What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-08-05 compared with 2021-05-06 · 73 added, 77 removed, 120 unchanged (56% of the section changed)

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This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the condensed consolidated financial statements and related notes thereto contained elsewhere in this quarterly report, as well as the information under "Note Regarding Forward-Looking Statements."

The description of our business included in this quarterly report is summary in nature and only includes material developments that have occurred since the latest full description.

The full description of the history and general development of our business is included in "Item 1.

Description of Business" section of the Company's Annual Report on Form 10-K filed with the SEC on March 11, 2021, which section is incorporated herein by reference.

We are the only global medical device company focused exclusively on providing a comprehensive trauma and deformity correction, scoliosis and sports medicine product offering to the pediatric orthopedic market in order to improve the lives of children with orthopedic conditions.

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We provide our implants in sets that consist of a range of implant sizes and include the instruments necessary to perform the surgical procedure.

In the United States and a few selected international markets, our customers typically expect us to have full sets of implants and instruments on site at each hospital but do not purchase the implants until they are used in surgery.

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 United States and multiple international markets, our customers typically expect us to have full sets of implants and instruments on site at each hospital but do not purchase the implants until they are used in surgery.

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.

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We do not sell our products through or participate in physician-owned distributorships, or PODs.

We market and sell our products internationally in 45 countries, primarily through independent stocking distributors.

We market and sell our products internationally in 45 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.

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We expect these arrangements to generate an increase in revenue and gross margin.

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

("Vilex") and all of the issued and outstanding units of membership interests in Orthex, LLC ("Orthex") for $60.2 million in total consideration, net of working capital adjustments.

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

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.

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

Telos is a boutique regulatory consulting firm formed in Colorado.

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

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

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

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

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

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

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

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

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

On June 10, 2020, we purchased certain intellectual property assets from Band-Lok, LLC, a North Carolina limited liability company ("Band-Lok"), related to its Tether Clamp and Implantation System ("Tether Clamp System") for approximately $3.4 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 believe there are significant opportunities for us to strengthen our position in U.S.

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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” in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "SEC") on March 11, 2021 and in other reports filed with the SEC that discuss the risks and factors that may affect our business.

The global COVID-19 pandemic (“COVID-19” or the “pandemic”), together with the preventative and precautionary measures taken by governments, governmental agencies, communities, businesses and hospital administrators, has impacted, and may continue to impact significant aspects of our business, including demand for our products, supply chain and distribution systems, our operations generally, and the timing for bringing new products to market.

We also expect medical procedure rates to continue to vary by type and country, and could be impacted by regional COVID-19 case volumes, hospital and clinical occupancy and staffing levels, the willingness of patients to schedule elective procedures, travel and quarantine restrictions, vaccine immunization rates, and new COVID-19 variants.

While COVID-19 case volumes appear to be decreasing in the U.S.

and certain other countries as a result of higher vaccination rates, the global COVID-19 outlook remains uncertain as vaccination rates have slowed and the spread of new variants has accelerated.

While the impact of COVID-19 has had, and may continue to have, an adverse effect on our business, results of operations, financial condition and cash flows, the nature and extent of such impact is unknown, as we cannot predict with confidence the ultimate duration or further severity of the pandemic.

We encourage the readers of this document to read our risk factors in their entirety contained in Item 1A “Risk Factors” in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "SEC") on March 11, 2021 and in other reports filed with the SEC that discuss the risks and factors that may affect our business.

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

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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.

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

The outbreak has significantly increased economic and demand uncertainty.

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Emerging Growth Company and Smaller Reporting Company Status

We qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”).

For as long as a company is deemed to be an emerging growth company, it may take advantage of specified reduced reporting and other regulatory requirements that are generally unavailable to other public companies.

We will qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”) until December 31, 2022.

For as long as a company is deemed to be an emerging growth company, it may take advantage of specified reduced reporting and other regulatory requirements

that are generally unavailable to other public companies.

We also qualify as a "smaller reporting company," as such term is defined in Rule 12b-2 under the Exchange Act.

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

Summary of Statements of Operations for the Three Months Ended March 31, 2021 and 2020

The following table sets forth our results of operations for the three months ended March 31, 2021 and 2020:

Three Months Ended March 31,

2021 2020 Increase (Decrease) %

Summary of Statements of Operations for the Three and Six Months Ended June 30, 2021 and 2020

The following table sets forth our results of operations for the three and six months ended June 30, 2021 and 2020:

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

2021 2020 Increase

(Decrease) % 2021 2020 Increase (Decrease) %

Net revenue $ 26,695 $ 13,593 $ 13,102 96 % $ 48,157 $ 29,949 $ 18,208 61 %

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Net loss $ (3,756) $ (9,447) $ (5,691) (60) % $ (14,135) $ (14,392) $ (257) (2) %

The following tables set forth our net revenue by geography and product category for the three months ended March 31, 2021 and 2020:

Three Months Ended March 31,

The following tables set forth our net revenue by geography and product category for the three and six months ended June 30, 2021 and 2020:

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

Product sales by geographic location:

2021 2020 2021 2020

$ 21,737 $ 12,146 $ 38,576 $ 25,530

International 4,958 1,447 9,581 4,419

Total $ 26,695 $ 13,593 $ 48,157 $ 29,949

Three Months Ended March 31,

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

Product sales by category:

2021 2020 2021 2020

Trauma and deformity $ 17,933 $ 9,220 $ 32,485 $ 21,430

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Total $ 26,695 $ 13,593 $ 48,157 $ 29,949

Net revenue increased $5.1 million, or 31%, from $16.4 million for the three months ended March 31, 2020 to $21.5 million for the three months ended March 31, 2021.

The increase during the three months ended March 31, 2021 reflects the continued return to normalization in both the U.S.

and international markets which, during the three months ended March 31, 2020, had begun experiencing the impacts of the COVID-19 pandemic.

Trauma and deformity sales increased $2.3 million, or 19%, during the three months ended March 31, 2021, primarily driven by strong trauma growth, specifically our PNP Femur and PediPlate systems.

Scoliosis sales increased $2.2 million, or 60%, during the three months ended March 31, 2021, primarily driven by increased sales of our RESPONSE 5.5/6.0 system and strong performance of the ApiFix ® Mid-C System.

Sports medicine / other increased $0.5 million, or 120%, during the three months ended March 31, 2021.

Net revenue increased $13.1 million, or 96%, from $13.6 million for the three months ended June 30, 2020 to $26.7 million for the three months ended June 30, 2021 and increased $18.2 million, or 61%, from $29.9 million for the six months ended June 30, 2020 to $48.2 million for the six months ended June 30, 2021.

The increase during the three and six months ended June 30, 2021 reflects the continued

return to normalization in both the U.S.

and international markets which, during the three months ended June 30, 2020, experienced the most significant impacts from the COVID-19 pandemic.

Additionally, we continue to see the benefit of converting Germany, Austria, and Switzerland to a direct agency sales model.

Trauma and deformity sales increased $8.7 million, or 95%, during the three months ended June 30, 2021, and increased $11.1 million, or 52%, during the six months ended June 30, 2021, in each case, primarily driven by strong trauma and deformity growth across numerous product lines, specifically our PNP Femur, Cannulated Screws and Orthex systems.

Scoliosis sales increased $3.8 million, or 100%, during the three months ended June 30, 2021, and increased $6.1 million, or 80%, during the six months ended June 30, 2021, in each case , primarily driven by increased sales of our RESPONSE 5.5/6.0 system and FIREFLY ® Pedicle Screw Navigation Guides, and additional sales contributed from the ApiFix acquisition.

Sports medicine / other increased $0.6 million, or 106%, during the three months ended June 30, 2021, and increased $1.1 million, or 112%, during the six months ended June 30, 2021, in each case, primarily driven by the additional sales contributed from Telos.

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

Cost of Revenue and Gross Margin

Cost of revenue increased $1.0 million, or 24%, from $4.1 million for the three months ended March 31, 2020 to $5.1 million for the three months ended March 31, 2021.

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

Cost of revenue increased $2.7 million, or 77%, from $3.5 million for the three months ended June 30, 2020 to $6.3 million for the three months ended June 30, 2021.

Cost of revenue increased $3.7 million, or 48%, from $7.7 million for the six months ended June 30, 2020 to $11.4 million for the six months ended June 30, 2021.

The increases were due primarily to increased sales volume in both the U.S.

and international markets.

Gross margin was 75% for the three months ended March 31, 2020 and 76% for the three months ended March 31, 2021.

Gross margin was 74% for the three months ended June 30, 2020 and 77% for the three months ended June 30, 2021.

Gross margin was 74% for the six months ended June 30, 2020 and 76% for the six months ended June 30, 2021.

Sales and Marketing Expenses

Sales and marketing expenses increased $1.4 million, or 18%, to $8.9 million for the three months ended March 31, 2021 from $7.6 million for the three months ended March 31, 2020.

The change in the three month period ended March 31, 2021 was due primarily to fluctuations in sales commission expenses, driven by unit volumes sold.

Sales and marketing expenses increased $5.3 million, or 94%, to $10.9 million for the three months ended June 30, 2021 from $5.6 million for the three months ended June 30, 2020.

Sales and marketing expenses increased $6.6 million, or 50%, to $19.8 million for the six months ended June 30, 2021 from $13.2 million for the six months ended June 30, 2020.

The changes in the three and six month periods ended June 30, 2021 were due primarily to increased sales commission expenses, driven by increased unit volumes sold.

General and Administrative Expenses

General and administrative expenses increased $4.2 million, or 53%, from $7.9 million for the three months ended March 31, 2020 to $12.0 million for the three months ended March 31, 2021.

The increase for the three month period ended March 31, 2021 was due primarily to the additional expenses associated with the ApiFix and Telos acquisitions, the addition of personnel and resources to support the continued

expansion of our business and an increase in legal and other professional service expense associated with our ongoing litigation and acquisitions.

Depreciation and amortization expenses increased $1.2 million, or 86%, from $1.4 million for the three months ended March 31, 2020 to $2.5 million for the three months ended March 31, 2021.

The increase for the three month period ended March 31, 2021 was primarily due to the amortization of intangible assets acquired through the Vilex, Telos and ApiFix acquisitions and the purchase of the Band-Lok intellectual property.

General and administrative expenses increased $0.5 million, or 5%, from $10.6 million for the three months ended June 30, 2020 to $11.1 million for the three months ended June 30, 2021.

General and administrative expenses increased $4.7 million, or 25%, from $18.5 million for the six months ended June 30, 2020 to $23.1 million for the six months ended June 30, 2021.

The increases for the three and six month periods ended June 30, 2021 were due primarily to the additional expenses associated with the ApiFix and Telos acquisitions, the addition of personnel and resources to support the continued expansion of our business and an increase in legal and other professional service expense associated with litigation.

Depreciation and amortization expenses increased $0.7 million, or 34%, from $1.9 million for the three months ended June 30, 2020 to $2.6 million for the three months ended June 30, 2021.

Depreciation and amortization expenses increased $1.8 million, or 54%, from $3.3 million for the six months ended June 30, 2020 to $5.1 million for the six months ended June 30, 2021.

The increases for the three and six month periods ended June 30, 2021 were primarily due to the amortization of intangible assets acquired through the Vilex, Telos and ApiFix acquisitions and the purchase of the Band-Lok intellectual property.

Research and Development Expenses

Research and development expenses of $1.3 million for the three months ended March 31, 2021 remained flat to a similar amount for the three months ended March 31, 2020.

Research and development expenses increased $0.4 million, or 50%, from $0.9 million for the three months ended June 30, 2021 to $1.3 million for the three months ended June 30, 2021.

Research and development expenses increased $0.5 million, or 23%, from $2.1 million for the six months ended June 30, 2020 to $2.6 million for the six months ended June 30, 2021.

The increases for the three and six month periods ended June 30, 2021 were primarily due to incremental product development including the addition of personnel and the growth of our business.

Total Other Expenses

Other expenses were $4.7 million and $0.4 million for the three months ended March 31, 2021 and 2020, respectively.

The increase in other expense is due to the accretion of interest expense attributable to the acquisition installment payable and the fair value adjustments of contingent consideration related to the ApiFix acquisition.

Total interest expense and fair value adjustments for the three months ended March 31, 2021 were $0.6 million and $4.2 million, respectively.

Other expenses were $1.2 million and $2.4 million for the three months ended June 30, 2021 and 2020, respectively, and $5.9 million and $2.9 million for the six months ended June 30, 2021 and 2020, respectively.

The decrease in other expense for the three months ended June 30, 2021 was primarily due to the decrease in interest expense after repaying all outstanding debt with Squadron.

The increase in other expense for the six months ended June 30, 2021 is primarily due to the accretion of interest expense attributable to the acquisition installment payable and the fair value adjustments of contingent consideration related to the ApiFix acquisition.

The aggregate of accreted interest expense and fair value adjustments for the three and six months ended June 30, 2021 were $1.6 million and $6.4 million, respectively, and for both the three and six months ended June 30, 2020, was $1.8 million.

Liquidity and Capital Resources

We have incurred operating losses since inception which resulted in negative cash flows for continuing operations from operating activities of $1.9 million and $7.0 million for the three months ended March 31, 2021 and 2020, respectively.

As of March 31, 2021, we had an accumulated deficit of $172.1 million.

We have incurred operating losses since inception which resulted in negative cash flows for continuing operations from operating activities of $10.9 million and $14.7 million for the six months ended June 30, 2021 and 2020, respectively.

As of June 30, 2021, we had an accumulated deficit of $175.9 million.

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

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

At March 31, 2021, we had cash and cash equivalents, restricted cash and short term investments of $78.0 million.

At June 30, 2021, we had cash and cash equivalents, restricted cash and short term investments of $67.2 million.

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

Three Months Ended March 31,

Six Months Ended June 30,

Net cash used in operating activities $ (10,891) $ (14,707)

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Effect of exchange rate changes on cash 29 17

Net increase (decrease) in cash $ (7,337) $ (17,086)

Net (decrease) increase in cash $ (18,196) $ 42,388

Cash Used in Operating Activities

Net cash used in operating activities from continuing operations was $1.9 million and $7.0 million for the three months ended March 31, 2021 and 2020, respectively.

Net cash used in operating activities from continuing operations was $10.9 million and $14.7 million for the six months ended June 30, 2021 and 2020, respectively.

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

Net cash provided by working capital was $0.1 million and net cash used for working capital was $4.3 million

for the three months ended March 31, 2021 and 2020, respectively.

During the three months ended March 31, 2021, the primary driver of working capital cash usage was the increase in inventory of $2.5 million related to future sales growth and our acquisitions and new agencies and accrued legal settlements.

This cash usage was offset primarily by trade payables which was a source of cash of $2.1 million.

Net cash used for working capital was $10.4 million and $8.8 million for the six months ended June 30, 2021 and 2020, respectively.

During the six months ended June 30, 2021, the primary driver of working capital cash usage was the increase in accounts receivable of $1.8 million due to increased sales during the

period, the increase in inventory of $3.3 million to support future sales growth, and legal settlements of $6.3 million.

This cash usage was offset primarily by other accrued expenses which was a source of cash of $1.1 million.

Cash Used in Investing Activities

Net cash used in investing activities was $5.6 million for each of the three months ended March 31, 2021 and 2020, respectively.

Net cash used in investing activities for the three months ended March 31, 2021 consisted of the purchase of a license agreement as a result of the Dr.

Barry legal settlement (see “Part II, Item 1 – Legal Proceedings” of this quarterly report for additional information) and purchases of instrument sets of $2.7 million.

Net cash used in investing activities for the three months ended March 31, 2020 consisted of $1.6 million for the acquisition of Telos, net of cash received, and $4.0 million for purchases of instrument sets.

Net cash used in investing activities was $7.3 million and $9.3 million for the six months ended June 30, 2021 and 2020, respectively.

Net cash used in investing activities for the six months ended June 30, 2021 consisted of the purchase of a license agreement as a result of the Dr.

Barry legal settlement and purchases of instrument sets of $4.5 million.

Net cash used in investing activities for the six months ended June 30, 2020 consisted of $1.7 million for the acquisition of Telos, net of cash received, the acquisition of ApiFix for $1.7 million, net of cash received, the acquisition of the Band-Lok intellectual propoerty of $0.8 million and $5.2 million for purchases of instrument sets.

Cash Provided By Financing Activities

Net cash provided by financing activities was $0.0 million and net cash used in financing activities was $(4.5) million for the three months ended March 31, 2021 and 2020, respectively.

Net cash provided by financing activities for the three months ended March 31, 2021 was immaterial to the results of our operations.

Net cash used in financing activities for the three months ended March 31, 2020 consisted primarily of the payment of $5 million of the revolving credit facility with Squadron and the repurchase of $0.2 million of common shares, offset by $0.7 million from the exercise of stock options.

Net cash used in financing activities for the six months ended June 30, 2021 was immaterial to the results of our operations.

Net cash provided by financing activities for the six months ended June 30, 2020 was $66.4 million, consisting primarily of the proceeds from the issuance of common stock of $70.2 million and $1.3 million from the exercise of stock options and offset by the payment of $5.0 million of the revolving credit facility with Squadron.

Loan Agreement

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

The mortgage balance was $1.1 million and $1.2 million at March 31, 2021 and December 31, 2020, respectively.

The mortgage balance was $1.1 million and $1.2 million at June 30, 2021 and December 31, 2020, respectively.

Pediatric Orthopedic Business Seasonality

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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-Q

Item 2. Management’s Discussion and Analysis