What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-11-07 compared with 2023-08-01 · 66 added, 57 removed, 123 unchanged (50% of the section changed)

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Our independent 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.

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.

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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.

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.

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 a partial impairment loss of $3.6 million was recorded in the period.

During 2023, 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 a partial impairment loss of $1.0 million was recorded in the three and nine months ended September 30, 2023.

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

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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 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,

Summary of Statements of Operations for the Three and Nine Months Ended September 30, 2023 and 2022

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

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

2023 2022 Increase

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General and administrative expenses 18,507 15,116 3,391 22 % 55,827 42,829 12,998 30 %

Trademark impairment 985 3,609 (2,624) (73) % 985 3,609 (2,624) (73) %

Research and development expenses 2,387 2,206 181 8 % 7,449 5,980 1,469 25 %

Other (income) expenses (2,299) (2,971) 672 (23) % (3,510) 60 (3,570) (5,950) %

Other income (766) (21,357) 20,591 (96) % (4,276) (21,297) 17,021 (80) %

Provision for income taxes (benefit) 849 (4,143) 4,992 120 % (126) (4,899) 4,773 97 %

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 and six months ended June 30, 2023 and 2022:

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

Net (loss) income $ (4,591) $ 18,539 $ 23,130 (125) % $ (14,283) $ 9,106 $ 23,389 (257) %

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

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

Product sales by geographic location:

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Total $ 39,972 $ 34,950 $ 111,119 $ 91,295

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

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

Product sales by category:

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Total $ 39,972 $ 34,950 $ 111,119 $ 91,295

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.

Net revenue increased $5.0 million, or 14%, from $35.0 million for the three months ended September 30, 2022 to $40.0 million for the three months ended September 30, 2023.

Net revenue increased $19.8 million, or 22%, from $91.3 million for the nine months ended September 30, 2022 to $111.1 million for the nine months ended September 30, 2023.

The increases during the three and nine months ended September 30, 2023 were primarily driven by strong performance across trauma and deformity, partially due to acquisitions.

Trauma and deformity sales increased $4.9 million, or 21%, from $23.9 million during the three months ended September 30, 2022, to $28.8 million for the three months ended September 30, 2023.

Sales increased $16.7 million, or 27%, from $63.0 million during the nine months ended September 30, 2022 to $79.7 million for the nine months ended September 30, 2023.

Increases for both the three and nine month periods ended September 30, 2023 were primarily driven by strong growth across numerous product lines, specifically our Cannulated Screws, PNP Femur, PediPlate, external fixation and Pega systems.

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

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.

Scoliosis sales increased $0.3 million, or 3%, during the three months ended September 30, 2023.

Sales increased $2.9 million, or 11%, from $25.4 million during the nine months ended September 30, 2022 to $28.3 million for the nine months ended September 30, 2023.

Increases for both the three and nine month periods ended September 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 decreased $0.2 million, or 20%, during the three months ended September 30, 2023, and increased $0.2 million, or 7%, during the nine months ended September 30, 2023.

Changes in sports medicine / other 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 $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.

Cost of revenue remained substantially flat from $9.1 million for the three months ended September 30, 2022 to $9.0 million for the three months ended September 30, 2023.

Cost of revenue increased $4.7 million, or 22%, from $21.9 million for the nine months ended September 30, 2022 to $26.6 million for the nine months ended September 30, 2023.

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

Gross margin was 77% and 74% for the three months ended September 30, 2023 and September 30, 2022, respectively.

The gross margin was 76% for both the nine months ended September 30, 2023 and September 30, 2022,

Sales and Marketing Expenses

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.

Sales and marketing expenses increased $1.7 million, or 14%, to $13.6 million for the three months ended September 30, 2023 from $11.9 million for the three months ended September 30, 2022.

Sales and marketing expense increased $4.9 million, or 14%, to $39.0 million for the nine months ended September 30, 2023 from $34.1 million for the nine months ended September 30, 2022.

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

General and Administrative Expenses

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.

General and administrative expenses increased $3.4 million, or 22%, from $15.1 million for the three months ended September 30, 2022 to $18.5 million for the three months ended September 30, 2023, and increased $13.0 million, or 30%, from $42.8 million for the nine months September 30, 2022 to $55.8 million for the nine months ended September 30, 2023.

The increases for the three and nine month periods ended September 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.

Depreciation and amortization expenses increased $1.7 million, or 52%, from $3.3 million for the three months ended September 30, 2022 to $5.0 million for the three months ended September 30, 2023.

Depreciation and amortization expenses increased $3.3 million, or 35%, from $9.6 million for the nine months ended September 30, 2022 to $12.9 million for the nine months ended September 30, 2023.

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

Trademark Impairment

The Company recorded an impairment charge of $1.0 million and $3.6 million associated with the ApiFix trademark for the three and nine months ended September 30, 2023 and 2022, respectively.

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

Research and Development Expenses

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.

Research and development expenses increased $0.2 million, or 8%, from $2.2 million for the three months ended September 30, 2022 to $2.4 million for the three months ended September 30, 2023.

Research and development expenses increased $1.5 million, or 25%, from $6.0 million for the nine months ended September 30, 2022 to $7.4 million for the nine months ended September 30, 2023.

The increase for the three and nine month periods ended September 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 $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.

Other income was $0.8 million and $21.4 million for the three months ended September 30, 2023 and 2022, respectively, a change of $20.6 million or 96%.

Other income was $4.3 million $21.3 million for the nine months ended September 30, 2023 and 2022, respectively, resulting in a change of $17.0 million.

The change in other income for the three and nine months ended September 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 in the previous 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 $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 have incurred operating losses since inception which resulted in negative cash flows used in operating activities of $19.5 million and $18.4 million for the nine months ended September 30, 2023 and 2022, respectively.

As of September 30, 2023, we had an accumulated deficit of $191.1 million.

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

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

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

At September 30, 2023, we had cash and cash equivalents, restricted cash and short-term investments of $84.0 million.

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

Six Months Ended June 30,

Nine Months Ended September 30,

Net cash used in operating activities $ (19,503) $ (18,425)

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

Net cash provided by (used in) investing activities 23,755 (90,144)

Net cash (used in) provided by financing activities (2,086) 136,009

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Cash Used in Operating Activities

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.

Net cash used in operating activities was $19.5 million and $18.4 million for the nine months ended September 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 $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 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.

Net cash used for working capital was $23.4 million for the nine months ended September 30, 2023 compared to a use of $17.4 million for the nine months ended September 30, 2022.

The increase in cash used in

operating activities was primarily driven by additional inventory purchased to support sales growth as well as accounts receivable from the increased sales which was offset by cash provided by accounts payable associated with the acquired inventory.

Cash Provided by (Used in) Investing Activities

Net cash provided by investing activities for the nine months ended September 30, 2023 was $23.8 million compared to cash used of $90.1 million for the nine months ended September 30, 2022.

Net cash used in investing activities for the nine months ended September 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 $13.0 million, the majority of which is instrument sets.

The change in cash related to investing activities is primarily driven by business combinations and the purchase of short term marketable securities which decreased from the prior year.

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.

Net cash used in financing activities for the nine months ended September 30, 2023 was $2.1 compared to net cash provided by financing activities of $136.0 for the nine months ended September 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 source of cash in the prior year was mainly attributable to the Company's follow-on offering.

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 June 30, 2023, there was no outstanding indebtedness under the Loan Agreement.

As of September 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