What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-03-03 compared with 2021-03-11 · 110 added, 174 removed, 232 unchanged (55% of the section changed)

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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 36 independent sales agencies employing 171 sales representatives specifically focused on

The majority of our revenue has been generated in the United States, where we sell our products through a network of 40 independent sales agencies employing 190 sales representatives specifically focused on pediatrics.

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

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

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

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

Vilex and Orthex 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 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 45 countries through independent stocking distributors and sales agencies.

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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.

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.

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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 $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.

Environmental, Social and Governance ("ESG") Activities

OrthoPediatrics was founded on the cause of impacting the lives of children with orthopedic conditions.

Since inception we have impacted the lives of over 234,000 children.

We believe we should continue to expand our social efforts while minimizing our impact to the environment and ensuring corporate governance.

In 2021, we created an internal ESG team, which reports directly to our Board’s Governance and Nominating Committee, to identify ESG topics for disclosure by assessing both the impact on our business and the importance to our stakeholders.

We encourage you to review our ESG page under the "About" section of our corporate website for more detailed information regarding our ESG efforts and current initiatives.

On our website, among other information, are the following highlights:

• OrthoPediatrics cares about our environmental impact while working in a highly regulated industry and we are certified according to ISO 13485.

• The Company and its associates regularly participate in philanthropic causes important to our local communities.

We also partner with charitable organizations that provide pediatric orthopedic care around the world.

In 2020 we were named as "Corporate Partner of the Year" by the World Pediatric Project - with whom we work to provide access to medical care for children in developing countries.

• We are committed to fostering an environment that is respectful, compassionate, and inclusive of everyone in our community.

• The Board of Directors understands the value of diversity and will increase the diversity of the Board over the next 18 months.

The Governance and Nominating Committed engaged a global recruiting firm to assist in adding two diverse Board candidates.

We believe effectively managing our priorities, as well as increasing our transparency related to ESG programs, will help create long-term value for our stakeholders.

We expect to increase our disclosures and communicate our ESG efforts in future SEC filings.

Nothing on our website shall be deemed part of or incorporated by reference into this Annual Report on Form 10-K.

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.

A novel strain of the coronavirus disease 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.

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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.

During 2020 and 2021, we continued to focus on developing innovative solutions, acquired multiple enabling technologies, invested in both new and existing partnerships and continued to deploy additional consigned instrument and implant sets in furtherance of our strategy.

Health and Safety

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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.

During 2021 and 2020, we 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 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.

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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 .

Other Trends and Uncertainties

From time to time we acquire, make investments in or license other technologies, products and business that may enhance our capabilities, complement our current products or expand the breadth of our markets or customer base.

As a result of these transactions, we may record certain intangible assets, including goodwill and trademarks, which are subject to annual impairment testing.

Impairment is based on our current assessment of the expected future cash flows based on recent results and other specific market factors.

Although we have not recorded any impairment charges to date, the most recently prepared assessment indicates our passing rate has narrowed for certain intangible assets.

We believe that the expected future cash flows represent management’s

best estimate;

however, if actual results differ materially from these estimates, we could record an impairment charge which could be material to our consolidated financial statements and have an adverse impact on our results of operations.

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.

Pricing for each customer is dictated by a unique price list and or a 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.

Based on our history of collections and returns from international customers, prior to 2019, we concluded that collectibility was not reasonably assured at the time of delivery for certain customers who had not evidenced a consistent pattern of timely payment.

Accordingly, in the past we did not recognize international revenue and associated cost of revenue at the time title transfers for these customers for whom collectibility had not been deemed probable based on the customer’s history and ability to pay, but rather when cash had been received.

Until such payment, cost of revenue was recorded as inventories held by international distributors, net of adjustment for estimated unreturnable inventory, on our consolidated balance sheets.

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 when title passes upon shipment.

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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.

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.

Pricing for each customer is dictated by a unique price list and or a pricing agreement.

Cost of Revenue and Gross Profit

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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.

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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Sales and Marketing Expenses

Our sales and marketing expenses primarily consist of commissions to our domestic and international independent sales agencies, as well as compensation, commissions, benefits and other related personnel costs.

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

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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

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.

These costs were recorded and then reclassified to stockholders' equity.

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

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 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.

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

During 2021, there were no material adjustments to the accrual and we paid the settlement amounts, resolving the related legal proceedings.

See Note 16 – Commitments and Contingencies in Item 8 for additional details regarding current legal proceedings.

Research and Development Expenses

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Research and development expenses 5,543 5,273 270 5 %

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

Other expenses (Income) (636) 6,912 (7,548) (109) %

Provision for income taxes (benefit) (1,128) (723) (405) 56 %

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

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

Net loss $ (16,260) $ (32,944) $ 16,684 (51) %

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Total $ 98,049 100% $ 71,078 100%

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.

Net revenue increased $27.0 million, or 38%, from $71.1 million for the year ended December 31, 2020 to $98.0 million for the year ended December 31, 2021.

The increase was primarily driven by the recovery in both domestic and global markets as the COVID-19 pandemic, including any variants, continues to reach the world at varying times and to varying degrees.

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

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.

Trauma and deformity sales increased $18.2 million, or 38%, primarily driven by increased sales in our PNP Femur, Cannulated Screws and Orthex systems.

Scoliosis systems increased $7.3 million, or 35%, primarily driven by increased sales of our 4.5/5.0 and 5.5/6.0 RESPONSE systems, and a full year of sales under our ApiFix system.

Sports medicine / other increased $1.5 million, or 57% due to the acquisition of Telos, which also experienced recovery from the COVID-19 pandemic.

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

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Gross margin was 75% for the year ended December 31, 2021 and 77% for the year ended December 31, 2020.

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 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 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 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 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 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

The following table sets for the our results of operations for the years ended December 31, 2019 and 2018:

(in thousands, except percentages) 2019 2018 Increase

Net revenue $ 72,552 $ 57,559 $ 14,993 26 %

Cost of revenue 17,933 14,879 3,054 21 %

Sales and marketing expenses 31,284 26,563 4,721 18 %

General and administrative expenses 26,664 20,938 5,726 27 %

Research and development expenses 5,748 4,732 1,016 21 %

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 %

The following tables set forth our revenue by geography and product category for the years ended December 31, 2019 and 2018:

Revenue by Geography

Year Ended December 31,

(in thousands, except percentages) 2019 % of revenue 2018 % of revenue

$ 55,055 76% $ 43,461 76%

International 17,497 24% 14,098 24%

Total $ 72,552 100% $ 57,559 100%

Revenue by Product Category

Year Ended December 31,

(in thousands, except percentages) 2019 % of revenue 2018 % of revenue

Trauma and deformity $ 49,371 68% $ 39,695 69%

Scoliosis 21,485 30% 16,662 29%

Sports medicine/other 1,696 2% 1,202 2%

Total $ 72,552 100% $ 57,559 100%

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 the increase in unit volume sold and not a result of price changes.

Cost of Revenue and Gross Margin

Cost of revenue was $17.9 million and $14.9 million for the years ended December 31, 2019 and 2018, respectively.

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

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.

The increase in cost of revenue was primarily driven by volume of units sold.

The decrease in gross margin was the result of our sales mix to our international distributors which increased over the prior year due to the COVID-19 recovery.

Gross margin was also unfavorably impacted by a $0.5 million penalty for purchase commitment minimums which were not achieved due to COVID-19.

See note 16 - Commitments and Contingencies in Item 8 for additional details of our purchase commitments.

Sales and Marketing Expenses

Sales and marketing expenses increased $7.8 million, or 24.5%, from $31.9 million for the year ended December 31, 2020 to $39.7 million for the year ended December 31, 2021.

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 and an overall increase in volume of units sold.

General and Administrative Expenses

General and administrative expenses increased $7.7 million, or 20%, from $38.3 million for the year ended December 31, 2020 to $46.1 million for the year ended December 31, 2021.

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 and increased general and administrative expenses associated with the acquisitions of ApiFix and Telos which were included in our consolidated results for the full year 2021.

These increases were offset by the $6.3 million of legal settlement expenses which did not repeat in the current year.

Depreciation and amortization expenses increased $2.7 million, or 34%, from $8.0 million for the year ended December 31, 2020 to $10.7 million for the year ended December 31, 2021.

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.

The increase was primarily due to the amortization on intangible assets acquired through the Telos and ApiFix acquisitions, the purchase of the Band-Lok intellectual property and the purchases of licensing agreements, including the 7D Surgical FLASH TM Navigation platform, FIREFLY, and the license from Dr.

See Note 16 - Commitments and Contingencies in Item 8 for further discussion of this license.

Research and Development Expenses

Research and development expenses increased $0.3 million, or 5%, from $5.3 million for the year ended December 31, 2020 to $5.5 million for the year ended December 31, 2021.

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

Other Expenses

Other expenses were $3.6 million for each of the years ended December 31, 2019 and 2018, respectively.

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

The increase was primarily due to incremental product development including the addition of personnel and the support of future growth of our business.

Total Other Expenses (Income)

Total other expenses decreased $7.5 million, or 109%, from $6.9 million of expense for the year ended December 31, 2020 to income of $0.6 million for the year ended December 31, 2021.

The change is driven primarily by the decrease in fair value of the contingent consideration related to the ApiFix acquisition.

For the year ended December 31, 2021, the change in fair value resulted in income of $1.8 million, compared to expense of $3.5 million for the year ended December 31, 2020.

Additionally, interest expense during 2021 was $0.1 million compared to $1.2 million as the Company repaid its outstanding principal amount under its debt agreement during the third quarter 2020.

Liquidity and Capital Resources

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Net cash used for working capital was $12.6 million, $5.0 million and $11.4 million for the years ended December 31, 2021, 2020 and 2019, respectively.

During 2021, the primary uses of cash included the payment of $6.3 million to finalize our legal settlement, an increase of inventory by $5.1 million as we deployed additional inventory, and accounts receivable and accounts payable were uses of $0.5 million and $0.6 million in cash, respectively.

These uses of cash were partially offset by cash inflows from other accrued expenses of $1.1 million.

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.

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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.

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 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.

We had a net loss of $16.3 million, $32.9 million and $13.7 million for the years ended December 31, 2021, 2020 and 2019, respectively, which also drove a difference in the use of operating cash between the periods.

Cash Used in Investing Activities

Net cash used in investing activities was $7.4 million, $69.7 million and $61.9 million for the years ended December 31, 2021, 2020 and 2019, 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.

Net cash used in investing activities in 2021 consisted primarily of the purchases of licenses of $7.9 million and the purchases of property plant and equipment, primarily instrument sets which were consigned in the United States and select international markets, of $8.1 million.

This was partially offset by the sale of short term investments which was a $9.3 million source of cash.

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 instrument sets of $11.8 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 was $6 thousand, $46.7 million and $91.0 million for the years ended December 31, 2021, 2020 and 2019, respectively.

Net cash provided by financing activities in 2021 were immaterial to the results of our operations.

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.

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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.

Loan Agreement

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

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

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

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%.

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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 Company also 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.

Effective December 31, 2021, the Company entered into a Third Amendment (the "Third Amendment") to its Second Amended Loan Agreement with Squadron (as so further amended, the "Third Amended Loan Agreement").

The Third Amendment addresses the transition of the interest rate calculation from LIBOR to a SOFR (Secured Overnight Financing Rate) based rate.

The previous interest rate on the facilities was at the greater of (a) three month LIBOR plus 8.61% and (b) 10.0%.

Following the Third Amendment, the interest rate on the revolving credit facility is the greater of (a) six month SOFR plus 8.69% and (b) 10.0%.

Following repayment of the Term Note A and Term Note B, there are no outstanding term loan obligations under the Third Amended Loan Agreement.

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;

(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.

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 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.

Borrowings under the Third 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 Third Amended Loan Agreement.

The Third 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 thousand.

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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.

The mortgage balance was $1.0 million and $1.2 million as of December 31, 2021 and 2020, respectively.

Contractual Obligations and Commitments

The Company's cash requirements within the next twelve months include accounts payable, accrued compensation and benefits, current maturities of long-term debt, current portion of acquisition installment payable and other current liabilities.

The acquisition installment payable is related to the acquisition of ApiFix - See Note 3.

Business Combinations in Item 8 for further detail of the acquisition and the acquisition installment payables.

Our long-term cash requirements under various contractual obligations and commitments include:

• Debt obligations and interest payments - See Note 9.

Debt and Credit Arrangements in Item 8 for further detail regarding our debt and the timing of expected future principal and interest payments.

• Acquisition installment payables, net of current portion and contingent consideration - See Note 3.

Business Combinations in Item 8 for further detail regarding our obligations and timing of expected future payments.

• Minimum purchase obligations - Purchase obligations include agreements for purchases of product in the normal course of business, including minimum quantities required pursuant to our license agreements.

Commitments and Contingencies in Item 8 for further detail regarding these requirements.

• Lease Obligations - See Note 16.

Commitments and Contingencies in Item 8 for further detail regarding our lease obligations.

• Royalties - See Note 16.

Commitments and Contingencies in Item 8 for further detail regarding minimum royalty obligations.

Pediatric Orthopedic Business Seasonality

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Revenue Recognition

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.

In the United States and in thirteen 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.

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

Until such payment, cost of revenue was recorded as inventories held by international distributors, net of adjustment for estimated unreturnable inventory, on our consolidated balance sheets.

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

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The goodwill is considered to be impaired if we determine that the carrying value of our one reporting unit exceeds its respective fair value.

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.

We have indefinite lived trademark 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 discounted cash flows expected to be generated by the associated asset.

Calculating net discounted cash flows requires us to make significant estimates and assumptions related to forecasts of future revenues and discount rates.

Changes in these assumptions could have a significant impact on the fair value of of trademarks.

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.

Stock-based Compensation

We recognize compensation costs related to restricted stock granted to employees based on the estimated fair value of the awards on the date of the grant amortized over the restriction period.

Forfeitures are recorded upon forfeiture date.

Historically, for all periods prior to our IPO, the fair values of the shares of common stock underlying our restricted stock and stock option awards were estimated on each grant date by management and approved by the board of directors.

In order to determine the fair value of our common stock underlying such grants, we consider multiple inputs to value our common stock, including the value of equity, enterprise value and key price points in our capital structure.

Given the absence of a public trading market for our common stock at that time, we exercised reasonable judgment and considered a number of objective and subjective factors to determine the best estimate of the fair value of our common stock, including the preferences and dividends of our redeemable convertible preferred stock relative to those of our common stock;

our operating results and financial conditions, including our level of available capital resources;

equity market conditions affecting comparable public companies;

market conditions and the lack of marketability of our common stock.

In valuing our common stock, we used the market approach, which is based on the assumption that the value of an asset is equal to the value of a substitute asset with the same characteristics.

In using the market approach, we have considered both the guideline public company method and the precedent transaction method.

We allocated the enterprise value across our classes of capital stock to determine the fair value of our common stock at each valuation date.

After the equity value was allocated to the share classes, we applied a discount for lack of marketability to our common shares because we were valuing a minority interest in our company as a closely held, non-public company with no liquid market for its shares.

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.

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.

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.

We expect to continue to grant restricted stock and other equity-based awards in the future, and to the extent that we do, our stock-based compensation expenses in future periods may increase.

Contractual Obligations and Commitments

The following table summarizes our contractual obligations as of December 31, 2020:

Payments Due by Period

(in thousands) Total Less than 1 Year 1-3 Years 3-5 Years More than 5 Years

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 —

Lease agreements 333 124 209 — —

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements, as defined by applicable regulations of the SEC, that are reasonably likely to have a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.

During 2021, the estimated fair values for certain intangible assets exceeded its carrying value by narrow margins.

We believe that the expected future cash flows represent management's best estimate;

however, if actual results differ materially from these estimates, we could record an impairment charge related to these intangible assets which could be material to our consolidated financial statements and have an adverse impact on our results of operations.

Net Operating Losses

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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