What changed in this filing

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Item 7. Management’s Discussion and Analysis

2025-03-05 compared with 2024-03-08 · 115 added, 118 removed, 200 unchanged (54% of the section changed)

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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 b illion opportunity globally, including ov er $1.7 bi llion in the United States.

We estimate that the portion of this market that we currently serve represents a $6.2 billion opportunity globally, including ov er $2.8 billion 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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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.

We operate approximately 30 orthotic and prosthetic ("O&P") clinics in the United States serving children's hospitals in numerous states.

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 mar ket 53 su rgical and specialized bracing systems that serve three of the largest categories within the pediatric orthopedic market:

We currently mar ket over 75 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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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.

We sell our implants and instruments through a networ k of multiple direct sales representatives as well as nearly over 40 independent sales agencies employing approximately 230 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.

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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.

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

In 2023 and 2024, we hired operating and sales representatives in Germany as salaried employees to better serve our customers and opened warehouses in Germany and Australia in 2024.

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

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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.

Environmental, Social and Governance ("ESG") Activities

and international markets by increasing investments in consigned implant and instrument sets, strengthening our global sales and distribution infrastructure, and expanding our product offering as well as our O&P clinic network.

Social Impact

OrthoPediatrics was founded on the cause of impacting the lives of children with orthopedic conditions.

Since inception we have impacted the lives of ove r 1,140,000 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 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.

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.

We believe we should continue to expand our social impact, create an inclusive culture, and ensure good corporate governance practices.

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

We also partner with charitable organizations that provide pediatric orthopedic care around the world.

We also partner with over 40 charitable organizations that provide pediatric orthopedic care around the world.

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 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.

For eight 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.

We expect to increase our disclosures and communicate our ESG efforts in future SEC filings.

Nothing on our website shall be deemed part of or incorporated by reference into this Annual Report on Form 10-K.

We believe effectively managing our priorities, as well as increasing our transparency related to social impact programs, will help create long-term value for our stakeholders.

We expect to continue to increase our disclosures and communicate our social impact efforts in future SEC filings.

Trends and Uncertainties

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During 2024, 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.

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 $1.8 million, $1.0 million, and $3.6 million were recorded in 2024, 2023, and 2022, respectively.

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

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Components of our Results of Operations

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

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

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

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

This typically occurs when we transfer control of our products to the customer, generally upon implantation or when title passes upon shipment.

For our implants and instruments, this typically occurs when we transfer control of our products to the customer, generally upon implantation or when title passes upon shipment.

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

On rare occasions, hospitals purchase products for their own inventory, and revenue is recognized when the hospital obtains control of the product, typically either upon shipment or delivery of the product dependent on the terms of the contract.

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

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

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

For our O&P clinics, we recognize revenue when our custom manufactured braces or other products are fitted to and accepted by patients.

Revenue from these O&P clinics is primarily derived from contracts with third party payors.

At, or subsequent to delivery, an invoice is issued to the third-party payor, which primarily consists of commercial insurance companies, Medicare, Medicaid, and private or patient pay individuals.

Revenue is recognized for the amounts expected to be received from payors based on contractual reimbursement rates, which are net of estimated contractual discounts and other implicit price concessions.

These revenue amounts are further revised as claims are adjudicated, which may result in additional disallowances, which are considered as part of the transaction price and recorded as a reduction of revenues.

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

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Cost of Revenue and Gross Profit

Our cost of revenue consists primarily of products purchased from third-party suppliers, inbound freight, excess and obsolete inventory adjustments and royalties.

Our cost of revenue consists primarily of products purchased from third-party suppliers, inbound freight, excess and obsolete inventory adjustments, royalties, material, labor and overhead related to the manufacturing of our braces.

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

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

We purchase the raw materials to make our specialized bracing products in our own facilities in Iowa and Boston.

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

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The costs of instruments are typically capitalized and not included in cost of revenue unless sold as a set to our international stocking distributors or directly to hospitals.

We recognize the cost of revenue on our braces sold to other O&P clinics not owned by us when they are shipped and the cost of our O&P clinic services when the customized

brace has been fitted and accepted by the patient.

We expect our cost of revenue to increase in absolute dollars due primarily to increased sales volume and changes in the geographic mix of our sales as our international operations tend to have a higher cost of revenue as a percentage of sales.

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

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

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

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

Sales and Marketing Expenses

Our sales and marketing expenses primarily consist of commissions to our domestic and international independent sales agencies, as well as compensation, commissions, benefits and other related personnel costs to our global sales management team.

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

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General and Administrative Expenses

Our general and administrative expenses primarily consist of compensation, benefits and other related costs for personnel employed in our executive management, administration, finance, legal, quality and regulatory, product management, warehousing, information technology and human resources departments, including stock-based compensation for all personnel, as well as facility costs.

We include insurance expenses in general and administrative expenses, as well as costs related to the maintenance and protection of our intellectual property portfolio.

Our general and administrative expenses also include the depreciation of our capitalized instrument sets, which represented $8.4 million, $7.9 million and $6.2 million for the years ended December 31, 2024, 2023 and 2022, respectively.

We expect our general and administrative expenses to continue to increase in absolute dollars as we hire additional personnel to support the growth of our business as well as increased set deployment.

We expect our general and administrative expenses to continue to increase in absolute dollars as we hire additional personnel to support the growth of our business, increased set deployment, and additional O&P clinics.

We expect the growth rate of our general and administrative expenses will be lower than the growth rate of our revenue.

Legal Settlement Expenses

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

Liabilities for estimated losses are accrued if the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated.

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

Research and Development Expenses

Our research and development expenses primarily consist of costs associated with engineering, product development, consulting services, outside prototyping services, outside research activities, materials and development of our intellectual property portfolio.

We also include related personnel and consultants’ compensation expense.

We also include related personnel and consultants’ compensation expense, including stock-based compensation for these personnel.

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 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.

Our other income (expense) primarily consists of (i) fair value adjustments of contingent consideration associated with our ApiFix acquisition, (ii) accreted interest expense related to the acquisition installment payables, (iii) interest costs associated with our debt obligations, and (iv) loss on early debt extinguishment.

Results of Operations

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Trademark impairment 1,836 985 851 86 %

Restructuring expense 3,653 — 3,653 100 %

Research and development expenses 11,034 10,895 139 1 %

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

Other expenses (income), net 6,919 (5,439) 12,358 227 %

Provision for income taxes (benefit) (4,107) (338) 3,769 1,115 %

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

Net loss $ (37,822) $ (20,974) $ 16,848 80 %

The following tables set forth our revenue by geography and product category for the years ended December 31, 2024 and 2023:

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Net revenue increased $56.0 million, or 38%, from $148.7 million for the year ended December 31, 2023 to $204.7 million for the year ended December 31, 2024.

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.

Th e increase was primarily driven by the addition of Boston O&P sales of $30.0 million, as well as strong performance across global Trauma and Deformity, Scoliosis and OP Specialty Bracing.

Trauma and deformity revenue, which includes the impact from acquired businesses, increased $38.3 million, or 36%, primarily driven by strong growth across numerous product lines, specifically our Cannulated Screws, PNP Femur, PediPlate, external fixation and Pega systems, as well as the addition of Boston O&P.

Sco liosis revenue increased $17.2 million, or 45%, primarily driven by increased sales of our RESPONSE 5.5/6.0 and ApiFix systems and revenue generated from 7D Technology, as well as the addition of Boston O&P .

Sports medicine / other increased $0.4 million, or 11%.

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Gross margin was 73% for the year ended December 31, 2024 and 75% for the year ended December 31, 2023.

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.

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

The gross margin includes a minimum performance

obligation fee on the Firefly licensing agreement.

See Note 17 - Commitments and Contingencies in Item 8 for additional details of our purchase commitments and performance obligations.

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Sales and marketing expenses for the year ended December 31, 2024 were approximately 31% of revenue compared to 36% for 2023 .

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

The lower rate was driven by Boston O&P and MD Ortho sales, which are sold at a significantly lower sales commission, and lower commissions on other newly acquired products.

General and Administrative Expenses

General and administrative expenses increased $29.5 million, or 40%, from $73.3 million for the year ended December 31, 2023 to $102.8 million for the year ended December 31, 2024.

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.

The increase was due primarily to the addition of Boston O&P.

Stock-based compensation increased $2.1 million due to the increase in personnel and also as a result of restricted stock issued as part of the Boston O&P acquisition.

Depreciation and amortization expenses increased $1.1 million, or 6%, from $17.4 million for the year ended December 31, 2023 to $18.5 million for the year ended December 31, 2024 .

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

Research and development expenses increased $2.2 million, or 27%, from $8.0 million for the year ended December 31, 2022 to $10.2 million for the year ended December 31, 2023.

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.

The increase was primarily due to higher set deployments and increased amortization associated with acquisitions, as well as the addition of Boston O&P.

Trademark Impairment

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See Note 5 - Goodwill and Intangible Assets for further details.

Total Other Income

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.

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.

Research and Development Expenses

Research and development expenses increased $0.1 million, or 1%, from $10.9 million for the year ended December 31, 2023 to $11.0 million for the year ended December 31, 2024.

The increase was primarily due to the timing of product development and the addition of personnel to support the future growth of the business during 2024.

Restructuring Expense

The 2024 Restructuring Plan aims to improve operational efficiency, reduce costs by integrating the ApiFix product into the broader OP Scoliosis portfolio, and additional staff reduction across all of OrthoPediatrics Corp.

The Company recorded restructuring expenses of $3.7 million for the year ended December 31, 2024 compared to $0 for the year ended December 31, 2023.

The expense was a result of a 2024 global Restructuring Plan comprised the reduction of our Israeli physical site, reducing the ApiFix portfolio inventory, reserving for excess inventory, and certain employee termination benefits.

Total Other Expenses (Income)

Total other expense increased $12.4 million year over year, with other expense of $6.9 million for the year ended December 31, 2024 compared to other income of $5.4 million for the year ended December 31, 2023.

The change was primarily due to the fair value adjustment of contingent consideration associated with our ApiFix acquisition, which generated income in the comparative prior year period of $3.0 million , the early extinguishment of the MidCap Credit Agreement in the third quarter 2024 of $3.2 million , and additional interest expense of $2.6 million, net related to our indebtedness.

Liquidity and Capital Resources

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

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

Since inception, we have

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

As of December 31, 2024, we had cash, cash equivalents and restricted cash of $45.8 million and short-term investments of $25.0 million for a total of $70.8 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.

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.

If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock.

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.

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

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Net cash used in operating activities $ (27,048) $ (27,046)

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

Net cash (used in) provided by investing activities (13,162) 41,677

Net cash provided by financing activities 53,135 7,301

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Cash Used in Operating Activities

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 $6.9 million, related primarily to accrued compensation, and an increase in accounts payable of $1.5 million.

Net cash used in operating activities was $27.0 million for both the years ended December 31, 2024 and 2023, 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 and changes in other operating assets and liabilities was $23.3 million and $32.2 million for the years ended December 31, 2024 and 2023, respectively.

During 2024, the primary uses of cash used in operating activities was driven by inventory purchases of $13.2 million to support sales growth as well as an increase in accounts receivable of $4.7 million, and a decrease to accounts payable of $4.3 million.

These uses of cash were partially offset by cash inflows from other accrued expenses and other liabilities of $0.5 million, related primarily to accrued compensation.

During 2023, we increased inventory by $26.3 million as we deployed additional inventory and accounts receivable increased by $9.7 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.

We had a net loss of $37.8 million for the year ended December 31, 2024, compared to a net loss of $21.0 million for the year ended December 31, 2023.

Cash (Used in) Provided by Investing Activities

Net cash (used in) provided by investing activities was $(13.2) million and $41.7 million for the years ended December 31, 2024 and 2023, respectively.

Net cash used in investing activities in 2024 was primarily related to the purchase of short-term investments of $25.0 million and cash paid for the acquisitions of Boston O&P of $20.2 million and other clinics of $2.9 million, which was partially offset by the sales of short-term marketable securities of $49.9 million.

We also invested $14.3 million in property and equipment, primarily instrument sets which were consigned in the United States and select international markets.

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

We also invested $16.9 million in property 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 $53.1 million and $7.3 million for the years ended December 31, 2024 and 2023, 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 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.

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.

Net cash provided by financing activities in 2024 consisted of $73.5 million from the proceeds of the Credit Agreement with Braidwell and sale of our Convertible Notes, offset by $12.2 million of cash used to repay our term loan and revolving facility with MidCap, $3.4 million of debt issuance costs, and $2.3 million related to the ApiFix fourth and final anniversary payment and $1.3 million related to the MedTech first year anniversary payment.

Net cash provided by financing activities for 2023 consisted of the proceeds of

$9.4 million, net of issuance costs, from our term loan agreement with MidCap, offset by the cash paid for the acquisition installment to ApiFix of $2.0 million.

Term Loan Agreement and Convertible Notes

On August 5, 2024, the Company signed an $100 million term loan and private placement arrangement with Braidwell LP by and among (i) the Company and other borrowers party to the Credit Agreement, (ii) Braidwell LP, and (iii) the financial institutions or other entities from time to time party thereto as Lenders.

Terms of the financing include a $50 million term loan and $50 million of convertible notes.

The term loan consists of an initial term loan of $25 million and access to a delayed draw term loan facility for an additional $25 million, subject to certain terms and conditions.

The interest rate on the term loan is SOFR + 6.50% with the Company having the option to make a payment-in-kind interest payment equal to 1.00% per annum of the rate.

Payments are interest only until the maturity date in August 2029.

Included in the term loan are financial covenants to maintain cash in certain pledged accounts of at least 25% of the outstanding principal amount of the loan and to maintain certain minimum net product sales during the loan period.

The $50 million of convertible notes accrue interest at a rate of 4.75% per annum.

Payments will consist of interest only until the maturity date in February 2030.

The notes are convertible into common stock of the Company at an initial conversion price of $40.98, which represented a 30% premium to the Company’s volume weighted average common stock price for the thirty trading days ended August 2, 2024.

In connection with its approval of the financing, the Company’s Board approved a stock repurchase program of up to $5 million in value of the Company’s outstanding common stock.

Using the closing price on August 2, 2024, of $29.56, the amount of common stock subject to the repurchase program represents approximately 169,000 shares or 0.7% of the Company’s outstanding common stock.

No shares were repurchased under the program which reduced to $0.25 million on December 31, 2024.

The proceeds from the financing were used to repay the Company’s outstanding debt of approximately $10 million with MidCap, transaction fees incurred in connection with the financing, potential stock repurchases under the program described above, and for general corporate purposes and working capital needs.

The debt facilities replace the $80 million Credit, Security, and Guaranty Agreement with MidCap Funding IV Trust and MidCap Financial Trust and other parties named therein.

There was approximately $10 million outstanding under the MidCap Credit Agreement and it was terminated in connection with the Credit Agreement.

Tawani Mortgage

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.

See Note 9 - Debt and Credit Arrangements in Item 8 for further detail regarding our debt.

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 and MedTech - See Note 3.

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

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

The acquisition installment payable is related to the acquisition of 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:

• Debt obligations and interest payments - See Note 8.

Debt and Credit Arrangements in Item 8 for further detail regarding our debt and the timing of expected future principal and interest payments.

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

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

• Debt obligations and interest payments - See Note 9 - Debt and Credit Arrangements in Item 8 for further detail regarding our debt and the timing of expected future principal and interest payments.

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

Commitments and Contingencies in Item 8 for further detail regarding these requirements.

• Lease Obligations - See Note 15.

Commitments and Contingencies in Item 8 for further detail regarding our lease obligations.

• Royalties - See Note 15.

Commitments and Contingencies in Item 8 for further detail regarding minimum royalty obligations.

See Note 17 - Commitments and Contingencies in Item 8 for further detail regarding these requirements.

• Clinic acquisition promissory notes - See Note 17 - Commitments and Contingencies in Item 8 for further detail regarding our clinic acquisition promissory notes.

• Lease Obligations - See Note 16 - Leases in Item 8 for further detail regarding our lease obligations.

• Royalties - See Note 17 - Commitments and Contingencies in Item 8 for further detail regarding minimum royalty obligations.

Pediatric Orthopedic Business Seasonality

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

Our O&P clinics recognize revenue when our custom manufactured braces or other products are fitted to and accepted by patients.

Revenue from these O&P clinic is primarily derived from contracts with third party payors.

At, or subsequent to delivery, an invoice is issued to the third-party payor, which primarily consists of commercial insurance companies, Medicare, Medicaid, and private or patient pay individuals.

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

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Calculating net discounted cash flows requires us to make significant estimates and assumptions related to forecasts of future revenues and discount rates.

Changes in these assumptions could have a significant impact on the fair value of of trademarks.

Changes in these assumptions could have a significant impact on the fair value of trademarks.

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.

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

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.

We recorded impairment charges of $1.8 million, $1.0 million, and $3.6 million for the years ended December 31, 2024, 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.

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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, 2023 and 2022 and no income tax benefit has been recognized in continuing operations related to the NOLs which have valuation allowances.

As of December 31, 2024, we had federal, state and foreign tax net operating loss carryforwards, or NOLs, of approximately $136.6 million, $85.4 million and $35.2 million, respectively, which begin to expire, if not utilized, beginning in 2028.

All deferred tax assets were fully offset by a valuation allowance, with the exception of certain deferred tax liabilities in Canada in 2024, and Canada and Israel in 2023, 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