What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-03-01 compared with 2022-03-03 · 117 added, 130 removed, 212 unchanged (54% of the section changed)

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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.

We design, develop and commercialize innovative orthopedic implants and instruments to meet the specialized needs of pediatric surgeons and their patients, who we believe have been largely neglected by the orthopedic industry.

We design, develop and commercialize innovative orthopedic implants, instruments and specialized braces to meet the needs of pediatric surgeons or orthotists and their patients, who we believe have been largely neglected by the orthopedic industry.

We currently serve three of the largest categories in this market.

We estimate that the portion of this market that we currently serve represents a $3.9 billion opportunity globally, including over $1.7 billion in the United States.

We sell implants and instruments to our customers for use by pediatric orthopedic surgeons to treat orthopedic conditions in children.

We sell implants, instruments and specialized braces to our customers for use by pediatric orthopedic surgeons, orthotists or physical therapists to treat orthopedic conditions in children.

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

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

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

We currently market 37 surgical systems that serve three of the largest categories within the pediatric orthopedic market:

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

We currently market 46 surgical and specialized bracing systems that serve three of the largest categories within the pediatric orthopedic market:

(i) trauma and deformity correction, (ii) scoliosis and (iii) sports medicine.

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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 40 independent sales agencies employing 190 sales representatives specifically focused on pediatrics.

The majority of our revenue from implants, instruments and specialized braces has been generated in the United States.

We sell our implants and instruments through a network of 41 independent sales agencies employing 197 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.

We market and sell our products internationally in 45 countries through independent stocking distributors and sales agencies.

The revenue generated in the United States from our bracing products is sold directly to orthopedic surgeons, orthotists, physical therapists or, at certain times, directly to the end customer.

We market and sell our products internationally in over 70 countries through independent stocking distributors and sales agencies.

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

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

We began selling

direct to Canada in September 2018, Belgium and the Netherlands in January 2019, Italy in March 2020 and Germany, Switzerland and Austria in January 2021.

Additionally, in March 2019, we established an operating company in the Netherlands in order to enhance our operations in Europe.

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.

In order to further enhance our operations in Europe, we established operating companies in the Netherlands and Germany in March 2019 and April 2022, respectively.

In these markets, we work through sales agencies that are paid a commission, similar to our U.S.

These arrangements have generated an increase in revenue and gross margin.

For the years ended December 31, 2021, 2020 and 2019, international sales accounted for approximately 21%, 11% and 24% of our revenue, respectively.

For the years ended

December 31, 2022, 2021 and 2020, international sales accounted for approximately 24%, 21% and 11% of our revenue, respectively.

We believe there are significant opportunities for us to strengthen our position in U.S.

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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.

Since inception we have impacted the lives of over 630,000 children, when including those served by our acquired companies.

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.

In 2021, we created an internal ESG team, which reports directly to our Board’s Governance 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.

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• 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.

• The Company and its Board of Directors understand the value of diversity.

In 2022, the Company added one additional diverse Director and our Board is targeting the addition of another diverse candidate in 2023.

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.

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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 was first identified in Wuhan, China in December 2019, and the related outbreak was subsequently declared a pandemic by the World Health Organization and a national emergency by the President of the United States.

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

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

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

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

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

During 2020, we raised additional capital to solidify our financial foundation.

We continued to train and educate our sales team and our surgeons on our products.

During 2020 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

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

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

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

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

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

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

We may decide to take similar actions going forward.

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

The outbreak has significantly increased economic and demand uncertainty.

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

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

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

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

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

Other Trends and Uncertainties

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.

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

During 2022, we determined that a triggering event had occurred indicating it was more likely than not the fair value of the ApiFix 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 of $3.6 million 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 2022, there was 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 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 had a negative impact on our sales volume in 2022 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.

As a result of the COVID-19 pandemic, we have experienced significant business disruption throughout the last few years.

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

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.

We encourage the readers of this document to read our risk factors in its entirety contained in Item 1A “Risk Factors” where there is additional information regarding epidemics, pandemics or other illnesses such as RSV and COVID-19.

Components of our Results of Operations

Revenue in the United States is generated primarily from the sale of our implants and, to a much lesser extent, from the sale of our instruments.

Sales in the United States are primarily to hospital accounts through independent sales agencies.

Revenue in the United States is generated primarily from the sale of our implants, specialized braces and, to a much lesser extent, from the sale of our instruments.

Sales of our implants and instruments in the United States are primarily to hospital accounts through independent sales agencies.

We recognize revenue when our performance obligations under the terms of a contract with our customer are satisfied.

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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 price list and or a pricing agreement.

We consider our performance obligation of our braces to be settled upon shipment, and revenue is therefore recognized at that time.

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

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

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

We began selling direct to Canada in September 2018, Belgium and the Netherlands in January 2019, Italy in March 2020 and Germany, Switzerland and Austria in January 2021.

Additionally, in March 2019, we established an operating company in the Netherlands in order to enhance our operations in Europe.

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

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

Cost of Revenue and Gross Profit

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Our implants and instruments are manufactured to our specifications by third-party suppliers.

We purchase the raw materials to make our specialized bracing products in our own facility in Iowa.

The majority of our implants and instruments are produced in the United States.

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Our gross profit as a percentage of total revenue, or gross margin, was similar across all periods presented.

Our gross margin is impacted by the mix of revenue between the United States, where we earn a higher gross margin that is required to pay sales commissions, and international, where we earn a lower gross margin because the distributor is responsible for paying sales commissions.

Our gross margin is impacted by the mix of revenue between the United States, where we earn a higher gross

margin that is required to pay sales commissions, and international stocking distributors, where we earn a lower gross margin because the distributor is responsible for paying sales commissions.

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

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

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Legal Settlement Expenses

The Company is involved in various legal proceedings.

The Company is involved in various legal proceedings from time-to-time.

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.

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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.

No accrual or adjustments were made during the year ended December 31, 2022.

Research and Development Expenses

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General and administrative expenses 59,383 46,061 13,322 29 %

Trademark impairment 3,609 — 3,609 100 %

Legal settlement expenses — 150 (150) (100) %

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Provision for income taxes (benefit) (4,947) (1,128) (3,819) 339 %

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

Net income (loss) $ 1,258 $ (16,260) $ 17,518 (108) %

The following tables set forth our revenue by geography and product category for the years ended December 31, 2022 and 2021:

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Net revenue increased $24.2 million, or 25%, from $98.0 million for the year ended December 31, 2021 to $122.3 million for the year ended December 31, 2022.

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.

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.

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.

The increase was primarily driven by the COVID-19 recovery in both domestic and global markets as well as $11.2 million of growth as a result of the MDO and Pega acquisitions.

This was offset by a reduction in the number of procedures caused by an unusually high volume of respiratory illnesses in the United States, as well as a negative impact from the foreign currency conversion of our international revenue.

Revenue from current year acquisitions is included in our trauma and deformity channel.

Trauma and deformity revenue, which includes the impact from current year acquisitions, increased $19.2 million, or 29%, primarily driven by increased sales in our PNP Femur, Cannulated Screws, Orthex systems and $11.2 million of sales generated from acquired businesses.

Scoliosis revenue increased $5.4 million, or 19%, primarily driven by increased sales of our 4.5/5.0 and 5.5/6.0 RESPONSE systems, BandLoc and ApiFix as well as the sale and pull through of 7D.

Sports medicine / other decreased $0.4 million, or 9%, due to lower external revenue from Telos.

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

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Gross margin was 74% for the year ended December 31, 2022 and 75% for the year ended December 31, 2021.

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.

The increase in cost of revenue was primarily driven by volume of units sold which included approximately $3.5 million from the result of acquisitions.

The slight decrease in gross margin was driven primarily by higher set sales, sold at cost, to our international stocking distributors, as well as by payment of a minimum performance obligation fee on the Firefly licensing agreement, which resulted from the unfavorable impacts of COVID and respiratory illnesses in the first and fourth quarters of 2022, respectively.

See note 15 - Commitments and Contingencies in Item 8 for additional details of our purchase commitments and performance obligations.

Sales and Marketing Expenses

Sales and marketing expenses increased $5.4 million, or 13.6%, from $39.7 million for the year ended December 31, 2021 to $45.1 million for the year ended December 31, 2022.

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.

The increase was due primarily to increased sales commission expenses and an overall increase in volume of units sold.

Sales and marketing expenses also increased by approximately $1.5 million as a result of the acquisitions.

Sales and marketing expenses for the year ended December 31, 2022 were approximately 37% of revenue compared to 40% for 2021.

The lower rate was driven by MD Ortho e-Commerce sales, which is sold without sales commissions, and lower commissions on other newly acquired products.

General and Administrative Expenses

General and administrative expenses increased $13.3 million, or 29%, from $46.1 million for the year ended December 31, 2021 to $59.4 million for the year ended December 31, 2022.

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.

The increase was due primarily to the addition of personnel and resources to support the continued expansion of our business and approximately $4.6 million in increased general and administrative expenses as a result of the acquisitions of MD Ortho and Pega.

Depreciation and amortization expenses increased $2.4 million, or 22%, from $10.7 million for the year ended December 31, 2021 to $13.1 million for the year ended December 31, 2022.

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.

The increase was primarily due to the amortization on intangible assets acquired through the MD Ortho and Pega acquisitions and a full year of amortization associated with 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 2021 scoliosis derotation license.

Research and Development Expenses

Research and development expenses increased $2.5 million, or 45%, from $5.5 million for the year ended December 31, 2021 to $8.0 million for the year ended December 31, 2022.

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 increase was primarily due to incremental product development including the addition of personnel and the support of future growth of our business as well as the research and development associated from the newly acquired businesses.

Total Other Income

Total other income increased $21.1 million from $0.6 million for the year ended December 31, 2021 to $21.7 million for the year ended December 31, 2022.

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.

For the year ended December 31, 2022, the change in fair value resulted in income of $25.9 million, compared to income of $1.8 million for the year ended December 31, 2021.

This was offset partially by the realized losses of investments of approximately $1.6 million and increased interest expense while the Company had borrowings under its Loan Agreement for the Pega acquisition.

Interest expense for the year ended December 31, 2022 was $0.7 million compared to $0.1 million for the year ended December 31, 2021.

Liquidity and Capital Resources

We have incurred operating losses since inception and negative cash flows from operating activities of $13.1 million, $18.5 million and $17.8 million for the years ended December 31, 2021, 2020 and 2019, respectively.

We have incurred operating losses since inception, excluding the fiscal year ended December 31, 2022, and negative cash flows from operating activities of $21.8 million, $13.1 million and $18.5 million for the years ended December 31, 2022, 2021 and 2020, respectively.

As of December 31, 2022, we had an accumulated deficit of $176.8 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.

Since inception, we have funded our operations primarily with proceeds from the sales of our

common and preferred stock, convertible securities and debt, as well as through sales of our products.

As of December 31, 2022, we had cash, cash equivalents and restricted cash of $10.5 million and short-term investments of $109.3 million.

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

We believe our existing cash and cash equivalents, amounts available under the Loan Agreement, cash receipts from sales of our products and net proceeds from our August 2022 public securities offering will be sufficient to meet our anticipated cash requirements for at least the next 12 months.

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

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Effect of exchange rate changes on cash 619 (658) (404)

Net increase in cash and restricted cash $ (21,126) $ (41,895) $ 11,336

Net increase (decrease) in cash and restricted cash $ 1,456 $ (21,126) $ (41,895)

Cash Used in Operating Activities

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Net cash used for working capital was $17.8 million, $12.6 million and $5.0 million for the years ended December 31, 2022, 2021 and 2020, 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 2022, the primary uses of cash included an increase in inventory of $16.9 million as we deployed additional inventory, and an increase in accounts receivable of $3.9 million.

These uses of cash were partially offset by cash inflows from other accrued expenses of $3.3 million, related primarily to accrued compensation.

During 2021, we increased inventory by $5.1 million as we deployed additional inventory, including $1.6 million and accounts receivable increased by $0.5 million.

These uses of cash for working capital were offset by our legal settlement accrual of $6.3 and $1.1 million of other accrued expenses.

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

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

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

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.

These uses of cash for working capital were offset by our legal settlement accrual of $6.3 million and an increase in accounts payable of $3.1 million.

We had net income of $1.3 million and net losses of $16.3 million and $32.9 million for the years ended December 31, 2022, 2021 and 2020, respectively.

Cash Used in Investing Activities

Net cash used in investing activities was $113.4 million, $7.4 million and $69.7 million for the years ended December 31, 2022, 2021 and 2020, respectively.

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.

Net cash used in investing activities in 2022 was primarily related to the cash portions paid in the acquisitions of MDO and Pega in the aggregate amount of $40.1 million and purchases of short term investments of $110.1 million, both of which were offset by sales of short term securities of $46.9 million.

We also invested an additional $10.0 million in property, plant and equipment, primarily instrument sets which were consigned in the United States and select international markets.

Net cash used in

2021 consisted primarily of the purchases of licenses of $7.9 million and the purchases of property plant and equipment, which were 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 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 instrument sets, 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 instrument sets of $11.8 million.

Cash Provided By Financing Activities

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 was $136.0 million, $6 thousand and $46.7 million for the years ended December 31, 2022, 2021 and 2020, respectively.

Net cash provided by financing activities for 2022 consisted primarily of the proceeds from the issuance of common stock and pre-funded warrants of $139.3 million, net of issuance costs.

This was offset by the cash paid for the first acquisition installment to ApiFix.

The Company also utilized $31.0 million of its revolving credit facility with Squadron to fund the Pega acquisition.

This was subsequently paid off in 2022.

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.

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

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

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.

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

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

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

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

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

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

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

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

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

The Company 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 Company is party to a Fourth Amended and Restated Loan and Security Agreement with Squadron, as amended from time to time (as amended, the “Loan Agreement”), which provides the Company with a $50.0 million revolving credit facility.

As of December 31, 2022, there was no outstanding indebtedness under the Loan Agreement.

Borrowings under the revolving facility accrue interest at an annual rate equal to the greater of (a) six month SOFR plus 8.69% and (b) 10.0%, and the Company is permitted to make interest only payments on amounts outstanding.

Prior to December 31, 2021, the interest rate on the facility had been equal to the greater of (a) three month LIBOR plus 8.61% and (b) 10.0%.

The Company pays 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;

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 matures at the earlier of:

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

and (ii) January 1, 2024.

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.

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 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.

Borrowings under the 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 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.

judgment against us in an amount greater than $250 thousand.

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

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Revenue Recognition

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.

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

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

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

Sales of our bracing products are sold to stocking distributors, hospitals, orthotist and other medical professionals or directly to end customers.

Revenue is recognized for braces generally when title passes upon shipment.

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

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

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

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

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.

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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.

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.

The calculation of the fair value

of the trademark assets involves Level 3 fair value measurements.

To estimate the fair value of the trademark asset and associated impairment, we utilized an income approach, or discounted cash flow model.

This approach requires us to make significant estimates and assumptions including preparation of forecasted revenue, selection of a royalty rate and discount rate and estimate of the terminal year revenue growth rate.

During 2022, management determined that a triggering event occurred, indicating that it was more likely than not the fair value of the ApiFix trademark asset was less than the carrying value.

As such, the company completed a quantitative analysis whereby we determined the fair value of the ApiFix trademark asset associated was below the carrying value.

The primary reason for the impairment is the lower forecasted revenue of our ApiFix product than previously expected.

We recorded a $3,609 impairment charge for the year ended December 31, 2022 to reduce the carrying amount of the intangible asset to its estimated fair value.

Following the impairment, the newly calculated fair value becomes the new accounting basis and carrying value of the trademark.

Net Operating Losses

As of December 31, 2022, we had federal, state and foreign tax net operating loss carryforwards, or NOLs, of approximately $117.1 million, $74.8 million and $24.4 million, respectively, which begin to expire in 2028 unless utilized.

The deferred tax assets, except for those recorded in Israel, were fully offset by a valuation allowance as of December 31, 2021 and 2020, and no income tax benefit has been recognized in our consolidated statements of operations.

The deferred tax assets, except for those recorded in Canada and Israel, were fully offset by a valuation allowance as of December 31, 2022 and 2021 and no income tax benefit has been recognized in continuing operations related to the NOLs which have valuation allowances.

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

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis