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Item 2. Management’s Discussion and Analysis

2023-05-02 compared with 2022-11-01 · 86 added, 147 removed, 81 unchanged (74% 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, instruments and braces 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, we also sell to stocking distributors, where we transfer control of our products to the distributor when title passes upon shipment.

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 48 surgical systems that serve three of the largest categories within the pediatric orthopedic market:

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

We primarily rely on a broad network of third parties to manufacture the components of our products, which we then inspect and package.

We rely on a broad network of third parties to manufacture the components of our products, which we then inspect and package.

We believe our innovative products promote improved surgical accuracy, increase consistency of outcomes and enhance surgeon confidence in achieving high standards of care.

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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 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 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.

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

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

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

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

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.

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 613,000 children, including MD Ortho.

Since inception we have impacted the lives of over 649,000 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.

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.

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 and summary report which can be found 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.

Our team in Warsaw recently implemented an enhanced recycling program.

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

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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 12 months.

The Governance and Nominating Committee 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.

Since the conclusion of our 2022 annual meeting of stockholders, the Company has added two diverse Directors to our Board.

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 Quarterly Report on Form 10-Q.

Impact of COVID-19 on our Business

As a result of the COVID-19 pandemic (“COVID-19” or the “pandemic”), we have experienced significant business disruption.

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.

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.

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.

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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.

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 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.

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 has experienced a significant increase during the summer months.

In 2022 the United States experienced a significant increase in RSV activity outside of the typical peak season as well as a heightened impact during the winter 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

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

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

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

To the extent that we continue to qualify as a smaller reporting company, after we cease to qualify as an emerging growth company, certain of the exemptions available to us as an emerging growth company may continue to be available to us as a smaller reporting company.

The JOBS Act also provides that an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies.

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 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,

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.

As a result of the COVID-19 pandemic, we have experienced significant business disruption throughout the last several 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 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 1, 2023 and in other reports filed with the SEC that discuss the risks and factors that may affect our business.

Smaller Reporting Company Status

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

To the extent that we continue to qualify as a smaller reporting company, certain exemptions may be available to us.

Summary of Statements of Operations for the Three Months Ended March 31, 2023 and 2022

The following table sets forth our results of operations for the three months ended March 31, 2023 and 2022:

Three Months Ended March 31,

2023 2022 Increase

(Decrease) % 2022 2021 Increase (Decrease) %

Net revenue $ 31,588 $ 23,417 $ 8,171 35 %

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General and administrative expenses 17,666 13,167 4,499 34 %

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

Research and development expenses 2,270 2,027 243 12 %

Total other expenses (income) (21,357) (1,155) (20,202) 1749 % (21,297) 4,759 (26,056) (548) %

Other (income) expenses (1,211) 3,031 (4,242) (140) %

Provision for income taxes (benefit) (574) (317) (257) (81) %

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,

Net loss $ (6,806) $ (9,100) $ (2,294) (25) %

The following tables set forth our net revenue by geography and product category for the three months ended March 31, 2023 and 2022:

Three Months Ended March 31,

Product sales by geographic location:

$ 23,800 $ 18,188

$ 26,539 $ 19,354 $ 69,687 $ 57,930

International 7,788 5,229

Total $ 31,588 $ 23,417

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

Three Months Ended March 31,

Product sales by category:

2022 2021 2022 2021

Trauma and deformity $ 23,395 $ 16,516

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Total $ 31,588 $ 23,417

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.

Net revenue increased $8.2 million, or 35%, from $23.4 million for the three months ended March 31, 2022 to $31.6 million for the three months ended March 31, 2023.

The increase during the three months ended March 31, 2023 was primarily driven by the COVID-19 recovery in both domestic and global markets as well as $4.8 million of growth as a result of the MDO and Pega acquisitions.

This was slightly offset by a negative impact from the foreign currency conversion of our international revenue.

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

Trauma and deformity sales increased $6.9 million, or 42%, during the three months ended March 31, 2023, primarily driven by strong trauma and deformity growth across numerous product lines, specifically our Cannulated Screws, PNP Femur and PediPlate systems.

Also, as previously mentioned, revenue from the prior year acquisitions is included in trauma and deformity.

Scoliosis sales increased $1.1 million, or 18%, during the three months ended March 31, 2023, primarily driven by increased sales of our

RESPONSE 4.5/5.0 and 5.5/6.0 systems and sales of the FireFly surgical guides.

Sports medicine / other increased $0.2 million, or 22%, during the three months ended March 31, 2023, primarily driven by an increase in sales from our Telos operations.

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 $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 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.

Cost of revenue increased $3.2 million, or 65%, from $4.9 million for the three months ended March 31, 2022 to $8.0 million for the three months ended March 31, 2023.

The increase is due primarily to sales volume, including the added cost of revenue associated with the revenue generated by acquisitions.

Gross margin was 79% for the three months ended March 31, 2022 and 75% for the three months ended March 31, 2023.

The change in gross margin is primarily driven by favorable purchase price variances in the three months ended March 31, 2022 which did not repeat in the three months ended March 31, 2023.

Sales and Marketing Expenses

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.

Sales and marketing expenses increased $2.5 million, or 25%, to $12.2 million for the three months ended March 31, 2023 from $9.8 million for the three months ended March 31, 2022.

The change in the three month period ended March 31, 2023 was due primarily to increased sales commission expenses, driven by increased unit volumes sold as well as $0.6 million of additional expense from acquisitions.

General and Administrative Expenses

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.

General and administrative expenses increased $4.5 million, or 34%, from $13.2 million for the three months ended March 31, 2022 to $17.7 million for the three months ended March 31, 2023.

The increase for the three month period ended March 31, 2023 was due primarily to the addition of personnel and resources to support the continued expansion of our business, including $2.3 million from acquisitions and an increase in legal expenses and travel expenses.

Depreciation and amortization expenses increased $0.9 million, or 30%, from $3.0 million for the three months ended March 31, 2022 to $3.8 million for the three months ended March 31, 2023.

The increase for the three month period ended March 31, 2023 was primarily due to an increase in depreciation from higher set deployments and $0.6 million of depreciation and amortization expenses related to the assets acquired from acquisitions.

Research and Development Expenses

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.

Research and development expenses increased $0.2 million, or 12%, from $2.0 million for the three months ended March 31, 2022 to $2.3 million for the three months ended March 31, 2023.

The increase for the three month period ended March 31, 2023 was primarily due to incremental product development and the addition of personnel to support the future growth of the business.

Total Other (Income) Expenses

Other income was $1.2 million and $3.0 million of other expense for the three months ended March 31, 2023 and 2022, respectively, a change of $4.2 million or 140%.

The change in other expense for the three months ended March 31, 2023 was primarily due to the fair value adjustment of contingent consideration, which was driven by the valuation inputs that were lower in comparison to the same period last year, resulting in income rather than expense.

We recognized net interest income during the three months ended March 31, 2023 compared to net interest expense for the three months ended March 31, 2022.

The aggregate of accreted interest expense and fair value adjustments for the three months ended March 31, 2023 and 2022 were income of $0.3 million and expense of $3.0 million, respectively.

Liquidity and Capital Resources

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 have incurred operating losses since inception which resulted in negative cash flows used in operating activities of $6.5 million and $4.2 million for the three months ended March 31, 2023 and 2022, respectively.

As of March 31, 2023, we had an accumulated deficit of $183.6 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 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.

At March 31, 2023, we had cash and cash equivalents, restricted cash and short-term investments of $109.2 million.

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

Nine Months Ended September 30,

Three Months Ended March 31,

Net cash used in operating activities $ (6,461) $ (4,197)

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)

Net increase (decrease) in cash $ 27,866 $ (22,430)

Net cash provided by investing activities 32,310 14,303

Net cash used in financing activities (36) (33)

Effect of exchange rate changes on cash, cash equivalents and restricted cash (138) 241

Net increase in cash, cash equivalents and restricted cash $ 25,675 $ 10,314

Cash Used in Operating Activities

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.

Net cash used in operating activities from continuing operations was $6.5 million and $4.2 million for the three months ended March 31, 2023 and 2022, 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 $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 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 (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%.

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.

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:

(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 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.

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.

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.

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

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

Net cash used for working capital was $4.8 million for the three months ended March 31, 2023 compared to a use of $2.3 million for the three months ended March 31, 2022.

During the three months ended March 31, 2023, the primary driver of working capital cash usage was the increase in inventory of $6.0 million to support future sales growth which is offset by trade payables of $5.5 million.

We also saw an increase in the use of cash from accrued expenses related to compensation paid in the first quarter as well as the settlement of a minimum purchase commitment required for the year ended December 31, 2022 in connection with the Company's exclusive distribution rights of the FIREFLY ® Technology.

Cash Provided by Investing Activities

Net cash provided by investing activities for the three months ended March 31, 2023 was $32.3 million compared to $14.3 million for the three months ended March 31, 2022.

Net cash provided by investing activities for the three months ended March 31, 2023 consisted primarily of the sale of short-term marketable securities offset by purchases of instrument sets of $4.9 million.

Cash Used in Financing Activities

Net cash used in financing activities for the three months ended March 31, 2023 and 2022, respectively, were not material to the results of our operations.

The Company is party to a Fourth Amended and Restated Loan and Security Agreement with Squadron, which provides the Company with a $50.0 million revolving credit facility.

As of March 31, 2023, there was no outstanding indebtedness under the Loan Agreement.

In August 2013, pursuant to the purchase of our office and warehouse space, we entered into a mortgage note payable to Tawani Enterprises Inc., the owner of which is a member of Squadron’s management committee.

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

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 $0.9 million and $1.0 million at September 30, 2022 and December 31, 2021, respectively.

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.

See Note 6 - Debt and Credit Arrangements in Item 1 for further detail regarding our debt.

Pediatric Orthopedic Business Seasonality

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Critical Accounting Policies and Significant Judgments and Estimates

This management’s discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with GAAP.

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

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

We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.

Changes in estimates are reflected in reported results for the period in which they become known.

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.

There were no material changes to our critical accounting policies that are disclosed in our audited consolidated financial statements for the year ended December 31, 2022 filed with the SEC on March 1, 2023.

Recent Accounting Pronouncements

See Note 2 - Significant Accounting Policies in Item 1 Financial Statements of Part 1 of this Quarterly report on Form 10-Q for a description of recent accounting pronouncements applicable to our condensed consolidated financial statements.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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What changed 10-Q

Item 2. Management’s Discussion and Analysis