What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-11-01 compared with 2022-08-04 · 98 added, 91 removed, 130 unchanged (59% of the section changed)

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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.

Additionally, in July 2022, we established an operating company in Germany and 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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For example, on April 1, 2022, the Company acquired MD Orthopaedics, Inc., a developer and manufacturer of a portfolio of orthopedic clubfoot products.

Also, on July 1, 2022, the Company, along with its newly-formed, indirect wholly-owned subsidiary OrthoPediatrics Canada ULC, purchased all of the issued and outstanding share capital of Pega Medical Inc., which has developed and sells a portfolio of trauma and deformity correction devices for children, including the Fassier-Duval Telescopic Intramedullary System, a well-recognized, innovative implant designed to treat bony deformities in children with osteogenesis imperfecta without disrupting their normal growth.

implant designed to treat bony deformities in children with osteogenesis imperfecta without disrupting their normal growth.

Environmental, Social and Governance ("ESG") Activities

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As a result of the COVID-19 pandemic (“COVID-19” or 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.

In addition, elective procedures are also being delayed in some cases as hospitals continue to struggle with adequate staffing levels.

Elective procedures are delayed in some cases as hospitals continue to struggle with adequate staffing levels.

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 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 3, 2022 and in other reports filed with the SEC that discuss the risks and factors that may affect our business.

Throughout the pandemic, we have taken a variety of steps to address the impact.

We continue to monitor the impact of the pandemic on our employees and customers and the markets in which we operate and will take further actions that are considered prudent to address the pandemic.

We cannot accurately predict with certainty the full extent to which the pandemic will impact demand for our products in the future.

Accordingly, the COVID-19 pandemic could have a material adverse impact on our results of operations, financial condition and capital resources.

"SEC") on March 3, 2022 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.

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 also installed enhanced HVAC systems across our Warsaw facility to reduce the spreading of germs.

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 quarter.

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, may result 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.

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 COVID-19 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 expanding our line of credit from $25 million to $50 million and 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, including our short-term investments, 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 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.

Other Trends and Uncertainties

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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.

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

During the third quarter ended September 30, 2022, we determined that a triggering event had occurred indicating it was more likely than not the fair value of an acquired trademark was less than the associated carrying value.

Subsequently, the company completed a quantitative analysis and concluded that the fair value was in fact less than the carrying value and an impairment loss was recorded in the period.

We believe that the expected future cash flows in the most recent calculations represent management’s best estimate;

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

In the three-month period ended September 30, 2022, there has been a significant and unprecedented increase in cases of respiratory syncytial virus, or RSV, and other respiratory illnesses.

RSV is a common respiratory virus that follows a seasonal pattern.

The typical season shows an increase in mid-September, peaks in late December and drops around mid-April;

however, in 2022 the United States has experienced a significant increase during the summer months.

The volume of elective procedures utilizing our products were negatively impacted as a significant percent of hospital capacity was absorbed to cover the increase in RSV-related hospitalizations.

This has had a negative impact on our sales volume and may continue to do so into the future.

We are unable to accurately determine exactly how this will impact us in the future, but we will continue to monitor this dynamic as we get closer to the traditional peak of RSV season.

Emerging Growth Company and Smaller Reporting Company Status

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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 and Six Months Ended June 30, 2022 and 2021

The following table sets forth our results of operations for the three and six months ended June 30, 2022 and 2021:

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

Summary of Statements of Operations for the Three and Nine Months Ended September 30, 2022 and 2021

The following table sets forth our results of operations for the three and nine months ended September 30, 2022 and 2021:

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 Increase

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General and administrative expenses 15,116 11,034 4,082 37 % 42,829 34,163 8,666 25 %

Trademark impairment 3,609 — 3,609 100 % 3,609 — 3,609 100 %

Research and development expenses 2,206 1,302 904 69 % 5,980 3,935 2,045 52 %

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Provision for income taxes (benefit) (4,143) (292) (3,851) (1319) % (4,899) (890) (4,009) (450) %

Net loss $ (333) $ (3,756) $ (3,423) (91) % $ (9,433) $ (14,135) $ (4,702) (33) %

The following tables set forth our net revenue by geography and product category for the three and six months ended June 30, 2022 and 2021:

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

Net income (loss) $ 18,539 $ (2,197) $ (20,736) (944) % $ 9,106 $ (16,332) $ (25,438) (156) %

The following tables set forth our net revenue by geography and product category for the three and nine months ended September 30, 2022 and 2021:

Three Months Ended September 30, Nine Months Ended September 30,

Product sales by geographic location:

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Total $ 34,950 $ 25,079 $ 91,295 $ 73,236

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

Three Months Ended September 30, Nine Months Ended September 30,

Product sales by category:

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Total $ 34,950 $ 25,079 $ 91,295 $ 73,236

Net revenue increased $6.2 million, or 23%, from $26.7 million for the three months ended June 30, 2021 to $32.9 million for the three months ended June 30, 2022 and increased $8.2 million, or 17%, from $48.2 million for the six months ended June 30, 2021.

The increase during the three and six months ended June 30, 2022 was driven primarily by non-elective trauma sales.

Additionally, in the second quarter we saw non-organic growth of approximately $2.6 million related to the acquisition of MD Ortho for the three and six month periods ended June 30, 2022.

Trauma and deformity sales, which include the non-organic growth from the MD Ortho acquisition, increased $4.6 million, or 26%, during the three months ended June 30, 2022, and increased $6.6 million,

or 20%, during the six months ended June 30, 2022.

In each case, the increase was primarily driven by strong trauma and deformity growth across numerous product lines, specifically our Cannulated Screws, PediFoot System, and PNP Femur System as well as the non-organic growth from MD Ortho.

Scoliosis sales increased $1.8 million, or 23%, during the three months ended June 30, 2022, and increased $1.8 million, or 13%, during the six months ended June 30, 2022.

In each case, the growth was primarily driven by increased sales of our RESPONSE 4.5/5.0, sales of the FireFly surgical guides, and Bandloc.

Sports medicine / other decreased $0.2 million, or 15%, during the three months ended June 30, 2022, and decreased $0.2 million, or 10%, during the six months ended June 30, 2022.

In each case, the decrease was driven by a decline in sales from our Telos operations.

Net revenue increased $9.9 million, or 39%, from $25.1 million for the three months ended September 30, 2021 to $35.0 million for the three months ended September 30, 2022 and increased $18.1 million, or 25%, from $73.2 million for the nine months ended September 30, 2021 to $91.3 million for the nine months ended September 30, 2022.

The increase during the three and nine months ended September 30, 2022 was driven primarily by increased usage of Orthex Ex-Fix, RESPONSE and ApiFix Scoliosis, PNP Femur as well as cannulated screw systems.

Additionally, growth from acquisitions for the three and nine months ended September 30, 2022 was $4.4 million and $7.0 million, respectively.

Trauma and deformity sales, which include the non-organic growth from acquisitions, increased $7.1 million, or 42%, during the three months ended September 30, 2022, and increased $13.7 million, or 28%, during the nine months ended September 30, 2022.

In each case, the increase was primarily driven by strong trauma and deformity growth across numerous product lines, specifically external fixation, the PNP Femur system, and cannulated screws as well as the sales generated from acquired businesses.

Scoliosis sales increased $2.7 million, or 37%, during the three months ended September 30, 2022, and increased $4.5 million, or 22%, during the nine months ended September 30, 2022.

In each case, the growth was primarily driven by increased sales of our RESPONSE fusion systems and ApiFix non-fusion

system as well as set sales to international stocking distributors.

Sports medicine / other increased $0.1 million, or 8%, during the three months ended September 30, 2022, and decreased $0.1 million, or 4%, during the nine months ended September 30, 2022.

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

Cost of Revenue and Gross Margin

Cost of revenue increased $1.7 million, or 27%, from $6.3 million for the three months ended June 30, 2021 to $7.9 million for the three months ended June 30, 2022.

Cost of revenue increased $1.4 million, or 12%, from $11.4 million for the six months ended June 30, 2021 to $12.8 million for the six months ended June 30, 2022.

Cost of revenue increased $2.5 million, or 39%, from $6.5 million for the three months ended September 30, 2021 to $9.1 million for the three months ended September 30, 2022.

Cost of revenue increased $3.9 million, or 22%, from $17.9 million for the nine months ended September 30, 2021 to $21.9 million for the nine months ended September 30, 2022.

In both cases, the increase was due primarily to an increase in volumes sold.

Gross margin was 77% for the three months ended June 30, 2021 and 76% for the three months ended June 30, 2022.

Gross margin was 77% for the six months ended June 30, 2022 and 76% for the six months ended June 30, 2021.

Gross margin was 74% for the three months ended September 30, 2021 and 74% for the three months ended September 30, 2022.

Gross margin was 76% for the nine months ended September 30, 2022 and 76% for the nine months ended September 30, 2021.

Sales and Marketing Expenses

Sales and marketing expenses increased $1.6 million, or 14%, to $12.4 million for the three months ended June 30, 2022 from $10.9 million for the three months ended June 30, 2021.

Sales and marketing expenses increased $2.4 million, or 12%, to $22.2 million for the six months ended June 30, 2022 from $19.8 million for the six months ended June 30, 2021.

The changes in the three and six month periods ended June 30, 2022 were due primarily to increased sales commission expenses, driven by increased unit volumes sold.

Sales and marketing expenses increased $2.1 million, or 21%, to $11.9 million for the three months ended September 30, 2022 from $9.9 million for the three months ended September 30, 2021.

Sales and marketing expenses increased $4.4 million, or 15%, to $34.1 million for the nine months ended September 30, 2022 from $29.7 million for the nine months ended September 30, 2021.

The changes in the three and nine month periods ended September 30, 2022 were due primarily to increased sales commission expenses, driven by increased unit volumes sold.

This is partially offset by lower commission rates associated with the acquired businesses.

Additionally, the Company has experienced higher expense of approximately $0.6 million related to the businesses acquired in the current year, which were not present in the prior year.

General and Administrative Expenses

General and administrative expenses increased $3.5 million, or 31%, from $11.1 million for the three months ended June 30, 2021 to $14.5 million for the three months ended June 30, 2022.

General and administrative expenses increased $4.6 million, or 20%, to $27.7 million for the six months ended June 30, 2022 from the $23.1 million for the six months ended June 30, 2021.The increases for the three and six month periods ended June 30, 2022 were due primarily to the addition of personnel and resources to support the continued expansion of our business and an increase in legal expenses, driven by two recent acquisitions, and other professional service expenses.

Additionally, the Company saw higher expenses of approximately $0.9 million due to the acquisition of MD Ortho, including standard operating expenses and amortization of intangible assets which began amortizing on the date of acquisition.

Depreciation and amortization expenses increased $0.6 million, or 24%, from $2.6 million for the three months ended June 30, 2021 to $3.2 million for the three months ended June 30, 2022.

Depreciation and amortization expenses increased $1.0 million, or 19%, to $6.1 million for the six months ended June 30, 2022 from $5.1 million for the six months ended June 30, 2021.The increases for the three and six month periods ended June 30, 2022 were primarily due to increases in depreciation from higher set deployments and the amortization of intangible assets, including licenses which had not yet been put into the market in the first half of 2021, as well as the intangible assets included in the acquisition of MD Ortho.

General and administrative expenses increased $4.1 million, or 37%, from $11.0 million for the three months ended September 30, 2021 to $15.1 million for the three months ended September 30, 2022.

General and administrative expenses increased $8.7 million, or 25%, to $42.8 million for the nine months ended September 30, 2022 from the $34.2 million for the nine months ended September 30, 2021.The increases for the three and nine month periods ended September 30, 2022 were due primarily to the addition of personnel and resources to support the continued expansion of our business and an increase in legal expenses, driven by two recent acquisitions, and other professional service expenses.

Additionally, the Company has experienced higher expense of approximately $3.0 million related to the businesses acquired in the current year, which were not present in the prior year.

Depreciation and amortization expenses increased $0.7 million, or 27%, from $2.7 million for the three months ended September 30, 2021 to $3.4 million for the three months ended September 30, 2022.

Depreciation and amortization expenses increased $1.7 million, or 22%, to $9.6 million for the nine months ended September 30, 2022 from $7.9 million for the nine months ended September 30, 2021.The increases for the three and nine month periods ended September 30, 2022 were primarily due to increases in depreciation from higher set deployments and the amortization of intangible assets, primarily those acquired with MD Ortho and Pega.

Additionally, the Company recorded an impairment charge associated with the ApiFix trademark.

See Note 4 - Goodwill and Intangible Assets for further details.

Research and Development Expenses

Research and development expenses increased $0.4 million, or 32%, from $1.3 million for the three months ended June 30, 2021 to $1.7 million for the three months ended June 30, 2022.

Research and development expenses increased $1.1 million, or 43%, to $3.8 million for the six months ended June 30, 2022 from the $2.6 million for the six months ended June 30, 2021.

The increases for the three and six month periods ended June 30, 2022 were primarily due to incremental product development and the addition of personnel to support the future growth of the business.

Total Other Expenses

Total other expenses reflect income of $3.0 million and expense of $1.2 million for the three months ended June 30, 2022 and 2021, respectively, a decrease of $4.2 million or 348%.

Other expenses decreased $5.9 million, or 99%, to $60 thousand for the six months ended June 30, 2022 from the $5.9 million for the six months ended June 30, 2021.

The decrease in total other expenses for each of the three and six months ended June 30, 2022 was primarily due to the fair value adjustments of contingent consideration, which was driven by the valuation inputs that were lower in comparison to the same period last year.

This was offset by additional interest expense of approximately $0.7 million as the result of the finalization of the ApiFix installment paid in the second quarter and increased losses due to foreign currency conversions of approximately $1.1 million and $1.2 million for the three and six months ended June 30, 2022, respectively.

The increased interest expense was driven by the variance in our closing stock price on the payment date compared to the 30 day average used to calculate the number of shares paid, which increase was non-cash in nature.

Research and development expenses increased $0.9 million, or 69%, from $1.3 million for the three months ended September 30, 2021 to $2.2 million for the three months ended September 30, 2022.

Research and development expenses increased $2.0 million, or 52%, to $6.0 million for the nine months ended September 30, 2022 from the $3.9 million for the nine months ended September 30, 2021.

The increases for the three and nine month periods ended September 30, 2022 were primarily due to incremental product development and the addition of personnel to support the future growth of the business.

Additionally, the Company has experienced higher expense of approximately $0.1 million related to the businesses acquired in the current year, which were not present in the prior year.

Total Other (Income) Expense

Total other income reflects income of $21.4 million and $1.2 million for the three months ended September 30, 2022 and 2021, respectively, an increase of $20.2 million or 1,749%.

Other expenses fluctuated $26.1 million, or 548%, to income of $21.3 million for the nine months ended September 30, 2022 from the $4.8 million of expense for the nine months ended September 30, 2021.

The change in total other income for the three and nine months ended September 30, 2022 was primarily due to the fair value adjustments of contingent consideration, which was driven by the valuation inputs, specifically a significant reduction in the forecasted ApiFix product sales.

This was offset by additional interest expense of approximately $0.7 million as the result of the finalization of the ApiFix installment paid in the second quarter and the accreted interest expense associated with the acquisition installment payables.

The increased interest expense from the ApiFix installment payment was driven by the variance in our closing stock price on the payment date compared to the 30 day average used to calculate the number of shares paid, which increase was non-cash in nature.

Liquidity and Capital Resources

We have incurred operating losses since inception which resulted in negative cash flows for continuing operations from operating activities of $12.4 million and $10.9 million for the six months ended June 30, 2022 and 2021, respectively.

As of June 30, 2022, we had an accumulated deficit of $187.5 million.

We have incurred operating losses since inception which resulted in negative cash flows for continuing operations from operating activities of $18.4 million and $11.8 million for the nine months ended September 30, 2022 and 2021, respectively.

As of September 30, 2022, we had an accumulated deficit of $168.9 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 June 30, 2022, we had cash and cash equivalents, restricted cash and short term investments of $52.5 million.

At September 30, 2022, we had cash, restricted cash and short term investments of $121.6 million.

We also currently have $50 million available on our line of credit.

During the quarter ended September 30, 2022, we raised net proceeds of approximately $139.3 million from a public offering of (a) 1,091,250 shares our common stock, and (b) pre-funded warrants exercisable for an aggregate of up to 1,525,000 shares of common stock to Squadron Capital LLC (“Squadron”), our largest investor.

The net proceeds reflect the Company’s payment of $4.3 million in underwriting discounts and commissions and $0.3 million in other offering costs.

A portion of the net proceeds were used to repay $31 million of borrowings previously outstanding under the Company’s revolving credit facility with Squadron.

On September 20, 2022, the Company issued an aggregate of 1,525,000 shares of common stock to Squadron upon exercise of the pre-funded warrants.

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

Six Months Ended June 30,

Nine Months Ended September 30,

Net cash used in operating activities $ (18,425) $ (11,828)

Net cash provided by (used in) investing activities 13,775 (7,332)

Net cash provided by (used in) financing activities 27,741 (2)

Net cash used in investing activities (90,144) (10,376)

Net cash provided financing activities 136,009 40

Effect of exchange rate changes on cash 426 (266)

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Cash Used in Operating Activities

Net cash used in operating activities from continuing operations was $12.4 million and $10.9 million for the six months ended June 30, 2022 and 2021, respectively.

Net cash used in operating activities from continuing operations was $18.4 million and $11.8 million for the nine months ended September 30, 2022 and 2021, 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 periods.

Net cash used for working capital was $10.9 million for the six months ended June 30, 2022 compared to

a source of $10.4 million for the six months ended June 30, 2021.

During the six months ended June 30, 2022, the primary driver of working capital cash usage was the increase in inventory of $10.9 million and trade receivables of $6.6 million, offset by trade payables of $5.3 million to support future sales growth.

Net cash used for working capital was $17.4 million for the nine months ended September 30, 2022 compared to a use of $12.1 million for the nine months ended September 30, 2021.

During the nine months ended September 30, 2022, the primary driver of working capital cash usage was the increase in inventory of $14.8 million and trade receivables of $5.6 million, offset by trade payables of $0.4 million to support future sales growth.

We also saw an increase in the sourcing of cash from other accrued expenses of $1.8 million.

Cash Provided by (Used in) Investing Activities

Net cash provided by investing activities for the six months ended June 30, 2022 was $13.8 million compared to a use of cash of $7.3 million for the six months ended June 30, 2021.

Net cash provided by investing activities for the six months ended June 30, 2022 consisted primarily of the sale of short-term marketable securities to fund the acquisition of MD Ortho, which was offset by the purchases of instrument sets of $9.5 million and the cash consideration paid to acquire MD Ortho.

Cash Provided By (Used in) Financing Activities

Net cash provided by financing activities for the six months ended June 30, 2022 was $27.7 million.

Net cash used in financing activites for the six months ended June 30, 2021 was not material to the results of our operations.

Net cash provided by financing activities for the six months ended June 30, 2022 consisted primarily of the proceeds from the $31 million of debt incurred in connection with the acquisition of Pega Medical Inc., which was offset by the first anniversary installment payment to ApiFix.

Cash Used in Investing Activities

Net cash used in investing activities for the nine months ended September 30, 2022 was $90.1 million compared to $10.4 million for the nine months ended September 30, 2021.

Net cash used in investing activities for the nine months ended September 30, 2022 consisted primarily of the sale of short-term marketable securities used to fund the acquisition of MD Ortho, acquisition of Pega and cash planning in association with the public offering.

This was offset by the purchases of instrument sets of $10.6 million, the cash consideration paid for acquisitions and the purchase of short-term marketable securities from the excess cash after the follow-on offering.

Cash Provided By Financing Activities

Net cash provided by financing activities for the nine months ended September 30, 2022 was $136.0 million.

Net cash used in financing activities for the nine months ended September 30, 2021 was not material to the results of our operations.

Net cash provided by financing activities for the nine months ended September 30, 2022 consisted primarily of the proceeds from the $31 million of debt incurred in connection with the acquisition of Pega Medical Inc., which was offset by an equal payment after the follow-on offering completed in August.

The proceeds from issuance of common stock, net of issuance costs provided a source of cash in financing activities of $139.3 million for the three and nine months ended September 30, 2022.

Loan Agreement

On June 13, 2022, the Company entered into a Fourth Amendment (the “Fourth Amendment”) to its Fourth Amended and Restated Loan and Security Agreement with Squadron Capital LLC, or Squadron (as so amended, the “Loan Agreement”).

On June 13, 2022, the Company entered into a Fourth Amendment (the “Fourth Amendment”) to its Fourth Amended and Restated Loan and Security Agreement with Squadron (as so amended, the “Loan Agreement”).

The Fourth Amendment increased the amount available under the revolving credit facility from $25 million to $50 million in anticipation of using the facility to fund the cash portion of the Company’s July 1, 2022 acquisition of Pega Medical Inc.

After borrowing $31 million under the Loan

Agreement in June 2022 to fund such acquisition, the Company repaid the entire amount on August 15, 2022 with proceeds from a public offering of securities.

The Loan Agreement provides a revolving credit facility, with interest only payments, at an annual interest rate equal to the greater of (a) six month SOFR plus 8.69% and (b) 10.0%.

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The unused commitment fee is payable quarterly in arrears.

Borrowings under the revolving credit facility are 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.

Borrowings under the revolving credit facility are made under a Second Amended and Restated Revolving Note, dated June 13, 2022 (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:

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

The 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.

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

As of June 30, 2022 the Company has $31 million outstanding on the line of credit and a remaining $19 million available.

As of December 31, 2021 there was no outstanding debt on the line of credit.

As of September 30, 2022 and December 31, 2021 there was no outstanding debt on the line of credit.

As a result, $50 million is currently available for future borrowing.

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 thousand, 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 $1.0 million at June 30, 2022 and December 31, 2021, respectively.

The mortgage balance was $0.9 million and $1.0 million at September 30, 2022 and December 31, 2021, respectively.

Pediatric Orthopedic Business Seasonality

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

See additional detail regarding our Critical Accounting Policies in our Annual Report on Form 10-K filed with the SEC on March 3, 2022.

There have been no material changes to these policies since the filing of our Annual Report on Form 10-K.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

1 unchanged sentence

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