What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-03-11 compared with 2020-03-05 · 153 added, 90 removed, 253 unchanged (49% of the section changed)

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Accordingly, we must make an up-front investment in inventory of consigned implants and instruments before we can generate revenue from a particular hospital and we maintain substantial levels of inventory at any given time.

In the international markets where we sell to stocking distributors, we transfer control of our products to the distributor when title passes upon shipment.

We currently market 35 surgical systems that serve three of the largest categories within the pediatric orthopedic market:

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In the future, we expect to expand our product offering within these categories, as well as to address additional categories of the pediatric orthopedic market.

The majority of our revenue has been generated in the United States, where we sell our products through a network of 38 independent sales agencies employing 167 sales representatives specifically focused on pediatrics.

The majority of our revenue has been generated in the United States, where we sell our products through a network of 36 independent sales agencies employing 171 sales representatives specifically focused on

These independent sales agents are trained by us, distribute our products and are compensated through sales-based commissions and performance bonuses.

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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 $25.0 million reduction in a Term Note owed to Squadron in connection with the initial acquisition.

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

The total consideration of $25.0 million included $12.6 million allocated to the divested Vilex business and $12.4 million to the license and distribution agreement.

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

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

Telos is a boutique regulatory consulting firm formed in Colorado.

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

("ApiFix") for (a) $2.0 million in cash, and (b) 934,783 shares of the Company's common stock, $0.00025 par value per share, representing approximately $35.0 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 $13.0 million on the second anniversary of the closing date, provided that such payment will be paid earlier if 150 clinical procedures using the ApiFix System are completed in the United States before such anniversary date, (ii) $8.0 million on the third anniversary of the closing date;

and (iii) $9.0 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 $3.4 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.

We market and sell our products internationally in 44 countries through independent stocking distributors and sales agencies.

Our independent distributors manage the billing relationship with each hospital in their respective territories and are responsible for servicing the product needs of their surgeon customers.

In 2017, we 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 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.

Our independent stocking distributors manage the billing relationship with each hospital in their respective territories and are responsible for servicing the product needs of their surgeon customers.

In 2017, we began to supplement our international stocking distributors with sales agencies using direct sales programs in the United Kingdom, Ireland, Australia and New Zealand where we sell directly to the hospitals.

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, similar to our U.S.

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and international markets by increasing investments in consigned implant and instrument sets, strengthening our global sales and distribution infrastructure and expanding our product offering.

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, and our net loss was $13.7 million, $12.0 million and $8.9 million, respectively.

Our net loss for the year ended December 31, 2018 and 2017, included $2.0 million and $2.0 million, respectively, of non-cash accelerated vesting of restricted stock compensation expense related to our October 2017 IPO.

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, and our net loss was $32.9 million, $13.7 million and $12.0 million, respectively.

Our net loss for the year ended December 31, 2018 included $2.0 million of non-cash accelerated vesting of restricted stock compensation expense related to our October 2017 IPO.

Impact of COVID-19 on our Business

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.

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.

We encourage the readers of this document to read our risk factors in its entirety contained in Item 1A “Risk Factors” where there is additional information regarding the COVID-19 pandemic.

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.

Health and Safety

From the earliest signs of the outbreak, we have taken proactive, aggressive action to protect the health and safety of our employees, customers, partners and suppliers.

We enacted rigorous safety measures in all applicable locations, including implementing social distancing protocols, requiring working from home for those employees that do not need to be physically present on the warehouse floor, suspending travel, extensively and frequently disinfecting our workspaces and providing masks to those employees who must be physically present.

We will continue to utilize some or all of these measures until we determine that the COVID-19 pandemic is adequately contained for purposes of our business.

We may also take further actions as government authorities require or recommend or as we determine to be in the best interests of our employees, customers, partners and suppliers.

We have not yet experienced any significant impacts or interruptions to our supply chain as a result of the COVID-19 pandemic.

To mitigate the risk of any potential supply interruptions from the COVID-19 pandemic, we chose to increase certain inventory levels during the year.

We may decide to take similar actions going forward.

Additionally, restrictions or disruptions of transportation, such as reduced availability of air transport, port closures and increased border controls or closures, have resulted in higher costs and delays.

The outbreak has significantly increased economic and demand uncertainty.

We anticipate that the current outbreak or continued spread of COVID-19, and the actions taken by governmental authorities and other third parties to contain the virus, may cause a global economic slowdown, and it is possible that it could cause a global recession.

In the event of a recession, demand for our products would decline and our business would be adversely effected.

During 2020, we have experienced a reduction in revenue as a result of global delays in elective surgeries.

Although there is uncertainty related to the anticipated impact of the recent COVID-19 outbreak on our future results, we believe our business model, our current cash reserves and the recent steps we have taken to strengthen our balance sheet, including our June 2020 and December 2019 equity offerings, leave us well-positioned to manage our business through this crisis as it continues to unfold.

We believe our existing balances

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

We continue to monitor the rapidly evolving situation and guidance from international and domestic authorities, including federal, state and local public health authorities and may take additional actions based on their recommendations.

In these circumstances, there may be developments outside our control requiring us to adjust our operating plan.

As such, given the dynamic nature of this situation, we cannot reasonably estimate the impacts of COVID-19 on our financial condition, results of operations or cash flows in the future .

Components of our Results of Operations

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On rare occasions, hospitals purchase products for their own inventory, and revenue is recognized when the hospital obtains control of the product, typically either upon shipment or delivery of the product dependent on the terms of the contract.

Pricing for each customer is dictated by a unique pricing agreement, which does not generally include rebates or discounts.

Outside of the United States, we primarily sell our products through independent stocking distributors.

Pricing for each customer is dictated by a unique pricing agreement.

Outside of the United States, we sell our products directly to hospitals through independent sales agencies or to independent stocking distributors.

Generally, the distributors are allowed to return products, and some are thinly capitalized.

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Following a review of our collection history, we deemed collectibility was probable for all international stocking distributors effective January 1, 2019.

Based on a history of reliable collections, we have concluded that a contract exists and revenue should be recognized when we transfer control of our products to the customer, generally upon implantation or when title passes upon shipment.

Additionally, based on our history of immaterial returns from international customers, we have historically estimated no reserve for returns.

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

Additionally, in September 2018 we began selling in Canada and in January 2019 to Belgium and the Netherlands utilizing the agency model.

The products are generally consigned to our independent sales agencies, and revenue is recognized when the products are used by or shipped to the hospital for surgeries on a case by case basis.

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.The products are generally consigned to our independent sales agencies, and revenue is recognized when the products are used by or shipped to the hospital for surgeries on a case by case basis.

Pricing for each customer is dictated by a unique pricing agreement, which does not generally include rebates or discounts.

Cost of Revenue and Gross Margin

Pricing for each customer is dictated by a unique pricing agreement.

Cost of Revenue and Gross Profit

Our cost of revenue consists primarily of products purchased from third-party suppliers, inbound freight, excess and obsolete inventory adjustments and royalties.

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Prior to their use in surgery, the cost of consigned implants is recorded as inventory in our balance sheet.

The costs of instruments are typically capitalized and not included in cost of revenue.

We expect our cost of revenue to increase in absolute dollars due primarily to increased sales volume and changes in the geographic mix of our sales as our international operations tend to have a higher cost of revenue as a percentage of sales.

The costs of instruments are typically capitalized and not included in cost of revenue unless sold as a set to our international stocking distributors or directly to hospitals.

We expect our cost

of revenue to increase in absolute dollars due primarily to increased sales volume and changes in the geographic mix of our sales as our international operations tend to have a higher cost of revenue as a percentage of sales.

Our gross profit is calculated by subtracting our cost of revenue from revenue and is expected to increase in absolute dollars due primarily to increased sales volume and sales mix to customers based in the United States.

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Commissions and bonuses are generally based on a percentage of sales.

Our international independent distributors purchase implant and instrument sets and replenishment stock for resale, and we do not pay commissions or any other sales-related costs for international sales.

Our international independent stocking distributors purchase implant and instrument sets and replenishment stock for resale, and we do not pay commissions or any other sales-related costs for these international sales.

We expect our sales and marketing expenses to continue to increase in absolute dollars with the commercialization of our current and pipeline products and continued investment in our global sales organization to reach new customers.

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We expect the growth rate of our general and administrative expenses will be lower than the growth rate of our revenue.

Legal Settlement Expenses

The Company is involved in various legal proceedings.

Liabilities for estimated losses are accrued if the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated.

For the year ended December 31, 2020, the Company accrued $6.3 million as a result of the current legal settlement negotiations.

As additional information becomes available, management will reassess the pending claims and litigation and may revise its previously accrued estimate.

See Note 17 for additional details regarding current legal proceedings.

Public Offering Costs

During the year ended December 31, 2017, we incurred $1.8 million of costs, primarily consisting of legal, accounting and other direct fees and costs related to our initial public offering, or our IPO.

These costs were initially deferred and capitalized and then reclassified to stockholders’ equity at the conclusion of our IPO on October 12, 2017.

In October 2017, we also recorded $2.0 million non-cash restricted stock expense related to the accelerated vesting associated with our IPO.

On December 11, 2018, we completed a follow-on offering and incurred $0.4 million of costs primarily consisting of legal, accounting and other direct fees and costs.

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On December 13, 2019, we completed another offering of shares of common stock.

Offering expenses of $0.2 million, primarily consisting of legal, accounting and other direct fees and costs related to the offering were recorded in stockholder's equity at the conclusion of our offering.

Offering expenses of $0.2 million, primarily consisting of legal, accounting and other direct fees and costs related to the offering were recorded in stockholders' equity at the conclusion of our offering.

On June 22, 2020, we completed another offering of shares of common stock.

Offering expenses of $0.5 million, primarily consisting of legal, accounting and other direct fees and costs related to the offering were recorded in stockholders' equity at the conclusion of our offering.

Research and Development Expenses

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Other Expenses

Our other expenses primarily consist of borrowing costs and expenses related to long-term debt.

Our other expenses primarily consist of fair value adjustments of contingent consideration, accreted interest expense related to the acquisition installment payables and borrowing costs and expenses related to long-term debt.

Results of Operations

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General and administrative expenses 38,317 26,664 11,653 44 %

Legal settlement expenses 6,342 — 6,342 100 %

Research and development expenses 5,273 5,748 (475) (8) %

Other expenses 6,912 3,608 3,304 92 %

Provision for income taxes (benefit) (723) — (723) (100) %

Net loss from continuing operations (32,944) (12,685) $ (20,259) 159.7 %

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Total $ 71,078 100% $ 72,552 100%

Revenue increased $15.0 million, or 26%, from $57.6 million for the year ended December 31, 2018 to $72.6 million for the year ended December 31, 2019.

The increase was due primarily to trauma and deformity sales growth of $9.7 million, or 24%, primarily driven by sales of our Pediatric Nailing Platform | Femur, PediPlate, and Orthex hexapod system, and scoliosis sales growth of $4.8 million, or 29%, primarily driven by sales of our RESPONSE TM and other licensed products.

Nearly all of the increase in each of the trauma and deformity and scoliosis categories was due to an increase in the unit volume sold and not a result of price changes.

Net revenue decreased $1.5 million, or 2%, from $72.6 million for the year ended December 31, 2019 to $71.1 million for the year ended December 31, 2020.

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 suspension of elective surgeries as a result of the COVID-19 pandemic adversely affected revenue.

The domestic markets were primarily impacted during the second quarter and saw trends towards normalization for the balance of the year.

International markets were impacted more severely and remained at less than historical levels throughout the year.

Trauma and deformity sales decreased $1.7 million, or 3%, primarily driven by fewer elective deformity correction surgeries caused by the pandemic and specifically by decreased sales of our PediPlates system and PediNail system.

Scoliosis systems decreased $0.7 million, or 3%, primarily driven by lower sales of our RESPONSE system and BandLoc system.

Sports medicine / other increased $1.0 million, or 57% due to the acquisition of Telos.

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

Cost of Revenue and Gross Margin

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Gross margin was 77% for the year ended December 31, 2020 and 75% for the year ended December 31, 2019.

The increase in gross margin was due primarily to a decrease in cost of goods sold related to the addition of sales agents in our international markets along with increased sales.

The increase in gross margin was primarily driven by the converted sales agents in our international markets and lower international stocking distributor orders driven by the impact of the COVID-19 pandemic on our geographical sales mix.

Sales and Marketing Expenses

Sales and marketing expenses increased $0.6 million, or 1.8%, from $31.3 million for the year ended December 31, 2019 to $31.9 million for the year ended December 31, 2020.

The increase was due primarily to increased sales commission expenses, driven by the increase in unit volume sold, and marketing expenses.

The increase was due primarily to increased sales commission expenses, driven by the converted sales agents in our international markets.

General and Administrative Expenses

General and administrative expenses increased $11.7 million, or 44%, from $26.7 million for the year ended December 31, 2019 to $38.3 million for the year ended December 31, 2020.

The increase was due primarily to the addition of personnel and resources to support the growth of our business as well as increased quality and regulatory resources and consultants to comply with new FDA and EU regulatory requirements.

The increase was due primarily to the addition of personnel and resources to support the continued expansion of our business, an increase in stock-based compensation expense of $3.6 million driven by a third year of restricted stock grants in a three year vesting cycle and one-time stock grants of $1.5 million related to executive management transitions, increase in legal expenses of $2.3 million related to our ongoing litigation and acquisitions, and increased general and administrative expenses associated with the acquisitions of ApiFix and Telos.

Depreciation and amortization expenses increased $3.4 million, or 74%, from $4.6 million for the year ended December 31, 2019 to $8.0 million for the year ended December 31, 2020.

The increase was primarily due to increased investments in consigned surgical instrument sets and amortization on intangible licenses.

We also purchased $13.2 million in amortizable intangibles associated with the acquisition of Orthex on June 4, 2019, which increased amortization expense in the current year.

The increase was primarily due to the amortization on intangible assets acquired through the Orthex, Telos and ApiFix acquisitions and the purchase of the Band-Lok intellectual property and increased investments in consigned surgical instrument sets.

Research and Development Expenses

Research and development expenses increased $1.0 million, or 21%, from $4.7 million for the year ended December 31, 2018 to $5.7 million for the year ended December 31, 2019.

The increase was due to the addition of personnel to support our product pipeline and the growth of our business.

Research and development expenses decreased $0.4 million, or 8%, from $5.7 million for the year ended December 31, 2019 to $5.3 million for the year ended December 31, 2020.

The decrease was driven by a reduced investment in research and development project expenses as a result of the sales decline related to the COVID-19 pandemic.

Total Other Expenses

Total other expenses increased $3.3 million, or 92%, from $3.6 million for the year ended December 31, 2018 to $6.9 million for the year ended December 31, 2020.

The expense in both of these periods consisted primarily of interest expense on long-term debt.

The increase in other expense is due to the fair value adjustment of $3.5 million related to the ApiFix contingent consideration payment.

Comparison of the Years Ended December 31, 2019 and 2018

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Other expenses 3,608 2,472 1,136 46 %

Net loss from continuing operations (12,685) (12,025) $ (660) 5.5 %

Net loss from discontinued operations (1,046) — (1,046) (100) %

Net loss $ (13,731) $ (12,025) $ (1,706) 14 %

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Revenue increased $15.0 million, or 26%, from $57.6 million for the year ended December 31, 2018 to $72.6 million for the year ended December 31, 2019.

The increase was due primarily to trauma and deformity sales growth of $6.9 million, or 21%, primarily driven by sales of our PediNail and PediFrag products, and scoliosis sales growth of $5.1 million, or 44%, primarily driven by sales of our RESPONSE TM and other licensed products.

Nearly all of the increase in each of the trauma and deformity and scoliosis categories was due to the increase in unit volume sold and not a result of price changes.

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Gross margin was 75% for the year ended December 31, 2019 and 74% for the year ended December 31, 2018.

The decrease in gross margin was due primarily to an increase in cost of goods sold related to an increase in international and distributed product sales.

The increase in gross margin was due primarily to a decrease in cost of goods sold related to the addition of sales agents in our international markets along with increase sales.

Sales and Marketing Expenses

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General and administrative expenses increased $5.7 million, or 27%, from $20.9 million for the year ended December 31, 2018 to $26.7 million for the year ended December 31, 2019.

The increase was due primarily to

the addition of personnel and resources to support the growth of our business, additional public company costs and additional non-recurring legal fees.

Depreciation and amortization expenses increased $1.7 million, or 59%, from $2.9 million for the year ended December 31, 2018 to $4.6 million for the year ended December 31, 2019.

The increase was primarily due to prior increased investments in consigned surgical instrument sets and amortization on intangible licenses.

We also purchased $13.2 million in amortizable intangibles associated with the acquisition of Orthex on June 4, 2019, which increased amortization expense in the current year.

Research and Development Expenses

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

As of December 31, 2019 we had cash, cash equivalents and restricted cash of $72.0 million.

We believe our existing cash and cash equivalents, amounts available under the Loan Agreement, cash receipts from sales of our products and net proceeds from our December 2018 and December 2019 follow-on offerings will be sufficient to meet our anticipated cash requirements for at least the next 12 months.

As of December 31, 2020 we had cash, cash equivalents and restricted cash of $30.1 million and short-term investments of $55.1 million.

We believe our existing cash and cash equivalents, amounts available under the Loan Agreement, cash receipts from sales of our products and net proceeds from our December 2018, December 2019 and June 2020 follow-on offerings will be sufficient to meet our anticipated cash requirements for at least the next 12 months.

Nonetheless, from time to time, we may seek additional financing sources to meet our working capital requirements, make continued research and development investments and make capital expenditures needed for us to maintain and grow our business.

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Net cash used in operating activities was $18.4 million, $17.8 million and $15.6 million for the years ended December 31, 2020, 2019 and 2018, respectively.

The primary use of this cash was to fund our operations

related to the development and commercialization of our products in each of these years.

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

Net cash used for working capital was $(5.0) million, $(11.4) million and $(9.6) million for the years ended December 31, 2020, 2019 and 2018, respectively.

During 2020, we increased inventory by $12.1 million as we deployed additional inventory, including $1.6 million due to the repurchase of inventory from a stocking distributor in Germany, Austria and Switzerland that we converted to a sales agency, and accounts receivable increased by $0.5 million.

These uses of cash for working capital were offset by our legal settlement accrual of $6.3 million and an increase in accounts payable of $3.1 million as we purchased inventory on account for deployment into the field.

During 2019, we increased inventory by $9.8 million as we deployed additional inventory and accounts receivable increased by $5.8 million as our sales increased.

During 2018, we increased inventory by $4.8 million as we deployed additional inventory following our IPO and accounts receivable increased by $3.8 million as our sales increased.

During 2017, the primary driver of working capital cash use was a $4.3 million increase in warehouse inventory.

We had a net loss of $32.9 million, $13.7 million and $12.0 million for the years ended December 31, 2020, 2019 and 2018, respectively, which drove a difference in the use of operating cash between the periods.

Our net loss for the years ended December 31, 2018 and 2017 each included a $2.0 million non-cash expense associated with the accelerated vesting of our restricted stock related to our IPO.

Our net loss for the year ended December 31, 2018 included a $2.0 million non-cash expense associated with the accelerated vesting of our restricted stock related to our IPO.

Cash Used in Investing Activities

Net cash used in investing activities was $69.8 million, $61.9 million and $6.0 million for the years ended December 31, 2020, 2019 and 2018, respectively.

Net cash used in investing activities consisted primarily of purchases of instrument sets, which were consigned in the United States and select international markets, of $11.6 million, $5.2 million and $5.2 million for the years ended December 31, 2019, 2018 and 2017, respectively.

In 2019, we acquired the Vilex Companies for $49.8 million plus shares of common stock.

In 2019, 2018 and 2017, we purchased an additional $0.3 million, $0.2 million and $1.3 million in new product licenses, respectively.

Net cash used in investing activities in 2020 consisted primarily of the purchase of short-term investments of $55.0 million, the acquisition of Telos of $1.7 million, net of cash received, the acquisition of ApiFix of $1.7 million, net of cash received, the acquisition of the Band-Lok intellectual property of $0.8 million and the purchases of property plant and equipment, primarily instruments sets which were consigned in the United States and select international markets, of $10.5 million.

Net cash used in investing activities in 2019 consisted primarily of the acquisition of Vilex and Orthex of $49.8 million, net of cash received, and the purchases of property plant and equipment, primarily instrument sets, of $11.8 million.

Net cash used in investing activities in 2018 consisted primarily of the purchases of instrument sets of $5.3 million.

Cash Provided By Financing Activities

Net cash provided by financing activities was $46.7 million, $91.0 million and $39.7 million for the years ended December 31, 2020, 2019 and 2018, respectively.

Net cash provided by financing activities in 2020 consisted primarily of the proceeds from the issuance of common stock of $70.2 million, net of issuance costs and $1.6 million from the exercise of stock options, offset by the payment of $25.0 million of the revolving credit facility and term loan with Squadron.

Net cash provided by financing activities in 2019 consisted primarily of proceeds from the issuance of common stock, net of issuance costs, of $60.0 million and $1.1 million related to proceeds from the exercise of stock options.

We also had $30.0 million of proceeds from Term Loan B.

We also had $30.0 million of proceeds from Term Loan B in 2019.

Net cash provided by financing activities in 2018 consisted primarily of proceeds from the issuance of common stock, net of issuance costs, of $43.4 million offset by a $4.0 million payment on our revolving credit facility.

Net cash provided by financing activities during 2017 consisted primarily of proceeds from the issuance of common stock, net of issuance costs, of $53.8 million and proceeds from the issuance of debt of $8.0 million, which was partially offset by payments of preferred stock dividends of $6.0 million and shares surrendered by employees to pay taxes on restricted stock of $1.0 million.

Loan Agreement

On December 31, 2017, we entered into a Fourth Amended and Restated Loan and Security Agreement (the "Loan Agreement") with Squadron Capital LLC ("Squadron").

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

Interest on the term loan and revolving loan accrues at the lesser of (a) three month LIBOR plus 8.61%, and (b) 10.0% (the "Applicable Rate") and is payable monthly by us.

The Loan Agreement expires in January 2023.

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

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

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

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

The largest principal amount outstanding under the Amended Loan Agreement at any time since December 2017 was $51.2 million, which included the $30.0 million Term Note B.

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

The fair value of our notes payable to Squadron were estimated based on prices for the same or similar issues and the current interest rates offered for the debt of the same remaining maturities, which are considered Level 2 inputs in accordance with ASC Topic 820, “ Fair Value Measurements and Disclosures .” As of December 31, 2019, the fair value approximated the carrying value.

As provided in the Amendment, Orthex became a "Borrower" under the Amended Loan Agreement and, as such, granted to Squadron a security interest in all of its personal property as collateral for all borrowings under the Amended Loan Agreement.

In connection with the Amendment, the Company granted a security interest in (a) the units of membership interest in Orthex held by the Company, and (b) the shares of stock of Vilex held by the Company, as collateral for borrowings under the Amended Loan Agreement.

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

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

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

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

These events of default include, among other things, the failure to pay amounts due under the credit facilities, insolvency, the occurrence of a material adverse event, which includes a material adverse change in our business, operations or properties (financial or otherwise) or a material impairment of the prospect of repayment of any portion of the obligations, the occurrence of any default under certain other indebtedness and a final judgment against us in an amount greater than $250,000.

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

Under the terms of the Loan Agreement, Squadron provided us a term loan in the principal amount of $20.0 million, represented by a

Term Note A, and a revolving loan in an aggregate principal amount to not exceed $15.0 million, represented by a Revolving Note.

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

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

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

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

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

On July 15, 2020, the Company repaid the $20.0 million principal amount outstanding under the Term Note A, together with all unpaid interest and other related amounts payable.

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

Pursuant to the Second Amendment, the First Amended Loan Agreement’s revolving credit commitment was increased from the previously established $15 million to $25 million and the maturity date was extended from January 31, 2023 to January 1, 2024.

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

The unused commitment fee is payable quarterly in arrears.

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

The Amended Revolving Note will mature at the earlier of:

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

and (ii) January 1, 2024.

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

Following such repayment, there are no outstanding term loan obligations under the Second Amended Loan Agreement.

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

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

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

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

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

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

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

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

Mortgage Note

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Pursuant to the terms of the mortgage note, we pay Tawani Enterprises Inc.

monthly principal and interest installments of $15,543, with interest compounded at 5% until maturity in August 2028, at which time a final payment of remaining principal and interest will become due.

monthly principal and interest

installments of $15,543, with interest compounded at 5% until maturity in August 2028, at which time a final payment of remaining principal and interest will become due.

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

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This management’s discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP.

The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and

liabilities at the date of the financial statements, as well as the reported revenue and expenses during the reporting periods.

The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenue and expenses during the reporting periods.

We monitor and analyze these items for changes in facts and circumstances, and material changes in these estimates could occur in the future.

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Actual results may differ materially from these estimates under different assumptions or conditions.

While our significant accounting policies are more fully described in the notes to our consolidated financial statements appearing elsewhere in this annual report, we believe the following accounting policies are most critical to understanding and evaluating our reported financial results.

Revenue Recognition

In the United States and in seven international markets, we primarily sell our implants, and to a much lesser extent our instruments, through third-party independent sales agencies to medical facilities and hospitals.

In the United States and in ten international markets, we primarily sell our implants, and to a much lesser extent our instruments, through third-party independent sales agencies to medical facilities and hospitals.

For such sales, revenue and associated cost of revenue is recognized when a product is used in a procedure.

In a few cases, hospitals purchase our products for their own inventory, and such revenue and associated cost of revenue is recognized when a product is shipped or delivered and the title and risk of loss passes to the customer.

Outside of the United States, we primarily sell our products through independent stocking distributors.

Outside of the United States, we sell our products directly to hospitals through independent sales agencies or to independent stocking distributors.

Generally, the distributors are allowed to return products, and some are thinly capitalized.

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Following a review of our collection history, we deemed collectibility was probable for all international stocking distributors effective January 1, 2019.

Additionally, based on our history of immaterial returns from international customers, we have historically estimated no reserve for returns.

Inventory Valuation

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Our goodwill represents the excess of the cost over the fair value of net assets acquired.

The determination of the value of goodwill and intangible assets arising from acquisitions requires extensive use of accounting estimates

and judgments to allocate the purchase price to the fair value of net tangible and intangible assets acquired.

The determination of the value of goodwill and intangible assets arising from acquisitions requires extensive use of accounting estimates and judgments to allocate the purchase price to the fair value of net tangible and intangible assets acquired.

Goodwill is not amortized and is assessed for impairment using fair value measurement techniques on an annual basis or more frequently if facts and circumstances warrant such a review.

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We have indefinite lived tradename assets that are reviewed for impairment by performing a quantitative analysis, which occurs annually in the fourth quarter or whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable.

Recoverability is measured by a comparison of the carrying amount to future net undiscounted cash flows expected to be generated by the associated asset.

Recoverability is measured by a comparison of the carrying amount to future net discounted cash flows expected to be generated by the associated asset.

If such assets are determined to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount exceeds the fair market value of the assets.

Deferred Revenue

Deferred revenue consists of the unearned portion of the exclusive license arrangement to permit the purchasers of Vilex the ability to sell products using the external fixation technology of Orthex, LLC to non-pediatric accounts.

This deferred revenue will be recognized on a proportional basis relative to the total expected Orthex sales subject to this license and distribution arrangement.

Stock-based Compensation

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We also considered the various rights and privileges of our redeemable convertible preferred stock relative to our common stock, including anti-dilution protection, cumulative dividend rights, protective provisions in our certificate of incorporation and rights to participate in future rounds of financing.

For stock-based awards granted after the completion of our IPO, our Board of Directors intends to determine the fair value of each share of underlying common stock based on the closing price of our common stock as reported on the date of grant.

The fair value of each share of underlying common stock for stock-based awards is based on the closing price of our common stock as reported on the date of grant.

We recorded total stock-based compensation expenses of $6.2 million, $2.6 million and $3.2 million for the years ended December 31, 2020, 2019 and 2018, respectively.

In October 2017, we recorded a $2.0 million non-cash restricted stock compensation expense related to the accelerated vesting of our restricted stock compensation expense in conjunction with our IPO.

The increase in stock-based compensation expense is driven by a third year of restricted stock grants in a three year vesting cycle and one-time stock grants of $1.5 million related to executive management transitions.

During the first four months of 2018, we recorded an additional $2.0 million non-cash restricted stock expense related to the accelerated vesting of our restricted stock following our IPO.

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Total debt $ 1,175 $ 131 $ 433 $ 328 $ 283

Acquisition Installments 29,934 12,934 17,000 — —

Contingent consideration 43,445 — 43,445 — —

Minimum royalty payments 60 10 30 20 —

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Net Operating Losses

As of December 31, 2019, we had federal tax net operating loss carryforwards, or NOLs, of approximately $86.8 million and state NOLs of $64.0 million, which begin to expire in 2028 unless utilized.

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 our consolidated statements of operations.

As of December 31, 2020, we had federal, state and foreign tax net operating loss carryforwards, or NOLs, of approximately $98.9 million, $68.9 million and $16.9 million, respectively, which begin to expire in 2028 unless utilized.

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 our consolidated statements of operations.

Pursuant to Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, annual use of our pre-change NOLs may be limited in the post-change period in the event that an ‘‘ownership change’’ occurs, which is generally defined as a cumulative change in equity ownership by ‘‘5% shareholders’’ that exceeds 50 percentage points over a rolling three-year period.

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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 7. Management’s Discussion and Analysis