employees or our employees located in other jurisdictions or any third parties such as our sales agencies and distributors that we engage to do work on our behalf in foreign countries may take action determined to be in violation of anti-corruption laws in any jurisdiction in which we conduct business, including the FCPA and the Bribery Act of 2010, or the U.K.

employees or our employees located in other jurisdictions or any third parties

such as our sales agencies and distributors that we engage to do work on our behalf in foreign countries may take action determined to be in violation of anti-corruption laws in any jurisdiction in which we conduct business, including the FCPA and the Bribery Act of 2010, or the U.K.

Anti-Bribery Act.

The FCPA generally prohibits covered entities and their intermediaries from engaging in bribery or making other prohibited payments, offers or promises to foreign officials for the purpose of obtaining or retaining business or other advantages.

In addition, the FCPA imposes recordkeeping and internal controls requirements on publicly traded corporations and their foreign

affiliates, which are intended to, among other things, prevent the diversion of corporate funds to the payment of bribes and other improper payments, and to prevent the establishment of “off books” slush funds from which such improper payments can be made.

In addition, the FCPA imposes recordkeeping and internal controls requirements on publicly traded corporations and their foreign affiliates, which are intended to, among other things, prevent the diversion of corporate funds to the payment of bribes and other improper payments, and to prevent the establishment of “off books” slush funds from which such improper payments can be made.

As a substantial portion of our revenue is, and we expect will continue to be, from jurisdictions outside of the United States, we face significant risks if we fail to comply with the FCPA and other laws that prohibit improper payments, offers or promises of payment to foreign governments and their officials and political parties by us and other business entities for the purpose of obtaining or retaining business or other advantages.

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Stockholder activism, the current political environment and the current high level of government intervention and regulatory reform may lead to substantial new regulations and disclosure obligations, which may lead to additional compliance costs and impact, in ways we cannot currently anticipate, the manner in which we operate our business.

Our management and other personnel will devote a substantial amount of time to these compliance programs and monitoring of public company reporting obligations and as a result of the new corporate governance and executive compensation related rules, regulations and guidelines prompted by the Dodd-Frank Wall Street Reform and Consumer Protection Act, and further regulations and disclosure obligations expected in the future, we will likely need to devote additional time and costs to comply with such compliance programs and rules.

the future, we will likely need to devote additional time and costs to comply with such compliance programs and rules.

These rules and regulations will cause us to incur significant legal and financial compliance costs and will make some activities more time-consuming and costly.

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Increased cyber-security threats also pose a potential risk to the security of the Company’s information technology systems, as well as the confidentiality, integrity and availability of data stored on these systems.

Any breach could result in disclosure or misuse of confidential or proprietary information, including sensitive customer, vendor, employee or financial information.

In addition, a greater number of our employees working remotely during the COVID-19 pandemic has exposed us, and may continue to expose us, to greater risks related to cyber-security.

Any breach of our systems could result in disclosure or misuse of confidential or proprietary information, including sensitive customer, vendor, employee or financial information.

Such events could cause damage to the Company’s reputation and result in significant recovery or remediation costs, which may adversely impact results of operations.

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In addition, we may be unable to maintain insurance coverage at a reasonable cost or in sufficient amounts or scope to protect us against losses.

Any claims against us, regardless of their merit, could severely harm our financial condition, strain our management and other resources and adversely affect or eliminate the prospects for commercialization or sales of a product or product candidate that is the subject of any such claim.

Any claims against us, regardless of their merit, could severely harm our financial condition, strain our management and other resources

and adversely affect or eliminate the prospects for commercialization or sales of a product or product candidate that is the subject of any such claim.

Our operations are vulnerable to interruption or loss due to natural or other disasters, power loss, strikes and other events beyond our control.

product shipment or installation during the time required to repair, rebuild or replace our suppliers’ damaged manufacturing facilities;

A major earthquake, fire or other disaster (such as a major flood, tsunami, volcanic eruption or terrorist attack) affecting our facilities, or those of our suppliers, could significantly disrupt our operations, and delay or prevent product shipment or installation during the time required to repair, rebuild or replace our suppliers’ damaged manufacturing facilities;

these delays could be lengthy and costly.

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Risks Related to Regulatory Matters

Our products and operations are subject to extensive government regulation and oversight both in the United States and abroad, and our failure to comply with applicable requirements could harm our business.

We and our products are subject to extensive regulation in the United States and elsewhere, including by the FDA and its foreign counterparts.

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and in the most serious cases, criminal penalties.

In addition, our ApiFix Mid-C System is an approved device under the Humanitarian Device Exemption (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 FDA may grant an HDE, which is an exemption from the effectiveness requirements of sections 514 and 515 of the Federal Food, Drug, and Cosmetic Act, or the FDCA, if the FDA determines that the device meets certain criteria.

After HDE approval, the medical device may only be used after approval by an institutional review board, or IRB, 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.

Failure to submit the necessary reports, IRB required modifications or IRB disapproval could cancel or delay our exemption which would cause our sales to decline.

We may not receive the necessary clearances or approvals for our future products, and failure to timely obtain necessary clearances or approvals for our future products would adversely affect our ability to grow our business.

An element of our strategy is to continue to upgrade our products, add new features and expand clearance or approval of our current products to new indications.

In the United States, before we can market a new medical device, or a new use of, new claim for or significant modification to an existing product, we must first receive either clearance under Section 510(k) of the Federal Food, Drug, and Cosmetic Act, or the FDCA, or approval of a premarket approval application, or PMA, from the FDA, unless an exemption applies.

In the United States, before we can market a new medical device, or a new use of, new claim for or significant modification to an existing product, we must first receive either clearance under Section 510(k) of the FDCA or approval of a premarket approval application, or PMA, from the FDA, unless an exemption applies.

In the 510(k) clearance process, before a device may be marketed, the FDA must determine that a proposed device is “substantially equivalent” to a legally-marketed “predicate” device, which includes a device that has been previously cleared through the 510(k) process, a device that was legally marketed prior to May 28, 1976 (pre-amendments device), a device that was originally on the U.S.

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Similarly, certain modifications made to products cleared through a 510(k) may require a new 510(k) clearance.

PMA approval and the 510(k) clearance process can be expensive, lengthy and uncertain.

Both the PMA approval and the 510(k) clearance process can be expensive, lengthy and uncertain.

The FDA’s 510(k) clearance process usually takes from three to 12 months, but can last longer.

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This certificate entitles the manufacturer to affix the CE Mark to its medical devices after having prepared and signed a related EC Declaration of Conformity.

In order to sell our products in Great Britain (England, Wales and Scotland) our products must comply with the requirements of the UK Medical Device Regulations.

Compliance with these requirements is a prerequisite to be able to affix the UKCA Mark to our products, without which they cannot be sold or marketed in Great Britain.

To demonstrate compliance with the essential requirements we must undergo a conformity assessment procedure, which varies according to the type of medical device and its classification.

A conformity assessment procedure requires the intervention of an organization accredited by an Approved Body under UK Medical Device Regulations, or Approved Body.

Depending on the relevant conformity assessment procedure, the Approved Body would typically audit and examine the technical file and the quality system for the manufacture, design and final inspection of our devices.

The Approved Body issues a certificate of conformity following successful completion of a conformity assessment procedure conducted in relation to the medical device and its manufacturer and their conformity with the essential requirements.

This certificate entitles the manufacturer to affix the UKCA Mark to its medical devices after having prepared and signed a related UK Declaration of Conformity.

As a general rule, demonstration of conformity of medical devices and their manufacturers with the essential requirements must be based, among other things, on the evaluation of clinical data supporting the safety and performance of the products during normal conditions of use.

Specifically, a manufacturer must demonstrate that the device achieves its intended performance during normal conditions of use, that the known and foreseeable

risks, and any adverse events, are minimized and acceptable when weighed against the benefits of its intended performance, and that any claims made about the performance and safety of the device are supported by suitable evidence.

If we fail to remain in compliance with applicable European laws and directives, we would be unable to continue to affix the CE Mark to our surgical systems, which would prevent us from selling them within the EEA.

Specifically, a manufacturer must demonstrate that the device achieves its intended performance during normal conditions of use, that the known and foreseeable risks, and any adverse events, are minimized and acceptable when weighed against the benefits of its intended performance, and that any claims made about the performance and safety of the device are supported by suitable evidence.

If we fail to remain in compliance with applicable European and United Kingdom laws and directives, we would be unable to continue to affix the CE or UKCA Marks to our surgical systems, which would prevent us from selling them within the EEA and the United Kingdom, respectively.

We or our distributors will also need to obtain regulatory approval in other foreign jurisdictions in which we plan to market and sell our products.

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If the FDA disagrees with our determination and requires us to submit new 510(k) notifications or PMAs for modifications to our previously cleared products for which we have concluded that new clearances or approvals are unnecessary, we may be required to cease marketing or to recall the modified product until we obtain clearance or approval, and we may be subject to significant regulatory fines or penalties.

In addition, the FDA may not approve or clear our products for the indications that are necessary or desirable for successful commercialization or could require clinical trials to support any modifications.

In addition, the FDA may not approve or clear

our products for the indications that are necessary or desirable for successful commercialization or could require clinical trials to support any modifications.

Any delay or failure in obtaining required clearances or approvals would adversely affect our ability to introduce new or enhanced products in a timely manner, which in turn would harm our future growth.

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administrative or judicially imposed sanctions;

the FDA’s refusal to grant

pending or future clearances or approvals for our products;

the FDA’s refusal to grant pending or future clearances or approvals for our products;

clinical holds;

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Our products have been cleared by the FDA for specific indications.

We train our marketing personnel and independent sales agencies and distributors to not promote our products for uses outside of the FDA-cleared indications for use, known as “off-label uses.” We cannot, however, prevent a physician from using our products off-label, when in the physician’s independent professional medical judgment he or she deems it appropriate.

products off-label, when in the physician’s independent professional medical judgment he or she deems it appropriate.

There may be increased risk of injury to patients if physicians attempt to use our products off-label.

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However, a failure or delay in obtaining regulatory clearance or approval in one country may have a negative effect on the regulatory process in others.

Legislative or regulatory reforms in the United States or the EU may make it more difficult and costly for us to obtain regulatory clearances or approvals for our products or to manufacture, market or distribute our products after clearance or approval is obtained.

Legislative or regulatory reforms in the United States, the United Kingdom or the European Union may make it more difficult and costly for us to obtain regulatory clearances or approvals for our products or to manufacture, market or distribute our products after clearance or approval is obtained.

From time to time, legislation is drafted and introduced in Congress that could significantly change the statutory provisions governing the regulation of medical devices.

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We cannot determine what effect changes in regulations, statutes, legal interpretation or policies, when and if promulgated, enacted or adopted may have on our business in the future.

Such changes could, among

other things, require:

Such changes could, among other things, require:

additional testing prior to obtaining clearance or approval;

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These new procedures may result in a longer or more burdensome assessment of our new products.

The Medical Devices Regulation, or MDR, entered into force in May 2017 and will become applicable in 2020.

The Company can continue marketing under the old regulation until March 2021.

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

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 Company can continue marketing existing CE-marked products under the previous regulation until March 2023 so long as a certification extension is granted by its notified body.

Any products not yet CE-marked or products with significant changes that require additional notified review are subject to the MDR as of May 2021, including the requirement of obtaining QSR certification under the MDR.

The MDR among other things, imposes additional reporting requirements on

manufacturers of high risk medical devices, imposes an obligation on manufacturers to appoint a “qualified person” responsible for regulatory compliance, and provides for more strict clinical evidence requirements.

Effective January 31, 2020, the United Kingdom withdrew from the 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 MHRA.

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

The Approved Body 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 Approved Body 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.

We are subject to certain federal, state and foreign fraud and abuse laws, health information privacy and security laws and transparency laws, which, if violated, could subject us to substantial penalties.

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We could be adversely affected if regulatory agencies determine our financial relationships with such physicians to be in violation of applicable laws.

Due to the breadth of these laws, the narrowness of statutory exceptions and regulatory safe harbors available, and the range of

interpretations to which they are subject, it is possible that some of our current or future practices might be challenged under one or more of these laws.

To enforce compliance with the healthcare regulatory laws, certain enforcement bodies have recently increased their scrutiny of interactions between healthcare companies and healthcare providers, which has led to a number of investigations, prosecutions, convictions and settlements in the healthcare industry.

Due to the breadth of these laws, the narrowness of statutory exceptions and regulatory safe harbors available, and the range of interpretations to which they are subject, it is possible that some of our current or future practices might be challenged under one or more of these laws.

led to a number of investigations, prosecutions, convictions and settlements in the healthcare industry.

Responding to investigations can be time-and resource-consuming and can divert management’s attention from the business.

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We do not yet know the full impact that the Affordable Care Act will have on our business.

The Trump Administration and the U.S.

The Biden Administration and the U.S.

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

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On January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law, which, 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.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act, was signed into law, which, among other things, includes a program for providers to receive accelerated or advanced Medicare payments.

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

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Our third-party manufacturers’ activities may involve the controlled storage, use and disposal of hazardous materials.

Our manufacturers are subject to federal, state, local and foreign laws and regulations governing the use, generation, manufacture, storage, handling and disposal of these hazardous materials.

Our manufacturers are subject to federal, state, local and foreign laws and regulations governing the

use, generation, manufacture, storage, handling and disposal of these hazardous materials.

We currently carry no insurance specifically covering environmental claims relating to the use of hazardous materials, but we do reserve funds to address these claims at both the federal and state levels.

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We may not be successful in maintaining strong relationships with our independent sales agencies.

In addition, our independent sales agencies are not required to sell our products on an exclusive basis and also are not required to purchase any minimum quantity of our products.

In addition, our independent sales agencies are not required to sell our products on an exclusive basis and also are not required to sell any minimum quantity of our products.

The failure of our network of independent sales agencies to generate U.S.

sales of our products and promote our brand effectively would impair our business and results of operations.

We also sell our products in international markets, primarily through a network of 39 independent stocking distributors and seven independent sales agencies.

We also sell our products in international markets, primarily through a network of 42 independent stocking distributors and 11 independent sales agencies.

We sell our products in 44 countries outside of the United States, and we expect a significant amount of our revenue to come from international sales for the foreseeable future.

In the past, we have experienced issues collecting payments from certain of our independent distributors and we may again experience such issues in the future.

We face significant challenges and risks in managing our geographically dispersed distribution network and retaining the individuals who make up that network.

In the past, we have experienced issues collecting payments from certain of our independent stocking distributors and we may again experience such issues in the future.

Our ability to market, distribute, and sell our products through our network of distributors and agencies has been adversely affected as a result of precautionary responses to the COVID-19 pandemic, including travel restrictions, suspension and shutdown orders and other measures intended to limit person-to-person contact.

We also face other significant challenges and risks in managing our geographically dispersed distribution network and retaining the individuals who make up that network.

We cannot control the efforts and resources our third-party sales agencies and distributors will devote to marketing our products.

Our sales agencies and distributors may be unable to successfully market and sell our products and may not devote sufficient time and resources to support the marketing and selling efforts that enable the products to develop, achieve or sustain market acceptance in their respective jurisdictions.

Our sales agencies and stocking distributors may be unable to successfully market and sell our products and may not devote sufficient time and resources to support the marketing and selling efforts that enable the products to develop, achieve or sustain market acceptance in their respective jurisdictions.

Additionally, in some international jurisdictions, we rely on our distributors to manage the regulatory process, while complying with all applicable rules and regulations, and we are dependent on their ability to do so effectively.

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Some of our independent sales agencies and distributors have historically accounted for a material portion of our sales volume.

Sales to two of our independent sales agencies accounted for 12.3% and 12.2%, respectively, of our revenue in 2019.

Sales to two of our independent sales agencies accounted for 12.1% and 11.2%, respectively, of our revenue in 2018.

Sales to two of our independent sales agencies accounted for 10.1% and 10.1%, respectively, of our revenue in 2017.

Sales through two of our independent sales agencies in the United States accounted for 14.2% and 13.8%, respectively, of our global revenue in 2020.

Sales through two of our independent sales agencies in the United States accounted for 12.3% and 12.2%, respectively, of our global revenue in 2019.

Sales through two of our independent sales agencies in the United States accounted for 12.1% and 11.2%, respectively, of our global revenue in 2018.

If any such agency or distributor were to cease to sell and market our products, our sales could be adversely affected.

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Any of these factors could reduce our revenue from affected markets, increase our costs in those markets or damage our reputation.

If an independent sales agency or distributor were to depart and be retained by one of our competitors, we may

be unable to prevent them from helping competitors solicit business from our existing customers, which could further adversely affect our sales.

independent sales agency or distributor were to depart and be retained by one of our competitors, we may be unable to prevent them from helping competitors solicit business from our existing customers, which could further adversely affect our sales.

In any such situation in which we lose the services of an independent sales agency or distributor, we may need to seek alternative sales agencies or distributors, and our sales may be adversely affected.

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This could disrupt our ability to fulfill orders during a transition and impact our ability to utilize our current supply chain.

In addition, we currently use Structure Medical, LLC, a Squadron-affiliated entity, as a supplier for components of our products.

In addition, we currently use Structure Medical, LLC and Vilex, LLC, Squadron-affiliated entities, as suppliers for some of our components of our products.

While the COVID-19 pandemic has resulted in governmental authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in place or total lock-down orders, social distancing requirements, and business limitations and shutdowns, those measures, have not yet had any significant impacts on our product supply chain.

However, any negative impacts on the assembly and production of our products in the future may result in a decline in sales.

Performance issues, service interruptions or price increases by our shipping carriers could adversely affect our business and harm our reputation and ability to provide our services on a timely basis.

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We rely on a limited number of third-party suppliers for the majority of our products and may be unable to find replacements or immediately transition to alternative suppliers.

We rely on several suppliers for the majority of our products, with whom we do not have long-term supply contracts.

We rely on several suppliers for the majority of our products and we maintain certain long-term contracts with these key suppliers.

These suppliers may be unwilling or unable to supply these products to us reliably and at the prices and levels we anticipate or are required by the market.

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The occurrence of any of these events could harm our ability to meet the demand for our products in a timely or cost-effective manner.

As discussed above under the third-party manufacturer risk factor, the impact of the COVID-19 pandemic has not yet had any significant impacts on our product supply chain.

However, any negative impacts on the production and supply of our products in the future may result in a decline in sales.

Risks Related to Intellectual Property

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Furthermore, an adverse decision in a derivation proceeding can result in a third party receiving the patent right sought by us, which in turn could affect our ability to commercialize our products.

Furthermore, though an issued patent is presumed valid and enforceable, its issuance is not conclusive as to its validity or its enforceability and it may not provide us with adequate proprietary protection or competitive advantages against competitors with similar products.

advantages against competitors with similar products.

Competitors may also be able to design around our patents.

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In addition, proceedings to enforce or defend our patents could put our patents at risk of being invalidated, held unenforceable or interpreted narrowly.

Such proceedings could also provoke third parties to assert claims

against us, including that some or all of the claims in one or more of our patents are invalid or otherwise unenforceable.

Such proceedings could also provoke third parties to assert claims against us, including that some or all of the claims in one or more of our patents are invalid or otherwise unenforceable.

If any of our patents covering our products are invalidated or found unenforceable, or if a court found that valid, enforceable patents held by third parties covered one or more of our products, our competitive position could be harmed or we could be required to incur significant expenses to enforce or defend our rights.

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These applications may later result in issued patents, or the revival of previously abandoned patents, that will prevent, limit or otherwise interfere with our ability to make, use or sell our products.

Third parties may, in the future, assert claims that we are employing their proprietary technology without authorization, including claims from competitors or from non-practicing entities that have no relevant product

revenue and against whom our own patent portfolio may have no deterrent effect.

As we continue to commercialize our products in their current or updated forms, launch new products and enter new markets, we expect competitors may claim that one or more of our products infringe their intellectual property rights as part of business strategies designed to impede our successful commercialization and entry into new markets.

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These claims may require us to initiate or defend protracted and costly litigation on behalf of our customers or distributors, regardless of the merits of these claims.

If any of these claims succeed or

settle, we may be forced to pay damages or settlement payments on behalf of our customers or distributors or may be required to obtain licenses for the products they use.

If any of these claims succeed or settle, we may be forced to pay damages or settlement payments on behalf of our customers or distributors or may be required to obtain licenses for the products they use.

If we cannot obtain all necessary licenses on commercially reasonable terms, our customers may be forced to stop using our products.

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Accordingly, our efforts to protect our intellectual property rights in such countries may be inadequate.

In addition, changes in the law and legal decisions by courts in the United States and foreign countries may affect our ability to obtain adequate protection for our technology and the enforcement of our intellectual property.

In addition, changes in the law and legal decisions by courts in the

United States and foreign countries may affect our ability to obtain adequate protection for our technology and the enforcement of our intellectual property.

Third parties may assert ownership or commercial rights to inventions we develop.

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Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees.

Recent changes in U.S.

patent laws may limit our ability to obtain, defend and/or enforce our patents.

Recent patent reform legislation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents.

The Leahy-Smith America Invents Act, or the Leahy-Smith Act, includes a number of significant changes to U.S.

These include provisions that affect the way patent applications are prosecuted and also affect patent litigation.

Patent and Trademark Office recently developed new regulations and procedures to govern administration of the Leahy-Smith Act, and many of the substantive changes to patent law associated with the Leahy-Smith Act, and in particular, the first to file provisions, which became effective on March 16, 2013.

The first to file provisions limit the rights of an inventor to patent an invention if not the first to file an application for patenting that invention, even if such invention was the first invention.

Accordingly, it is not clear what, if any, impact the Leahy-Smith Act will have on the operation of our business.

However, the Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the enforcement and defense of our issued patents.

For example, the Leahy-Smith Act provides that an administrative tribunal known as the Patent Trial and Appeals Board, or PTAB, provides a venue for challenging the validity of patents at a cost that may be lower than district court litigation and on timelines that are much faster.

Although it is not clear what, if any, long-term impact the PTAB proceedings will have on the operation of our business, the initial results of patent challenge proceedings before the PTAB since its inception in 2013 have resulted in the invalidation of many U.S.

patent claims.

The availability of the PTAB as a lower-cost, faster and potentially more potent tribunal for challenging patents could increase the likelihood that our own patents will be challenged, thereby increasing the uncertainties and costs of maintaining and enforcing them.

Risks Related to Ownership of Our Common Stock

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• issuance of new or changed securities analysts’ reports or recommendations regarding us;

• short interest reports and or trading.

In addition, the stock markets in general, and the markets for companies like ours in particular, have from time to time experienced extreme volatility that have has been often unrelated to the operating performance of the issuer.

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These broad market and industry fluctuations may negatively impact the price or liquidity of our common stock, regardless of our operating performance.

The price of our stock may be vulnerable to manipulation, including through short sales.

We believe our common stock has been the subject of recent short selling efforts by certain market participants.

Short sales are transactions in which a market participant sells a security that it does not own.

To complete the transaction, the market participant must borrow the security to make delivery to the buyer.

The market participant is then obligated to replace the security borrowed by purchasing the security at the market price at the time of required replacement.

If the price at the time of replacement is lower than the price at which the security was originally sold by the market participant, then the market participant will realize a gain on the transaction.

Thus, it is in the market participant’s interest for the market price of the underlying security to decline as much as possible during the period prior to the time of replacement.

Short selling may negatively affect the value of our stock to the detriment of our stockholders.

In addition, market participants with disclosed short positions in our stock have published, and may in the future continue to publish, negative information regarding us that we believe is inaccurate and misleading.

We believe that the publication of this negative information, and other efforts by certain market participants to manipulate the price of our common stock for their personal financial gain, may in the future lead to downward pressure on the price of our stock to the detriment of our stockholders.

We may be subject to securities litigation, which is expensive and could divert our management’s attention.

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“Emerging growth companies” may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies, including not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.

Investors could find our common stock less attractive because we may rely on these exemptions.

Investors could find our common stock less attractive because we may rely

on these exemptions.

If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

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We are also a “smaller reporting company,” as such term is defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended.

As a result, many of the same exemptions from reporting requirements available to us as an emerging growth company are also available to us as a smaller reporting company, including not being

required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act and reduced disclosure obligations regarding executive compensation.

As a result, many of the same exemptions from reporting requirements available to us as an emerging growth company are also available to us as a smaller reporting company, including not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act and reduced disclosure obligations regarding executive compensation.

To the extent that we continue to qualify as a smaller reporting company, after we cease to qualify as an emerging growth company, those exemptions may continue to be available to us.

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As of December 31, 2020, we have a total of 19,560,291 outstanding shares of common stock, all of which may be resold in the public market immediately without restriction, other than shares owned by our affiliates, which may be sold pursuant to Rule 144 under the Securities Act, subject to the conditions of Rule 144 including volume limitations.

However, the resale of an aggregate of 5,941,937 shares have been restricted until March 11, 2020, as a result of lock-up agreements executed by our directors, certain of our executive officers and certain other shareholders in conjunction with our December 2019 follow-on offering.

The underwriters who are party to the lock-up agreements may, however, in their sole discretion, permit the stockholders who are subject to the lock-up agreements to sell shares prior to the expiration of the lock-up period.

In addition, holders of an aggregate of approximately 5,378,291 shares of our common stock will have rights, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders.

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Furthermore, any fluctuations in our operating results may, in turn, cause the price of our common stock to fluctuate substantially.

We believe comparisons of our financial results from various reporting periods are not necessarily meaningful and should not be relied upon as an indication of our future performance.

We believe comparisons of our financial

results from various reporting periods are not necessarily meaningful and should not be relied upon as an indication of our future performance.

Our principal stockholders and management own a significant percentage of our stock and will be able to exert control over matters subject to stockholder approval.

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In addition, pursuant to an agreement with the Company, Squadron has the right to designate up to four nominees for election to the Company’s board of directors, depending on the percentage of capital stock beneficially owned by Squadron.

Currently, four members of our board are Squadron designees.

Currently, three members of our board are Squadron designees.

Provisions of our charter documents or Delaware law could delay or prevent an acquisition of the company, even if the acquisition would be beneficial to our stockholders, which could make it more difficult for you to change management.

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• a requirement of approval of not less than 66 2∕3% of all outstanding shares of our capital stock entitled to vote to amend any bylaws by stockholder action, or to amend specific provisions of our amended and restated certificate of incorporation.

In addition, Delaware law prohibits a publicly held Delaware corporation from engaging in a business combination with an interested stockholder, generally a person who, together with its affiliates, owns, or within the last three years has owned, 15% or more of our voting stock, for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner.

in a prescribed manner.

Accordingly, Delaware law may discourage, delay or prevent a change in control of our company.

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Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty or other wrongdoing by any of our directors, officers, employees or agents to us or our stockholders, (iii) any action asserting a claim arising pursuant to any provision of the DGCL or our amended and restated certificate of incorporation or amended and restated bylaws or (iv) any action asserting a claim governed by the internal affairs doctrine.

This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors,

officers or other employees, which may discourage such lawsuits against us and our directors, officers and other employees.

This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and other employees.

Alternatively, if a court were to find the choice of forum provision contained in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions.

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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 1A. Risk Factors