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Item 7. Management’s Discussion and Analysis

2024-03-08 compared with 2023-03-01 · 103 added, 114 removed, 215 unchanged (50% of the section changed)

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You should review the ‘‘Risk Factors’’ section of this Annual Report on Form 10-K for a discussion of important factors that could cause our actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

This section discusses our results of operations for the year ended December 31, 2023 as compared to the year ended December 31, 2022.

For a discussion and analysis of the year ended December 31, 2022 compared to December 31, 2021, please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 1, 2023.

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.

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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 estimate that the portion of this market that we currently serve represents a $3.9 b illion opportunity globally, including ov er $1.7 bi llion in the United States.

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.

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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:

We currently mar ket 53 su rgical 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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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.

Our global sales management organization leads a network of sales agencies, stocking distributors as well as direct sales representatives.

We sell our implants and instruments through a networ k of multiple direct sales representatives as well as nearly 40 independent sales agencies employing approximately 200 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 performanc e bonuses.

We do not sell our products through or participate in physician-owned distributorships, or PODs.

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.

We market and sell our products internationally in over 70 coun tries 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.

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.

In these markets we work through sales agencies that are paid commissions.

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 2023, we hired operating and sales representatives in Germany as salaried employees to better serve our customers.

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

For the years ended

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

For the years ended December 31, 2023, 2022 and 2021, international sales accounted for approximately 25%, 24% and 21% 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 630,000 children, when including those served by our acquired companies.

Since inception we have impacted the lives of ove r 710,000 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.

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In 2020, we were named as "Corporate Partner of the Year" by the World Pediatric Project - with whom we work to provide access to medical care for children in developing countries.

• We are committed to fostering an environment that is respectful, compassionate, and inclusive of everyone in our community.

• 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 are committed to fostering an environment that is respectful, compassionate, and inclusive of everyone in our community which is communicated in our diversity and inclusion policy.

For seven years we have been recognized by the Indiana Chamber of Commerce - Best Companies to Work in Indiana.

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

In 2022 and again in 2023, the Company added diverse Directors to our Board and will continue its Board diversity initiative in the future.

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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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.

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.

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

During 2023 and 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 impairment losses of $1.0

million and $3.6 million were recorded in 2023 and 2022, respectively.

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.

In 2023 and 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 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 and fall months and in 2023 the United States experienced a significant increase in January and February as well as October through December 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.

This had a negative impact on our sales volume in 2023 and 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.

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.

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.

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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 costs.

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

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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.

For the year ended December 31, 2020, the Company accrued $6.3 million as a result of legal settlement negotiations ongoing at that time.

During 2021, there were no material adjustments to the accrual and we paid the settlement amounts, resolving the related legal proceedings.

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

No accrual or adjustments were made during the years ended December 31, 2023 or 2022.

Research and Development Expenses

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We expect research and development expenses to continue to increase both in absolute dollars and as a percentage of revenue as we continue to develop new products to expand our product offering, broaden our intellectual property portfolio and add research and development personnel.

Other Expenses

Our other expenses primarily consist of fair value adjustments of contingent consideration, accreted interest expense related to the acquisition installment payables and borrowing costs and expenses related to long-term debt.

Other Income (Expense)

Our other income (expense) primarily consists of fair value adjustments of contingent consideration, accreted interest expense related to the acquisition installment payables, borrowing costs and expenses related to debt.

Results of Operations

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

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

Research and development expenses 10,196 8,014 2,182 27 %

Other expenses (income) (21,710) (636) (21,074) 3314 %

Other income (5,439) (21,710) 16,271 (75) %

Provision for income taxes (benefit) (338) (4,947) 4,609 (93) %

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

Net (loss) income $ (20,974) $ 1,258 $ (22,232) (1,767) %

The following tables set forth our revenue by geography and product category for the years ended December 31, 2023 and 2022:

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Net revenue increased $26.4 million, or 22%, from $122.3 million for the year ended December 31, 2022 to $148.7 million for the year ended December 31, 2023.

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.

Th e increase was primarily driven by increased market share across our product offerings as well as $5.3 million of growth as a result of the MDO and Pega acquisitions.

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

Trauma and deformity revenue, which includes the impact from acquired businesses, increased $21.7 million, or 26%, primarily driven by increased sales in our Pega, PNP Femur, Cannulated Screws, Orthex systems and $5.3 million of sales generated from acquired businesses.

Sco liosis revenue increased $4.5 million, or 13%, primarily driven by increased sales of our 4.5/5.0 and 5.5/6.0 RESPONSE systems and ApiFix as well as the sale and pull through of 7D.

Sports medicine / other increased $0.2 million, or 6%.

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 75% for the year ended December 31, 2023 and 74% for the year ended December 31, 2022.

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.

The increase in cost of revenue was primarily driven by v olume of units sold which included approximately $1.7 million from the result of acquisitions.

The gross margin includes a minimum performance obligation fee on the Firefly licensing agreement.

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

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Sales and marketing expenses increased $6.3 million, or 14%, from $45.1 million for the year ended December 31, 2022 to $51.4 million for the year ended December 31, 2023.

The increase was due primarily to increased sales commission expenses 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 u nits sold.

Sales and marketing expenses also increased by approximately $0.7 million as a result of the acquisitions.

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General and administrative expenses increased $16.0 million, or 27%, from $59.4 million for the year ended December 31, 2022 to $75.4 million for the year ended December 31, 2023.

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.

The increase was due primarily to the addition of personnel and resources to support the continued expansion of our business and stock compensation expense of $3.8 million.

Depreciation and amortization expenses increased $4.3 million, or 33%, from $13.1 million for the year ended December 31, 2022 to $17.4 million for the year ended December 31, 2023 .

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.

The increase was primarily due to a full year of amortization on intangible assets acquired through the MD Ortho and Pega acquisitions as well as the addition of MedTech Concepts and Rhino acquisitions.

Research and Development Expenses

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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.

Trademark Impairment

The Company recorded a partial impairment charge of $1.0 million and $3.6 million associated with the ApiFix trademark during the years ended December 31, 2023 and 2022, respectively.

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

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.

Total other income decreased $16.3 million from $21.7 million for the year ended December 31, 2022 to $5.4 million for the year ended December 31, 2023.

The change is driven primarily by the decrease in fair value of the contingent consideration related to the ApiFix acquisition in 2022.

For the year ended December 31, 2023, the change in fair value resulted in income of $3.0 million, compared to income of $25.9 million for the year ended December 31, 2022.

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.

Interest expense for the year ended December 31, 2023 was less than $0.1 million compared to $0.7 million for the year ended December 31, 2022.

Liquidity and Capital Resources

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.

We have incurred operating losses since inception and negative cash flows from operating activities of $27.0 million, $21.8 million and $13.1 million for the years ended December 31, 2023, 2022 and 2021, respectively.

As of December 31, 2023, we had an accumulated deficit of $197.7 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.

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 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.

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, 2023, we had cash, cash equivalents and restricted cash of $33.0 million and short-term investments of $49.3 million for a total of $82.3 million.

We believe our existing cash and cash equivalents, amounts available under our new Credit 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 me et our working capital requirements, make continued research and development investments and make capital expenditures needed for us to maintain and grow our business.

We may not be able to obtain additional financing on terms favorable to us, if at all.

It is also possible that we may allocate significant amounts of capital toward products or technologies for which market demand is lower than anticipated and, as a result, abandon such efforts.

It is also possible

that we may allocate significant amounts of capital toward products or technologies for which market demand is lower than anticipated and, as a result, abandon such efforts.

If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, or if we expend capital on products or technologies that are unsuccessful, our ability to continue to support our business growth and to respond to business challenges could be significantly limited, or we may have to scale back our operations.

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Net cash used in operating activities $ (27,046) $ (21,766)

Net cash used in investing activities (113,371) (7,411) (69,693)

Net cash provided by (used in) investing activities 41,677 (113,371)

Net cash provided by financing activities 7,301 135,974

Effect of exchange rate changes on cash 633 619

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

Net increase in cash and restricted cash $ 22,565 $ 1,456

Cash Used in Operating Activities

Net cash used in operating activities was $21.8 million, $13.1 million and $18.5 million for the years ended December 31, 2022, 2021 and 2020, 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 years.

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.

Net cash used in operating activities was $27.0 million and $21.8 million for the years ended December 31, 2023 and 2022, respectively.

The primary use of this cash was for working capital.

Net cash used for working capital was $32.2 million and $17.8 million for the years ended December 31, 2023 and 2022, respectively.

During 2023, the primary uses of cash included an increase in inventory of $26.3 million as we deployed additional inventory and an increase in accounts receivable of $9.7 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.

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 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.

These uses of cash were partially offset by cash inflows from other accrued expenses of $6.9 million, related primarily to accrued compensation, and an increase in accounts payable of $1.5 million.

During 2022, we increased inventory by $16.9 million as we deployed additional inventory and accounts receivable increased by $3.9 million.

We had a net loss of $21.0 million for the year ended December 31, 2023, compared to net income of $1.3 million for the year ended December 2022.

Cash Provided by (Used in) Investing Activities

Net cash provided by (used in) investing activities was $41.7 million and $(113.4) million for the years ended December 31, 2023 and 2022, respectively.

Net cash provided by investing activities in 2023 was primarily related to the sales of short-term marketable securities of $112.9 million which was offset by the purchase of short-term investments of $48.6 million and the cash portion paid in the acquisitions of MedTech of $3.1 million and Rhino of $0.5 million.

We also invested $16.9 million in property, plant and equipment, primarily instrument sets which were consigned in the United States and select international markets.

Net cash used 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 $10.0 million in property, plant and equipment, primarily instrument sets which were consigned in the United States and select international markets.

Cash Provided By Financing Activities

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 was $7.3 million and $136.0 million for the years ended December 31, 2023 and 2022, respectively.

Net cash provided by financing activities in 2023 consisted of the proceeds of $9.4 million, net of issuance costs, from our new loan agreement with MidCap Financial Trust.

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

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.

This was offset by the cash paid for the 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.

Loan Agreement

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.

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 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.

Mortgage Note

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 $15,543, with interest compounded at 5% until maturity in August 2028, at which time a final payment of remaining principal and interest will become due.

The mortgage is secured by the related real estate and building.

The mortgage balance was $0.9 million and $1.0 million as of December 31, 2022 and 2021, respectively.

Credit Agreement

On December 29, 2023, the Company entered into an $80 million Credit, Security and Guaranty Agreement by and among (i) the Company and other borrowers party to the Credit Agreement, (ii) MidCap Funding IV Trust, (iii) MidCap Financial Trust, and (iv) the financial institutions or other entities from time to time party thereto as Lenders.

Under the terms of the Credit Agreement, the Lenders have provided to Borrowers a term loan in an aggregate principal amount that will not exceed $30 million available in three tranches of $10 million (the "Term Loan") each subject to certain draw conditions and a revolving loan in an aggregate principal amount that will not exceed $50 million (the "Revolving Loan").

Borrowings are available subject to certain levels of working capital for the Revolving Loan.

The second tranche of the Term Loan is eligible to be drawn between July 1, 2024 through June 30, 2025.

The third tranche of the Term Loan is eligible to be drawn between January 1, 2025 through June 30, 2025.

The Company must meet certain cash usage requirements at the time of each draw to be eligible to access these term loans.

Interest on the Term Loan will accrue at the greater of (a) One Month Term SOFR plus 6.50% or (b) 9.0% and interest on the Revolving Loan will accrue at the greater of (a) One Month Term SOFR plus 4.0% or (b) 6.50% and will be payable monthly by the Company.

The Term Loans may be prepaid in full through December 29, 2024 with payment of a 3.00% prepayment premium, after which they may be prepaid in full through December 29, 2025 with payment of a 2.00% prepayment premium, after which they may be prepaid in full through December 29, 2026 with payment of a 1.00% prepayment premium, after which they may be prepaid in full with no prepayment premium.

An additional final payment of 3.00% of the amount of the Term Loans advanced by the Lenders will be due upon prepayment or repayment of the Terms Loan in full.

The first tranche of $10 million was issued under the Term Loan upon execution.

Payments of principal and all accrued but unpaid interest will be due and payable upon the earlier of December 1, 2028, or (i) the occurrence of any transaction or series of transactions pursuant to which any person or entity in the aggregate acquire(s) 35% or more of the voting capital stock of the Company, (ii) a change in the majority of the Company’s Board of Directors over a 12-month period;

(iii) the Company ceases to own directly or indirectly, 100% of the capital stock of any of its subsidiaries (with the exception of any subsidiaries permitted to be dissolved, merged or otherwise disposed of by the Credit Agreement), or (iv) the occurrence of a change in control, fundamental change, deemed liquidation event or terms of similar import under any document or instrument governing or relating to debt of or equity interests of the Company.

The loans under the Credit Agreement are secured by a security interest in the Company’s and other Borrower’s assets.

The Credit Agreement provides for customary events of default.

If an event of default is not cured within the time periods specified (if any), the Lenders and Agent have the right to accelerate the Company’s payment of principal and interest in addition to other rights and remedies.

The Term Loan includes certain customary non-financial covenants, and also includes certain financial covenants related to the Company achieving minimum revenue targets over a trailing twelve-month period.

The Company was in compliance with all covenants under the Credit Agreement as of December 31, 2023.

The debt facilities available under the Credit Agreement replace the Fourth Amended and Restated Loan and Security Agreement with Squadron (as amended, the “Squadron Loan Agreement”), which provided the Company with a $50 million revolving credit facility.

There was no indebtedness outstanding under the Squadron Loan Agreement and it was terminated in connection with the Credit Agreement.

Contractual Obligations and Commitments

The Company's cash requirements within the next twelve months include accounts payable, accrued compensation and benefits, current maturities of long-term debt, current portion of acquisition installment payable and other current liabilities.

The acquisition installment payable is related to the acquisition of ApiFix - See Note 3.

Business Combinations in Item 8 for further detail of the acquisition and the acquisition installment payables.

The acquisition installment payable is related to the acquisition of ApiFix and MedTech - See Note 3.

Business Combinations and Asset Acquisitions in Item 8 for further detail of the acquisition and the acquisition installment payables.

Our long-term cash requirements under various contractual obligations and commitments include:

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• Acquisition installment payables, net of current portion and contingent consideration - See Note 3.

Business Combinations in Item 8 for further detail regarding our obligations and timing of expected future payments.

Business Combinations and Asset Acquisitions in Item 8 for further detail regarding our obligations and timing of expected future payments.

• Minimum purchase obligations - Purchase obligations include agreements for purchases of product in the normal course of business, including minimum quantities required pursuant to our license agreements.

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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.

The calculation of the fair value

of the trademark assets involves Level 3 fair value measurements.

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.

During 2023 and 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 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.

We recorded impairment charges of $1.0 million and $3.6 million for the years ended December 31, 2023 and 2022, respectively, 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.

As of October 1, 2023, the date of our last impairment review, the fair value of three of our trademarks exceeded their respective carrying values by less than 15%, excluding ApiFix described above.

As of December 31, 2023, the carrying value of these three trademarks was $10.4 million.

Net Operating Losses

As of December 31, 2023, we had federal, state and foreign tax net operating loss carryforwards, or NOLs, of approximately $118.9 million, $76.9 million and $26.3 million, respectively, which begin to expire in 2028 unless utilized.

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.

The deferred tax assets, except for those recorded in Canada and Israel, were fully offset by a

valuation allowance as of December 31, 2023 and 2022 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