What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-01 compared with 2023-05-02 · 63 added, 50 removed, 117 unchanged (49% of the section changed)

26 unchanged sentences

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.

In January 2023, we established a direct sales organization in Germany, the Company's first direct selling organization serving an international market.

In our international markets, excluding Germany, 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.

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

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

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.

Subsequently, the Company completed a quantitative analysis and concluded that the fair value was in fact less than the carrying value and a partial 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;

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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.

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

Elective procedures were 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.

Throughout the pandemic, we took 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.

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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,

Summary of Statements of Operations for the Three and Six Months Ended June 30, 2023 and 2022

The following table sets forth our results of operations for the three and six months ended June 30, 2023 and 2022:

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

2023 2022 Increase

(Decrease) % 2023 2022 Increase (Decrease) %

Net revenue $ 39,559 $ 32,928 $ 6,631 20 % $ 71,147 $ 56,345 $ 14,802 26 %

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Net loss $ (2,886) $ (333) $ 2,553 767 % $ (9,692) $ (9,433) $ 259 3 %

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,

The following tables set forth our net revenue by geography and product category for the three and six months ended June 30, 2023 and 2022:

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

Product sales by geographic location:

2023 2022 2023 2022

$ 29,587 $ 24,960 $ 53,388 $ 43,148

International 9,972 7,968 17,759 13,197

Total $ 39,559 $ 32,928 $ 71,147 $ 56,345

Three Months Ended March 31,

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

Product sales by category:

2023 2022 2023 2022

Trauma and deformity $ 27,514 $ 22,568 $ 50,909 $ 39,084

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Total $ 39,559 $ 32,928 $ 71,147 $ 56,345

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.

Net revenue increased $6.6 million, or 20%, from $32.9 million for the three months ended June 30, 2022 to $39.6 million for the three months ended June 30, 2023.

Net revenue increased $14.8 million, or 26%, from $56.3 million for the six months ended June 30, 2022 to $71.1 million for the six months ended June 30, 2023.

The increases during the three and six months ended June 30, 2023 were primarily driven by strong performance across trauma and deformity, partially due to acquisitions, and a 35% increase in international revenue.

Trauma and deformity sales increased $4.9 million, or 22%, from $22.6 million during the three months ended June 30, 2022, to $27.5 million for the three months ended June 30, 2023.

Sales increased $11.8 million, or 30%, from $39.1 million during the six months ended June 30, 2022 to $50.9 million for the six months ended June 30, 2023.

Increases for both the three and six month periods ended June 30, 2023 were primarily driven by strong growth across numerous product lines, specifically our Cannulated

Screws, PNP Femur, PediPlate and external fixation 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.

Scoliosis sales increased $1.5 million, or 16%, during the three months ended June 30, 2023.

Sales increased $2.6 million, or 17%, from $15.4 million during the six months ended June 30, 2022 to $18.0 million for the six months ended June 30, 2023.

Increases for both the three and six month periods ended June 30, 2023 were primarily driven by increased sales of our RESPONSE 5.5/6.0 and ApiFix systems and revenue generated from 7D Technology.

Sports medicine / other increased $0.2 million, or 23%, during the three months ended June 30, 2023, and increased $0.4 million, or 22%, during the six months ended June 30, 2023.

Increases were primarily driven by 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 $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.

Cost of revenue increased $1.6 million, or 20%, from $7.9 million for the three months ended June 30, 2022 to $9.5 million for the three months ended June 30, 2023.

Cost of revenue increased $4.8 million, or 37%, from $12.8 million for the six months ended June 30, 2022 to $17.6 million for the six months ended June 30, 2023.

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

Gross margin was 76% for the three months ended June 30, 2023 and June 30, 2022.

The gross margin was 75% and 77% for the six months ended June 30, 2023 and June 30, 2022, respectively.

Sales and Marketing Expenses

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.

Sales and marketing expenses increased $0.7 million, or 6%, to $13.2 million for the three months ended June 30, 2023 from $12.4 million for the three months ended June 30, 2022.

Sales and marketing expense increased $3.2 million, or 14%, to $25.4 million for the six months ended June 30, 2023 from $22.2 million for the six months ended June 30, 2022.

The changes in the three and six month periods ended June 30, 2023 were due primarily to increased sales commission expenses.

General and Administrative Expenses

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.

General and administrative expenses increased $5.1 million, or 35%, from $14.5 million for the three months ended June 30, 2022 to $19.7 million for the three months ended June 30, 2023, and increased $9.6 million, or 35%, from $27.7 million for the six months June 30, 2022 to $37.3 million for the six months ended June 30, 2023.

The increases for the three and six month periods ended June 30, 2023 were due primarily to the addition of personnel and resources to support the continued expansion of our business.

Stock compensation increased in tandem with the increase in personnel, and also as a result of common stock issued to a former MedTech owner that is subject to service-based vesting conditions.

Depreciation and amortization expenses increased $0.8 million, or 24%, from $3.2 million for the three months ended June 30, 2022 to $4.0 million for the three months ended June 30, 2023.

Depreciation and amortization expenses increased $1.6 million, or 26%, from $6.3 million for the six months ended June 30, 2022 to $7.9 million for the six months ended June 30, 2023.

The increases in depreciation for the three and six month periods ended June 30, 2023 were primarily due to higher set deployments and increased amortization associated with acquisitions.

Research and Development Expenses

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.

Research and development expenses increased $1.0 million, or 60%, from $1.7 million for the three months ended June 30, 2022 to $2.8 million for the three months ended June 30, 2023.

Research and development expenses increased $1.3 million, or 34%, from $3.8 million for the six months ended June 30, 2022 to $5.1 million for the six months ended June 30, 2023.

The increase for the three and six month periods ended June 30, 2023 were 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.

Other income was $2.3 million and $3.0 million for the three months ended June 30, 2023 and 2022, respectively, a change of $0.7 million or 23%.

Other income was $3.5 million and other expense was $60 thousand for the six months ended June 30, 2023 and 2022, respectively, resulting in a change of $3.6 million.

The change in other (income) expense for the three and six months ended June 30, 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 as well as a decrease in net interest expense.

Liquidity and Capital Resources

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 have incurred operating losses since inception which resulted in negative cash flows used in operating activities of $10.8 million and $12.4 million for the six months ended June 30, 2023 and 2022, respectively.

As of June 30, 2023, we had an accumulated deficit of $186.5 million.

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

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

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

At June 30, 2023, we had cash and cash equivalents, restricted cash and short-term investments of $94.8 million.

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

Three Months Ended March 31,

Six Months Ended June 30,

Net cash used in operating activities $ (10,834) $ (12,367)

Net cash provided by investing activities 14,087 13,775

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

Net cash (used in) provided by financing activities (2,071) 27,741

Effect of exchange rate changes on cash, cash equivalents and restricted cash (335) 400

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Cash Used in Operating Activities

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.

Net cash used in operating activities was $10.8 million and $12.4 million for the six months ended June 30, 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 $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.

Net cash used for working capital was $11.3 million for the six months ended June 30, 2023 compared to a use of $10.9 million for the six months ended June 30, 2022.

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.

Net cash provided by investing activities for the six months ended June 30, 2023 was $14.1 million compared to $13.8 million for the six months ended June 30, 2022.

Net cash provided by investing activities for the six months ended June 30, 2023 consisted primarily of the sale of short-term marketable securities, when netted against the purchase of similar securities, offset by purchases of property, plant and equipment of $10.6 million, the majority of which is instrument sets.

Cash (Used in) Provided by Financing Activities

Net cash used in financing activities for the six months ended June 30, 2023 was $2.1 compared to net cash provided by financing activities of $27.7 for the six months ended June 30, 2022.

The use of cash in 2023 primarily related to the cash settlement of the current year ApiFix installment payment.

The source of cash in 2022 was driven primarily by the proceeds of debt incurred in connection with the acquisition of Pega Medical Inc.

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.

As of June 30, 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.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis