S-1/A 1 d903272ds1a.htm S-1/A S-1/A
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As filed with the Securities and Exchange Commission on October 8, 2020.

Registration No. 333-248999

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 1

to

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

SPINAL ELEMENTS HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   3841   38-3994502
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employee
Identification Number)

 

 

3115 Melrose Drive, Suite 200

Carlsbad, CA 92010

(877) 774-6255

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Jason Blain

President and Chief Executive Officer

3115 Melrose Drive, Suite 200

Carlsbad, CA 92010

(877) 774-6255

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies of all communications, including communications sent to agent for service, should be sent to:

 

Craig E. Marcus, Esq.

Michael S. Pilo, Esq.

Ropes & Gray LLP

800 Boylston Street

Boston, Massachusetts 02199

(617) 951-7000

 

John H. Chory, Esq.

Ian D. Schuman, Esq.

Jason C. Ewart, Esq.

Latham & Watkins LLP

885 Third Avenue

New York, New York 10022

(212) 906-1200

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement is declared effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, check the following box.  ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer

 

  

Accelerated Filer

 

Non-Accelerated Filer

 

  

Smaller Reporting Company

 

    

Emerging Growth Company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided to Section 7(a)(2)(B) of the Securities Act.  ☐

 

 

CALCULATION OF REGISTRATION FEE

 

 

 

Title of Each Class of
Securities to be Registered
   Amount to be
Registered(1)
   Proposed
Maximum
Offering Price
Per Share
   Proposed
Maximum
Aggregate
Offering
Price(2)
   Amount of
Registration
Fee(3)

Common Stock, par value $0.001 per share

   8,855,000    $15.00    $132,825,000    $16,562

 

 

(1)

Includes 1,155,000 shares of common stock issuable upon exercise of the underwriters’ option to purchase additional shares.

(2)

Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(a) of the Securities Act of 1933, as amended, based upon an estimate of the maximum aggregate offering price.

(3)

$12,980 was previously paid.

 

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment that specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


Table of Contents

The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED OCTOBER 8, 2020

Preliminary Prospectus

7,700,000 Shares

 

LOGO

Common Stock

 

 

This is the initial public offering of shares of common stock of Spinal Elements Holdings, Inc.

Prior to this offering, there has been no public market for our common stock. We anticipate that the initial public offering price per share will be between $13.00 and $15.00. We have applied to list our common stock on the Nasdaq Global Market under the symbol “SPEL.”

We have granted the underwriters a 30-day option to purchase up to 1,155,000 additional shares from us at the initial public offering price, less the underwriting discounts and commissions.

We are an “emerging growth company” as the term is used in the Jumpstart Our Business Startups Act of 2012 and, as such, have elected to comply with certain reduced public company reporting requirements. See “Prospectus Summary—Implications of Being an Emerging Growth Company and a Smaller Reporting Company.”

After the completion of this offering, certain investment funds affiliated with Kohlberg & Co., L.L.C. (the “Kohlberg Funds”) will hold shares of our common stock representing a majority of the voting power for the election of our directors. As a result, we will be a “controlled company” under the corporate governance standards of the Nasdaq Stock Market, Inc. See “Management—Status as a Controlled Company.”

Investing in our common stock involves risks. See “Risk Factors” beginning on page 19.

 

      

Price to

Public

    

Underwriting
Discounts and
Commissions(1)

    

Proceeds

to us

(before
expenses)

Per share

          $                      $                

Total

          $                      $                

 

(1)

See “Underwriting” for additional disclosure regarding underwriting discounts, commissions and estimated offering expenses.

The Kohlberg Funds have expressed an interest in purchasing 6,000,000 shares of our common stock at the initial public offering price in a private placement that would close immediately following the pricing of this offering. Indications of interest are not binding commitments to purchase and the Kohlberg Funds could determine to purchase more or less shares in the proposed private placement. The sale of the shares of our common stock in the proposed private placement will not be registered under the Securities Act of 1933, as amended. The underwriters will not receive any fees in connection with a sale of shares in the proposed private placement.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares of common stock to purchasers on or about                 , 2020.

 

Credit Suisse   Baird   Stifel

Truist Securities                            

 

    BTIG    

Siebert Williams Shank

The date of this prospectus is                 , 2020.


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TABLE OF CONTENTS

 

     Page  

PROSPECTUS SUMMARY

     1  

THE OFFERING

     12  

RISK FACTORS

     19  

INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

     80  

USE OF PROCEEDS

     82  

DIVIDEND POLICY

     84  

RECAPITALIZATION

     85  

CAPITALIZATION

     87  

DILUTION

     90  

SELECTED CONSOLIDATED FINANCIAL DATA

     93  

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     95  

BUSINESS

     118  

MANAGEMENT

     161  

EXECUTIVE AND DIRECTOR COMPENSATION

     169  

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     183  

PRINCIPAL STOCKHOLDERS

     186  

DESCRIPTION OF CERTAIN INDEBTEDNESS

     188  

DESCRIPTION OF CAPITAL STOCK

     193  

SHARES ELIGIBLE FOR FUTURE SALE

     198  

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS OF OUR COMMON STOCK

     200  

UNDERWRITING

     204  

LEGAL MATTERS

     210  

EXPERTS

     210  

WHERE YOU CAN FIND ADDITIONAL INFORMATION

     210  

INDEX TO FINANCIAL STATEMENTS

     F-1  

 

 

Until                , 2020 (25 days after the date of this prospectus) all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions.

You should rely only on the information contained in this document or to which we have referred you. Neither we nor the underwriters have authorized anyone to provide you with information that is different. This document may only be used where it is legal to sell these securities. The information in this document may only be accurate on the date of this document. Regardless of the time of delivery of this prospectus or of any sale of shares of our common stock, the information in any free writing prospectus that we may provide you in connection with this offering is accurate only as of the date of that free writing prospectus. Our business, financial condition, results of operations and future growth prospects may have changed since those dates.

For investors outside of the United States: Neither we nor the underwriters have done anything that would permit this offering or possession or distribution of this prospectus or any free writing prospectus we may provide to you in connection with this offering in any jurisdiction where action for that purpose is required, other than in the United States (the “U.S.”). You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus and any such free writing prospectus outside of the U.S.

Trademarks

Unless the context indicates otherwise, as used in this prospectus, the terms “Spinal Elements,” “Karma Fixation System,” “Katana Lateral Access System,” “Lucent XP Expandable Interbody Device System,” “OmegaLIF Posterior Oblique Access and Interbody Device Implant System,” “Sapphire X Anterior Cervical Plate System,” “TeleGraft Bone Graft Delivery System” and other formative trademarks, as well as other trademarks, trade names or service marks of Spinal Elements Holdings, Inc. or Spinal Elements, Inc. appearing

 

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in this prospectus, are the property of Spinal Elements Holdings, Inc. or Spinal Elements, Inc., respectively. This prospectus contains additional trade names, trademarks and service marks of ours and of other companies. Solely for convenience, trade names, trademarks and service marks referred to in this prospectus appear without the ® and TM symbols, but those references are not intended to indicate, in any way, that we or the applicable owner will not assert, to the fullest extent under applicable law, our or its rights to these trade names, trademarks and service marks. We do not intend our use or display of other companies’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, these other companies.

Market and Industry Data

Unless otherwise indicated, information contained in this prospectus concerning our industry and the markets in which we operate, including our general expectations and market position, market opportunity and market share, is based on information from our own management estimates and research, as well as from industry and general publications and research, surveys and studies conducted by third parties, including iData Research, Inc. (“iData Research”), Curvo Labs, LLC (“Curvo Labs”) and Millennium Research Group, Inc. (“Millennium Research Group”). We have not commissioned any of the third-party data that we cite in this prospectus. Specifically, iData Research and Millennium Research Group permitted us to reprint their data from their industry reports and Curvo Labs permitted us to reprint its data from Orthopedic News Network in this prospectus. None of iData Research, Curvo Labs or Millennium Research Group guarantees the performance of any company about which they collect and provide data, including ours. Nothing in the data provided by iData Research, Curvo Labs or Millennium Research Group should be construed as advice. Further, Millennium Research Group makes no representation or warranty as to the accuracy or completeness of the data included in this prospectus and neither has nor accepts liability of any kind, whether in contract, tort, including negligence, or otherwise, to any third party arising from or related to use of the data. While we have no reason to believe any such information is incorrect and we are in any case responsible for the contents of this prospectus, Millennium Research Group asserts that any use of the data, or any reliance on the data, or decisions made based on the data, are your and our sole responsibilities and in no way shall any data amount to any form of prediction of future events or circumstances and no such reliance may be inferred or implied. Millennium Research Group asserts copyright protection over the use of its data and reserves all rights with respect to its use. Its data has been reprinted in this prospectus with Millennium Research Group’s permission and the reproduction, distribution, transmission or publication of its data is prohibited without its consent. Management estimates are derived from publicly available information, our knowledge of our industry and assumptions based on such information and knowledge, which we believe to be reasonable. This data involves a number of assumptions and limitations. In addition, assumptions and estimates of our and our industry’s future performance are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in the section entitled “Risk Factors.” These and other factors could cause our future performance to differ materially from our assumptions and estimates.

 

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PROSPECTUS SUMMARY

This summary highlights certain information contained elsewhere in this prospectus. This summary is not complete and does not contain all of the information you should consider in making your investment decision. Before making an investment in our common stock, you should read the entire prospectus carefully, including the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited and unaudited condensed consolidated financial statements and the related notes included elsewhere in this prospectus. Except as otherwise indicated herein or as the context otherwise requires, references in this prospectus to “Spinal Elements Holdings, Inc.,” “the Company,” “our Company,” “we,” “us” and “our” refer to Spinal Elements Holdings, Inc. together with its subsidiaries. All information in this prospectus assumes no exercise of the underwriters’ option to purchase additional shares of our common stock and does not give effect to any shares purchased by the Kohlberg Funds in a concurrent private placement, unless otherwise noted.

Overview

We are a medical device company focused on the design, development and commercialization of a comprehensive portfolio of systems, products and technologies for spine surgery procedures, with a strategic focus on minimally invasive surgery (“MIS”) procedures. We are an innovation-driven company with a track-record of delivering pioneering and differentiated products and technologies. Our product portfolio addresses a broad spectrum of spine surgery procedures and consists of innovative spinal fixation systems (implantable hardware systems that are mechanically attached to the spine and provide stability), interbody implants (devices implanted between the vertebral bodies of the spine), surgical instruments (instruments used to prepare the spine and implant our devices) and biologics (allograft or synthetic biomaterials intended to augment or replace the normal capacity of such tissue in the body). We offer a comprehensive product portfolio that can address approximately 95% of the spine surgery procedures performed worldwide in 2018 and our systems, products and technologies cover a wide variety of spine disorders, including degenerative conditions, deformities and trauma. We expect to continue to complement our existing product portfolio with new product offerings based on innovative technologies. We believe our comprehensive product portfolio has the potential to enhance the way surgeons operate and to disrupt the spine surgery market.

The majority of our product portfolio and all of our current pipeline technologies are developed for MIS procedures. MIS procedures generally address similar clinical conditions as open surgery procedures, but with reduced trauma to the muscles and soft tissues, less blood loss, smaller incisions, shorter procedure time, reduced hospitalization, lower post-operative medication use, faster patient recovery and other benefits for patients and surgeons.

We believe our novel technologies are a leap forward in MIS access systems and implantable devices. Our transformative suite of MIS technologies, branded MIS Ultra, is designed to enable minimal surgical disruption to the patient’s healthy anatomy and to improve surgeon workflow in a manner that is logical and reproducible. We believe that benefits of our MIS Ultra technologies include a reduced need for intra-operative x-rays and reduced risk of nerve injury by requiring fewer passes by neural structures during surgical access, as compared to conventional options.

We designate each of the products in our product portfolio as either a “Featured Product” or a “Certain Legacy Product.” We began using these designations in 2018 as part of the integration process stemming from our combination with Amendia, Inc. Featured Products are our leading products and systems, as well as any future products and systems we commercialize, in which we are or have been actively marketing and investing since 2018. Investments in Featured Products include, but are not limited to, investments in (i) additional

 

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instrument sets, (ii) research and development of system improvements and line extensions, (iii) commercial, marketing and branding campaigns and (iv) real-world analysis and clinical studies. Certain Legacy Products are products and systems that we continue to sell, but have not actively invested in, other than production costs, since 2018.

All of the products in our product portfolio that feature our MIS Ultra technology are designated as Featured Products. Our key systems that feature MIS Ultra technologies include:

 

   

Karma Fixation System—unique, metal-free posterior fixation device that is less rigid and rests well under the patient’s musculature while still stabilizing the spine and requiring only a limited number of surgical instruments, with an estimated addressable U.S. market in excess of $2.7 billion in 2019;

 

   

Katana Lateral Access System—a retractor and access system for MIS that offers a novel approach by allowing surgeons to gain lateral access in fewer steps and that is designed to prevent damage to neural structures and reduce patient’s post-operative pain;

 

   

Lucent XP Expandable Interbody Device System—made from polyetheretherketone (“PEEK”), a high-performance polymer, and covered with our proprietary Ti-Bond titanium porous coating, that provides support for up to three millimeters of vertical expansion and up to 15 degrees of curvature while requiring simple instrumentation and implantation procedure that is designed to restore height and balance of the spine as well as to create stability;

 

   

OmegaLIF Posterior Oblique Access and Interbody Device Implant System—allows for minimally invasive single position interbody fusion and posterior fixation while requiring simple instrumentation and designed to enable efficient surgical flow and limit blood loss;

 

   

Sapphire X Anterior Cervical Plate System (which we anticipate commercially launching in late 2020)—a cervical plate and interbody delivery system that allows for a smaller incision and operative corridor while still providing for a safe, accurate and reproducible procedure; and

 

   

TeleGraft Bone Graft Delivery System (a version of which is being evaluated in early-stage clinical preference and usability testing with the expectation of commercially launching an improved version of this system in late 2020)—results in a precise and reproducible placement of bone graft material.

Additionally, a significant portion of our product portfolio features our proprietary Ti-Bond technology. Ti-Bond is a titanium porous coating applied to products to create a favorable environment for bone healing during fusion. The randomly structured porous titanium and increased surface area of Ti-Bond are designed to create an ideal bone apposing surface for peri-implant bone growth while stimulating the proliferation of osteoblasts, which are the building blocks of bone formation. In addition, Ti-Bond features differentiated characteristics, such as scratch fit, that have been demonstrated to reduce migration and therefore may enhance long-term fixation. A 2015 animal study comparing Ti-Bond-coated PEEK to non-coated PEEK demonstrated Ti-Bond’s improved bone-implant interface strength at four weeks with continued improvement at 12 weeks. All of the products in our product portfolio that feature our Ti-Bond technology are designated as Featured Products.

Our culture of innovation has enabled us to design, develop and commercialize 15 systems representing over 850 products and biologics since the beginning of 2016 that feature our MIS Ultra, Ti-Bond or other differentiated technologies. We plan to continue expanding our portfolio with systems and products that feature our disruptive technologies. In addition to systems and products that feature our MIS Ultra or Ti-Bond technologies, our comprehensive product portfolio includes well-established, innovative hardware products, including cervical and thoracolumbar spinal implant devices and fixation systems, surgical instruments (which are typically loaned to the surgeon or hospital, as applicable, and are generally necessary to perform procedures using our products) and biologics, each of which are designed to promote healing and recovery.

 

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We intend to remain at the forefront of spine surgery solutions through our focus on innovation, research and development and technology pipeline expansion capabilities. Our forthcoming launches of disruptive and next generation technologies are expected to include the TeleGraft Bone Graft Delivery System, Sapphire X Anterior Cervical Plate System, Lucent XP Curved Expandable Interbody Device System, 3D printed interbody devices, Dimension MIS TLIF Retractor and the next generation of our OmegaLIF Posterior Oblique Access and Interbody Device Implant System, subject to obtaining the requisite regulatory clearances from the FDA, as applicable.

Market Opportunity

According to iData Research, the estimated size of the global spine surgery market was approximately $17.6 billion in 2018 and is expected to grow to $22.5 billion by 2024. Currently, we primarily serve the U.S. spine surgery market, which was estimated to be approximately $10.0 billion in 2018, with a strategic focus on addressing the MIS segment, one of the fastest growing spine surgery segments of the overall spine surgery market. For example, our proprietary Katana Lateral Access System serves the MIS LLIF U.S. market, which is expected to grow at an average annual rate of 11.6% from 2018 through 2024 according to research completed by healthcare consultancy firm, Millennium Research Group. Moreover, our recently introduced proprietary Karma Fixation System, which has been cleared to address a wide range of thoracolumbar procedures, will serve a market we estimate to be in excess of $2.7 billion in the U.S. in 2019.

We believe we are well-positioned to grow faster than the underlying spine surgery market. Spine-focused companies like us have taken significant market share in the spine surgery market from larger, more diversified orthopedic companies, in part by prioritizing innovation and new product development. According to Orthopedic News Network, market share for the top five spine companies declined from 87% in 2004 to 58% in 2018, driven partially by share gains from smaller, innovative spine-focused companies. In addition, as the spine surgery market and spine surgery procedures evolve, we expect that certain industry dynamics will continue to benefit us, including a focus on minimizing use of pain medications, improved technologies leading to increased use of spinal fusion procedures, favorable patient demographics, disruptive technologies driving earlier interventions and creating an expanded patient base and shift to ambulatory surgery centers. We believe we are well-positioned to take advantage of these industry dynamics with our differentiated technologies.

Our commercial sales organization and relationships with surgeons and key opinion leaders have also been instrumental to our ability to capitalize on these industry dynamics. Our sales management team maintains relationships with a network of over 200 independent distributors and over 400 surgeons across more than 500 hospitals and ambulatory surgery centers.

We generated total revenue of $95.9 million and $90.8 million in the years ended December 31, 2019 and 2018, respectively, representing an annual growth rate of 5.7%, and $42.7 million and $46.1 million for the six months ended June 30, 2020 and 2019, respectively, representing a decrease of 7.3%. Our net losses for the years ended December 31, 2019 and 2018 were $42.8 million and $45.8 million, respectively, and $21.5 million and $25.4 million for the six months ended June 30, 2020 and 2019, respectively. Additionally, we generated revenue from our Featured Products of $83.0 million and $71.4 million in the years ended December 31, 2019 and 2018, respectively, representing an annual growth rate of 16.2%, and $38.3 million and $39.2 million for the six months ended June 30, 2020 and 2019, respectively, representing a decrease of 2.5%. The decrease in revenue for the six months ended June 30, 2020 was primarily the result of the largely government imposed delay in elective spine surgery procedures in an attempt to free up medical resources to address the Coronavirus Disease 2019 (“COVID-19”) pandemic. For additional details regarding our product revenue by product category, see “Business—Our Technology Portfolio.”

 

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Our Competitive Strengths

Our executive team has extensive experience in the spine industry, which, coupled with the following competitive strengths, has been instrumental in our success thus far and we believe will continue to be so in the future:

 

   

Comprehensive proprietary product portfolio led by disruptive and differentiated technologies. We have achieved significant commercial success with our established product portfolio as well as with recent launches of innovative technologies that are disruptive and differentiated. For example, our proprietary MIS Ultra technologies have been designed to provide significant advantages to surgeons and patients when compared to other traditional fusion and fixation products, including reduced trauma to muscles and soft tissues, less blood loss, shorter procedure time, reduced hospitalization and faster patient recovery.

 

   

Culture of innovation promotes consistent development and commercialization of disruptive technologies. We have an established culture of innovation that has enabled us to design, develop and commercialize 15 systems representing more than 850 products and biologics since 2016. In 2019, products launched in the prior three years represented 20.2% of total revenue for the year ended December 31, 2019. We have consistently strengthened our pipeline with novel systems and products and disruptive technologies that appeal to the evolving needs of the markets we serve. We work closely with thought-leading surgeons and scientific advisors throughout the development process to refine our systems and products and in doing so seek to ensure they are addressing patients’ and surgeons’ needs appropriately.

 

   

MIS focused, which serves one of the fastest growing segments of the spine surgery market. Our Company is largely focused on the MIS segment of the overall spine surgery market. Within MIS, we have innovated our offerings with the MIS Ultra branded products, which have the potential to further disrupt the MIS segment. The MIS segment is one of the fastest growing spine surgery segments and is expected to take market share over time. Our differentiated MIS Ultra technologies are designed to enhance spine surgery procedures and patient outcomes by reducing trauma to the muscles and soft tissues, which can result in reduced blood loss as well as allow for smaller incisions, shorter procedure time, reduced hospitalization and faster patient recovery as compared to conventional options. Further, we believe our MIS Ultra technologies reduce the need for intra-operative x-rays, through a design that allows for fewer passes by neural structures.

 

   

Focus on products that are well-suited for ambulatory surgery centers. Our differentiated technologies benefit from the shift towards spine surgery procedures being performed at ambulatory surgery centers. Furthermore, MIS procedures are preferred spine surgery procedures in the ambulatory surgery center setting. According to a Bain & Company report published in 2019, approximately 10% of all spine surgery procedures performed in 2018 in the U.S. were performed in ambulatory surgery centers, and by the mid-2020s, approximately 30% of all spine surgery procedures in the U.S. are expected to be performed in ambulatory surgery centers. We are well-positioned to take advantage of these trends with our MIS Ultra technologies. MIS Ultra technologies improve surgical workflow and entail fewer and smaller instruments. They also allow surgeons to be less dependent on navigation tools and robotics, which require significant investment and have limited availability in ambulatory surgery centers. These factors give our MIS Ultra technologies a competitive edge in the ambulatory surgery center setting.

 

   

Our product portfolio is supported by a robust IP portfolio. Our comprehensive product portfolio and innovative product pipeline are supported by extensive intellectual property, both in the U.S. and select markets across the world. As of September 30, 2020, we had approximately 316 issued patents and 50 pending patents in the U.S. and approximately 97 issued patents and 50 pending patents in other parts of the world.

 

   

Outsourced manufacturing and independent distribution allow us to scale and innovate with lower fixed costs. We operate our manufacturing process under an asset-light business model by outsourcing the

 

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production of our products, instruments and biologics. This allows us to focus our resources on innovation and efficiently scale our business with new disruptive technologies, without incurring fixed manufacturing costs. We work closely with our manufacturing partners to monitor the quality and safety of our products and to anticipate and meet the requirements of our customers. For our commercialization efforts, we operate through a combination of a sales management team and sales specialists and a network of independent distributors, which allows us to cover a broad geographic footprint with modest fixed sales and marketing expenses. We believe that the combination of outsourced manufacturing and an independent distribution network allows us to focus our efforts and resources on our core areas of expertise—namely the design, development and commercialization of our differentiated products and disruptive technologies—with the ability to access and serve customers throughout our marketplace.

 

   

Seasoned management team with extensive leadership experience in the spine industry. Our leadership team has extensive experience in the spine industry with over 100 years of collective industry experience. As of June 30, 2020, we had approximately 120 employees. Our approach with people is similar to our product strategy—we prioritize having a lean structure, adding employees only when necessary. We emphasize having a strong and knowledgeable team with a passion for innovation. We encourage all employees to attend our training programs, including our proprietary Spine IQ Core Education program, where sessions cover spine surgery terminology and basic spine anatomy.

Our Strategy

Our Company and employees have defined objectives that allow us to deliver an innovative and broad suite of systems, products and technologies to surgeons and patients. We believe the execution of the below strategies will allow us to continue growing and strengthening our business:

 

   

Leverage disruptive technologies to continue attracting leading surgeons. We prioritize relationships with surgeons, both in the development and deployment of our products. We continuously gather feedback from surgeons on our current product offerings and product pipeline to accelerate the pace of innovation and strengthen our presence in a competitive spine surgery market. We believe that surgeons are attracted to our products and pipeline because they have the potential to meaningfully improve surgical workflow and benefit their patients.

 

   

Continue to provide a comprehensive and innovative product portfolio to serve surgeon and patient needs. Our comprehensive product portfolio consists of well-established, innovative hardware products and biologics which promote healing and recovery. Given our broad suite of systems, products and technologies, we believe we can maximize revenue by capturing a large portion of surgeons’ product needs through cross-selling. Additionally, we believe that our new and disruptive technologies will generate surgeon interest, which will in turn drive demand for our other products as surgeons and healthcare providers tend to prefer having fewer, but more comprehensive, suppliers.

 

   

Drive product innovation through new product development and further enhancements to existing Featured Products. We have a proven history of designing, developing and commercializing new technologies in the spine surgery market. For over 15 years, we have focused on developing products and technologies with advanced design and using high-performance materials, expanding our product portfolio through the addition of the right products and supporting our organization and infrastructure. Throughout that time, we have had a ‘first to market’ culture, demonstrated by our ability to innovate and launch novel products and disruptive technologies, such as using PEEK as a material for interbody systems and applying our proprietary Ti-Bond titanium porous coating onto PEEK interbody devices. We believe we are the first company to receive FDA clearance for an interbody device as well as the first to launch a stand-alone cervical device, Mosaic. Additionally, we are focused on increasing the penetration of our recently launched systems and products, while continuing to work on new product innovation and

 

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enhancing our existing technologies. We intend to continue surrounding our core differentiated technologies with supportive adjacent products and services to provide a complete suite of systems, products and technologies.

 

   

Collect real-world clinical evidence to support our innovative technologies. We are planning to gather real-world clinical evidence to support further adoption of our differentiated technologies. We plan to share such data analyses through scientific publications and presentations to the spine surgery medical community. This will bring increased awareness of our products and technologies, which we believe will ultimately attract more surgeon and patient interest. We have already conducted comprehensive biomechanical testing for the Karma Fixation System, which we plan to supplement with multiple studies on its clinical performance. We plan to conduct studies on the Katana Lateral Access System focused on surgical efficiency and post-operative pain. We believe such studies will result in increased penetration of our products among the surgeon community.

 

   

Continue to deepen surgeon partnerships through education, training and collaboration programs. We focus on further strengthening our relationships with thought-leading surgeons and scientific advisors through education, training and collaborations. We believe that our strong relationships with thought-leading surgeons and scientific advisors have helped, and will continue to help, us adopt and promote our products and technologies. We also invest extensively in surgeon education and training programs that allow surgeons to stay up-to-date with current surgical techniques and enhance their skillset. In cultivating relationships with new surgeons, we encourage their attendance at our cadaver labs, where they can gain hands-on experience with our products after preliminary education. Through our relationships with surgeons, we are also able to offer them an opportunity to collaborate in our product development process. We encourage their feedback throughout our education and training sessions. During the year ended December 31, 2019, we sponsored approximately 41 programs with over 70 surgeons, fellows and residents participating.

 

   

Grow our commercial footprint and continue to improve productivity while strengthening independent distributor relationships. Our sales management team and sales specialists support commercial efforts in the U.S. through a network of independent distributors. We ensure that our sales management team, which has a strong command of our technologies, shares their expertise with our distributor representatives. We focus on developing this knowledge base to enhance our relationships with surgeons, hospitals and other healthcare organizations and to help us appropriately manage and address their needs and requirements. We plan to expand our sales management and sales specialist teams as needed in order to continue growing in the U.S. and to support our planned expansion outside of the U.S. We are continuously improving the productivity of our sales management and sales specialist teams by delineating their responsibilities and designing appropriate incentive structures. Our sales management team members are assigned specific regions and tasked with driving business alongside independent distributors which fall within their region. Their performance evaluation is tied to quantifiable metrics including monthly, quarterly, and annual sales quotas with a portion of their compensation tied to revenue performance. We have recently increased our focus on expanding our independent distributor and surgeon networks to support our growth initiatives.

 

   

Expand our international presence. We currently sell some of our products internationally, primarily in Mexico, Brazil and Australia. While maintaining our strong presence in the U.S., we plan to further expand our global independent distribution network. We have begun initiating registrations of our products in multiple international geographies, focusing on key markets where we plan to expand.

Our Sponsor

Kohlberg & Co., L.L.C. (“Kohlberg”) is a New York-based private equity firm founded in 1987. Kohlberg has over thirty years of experience partnering with management teams to execute transformational strategies

 

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enabling middle market companies to enhance business efficiency, breadth, growth and scale. Kohlberg has raised nine private equity funds since inception, totaling over $10 billion in aggregate commitments, and has successfully completed 81 platform investments and approximately 200 add-on acquisitions. Prior to the completion of this offering and after giving effect to the recapitalization described elsewhere in this prospectus, certain investment funds affiliated with Kohlberg (the “Kohlberg Funds”) will beneficially own approximately 87% of the outstanding shares of our common stock. After the completion of this offering, assuming we sell the number of shares of our common stock set forth on the cover page of this prospectus and after giving effect to the recapitalization described elsewhere in this prospectus, but excluding any shares of our common stock that the Kohlberg Funds purchase in a concurrent private placement, the Kohlberg Funds will beneficially own approximately 56% of the outstanding shares of our common stock (or approximately 53% of the outstanding shares of our common stock if the underwriters exercise their option to purchase additional shares in full). Assuming the Kohlberg Funds purchase 6,000,000 shares of our common stock in a concurrent private placement, the Kohlberg Funds will beneficially own approximately 65% of the outstanding shares of our common stock (or approximately 63% of the outstanding shares of our common stock if the underwriters exercise their option to purchase additional shares in full). As a result, we will be a “controlled company” under the corporate governance standards of Nasdaq Stock Market, Inc. (the “Nasdaq Stock Market”), and the Kohlberg Funds will have the ability to control all major corporate decisions. See “Management—Status as a Controlled Company” and “Risk Factors—Risks Related to this Offering and Ownership of Our Common Stock—Because the Kohlberg Funds will beneficially own a significant percentage of our common stock, they will have the ability to control all major corporate decisions and their interests may conflict with your interests as an owner of our common stock and those of the company.” Additionally, certain of our indebtedness that will be repaid in connection with this offering is guaranteed by an affiliate of Kohlberg. Five of our directors, Messrs. Anderson, Frieder, Woodward and Jennings and Ms. Kalenka, are partners or employees of Kohlberg. See “Management—Executive Officers and Directors.”

Recent Developments

Third Quarter Ended September 30, 2020

We are in the process of finalizing our financial results for the three and nine months ended September 30, 2020. Based on available information to date, we expect to report total revenue for the three months ended September 30, 2020 of between $23.5 million and $23.9 million, compared to $23.8 million for the three months ended September 30, 2019. Additionally, we expect to report revenue from our Featured Products for the three months ended September 30, 2020 of between $21.5 million and $22.0 million, compared to $20.7 million for the three months ended September 30, 2019. Based on available information to date, we expect to report total revenue for the nine months ended September 30, 2020 of between $66.2 million and $66.6 million, compared to $69.8 million for the nine months ended September 30, 2019. Additionally, we expect to report revenue from our Featured Products for the nine months ended September 30, 2020 of between $59.8 million and $60.2 million, compared to $59.9 million for the nine months ended September 30, 2019.

Our unaudited consolidated financial data for the three and nine months ended September 30, 2020 presented above within a range are preliminary, based upon our estimates and subject to completion of our financial closing procedures. All of the data presented above have been prepared by and are the responsibility of management. Our independent registered public accounting firm, PricewaterhouseCoopers LLP, has not audited, reviewed, compiled or performed any procedures, and does not express an opinion or any other form of assurance with respect to any of such data. This summary is not a comprehensive statement of our financial results for the period and our actual results may differ materially from these estimates as a result of the completion of our financial closing procedures, final adjustments and other developments that may arise between now and the time the financial results for this period are finalized.

 

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Risks Related to Our Business

Our ability to implement our business strategy is subject to numerous risks that you should be aware of before making an investment decision. These risks are described more fully in the section of this prospectus entitled “Risk Factors,” immediately following this prospectus summary. These risks include the following, among others:

 

   

We have incurred losses in the past, expect to incur losses in the future and may be unable to achieve or sustain profitability in the future.

 

   

We may be unable to generate sufficient revenue from the sales of our products to achieve and sustain profitability and our financial condition raises substantial doubt as to our ability to continue as a going concern.

 

   

We have identified material weaknesses in our internal control over financial reporting. If we are unable to remediate these material weaknesses, or if we identify additional material weaknesses in the future or otherwise fail to maintain an effective system of internal controls, we may not be able to accurately or timely report our financial condition or results of operations, which may adversely affect investor confidence in us and, as a result, our stock price and ability to access the capital markets in the future.

 

   

We might need to raise additional capital in the future to fund our existing commercial operations, develop and commercialize new products and technologies and expand our operations.

 

   

Our indebtedness could adversely affect our financial condition. As of June 30, 2020, we had total long-term debt of $152.2 million and total short-term debt of $20.0 million, which has been under a forbearance agreement since July 2018. We intend to consummate a debt refinancing in connection with this offering, but there can be no assurances that the final terms of the debt refinancing will be favorable to us. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Refinancing of First Lien Credit Facilities and Second Lien Notes” and “Description of Certain Indebtedness.”

 

   

We operate in a very competitive business environment and if we are unable to compete successfully against our existing or potential competitors, our business, financial condition and results of operations may be adversely affected.

 

   

Our long-term growth depends on our ability to market, sell and improve our existing products and technologies, commercialize our existing products and products in development and develop new products and technologies through our research and development efforts, and if we fail to do so, we may not be able to increase our market share in the spine surgery market.

 

   

The ongoing global outbreak of COVID-19 has adversely affected, and may continue to adversely affect, our business, financial condition and results of operations. Specifically, the COVID-19 pandemic has resulted in patients delaying or foregoing non-urgent spine surgery procedures either by choice or by government mandate, which has had a significant impact on our operations in the form of a decrease in revenue and cash flows.

 

   

We may be unable to successfully demonstrate to surgeons or key opinion leaders the merits of our products and technologies compared to those of our competitors, which may make it difficult to establish our products and technologies as a standard of care and achieve market acceptance.

 

   

If we are unable to persuade hospitals, ambulatory surgery centers and other healthcare facilities to approve the use of our products, our sales may decrease.

 

   

If the quality of our products and technologies does not meet the expectations of surgeons or patients, then our brand and reputation could suffer and our business could be adversely impacted.

 

   

We lack published long-term data supporting superior clinical outcomes enabled by our products or technologies, which could negatively impact our sales, and we may not generate sufficient revenue to achieve and sustain profitability.

 

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Industry trends have resulted in increased downward pricing pressure on medical services and products, which may affect our ability to sell our products at prices necessary to support our current business strategy.

 

   

If the coverage and reimbursements for procedures using our products are inadequate or if payments are denied altogether, adoption and use of our products and the prices paid for our products may decline, which could have a material adverse effect on our business, financial condition or results of operations.

 

   

The size and future growth in the market for our products and technologies has not been established with precision and may be smaller than we estimate, possibly materially.

 

   

We rely on a network of distributors to market, sell and distribute our products, and if we are unable to maintain and expand our network of independent distributors, we may be unable to generate anticipated sales.

 

   

We are dependent on a limited number of third-party suppliers, some of them single-source and some of them in single locations, for most of our products and components, and the loss of any of these suppliers, or their inability to provide us with an adequate supply of materials in a timely and cost-effective manner, could have a material adverse effect on our business, financial condition and results of operations.

 

   

We rely on third-party contract manufacturers to machine and assemble our products, and a loss or degradation in performance of these contract manufacturers could have a material adverse effect on our business, financial condition and results of operations.

 

   

Our products and operations are subject to extensive government regulation and oversight both in the U.S. and abroad, and our failure to comply with applicable requirements could have a material adverse effect on our business, financial condition or results of operations.

 

   

We may not receive the necessary regulatory clearances or approvals for our future products, and failure to timely obtain necessary regulatory clearances or approvals for our future products would adversely affect our ability to grow our business.

 

   

If we are unable to adequately protect our intellectual property rights, or if we are accused of infringing on the intellectual property rights of others, our competitive position could be harmed or we could be required to incur significant expenses to enforce or defend our rights.

Implications of Being an Emerging Growth Company and a Smaller Reporting Company

We qualify as an “emerging growth company” (an “EGC”) as defined in the Jumpstart Our Business Startups Act of 2012, as amended (the “JOBS Act”). As an EGC, we may take advantage of specified reduced disclosure and other requirements that are otherwise applicable generally to public companies. These provisions include, but are not limited to:

 

   

being permitted to present only two years of audited financial statements and only two years of related “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this prospectus;

 

   

not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended (the “Sarbanes-Oxley Act”);

 

   

reduced disclosure obligations regarding executive compensation in our periodic reports, proxy statements and registration statements, including in this prospectus; and

 

   

exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.

We may take advantage of these exemptions until we are no longer an EGC. We will cease to be an EGC on the date that is the earliest of (i) the last day of the fiscal year in which we have total annual gross revenues of

 

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$1.07 billion or more; (ii) the last day of the fiscal year following the fifth anniversary of the completion of this offering; (iii) the date on which we have issued more than $1.0 billion in nonconvertible debt during the previous three years; or (iv) the last day of the fiscal year in which we are deemed to be a large accelerated filer under the rules of the Securities and Exchange Commission (the “SEC”). We may choose to take advantage of some but not all of these exemptions. We have taken advantage of reduced reporting requirements in this prospectus. Accordingly, the information contained herein may be different from the information you receive from other public companies in which you hold stock.

In addition, the JOBS Act provides that an EGC can take advantage of an extended transition period for complying with new or revised accounting standards. This provision allows an EGC to delay the adoption of some accounting standards until those standards would otherwise apply to private companies. We have elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we (i) are no longer an EGC or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our audited and unaudited consolidated financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.

We are also a “smaller reporting company,” as defined in Item 10(f)(1) of Regulation S-K. We may continue to be a smaller reporting company after this offering if either (i) the market value of our stock held by non-affiliates is less than $250 million or (ii) our annual revenue is less than $100 million during the most recently completed fiscal year and the market value of our stock held by non-affiliates is less than $700 million. If we are a smaller reporting company at the time we cease to be an EGC, we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies. Specifically, as a smaller reporting company we may choose to present only the two most recent fiscal years of audited financial statements in our Annual Report on Form 10-K and, similar to emerging growth companies, smaller reporting companies have reduced disclosure obligations regarding executive compensation.

Status as a Controlled Company

After the completion of this offering, assuming we sell the number of shares of our common stock set forth on the cover page of this prospectus and after giving effect to the recapitalization described elsewhere in this prospectus, but excluding any shares of our common stock that the Kohlberg Funds purchase in a concurrent private placement, the Kohlberg Funds will beneficially own approximately 56% of the outstanding shares of our common stock (or approximately 53% of the outstanding shares of our common stock if the underwriters exercise their option to purchase additional shares in full). Assuming the Kohlberg Funds purchase 6,000,000 shares of our common stock in a concurrent private placement, the Kohlberg Funds will beneficially own approximately 65% of the outstanding shares of our common stock (or approximately 63% of the outstanding shares of our common stock if the underwriters exercise their option to purchase additional shares in full). As a result, the Kohlberg Funds will hold shares of our common stock representing a majority of the voting power for the election of our directors and we will be a “controlled company” under the corporate governance standards of the Nasdaq Stock Market. As a controlled company, we will be exempt from certain of the Nasdaq Stock Market corporate governance requirements, including the requirements that (i) a majority of our board of directors consists of “independent directors,” as defined under the Nasdaq Stock Market listing rules; (ii) that the compensation of our executive officers be determined, or recommended to the board of directors for determination, by majority vote of the independent directors or by a compensation committee comprised solely of independent directors; and (iii) that director nominees be selected, or recommended to the board of directors for selection, by majority vote of the independent directors or by a nominating and corporate governance committee comprised solely of independent directors. Accordingly, you may not have the same protections afforded to stockholders of companies that are subject to all of Nasdaq Stock Market corporate governance requirements. In the event that we cease to be a controlled company, we will be required to comply with these provisions within the transition periods specified in the Nasdaq Stock Market corporate governance standards. See “Management—Status as a Controlled Company.”

 

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Corporate Background and Information

Spinal Elements Holdings, Inc., previously known as KAMD Holdings, Inc., was incorporated by Kohlberg in March 2016 in Delaware for the purpose of acquiring Amendia, Inc. (“Amendia”), a Georgia-based medical device company focused on spine surgery procedures. Subsequently, Spinal Elements Holdings, Inc., in 2017, through Amendia, acquired Spinal Elements, Inc. (“Original Spinal Elements”). We refer to the acquisition of Amendia as the “Initial Acquisition” and to the acquisition of Original Spinal Elements and the associated integration of the companies as the “Combination.” The Initial Acquisition was financed with the proceeds from the term loan and the Second Lien Notes (as defined herein) and the Combination was financed with the proceeds from the issuance of Series B preferred stock. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Existing Indebtedness—First Lien Credit Facilities” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Existing Indebtedness—Second Lien Notes” for more information about our existing indebtedness.

Following the Combination, we adopted the Original Spinal Elements corporate identity, branding and management team. Original Spinal Elements was founded in Carlsbad, California as Quantum Orthopedics in November 2003 by an executive team that included Jason Blain, our President and Chief Executive Officer, and Steve McGowan, our Chief Financial Officer. In 2006, it changed its name to “Spinal Elements, Inc.” to reflect its focus on spine surgery technologies and began commercializing its products under the Spinal Elements brand. Over the next decade, Original Spinal Elements developed, launched and commercialized multiple systems, including the Sapphire Anterior Cervical Plate System, the Mercury Classic Spinal System, the Mercury MIS Spinal System and the Magnum+ Stand-Alone No Profile ALIF System, which it had continually complemented with a robust pipeline of innovative products. Additionally, in parallel with the commercialization of these systems, it advanced a number of disruptive technologies that remain part of our product portfolio today.

The Combination allowed us to have a larger footprint and broader product portfolio, including the OmegaLIF Posterior Oblique Access and Interbody Device Implant System and the Overwatch Spine System, which all originated from Amendia and were integrated into our product portfolio following the Combination, as well as a more complete biologics portfolio, and resulted in our ability to offer a more complete suite of systems, products and technologies to surgeons and patients. Further, since the Combination, we have ramped up the design, development and commercialization of our product portfolio. We have introduced and launched multiple new systems, products and technologies, including the Karma Fixation System, the Katana Lateral Access System, the Overwatch Spine System, the Lucent XP Expandable Interbody Device System, the Ceres Cervical Plate System and the Clutch ISP Posterior Fixation System. The integration of Original Spinal Elements and Amendia, which included merging and consolidating the two sets of product portfolios, integrating customer relationships into a cohesive commercial strategy, and centralizing corporate functions and operations into our Carlsbad headquarters was substantially completed in the first half of 2019.

In June 2019, in connection with an internal reorganization and the finalization of the Combination, we sold all real and personal property, other than certain products and equipment, from Amendia’s manufacturing facility located in Marietta, Georgia (the “Marietta Facility”), and outsourced all products that were manufactured at that facility to third-party manufacturers. Additionally, after completing the internal reorganization and the Combination, effective December 31, 2019, we converted Amendia from a Georgia corporation to a Delaware corporation and merged Original Spinal Elements with and into Amendia, with Amendia remaining as the surviving company, which was renamed “Spinal Elements, Inc.”

Our principal executive offices are located at 3115 Melrose Drive, Suite 200, Carlsbad, California 92010 and our telephone number is (877) 774-6255. Our website address is http://www.spinalelements.com. The reference to our website address does not constitute incorporation by reference of the information contained at or available through our website, and you should not consider it to be a part of this prospectus. We have included our website address as an inactive textual reference only.

 

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THE OFFERING

 

Common stock offered by us

7,700,000 shares.

 

Common stock to be outstanding after this offering and concurrent private placement

27,154,783 shares (28,309,783 shares if the underwriters exercise their option to purchase additional shares of our common stock in full).

 

Option to purchase additional shares of common stock

We have granted to the underwriters a 30-day option to purchase up to 1,155,000 additional shares from us at the initial public offering price, less the underwriting discounts and commissions.

 

Use of proceeds

We estimate that our net proceeds from this offering will be approximately $91.6 million, or $106.7 million if the underwriters exercise their option to purchase additional shares of our common stock in full, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, assuming an initial public offering price of $14.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus. Further, we expect the net proceeds from the private placement to be $84 million based on an assumed price of $14.00 per share, equal to the midpoint of the price range for the shares offered hereby set forth on the cover page of this prospectus.

 

  We intend to use the net proceeds from this offering, together with the net proceeds from (a) the sale of 6,000,000 shares of our common stock at an assumed price of $14.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, in a private placement that would close immediately following the pricing of this offering, and (b) the Senior Secured Term Loans (as defined herein), as described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Refinancing of First Lien Credit Facilities and Second Lien Notes,” to (i) repay approximately $168.1 million of our indebtedness, representing all amounts outstanding under the First Lien Credit Facilities (as defined herein) and the Second Lien Notes (as defined herein) as of October 6, 2020, (ii) redeem, at a redemption price of approximately $3.4 million in the aggregate, all outstanding shares of Series A preferred stock, (iii) repay all amounts outstanding under Series A Notes (as defined herein) and Series C Notes (as defined herein), including accrued interest but excluding any Series A Notes and Series C Notes that have been tendered to us for exchange into shares of our common stock pursuant to the exchange offer that we have made to all holders of the Series A Notes and Series C Notes, and (iv) use any remaining net proceeds for working capital and for general corporate purposes.

 

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  As of June 30, 2020, there was approximately $138.9 million in aggregate principal amount of debt outstanding under the First Lien Credit Facilities, consisting of (i) approximately $67.0 million outstanding under the Term Loan (as defined herein), bearing interest at rates ranging from 6.5% to 7.3% and having a maturity date of April 13, 2023, (ii) approximately $21.9 million outstanding under the Revolving Credit Facility (as defined herein), bearing interest at a rate of 6.5% and having a maturity date of April 13, 2022 and (iii) approximately $50.0 million outstanding under the LIFO Revolving Facility (as defined herein), bearing interest at rates ranging from 6.0% to 6.6% and having a maturity date of December 31, 2021. As of June 30, 2020, there was also (i) approximately $27.1 million of debt outstanding under the Second Lien Notes, bearing interest at a rate of 11.9% and having a maturity date of October 31, 2023, (ii) approximately $6.9 million of debt outstanding under Series A Notes, bearing interest at a rate of 12% and having a maturity date of March 5, 2025, of which approximately $0.4 million in aggregate principal amount has been tendered to us as of October 6, 2020 for exchange into shares of our common stock pursuant to the exchange offer and (iii) approximately $0.4 million of debt outstanding under Series C Notes, bearing interest at a rate of 12% and having a maturity date of March 5, 2025, of which approximately $0.3 million in aggregate principal amount has been tendered to us as of October 6, 2020 for exchange into shares of our common stock pursuant to the exchange offer. For additional information regarding the First Lien Credit Facilities, the Second Lien Notes, the Series A Notes and the Series C Notes, see “Description of Certain Indebtedness.” For additional information regarding the exchange offer, see “Recapitalization.”

 

  For more information, including information about our indebtedness that will remain outstanding following this offering, see “Use of Proceeds,” “Description of Certain Indebtedness” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Indebtedness.”

 

Concurrent Private Placement

The Kohlberg Funds have expressed an interest in purchasing 6,000,000 shares of our common stock at the initial public offering price in a private placement that would close immediately following the pricing of this offering. Indications of interest are not binding commitments to purchase and the Kohlberg Funds could determine to purchase more or less shares in the proposed private placement. The sale of the shares of our common stock in the proposed private placement will not be registered under the Securities Act of 1933, as amended (the “Securities Act”). The underwriters will not receive any fees in connection with a sale of shares in the proposed private placement. All shares purchased by the Kohlberg Funds will be subject to a lock-up agreement with the underwriters for a period of up to 180 days after the date of this prospectus.

 

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Dividend policy

We do not currently intend to pay any cash dividends on our common stock in the foreseeable future. See “Dividend Policy.”

 

Controlled company

After the completion of this offering, the Kohlberg Funds will hold shares of our common stock representing a majority of the voting power for the election of our directors. As a result, we will be a “controlled company” under the corporate governance standards of the Nasdaq Stock Market. See “Management—Status as a Controlled Company.”

 

Directed share program

At our request, the underwriters have reserved up to 231,000 shares of our common stock, or 3% of the shares of our common stock being offered by this prospectus, for sale, at the initial public offering price, to certain of our directors, officers, employees and other persons having business relationships with us including Jason Blain, our Chief Executive Officer and a director, through a directed share program. The number of shares of our common stock available for sale to the general public will be reduced to the extent these parties purchase any of such reserved shares. Any reserved shares of our common stock that are not so purchased will be offered by the underwriters to the general public on the same terms as the other shares offered by this prospectus. Any shares of our common stock purchased by our directors or officers will be subject to the lock-up restrictions described in this prospectus. See “Underwriting.”

 

Risk factors

You should read the section entitled “Risk Factors” beginning on page 16 and the other information included in this prospectus for a discussion of factors that you should consider carefully before deciding to invest in our common stock.

 

Nasdaq Global Market symbol

“SPEL”

The number of shares of our common stock to be outstanding after this offering set forth above is based on 13,454,783 shares outstanding as of September 30, 2020, and does not reflect:

 

   

1,557,216 shares of our common stock issuable upon the exercise of stock options under our Amended and Restated 2016 Equity Incentive Plan (the “2016 Plan”) at a weighted average exercise price of $12.60 per share;

 

   

2,600,000 shares of our common stock issued or reserved for future issuance under the Spinal Elements Holdings, Inc. 2020 Equity Incentive Plan (the “2020 Plan”); and

 

   

178,571 shares of our common stock issuable upon the exercise of warrants to be issued to                  under the Senior Secured Term Loans, based on the assumed initial public offering price per share of $14.00, which is the midpoint of the price range set forth on the cover page of this prospectus. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Refinancing of First Lien Credit Facilities and Second Lien Notes.”

Except as otherwise indicated, all information in this prospectus:

 

   

gives effect to the filing of our restated certificate of incorporation and the adoption of our amended and restated bylaws in connection with the consummation of this offering;

 

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gives effect to a 1-for-12.6013 reverse split of our common stock effected on October 6, 2020;

 

   

assumes the conversion of all outstanding shares of Series B preferred stock into an aggregate of 6,601,955 shares of our common stock immediately prior to the completion of this offering based on the conversion price amount that assumes a closing date of October 19, 2020;

 

   

assumes the repayment in full of all amounts outstanding under Series A Notes, Series C Notes and Series A Notes underlying the Series A Warrants and therefore does not reflect the issuance of up to an aggregate of 705,027 shares of our common stock, based on an assumed closing date for this offering of October 19, 2020 and assumed initial public offering price per share of $14.00, which is the midpoint of the price range set forth on the cover page of this prospectus; to the extent some or all of such Series A Notes, Series C Notes and Series A Notes underlying the Series A Warrants are tendered to us for exchange pursuant to the exchange offer that we have made to all holders of Series A Notes, Series C Notes and Series A Warrants;

 

   

assumes the redemption of all outstanding shares of our Series A preferred stock following the completion of this offering at an aggregate redemption price currently estimated to be approximately $3.4 million, which redemption amount assumes a closing date of October 19, 2020;

 

   

does not reflect a purchase by the Kohlberg Funds of any shares of our common stock in a concurrent private placement;

 

   

assumes no exercise of the outstanding options described above; and

 

   

assumes no exercise by the underwriters of their option to purchase additional shares of our common stock.

 

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SUMMARY CONSOLIDATED FINANCIAL DATA

The following summary consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the audited and unaudited consolidated financial statements and the related notes included elsewhere in this prospectus. The summary consolidated financial data included in this section are not intended to replace the audited and unaudited consolidated financial statements and are qualified in their entirety by the audited and unaudited consolidated financial statements and the related notes included elsewhere in this prospectus.

The summary Consolidated Statements of Operations data for the years ended December 31, 2019 and 2018 is derived from our audited consolidated financial statements and the related notes included elsewhere in this prospectus. The summary Consolidated Statements of Operations data for the six months ended June 30, 2020 and 2019, respectively, and the summary Consolidated Balance Sheet data at June 30, 2020 are derived from our unaudited condensed consolidated financial statements and related notes included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results to be expected for any period in the future and our results for the six months ended June 30, 2020 are not necessarily indicative of the results that may be expected for the full fiscal year ended December 31, 2020 or for any other interim period.

 

     Six Months Ended
June 30,
    Year Ended
December 31,
 

(in thousands, except per share data)

   2020     2019     2019     2018  

Consolidated statements of operations data:

        

Revenue

   $ 42,694     $ 46,050     $ 95,916     $ 90,752  

Cost of goods sold

     13,550       16,988       32,801       32,159  
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     29,144       29,062       63,115       58,593  

Operating expenses:

        

Selling, general and administrative

     41,788       43,010       85,320       81,068  

Research and development

     2,626       3,372       6,014       6,961  

Loss (gain) on disposal of assets

     —       1,998       1,993       (66

Loss on impairment of goodwill

     —         —         —         6,611  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     44,414       48,380       93,327       94,574  
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (15,270     (19,318     (30,212     (35,981

Interest expense

     (6,795     (6,178     (12,585     (10,453

Other (expense) income, net

     (75     141       27       54  
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (22,140     (25,355     (42,770     (46,380

Income tax (benefit) expense

     (648     18       70       (550
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (21,492     (25,373     (42,840     (45,830

Cumulative undeclared dividends earned on redeemable convertible preferred stock

     (4,668     (4,121     (8,580     (7,631
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

   $ (26,160   $ (29,494   $ (51,420   $ (53,461
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per common share, basic and diluted

   $ (3.82     (4.30   $ (7.50     (7.71

Weighted-average shares used to compute basic and diluted net loss per common share

     6,853       6,853       6,853       6,931  

Pro forma net loss per common share, basic and diluted (unaudited)(1)

   $ (1.60 )     $ (3.19  

Pro forma weighted-average shares used to compute basic and diluted pro forma net loss per common share (unaudited)(1)

     13,437         13,437    

 

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     As of June 30, 2020  

(in thousands)

   Actual     Pro
Forma(2)
    Pro Forma As
Adjusted(3)
 

Consolidated balance sheet data:

      

Cash and cash equivalents

   $ 12,637     $ 12,637     $ 43,664  

Working capital(4)

     9,224       5,937       60,941  

Total assets

     119,361       119,361       150,388  

Total long-term debt

     152,209       152,209       35,000  

Total liabilities

     204,682       207,969       64,510  

Series A preferred stock

     2,561       —         —    

Series B preferred stock

     55,011       —         —    

Accumulated deficit

     (233,128     (233,128     (234,271

Total stockholders’ (deficit) equity

     (142,893     (88,608     85,878  

 

(1)

See Note 11 of our unaudited condensed consolidated financial statements and Note 15 of our audited consolidated financial statements included elsewhere in this prospectus for the method used to calculate pro forma net loss per common share, basic and diluted, and pro forma weighted-average shares used to compute basic and diluted pro forma net loss per share.

(2)

Reflects, on a pro forma basis, (i) the conversion, immediately prior to the completion of this offering, of all of our outstanding shares of Series B preferred stock into an aggregate of 6,349 shares of our common stock, as if such conversion had occurred on June 30, 2020 and (ii) the redemption of all outstanding shares of our Series A preferred stock in connection with this offering at a redemption price currently estimated to be approximately $3.3 million, as if such redemption had occurred on June 30, 2020. The pro forma amounts do not give effect to the payment in cash of the redemption price of our Series A preferred stock given our intention that such payment occur on the 40th day following the closing of this offering.

(3)

Reflects, on a pro forma as adjusted basis, the pro forma adjustments described in footnote (2) above and (i) the sale of 7,700,000 shares of our common stock in this offering, assuming an initial public offering price of $14.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us, (ii) the sale of 6,000,000 shares of our common stock at an assumed price of $14.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, in a private placement that would close immediately following the pricing of this offering, (iii) the repayment in full of all amounts outstanding under Series A Notes, Series C Notes and Series A Notes underlying the Series A Warrants, as if such repayment had occurred on June 30, 2020, (iv) the application of the net proceeds from this offering and the concurrent private placement as described in the section entitled “Use of Proceeds,” including repayment of the First Lien Credit Facilities and the Second Lien Notes, the payment of the redemption price to the holders of the outstanding shares of Series A preferred stock and the repayment of all amounts outstanding under the Series A Notes and the Series C Notes and (v) the debt refinancing, excluding warrants expected to be issued. To the extent any Series A Notes, Series C Notes or Series A Warrants are tendered to us in the exchange offer, we will issue shares of our common stock in satisfaction of our obligations under such Series A Notes, Series C Notes and Series A Warrants based upon the initial public offering price of our common stock in this offering. Historical interest expense, including the amortization of debt issuance costs, for the six months ended June 30, 2020, related to our total debt and Series A Warrants that will be repaid in connection with the offering, was $6.7 million. As part of our debt refinancing, we intend to enter into the Senior Secured Term Loans, including an Initial Term Loan of $35.0 million. We expect that interest expense under the Initial Term Loan will be approximately $3.6 million on an annual basis. Each $1.00 increase (decrease) in the assumed initial public offering price of $14.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the pro forma as adjusted amount of each of cash and cash equivalents, total assets and total stockholders’ equity by $13.2 million, assuming the number of common shares offered by us, as set

 

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forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each increase (decrease) of 1,000,000 shares in the number of common shares offered by us, as set forth on the cover page of this prospectus, would increase (decrease) the pro forma as adjusted amount of each of cash and cash equivalents, total assets and total stockholders’ equity by $13.0 million, assuming (a) no change in the assumed initial public offering price per share and (b) the sale of 6,000,000 shares of our common stock at an assumed price of $14.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, in a private placement that would close immediately following the pricing of this offering, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

(4)

Working capital is defined as current assets less current liabilities. See our unaudited condensed consolidated financial statements and the related notes included elsewhere in this prospectus. Working capital as of June 30, 2020 includes $20.0 million of short-term debt. See Note 3 of our unaudited condensed consolidated financial statements included elsewhere in this prospectus.

 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below, as well as the other information in this prospectus, including the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited and unaudited consolidated financial statements and the related notes included elsewhere in this prospectus and before deciding whether to invest in our common stock. The occurrence of any of the events or developments described below could materially and adversely affect our business, financial condition, results of operations and growth prospects. In such an event, the market price of our common stock could decline, and you may lose all or part of your investment. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations.

Risks Related to Our Financial Condition and Capital Requirements

We have incurred losses in the past, expect to incur losses in the future and may be unable to achieve or sustain profitability in the future.

We incurred net losses of $42.8 million and $45.8 million for the years ended December 31, 2019 and 2018, respectively, and $21.5 million for the six months ended June 30, 2020, and expect to continue to incur net losses for the foreseeable future. As a result of ongoing losses, as of June 30, 2020, we had an accumulated deficit of $233.1 million. We expect to continue to incur significant product development, clinical and regulatory, sales and marketing and other expenses. In addition, we expect that our general and administrative expenses will increase following this offering due to the additional costs associated with being a public company. These efforts and additional expenses may be more costly than we expect, and we cannot guarantee that we will be able to increase our revenue to offset such expenses. Our revenue may decline or our revenue growth may be constrained for a number of reasons, including reduced demand for our products and services, increased competition or if we cannot capitalize on growth opportunities. We will need to generate significant additional revenue to achieve and sustain profitability and, even if we achieve profitability, we cannot be sure that we will remain profitable for any substantial period of time. Our failure to achieve or sustain profitability could negatively impact the value of our common stock.

We may be unable to generate sufficient revenue from the sales of our products to achieve and sustain profitability and our financial condition raises substantial doubt as to our ability to continue as a going concern.

At present, we rely solely on the sales of our products to generate revenue, and we expect to generate substantially all of our revenue in the foreseeable future from sales of these products. Beyond generated revenues, we have primarily funded our operations with proceeds from sales of preferred stock and borrowings under credit agreements. In order to successfully commercialize our products, we will need to continue to expand our sales and marketing efforts to strengthen existing relationships and develop new relationships with distributors and surgeons, obtain regulatory clearances or approvals for our existing products in additional markets, design, develop, obtain regulatory clearances or approvals and commercialize future potential products and achieve and maintain compliance with all applicable regulatory requirements. If we fail to successfully commercialize our products, we may never receive a return on the substantial investments that we have made in product development, sales and marketing, regulatory compliance, quality assurance, as well as further investments we intend to make, which would have a material adverse effect on our business, financial condition and results of operations.

In addition, potential distributors and healthcare facilities, surgeons and other healthcare providers may decide not to purchase our products, or our existing distributors and healthcare facilities, surgeons and other healthcare providers may decide to cancel orders, due to, among other reasons, changes in product offerings, revised research and development plans, adverse clinical outcomes for our or similar products, difficulties in

 

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obtaining coverage or reimbursement for procedures using our products, difficulties obtaining approval from a hospital for procedures using our products, delays or other complications with our supply chain or the utilization of technology or products developed by other parties, many of which are outside of our control. Additionally, demand for our products may not increase as quickly as we predict, and we may be unable to increase our revenue levels as we expect. Further, COVID-19 has resulted in patients delaying or foregoing non-urgent spine surgery procedures to avoid hospitals and other healthcare facilities and comply with quarantine and similar directives from local and national health and government officials which had a significant impact on our operations in the form of a rapid decrease in revenue and cash flows beginning in March 2020 as compared to prior periods and original expectations. Despite some recovery, this reduction in sales, as compared to original expectations, continued into June 2020.

Even if we succeed in strengthening our existing relationships and developing new relationships with distributors and surgeons, obtaining regulatory clearances or approvals for our products in the U.S. and additional countries, achieving and maintaining compliance with all applicable regulatory requirements and expanding our product offerings, we may be unable to generate sufficient revenue from the commercialization of our products to achieve or sustain profitability.

As of June 30, 2020, we had total long-term debt of $152.2 million and total short-term debt of $20.0 million, which has been under a forbearance agreement since July 2018 for failure to make principal and interest payments, an accumulated deficit of $233.1 million and $9.2 million of working capital, including $12.6 million of cash and cash equivalents and $20.0 million of short-term debt. We have concluded that there is substantial doubt about our ability to continue as a going concern. Additionally, our auditors have issued a going concern opinion on our audited consolidated financial statements for the year ended December 31, 2019, expressing substantial doubt that we can continue as an ongoing business due to our limited amount of liquidity, recurring losses from operations incurred since inception, expectation of continuing operating losses for the foreseeable future and our long-term debt that has been under a forbearance agreement since July 2018 for failure to make principal and interest payments. Our audited and unaudited consolidated financial statements do not include any adjustments that may result from the outcome of this uncertainty. While we have implemented programs designed to improve results and future cash flows such as product rationalization, inventory management, product branding and pricing, customer incentives and personnel management, as well as outsourced manufacturing at our Marietta Facility to a third-party contract manufacturer, which we believe will result in improved business performance, there can be no assurance that any such programs will be effective to improve our results or cash flows, and if they are not effective we may not be able to continue as a going concern. If, following the completion of this offering and the consummation of the contemplated debt refinancing, we are not able to improve our results of operations and service our debt obligations, we may not be able to continue as a going concern.

We have identified material weaknesses in our internal control over financial reporting. If we are unable to remediate these material weaknesses, or if we identify additional material weaknesses in the future or otherwise fail to maintain an effective system of internal controls, we may not be able to accurately or timely report our financial condition or results of operations, which may adversely affect investor confidence in us, our business and the market price of our common stock.

In connection with the audits of our annual consolidated financial statements for the years ended December 31, 2019 and 2018, we have identified material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected on a timely basis. If we are unable to remediate these material weaknesses, or if we identify additional material weaknesses in the future or otherwise fail to maintain an effective system of internal controls, we may not be able to accurately or timely report our financial condition or results of operations, which may adversely affect investor confidence in us and, as a result, our stock price and ability to access the capital markets in the future.

 

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The material weaknesses we identified include that we lack a sufficient number of professionals with the appropriate level of knowledge, training and experience to appropriately analyze, record and disclose accounting matters timely and accurately in accordance with generally accepted accounting principles (“GAAP”). This material weakness contributed to the Company not being able to (a) design and maintain formal accounting policies, procedures and controls over the fair presentation of our financial statements; (b) design and maintain formal accounting policies, processes and controls to analyze, account for and disclose complex transactions; (c) design and maintain controls over the preparation and review of account reconciliations, journal entries and financial statements, including maintaining appropriate segregation of duties; and (d) design and maintain information technology general controls over the integrity of the data and processes in the information systems used for financial reporting. Each of these control deficiencies could result in a misstatement of accounts or disclosures that would result in a material misstatement of our financial statements that would not be prevented or detected, and accordingly, it was determined that these control deficiencies constitute material weaknesses. The material weaknesses resulted in material errors to previously issued financial statements, which required a restatement of such historical previously issued financial statements.

We continue to evaluate and implement additional procedures to enhance our internal control over financial reporting and address these material weaknesses, including by hiring additional financial reporting personnel with technical accounting and financial reporting experience and by supplementing our resources through the use of third-party advisors. We intend to continue evaluating the implementation of additional procedures to address these material weaknesses as well as continue utilizing third-party advisors until we have hired an appropriate number of skilled professionals. However, we cannot assure you that these or other measures will fully remediate the material weaknesses described above in a timely manner, if at all.

We have not performed an evaluation of our internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act because no such evaluation has been required, nor have we engaged our independent registered public accounting firm to perform an audit of our internal control over financial reporting as of any balance sheet date or for any period reported in our financial statements. Our management will first be required to perform an annual assessment of the effectiveness of our internal control over financial reporting in connection with our second Annual Report on Form 10-K. Our independent public registered accounting firm will first be required to attest to the effectiveness of our internal control over financial reporting for our Annual Report on Form 10-K for the first year we are no longer an “emerging growth company,” as defined in the JOBS Act. We will remain an EGC for up to five years, although if the market value of our common stock that is held by non-affiliates exceeds $700.0 million as of June 30 of any year before that time, we would cease to be an EGC as of December 31 of that year. At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed or operating. Our remediation efforts may not enable us to avoid material weaknesses in our internal control over financial reporting in the future.

If we are unable to remediate the material weaknesses, or otherwise maintain effective internal control over financial reporting, we may not be able to report our financial results accurately, prevent fraud or file our periodic reports in a timely manner. If our remediation of these material weaknesses is not effective, or if we experience additional material weaknesses or otherwise fail to maintain an effective system of internal controls in the future, we may not be able to accurately or timely report our financial condition or results of operations, which may adversely affect investor confidence in us and, as a result, the value of our common stock. We cannot assure you that all of our existing material weaknesses have been identified, or that we will not in the future identify additional material weaknesses.

We might need to raise additional capital in the future to fund our existing commercial operations, develop and commercialize new products and technologies and expand our operations.

Based on our current strategic business plan, we believe our current cash, anticipated borrowing capacity under our new senior credit facilities, cash receipts from sales of our products and net proceeds from this offering and the

 

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concurrent private placement will be sufficient to meet our anticipated cash requirements for at least the next 12 months. For more information about our new senior credit facilities, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Indebtedness—Refinancing of First Lien Credit Facilities and Second Lien Notes.” This estimate is based on assumptions that may prove to be wrong, and we may use our available capital resources sooner than we currently expect. If our available cash balances, borrowing capacity, anticipated cash flow from operations and net proceeds from this offering and the concurrent private placement are insufficient to satisfy our liquidity requirements, including because of lower demand for our products as a result of the risks described in this prospectus or otherwise, we may seek to sell common or preferred equity or convertible debt securities, enter into an additional credit facility or another form of third-party funding or seek other debt financing.

We may consider raising additional capital in the future to fund our existing commercial operations, develop and commercialize new products, expand our operations or for other reasons, including to:

 

   

increase our sales and marketing efforts to increase market adoption of our products and address competitive developments;

 

   

provide for supply and inventory costs associated with plans to accommodate potential increases in demand for our products;

 

   

fund development and marketing efforts of any future product offerings or additional features to then-existing products;

 

   

acquire, license or invest in new technologies;

 

   

acquire or invest in complementary businesses or assets; and

 

   

finance capital expenditures and general and administrative expenses.

Our present and future funding requirements will depend on many factors, including:

 

   

our ability to achieve revenue growth and improve gross margins;

 

   

our rate of progress in establishing and maintaining coverage and reimbursement arrangements with third-party payors;

 

   

the cost of expanding our operations and product offerings, including our sales and marketing efforts;

 

   

our rate of progress in, and cost of the sales and marketing activities associated with, establishing and maintaining adoption of our products;

 

   

the cost of research and development activities;

 

   

the effect of competing technological and market developments;

 

   

costs related to international expansion; and

 

   

the potential cost of and delays in product development as a result of any regulatory oversight applicable to our products.

Additionally, our ability to raise capital in a timely manner if needed in the future may be limited, or such capital may be unavailable on acceptable terms, if at all. For instance, we will not have access to a revolving credit facility as part of the New Credit Agreement or otherwise, which may limit our ability to fund our operating needs should it become necessary and there can be no assurance that we would be able to secure a revolving credit facility or similar debt financing in the future in the event that we require additional capital. Any additional equity or convertible debt financing we enter would likely be dilutive to our stockholders and any future debt financing we enter may impose covenants upon us that restrict our operations, including limitations on our ability to incur liens or additional debt, pay dividends, repurchase our stock, make certain investments and engage in certain merger, consolidation or asset sale transactions. Any debt financing or additional equity that we raise may contain terms that are not favorable to us or our stockholders. If we raise additional funds through

 

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collaboration and licensing arrangements with third parties, it may be necessary to relinquish some rights to our technologies or our products, or grant licenses on terms that are not favorable to us. If access to sufficient capital is not available as and when needed, our business will be materially impaired and we may be required to cease operations, curtail one or more product development or commercialization programs, or we may be required to significantly reduce expenses, sell assets, seek a merger or joint venture partner, file for protection from creditors or liquidate all or part of our assets.

Our indebtedness could adversely affect our financial condition.

As of June 30, 2020, there was approximately $138.9 million in aggregate principal amount of debt outstanding under the First Lien Credit Facilities, approximately $27.1 million of debt outstanding under the Second Lien Notes and approximately $7.3 million of aggregate principal amount of debt outstanding under Series A Notes and Series C Notes, of which $0.7 million in aggregate principal amount of Series A Notes and Series C Notes has been tendered to us as of October 6, 2020 for exchange into shares of our common stock pursuant to the exchange offer. In addition, as of such date we had outstanding Series A Warrants to purchase approximately $0.8 million in aggregate principal amount of additional Series A Notes, of which $0.2 million in aggregate principal amount of Series A Warrants has been tendered to us as of October 6, 2020 for exchange into shares of our common stock pursuant to the exchange offer. We intend to consummate a debt refinancing in connection with this offering pursuant to which we intend to refinance all amounts outstanding under the First Lien Credit Facilities and the Second Lien Notes. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Refinancing of First Lien Credit Facilities and Second Lien Notes.” Additionally, we intend to use a portion of the net proceeds from this offering to repay all amounts outstanding under Series A Notes and Series C Notes that have not been tendered to us pursuant to the exchange offer that we have made to all note holders to exchange their Series A Notes and Series C Notes for shares of our common stock. We also intend to cancel approximately $0.6 million of outstanding Series A Warrants and repay approximately $0.2 million, which represents all accrued but unpaid interest from March 5, 2018 to October 19, 2020 (the assumed closing date of this offering) outstanding under the Series A Warrants, assuming $0.2 million aggregate principal amount of the Series A Warrants will be tendered to us for exchange into shares of our common stock pursuant to the exchange offer. After giving effect to the completion of this offering and the concurrent private placement and the application of the net proceeds therefrom as described in the section entitled “Use of Proceeds,” we would have had $35 million of total indebtedness outstanding as of June 30, 2020. Our level of debt could have important consequences, including:

 

   

limiting our ability to obtain additional financing to fund future working capital and other general corporate requirements and increasing our cost of borrowing, including by limiting our ability to enter into a revolving credit facility in the future on terms favorable to us, if at all;

 

   

requiring a substantial portion of our cash flow to be dedicated to debt service payments instead of other purposes, thereby reducing the amount of cash flow available for working capital and other general corporate purposes;

 

   

exposing us to the risk of increased interest rates as certain of our borrowings are at variable rates of interest;

 

   

limiting our flexibility in planning for and reacting to changes in the spine surgery market; and

 

   

placing us at a disadvantage compared to other, less leveraged competitors or competitors with comparable debt at more favorable interest rates.

We may incur significant additional indebtedness in the future. Although the Amended Credit Agreement (as defined herein) governing the First Lien Credit Facilities and the Amended Note Purchase Agreement (as defined herein) governing the Second Lien Notes contain restrictions on the incurrence of additional indebtedness, those restrictions are subject to a number of qualifications and exceptions, and we expect that if we are able to consummate the Senior Secured Term Loans as described under the section entitled “Management’s

 

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Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Refinancing of First Lien Credit Facilities and Second Lien Notes,” we will retain similar qualifications and exceptions and the additional indebtedness incurred in compliance with those restrictions could be substantial.

In addition, the borrowings under the First Lien Credit Facilities and the Second Lien Notes bear interest at variable rates. If market interest rates increase, variable rate debt will create higher debt service requirements, which could adversely affect our cash flow. While we may in the future enter into agreements limiting our exposure to higher interest rates, any such agreements may not offer complete protection from this risk. Additionally, our borrowings under the First Lien Credit Facilities and the Second Lien Notes bear interest at

variable rates that are indexed to LIBOR. If we are able to consummate the Senior Secured Term Loans as described under the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Refinancing of First Lien Credit Facilities and Second Lien Notes,” such loans will bear interest at a rate per annum equal to LIBOR (subject to a floor of 0.50%) plus 9.65%. In July 2017, the U.K.’s Financial Conduct Authority, which regulates LIBOR, announced that it intends to phase out LIBOR by the end of 2021. The expected discontinuation, reform or replacement of LIBOR may result in fluctuating interest rates, or higher interest rates, which could have an adverse effect on our interest expense.

The terms of our indebtedness restrict our current and future operations, particularly our ability to respond to changes or to take certain actions.

The Amended Credit Agreement governing the First Lien Credit Facilities and the Amended Note Purchase Agreement governing the Second Lien Notes contain a number of restrictive covenants that impose significant operating and financial restrictions on us and may limit our ability to engage in acts that may be in our long-term best interest, including restrictions on our ability to incur liens, make investments, loans, advances and acquisitions, incur additional indebtedness or guarantees, pay dividends on capital stock or redeem, repurchase or retire capital stock or subordinated and earnout indebtedness, engage in transactions with affiliates, sell assets, including capital stock of our subsidiaries, alter the business we conduct, alter their organizational documents, engage in sale leasebacks, enter into agreements restricting our subsidiaries’ ability to pay dividends, and consolidate or merge. We expect that the Senior Secured Term Loans may contain similar restrictions, among others. See “Description of Certain Indebtedness” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Refinancing of First Lien Credit Facilities and Second Lien Notes.” In addition, the restrictive covenants in the Amended Credit Agreement and the Amended Note Purchase Agreement require us to maintain specified financial ratios and satisfy other financial condition tests, and we expect that the agreement governing the Senior Secured Term Loans will require us to maintain a minimum cash balance and minimum revenue targets. Our ability to meet those financial covenants can be affected by events beyond our control.

A breach of the covenants under the Amended Credit Agreement and the Amended Note Purchase Agreement, or any replacement facility, could result in an event of default under the applicable indebtedness, unless we obtain a waiver to avoid such default. If we are unable to obtain a waiver, such an event of default may allow the creditors to accelerate the related debt and may result in the acceleration of or default under any other debt to which a cross-acceleration or cross-default provision applies. In the event our lenders accelerate the repayment of our borrowings, we and our subsidiaries may not have sufficient assets to repay that indebtedness. Both the First Lien Credit Facilities and the Second Lien Notes are subject to existing events of default, including accrued and unpaid interest, prepayment penalties and fees and expenses related thereto. See “Description of Certain Indebtedness.” Following these events of default, the lenders agreed to forbear from exercising their rights with respect to the existing events of default. We intend to consummate a debt refinancing in connection with this offering pursuant to which we intend to refinance all amounts outstanding under the First Lien Credit Facilities and the Second Lien Notes, and following such debt refinancing, all outstanding commitments under the Amended Credit Agreement and the Amended Note Purchase Agreement will be terminated. However, there can be no guarantee that we will not breach covenants in the agreement governing the Senior Secured Term

 

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Loans in the future. In the event that we breach one or more covenants in the agreement governing the Senior Secured Term Loans, our lender may declare an event of default and require that we immediately repay all amounts outstanding, terminate any commitment to extend further credit and foreclose on the collateral granted to it to collateralize such indebtedness. The occurrence of any of these events could restrict our operations, which could have a material adverse effect on our business, financial condition and results of operations.

Our business is subject to quarterly, annual and seasonal fluctuations.

Our quarterly and annual financial results may fluctuate significantly in the future, and period-to-period comparisons of our operating results may not be meaningful. Accordingly, the results of any one quarter or period should not be relied upon as an indication of future performance. Our quarterly and annual financial results may fluctuate as a result of a variety of factors, many of which are outside our control. Factors that may cause fluctuations in our quarterly and annual operating results include:

 

   

adoption of our current and new products by surgeons and patients;

 

   

timing of new product offerings, acquisitions, licenses or other significant events by us or our competitors;

 

   

unanticipated pricing pressure;

 

   

interruption in the manufacturing or distribution of our products;

 

   

our ability to obtain and maintain regulatory clearances or approvals for any of our products in development or for our existing products for current or additional indications;

 

   

results of clinical research and trials on our existing products and products in development;

 

   

recalls or other safety issues;

 

   

our ability to establish and maintain an effective and dedicated sales management and sales specialist teams;

 

   

third-party payors coverage and reimbursement;

 

   

the cost of maintaining adequate insurance coverage, including product liability insurance;

 

   

impairment and other special charges; or

 

   

positive or negative coverage in the media or clinical publications of our products or products of our competitors or our industry.

Additionally, our business is subject to seasonal fluctuations in that our revenue is typically higher in the fourth quarter primarily because patients tend to schedule larger, more complex surgeries closer to the end of the year after they have largely or fully paid their insurance deductibles and in connection with the holiday season when, for those who work, they may be able to take more time off from work for recovery. Conversely, our revenue is typically lower in the summer months, which is primarily driven by patients’ or surgeons’ vacations. As a result of these and other factors, our financial results for any single quarter or period of less than one year are not necessarily indicative of the results that may be achieved for a full fiscal year.

Additionally, any quarterly, annual or seasonal fluctuations in our operating results may, in turn, cause the price of our common stock to fluctuate substantially. Further, if our quarterly or annual operating results fall below the expectations of investors or securities analysts, the price of our common stock could decline substantially.

Our effective tax rate may fluctuate, and we may incur tax obligations in excess of accrued amounts in the financial statements.

We are subject to taxation in numerous U.S. states and territories. As a result, our effective tax rate is derived from a combination of applicable tax rates in the various places that we operate. In preparing our

 

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financial statements, we estimate the amount of tax that will become payable in each of such places. Nevertheless, our effective tax rate may be different than experienced in the past due to numerous factors, including the effects of U.S. tax reform, changes in the mix of our profitability from jurisdiction to jurisdiction, the results of examinations and audits of our tax filings, our inability to secure or sustain acceptable agreements with tax authorities, changes in accounting for income taxes and changes in tax laws. Any of these factors could cause us to experience an effective tax rate significantly different from previous periods or our current expectations and may result in tax obligations in excess of accrued amounts in our financial statements.

The comprehensive U.S. federal income tax reform bill adopted in 2017 could have a material adverse effect on our business, financial condition and results of operations.

On December 22, 2017, the current administration signed into law new federal legislation (the “Tax Act”) that significantly revised the Internal Revenue Code of 1986, as amended (the “Code”). The Tax Act, among other things, contains significant changes to corporate taxation, including reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, limitation of the tax deduction for interest expense to 30% of adjusted earnings (except for certain small businesses), limitations on the deduction for net operating losses arising after 2017, one time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, elimination of U.S. tax on foreign earnings (subject to certain important exceptions), immediate deductions for certain new investments instead of deductions for depreciation expense over time, and modification or repeal of many business deductions and credits. Notwithstanding the reduction in the corporate income tax rate, the overall impact of the Tax Act is uncertain and could have a material adverse effect on our business, financial condition and results of operations. In addition, it is uncertain if and to what extent various states will conform to the newly enacted Tax Act. The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which was signed into law on March 27, 2020, increases the limitation on the tax deduction for interest expense to 50% of adjusted earnings for taxable years beginning in 2019 and 2020 (and provides that taxpayers can use 2019 adjusted earnings for purposes of calculating their 2020 limitation), and makes certain changes to the provisions of the Tax Act regarding net operating losses (for additional details see “Our ability to use NOLs and other tax attributes to offset future taxable income may be subject to limitations,” below).

Our ability to use NOLs and other tax attributes to offset future taxable income may be subject to limitations.

We have generated taxable losses during our history. To the extent that we continue to generate taxable losses, unused losses will carry forward to offset a portion of future taxable income, if any, subject to expiration of such carryforwards in the case of carryforwards generated prior to 2018. Under sections 382 and 383 of the Code, if a corporation undergoes an “ownership change,” generally defined as one or more shareholders or groups of shareholders who own at least 5% of the corporation’s equity increasing their ownership in the aggregate by a greater than 50 percentage point change (by value) over a three-year period, the corporation’s ability to use its pre-change net operating loss carryforwards (“NOLs”), and other pre-change tax attributes to offset its post-change income or taxes may be limited. Our prior equity offerings and other changes in our stock ownership may have resulted in such ownership changes. In addition, we may experience ownership changes in the future as a result of this offering or subsequent shifts in our stock ownership, some of which are outside of our control. As a result, if we earn net taxable income, our ability to use our pre-change NOLs or other pre-change tax attributes to offset our taxable income may be subject to limitations, which could potentially result in increased future tax liability to us.

Pursuant to the Tax Act, as modified by the CARES Act, the amount of post-2017 NOLs that we are permitted to deduct in any taxable year beginning after December 31, 2020 is limited to 80% of our taxable income in such year. The Tax Act generally eliminates the ability to carry back any NOLs to prior taxable years, while allowing post-2017 unused NOLs to be carried forward indefinitely. However, the CARES Act generally allows NOLs generated in taxable years beginning in 2018, 2019 and 2020 to be carried back for five years. There is a risk that due to changes under the Tax Act, the CARES Act, regulatory changes, or other unforeseen

 

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reasons, our existing NOLs could expire or otherwise be unavailable to offset future income tax liabilities. Moreover, recently proposed U.S. Treasury Regulations promulgated under section 382 of the Code could, if finalized, significantly impact a corporation’s ability to use its pre-change NOLs or other attributes following an ownership change. At the state level, there may also be periods during which the use of NOLs or other attributes is suspended or otherwise limited, which could accelerate or permanently increase state taxes owed. For these reasons, we may not be able to realize a tax benefit from the use of our NOLs or other attributes, even if we attain profitability.

Our future financial results could be adversely affected by impairments or other charges.

We assess periodically impairment of our long-lived assets, including finite-lived intangible assets, whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In addition, we continually assess the profitability of our products and, after such assessment, may discontinue certain products in the future. As a result, we may record impairment charges or accelerate amortization on certain intangible assets in the future. Impairment charges as a result of any of the foregoing could be significant and our financial results for the period in which the charge is taken could be adversely affected, which could have a material and adverse effect on the market price of our common stock.

Risks Related to Our Business and Industry

We operate in a very competitive business environment and if we are unable to compete successfully against our existing or potential competitors, our business, financial condition and results of operations may be adversely affected.

Our existing products and technologies are, and any new products or technologies we develop and commercialize will be, subject to intense competition. The industry in which we operate is competitive, subject to rapid change and highly sensitive to the introduction of new products or other market activities of industry participants. Our ability to compete successfully will depend on our ability to develop products and technologies that reach the market in a timely manner, receive adequate coverage and reimbursement from third-party payors and are safer, less invasive and more effective than the products and technologies of our competitors. Because of the size of the potential market, we anticipate that our competitors may dedicate significant resources, potentially in excess of what we are able to dedicate towards developing competing products and technologies.

We compete with large, diversified orthopedic companies, including Medtronic plc, Johnson & Johnson, Stryker Corporation, NuVasive, Inc., Globus Medical, Inc. and Zimmer Biomet Holdings, Inc. We also compete with smaller spine-focused companies, including Alphatec Holdings, Inc., RTI Surgical Holdings, Inc., Orthofix Medical, Inc. and SeaSpine Holdings Corporation. At any time, these competitors and other potential market entrants may develop new products, technologies or treatment alternatives that could render our products obsolete or uncompetitive. In addition, one or more of such competitors may gain a market advantage by developing and patenting competitive products, technologies or treatment alternatives earlier than we can, obtaining regulatory clearances or approvals more rapidly than we can or selling competitive products at prices lower than ours. Many of our current and potential competitors have substantially greater sales and financial resources than we do. In addition, these competitors may have more established distribution networks, a broader offering of products, entrenched relationships with surgeons and distributors or greater experience in launching, marketing, distributing and selling products or treatment alternatives.

In addition, new market participants have been entering, and we expect will continue to enter, our industry. Many of these new competitors specialize in a specific product or focus on a particular market sector, making it more difficult for us to increase our overall market position. The frequent introduction by competitors of products that are marketed as alternatives to our existing or planned products may also may make it difficult for surgeons and other health care providers to differentiate our products from competing products and may lead some of our competitors to employ pricing strategies that could adversely affect the pricing of our products and

 

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pricing in the spine surgery market generally, any of which may adversely affect our business, financial condition and results of operations.

We also face the particularly challenging issue of overcoming the traditional open surgery procedure practices by some surgeons of using the products of our larger, more established competitors. Surgeons who have completed many successful, complex surgeries using the products made by these competitors may be hesitant to adopt new products with which they are less familiar. For example, surgeons may not be willing to move away from their long-lasting practice of using pedicle screws and open surgery procedures and adopt our new MIS Ultra technologies such as the Karma Fixation System. Although we continue to invest in surgeon engagement by coordinating surgeon visits to our headquarters and our executive visits to surgeons in the field and provide surgeons with the necessary training in our products and technologies, our efforts to expand surgeon engagement and training may not be successful and the surgeons may choose to use the products of our larger, more established competitors. Further, such surgeons may choose to use the products of our larger, more established competitors because of their broad and comprehensive product offerings. If additional surgeons do not adopt our products our revenue growth may slow or decline, and we may not be able to grow at our expected rate, or at all.

We also compete with our competitors in acquiring technologies and technology licenses complementary to our products or advantageous to our business. In addition, we compete with our competitors to engage the services of distributors, both those presently working with us and those with whom we hope to work with as we expand. If we are unable to compete successfully against our existing or potential competitors, our business, financial condition and results of operations may be adversely affected and we may not be able to grow at our expected rate, if at all.

Our long-term growth depends on our ability to market, sell and improve our existing products and technologies, commercialize our existing products and products in development and develop new products and technologies through our research and development efforts, and if we fail to do so, we may not be able to increase our market share in the spine surgery market.

In order to increase our market share in the spine surgery market, we must successfully market, sell and improve our existing products and technologies, commercialize our existing products and products in development and develop and commercialize new products and technologies through our research and development efforts in response to changing clinical and patients’ needs and competitive pressures. Our industry is characterized by significant competition, technological and scientific advances, new product introductions and enhancements, as well as evolving industry standards. There can be no assurance that other companies will not succeed in developing or marketing products and technologies that are more effective than our products and technologies or that would render our products and technologies obsolete or noncompetitive. Additionally, new spine surgery procedures, medications and other therapies could be developed that replace or reduce the importance of any of our products and technologies. Accordingly, our business prospects depend in part on our ability to develop and commercialize new products and applications for our technology, including in new markets that develop as a result of technological and scientific advances, while improving the performance and cost-effectiveness of our existing products and technologies. Product and technology development is time-consuming and involves a high degree of risk and there can be no assurance that our product and technology development efforts will ultimately result in any commercially successful products. New technologies, techniques or products could emerge that might offer better combinations of price and performance than our existing products. It is important that we anticipate changes in technology and market demand, as well as in practices of healthcare facilities, surgeons and other healthcare providers, to successfully develop, obtain clearance or approval, if required, and introduce new, enhanced and competitive products and technologies that meet clinical and patients’ needs on a timely and cost-effective basis.

We might be unable to successfully commercialize our existing products or develop and obtain regulatory clearances or approvals to market new products and technologies. Additionally, our products and technologies may not be accepted by the surgeons or third-party payors, who reimburse for procedures performed using our

 

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products and technologies, or may not be successfully commercialized due to other factors, some of which are outside our control. The success of any new product or enhancement to an existing product or new technology will depend on numerous factors, including our ability to:

 

   

properly identify and anticipate clinical and patients’ needs;

 

   

develop and introduce new products, product enhancements and improvements and technologies in a timely manner;

 

   

adequately protect our intellectual property and avoid infringing upon the intellectual property rights of third parties;

 

   

demonstrate the safety and efficacy of new products and technologies; and

 

   

obtain the necessary regulatory clearances or approvals for new products or product enhancements and improvements.

If we do not develop or obtain regulatory clearances or approvals for new products or product enhancements and improvements in time to meet market demand, or if there is insufficient demand for these products or product enhancements and improvements, our results of operations will suffer and we will not be able to increase our market share in the spine surgery market. Our research and development efforts may require a substantial investment of time and resources before we are adequately able to determine the commercial viability of a new product, technology, material or other innovation. In addition, even if we are able to develop new products, product enhancements and improvements to existing products or technologies successfully, these new products, product enhancements and improvements or technologies may not produce sales in excess of the costs of development and such products may be rendered obsolete by changing clinical and patients’ preferences, introduction of products embodying new technologies or features or availability of products at lower costs.

Nevertheless, we must carefully manage the introduction and launch of our new products and technologies as well as the expansion of our product offerings. If potential surgeons or patients believe such products will offer enhanced features or be sold for a more attractive price, they may delay purchases until such products are available, which could result in excessive or obsolete inventory as we transition to new products and thereby adversely impact our business, financial condition and results of operations.

The ongoing global COVID-19 pandemic has adversely affected, and may continue to adversely affect, our business, financial condition and results of operations.

Since it was first reported to have emerged in December 2019, COVID-19 has spread to most countries across the world, including all 50 states within the U.S. On January 30, 2020, the World Health Organization declared the COVID-19 pandemic a Public Health Emergency of International Concern, and on March 13, 2020, the COVID-19 pandemic was declared a national emergency. Almost all U.S. states, including California where our headquarters is located, issued, and others in the future may issue, “shelter-in-place” orders, quarantines, executive orders and similar government orders, restrictions and recommendations for their residents to control the spread of COVID-19. Such orders, restrictions and recommendations, and the perception that additional orders, restrictions or recommendations could occur, have resulted in widespread closures of businesses not deemed “essential,” work stoppages, interruptions, slowdowns and delays, work-from-home policies and travel restrictions. As a result, some of our suppliers experienced closures, as well as delays and interruptions in the supply chain, and had difficulties obtaining materials or underlying components needed for our products. A portion of our contract manufacturers also experienced closures, as well as delays and interruptions in their operations, and had difficulties manufacturing our products. As the COVID-19 pandemic continues, we expect that our suppliers and manufacturers may experience additional closures, delays and interruptions.

Additionally, authorities in some instances forced hospitals, ambulatory surgical centers and surgeons to delay elective spine surgery procedures in an attempt to free up medical resources to address the COVID-19

 

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pandemic, and, even though some U.S. states have begun allowing ambulatory surgical centers to resume elective surgeries, it is unknown when these hospitals and ambulatory surgical centers will be fully reopened for elective spine surgery procedures or, if they are, whether they will be closed again in the event of a resurgence of COVID-19 cases. Additionally, in response to the COVID-19 pandemic, patients continue to delay or forego non-urgent elective spine surgery procedures to avoid hospitals or ambulatory surgical centers and surgeons and their staff are unavailable to perform such surgeries, contributing to delays and cancellations of the scheduled spine surgery procedures. Even if the COVID-19 pandemic subsides, it is possible that patients may continue to delay or forego their elective spine surgery procedures. In the event that there is a backlog of patients seeking medical procedures and surgeries related to a variety of medical conditions, patients seeking procedures performed using our products may have to navigate limited provider capacity. The COVID-19 pandemic continues to evolve, and the ultimate impact is highly uncertain and subject to change. Due to the reduced sales of our systems and products as a result of the COVID-19 pandemic, we experienced a decrease in revenue and cash flows beginning in March 2020 as compared to prior periods and original expectations. Despite some recovery, this reduction in sales, as compared to original expectations, continued into June 2020 and we expect the negative impacts to continue and may worsen in at least the short-term during the COVID-19 pandemic. Given the fluidity of the pandemic, it is unclear whether this reduction in sales was temporary or whether such sales may be recoverable in the future. If our sales continue to decline, or if such lost sales are not recoverable in the future, our business, financial condition and results of operations may be adversely affected. Additionally, as patients and providers react to the backlog of procedures and potentially rush to have procedures done before an anticipated future wave of the pandemic, we may experience revenue growth that could be difficult to sustain in future periods.

Further, the COVID-19 pandemic has adversely impacted global commercial activity and has contributed to significant volatility in financial markets. The pandemic may have a continued adverse impact on economic and market conditions and trigger a period of global economic slowdown and may result in significant disruption of global financial markets, reducing our ability to access capital, which could in the future negatively affect our liquidity. The rapid development and fluidity of the COVID-19 pandemic precludes any prediction as to the ultimate adverse impact on our business, financial condition or results of operations. However, the COVID-19 pandemic has adversely affected, and may continue to adversely affect, our business, financial condition and results of operations.

We may be unable to successfully demonstrate to surgeons or key opinion leaders the merits of our products and technologies compared to those of our competitors, which may make it difficult to establish our products and technologies as a standard of care and achieve market acceptance.

Surgeons play the primary role in determining the course of treatment and, ultimately, the type of products that will be used to treat a patient. As a result, our success depends, in large part, on our ability to effectively market and demonstrate to surgeons the merits of our products and technologies compared to those of our competitors. Acceptance of our products and technologies depends on educating surgeons as to the distinctive characteristics, clinical benefits, safety and cost-effectiveness of our products and technologies as compared to those of our competitors, and on training surgeons in the proper use of our products. If we are not successful in convincing surgeons of the merits of our products and technologies or educating them on the use of our products, they may not use our products or may not use them effectively and we may be unable to increase our sales, sustain our growth or achieve and sustain profitability.

Furthermore, we believe many surgeons, hospitals and healthcare facilities may be unwilling to adopt our products or technologies unless they determine, based on experience, clinical data and published peer-reviewed journal articles, that our products and technologies provide benefits or are attractive and cost-effective alternatives to our competitors’ products and technologies. Additionally, surgeons may be reluctant to change their surgical treatment practices for the following reasons, among others:

 

   

lack of experience with our products and technologies;

 

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existing relationships with competitors and distributors that sell competitive products;

 

   

lack or perceived lack of evidence supporting additional patient benefits;

 

   

perceived liability risks generally associated with the use of new products, technologies and procedures;

 

   

less attractive availability of coverage and reimbursement by third-party payors compared to procedures using competitive products and other techniques;

 

   

costs associated with the purchase of new products and equipment; and

 

   

the time commitment that may be required for training.

In addition, we believe recommendations and support of our products and technologies by influential surgeons and key opinion leaders in our industry are essential for market acceptance and establishment of our products and technologies as a standard of care. If we do not receive support from such surgeons and key opinion leaders, if long-term data does not show the benefits of using our products and technologies or if the benefits offered by our products and technologies are not sufficient to justify their cost, surgeons, hospitals and other healthcare facilities may not use our products and we might be unable to establish our products and technologies as a standard of care and achieve market acceptance.

If we are unable to persuade hospitals, ambulatory surgery centers and other healthcare facilities to approve the use of our products, our sales may decrease.

In order for surgeons to use our products at hospitals, ambulatory surgery centers and other healthcare facilities, we are often required to obtain approval from those hospitals, ambulatory surgery centers and healthcare facilities. Typically, hospitals, ambulatory surgery centers and healthcare facilities review the comparative effectiveness and cost of products used in the facility. The makeup and evaluation processes for healthcare facilities vary considerably, and it can be a lengthy, costly and time-consuming effort to obtain approval by the relevant healthcare facilities. Additionally, hospitals, ambulatory surgery centers other healthcare facilities and group purchasing organizations (“GPOs”), which manage purchasing for multiple facilities, may also require us to enter into a purchase agreement and satisfy numerous elements of their administrative procurement process, which can also be a lengthy, costly, and time-consuming effort. If we do not obtain access to hospitals, ambulatory surgery centers and other healthcare facilities in a timely manner, or at all, via their approvals or purchase contract processes, or otherwise, or if we are unable to obtain approvals or secure contracts in a timely manner, or at all, our operating costs will increase, our sales may decrease and our operating results may be adversely affected. Furthermore, we may expend significant efforts on these costly and time-consuming processes but may not be able to obtain necessary approvals or secure a purchase contract from such hospitals, ambulatory surgery centers, healthcare facilities or GPOs.

If the quality of our products and technologies does not meet the expectations of surgeons or patients, then our brand and reputation could suffer and our business could be adversely impacted.

In the course of conducting our business, we must adequately address quality issues that may arise with our products and technologies, as well as defects in third-party components or materials used in our products. Furthermore, a malfunction in one or more of our products may not be detected for an extended period of time, which may result in delay or failure to remedy the condition for which the product was prescribed. Although we have established internal procedures to minimize risks that may arise from quality issues, we may be unable to eliminate or mitigate occurrences of these issues and associated liabilities. If the quality of our products and technologies does not meet the expectations of surgeons or patients, then our brand and reputation could suffer and our business could be adversely impacted.

 

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We lack published long-term data supporting superior clinical outcomes enabled by our products or technologies, which could negatively impact our sales, and we may not generate sufficient revenue to achieve and sustain profitability.

Our products are regulated as medical devices by the U.S. Food and Drug Administration (the “FDA”) and substantially all have received premarket clearance under Section 510(k) of the U.S. Federal Drug and Cosmetic Act (the “FDCA”). In the 510(k) clearance process, before a device may be marketed, the FDA must determine that a proposed device is “substantially equivalent” to a legally-marketed “predicate” device, which includes a device that has been previously cleared through the 510(k) process, a device that was legally marketed prior to May 28, 1976 (preamendments device), a device that was originally on the U.S. market pursuant to an approved premarket approval (the “PMA”) application and later downclassified, or a 510(k)-exempt device. This process is typically shorter and generally requires the submission of less supporting documentation than the FDA’s PMA process and does not always require clinical studies.

Given the foregoing regulatory regime applicable to us, we lack the breadth of published long-term clinical data supporting the safety and efficacy of our products and technologies. For these reasons, surgeons may be slow to, or may not, adopt our products because we lack published long-term data supporting superior clinical outcomes enabled by our products or technologies as compared to our competitors. Many of our products have not been on the market for a considerable amount of time, and we therefore have limited real-world data with respect to treatment using these products. Additionally, future patient studies or clinical experience may not support our belief that treatment with our products improves patient outcomes. Given this, our sales could be negatively impacted and we may not generate sufficient revenue to achieve and sustain profitability.

Industry trends have resulted in increased downward pricing pressure on medical services and products, which may affect our ability to sell our products at prices necessary to support our current business strategy.

The trend toward healthcare cost containment through aggregating purchasing decisions and industry consolidation, along with the growth of managed care organizations, is placing increased emphasis on the delivery of more cost-effective medical therapies. For example:

 

   

There has been consolidation among healthcare facilities and purchasers of medical devices, particularly in the U.S. One of the results of such consolidation is that GPOs, integrated delivery networks and large single accounts use their market power to consolidate purchasing decisions, which intensifies competition to provide products and services to healthcare providers and other industry participants, resulting in greater pricing pressures and the exclusion of certain suppliers from important market segments. For example, some GPOs negotiate pricing for their member hospitals and require us to discount, or limit our ability to increase, prices for certain of our products.

 

   

Surgeons increasingly have moved from independent, outpatient practice settings toward employment by hospitals and other larger healthcare organizations, which align surgeons’ product choices with their employers’ price sensitivities and adds to pricing pressures. Hospitals and healthcare facilities have introduced and may continue to introduce new pricing structures into their contracts to contain healthcare costs, including fixed price formulas and capitated and construct pricing.

 

   

Certain hospitals provide financial incentives to doctors for reducing hospital costs (known as gainsharing), rewarding physician efficiency (known as physician profiling) and encouraging partnerships with healthcare service and goods providers to reduce prices.

 

   

Existing and proposed laws, regulations and industry policies, in both domestic and international markets, regulate or seek to increase regulation of sales and marketing practices and the pricing and profitability of companies in the healthcare industry.

More broadly, provisions of the Affordable Care Act (“ACA”) could meaningfully change the way healthcare is developed and delivered in the U.S., and may adversely affect our business and results of

 

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operations. For example, the ACA encourages hospitals and physicians to work collaboratively through shared savings programs, such as accountable care organizations, as well as other bundled payment initiatives, which may ultimately result in the reduction of product purchases and the consolidation of suppliers used by hospitals. Since its enactment, there have been judicial and Congressional challenges to the ACA. For further discussion of these challenges, see “—Risks Related to Regulatory Matters—We face risks in connection with the ACA or its possible replacement or modifications.” We cannot predict accurately what healthcare programs and regulations will ultimately be implemented at the federal or state level, or the effect of any future legislation or regulation in the U.S. or elsewhere. However, any changes that have the effect of reducing reimbursements for our products or reducing medical procedure volumes could have a material and adverse effect on our business, financial condition and results of operations.

In addition, the largest device companies with multiple product franchises have increased their effort to leverage and contract broadly with customers across franchises by providing volume discounts and multi-year arrangements that could prevent our access to these customers or make it difficult, or impossible, to compete on price.

If the coverage and reimbursements for procedures using our products are inadequate or if payments are denied altogether, adoption and use of our products and the prices paid for our products may decline, which could have a material adverse effect on our business, financial condition or results of operations.

Adequate coverage and reimbursement from third-party payors, including government programs such as Medicare and Medicaid, private insurance plans and managed care programs, for procedures using our products is central to the acceptance and adoption of our existing and future products and technologies. Hospitals, healthcare facilities, surgeons and other healthcare providers that purchase and use our products generally rely on third-party payors to pay for all or part of the costs and fees associated with the procedures using our products. If third-party payors reduce their current levels of payment, if our costs of production increase faster than increases in reimbursement levels or if third-party payors deny reimbursement for our products, our products and technologies may not be adopted or accepted by the hospitals, healthcare facilities, surgeons or other healthcare providers and the prices paid for our products may decline, which could have a material adverse effect on our business, financial condition or results of operations.

When procedures using our products are performed, both the surgeon or other healthcare provider and the hospital or healthcare facility submit claims for reimbursement to the third-party payor. Generally, the hospital or healthcare facility obtains a lump sum payment, or facility fee, for spine surgery procedures. Our products are purchased by the hospital or healthcare facility, along with other supplies used in the procedure. The hospital or healthcare facility must also pay for its own fixed costs of operation, including certain operating room personnel involved in the procedure. If the costs associated with our products, the supplies and other fixed costs exceed the facility fee reimbursement, the managers of hospitals and healthcare facilities may discourage or restrict surgeons and other healthcare providers from performing procedures using our products or technologies in their facilities or use certain of our products or technologies. While we believe that the facility fee reimbursement is generally adequate for the facilities to offer procedures using our products, there can be no guarantee that the facility fee reimbursement will not decline in the future or be denied altogether. The number of procedures using our products performed and the prices paid for our products may decline in the future if payments to facilities for spine surgery procedures decline or are denied altogether.

Surgeons and other healthcare providers are reimbursed separately for their professional time and effort to perform a spine surgery procedure. Third-party payors regularly update reimbursement amounts and also from time to time revise the methodologies used to determine reimbursement amounts. This includes routine updates to payments to physicians, hospitals and ambulatory surgery centers for procedures during which our products are used. These updates could directly impact the demand for our products. For example, the Medicare Access and CHIP Reauthorization Act of 2015 (“MACRA”) provided for a 0.5% annual increase in payment rates under the Medicare Physician Fee Schedule (“PFS”) through 2019, but no annual update from 2020 through 2025.

 

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MACRA also introduced a Quality Payment Program (“QPP”) for Medicare physicians, nurses and other “eligible clinicians” (as defined in MACRA) that adjusts overall reimbursement under the PFS based on certain performance categories. We believe that some surgeons and other healthcare providers view the current Medicare reimbursement amount as insufficient, given the work effort involved with the procedure, including the time to diagnose the patient and to obtain prior authorization. While MACRA applies only to Medicare reimbursement, Medicaid and private payors often follow Medicare payment limitations in setting their own reimbursement rates, and any reduction in Medicare reimbursement may result in a similar reduction in payments from private payors, which may result in reduced demand for our products. However, there is no uniform policy of coverage and reimbursement among payors in the U.S. Therefore, coverage and reimbursement for procedures can differ significantly from payor to payor. Many private payors require extensive documentation of a multi-step diagnosis before authorizing procedures using our products. We believe that some private payors apply their own coverage policies and criteria inconsistently, and surgeons and other healthcare providers may not be able to receive approval and reimbursement for certain procedures using our products consistently. The perception by surgeons and other healthcare providers that the reimbursement for procedures using our products is inadequate to compensate them for the work required, including diagnosis, documentation, obtaining third-party payor approval for the procedure and other burdens on their office staff or that they may not be reimbursed at all for the procedures using our products, may negatively affect the number of procedures performed, adoption and use of our products and technologies and the prices paid for our products may decline.

The healthcare industry in the U.S. has experienced a trend toward cost containment as government and private insurers seek to control healthcare costs. Third-party payors are imposing lower payment rates and negotiating reduced contract rates with hospitals, other healthcare facilities, surgeons and other healthcare providers and being increasingly selective about the products, technologies and procedures they chose to cover and provide reimbursement for. Third-party payors may adopt policies in the future restricting access to products and technologies like ours and/or the procedures performed using such products. Therefore, we cannot be certain that the procedures performed with each of our products will be covered and reimbursed. There can be no guarantee that should we introduce new products and technologies, third-party payors will provide adequate coverage and reimbursement for those products or the procedures in which they are used. If third-party payors do not provide adequate coverage or reimbursement for our products, then our sales may be limited to circumstances where our products and procedures using our products are being self-paid by patients or funded by non-profit foundations.

Additionally, market acceptance of our products and technologies in foreign markets may depend, in part, upon the availability of coverage and reimbursement within prevailing healthcare payment systems. Reimbursement and healthcare payment systems in international markets vary significantly by country and include both government-sponsored healthcare and private insurance. We may not obtain additional international coverage and reimbursement approvals in a timely manner, if at all. Our failure to receive such approvals would negatively impact market acceptance of our products in the international markets in which those approvals are sought.

The proliferation of physician-owned distributorships could result in increased downward pricing pressure on our products or harm our ability to sell our products to surgeons who own or are affiliated with those distributorships.

Physician-owned distributorships (“PODs”) are product distributors that are owned, directly or indirectly, by physicians. The proliferation of PODs could result in increased downward pricing pressure on our products or harm our ability to sell our products to physicians who own or are affiliated with PODs. These physicians derive a proportion of their revenue from selling or arranging for the sale of medical devices for use in procedures they perform on their own patients at hospitals that agree to purchase from or through the POD, or that otherwise furnish ordering physicians with income based, directly or indirectly, on those orders of medical devices.

On March 26, 2013, the Office of Inspector General of the U.S. Department of Health and Human Services (the “DHHS”) issued a special fraud alert on PODs and stated that it views PODs as inherently suspect under the

 

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federal anti-kickback statute and is concerned about the proliferation of PODs. Notwithstanding the DHHS’ concern about PODs, the number of PODs in the spine surgery market may continue to grow as economic pressures increase throughout the industry, healthcare facilities, surgeons and other healthcare providers search for ways to reduce costs and, in the case of the surgeons, search for ways to increase their incomes. PODs and the physicians who own, or partially own, them have significant market knowledge and access to the surgeons who use our products and the healthcare facilities that purchase our products and thus the growth of PODs may reduce our ability to compete effectively for business from surgeons who own such PODs. Growth in the number of PODs may reduce our ability to compete effectively for business from physicians who own, or partially own, them, which could have a material and adverse effect on our business, results of operations and financial condition.

The size and future growth in the market for our products and technologies has not been established with precision and may be smaller than we estimate, possibly materially.

We are not aware of an independent third-party study that reliably reports the potential market size for our products and technologies, cost savings, if any, as a result of the procedures using our products and technologies or the number of people requiring spine surgery procedures. Therefore, our estimates of the size and future growth in the market for our products and technologies are based on a number of internal and third-party studies, surveys, reports and estimates, and such estimates may not be correct and the conditions supporting such estimates may change at any time, thereby reducing the predictive accuracy of these underlying factors. If the size or future growth in the market for our products and technologies is materially smaller than our estimates, our revenue may be adversely affected and our business may suffer.

If surgeons fail to safely and appropriately use our products, or if we are unable to train surgeons on the safe and appropriate use of our products, we may be unable to achieve our expected sales, growth or profitability.

An important part of our sales process includes our ability to screen for and identify surgeons who have the requisite training and experience to safely and appropriately use our products and to train a sufficient number of surgeons and to provide them with adequate instruction in use of our products. There is a training process involved for surgeons to become proficient in the safe and appropriate use of our products. This training process may take longer than expected and may therefore affect our ability to increase sales. Convincing surgeons to dedicate the time and energy necessary for adequate training is challenging, and we may not be successful in these efforts. If surgeons fail to safely and appropriately use our products or if we are unable to train surgeons on the safe and appropriate use of our products, we may be unable to achieve our expected sales, growth or profitability.

Any of our products and technologies may have unforeseen adverse events or undesirable side effects which may require our products to be taken off the market, require our products to include safety warnings or otherwise limit sales of our products.

Unforeseen adverse events or undesirable side effects related to the use of any of our products or technologies may arise either during clinical development or, if cleared or approved, after the product has been marketed. If we or others identify unforeseen adverse events or undesirable side effects caused by one or more of our products or technologies:

 

   

sales of the affected product may decrease significantly and we may not achieve the anticipated market share;

 

   

regulatory authorities may require changes to the labeling of the affected product, which may include the addition of labeling statements, specific warnings and contraindications and issuing field alerts to surgeons and patients;

 

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we may be required to modify the affected product, change instructions regarding the way the product is used or conduct additional clinical trials;

 

   

we may be subject to limitations on how we may promote the affected product;

 

   

regulatory authorities may require us to take our approved affected product off the market (temporarily or permanently) or to conduct other field safety corrective actions;

 

   

we may be subject to fines, litigation costs or product liability claims; and

 

   

our reputation may suffer.

Any of these events could prevent us from achieving or maintaining market acceptance of the affected product or could substantially increase our commercialization costs and expenses, which in turn could delay or prevent us from generating sufficient revenue to achieve or sustain profitability.

We bear the risk of warranty claims on our products.

We bear the risk of warranty claims on our products. We may not be successful in claiming recovery under any warranty or indemnity provided to us by our suppliers or vendors in the event of a successful warranty claim against us or that any recovery from such vendor or supplier would be adequate. In addition, warranty claims related to third-party components and materials may arise after our ability to bring corresponding warranty claims against such suppliers expires, which could result in costs to us.

Changes in the manufacturing methods and configurations of our products in development may result in additional costs or delay, which could have a material adverse effect on our business, financial condition and results of operations.

As we modify existing products and develop new products through pre-clinical testing and clinical trials towards clearance or approval and commercialization, we may alter manufacturing methods and configurations of the products along the way in an effort to optimize processes and results. Any changes we make carry the risk that they will not achieve the intended objectives and instead could result in unforeseen adverse events or have undesirable effects that impact the results of any clinical trials conducted with the altered products. Such changes may also require additional testing, regulatory notification or regulatory approval, which could delay completion of pre-clinical testing or clinical trials, increase costs, delay approval of our future products and jeopardize our ability to commence or maintain sales and generate revenue as expected, all of which could have a material adverse effect on our business, financial condition and results of operations.

We are required to maintain adequate levels of inventory, which could consume our resources and reduce our cash flows.

We are required to maintain adequate levels of spinal fixation systems, interbody implants, surgical instruments and biologics for consignment to our distributors, healthcare facilities, surgeons and other healthcare providers. The amount of investment needed for our inventory is driven by the number of surgeons using our products, and as the number of different surgeons that use our products increases, the number of spinal fixation systems, implants and surgical instruments required to meet this demand will increase. As a result of the need to maintain adequate levels of inventory, we are subject to the risk of inventory obsolescence. Many of our products come in sets, which feature components in a variety of sizes so that the implants may be customized to the patients’ needs. In order to market our products effectively, we often maintain and provide healthcare facilities, surgeons and other healthcare providers with back-up products and products of different sizes. In addition, because not all of the components of each set are typically used in an individual spine surgery procedure, certain portions of our sets may become obsolete before they can be used, which could result in the whole set being considered obsolete and requiring replacement. In the event that a substantial portion of our inventory becomes obsolete, it could have a material adverse effect on our earnings and cash flows due to the resulting costs

 

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associated with the inventory impairment charges and costs required to replace such inventory. In addition, as we introduce new products, new implants and surgical instruments may be required, with a significant initial investment needed to accommodate the launch of the new product.

The provision of loaned surgical instrument sets to our customers may implicate certain federal and state fraud and abuse laws.

We typically loan the surgical instrument sets necessary to perform procedures using our products for each surgery at no additional charge. The provision of these instruments at no charge may implicate certain federal and state fraud and abuse laws. Because the provision of loaned surgical instrument sets may result in a benefit to the hospital, surgeon or other healthcare provider, the government could view this practice as a prohibited transfer of value intended to induce hospitals, surgeons or other healthcare providers to purchase our products that are used in procedures reimbursed by a federal healthcare program. For further discussion of these laws, see “—Risks Related to Regulatory Matters.” Any challenge to or investigation into our practices under these laws could cause adverse publicity and be costly to respond to, and thus could harm our business.

We may seek to grow our business through acquisitions or investments in new or complementary businesses, products or technologies, through the licensing of products or technologies from third parties or other strategic alliances, and the failure to manage acquisitions, investments, licenses or other strategic alliances, or the failure to integrate them with our existing business, could have a material adverse effect on our operating results, dilute our stockholders’ ownership, increase our debt or cause us to incur significant expense.

Our success depends on our ability to continually enhance and broaden our product offerings in response to changing clinician and patients’ needs, competitive technologies and market pressures. Accordingly, from time to time we may consider opportunities to acquire, make investments in or license other technologies, products and businesses that may enhance our capabilities, complement our existing products and technologies or expand the breadth of our markets or customer base. Potential and completed acquisitions, strategic investments, licenses and other alliances involve numerous risks, including:

 

   

difficulty assimilating or integrating acquired or licensed technologies, products, employees or business operations;

 

   

issues maintaining uniform standards, procedures, controls and policies;

 

   

unanticipated costs associated with acquisitions or strategic alliances, including the assumption of unknown or contingent liabilities and the incurrence of debt or future write-offs of intangible assets or goodwill;

 

   

diversion of management’s attention from our core business and disruption of ongoing operations;

 

   

adverse effects on existing business relationships with suppliers, distributors, healthcare facilities, surgeons and other healthcare providers;

 

   

risks associated with entering new markets in which we have limited or no experience;

 

   

potential losses related to investments in other companies;

 

   

potential loss of key employees of acquired businesses; and

 

   

increased legal and accounting compliance costs.

We do not know if we will be able to identify acquisitions or strategic relationships we deem suitable, whether we will be able to successfully complete any such transactions on favorable terms, if at all, or whether we will be able to successfully integrate any acquired business, product or technology into our business or retain any key personnel, suppliers, distributors, healthcare facilities, surgeons or other healthcare providers. Our ability

 

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to successfully grow through strategic transactions depends upon our ability to identify, negotiate, complete and integrate suitable target businesses, technologies or products and to obtain any necessary financing. These efforts could be expensive and time-consuming and may disrupt our ongoing business and prevent management from focusing on our operations.

If we pursue any foreign acquisitions, they typically involve unique risks in addition to those mentioned above, including those related to integration of operations across different cultures, languages and legal and regulatory environments, currency risks and the particular economic, political and regulatory risks associated with specific countries.

To finance any acquisitions, investments or strategic alliances, we may choose to issue shares of our common stock as consideration, which could dilute the ownership of our stockholders. If the price of our common stock is low or volatile, we may be unable to consummate any acquisitions, investments or strategic alliances using our common stock as consideration. Additional funds may not be available on terms that are favorable to us, or at all.

Our employees, consultants, suppliers, manufacturers, distributors and other commercial partners may engage in misconduct or other improper activities, including non-compliance with regulatory standards and requirements.

We are exposed to the risk that our employees, consultants, suppliers, manufacturers, independent distributors and other commercial partners may engage in fraudulent or illegal activity. Misconduct by these parties could include intentional, reckless or negligent conduct or other unauthorized activities that violate the regulations of the FDA and other U.S. and non-U.S. healthcare regulators, including those laws requiring the reporting of true, complete and accurate information to such regulators, manufacturing standards, healthcare fraud and abuse laws and regulations in the U.S. and elsewhere or laws that require the true, complete and accurate reporting of financial information or data. In particular, sales, marketing and business arrangements in the healthcare industry, including the sale of medical devices, are subject to extensive laws and regulations intended to prevent fraud, misconduct, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. It is not always possible to identify and deter misconduct by our employees, consultants, manufacturers, distributors and other third parties, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to comply with these laws or regulations. If any such actions are instituted against us and we are not successful in defending ourselves or asserting our rights, those actions could result in the imposition of significant fines or other sanctions, including the imposition of civil, criminal and administrative penalties, damages, monetary fines, possible exclusion from participation in government healthcare programs, contractual damages, reputational harm, diminished profits and future earnings and curtailment of operations. Whether or not we are successful in defending against such actions or investigations, we could incur substantial costs, including legal fees, and divert the attention of management in defending ourselves against any of these claims or investigations.

Our insurance policies protect us only from some and not all business risks, which leaves us exposed to significant uninsured liabilities.

We do not carry insurance for all categories of risk that our business may encounter. Some of the policies we currently maintain include general liability, foreign liability, employee benefits liability, property, umbrella, workers’ compensation, products liability, cybersecurity and directors’ and officers’ insurance. We do not know, however, if these policies will provide us with adequate levels of coverage. Any significant uninsured liability may require us to pay substantial amounts, which would adversely affect our cash position and results of operations.

 

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Risks Related to Administrative, Organizational and Commercial Operations and Growth

We rely on a network of independent distributors to market, sell and distribute our products, and if we are unable to maintain and expand our network of independent distributors, we may be unable to generate anticipated sales.

We rely on independent distributors to market, sell and distribute our products in both the U.S. and in international markets, including in Mexico, Brazil and Australia, and we do not have any exclusive distributors. We may not be successful in maintaining strong relationships with our distributors. In addition, our independent distributors are not required to sell our products on an exclusive basis and are not required to sell or purchase any minimum quantity of our products. The failure of our distributors to generate sales of our products and promote our brand effectively would impair our business and results of operations.

We face significant challenges and risks in managing our geographically dispersed network of independent distributors. We cannot control the efforts and resources our independent distributors will devote to marketing our products and technologies. Our independent distributors may be unable to successfully market and sell our products and may not devote sufficient time and resources to support the marketing and sale efforts that enable our products and technologies to develop, achieve or sustain market acceptance in their respective geographic areas.

In addition, if a dispute arises with a distributor or if a distributor is terminated by us or goes out of business, it may take time to locate an alternative distributor, to seek appropriate regulatory approvals and to train new personnel to market our products and technologies, and our ability to sell our products in the geographic area formerly serviced by such terminated distributor could be harmed. If a distributor were to depart and be retained by one of our competitors, we may be unable to prevent them from helping competitors solicit business from our existing customers, which could further adversely affect our sales. Any of our distributors could also become insolvent or otherwise become unable to pay amounts owed to us when due. Additionally, we may be subject to disruptions and increased costs due to factors beyond our control, including labor strikes, third-party error and other issues. In any such situation in which we lose the services of a distributor, we may need to seek alternative distributors, and our sales could be adversely affected. Because of the intense competition for their services, we may be unable to recruit or retain additional qualified distributors to work with us. We may be unable to enter into agreements with them on favorable or commercially reasonable terms, if at all. Failure to hire or retain qualified distributors would prevent us from expanding our business and generating sales.

Further, if we are unable to attract additional distributors that will market and sell our products in international markets, our international revenue may not grow. In some international jurisdictions, we rely on our independent distributors to manage the regulatory process, while complying with all applicable rules and regulations, and we are dependent on their ability to do so effectively.

We are dependent on a limited number of third-party suppliers, some of them single-source and some of them in single locations, for most of our products and components, and the loss of any of these suppliers, or their inability to provide us with an adequate supply of materials in a timely and cost-effective manner, could have a material adverse effect on our business, financial condition and results of operations.

We rely on third-party suppliers to supply substantially all of our products. For us to be successful, our suppliers must be able to provide us with products and components in substantial quantities, in compliance with regulatory requirements, in accordance with agreed upon specifications, at acceptable prices and on a timely basis. We do not have long-term supply contracts with some of our suppliers, and in some cases, even where we do have agreements in place, we purchase important parts of certain of our products from a single supplier. Therefore, we cannot assure you that we will be able to obtain sufficient quantities of product in the future. We generally use a small number of suppliers for our instruments and our products. For example, our Ti-Bond products, ORIOS product and certain other biologics are each provided by a single supplier and loss of these suppliers or their inability to provide us with adequate quantities of these products in a timely and cost-effective manner, could have a material adverse effect on our business, financial condition and results of operations.

 

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In addition, our anticipated growth could strain the ability of our suppliers to deliver an increasingly large supply of our products, materials and underlying components. Suppliers often experience difficulties in scaling up production, including financial limitations, or issues with production yields and quality control and assurance. In the past, our supplier of Ti-Bond has had difficulty scaling to meet demand due to receipt of a large number of orders that exceeded its capacity. Additionally, due to the COVID-19 pandemic, some of our suppliers experienced closures, as well as delays and interruptions in the supply chain, and had difficulties obtaining materials and underlying components needed for our products. As the COVID-19 pandemic continues, we expect that our suppliers may experience additional closures, delays and interruptions. Additionally, our dependence on third-party suppliers exposes us to risks, including, among other things:

 

   

third-party suppliers may fail to comply with regulatory requirements that could negatively affect the safety or effectiveness of our products or cause delays in shipments of our products;

 

   

we or our third-party suppliers may not be able to respond to unanticipated changes in customer orders, and if orders do not match forecasts, we or our suppliers may have excess or inadequate inventory of materials and components;

 

   

we or our third-party suppliers may be subject to price fluctuations due to a lack of long-term supply arrangements for key components;

 

   

we or our third-party suppliers may lose access to critical services and components, resulting in an interruption in the manufacture, assembly and shipment of our products;

 

   

we may experience delays in delivery by our third-party suppliers due to changes in demand from us or their other customers;

 

   

fluctuations in demand for products that our third-party suppliers manufacture for others may affect their ability or willingness to deliver components to us in a timely manner;

 

   

our third-party suppliers may wish to discontinue supplying components or services to us for risk management reasons;

 

   

we may not be able to find new or alternative components or reconfigure our products and manufacturing processes in a timely manner if the necessary components become unavailable; and

 

   

our third-party suppliers may encounter financial hardships unrelated to our demand, which could inhibit their ability to fulfill our orders and meet our requirements.

If any one or more of these risks materialize, it could significantly increase our costs and impact our ability to meet demand for our products. If we are unable to satisfy commercial demand for our products in a timely manner, our ability to generate revenue would be impaired, market acceptance of our products could be adversely affected and customers may instead purchase or use our competitors’ products. Additionally, we could be forced to seek alternative sources of supply.

In addition, most of our supply agreements do not have minimum manufacturing or purchase obligations. As such, we have no obligation to buy any given quantity of products, and our suppliers have no obligation to sell us or to manufacture for us any given quantity of components or products. As a result, our ability to purchase adequate quantities of components or our products may be limited and we may not be able to convince suppliers to make components and products available to us. Our suppliers may also encounter problems that limit their ability to supply components or manufacture products for us, including financial difficulties, damage to their manufacturing equipment or facilities, or product discontinuations. As a result, there is a risk that certain components could be discontinued and no longer available to us. We may be required to make significant “last time” purchases of component inventory that is being discontinued by the supplier to ensure supply continuity. If we fail to obtain sufficient quantities of high quality components to meet demand for our products in a timely manner or on terms acceptable to us, we would have to seek alternative sources of supply. Securing a replacement third-party supplier could be difficult.

 

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The introduction of new or alternative suppliers also may require design changes to our products that are subject to domestic and international regulatory clearances or approvals. Because of the nature of our internal quality control requirements, regulatory requirements and the custom and proprietary nature of the components, we may not be able to quickly engage additional or replacement suppliers for many of our critical components. We may also be required to assess any potential new supplier’s compliance with all applicable regulations and guidelines, which could further impede our ability to manufacture our products in a timely manner. As a result, we could incur increased production costs, experience delays in deliveries of our products, suffer damage to our reputation, and experience an adverse effect on our business and financial results. Failure of any of our third-party suppliers to meet our product demand level would limit our ability to meet our sales commitments to our customers and could have a material adverse effect on our business.

We may also have difficulty obtaining similar components from other suppliers that are acceptable to the FDA or foreign regulatory authorities, and the failure of our suppliers to comply with strictly enforced regulatory requirements could expose us to delays in obtaining clearances or approvals, regulatory action including warning letters, product recalls, termination of distribution, product seizures, civil, administrative, or criminal penalties and the suspension or variation. We could incur delays while we locate and engage qualified alternative suppliers, and we may be unable to engage alternative suppliers on favorable terms or at all. Any such disruption or increased expenses could harm our commercialization efforts and adversely affect our ability to generate sales.

In addition, some of our third-party suppliers operate at a facility in a single location. We, and our suppliers, take precautions to safeguard facilities, including acquiring insurance, employing back-up generators, adopting health and safety protocols, and utilizing off-site storage of computer data. However, vandalism, terrorism, or a natural or other disaster, such as an earthquake, fire or flood, could damage or destroy equipment or our inventory of component supplies or finished products, cause substantial delays in our operations, result in the loss of key information, and cause us to incur additional expenses. Our insurance may not cover our losses in any particular case. In addition, regardless of the level of insurance coverage, damage to our or our suppliers’ facilities could have a material adverse effect on our business, financial condition and operating results.

We rely on third-party contract manufacturers to machine and assemble our products, and a loss or degradation in performance of these contract manufacturers could have a material adverse effect on our business, financial condition and results of operations.

We rely on a small number of third-party contract manufacturers in the U.S. to machine and assemble our products and we only manufacture one of our products onsite. The facilities used by our contract manufacturers to manufacture our product candidates must comply with applicable requirements from FDA and other comparable regulatory authorities. We do not directly control the manufacturing process of, and are dependent on, our contract manufacturing partners for compliance with the regulatory requirements, for a significant number of our products. If our contract manufacturers cannot successfully manufacture material that conforms to our specifications and the strict regulatory requirements of the FDA or others, they or we may be subject to enforcement action and other risks related to such noncompliance. Additionally, due to the COVID-19 pandemic, some of our contract manufacturers also experienced closures, as well as delays and interruptions in their operations, and had difficulties manufacturing our products. As the COVID-19 pandemic continues, we expect that our contract manufacturers may experience additional closures, delays and interruptions. If our contract manufacturers experience closures, delays or interruptions, we may lose revenue, experience manufacturing delays, incur increased costs or otherwise suffer impairment to our customer relationships.

In addition, we have no control over the ability of our contract manufacturers to maintain adequate quality control, quality assurance and qualified personnel. If any of these contract manufacturers fails to adequately perform, our revenue and profitability could be adversely affected. Inadequate performance could include, among other things, the production of products that do not meet our quality standards, which could cause us to seek additional sources of manufacturing. Additionally, in the future, our contract manufacturers may decide to discontinue or reduce the level of business they conduct with us. If we are required to change contract

 

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manufacturers due to any termination of our relationships with our contract manufacturers, we may lose revenue, experience manufacturing delays, incur increased costs or otherwise suffer impairment to our customer relationships. We cannot guarantee that we will be able to establish alternative manufacturing relationships on similar terms or without delay. Furthermore, our contract manufacturers could require us to move to another one of their production facilities. This could disrupt our ability to fulfill orders during a transition and impact our ability to utilize our current supply chain.

Performance issues, service interruptions or price increases by our shipping carriers could adversely affect our business and harm our reputation and ability to provide our services on a timely basis.

Expedited and reliable shipping is essential to our operations. We rely heavily on providers of transport services for reliable and secure point-to-point transport of our products to our customers and for tracking of these shipments. Should a carrier encounter delivery performance issues such as loss, damage or destruction of any products, it would be costly to replace such products in a timely manner and such occurrences may damage our reputation and lead to decreased demand for our products and increased cost and expense to our business. In addition, any significant increase in shipping rates could adversely affect our operating margins and results of operations. Similarly, strikes, severe weather, natural disasters or other service interruptions affecting delivery services we use would adversely affect our ability to process orders for our products on a timely basis.

If we are unable to successfully expand our sales management and sales specialist teams, it could negatively impact our sales, and we may not generate sufficient revenue to sustain profitability.

Our revenue and profitability is directly dependable upon the sales and marketing efforts of our sales management and sales specialist teams. We believe it is necessary to utilize sales management and sales specialist teams that have strong sales leadership and technical background specializing in sales and marketing of products for spine surgery procedures. Our future success will depend largely on our ability to continue to hire, train, retain and motivate skilled members of our sales management and sales specialist teams with significant technical knowledge in various areas. New hires require training and take time to achieve full productivity. If we fail to train new hires adequately, or if we experience high turnover in our sales management and sales specialist teams in the future, new hires may not become as productive as may be necessary to maintain or increase our sales. If we are unable to expand our sales management and sales specialist teams, it could negatively impact our sales, and we may not generate sufficient revenue to sustain profitability.

The loss of any member on our executive management team or our inability to attract and retain highly skilled members of our sales management and marketing teams and engineers could have a material adverse effect on our business, financial condition and results of operations.

Our success depends on the skills, experience and performance of the members of our executive management team. The individual and collective efforts of these executives will be important as we continue to commercialize our existing products, develop new products and technologies and expand our commercial activities. The loss or incapacity of existing members of our executive management team could have a material adverse effect on our business, financial condition and results of operations if we experience difficulties in hiring qualified successors. We do not maintain “key person” insurance for any of our executives or key employees. We have employment agreements with each of the members of our executive management team; however, the existence of these employment agreement does not guarantee our retention of these executives for any period of time.

Our commercial, supply chain and research and development programs and operations depend on our ability to attract and retain highly skilled members of our sales management and marketing teams and engineers. We may be unable to attract or retain qualified member of our sales management and marketing teams or engineers in the future due to the competition for qualified personnel among medical device companies. We also face competition from universities and public and private research institutions in recruiting and retaining highly

 

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qualified engineers. Recruiting and retention difficulties can limit our ability to support our commercial, supply chain and research and development programs. All of our employees are at-will, which means that either we or the employee may terminate his or her employment at any time. The loss of key employees, failure of any key employee to perform, our inability to attract and retain skilled employees, as needed, or our inability to effectively plan for and implement a succession plan for key employees could have a material adverse effect on our business, financial condition and results of operations.

If our business strategy proves to be flawed, or if we do not successfully implement our business strategy, our business, financial condition and results of operations will be adversely affected.

Our business strategy is based on assumptions about the market that might prove to be flawed. We believe that various demographics and industry-specific trends will help drive growth in the market and our business, but these demographics and trends have been and will continue to be uncertain. Actual demand for our products could differ materially from projected demand if our assumptions regarding these factors prove to be incorrect or do not materialize, or if competitive products, technologies and treatments gain widespread acceptance. To implement our business strategy we need to, among other things, develop and introduce new products and technologies, find new applications for and improve our existing products and technologies, obtain new domestic and international regulatory clearances or approvals for new products and applications, and educate surgeons and third-party payors about the clinical benefits and cost effectiveness of our products and technologies. Additionally, because we are a technology company, we constantly need to improve our existing products and technologies and develop new products and technologies to keep up with technological advances. In addition, in order to increase our sales, we will need to commercialize our products in and expand our sales to new regions, which could result in us becoming subject to additional or different foreign and domestic regulatory requirements, with which we may not be able to comply. Moreover, we may decide to alter or discontinue aspects of our business strategy and may adopt different strategies due to business or competitive factors not currently foreseen, such as new scientific and technological advances that would make our products obsolete. Any failure to implement our business strategy may adversely affect our business, financial condition and results of operations.

We may be unable to manage our anticipated growth effectively, which could make it difficult to execute our business strategy.

We intend to grow our business operations and may experience periods of rapid growth and expansion. This anticipated growth could create a strain on our organizational, administrative and operational infrastructure, including our supply chain operations, quality control, technical support and customer service, sales management and sales specialist teams and general and financial administration, which could make it difficult to execute our business strategy. As our commercial operations and sales volume grow, we will need to continue to increase our workflow capacity for our supply chain, customer service, billing and general process improvements and expand our internal quality assurance program, among other things. These increases in scale or expansion of personnel may not be successfully implemented. Additionally, we may be unable to maintain the quality or delivery timelines of our products or satisfy demand for our products. Our ability to manage our growth properly will require us to continue to improve our operational, financial and management controls, as well as our reporting systems and procedures. We may implement new enterprise software systems in a number of areas affecting a broad range of business processes and functional areas. The time and resources required to improve our existing systems and procedures and to implement new systems are significant and failure to complete such improvements and implementations in a timely and efficient manner could make it difficult to execute our business strategy.

The requirements of being a public company may divert our management’s attention and affect our ability to attract and retain qualified board members and executive officers.

As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and will be required to comply with the applicable requirements of the

 

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Sarbanes-Oxley Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the listing requirements of the Nasdaq Stock Market and other applicable securities rules and regulations. Compliance with these rules and regulations will increase our legal and financial compliance costs, make some activities more difficult, time consuming or costly and increase demand on our systems and resources. Among other things, the Exchange Act requires that we file annual, quarterly and current reports with respect to our business and results of operations and maintain effective disclosure controls and procedures and internal controls over financial reporting. In order to maintain and, if required, improve our disclosure controls and procedures and internal controls over financial reporting to meet this standard, significant resources and management oversight may be required. As a result, management’s attention may be diverted from other business concerns, which could have a material adverse effect on our business, financial condition and results of operations. Although we intend to hire additional employees to comply with these requirements as well as to remediate the material weaknesses we identified that include a lack of a sufficient number of professionals with the appropriate level of knowledge, training and experience to appropriately analyze, record and disclose accounting matters timely and accurately in accordance with GAAP, we may need to hire even more employees in the future, which will increase our costs and expenses. Additionally, as a public company, it will be more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee and compensation committee, and qualified executive officers.

We will incur significant costs as a result of operating as a public company and our executive management team expects to devote substantial time to public company compliance programs.

As a public company, we will incur significant legal, accounting and other expenses due to our compliance with regulations and disclosure obligations applicable to us, including compliance with the Sarbanes-Oxley Act, as well as rules implemented by the SEC and the Nasdaq Stock Market. Stockholder activism, the current political environment and the current high level of government intervention and regulatory reform may lead to substantial new regulations and disclosure obligations, which may lead to additional compliance costs and impact, in ways we cannot currently anticipate, the manner in which we operate our business. Our executive management team and other personnel will devote a substantial amount of time to these compliance programs and monitoring of public company reporting obligations and as a result of the new corporate governance and executive compensation related rules, regulations and guidelines prompted by the Dodd-Frank Wall Street Reform and Consumer Protection Act, and further regulations and disclosure obligations expected in the future, we will likely need to devote additional time and costs to comply with such compliance programs and rules. These rules and regulations will cause us to incur significant legal and financial compliance costs and will make some activities more time-consuming and costly.

Failure to establish and maintain an effective system of internal controls could result in material misstatements of our financial statements or cause us to fail to meet our reporting obligations or fail to prevent fraud in which case, our stockholders could lose confidence in our financial reporting and the market price of our common stock could decline.

After the closing of this offering, we will be subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act and the rules and regulations of the Nasdaq Stock Market. Pursuant to Section 404 of the Sarbanes-Oxley Act, we will be required to furnish a report by our management on our internal control over financial reporting beginning with our second annual report on Form 10-K. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting. However, our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting until our first annual report required to be filed with the SEC following the date we are no longer an EGC. At such time as we are required to obtain auditor attestation, if we then have a material weakness, we would receive an adverse opinion regarding our internal control over financial reporting from our independent registered accounting firm. To achieve compliance with

 

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Section 404 within the prescribed period, we will be engaged in a process to document and evaluate our internal control over financial reporting, which is both costly and challenging. In this regard, we will need to continue to dedicate internal resources, including through hiring additional financial and accounting personnel, potentially engage outside consultants and adopt a detailed work plan to assess and document the adequacy of internal control over financial reporting, continue steps to improve control processes as appropriate, validate through testing that controls are functioning as documented, and implement a continuous reporting and improvement process for internal control over financial reporting. During our evaluation of our internal control, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal control over financial reporting is effective.

We have, and may in the future discover, material weaknesses in our system of internal financial and accounting controls and procedures that could result in a misstatement of our financial statements. For example, in connection with the audits of our audited consolidated financial statements for the years ended December 31, 2019 and 2018, we have identified material weaknesses in our internal control over financial reporting. The material weaknesses we identified include that we lack a sufficient number of professionals with the appropriate level of knowledge, training and experience to appropriately analyze, record and disclose accounting matters timely and accurately in accordance with GAAP. This material weakness contributed to the Company not being able to (a) design and maintain formal accounting policies, procedures and controls over the fair presentation of our financial statements; (b) design and maintain formal accounting policies, processes and controls to analyze, account for and disclose complex transactions; (c) design and maintain controls over the preparation and review of account reconciliations, journal entries and financial statements, including maintaining appropriate segregation of duties; and (d) design and maintain information technology general controls over the integrity of the data and processes in the information systems used for financial reporting. Each of these control deficiencies could result in a misstatement of accounts or disclosures that would result in a material misstatement of our financial statements that would not be prevented or detected, and accordingly, it was determined that these control deficiencies constitute material weaknesses. The material weaknesses resulted in material errors to previously issued financial statements, which required a restatement of such historical previously issued financial statements. We continue to evaluate and implement procedures to enhance our internal control over financial reporting and address these material weaknesses. However, we cannot assure you that these or other measures will fully remediate the material weaknesses described above in a timely manner, if at all. If we are unable to remediate the existing or future material weaknesses, or otherwise maintain effective internal control over financial reporting, we may not be able to report our financial results accurately, prevent fraud or file our periodic reports in a timely manner. See “Risks Related to Our Financial Condition and Capital Requirements—We have identified material weaknesses in our internal control over financial reporting. If we are unable to remediate these material weaknesses, or if we identify additional material weaknesses in the future or otherwise fail to maintain an effective system of internal controls, we may not be able to accurately or timely report our financial condition or results of operations, which may adversely affect investor confidence in us, our business and the market price of our common stock.”

If our remediation of these material weaknesses is not effective, or if we experience additional material weaknesses or otherwise fail to maintain an effective system of internal controls in the future, we may not be able to accurately or timely report our financial condition or results of operations, which may adversely affect investor confidence in us and, as a result, our stock price and ability to access the capital markets in the future. In addition, our internal control over financial reporting will not prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud will be detected.

The rules governing the standards that must be met for our management to assess our internal control over financial reporting are complex and require significant documentation, testing and possible remediation. If we are not able to comply with the requirements of Section 404 in a timely manner or if we are unable to maintain

 

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proper and effective internal controls, we may not be able to produce timely and accurate financial statements. In addition, in connection with the future attestation process by our independent registered public accounting firm, we may encounter problems or delays in completing the implementation of any requested improvements and receiving a favorable attestation. If we cannot favorably assess the effectiveness of our internal control over financial reporting, or if our independent registered public accounting firm is unable to provide an unqualified attestation report on our internal controls, our stockholders could lose confidence in our reporting and the market price of our common stock could decline. In addition, we could be subject to sanctions or investigations by the Nasdaq Stock Market, the SEC or other regulatory authorities.

If we experience significant disruptions in our information technology systems, our business may be adversely affected.

We are increasingly dependent on information technology for our infrastructure. Our information technology systems require an ongoing commitment of significant resources to maintain, protect and enhance existing systems. We depend on our information technology systems, some of which are dependent on services provided by third parties, for the efficient functioning of our business, including accounting, data storage, compliance, purchasing and inventory management. We utilize a cloud-based enterprise resource planning systems. These systems could be damaged or cease to function properly due to any number of causes, such as catastrophic events, power outages, security breaches, computer viruses or cyber-based attacks. We have contingency plans in place to prevent or mitigate the impact of these events, however, if they are not effective on a timely basis, business interruptions could occur which could have a materially adverse effect on our results of operations. While we will attempt to mitigate interruptions, we may experience difficulties in implementing some upgrades or incident-containment steps, which would impact our business operations, or experience difficulties in operating our business during the upgrade or incident, either of which could disrupt our operations, including our ability to timely ship and track product orders, project inventory requirements, manage our supply chain and otherwise adequately service our customers. In the event we experience significant disruptions as a result of any of these information technology risks, we may be unable to repair our systems or restore normal business operations in an efficient and timely manner. Accordingly, such events may disrupt or reduce the efficiency of our entire operation and could have a material adverse effect on our results of operations and cash flows.

Protecting information systems from data theft or corruption, cyber-based attacks, security breaches or privacy violations is critical to the success of our business.

Increased cyber-security threats also pose a potential risk to the security of our information technology systems, as well as the confidentiality, integrity and availability of data stored on these systems. A security breach of this infrastructure, including physical or electronic break-ins, computer viruses, malware attacks by hackers and similar breaches, could result in disclosure or misuse of confidential or proprietary information, including sensitive customer, vendor, employee or financial information. We invest in security technology to protect our data against risks of data security breaches and cyber-attacks, and we have implemented solutions, processes, and procedures to help mitigate these risks at various locations, such as encryption, virus protection, security firewalls and information security and privacy policies.

Nonetheless, the information technology and infrastructure which we rely upon has in the past and may in the future be subject to attacks by hackers and may be breached due to inadequate protective measures undertaken, human errors or omissions, malfeasance or other disruptions. For example, in 2018, a business email compromise led to the misappropriation of an immaterial portion of our funds. Although we have implemented remedial measures promptly following this incident and it did not materially impact our business, we cannot guarantee that our implemented remedial measures, or any future measures, will prevent additional similar or different cyber-attacks. Further, a security breach or privacy violation that leads to unauthorized disclosure of consumer information (including personally identifiable information or PHI (as defined herein)) could harm our reputation, compel us to comply with disparate federal, state and foreign breach notification laws and otherwise subject us to liability under laws that protect personal data, resulting in increased costs or loss of revenue. If we

 

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or our third-party providers are unable to prevent security breaches or privacy violations or implement satisfactory remedial measures, our operations could be disrupted, we may be subject to additional legal claims or proceedings, or we may suffer loss of reputation, financial loss and other regulatory penalties, which could have a material adverse impact on our business, financial condition and results of operations. Hackers and other cyber criminals are using increasingly sophisticated and constantly evolving techniques, and we may need to expend substantial additional resources to continue to protect against potential security breaches or to address problems caused by such attacks or any breach of our safeguards.

In addition, a data security breach could distract management or other key personnel from performing their primary operational duties, impair our ability to transact business with our customers, lose access to critical data or systems, or compromise confidential information including trade secrets and other intellectual property, any of which may harm our competitive position, require us to allocate more resources to improved security technologies, or otherwise adversely affect our business.

We are subject to various litigation claims and legal proceedings.

We, as well as certain of our executives and distributors, may be subject to various litigation claims and legal proceedings. Regardless of the outcome, these litigation claims and legal proceedings may result in significant legal fees and expenses, could divert management’s time and other resources and could result in negative publicity which may harm our reputation. If the claims contained in these litigation claims and legal proceedings are successfully asserted against us, we could be liable for damages and be required to alter or cease certain of our business practices or our products or technologies.

We may incur product liability losses, and insurance coverage may be inadequate or unavailable to cover these losses.

Our business exposes us to potential product liability claims and lawsuits that are inherent in the testing, manufacturing and selling of medical devices for spine surgery procedures. Spine surgeries involve significant risk of serious complications, including bleeding, nerve injury, paralysis and even death. Additionally, if surgeons are not sufficiently trained in the use of our products or technologies, they may misuse or ineffectively use our products, which may result in unsatisfactory patient outcomes or patient injury. We could also become the subject of product liability claims and lawsuits alleging that component failures, malfunctions, manufacturing flaws, design defects or inadequate disclosure of product-related risks or product-related information resulted in an unsafe condition or injury to patients. We have had, and continue to have, a small number of product liability claims and lawsuits relating to our products, and in the future, we may be subject to additional product liability claims and lawsuits.

Regardless of the merit or eventual outcome, product liability claims and lawsuits may result in:

 

   

decreased demand for our products and technologies;

 

   

injury to our reputation;

 

   

significant litigation costs;

 

   

substantial monetary awards to or costly settlements with patients;

 

   

product recalls;

 

   

material defense costs;

 

   

loss of revenue;

 

   

the inability to commercialize new products or product candidates; and

 

   

diversion of management attention from pursuing our business strategy.

 

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Our existing product liability insurance coverage may be inadequate to protect us from any liabilities we may incur. If a product liability claim or series of claims is brought against us for uninsured liabilities or in excess of our insurance coverage, it could have a material adverse effect on our business, financial condition and results of operations. Even if a product liability loss is covered by an insurance policy, these policies typically have substantial retentions or deductibles that we are responsible for. In addition, a recall of some of our products, whether or not the result of a product liability claim, could result in significant costs and loss of customers. Further, any claims against us, regardless of their merit, could have a material adverse effect on our business, financial condition and results of operations, strain our management and other resources and could have a material adverse effect on or eliminate the prospects for commercialization or sales of a product or product candidate that is the subject of any such claim.

In addition, any product liability claim brought against us, with or without merit, could result in an increase of our product liability insurance rates. Insurance coverage varies in cost and can be difficult to obtain, and we cannot guarantee that we will be able to obtain insurance coverage in the future on terms acceptable to us or at all.

Although our international business is not substantial, we operate, and intend to expand our operations, in markets outside the U.S., including in regions that are or may be subject to political, economic and social instability and that expose us to additional risks.

Operations in countries outside of the U.S. accounted for less than 1% of our total revenue each of the six months ended June 30, 2020 and the year ended December 31, 2019. The anticipated growth of our operations outside of the U.S. is accompanied by certain financial and other risks, including:

 

   

the imposition of additional U.S. and foreign governmental controls or regulations on our products;

 

   

withdrawal from or revision to international trade policies or agreements and the imposition or increases in import and export licensing and other compliance requirements, customs duties and tariffs, import and export quotas and other trade restrictions, license obligations, and other non-tariff barriers to trade;

 

   

unexpected changes in tariffs, trade barriers and regulatory requirements;

 

   

the imposition of U.S. or international sanctions against a country, company, person, or entity with whom we do business that would restrict or prohibit continued business with that country, company, person, or entity;

 

   

economic instability, including currency risk between the U.S. dollar and foreign currencies, in our target markets;

 

   

economic weakness, including inflation, or political instability in particular foreign economies and markets;

 

   

the imposition of restrictions on the activities of foreign agents, representatives and distributors;

 

   

scrutiny of foreign tax authorities, which could result in significant fines, penalties and additional taxes being imposed upon us;

 

   

difficulties in managing and staffing international operations and increases in infrastructure costs including legal, tax, accounting and information technology;

 

   

a shortage of high-quality distributors that are able to make international sales;

 

   

loss of any key personnel who possess proprietary knowledge or are otherwise important to our success in international markets;

 

   

changes in third-party reimbursement policy that may require some of the patients who receive our products to directly absorb medical costs or that may necessitate our reducing selling prices for our products;

 

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unexpected changes in foreign regulatory requirements;

 

   

differing local product preferences and product requirements;

 

   

changes in tariffs and other trade restrictions, particularly related to the exportation of our biologics products;

 

   

difficulties in protecting, enforcing and defending intellectual property rights;

 

   

foreign currency exchange controls that might prevent us from repatriating cash;

 

   

longer payment cycles and difficulties in enforcing agreements and collecting receivables through certain foreign legal systems;

 

   

transportation delays and interruptions;

 

   

national and international conflicts, including foreign policy changes, acts of war or terrorist acts;

 

   

complex data privacy requirements and labor relations laws; and

 

   

exposure to different legal and political standards.

Additionally, Brexit, whereby the U.K. is planning to leave the European Union (the “EU”) has had and may continue to have a material adverse effect on global economic conditions and the stability of global financial markets. Given the lack of comparable precedent, it is unclear what implications the withdrawal of the U.K. from the EU will have and how such withdrawal could affect, or whether it could have a material adverse effect on, our business, financial condition and operating results. Pursuant to Article 50 of the Lisbon Treaty, the U.K. ceased being a Member State of the EU on January 31, 2020. However, the terms of the withdrawal have yet to be fully negotiated. The implementation period began February 1, 2020 and will continue until December 31, 2020. The impact of the impending Brexit is uncertain and cannot be predicted at this time.

Our operations are vulnerable to interruption or loss due to natural or other disasters, power loss, strikes and other events beyond our control.

A major earthquake, fire or other disaster (such as a major flood, tsunami, volcanic eruption or terrorist attack) affecting our headquarters or our other facilities, or facilities of our suppliers and manufacturers, could significantly disrupt our operations, and delay or prevent product shipment or installation during the time required to repair, rebuild or replace our suppliers’ and manufacturers’ damaged facilities, which delays could be lengthy and costly. If any of our customers’ facilities are negatively impacted by a disaster, shipments of our products could be delayed. Additionally, customers may delay purchases of our products until operations return to normal. Even if we are able to quickly respond to a disaster, the ongoing effects of the disaster could create some uncertainty in the operations of our business. In addition, our headquarters may be subject to a shortage of available electrical power and other energy supplies. Any shortages may increase our costs for power and energy supplies or could result in blackouts, which could disrupt the operations of our affected facilities and harm our business. Concerns about terrorism, the effects of a terrorist attack or political turmoil could have a negative effect on our operations, those of our suppliers and manufacturers and our customers.

Unfavorable media reports or other negative publicity could limit acceptance of our products and technologies and could have a material adverse effect on our business, financial condition and results of operations.

Unfavorable media reports of improper or illegal practices or other negative publicity could limit acceptance of our products and technologies and could have a material adverse effect on our business, financial condition and results of operations. For example, unfavorable media reports of improper or illegal tissue recovery practices, as well as incidents of improperly processed tissue leading to the transmission of disease, may affect the rate of future tissue donation and market acceptance of technologies incorporating human tissue. In addition, negative

 

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publicity could cause the families of potential donors to become reluctant to donate tissue to for-profit tissue processors. In the past, the media has reported examples of alleged illegal harvesting of body parts from cadavers and resulting recalls conducted by certain companies selling human tissue-based products affected by the alleged illegal harvesting.

Risks Related to Regulatory Matters

Our products and operations are subject to extensive government regulation and oversight both in the U.S. and abroad, and our failure to comply with applicable requirements could harm our business.

We and our products are subject to extensive regulation in the U.S. and elsewhere, including by the FDA and its foreign counterparts. The FDA and foreign regulatory agencies regulate, among other things, with respect to medical devices: (i) design, development and manufacturing; (ii) testing, labeling, content and language of instructions for use and storage; (iii) clinical trials; (iv) product safety; (v) marketing, sales and distribution; (vi) premarket clearance and approval; (vii) recordkeeping procedures; (viii) advertising and promotion; (ix) recalls and field safety corrective actions; (x) post-market surveillance, including reporting of deaths or serious injuries and malfunctions that, if they were to recur, could lead to death or serious injury; (xi) post-market approval studies; and (xii) product import and export.

The regulations to which we are subject are complex and have tended to become more stringent over time. Regulatory changes could result in restrictions on our ability to carry on or expand our operations, higher than anticipated costs or lower than anticipated sales. The FDA enforces these regulatory requirements through periodic unannounced inspections among other methods. We do not know whether we will pass any future FDA inspections. Failure to comply with applicable regulations could jeopardize our ability to sell our products and result in enforcement actions such as warning letters, fines, injunctions, civil penalties, termination of distribution, recalls or seizures of products, delays in the introduction of products into the market, total or partial suspension of production, refusal to grant future clearances or approvals, withdrawals or suspensions of current clearances or approvals, resulting in prohibitions on sales of our products and in the most serious cases, criminal penalties.

We may not receive the necessary regulatory clearances or approvals for our future products, and failure to timely obtain necessary regulatory clearances or approvals for our future products would adversely affect our ability to grow our business.

An element of our strategy is to continue to upgrade our products, add new features and expand clearance or approval of our existing products to new indications. In the U.S., before we can market a new medical device, or a new use of, new claim for or significant modification to an existing product, we must first receive either clearance under Section 510(k) of the FDCA, or approval of a PMA from the FDA, unless an exemption applies. In the 510(k) clearance process, before a device may be marketed, the FDA must determine that a proposed device is “substantially equivalent” to a legally-marketed “predicate” device, which includes a device that has been previously cleared through the 510(k) process, a device that was legally marketed prior to May 28, 1976 (pre-amendments device), a device that was originally on the U.S. market pursuant to an approved PMA and later down-classified, or a 510(k)-exempt device. To be “substantially equivalent,” the proposed device must have the same intended use as the predicate device, and either have the same technological characteristics as the predicate device or have different technological characteristics and not raise different questions of safety or effectiveness than the predicate device. Clinical data are sometimes required to support substantial equivalence. In the PMA process, the FDA must determine that a proposed device is safe and effective for its intended use based, in part, on extensive data, including, but not limited to, technical, pre-clinical, clinical trial, manufacturing and labeling data. The PMA process is typically required for devices that are deemed to pose the greatest risk, such as life-sustaining, life-supporting or implantable devices.

 

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The FDA can delay, limit or deny clearance or approval of a device for many reasons, including:

 

   

our inability to demonstrate to the satisfaction of the FDA that our products are safe or effective for their intended uses;

 

   

the disagreement of the FDA with the design or implementation of our clinical trials or the interpretation of data from pre-clinical studies or clinical trials;

 

   

serious and unexpected adverse device effects experienced by participants in our clinical trials;

 

   

the data from our pre-clinical studies and clinical trials may be insufficient to support clearance or approval, where required;

 

   

our inability to demonstrate that the clinical and other benefits of the device outweigh the risks;

 

   

the manufacturing process or facilities we use may not meet applicable requirements; and

 

   

the potential for approval policies or regulations of the FDA to change significantly in a manner rendering our clinical data or regulatory filings insufficient for clearance or approval.

Modifications to products that are approved through a PMA application generally require FDA approval. Similarly, certain modifications made to products cleared through a 510(k) may require a new 510(k) clearance. Both the PMA approval and the 510(k) clearance process can be expensive, lengthy and uncertain. The FDA’s 510(k) clearance process usually takes from three to 12 months, but can last longer. The process of obtaining a PMA is much more costly and uncertain than the 510(k) clearance process and generally takes from 12 to 18 months, or even longer, from the time the application is filed with the FDA. In addition, a PMA generally requires the performance of one or more clinical trials. Despite the time, effort and cost, a device may not be approved or cleared by the FDA. Any delay or failure to obtain necessary regulatory approvals could harm our business. Furthermore, even if we are granted regulatory clearances or approvals, they may include significant limitations on the indicated uses for the device, which may limit the market for the device.

In the U.S., we have obtained 510(k) premarket clearance from the FDA to market substantially all of our products requiring such clearance. Any modifications to these existing products may require new 510(k) clearance; however, future modifications may be subject to the substantially more costly, time-consuming and uncertain PMA process. If the FDA requires us to go through a lengthier, more rigorous examination for future products or modifications to existing products than we had expected, product introductions or modifications could be delayed or canceled, which could cause our sales to decline.

In addition, the FDA may change its clearance and approval policies, adopt additional regulations or revise existing regulations, or take other actions, which may prevent or delay approval or clearance of our future products under development or impact our ability to modify our currently cleared products on a timely basis. Such policy or regulatory changes could impose additional requirements upon us that could delay our ability to obtain new 510(k) clearances, increase the costs of compliance or restrict our ability to maintain our current clearances. For example, in November 2018, FDA officials announced forthcoming steps that the FDA intends to take to modernize the premarket notification pathway under Section 510(k) of the FDCA. Among other things, the FDA announced that it plans to develop proposals to drive manufacturers utilizing the 510(k) pathway toward the use of newer predicates. These proposals include possible plans to sunset certain older devices that were used as predicates under the 510(k) clearance pathway, and to publish a list of devices that have been cleared on the basis of demonstrated substantial equivalence to predicate devices that are more than 10 years old. The FDA also announced that it intends to finalize guidance to establish a premarket review pathway for “manufacturers of certain well-understood device types” as an alternative to the 510(k) clearance pathway and that such premarket review pathway would allow manufacturers to rely on objective safety and performance criteria recognized by the FDA to demonstrate substantial equivalence, obviating the need for manufacturers to compare the safety and performance of their medical devices to specific predicate devices in the clearance process. These proposals have not yet been finalized or adopted, and the FDA announced that it would seek public feedback prior to publication

 

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of any such proposals, and may work with Congress to implement such proposals through legislation. Accordingly, it is unclear the extent to which any proposals, if adopted, could impose additional regulatory requirements on us that could delay our ability to obtain new 510(k) clearances, increase the costs of compliance, or restrict our ability to maintain our current clearances, or otherwise create competition that may negatively affect our business.

In order to sell our devices in member countries of the European Economic Area (“EEA”) our products must comply with the essential requirements of the EU Medical Devices Directive (Council Directive 93/42/EEC). Compliance with these requirements is a prerequisite to be able to affix the Conformité Européene, or CE, mark to our products, without which they cannot be sold or marketed in the EEA. To demonstrate compliance with the essential requirements we must undergo a conformity assessment procedure, which varies according to the type of medical device and its classification. Except for low-risk medical devices (Class I with no measuring function and which are not sterile), where the manufacturer can issue an EC Declaration of Conformity based on a self-assessment of the conformity of its products with the essential requirements of the EU Medical Devices Directive, a conformity assessment procedure requires the intervention of an organization accredited by a Member State of the EEA (a “Notified Body”) to conduct conformity assessments. Depending on the relevant conformity assessment procedure, the Notified Body would typically audit and examine the technical file and the quality system for the manufacture, design and final inspection of our devices. The Notified Body issues a CE Certificate of Conformity (“CE mark”) following successful completion of a conformity assessment procedure conducted in relation to the medical device and its manufacturer and their conformity with the essential requirements. This certificate entitles the manufacturer to affix the CE mark to its medical devices after having prepared and signed a related EC Declaration of Conformity.

As a general rule, demonstration of conformity of medical devices and their manufacturers with the essential requirements must be based, among other things, on the evaluation of clinical data supporting the safety and performance of the products during normal conditions of use. Specifically, a manufacturer must demonstrate that the device achieves its intended performance during normal conditions of use, that the known and foreseeable risks, and any adverse events, are minimized and acceptable when weighed against the benefits of its intended performance, and that any claims made about the performance and safety of the device are supported by suitable evidence. If we fail to remain in compliance with applicable European laws and directives, we would be unable to continue to affix the CE mark to our surgical systems, which would prevent us from selling them within the EEA. We or our distributors will also need to obtain regulatory approval in other foreign jurisdictions in which we plan to market and sell our products.

Modifications to our products may require new 510(k) or de novo clearances or PMA approvals, and may require us to cease marketing or recall the modified products until clearances or approvals are obtained.

Any modification to a 510(k)-cleared product that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, design or manufacture, requires a new 510(k) or de novo clearance or, possibly, approval of a PMA. The FDA requires every manufacturer to make this determination in the first instance, but the FDA may review any manufacturer’s decision. The FDA may not agree with our decisions regarding whether new clearances or approvals are necessary. We have made modifications to our products in the past and have determined based on our review of the applicable FDA regulations and guidance that in certain instances new 510(k) clearances were not required.

We may make similar modifications or add additional features in the future that we believe do not require a new 510(k) clearance or approval of a PMA. If the FDA disagrees with our determination and requires us to submit new 510(k) notifications or PMAs for modifications to our previously cleared products for which we have concluded that new clearances or approvals are unnecessary, we may be required to cease marketing or to recall the modified product until we obtain clearance or approval, and we may be subject to significant regulatory fines or penalties. In addition, the FDA may not approve or clear our products for the indications that are necessary or desirable for successful commercialization or could require clinical trials to support any modifications. Any

 

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delay or failure in obtaining required clearances or approvals would adversely affect our ability to introduce new or enhanced products in a timely manner, which in turn would harm our future growth.

We are subject to ongoing and pervasive regulatory oversight and review. Failure to comply with post marketing regulatory requirements could subject us to enforcement actions, including substantial penalties, and might require us to recall or withdraw a product from the market.

We are subject to ongoing and pervasive regulatory requirements governing, among other things, the manufacture, marketing, advertising, medical device reporting, sale, promotion, import, export, registration and listing of devices. Even after we have obtained the proper regulatory clearance or approval to market a device, we have ongoing responsibilities under FDA regulations and applicable foreign laws and regulations. The FDA, state and foreign regulatory authorities have broad enforcement powers. Our failure to comply with applicable regulatory requirements could result in enforcement action by the FDA, state or foreign regulatory authorities, which may include any of the following:

 

   

untitled letters or warning letters;

 

   

fines, injunctions, consent decrees and civil penalties;

 

   

recalls, termination of distribution, administrative detention or seizure of our products;

 

   

customer notifications or repair, replacement or refunds;

 

   

operating restrictions or partial suspension or total shutdown of production;

 

   

delays in or refusal to grant our requests for future clearances or approvals or foreign regulatory approvals of new products, new intended uses or modifications to existing products;

 

   

withdrawals or suspensions of our current 510(k) clearances, resulting in prohibitions on sales of our products;

 

   

FDA refusal to issue certificates to foreign governments needed to export products for sale in other countries; and

 

   

criminal prosecution.

Any of these actions could result in higher than anticipated costs or lower than anticipated sales and have a material adverse effect on our reputation, business, financial condition and results of operations.

Certain of our products are derived from human tissue and are or could be subject to additional regulations and requirements.

Some of our biologics products are derived from human tissue, and as a result are also subject to FDA and certain state regulations regarding human cells, tissues and cellular or tissue-based products (“HCT/Ps”). An HCT/P is a product containing or consisting of human cells or tissue intended for transplantation into a human patient. Examples include bone, ligament, skin and cornea.

In the U.S., we are marketing our HCT/Ps pursuant to Section 361 of the Public Health Service Act and 21 CFR Part 1271 of FDA’s regulations. We do not manufacture these HCT/P products, but serve as a distributor for them. So-called Section 361 HCT/Ps are not currently subject to the FDA requirements to obtain marketing authorizations as long as they meet certain criteria provided in FDA’s regulations. In November 2017 the FDA published a guidance document clarifying the meaning and application of the criteria that a product must meet in order to be regulated as a Section 361 HCT/P, and therefore not be subject to the requirement for marketing authorization. In this guidance, the FDA indicated that it would exercise enforcement discretion through November 2020 to give product sponsors time to evaluate the need to submit marketing applications for products that had been marketed without such premarket review but that the FDA believes would be required. In July

 

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2020, FDA published an updated version of this guidance extending the enforcement discretion period through May 2021, at which point it expects to begin to enforce its premarket requirements on products that have been marketed as Section 361 HCT/Ps but do not meet the criteria for such marketing.

The FDA could disagree with the determination that our HCT/Ps meet the criteria to be marketed as Section 361 HCT/Ps and could determine that these products require affirmative marketing authorization from FDA. For example, the FDA has indicated that it believes the Provenda products made from amniotic tissue and fluid will require an affirmative marketing authorization once the FDA’s enforcement discretion period ends in May 2021. If the FDA continues to assert such marketing authorization is necessary and the product has not obtained marketing authorization by May 2021, we may not be able to continue marketing such product, which could have a material and adverse effect on our business. Moreover, if we continue to market products for which a marketing authorization is required but has not been obtained, we could be subject to enforcement action, including warning letters, untitled letters, administrative actions, criminal prosecution, imposition of civil monetary penalties, seizure of our products or delay in clearance of future products.

HCT/Ps regulated as “361 HCT/Ps” are currently subject to requirements relating to registering facilities and listing products with the FDA, screening and testing for tissue donor eligibility, current Good Tissue Practices when processing, storing, labeling and distributing HCT/Ps, including required labeling information, stringent record keeping and adverse event reporting. Biologic, device or drug HCT/Ps must comply both with the requirements exclusively applicable to 361 HCT/Ps and, in addition, with other requirements, including requirements for marketing authorization. The American Association of Tissue Banks has issued operating standards for tissue banking. Accreditation is voluntary, but compliance with these standards is a requirement to become a licensed tissue bank. In addition, some states have their own tissue banking regulations. In addition, procurement of certain human organs and tissue for transplantation is subject to the National Organ Transplant Act, or NOTA, which prohibits the transfer of certain human organs, including skin and related tissue, for valuable consideration, but permits the reasonable payment associated with the removal, transportation, implantation, processing, preservation, quality control and storage of human tissue and skin. We reimburse tissue banks for their expenses associated with the recovery, storage and transportation of donated human tissue they provide to us for processing. We include in our pricing structure amounts paid to tissue banks to reimburse them for their expenses associated with the recovery and transportation of the tissue, in addition to certain costs associated with processing, preservation, quality control and storage of the tissue, marketing and medical education expenses and costs associated with development of tissue processing technologies. NOTA payment allowances may be interpreted to limit the amount of costs and expenses we can recover in our pricing for our products, thereby reducing our future revenue and profitability. If we were to be found to have violated NOTA’s prohibition on the sale or transfer of human tissue for valuable consideration, we would potentially be subject to criminal enforcement sanctions, which could materially and adversely affect our results of operations.

We are engaged through our sales and marketing team in ongoing efforts designed to educate the medical community as to the benefits of our products and technologies, and we intend to continue our educational activities. Although we believe that NOTA permits payments in connection with these educational efforts as reasonable payments associated with the processing, transportation and implantation of our products, payments in connection with such education efforts are not exempt from NOTA’s restrictions and our inability to make such payments in connection with our education efforts may prevent us from paying our sales representatives for their education efforts and could adversely affect our business and prospects. No federal agency or court has determined whether NOTA is, or will be, applicable to every allograft bone tissue-based material which our processing technologies may generate. Assuming that NOTA applies to our processing of allograft bone tissue, we believe that we comply with NOTA, but there can be no assurance that more restrictive interpretations of, or amendments to, NOTA will not be adopted in the future which would call into question one or more aspects of our method of operations.

 

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Our products must be manufactured in accordance with federal and state regulations, and we could be forced to recall products that were used in past procedures or terminate production if we fail to comply with these regulations.

The methods used in, and the facilities used for, the manufacture of our products must comply with the FDA’s Quality System Regulation (“QSR”), which is a complex regulatory scheme that covers the procedures and documentation of the design, testing, production, process controls, quality assurance, labeling, packaging, handling, storage, distribution, installation, servicing and shipping of medical devices. Furthermore, we are required to verify that our suppliers maintain facilities, procedures and operations that comply with our quality standards and applicable regulatory requirements. The FDA enforces the QSR through periodic announced or unannounced inspections of medical device manufacturing facilities, which may include the facilities of subcontractors. Our products are also subject to similar state regulations and various laws and regulations of foreign countries governing manufacturing.

We or our third-party manufacturers may not take the necessary steps to comply with applicable regulations, which could cause delays in the delivery of our products. In addition, failure to comply with applicable FDA requirements or later discovery of previously unknown problems with our products or manufacturing processes could result in, among other things: (i) warning letters or untitled letters; (ii) fines, injunctions or civil penalties; (iii) suspension or withdrawal of approvals or clearances; (iv) customer notifications or repair, replacement, refunds, detention, seizures or recalls of our products; (v) total or partial suspension of production or distribution; (vi) administrative or judicially imposed sanctions; (vii) the FDA’s refusal to grant pending or future clearances or approvals for our products; (viii) clinical holds; (ix) refusal to permit the import or export of our products; (x) and criminal prosecution of us or our employees. Any of these actions could significantly and negatively impact supply of our products. If any of these events occurs, our reputation could be harmed, we could be exposed to product liability claims and we could lose customers and suffer reduced revenue and increased costs.

If treatment guidelines for the spine disorders we are targeting change or the standard of care evolves, we may need to redesign and seek new marketing authorization from the FDA for one or more of our products.

If treatment guidelines for the spine disorders we are targeting or the standard of care for such conditions evolves, we may need to redesign the applicable product and seek new clearances or approvals from the FDA. Our 510(k) clearances from the FDA are based on current treatment guidelines. If treatment guidelines change so that different treatments become desirable, our products can become obsolete, which could have a material adverse effect on our business, financial condition and results of operation.

The misuse or off-label use of our products may harm our reputation in the marketplace, result in injuries that lead to product liability suits or result in costly investigations, fines or sanctions by regulatory bodies if we are deemed to have engaged in the promotion of these uses, any of which could have a material adverse effect on our business, financial condition and results of operations.

Surgeons may misuse our products or use improper techniques if they are not adequately trained, potentially leading to injury and an increased risk of product liability. If our products are misused or used with improper technique, we may become subject to costly litigation by surgeons or their patients. Product liability claims could divert management’s attention from our core business, be expensive to defend and result in sizeable damage awards against us that may not be covered by insurance. In addition, any of the events described above could harm our business.

In addition, our products have been cleared by the FDA for specific indications. We train our sales and marketing team and distributors to not promote our products for uses outside of the FDA-cleared indications for use, known as “off-label uses.” We cannot, however, prevent a surgeon or other healthcare provider from using our products off-label, when in the surgeon’s or healthcare provider’s independent professional medical

 

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judgment he or she deems it appropriate. In addition, there may be increased risk of injury to patients if surgeons or other healthcare providers attempt to use our products off-label. Furthermore, the use of our products for indications other than those cleared by the FDA or approved by any foreign regulatory body may not effectively treat such conditions, which could harm our reputation in the marketplace among surgeons, healthcare providers and patients.

If the FDA or any foreign regulatory body determines that our promotional materials or training constitute promotion of an off-label use, it could request that we modify our training or promotional materials or subject us to regulatory or enforcement actions, including the issuance or imposition of a warning or untitled letter, injunction, seizure, civil fine or criminal penalties. It is also possible that other federal, state or foreign enforcement authorities might take action under other regulatory authority, such as false claims laws, if they consider our business activities to constitute promotion of an off-label use, which could result in significant penalties, including, but not limited to, criminal, civil and administrative penalties, damages, fines, disgorgement, exclusion from participation in government healthcare programs and the curtailment of our operations.

Our products may cause or contribute to adverse medical events that we are required to report to the FDA, and if we fail to do so, we would be subject to sanctions that could have a material adverse effect on our reputation, business, financial condition and results of operations. The discovery of serious safety issues with our products, or a recall of our products either voluntarily or at the direction of the FDA or another governmental authority, could have a negative impact on us.

We are subject to the FDA’s medical device reporting regulations and similar foreign regulations, which require us to report to the FDA when we receive or become aware of information that reasonably suggests that one or more of our products may have caused or contributed to a death or serious injury or malfunctioned in a way that, if the malfunction were to recur, it could cause or contribute to a death or serious injury. The timing of our obligation to report is triggered by the date we become aware of the adverse event as well as the nature of the event. We may fail to report adverse events of which we become aware within the prescribed timeframe. We may also fail to recognize that we have become aware of a reportable adverse event, especially if it is not reported to us as an adverse event or if it is an adverse event that is unexpected or removed in time from the use of the product. If we fail to comply with our reporting obligations, the FDA could take action, including warning letters, untitled letters, administrative actions, criminal prosecution, imposition of civil monetary penalties, revocation of our device clearance, seizure of our products or delay in clearance of future products.

The FDA and foreign regulatory bodies have the authority to require the recall of commercialized products in the event of material deficiencies or defects in design or manufacture of a product or in the event that a product poses an unacceptable risk to health. The FDA’s authority to require a recall must be based on a finding that there is reasonable probability that the device could cause serious injury or death. We may also choose to voluntarily recall a product if any material deficiency is found. We have in the past conducted several voluntary recalls of our products with lot-specific quality issues. A government-mandated or voluntary recall by us could occur as a result of an unacceptable risk to health, component failures, malfunctions, manufacturing defects, labeling or design deficiencies, packaging defects or other deficiencies or failures to comply with applicable regulations. Product defects or other errors may occur in the future. Depending on the corrective action we take to redress a product’s deficiencies or defects, the FDA may require, or we may decide, that we will need to obtain new approvals or clearances for the device before we may market or distribute the corrected device. Seeking such approvals or clearances may delay our ability to replace the recalled devices in a timely manner. Moreover, if we do not adequately address problems associated with our devices, we may face additional regulatory enforcement action, including FDA warning letters, product seizure, injunctions, administrative penalties or civil or criminal fines.

Companies are required to maintain certain records of recalls and corrections, even if they are not reportable to the FDA. We may initiate voluntary withdrawals or corrections for our products in the future that we determine do not require notification of the FDA. If the FDA disagrees with our determinations, it could require

 

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us to report those actions as recalls and we may be subject to enforcement action. A future recall announcement could harm our reputation with customers, potentially lead to product liability claims against us and negatively affect our sales.

If we or our distributors do not obtain and maintain international regulatory registrations or approvals for our products, we will be unable to market and sell our products outside of the U.S.

Sales of our products outside of the U.S. are subject to foreign regulatory requirements that vary widely from country to country. In addition, the FDA regulates exports of medical devices from the U.S. While the regulations of some countries may not impose barriers to marketing and selling our products or only require notification, others require that we or our distributors obtain the approval of a specified regulatory body. Complying with foreign regulatory requirements, including obtaining registrations or approvals, can be expensive and time-consuming, and we or our distributors may not receive regulatory approvals in each country in which we plan to market our products or we may be unable to do so on a timely basis. The time required to obtain registrations or approvals, if required by other countries, may be longer than that required for FDA clearance, and requirements for such registrations, clearances or approvals may significantly differ from FDA requirements. If we modify our products, we or our distributors may need to apply for additional regulatory approvals before we are permitted to sell the modified product. In addition, we may not continue to meet the quality and safety standards required to maintain the authorizations that we or our distributors have received. If we or our distributors are unable to maintain our authorizations in a particular country, we will no longer be able to sell the applicable product in that country.

Regulatory clearance or approval by the FDA does not ensure clearance or approval by regulatory authorities in other countries, and clearance or approval by one or more foreign regulatory authorities does not ensure clearance or approval by regulatory authorities in other foreign countries or by the FDA. However, a failure or delay in obtaining regulatory clearance or approval in one country may have a negative effect on the regulatory process in others.

Legislative or regulatory reforms in the U.S. may make it more difficult and costly for us to obtain regulatory clearances or approvals for our products or to manufacture, market or distribute our products after clearance or approval is obtained.

From time to time, legislation is drafted and introduced in Congress that could significantly change the statutory provisions governing the regulation of medical devices. In addition, FDA regulations and guidance are often revised or reinterpreted by the FDA in ways that may significantly affect our business and our products. Any new statutes, regulations or revisions or reinterpretations of existing regulations may impose additional costs or lengthen review times of any future products or make it more difficult to manufacture, market or distribute our products. We cannot determine what effect changes in regulations, statutes, legal interpretation or policies, when and if promulgated, enacted or adopted may have on our business in the future. Such changes could, among other things, require: (i) additional testing prior to obtaining clearance or approval; (ii) changes to manufacturing methods; (iii) recall, replacement or discontinuance of our products; or (iv) additional record keeping.

For example, in November 2018, FDA officials announced forthcoming steps that the FDA intends to take to modernize the premarket notification pathway under Section 510(k). Among other things, the FDA announced that it plans to develop proposals to drive manufacturers utilizing the 510(k) pathway toward the use of newer predicates. These proposals include possible plans to sunset certain older devices that were used as predicates under the 510(k) clearance pathway, and to publish a list of devices that have been cleared on the basis of demonstrated substantial equivalence to predicate devices that are more than 10 years old. In May 2019, the FDA solicited public feedback on these proposals. These proposals have not yet been finalized or adopted, and the FDA may work with Congress to implement such proposals through legislation. Accordingly, it is unclear the extent to which any proposals, if adopted, could impose additional regulatory requirements on us that could delay our ability to obtain new 510(k) clearances, increase the costs of compliance, restrict our ability to maintain our current clearances, or otherwise create competition that may negatively affect our business.

 

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More recently, in September 2019, the FDA finalized guidance describing an optional “safety and performance based” premarket review pathway for manufacturers of “certain, well-understood device types” to demonstrate substantial equivalence under the 510(k) clearance pathway by showing that such device meets objective safety and performance criteria established by the FDA, thereby obviating the need for manufacturers to compare the safety and performance of their medical devices to specific predicate devices in the clearance process. The FDA intends to develop and maintain a list device types appropriate for the “safety and performance based” pathway and will continue to develop product-specific guidance documents that identify the performance criteria for each such device type, as well as the testing methods recommended in the guidance documents, where feasible. The FDA may establish performance criteria for classes of devices for which we or our competitors seek or currently have received clearance, and it is unclear the extent to which such performance standards, if established, could impact our ability to obtain new 510(k) clearances or otherwise create competition that may negatively affect our business.

In addition, FDA regulations and guidance are often revised or reinterpreted by the FDA in ways that may significantly affect our business and our products. Any new statutes, regulations or revisions or reinterpretations of existing regulations may impose additional costs or lengthen review times of any future products or make it more difficult to obtain clearance or approval for, manufacture, market or distribute our medical device products. We cannot determine what effect changes in regulations, statutes, legal interpretation or policies, when and if promulgated, enacted or adopted may have on our business in the future. Such changes could, among other things, require: additional testing prior to obtaining clearance or approval; changes to manufacturing methods; recall, replacement or discontinuance of our products; or additional record keeping. The FDA’s and other regulatory authorities’ policies may change and additional government regulations may be enacted that could prevent, limit or delay regulatory clearance or approval of our medical device products. We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in the U.S. or abroad. For example, certain policies of the Trump administration may impact our business and industry. Namely, the Trump administration has taken several executive actions, including the issuance of a number of Executive Orders, that could impose significant burdens on, or otherwise materially delay, the FDA’s ability to engage in routine oversight activities such as implementing statutes through rulemaking, issuing guidance, and reviewing and issuing marketing authorizations. It is difficult to predict how these executive actions will be implemented, and the extent to which they will impact the FDA’s ability to exercise its regulatory authority. If these executive actions impose restrictions on the FDA’s ability to engage in oversight and implementation activities in the normal course, our business may be negatively impacted. If we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, we may lose any marketing clearances or approvals that we may have obtained and we may not achieve or sustain profitability.

Disruptions at the FDA and other government agencies caused by funding shortages or global health concerns could hinder their ability to hire, retain or deploy key leadership and other personnel, or otherwise prevent new or modified products and services from being developed, cleared, approved, or commercialized in a timely manner or at all, which could negatively impact our business.

The ability of the FDA to review and authorize new products can be affected by a variety of factors, including government budget and funding levels, statutory, regulatory, and policy changes, the FDA’s ability to hire and retain key personnel and accept the payment of user fees, and other events that may otherwise affect the FDA’s ability to perform routine functions. Average review times at the agency have fluctuated in recent years as a result. In addition, government funding of other government agencies that fund research and development activities is subject to the political process, which is inherently fluid and unpredictable. Disruptions at the FDA and other agencies may also slow the time necessary for new devices to be reviewed and/or approved or cleared by necessary government agencies, which would adversely affect our business. For example, over the last several years, including for 35 days beginning on December 22, 2018, the U.S. government has shut down several times and certain regulatory agencies, such as the FDA, have had to furlough critical FDA employees and stop critical activities.

 

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Separately, in response to the global COVID-19 pandemic, the FDA announced that all domestic and foreign routine surveillance inspections are temporarily postponed, and that pre-approval and for-cause inspections deemed mission critical are being considered on a case-by-case basis. Subsequently, on July 10, 2020, the FDA announced its intention to resume certain on-site inspections of domestic manufacturing facilities subject to a risk-based prioritization system. The FDA intends to use this risk-based assessment system to identify the categories of regulatory activity that can occur within a given geographic area, ranging from mission critical inspections to resumption of all regulatory activities. On August 19, 2020, the FDA confirmed that foreign pre-approval and for-cause inspection assignments that are not deemed mission-critical remain temporarily postponed, and those that are deemed mission-critical will be considered for inspection on a case-by-case basis. The FDA is continuing to use alternative inspection tools while such routine inspections are postponed, which will continue as conditions warrant. Regulatory authorities outside the U.S. have adopted similar restrictions or other policy measures in response to the COVID-19 pandemic. If a prolonged government shutdown occurs, or if global health concerns continue to prevent the FDA from conducting their regular inspections, reviews, or other regulatory activities, it could significantly impact the ability of the FDA to timely review and process our regulatory submissions, which could have a material adverse effect on our business.

Clinical studies are expensive and subject to extensive regulation and their results may not support our product candidate claims or may result in the discovery of adverse effects.

In developing new products or new indications for, or modifications to, existing products, we may conduct or sponsor pre-clinical testing, clinical studies or other clinical research. We may conduct post-market clinical trials of some of our products to gather information about their performance or optimal use. The data collected from these clinical studies may ultimately be used to support additional market clearance or approval for these products or future products. If any of our new products require premarket clinical studies, these studies are expensive, the outcomes are inherently uncertain and they are subject to extensive regulation and review by numerous governmental authorities both in the U.S. and abroad, including by the FDA and, if federal funds are involved or if an investigator or site has signed a federal assurance, are subject to further regulation by the Office for Human Research Protections and the National Institutes of Health.

Clinical trials must be conducted in accordance with the laws and regulations of the FDA and other applicable regulatory authorities’ legal requirements, regulations or guidelines, and are subject to oversight by these governmental agencies and IRBs at the medical institutions where the clinical trials are conducted. In addition, clinical trials must be conducted with supplies of our devices produced under current good manufacturing practice, or cGMP, requirements and other regulations.

Failure can occur at any time during the clinical trial process, and even if any of our future premarket clinical studies are completed as planned, we cannot be certain that their results will support our product candidates and/or proposed claims or that the FDA or foreign authorities will agree with our interpretation and conclusions regarding the data they generate. Success in pre-clinical studies and early clinical studies does not ensure that later clinical studies will succeed, and we cannot be sure that the results of later studies will replicate those of earlier or prior studies. The clinical study process may fail to demonstrate that our product candidates are safe and effective for the proposed indicated uses, which could cause us to abandon a product candidate and may delay development of others. The FDA or foreign regulatory authorities may require us to conduct unanticipated additional clinical trials as part of future product submissions, which could result in additional expenses and delays in bringing new products to the market. Any delay or termination of any future clinical studies would delay the filing of our product submissions and, ultimately, our ability to commercialize our product candidates and generate revenues. In addition, disruptions caused by the COVID-19 pandemic may increase the likelihood that we encounter such difficulties or delays in initiating, enrolling, conducting or completing our planned clinical trials. It is also possible that patient subjects enrolled in future clinical studies of our marketed products would experience adverse side effects that are not currently part of the product candidate’s profile and, if so, these findings may result in lower market acceptance, which could have a material and adverse effect on our business, results of operations and financial condition.

 

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If the third parties on which we rely to conduct our clinical studies and to assist us with pre-clinical development do not perform as contractually required or expected, we may not obtain regulatory clearance or approval for or commercialize our products.

We often must rely on third parties, such as contract research organizations, medical institutions, clinical investigators and contract laboratories, to assist in conducting our clinical studies and other development activities. The third parties with whom we contract for execution of our non-clinical studies and clinical trials play a significant role in the conduct of these studies and trials and the subsequent collection and analysis of data. However, these third parties are not our employees, and except for contractual duties and obligations, we have limited ability to control the amount or timing of resources that they devote to our programs.

Although we rely on third parties to conduct our clinical trials, we remain responsible for ensuring that each of our clinical trials is conducted in accordance with its investigational plan and protocol. Moreover, the FDA and foreign regulatory authorities require us to comply with regulations and standards, including some regulations commonly referred to as good clinical practices, or GCPs, for conducting, monitoring, recording and reporting the results of clinical trials to ensure that the data and results are scientifically credible and accurate, and that the trial subjects are adequately informed of the potential risks of participating in clinical trials.

If these third parties do not successfully carry out their contractual duties, comply with applicable regulatory obligations or meet expected deadlines, or if these third parties need to be replaced and we need to enter into new arrangements with alternative third parties (which could be difficult, costly, or impossible), or if the quality or accuracy of the data they obtain is compromised due to failing to adhere to clinical protocols, to applicable regulatory requirements or otherwise, our pre-clinical development activities and clinical studies may be extended, delayed, suspended or terminated. Under these circumstances, we may not be able to obtain regulatory clearance or approval for, or successfully commercialize, our products on a timely basis, if at all, and our business, operating results and prospects may be materially and adversely affected.

We are subject to certain U.S. federal, state and foreign fraud and abuse laws and physician payment transparency laws, which, if violated, could subject us to substantial penalties. Additionally, any challenge to or investigation into our practices under these laws could cause adverse publicity and be costly to respond to, and thus could harm our business.

There are numerous U.S. federal and state, as well as foreign, laws pertaining to healthcare fraud and abuse, including anti-kickback, false claims and physician payment transparency laws. Our business practices and relationships with healthcare facilities, surgeons and other healthcare providers are subject to scrutiny under these laws. We may also be subject to patient information privacy and security regulation by both the federal government and the states and foreign jurisdictions in which we conduct our business. The healthcare laws and regulations that may affect our ability to operate include:

 

   

the federal Anti-Kickback Statute, which prohibits, among other things, persons and entities from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce either the referral of an individual or furnishing or arranging for a good or service, for which payment may be made, in whole or in part, under federal healthcare programs, such as Medicare and Medicaid. A person or entity does not need to have actual knowledge of the statute or specific intent to violate it to have committed a violation. Violations of the federal Anti-Kickback Statute may result in substantial civil or criminal penalties, civil penalties under the Civil Monetary Penalties Law, civil penalties under the federal False Claims Act and exclusion from participation in government healthcare programs, including Medicare and Medicaid;

 

   

the federal civil and criminal false claims laws, including the federal civil False Claims Act, which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid or other federal healthcare programs that are false or fraudulent. Moreover, the government may assert that a claim including items or services

 

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resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal civil False Claims Act. Private individuals who bring False Claims Act “qui tam” actions, on behalf of the government and such individuals, commonly known as “whistleblowers,” may share in amounts paid by the entity to the government in fines or settlement. When an entity is determined to have violated the federal civil False Claims Act, the government may impose civil penalties, including treble damages, and exclude the entity from participation in Medicare, Medicaid and other federal healthcare programs;

 

   

the federal Civil Monetary Penalties Law, which prohibits, among other things, offering or transferring remuneration to a federal healthcare beneficiary that a person knows or should know is likely to influence the beneficiary’s decision to order or receive items or services reimbursable by the government from a particular provider or supplier;

 

   

the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), which created additional federal criminal statutes that prohibit, among other things, executing a scheme to defraud any healthcare benefit program and making false statements relating to healthcare matters. Similar to the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it to have committed a violation;

 

   

the federal Physician Payment Sunshine Act, which requires certain manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program (“CHIP”) to report annually to the DHHS Centers for Medicare and Medicaid Services (“CMS”) information related to payments and other transfers of value to physicians (which is defined broadly), teaching hospitals and certain other providers beginning in 2022, and applicable manufacturers to report annually ownership and investment interests held by physicians and their immediate family members. Manufacturers are required to submit annual reports to CMS and failure to do so may result in civil monetary penalties for all payments, transfers of value or ownership or investment interests not reported in an annual submission, and may result in liability under other federal laws or regulations; and

 

   

analogous state and foreign law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payor, including commercial insurers or patients; state laws that require device companies to comply with the industry’s voluntary compliance guidelines and the applicable compliance guidance promulgated by the federal government or otherwise restrict payments that may be made to healthcare providers and other potential referral sources; state laws that require device manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures; and state laws related to insurance fraud in the case of claims involving private insurers.

These laws and regulations, among other things, constrain our business, marketing and other promotional activities by limiting the kinds of financial arrangements, including sales programs, we may have with healthcare facilities, surgeons, other health care providers or other potential purchasers of our products. We have a variety of arrangements with our customers that could implicate these laws, including, among others, our consignment arrangements and our practice of loaning instrument sets to customers at no additional cost. We have also entered into consulting agreements and royalty agreements with surgeons, including some who influence the ordering of or use our products in procedures they perform. We could be adversely affected if regulatory agencies determine our financial relationships with such surgeons to be in violation of applicable laws. Due to the breadth of these laws, the narrowness of statutory exceptions and regulatory safe harbors available, and the range of interpretations to which they are subject, it is possible that some of our current or future practices might be challenged under one or more of these laws.

To enforce compliance with the healthcare regulatory laws, certain enforcement bodies have recently increased their scrutiny of interactions between healthcare companies and healthcare providers, which has led to a number of investigations, prosecutions, convictions and settlements in the healthcare industry. Responding to

 

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investigations can be time-and resource-consuming and can divert management’s attention from the business. Additionally, as a result of these investigations, healthcare providers and entities may have to agree to additional compliance and reporting requirements as part of a consent decree or corporate integrity agreement. Any such investigation or settlement could increase our costs or otherwise have an adverse effect on our business. Even an unsuccessful challenge or investigation into our practices could cause adverse publicity, and be costly to respond to.

If our operations are found to be in violation of any of the healthcare laws or regulations described above or any other healthcare regulations that apply to us, we may be subject to penalties, including administrative, civil and criminal penalties, damages, fines, exclusion from participation in government healthcare programs, such as Medicare and Medicaid, imprisonment, contractual damages, reputational harm, disgorgement and the curtailment or restructuring of our operations.

We are subject to, or may in the future become subject to, U.S. federal, state, and foreign laws and regulations imposing obligations on how we collect, store, use and process information collected from or about patients or their procedures using our products. Our actual or perceived failure to comply with such obligations could harm our business. Ensuring compliance with such legal requirements could also impair our efforts to maintain and expand our customer base, and thereby decrease our revenue.

In the conduct of our business, we may at times process personal data, including health-related personal data. In addition to specific healthcare laws and regulations, the U.S. federal government and various states have adopted or proposed laws, regulations, guidelines and rules for the collection, distribution, use and storage of personal information of patients.

In the U.S., HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009 (“HITECH”) and their respective implementing regulations, impose requirements on certain covered healthcare providers, health plans and healthcare clearinghouses as well as their business associates that perform services for them that involve individually identifiable health information, relating to the privacy, security and transmission of individually identifiable health information without appropriate authorization, including mandatory contractual terms as well as directly applicable privacy and security standards and requirements. Failure to comply with the HIPAA privacy and security standards can result in significant civil monetary penalties and, in certain circumstances, criminal penalties. State attorneys general can also bring a civil action to enjoin a HIPAA violation or to obtain statutory damages on behalf of residents of his or her state. In addition, state privacy and security laws vary from state to state and, in some cases, can impose more restrictive requirements than U.S. federal law, thus complicating compliance efforts. By way of example, California enacted the California Consumer Privacy Act (the “CCPA”) on June 28, 2018, which went into effect on January 1, 2020. The CCPA gives California residents expanded rights to access and delete their personal information, opt out of certain personal information sharing, and receive detailed information about how their personal information is used. Failure to comply with the CCPA could result in penalties of up to $7,500 per violation. The CCPA may increase our compliance costs and potential liability. Other states, including New York and Washington, have considered similar bills, which could be enacted in the future. In addition to fines and penalties that may be imposed for failure to comply with state law, some states also provide for private rights of action to patients for misuse of or unauthorized access to personal information.

Any actual or perceived failure by us or the third parties with whom we work to comply with privacy or security laws, policies, legal obligations or industry standards, or any security incident that results in the unauthorized release or transfer of personally identifiable information, may result in governmental enforcement actions and investigations by U.S. federal and state regulatory authorities, fines and penalties, litigation and/or adverse publicity, including by consumer advocacy groups, and could cause our customers, their patients and other healthcare professionals to lose trust in us, which could harm our reputation and have a material adverse effect on our business, financial condition and results of operations.

 

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We face risks in connection with the ACA or its possible replacement or modifications.

The ACA had introduced unprecedented changes into the US healthcare delivery and payment systems, including generally increasing the number of people with health insurance. Since its enactment, however, there have been judicial and Congressional challenges to certain aspects of the ACA, as well as efforts by the current administration to modify, repeal or otherwise invalidate all, or certain provisions of, the ACA. By way of example, the Tax Cuts and Jobs Act of 2017 (the Tax Act), includes a provision repealing, effective January 1, 2019, the tax-based shared responsibility payment imposed by the ACA on certain individuals who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate.” On December 14, 2018, a U.S. District Court Judge in the Northern District of Texas, ruled that the individual mandate is a critical and inseverable feature of the ACA, and therefore, because income penalties related to the individual mandate were repealed as part of the Tax Act, the remaining provisions of the ACA are invalid as well. On December 18, 2019, the U.S. Court of Appeals for the 5th Circuit upheld the District Court’s decision that the individual mandate was unconstitutional but remanded the case back to the District Court to determine whether the remaining provisions of the ACA are invalid as well. The U.S. Supreme Court has now agreed to review the case, though it is unclear when or how the Supreme Court will rule. It is also unclear how other efforts to challenge, repeal, or replace the ACA will impact the law or our business.

In addition, other legislative changes have been proposed and adopted since the ACA was enacted. On August 2, 2011, the Budget Control Act of 2011 (the “Budget Act”) was signed into law, which, among other things, reduced Medicare payments to providers by 2% per fiscal year, effective on April 1, 2013 and, due to subsequent legislative amendments to the statute, were to remain in effect through 2029. The CARES Act temporarily suspended these reductions from May 1, 2020 through December 31, 2020 and extended the sequester an additional year to 2030. On January 2, 2013, the American Taxpayer Relief Act of 2012 (the “American Taxpayer Relief Act”) was signed into law, which, among other things, reduced Medicare payments to several providers, including healthcare facilities, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. We expect additional state and federal healthcare reform measures to be adopted in the future, any of which could limit reimbursement for healthcare products and services, which could result in reduced demand for our products or additional pricing pressure.

Our business involves the use of hazardous materials and we and our third-party manufacturers must comply with environmental laws and regulations, which may be expensive and restrict how we do business.

Our third-party manufacturers’ activities may involve the controlled storage, use and disposal of hazardous materials. Our manufacturers are subject to federal, state, local and foreign laws and regulations governing the use, generation, manufacture, storage, handling and disposal of these hazardous materials. We currently carry no insurance specifically covering environmental claims relating to the use of hazardous materials, but we do reserve funds to address these claims at both the federal and state levels. Although we believe the safety procedures of our manufacturers for handling and disposing of these materials and waste products comply with the standards prescribed by these laws and regulations, we cannot eliminate the risk of accidental injury or contamination from the use, storage, handling or disposal of hazardous materials. In the event of an accident, state or federal or other applicable authorities may curtail our use of these materials and interrupt our business operations. In addition, if an accident or environmental discharge occurs, or if we discover contamination caused by prior operations, including by prior owners and operators of properties we acquire, we could be liable for cleanup obligations, damages and fines, which could be substantial.

Negative publicity concerning methods of tissue recovery and screening of donor tissue in our industry could reduce demand for our regenerative biologics products and impact the supply of available donor tissue.

Media reports or other negative publicity concerning both alleged improper methods of tissue recovery from donors and disease transmission from donated tissue could limit widespread acceptance of some of our

 

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regenerative biologics products. Unfavorable reports of improper or illegal tissue recovery practices, both in the U.S. and internationally, as well as incidents of improperly processed tissue leading to the transmission of disease, may broadly affect the rate of future tissue donation and market acceptance of technologies incorporating human tissue. In addition, such negative publicity could cause the families of potential donors to become reluctant to agree to donate tissue to for-profit tissue processors. For example, the media has reported examples of alleged illegal harvesting of body parts from cadavers and resulting recalls conducted by certain companies selling human tissue-based products affected by the alleged illegal harvesting. These reports and others could have a negative effect on our business.

Risks Related to Our Intellectual Property

If we are unable to adequately protect our intellectual property rights, or if we are accused of infringing the intellectual property rights of others, our competitive position could be harmed or we could be required to incur significant expenses to enforce or defend our rights.

Our commercial success will depend in part on our success in obtaining and maintaining issued patents and other intellectual property rights in the U.S. and elsewhere and protecting our proprietary technology. If we do not adequately protect our intellectual property and proprietary technology, competitors may be able to use our technologies and erode or negate any competitive advantage we may have, which could harm our business and ability to achieve profitability. As of September 30, 2020, we had approximately 316 issued patents and 50 pending patent applications in the U.S. and approximately 97 issued patents and 50 pending patent applications in other parts of the world. Assuming all required fees continue to be paid, as of September 30, 2020, issued U.S. patents owned by us are scheduled to expire between approximately 2020 and 2037. Six issued U.S. design patents directed to the Lucent Ti-Bond are expected to expire between 2020 and 2022. The expiration of patent protection could result in losses of revenue for those products and potentially harm our business. Some of our products are not protected by patents. Some of our products were acquired from third parties. Accordingly, in some cases, the availability and scope of potential patent protection is limited based on prior decisions by those third parties, such as decisions on when to file patent applications or whether to file patent applications at all.

Patent expiration dates may be affected by a number of factors. For example, patent terms may be shortened or lengthened by terminal disclaimers, patent term adjustments, supplemental protection certificates, and patent term extensions. Patent term extensions and supplemental protection certificates, and the like, may be impacted by the regulatory process and may not significantly lengthen patent term. Non-payment or delay in payment of patent fees or annuities, delay in patent filings or delay in extension filing (including any patent term extension or adjustment filing), whether intentional or unintentional, may also result in the loss of patent rights important to our business.

We cannot provide any assurances that any of our patents has, or that any of our pending patent applications that mature into issued patents will include, claims with a scope sufficient to protect our products and technologies, any additional features we develop for our products or any new products. Other parties may have developed technologies that may be related or competitive to our platform, may have filed or may file patent applications and may have received or may receive patents that overlap or conflict with our patents or patent applications, either by claiming the same methods or devices or by claiming subject matter that could dominate our patent position. The patent positions of medical device companies, including our patent position, may involve complex legal and factual questions, and, therefore, the scope, validity and enforceability of any patent claims that we may obtain cannot be predicted with certainty. Patents, if issued, may be challenged, deemed unenforceable, invalidated or circumvented. Proceedings challenging our patents could result in either loss of the patent or denial of the patent application or loss or reduction in the scope of one or more of the claims of the patent or patent application. In addition, such proceedings may be costly. Thus, any patents that we may own may not provide any protection against competitors. Furthermore, an adverse decision in a derivation proceeding can result in a third party receiving the patent right sought by us, which in turn could affect our ability to commercialize our products. Further, the U.S. Patent and Trademark Office (USPTO), international trademark

 

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offices or judicial bodies may deny our trademark applications and, even if published or registered, these trademarks may not effectively protect our brand and goodwill. Like patents, trademarks also may be opposed, cancelled, or challenged by third parties.

We may not be able to protect our intellectual property rights throughout the world. Filing, prosecuting and defending patents in all countries throughout the world would be prohibitively expensive, and our intellectual property rights in some countries outside the U.S. can be less extensive than those in the U.S. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as federal and state laws in the U.S. Consequently, we may not be able to prevent third parties from practicing our inventions in all countries outside the U.S., or from selling or importing products made using our inventions in and into the U.S. or other jurisdictions. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and further, may export otherwise infringing products to territories where we have patent protection, but enforcement is not as strong as that in the U.S. These products may compete with our products and our patents or other intellectual property rights may not be effective or sufficient to prevent them from competing.

We may not be able to correctly estimate or control our future operating expenses in relation to obtaining intellectual property, enforcing intellectual property and/or defending intellectual property, which could affect operating expenses. Our operating expenses may fluctuate significantly in the future as a result of a variety of factors, including the costs of preparing, filing, prosecuting, defending, and enforcing patent and trademark claims and other intellectual property-related costs, including adverse proceedings (such as litigation) costs.

In addition, while it is our policy to require our employees and contractors who may be involved in the conception or development of intellectual property to execute agreements assigning such intellectual property to us, we may be unsuccessful in executing such an agreement with each party who in fact conceives or develops intellectual property that we regard as our own. Our assignment agreements may not be self-executing or may be breached, and we may be forced to bring claims against third parties, or defend claims they may bring against us, to determine the ownership of what we regard as our intellectual property. We may be subject to claims challenging the inventorship or ownership of our intellectual property. We also may be subject to claims that former employees, collaborators or other third parties have an ownership interest in our patents or other intellectual property. Litigation may be necessary to defend against these and other claims challenging inventorship or ownership. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights. Such an outcome could have a material adverse effect on our business. Even if we are successful in defending against such claims, litigation could result in substantial costs and distraction to management and other employees.

Furthermore, though an issued patent is presumed valid and enforceable, its issuance is not conclusive as to its validity or its enforceability and it may not provide us with adequate proprietary protection or competitive advantages against competitors with similar products. Competitors also may be able to design around our patents. Other parties may develop and obtain patent protection for more effective technologies, designs or methods. We may be unable to prevent the unauthorized disclosure or use of our technical knowledge or trade secrets by consultants, suppliers, vendors, former employees and current employees. The laws of some foreign countries do not protect our proprietary rights to the same extent as the laws of the U.S., and we may encounter significant problems in protecting our proprietary rights in these countries.

Our ability to enforce our patent rights depends on our ability to detect infringement. It may be difficult to detect infringers that do not advertise the components that are used in their products. Moreover, it may be difficult or impossible to obtain evidence of infringement in a competitor’s or potential competitor’s product. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded if we were to prevail may not be commercially meaningful. Adverse proceedings can be expensive, time-consuming and may divert the efforts of our technical and managerial personnel, which could in turn harm our business, whether or not we receive a determination favorable to us. In addition, a court or other judicial body may decide that the patent we

 

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seek to enforce is invalid or unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that the patent in question does not cover the technology in question. An adverse result in any proceeding could put one or more of our patents at risk of being invalidated or interpreted narrowly. Some of our competitors may be able to devote significantly more resources to intellectual property proceedings, and may have significantly broader intellectual property portfolios to assert against us if we assert our rights against them. Further, because of the substantial discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be disclosed or otherwise compromised.

In addition, proceedings to enforce or defend our patents could put our patents at risk of being invalidated, held unenforceable or interpreted narrowly. Such proceedings could also provoke third parties to assert claims against us, including that some or all of the claims in one or more of our patents are invalid or otherwise unenforceable. If any of our patents covering our products is invalidated or found unenforceable, or if a court found that valid, enforceable patents held by third parties covered one or more of our products, our competitive position could be harmed or we could be required to incur significant expenses to enforce or defend our rights. The degree of future protection for our proprietary rights is uncertain, and we cannot ensure that:

 

   

any of our patents, or any of our pending patent applications, if issued, will include claims having a scope sufficient to protect our products;

 

   

any of our pending patent applications may issue as patents;

 

   

we will be able to successfully commercialize our products on a substantial scale, if approved, before our relevant patents we may have expire;

 

   

we were the first to make the inventions covered by each of our patents and pending patent applications;

 

   

we were the first to file patent applications for these inventions;

 

   

others will not develop similar or alternative technologies that do not infringe our patents;

 

   

any of our patents will be found to ultimately be valid and enforceable;

 

   

any patents issued to us will provide a basis for an exclusive market for our commercially viable products, will provide us with any competitive advantages or will not be challenged by third parties;

 

   

we will develop additional proprietary technologies or products that are separately patentable; or

 

   

our commercial activities or products will not infringe the patents of others.

We rely upon unpatented trade secrets, unpatented know-how and continuing technological innovation to develop and maintain our competitive position, which we seek to protect, in part, by confidentiality agreements with our employees and our collaborators and consultants. We also have agreements with our employees and consultants that obligate them to assign their inventions to us and have non-compete agreements with some, but not all, of our consultants. It is possible that technology relevant to our business will be independently developed by a person that is not a party to such an agreement. Furthermore, if the employees and consultants who are parties to these agreements breach or violate the terms of these agreements, we may not have adequate remedies for any such breach or violation, and we could lose our trade secrets through such breaches or violations. Further, our trade secrets could otherwise become known or be independently discovered by our competitors.

If we are unable to obtain, maintain and enforce intellectual property protection directed to our technology and any future technologies that we develop, others may be able to make, use, import or sell products that are the same or substantially the same as ours, which could adversely affect our ability to compete in the market.

If our trademarks and trade names are not adequately protected, then we may not be able to build name recognition in our markets of interest and our business may be adversely affected. Our registered or unregistered trademarks may be challenged, infringed, circumvented, declared to be descriptive, declared generic or conflict with third-party rights. We may not be able to protect our rights to these trademarks, which we need to build

 

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name recognition by potential partners or customers in our markets of interest. In addition, third parties may file first for our trademarks in certain countries. If they succeed in registering such trademarks, and if we are not successful in challenging such third-party rights, we may not be able to use these trademarks to market our products in those countries. In such cases, over the long term, if we are unable to establish name recognition based on our trademarks and trade names, then our marketing abilities may be impacted.

During trademark registration proceedings, we may receive rejections. Although we are given an opportunity to respond to those rejections, we may be unable to overcome such rejections. In addition, in the USPTO and comparable agencies in many foreign jurisdictions, third parties are given an opportunity to oppose pending trademark applications and seek to cancel registered trademarks. Opposition or cancellation proceedings may be filed against our trademarks, and our trademarks may not survive such proceedings. Moreover, any name we propose to use with our product candidates in the U.S. must be approved by the FDA, regardless of whether we have registered it, or applied to register it, as a trademark. The FDA typically conducts a review of proposed product names, including an evaluation of potential for confusion with other product names. If the FDA objects to any of our proposed proprietary product names, we may be required to expend significant additional resources in an effort to identify a suitable substitute name that would qualify under applicable trademark laws, not infringe the existing rights of third parties and be acceptable to the FDA.

Litigation or other proceedings or third-party claims of intellectual property infringement could require us to spend significant time and money and could prevent us from selling our products or impact our stock price.

Our technology and any future products that we commercialize could be alleged to infringe patent rights and other proprietary rights of third parties, which may require costly litigation and, if we are not successful, could cause us to pay substantial damages and/or limit our ability to commercialize our products. Our commercial success will depend in part on not infringing the patents or violating the other proprietary rights of others. Significant litigation and administrative proceedings regarding patent rights occur in our industry. Our competitors in both the U.S. and abroad, many of which have substantially greater resources and have made substantial investments in patent portfolios and competing technologies, may have applied for or obtained or may in the future apply for and obtain, patents that will prevent, limit or otherwise interfere with our ability to make, use and sell our products. Even if resolved in our favor, litigation or other legal proceedings relating to intellectual property claims may cause us to incur significant expenses, and could distract our technical and management personnel from their normal responsibilities. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments, and if securities analysts or investors perceive these results to be negative, it could have a material adverse effect on the price of our common stock. Finally, any uncertainties resulting from the initiation and continuation of any litigation could have a material adverse effect on our ability to raise the funds necessary to continue our operations. We do not always conduct independent reviews of patents issued to third parties and even when we do, such review may not identify patents of relevance to our business or we may incorrectly conclude that an identified patent is invalid or not relevant to our business. In addition, patent applications in the U.S. and elsewhere can be pending for many years before issuance, or unintentionally abandoned patents or applications can be revived, so there may be applications of others now pending or revived patents of which we are unaware. These applications may later result in issued patents, or the revival of previously abandoned patents, that will prevent, limit or otherwise interfere with our ability to make, use or sell our products. Third parties have in the past, and may, in the future, assert claims that we are employing their proprietary technology without authorization, including claims from competitors or from non-practicing entities that have no relevant product revenue and against whom our own patent portfolio may have no deterrent effect. As we continue to commercialize our products in their current or updated forms, launch new products and enter new markets, we expect competitors may claim that one or more of our products infringe their intellectual property rights as part of business strategies designed to impede our successful commercialization and entry into new markets. The large number of patents, the rapid filing rate of new patent applications and issuances, the complexities of the technology involved, and the uncertainty of litigation and administrative proceedings may increase the risk of business resources and management’s attention

 

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being diverted to patent administration and litigation. We have received, and we may in the future receive, letters or other threats or claims from third parties inviting us to take licenses under, or alleging that we infringe, their patents.

Moreover, we may become party to future adversarial proceedings regarding our patent portfolio or the patents of third parties. Such proceedings could include supplemental examination or contested post-grant proceedings such as inter partes review, reexamination, interference or derivation proceedings before the USPTO and challenges in U.S. District Court or before the U.S. International Trade Commission. Patents may be subjected to opposition, post-grant review or comparable proceedings lodged in various foreign, both national and regional, patent offices. The legal threshold for initiating litigation or contested proceedings may be low, so that even lawsuits or proceedings with a low probability of success might be initiated. Litigation and contested proceedings can also be expensive and time-consuming, and our adversaries in these proceedings may have the ability to dedicate substantially greater resources to prosecuting these legal actions than we can.

Any lawsuits resulting from such allegations could subject us to significant liability for damages and invalidate our proprietary rights. Any potential intellectual property litigation also could force us to do one or more of the following:

 

   

stop making, selling, importing or using products or technologies that allegedly infringe the asserted intellectual property;

 

   

lose the opportunity to license our technology to others or to collect royalty payments based upon successful protection and assertion of our intellectual property rights against others;

 

   

incur significant legal expenses;

 

   

pay substantial damages or royalties to the party whose intellectual property rights we may be found to be infringing;

 

   

pay the attorneys’ fees and costs of litigation to the party whose intellectual property rights we may be found to be infringing;

 

   

redesign those products that contain the allegedly infringing intellectual property, which could be costly, disruptive or infeasible; and

 

   

attempt to obtain a license to the relevant intellectual property from third parties, which may not be available on reasonable terms or at all, or from third parties who may attempt to license rights that they do not have.

Any litigation or claim against us, even those without merit, may cause us to incur substantial costs, and could place a significant strain on our financial resources, divert the attention of management from our core business and harm our reputation. If we are found to infringe the intellectual property rights of third parties, we could be required to pay substantial damages (which may be increased up to three times the amount of awarded damages) and/or substantial royalties and could be prevented from selling our products unless we obtain a license or are able to redesign our products to avoid infringement. Any such license may not be available on reasonable terms, if at all, and there can be no assurance that we would be able to redesign our products in a way that would not infringe the intellectual property rights of others. We could encounter delays in product introductions while we attempt to develop alternative methods or products. If we fail to obtain any required licenses or make any necessary changes to our products or technologies, we may have to withdraw existing products from the market or may be unable to commercialize one or more of our products.

Moreover, patent applications in the U.S. and many international jurisdictions are typically not published until 18 months after the filing of certain priority documents (or, in some cases, are not published until they issue as patents) and publications in the scientific literature often lag behind actual discoveries. Thus, we cannot be certain that others have not filed patent applications or made public disclosures relating to our technology or our

 

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contemplated technology. A third party may have filed, and may in the future file, patent applications covering our products or technology similar to ours. Any such patent application may have priority over our patent applications or patents, which could further require us to obtain rights, if available, to patents covering such technologies.

From time to time, we may be subject to legal proceedings and claims in the ordinary course of business with respect to intellectual property. We have received, and may in the future receive, claims from third parties asserting infringement of patents or other intellectual property rights or misappropriation of trade secrets, or offering licenses to such intellectual property. Any claims that we assert against perceived infringers could also provoke these parties to assert counterclaims against us alleging that we infringe their intellectual property rights. At any given time, we may be involved as either a plaintiff or a defendant in a number of patent infringement actions, the outcomes of which may not be known for prolonged periods of time. Litigation may be necessary to establish our intellectual property rights or to defend ourselves by determining the scope, enforceability and/or validity of third-party intellectual property rights. There can be no assurance with respect to the outcome of any litigation brought by or against us, and the outcome of any such litigation could have a material adverse impact on our business, operating results and financial condition. Litigation is inherently unpredictable and outcomes are uncertain. Further, as the costs and outcome of these types of claims and proceedings can vary significantly, it is difficult to estimate potential losses that may occur. Accordingly, we are unable at this time to estimate the effects of these potential future lawsuits on our financial condition, operations or cash flows.

In addition, we generally indemnify our customers and distributors with respect to infringement by our products of the proprietary rights of third parties. Third parties may assert infringement claims against our customers or distributors. These claims may require us to initiate or defend protracted and costly litigation on behalf of our customers or distributors, regardless of the merits of these claims. If any of these claims succeeds or settles, we may be forced to pay damages or settlement payments on behalf of our customers or distributors or may be required to obtain licenses for the products they use. If we cannot obtain all necessary licenses on commercially reasonable terms, our customers may be forced to stop purchasing and using our products.

If we are unable to protect the confidentiality of our trade secrets, our business and competitive position could be harmed.

In addition to patent protection, we also rely upon copyright and trade secret protection, as well as non-disclosure agreements and invention assignment agreements with our employees, consultants and third parties, to protect our confidential and proprietary information. We cannot guarantee that we have entered into such agreements with each party that may have had access to our confidential information or proprietary technology, or that such agreements, even if in place, will not be circumvented. In addition to contractual measures, we try to protect the confidential nature of our proprietary information using commonly accepted physical and technological security measures. Such measures may not, for example, in the case of misappropriation of a trade secret by an employee or third party with authorized access, provide adequate protection for our proprietary information. Our security measures may not prevent an employee or consultant from misappropriating our trade secrets and providing them to a competitor, and recourse we take against such misconduct may not provide an adequate remedy to protect our interests fully. Unauthorized parties may also attempt to copy or reverse engineer certain aspects of our products that we consider proprietary. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret can be difficult, expensive and time-consuming, and the outcome is unpredictable. Even though we use commonly accepted security measures, trade secret violations are often a matter of state law, and the criteria for protection of trade secrets can vary among different jurisdictions. In addition, trade secrets may be independently developed by others in a manner that could prevent legal recourse by us. If any of our confidential or proprietary information, such as our trade secrets, were to be disclosed or misappropriated, or if any such information was independently developed by a competitor, our business and competitive position could be harmed.

 

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We may be unable to enforce our intellectual property rights throughout the world.

We have a number of international patents and patent applications, and expect to continue to pursue patent protection in many of the significant markets in which we intend to do business. The laws of some foreign countries, do not protect intellectual property rights to the same extent as the laws of the U.S. Many companies have encountered significant problems in protecting and defending intellectual property rights in certain foreign jurisdictions. This could make it difficult for us to stop infringement of our foreign patents, if obtained, or the misappropriation of our other intellectual property rights. If we encounter such difficulties or we are otherwise precluded from effectively protecting our intellectual property rights in international jurisdictions, our business prospects could be substantially harmed. Moreover, some foreign countries have compulsory licensing laws under which a patent owner must grant licenses to third parties. In addition, some countries limit the enforceability of patents against third parties, including government agencies or government contractors. In these countries, patents may provide limited or no benefit. Patent protection must ultimately be sought on a country-by-country basis, which is an expensive and time-consuming process with uncertain outcomes. Patent protection available in one country may not be available in other countries. Accordingly, we may choose not to seek patent protection in certain countries, and we will not have the benefit of patent protection in such countries. Varying filing dates in international countries may also permit intervening third parties to allege priority to certain technology.

Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business. Accordingly, our efforts to protect our intellectual property rights in such countries may be inadequate and we may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially meaningful. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing and could provoke third parties to assert claims against us. In addition, changes in the law and legal decisions by courts in the U.S. and foreign countries may affect our ability to obtain adequate protection for our technology and the enforcement of our intellectual property. Certain countries have compulsory licensing laws under which a patent owner may be compelled to grant licenses to other parties. In addition, many countries limit the enforceability of patents against other parties, including government agencies or government contractors. In these countries, the patent owner may have limited remedies, which could materially diminish the value of any patents.

Third parties may assert ownership or commercial rights to inventions we develop.

Third parties may make claims challenging the inventorship or ownership of our intellectual property. In addition, we may face claims by third parties that our agreements with employees, contractors or consultants obligating them to assign intellectual property to us are ineffective or in conflict with prior or competing contractual obligations of assignment, which could result in ownership disputes regarding intellectual property we have developed or will develop and interfere with our ability to capture the commercial value of such intellectual property. Litigation may be necessary to resolve an ownership dispute, and if we are not successful, we may be precluded from using certain intellectual property or may lose our exclusive rights in that intellectual property. Either outcome could harm our business and competitive position.

Third parties may assert that our employees or consultants have wrongfully used or disclosed confidential information or misappropriated trade secrets.

We employ individuals who previously worked with other companies, including our competitors or potential competitors. Although we try to ensure that our employees and consultants do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that we or our employees, consultants or independent contractors have inadvertently or otherwise used or disclosed intellectual property, including trade secrets or other proprietary information, of a former employer or other third party. Litigation may

 

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be necessary to defend against these claims. If we fail in defending any such claims or settling those claims, in addition to paying monetary damages or a settlement payment, we may lose valuable intellectual property rights or personnel. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees.

Recent changes in U.S. patent laws may limit our ability to obtain, defend and/or enforce our patents.

If we were to initiate legal proceedings against a third party to enforce a patent covering one of our products or future products, the defendant could counterclaim that our patent is invalid and/or unenforceable. The defendant may challenge our patents through proceedings before the Patent Trial and Appeal Board (PTAB), including inter partes and post-grant reviews. Proceedings to challenge patents are also available internationally, including for example, opposition proceedings and nullity actions. In patent litigation in the U.S., counterclaims alleging invalidity and/or unenforceability and PTAB challenges are commonplace. Grounds for a validity challenge could be an alleged failure to meet any of several statutory requirements, including lack of novelty, obviousness or non-enablement. Grounds for an unenforceability assertion could be an allegation that someone connected with prosecution of the patent withheld relevant information from the USPTO, or made a misleading statement, during prosecution. Third parties also may raise similar claims before the PTAB, even outside the context of litigation. The outcome following legal assertions of invalidity and unenforceability is unpredictable. With respect to the validity question, for example, we cannot be certain that there is no invalidating prior art, of which we and the patent examiner were unaware during prosecution. If a defendant were to prevail on a legal assertion of invalidity and/or unenforceability, we may lose at least part, and perhaps all, of the patent protection on our product candidates. Such a loss of patent protection would have a material adverse impact on our business.

Even if our patents are determined by a court to be valid and enforceable, courts may not interpret them sufficiently broadly to prevent others from marketing products similar to ours or designing around our patents. For example, third parties may be able to make product that are similar to ours but that are not covered by the claims of our patents. Third parties may assert that we or our licensors were not the first to make the inventions covered by our issued patents or pending patent applications. The claims of our issued patents or patent applications when issued may not cover our proposed commercial technologies or the future products that we develop. We may not have freedom to commercialize unimpeded by the patent rights of others. Third parties may have dominating, blocking, or other patents relevant to our technology of which we are not aware. There may be prior public disclosures or art that could be deemed to invalidate one or more of our patent claims. Further, we may not develop additional proprietary technologies in the future, and, if we do, they may not be patentable.

Patent law can be highly uncertain and involve complex legal and factual questions for which important principles remain unresolved. In the U.S. and in many international jurisdictions, policy regarding the breadth of claims allowed in patents can be inconsistent. The U.S. Supreme Court and the Court of Appeals for the Federal Circuit have made, and will likely continue to make, changes in how the patent laws of the U.S. are interpreted. Similarly, international courts have made, and will likely continue to make, changes in how the patent laws in their respective jurisdictions are interpreted. We cannot predict future changes in the interpretation of patent laws or changes to patent laws that might be enacted into law by U.S. and international legislative bodies. Those changes may materially affect our patent rights and our ability to obtain issued patents.

We depend on technology that is licensed to us by third parties. Any loss of our rights to this technology could prevent us from selling some of our products.

We hold a few IP licenses and we do not own the IP that underlies these licenses. Our rights to use the licensed IP is subject to the continuation of and compliance with the terms of the licenses. We expect that we may need to enter into additional license agreements in the future. Our business could suffer, for example, if any current or future licenses terminates, if the licensors fail to abide by the terms of the license, if the licensed patents or other rights are found to be invalid or unenforceable, or if we are unable to enter into necessary licenses on acceptable terms.

 

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As we have done previously, we may need or may choose to obtain licenses from third parties to advance our research or allow commercialization of our current or future products, and we cannot provide any assurances that third-party patents do not exist that might be enforced against our current or future products in the absence of such a license. We may fail to obtain any of these licenses on commercially reasonable terms, if at all. Even if we are able to obtain a license, it may be non-exclusive, thereby giving our competitors access to the same technologies licensed to us. In that event, we may be required to expend significant time and resources to develop or license replacement technology. If we are unable to do so, we may be unable to develop or commercialize the affected products, which could materially harm our business and the third parties owning such intellectual property rights could seek either an injunction prohibiting our sales, or, with respect to our sales, an obligation on our part to pay royalties and/or other forms of compensation.

Licensing of intellectual property involves complex legal, business and scientific issues. Disputes may arise in the future between us and our licensors regarding intellectual property subject to a license agreement, including:

 

   

the scope of rights granted under the license agreement and other interpretation-related issues;

 

   

whether and the extent to which our technology and processes infringe intellectual property of the licensor that is not subject to the licensing agreement;

 

   

our right to sublicense patent and other rights to third parties under collaborative development relationships;

 

   

our diligence obligations with respect to the use of the licensed technology in relation to our development and commercialization of our products, and what activities satisfy those diligence obligations; and

 

   

the ownership of inventions and know-how resulting from the joint creation or use of intellectual property by our licensors and us and our partners.

If disputes over intellectual property that we have licensed prevent or impair our ability to maintain our current licensing arrangements on acceptable terms, we may be unable to successfully develop and commercialize the affected product, or the dispute may have an adverse effect on our results of operation.

Risks Related to this Offering and Ownership of Our Common Stock

The price of our common stock may be volatile, and the value of your investment could decline.

Prior to this offering, there has been no public market for our common stock, and stocks of medical device companies have historically experienced volatility. The trading price of shares of our common stock following this offering may fluctuate substantially. Following the closing of this offering, the market price of shares of our common stock may be higher or lower than the initial public offering price, depending on many factors, some of which are beyond our control and may not be related to our operating performance. These fluctuations could cause you to lose all or part of your investment in our common stock. Factors that could cause fluctuations in the trading price of our common stock include the following:

 

   

actual or anticipated changes or fluctuations in our results of operations;

 

   

results of our clinical trials and that of our competitors’ products;

 

   

regulatory actions with respect to our products or our competitor’s products;

 

   

announcements of new offerings, products, services or technologies, commercial relationships, acquisitions, or other events

 

   

by us or our competitors;

 

   

price and volume fluctuations in the overall stock market from time to time;

 

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significant volatility in the market price and trading volume of healthcare companies, in general, and of companies in the medical device industry in particular;

 

   

fluctuations in the trading volume of our shares or the size of our public float;

 

   

negative publicity;

 

   

whether our results of operations meet the expectations of securities analysts or investors or those expectations change;

 

   

litigation involving us, our industry, or both;

 

   

regulatory developments in the U.S., foreign countries, or both;

 

   

lock-up releases and sales of large blocks of our common stock;

 

   

additions or departures of key employees or scientific personnel; and

 

   

general economic conditions and trends.

In addition, if the market for medical device company stocks or the stock market, in general, experiences a loss of investor confidence, the trading price of shares of our common stock could decline for reasons unrelated to our business, results of operations or financial condition. The trading price of shares of our common stock might also decline in reaction to events that affect other companies in our industry even if these events do not directly affect us. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been brought against that company. If our stock price is volatile, we may become the target of securities litigation. Securities litigation could result in substantial costs and divert our management’s attention and resources from our business. This could have a material adverse effect on our business, results of operations and financial condition.

Sales of substantial amounts of our common stock in the public markets, including when the “lock-up” or “market standoff” period ends, or the perception that sales might occur, could reduce the price of shares of our common stock and may dilute your voting power and your ownership interest in us.

Sales of a substantial number of shares of our common stock in the public market after this offering, or the perception that these sales could occur, could adversely affect the market price of our common stock, and may make it more difficult for you to sell your common stock at a time and price that you deem appropriate. Based on the total number of outstanding shares of our common stock as of September 30, 2020 and assuming the sale of 6,000,000 shares of our common stock in a concurrent private placement, upon the closing of this offering, we will have 27,154,783 shares outstanding (or 28,309,783 shares if the underwriters exercise their option to purchase additional shares of our common stock in full). All of the shares of common stock sold in this offering will be freely tradable without restrictions or further registration under the Securities Act except for any shares held by our “affiliates” as defined in Rule 144 under the Securities Act.

Subject to certain exceptions, we, our directors and officers and the holders of substantially all of our common stock, warrants and stock options have agreed not to offer, sell or agree to sell, directly or indirectly, any shares of common stock without the prior written consent of Credit Suisse Securities (USA) LLC, Robert W. Baird & Co. Incorporated and Stifel, Nicolaus & Company, Incorporated for a period of 180 days from the date of this prospectus. When the lock- up period expires, our security holders will be able to sell shares in the public market subject to any restrictions under the securities laws. In addition, Credit Suisse Securities (USA) LLC, Robert W. Baird & Co. Incorporated and Stifel, Nicolaus & Company, Incorporated may, in their discretion, release all or some portion of the shares subject to lock-up agreements prior to the expiration of the lock-up period. See “Shares Eligible for Future Sale” for more information. Sales of a substantial number of such shares upon expiration, or the perception that such sales may occur, or early release of the lock-up, could cause our share price to fall, or make it more difficult for you to sell your shares of our common stock at a time and price that you deem appropriate.

 

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Based on shares outstanding as of September 30, 2020 and assuming the sale of 6,000,000 shares of our common stock in a concurrent private placement, the holders of 19,454,783 shares, or approximately 72%, of our common stock after this offering, will have rights, subject to some conditions, to require us to file registration statements covering the sale of their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. We also intend to register the offer and sale of all shares of common stock that we may issue under our equity compensation plans.

We may issue our shares of common stock or securities convertible into our common stock from time to time in connection with a financing, acquisition, investments or otherwise. Any such issuance could result in substantial dilution to our existing stockholders and cause the trading price of our common stock to decline.

Because the Kohlberg Funds will beneficially own a significant percentage of our common stock, they will have the ability to control all major corporate decisions and their interests may conflict with your interests as an owner of our common stock and those of the company.

We are controlled by the Kohlberg Funds, which after the completion of this offering, assuming we sell the number of shares of our common stock set forth on the cover page of this prospectus and after giving effect to the recapitalization described elsewhere in this prospectus, but excluding any shares of our common stock that the Kohlberg Funds purchase in a concurrent private placement, will beneficially own approximately 56% of the outstanding shares of our common stock (or approximately 53% of the outstanding shares of our common stock if the underwriters exercise their option to purchase additional shares in full). Assuming the Kohlberg Funds purchase 6,000,000 shares of our common stock in a concurrent private placement, the Kohlberg Funds will beneficially own approximately 65% of the outstanding shares of our common stock (or approximately 63% of the outstanding shares of our common stock if the underwriters exercise their option to purchase additional shares in full). Accordingly, the Kohlberg Funds will have the ability to control the election of the majority of our directors and could exercise a controlling interest over our business, affairs and policies, including the appointment of our management and the entering into of business combinations or dispositions and other corporate transactions. The directors they elect will have the authority to incur additional debt, issue or repurchase stock, declare dividends and make other decisions that could be detrimental to stockholders.

The Kohlberg Funds may have interests that are different from yours and may vote in a way with which you disagree and that may be adverse to your interests. In addition, concentration of ownership could have the effect of delaying or preventing a change in control or otherwise discouraging a potential acquirer from attempting to obtain control of us, which could cause the market price of our common stock to decline or prevent our stockholders from realizing a premium over the market price for their common stock.

Additionally, the Kohlberg Funds are in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete directly or indirectly with us or supply us with goods and services. They may also pursue acquisition opportunities that may be complementary to our business and, as a result, those acquisition opportunities may not be available to us. Stockholders should consider that the interests of the Kohlberg Funds may differ from their interests in material respects.

Insiders will continue to have substantial control over us after this offering, which could limit your ability to influence the outcome of key transactions, including a change of control.

Our directors, executive officers, and the Kohlberg Funds, will beneficially own an aggregate of approximately 58% of the outstanding shares of our common stock after this offering, assuming we sell the number of shares of our common stock set forth on the cover page of this prospectus and after giving effect to the recapitalization described elsewhere in this prospectus but excluding any shares of our common stock that the Kohlberg Funds purchase in a concurrent private placement. Assuming the Kohlberg Funds purchase 6,000,000 shares of our common stock in a concurrent private placement, the Kohlberg Funds will beneficially own approximately 65% of the outstanding shares of our common stock (or approximately 63% of the outstanding

 

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shares of our common stock if the underwriters exercise their option to purchase additional shares in full). As a result, these stockholders will be able to influence or control matters requiring approval by our stockholders, including the election of directors and the approval of mergers, acquisitions or other extraordinary transactions. They may also have interests that differ from yours and may vote in a manner that is adverse to your interests. This concentration of ownership may have the effect of deterring, delaying, or preventing a change of control of our Company, could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our Company and might ultimately affect the market price of our common stock.

After the completion of this offering, we will be a “controlled company” under the corporate governance standards of the Nasdaq Stock Market and will qualify for exemptions from certain corporate governance standards. You will not have the same protections afforded to stockholders of companies that are subject to such requirements.

After the completion of this offering, assuming we sell the number of shares of our common stock set forth on the cover page of this prospectus and after giving effect to the recapitalization, but excluding any shares of our common stock that the Kohlberg Funds purchase in a concurrent private placement, the Kohlberg Funds will beneficially own approximately 56% of the outstanding shares of our common stock (or approximately 53% of the outstanding shares of our common stock if the underwriters exercise their option to purchase additional shares in full). Assuming the Kohlberg Funds purchase 6,000,000 shares of our common stock in a concurrent private placement, the Kohlberg Funds will beneficially own approximately 65% of the outstanding shares of our common stock (or approximately 63% of the outstanding shares of our common stock if the underwriters exercise their option to purchase additional shares in full). As a result, the Kohlberg Funds will hold shares of our common stock representing a majority of the voting power for the election of our directors and we will be a “controlled company” under the corporate governance standards of the Nasdaq Stock Market. As a controlled company, exemptions under the Nasdaq Stock Market standards will exempt us from certain corporate governance requirements, including the requirements that (i) a majority of our board of directors consists of “independent directors,” as defined under the Nasdaq Stock Market rules; (ii) that the compensation of our executive officers be determined, or recommended to the board of directors for determination, by majority vote of the independent directors or by a compensation committee comprised solely of independent directors; and (iii) that director nominees be selected, or recommended to the board of directors for selection, by majority vote of the independent directors or by a nominating and corporate governance committee comprised solely of independent directors. Accordingly, you may not have the same protections afforded to stockholders of companies that are subject to all of the Nasdaq Stock Market corporate governance requirements. In the event that we cease to be a controlled company, we will be required to comply with these provisions within the transition periods specified in the Nasdaq Stock Market corporate governance standards. See “Management—Status as a Controlled Company.”

There is no existing market for our common stock, and we cannot assure you that a market will develop for our common stock or what the market price of our common stock will be.

Prior to this offering, there has been no public market for our common stock. We cannot predict the extent to which investor interest in our Company will lead to the development of an active trading market on the Nasdaq Global Market or otherwise or how liquid that market might become. If an active trading market does not develop, you may have difficulty selling any shares of our common stock that you purchase, and the value of such shares might be materially impaired.

In addition, we cannot predict the prices at which our common stock will trade. The initial public offering price for our common stock will be determined by negotiations between us and the representatives of the underwriters and may not be indicative of prices that will prevail in the open market following this offering. Consequently, you may not be able to sell shares of our common stock at prices equal to or greater than the price you paid in this offering.

 

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We have broad discretion in the use of net proceeds that we receive in this offering, and if we do not use those proceeds effectively, your investment could be harmed.

The principal purposes of this offering are to create a public market for our common stock, repay our existing indebtedness, redeem our Series A preferred stock, obtain additional working capital and facilitate our future access to the public equity markets. We intend to use the net proceeds from this offering, together with the net proceeds from (a) the sale of 6,000,000 shares of our common stock at an assumed price of $14.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, in a private placement that would close immediately following the pricing of this offering, and (b) the Senior Secured Term Loans, as described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Refinancing of First Lien Credit Facilities and Second Lien Notes,” to (i) repay approximately $168.1 million of our indebtedness, representing all amounts outstanding under the First Lien Credit Facilities and the Second Lien Notes as of October 6, 2020, (ii) redeem, at a redemption price of approximately $3.4 million in the aggregate, all outstanding shares of Series A preferred stock, (iii) repay all amounts outstanding under Series A Notes and Series C Notes, including accrued interest but excluding any Series A Notes and Series C Notes that have been tendered to us in the exchange offer that we have made to all note holders to exchange their Series A Notes and Series C Notes for shares of our common stock and (iv) use any remaining net proceeds for working capital and for general corporate purposes. Accordingly, our management will have broad discretion in the application of the net proceeds to us from this offering. Investors in this offering will need to rely upon the judgment of our management regarding the application of the proceeds. If we do not use the net proceeds that we receive in this offering effectively, our business, results of operations and financial condition could be harmed.

We are an “emerging growth company” and a “smaller reporting company,” we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies and smaller reporting companies will make our common stock less attractive to investors.

We are an “emerging growth company” as defined in the JOBS Act and we intend to take advantage of some of the exemptions from reporting requirements that are applicable to other public companies that are not emerging growth companies, including:

 

   

reduced obligations with respect to financial data, including presenting only two years of audited financial statements and only two years of selected financial data;

 

   

an exception from compliance with the auditor attestation requirements of Section 404 of the Sarbanes- Oxley Act of 2002;

 

   

reduced disclosure about our executive compensation arrangements in our periodic reports, proxy statements and registration statements;

 

   

exemptions from the requirements of holding non-binding advisory votes on executive compensation or golden parachute arrangements; and

 

   

exemption from complying with new or revised financial accounting standards until such time as such standards are applicable to private companies.

We cannot predict if investors will find our common stock less attractive because we will rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile. We may take advantage of these reporting exemptions until we are no longer an EGC.

We will cease to be an EGC on the date that is the earliest of (i) the last day of the fiscal year in which we have total annual gross revenues of $1.07 billion or more; (ii) the last day of the fiscal year following the fifth anniversary of the completion of this offering; (iii) the date on which we have issued more than $1.0 billion in nonconvertible debt during the previous three years; or (iv) the last day of the fiscal year in which we are deemed to be a large accelerated filer under the rules of the SEC.

 

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In addition, we are also a “smaller reporting company” as defined in Item 10(f)(1) of Regulation S-K. We may continue to be a smaller reporting company after this offering if either (i) the market value of our stock held by non-affiliates is less than $250 million or (ii) our annual revenue is less than $100 million during the most recently completed fiscal year and the market value of our stock held by non-affiliates is less than $700 million. If we are a smaller reporting company at the time we cease to be an EGC, we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies. Specifically, as a smaller reporting company we may choose to present only the two most recent fiscal years of audited financial statements in our Annual Report on Form 10-K and, similar to emerging growth companies, smaller reporting companies have reduced disclosure obligations regarding executive compensation.

Because the initial public offering price of our common stock will be substantially higher than the pro forma as adjusted net tangible book value per share of our outstanding common stock following this offering, new investors will experience immediate and substantial dilution.

The initial public offering price of our common stock is substantially higher than the pro forma as adjusted net tangible book value per share of our common stock immediately following this offering based on the total value of our tangible assets less our total liabilities. Therefore, if you purchase shares of our common stock in this offering, you will experience immediate dilution of $12.09 per share, the difference between the assumed limited public offering price of $14.00 per share, which is the midpoint of the range as set forth on the cover page of this prospectus, and the pro forma as adjusted net tangible book value per share of our common stock of $(1.91), immediately after giving effect to the issuance of shares of our common stock in this offering, the issuance of shares in the concurrent private placement and the recapitalization, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. See “Dilution.”

If securities or industry analysts do not publish research or reports about our business, or publish unfavorable research reports about our business, our share price and trading volume could decline.

The trading market for our common stock will, to some extent, depend on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. If one or more of the analysts who cover us publishes unfavorable commentary about us or changes their opinion of our business prospects, our share price would likely decline. If one or more of these analysts ceases coverage of or fails to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.

We do not intend to pay dividends for the foreseeable future and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.

We have never declared or paid any cash dividends on our common stock and we do not currently intend to pay any cash dividends on our common stock in the foreseeable future. In addition, the First Lien Credit Facilities and the Second Lien Notes restrict our ability to pay dividends on capital stock, and we expect that the Senior Secured Term Loans will include similar restrictions, which will limit our ability to pay dividends on our common stock. We currently intend to retain all available funds and any future earnings to support operations and to finance the growth and development of our business. As a result, you may only receive a return on your investment in our common stock if the market price of our common stock increases.

Our charter documents and Delaware law could discourage takeover attempts and lead to management entrenchment.

Our restated certificate of incorporation and amended and restated bylaws that will become effective immediately prior to the completion of this offering contain provisions that could delay or prevent a change in control of our Company. These provisions could also make it difficult for stockholders to elect directors that are

 

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not nominated by the current members of our board of directors or take other corporate actions, including effecting changes in our management. These provisions include:

 

   

a classified board of directors with three-year staggered terms, which could delay the ability of stockholders to change the membership of a majority of our board of directors;

 

   

the ability of our board of directors to issue shares of preferred stock and to determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquiror;

 

   

the exclusive right of our board of directors to elect a director to fill a vacancy created by the expansion of our board of directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our board of directors;

 

   

a prohibition on stockholder action by written consent, following the date on which the Kohlberg Funds no longer beneficially own a majority of the outstanding shares of our common stock, which forces stockholder action to be taken at an annual or special meeting of our stockholders;

 

   

the requirement that a special meeting of stockholders may be called only by our chairperson of the board of directors, by a resolution adopted by a majority of our board of directors and by our Secretary at the request of the holders of 50% or more of the outstanding shares of our common stock so long as the Kohlberg Funds beneficially own a majority of the outstanding shares of our common stock, which could delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors;

 

   

the requirement for the affirmative vote of holders of at least 75% of the voting power of all of the then-outstanding shares of the voting stock, voting together as a single class, following the date on which the Kohlberg Funds no longer beneficially own a majority of the outstanding shares of our common stock to amend the provisions of our restated certificate of incorporation relating to the management of our business or our amended and restated bylaws, which may inhibit the ability of an acquiror to effect such amendments to facilitate an unsolicited takeover attempt; and

 

   

advance notice procedures with which stockholders must comply to nominate candidates to our board of directors or to propose matters to be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquiror from conducting a solicitation of proxies to elect the acquiror’s own slate of directors or otherwise attempting to obtain control of us.

In addition, while we will not be subject to any anti-takeover effects of Section 203 of the Delaware General Corporation Law (the “DGCL”), our restated certificate of incorporation contains provisions that have the same effect as Section 203, except that they provide that the Kohlberg Funds will not be deemed to be an “interested stockholder,” regardless of the percentage of our voting stock owned by the Kohlberg Funds. These provisions may prohibit large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us for a certain period of time. This and other provisions in our restated certificate of incorporation, amended and restated bylaws and Delaware law could make it more difficult for stockholders or potential acquirers to obtain control of our board of directors or initiate actions that are opposed by our then-current board of directors, including delay or impede a merger, tender offer, or proxy contest involving our Company. The existence of these provisions could negatively affect the price of our common stock and limit opportunities for you to realize value in a corporate transaction.

Our restated certificate of incorporation provides that the Court of Chancery of the State of Delaware and the federal district courts of the United States of America will be the exclusive forums for substantially all disputes between us and our stockholders, which restricts our stockholders’ ability to bring a lawsuit against us or our directors, officers, or employees in jurisdictions other than Delaware and federal district courts.

Our restated certificate of incorporation provides that, unless our board of directors approves the selection of an alternate forum, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for: (i) any derivative action or proceeding brought on our behalf; (ii) any action asserting a claim of breach of a

 

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fiduciary duty owed by any of our directors, officers, employees, security holders or stockholders, or a claim for aiding and abetting any such breach; (iii) any action asserting a claim against us arising pursuant to any provision of the DGCL or our restated certificate of incorporation or amended and restated bylaws; (iv) any action to interpret, apply, enforce or determine the validity of our restated certificate of incorporation or amended and restated bylaws; or (v) any action asserting a claim governed by the internal affairs doctrine, except that, the exclusive forum provision will not apply to any suits brought to enforce any liability or duty created by the Exchange Act for which the federal courts have exclusive jurisdiction. Our restated certificate of incorporation further provides that the federal district courts of the United States of America will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act or the Exchange Act. These choice of forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees.

 

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INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

This prospectus includes forward-looking statements. All statements other than statements of historical facts contained in this prospectus, including statements regarding our future results of operations and financial position, business strategy and plans, industry environment, potential growth opportunities, existing and future products and technologies, product clearance and approvals, future results of our products and our expectations for future operations are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “design,” “intend,” “expect,” “could,” “plan,” “potential,” “seek,” “should,” “would,” or the negative version of these words and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events and trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in the section entitled “Risk Factors,” and the following risks, uncertainties and factors:

 

   

our inability to achieve or sustain profitability;

 

   

our inability to compete successfully;

 

   

our inability to market, sell and improve our existing products and technologies, commercialize our existing products and products in development and develop new products and technologies;

 

   

the current global COVID-19 pandemic;

 

   

our inability to demonstrate to surgeons and key opinion leaders the merits of our products and technologies;

 

   

our inability to persuade hospitals, ambulatory surgery centers and other healthcare facilities to approve the use of our products;

 

   

if the quality of our products and technologies does not meet the expectations of surgeons or patients;

 

   

lack of published long-term data supporting superior clinical outcomes enabled by our products or technologies;

 

   

increased downward pricing pressure on medical services and products caused by industry trends and the proliferation of physician-owned distributorships;

 

   

failure of surgeons to safely and appropriately use our products or our inability to train surgeons on the safe and appropriate use of our products;

 

   

unforeseen adverse events or undesirable side effects of our products;

 

   

our inability to maintain adequate levels of inventory;

 

   

our strategy proving to be flawed or our inability to successfully implement our business strategy;

 

   

our inability to manage our anticipated growth;

 

   

our inability to maintain and expand our network of independent distributors;

 

   

our inability to successfully expand our sales management and sales specialist teams;

 

   

loss or degradation in performance of our third-party suppliers and manufacturers;

 

   

loss of any member on our executive management team;

 

   

disruptions in our information technology systems;

 

   

inability to protect our information systems from data theft or corruption, cyber-based attacks, security breaches or privacy violations;

 

   

political, economic and social instability abroad;

 

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natural or other disasters, power loss, strikes and other events beyond our control;

 

   

negative publicity;

 

   

our inability to comply with government regulation and oversight both in the U.S. and abroad; and

 

   

our inability to adequately protect our intellectual property rights.

Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this prospectus may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance, or events and circumstances reflected in the forward-looking statements will be achieved or occur. Moreover, except as required by law, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this prospectus to conform these statements to actual results or to changes in our expectations.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this prospectus, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely upon these statements.

You should read this prospectus and the documents that we reference in this prospectus and have filed with the SEC as exhibits to the registration statement of which this prospectus is a part with the understanding that our future results of operations and financial position, business strategy and plans, industry environment, potential growth opportunities, existing and future products, product clearance and approvals, future results of our products and our expectations for future operations may be materially different from what we expect.

 

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USE OF PROCEEDS

We estimate that our net proceeds from this offering of 7,700,000 shares of our common stock will be approximately $91.6 million, or $106.7 million if the underwriters exercise their option to purchase additional shares of our common stock in full, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, assuming an initial public offering price of $14.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus. Further, we expect the net proceeds from the private placement to be $84 million based on an assumed price of $14.00 per share, equal to the midpoint of the price range for the shares offered hereby set forth on the cover page of this prospectus.

We intend to use the net proceeds from this offering, together with the net proceeds from (a) the sale of 6,000,000 shares of our common stock at an assumed price of $14.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, in a private placement that would close immediately following the pricing of this offering, and (b) the Senior Secured Term Loans, as described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Refinancing of First Lien Credit Facilities and Second Lien Notes,” to (i) repay approximately $168.1 million of our indebtedness, representing all amounts outstanding under the First Lien Credit Facilities and the Second Lien Notes as of October 6, 2020, (ii) redeem, at a redemption price of approximately $3.4 million in the aggregate, all outstanding shares of Series A preferred stock, (iii) repay all amounts outstanding under Series A Notes and Series C Notes, including accrued interest but excluding any Series A Notes and Series C Notes that have been tendered to us for exchange into shares of our common stock pursuant to the exchange offer that we have made to all of the holder of the Series A Notes and Series C Notes and (iv) use any remaining net proceeds for working capital and for general corporate purposes.

As of June 30, 2020, there was approximately $138.9 million in aggregate principal amount of debt outstanding under the First Lien Credit Facilities, consisting of (i) approximately $67.0 million outstanding under the Term Loan, bearing interest at rates ranging from 6.5% to 7.3% and having a maturity date of April 13, 2023, (ii) approximately $21.9 million outstanding under the Revolving Credit Facility, bearing interest at a rate of 6.5% and having a maturity date of April 13, 2022 and (iii) approximately $50.0 million outstanding under the LIFO Revolving Facility, bearing interest at rates ranging from 6.0% to 6.6% and having a maturity date of December 31, 2021. As of June 30, 2020, there was also (i) approximately $27.1 million of debt outstanding under the Second Lien Notes, bearing interest at a rate of 11.9% and having a maturity date of October 31, 2023, (ii) approximately $6.9 million of debt outstanding under Series A Notes, bearing interest at a rate of 12% and having a maturity date of March 5, 2025, of which $0.4 million in aggregate principal amount has been tendered to us for exchange into shares of our common stock pursuant to the exchange offer as of October 6, 2020 and (iii) approximately $0.4 million of debt outstanding under Series C Notes, bearing interest at a rate of 12% and having a maturity date of March 5, 2025, of which $0.3 million in aggregate principal amount has been tendered to us for exchange into shares of our common stock pursuant to the exchange offer as of October 6, 2020. For additional information regarding the First Lien Credit Facilities, the Second Lien Notes, the Series A Notes and the Series C Notes, see “Description of Certain Indebtedness.”

Assuming no exercise of the underwriters option to purchase additional shares of our common stock and excluding the proceeds from the sale of 6,000,000 shares of our common stock at an assumed price of $14.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, in a private placement that would close immediately following the pricing of this offering, each $1.00 increase (decrease) in the assumed initial public offering price of $14.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) our net proceeds from this offering by approximately $7.2 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. Each increase (decrease) by 100,000 shares in the number of shares offered by us would increase (decrease) our net proceeds from this offering by approximately $1.3 million, assuming the assumed initial public offering price remains the same and

 

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excluding any shares sold in the private placement that would close immediately following the pricing of this offering and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

Because we cannot specify with certainty all of the particular uses of our net proceeds, our management will have broad discretion over the use of our net proceeds from this offering. Pending the use of our net proceeds from this offering, we intend to invest the net proceeds in short-term interest-bearing investment-grade securities, certificates of deposit or government securities.

 

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DIVIDEND POLICY

We have never declared or paid any cash dividends on our common stock or preferred stock and we do not currently intend to pay any cash dividends on our common stock in the foreseeable future. In addition, the First Lien Credit Facilities and the Second Lien Notes restrict our ability to pay dividends on capital stock, and we expect that the Senior Secured Term Loans will include similar restrictions, which will limit our ability to pay dividends on our common stock.

We currently intend to retain all available funds and any future earnings to support operations and to finance the growth and development of our business. Any future determination to pay dividends will be made at the discretion of our board of directors subject to applicable laws, and will depend upon, among other factors, our results of operations, financial condition, contractual restrictions and capital requirements. Our future ability to pay cash dividends on our common stock may also be limited by the terms of any future indebtedness or preferred securities.

 

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RECAPITALIZATION

On October 6, 2020, we completed a 1-for-12.6013 reverse split of our common stock. Immediately prior to the completion this offering, we had common stock and two series of preferred stock outstanding, Series A preferred stock and Series B preferred stock. The Series A preferred stock accrue dividends from the date of issuance at the rate of $0.12 per share per annum. The Series A accruing dividends accrue from day to day, whether or not declared, and are cumulative and non-compounding. The Series A preferred stock is not convertible into common stock and may be redeemed by us at the election of our board of directors on not less than forty days prior written notice at a price per share, payable in cash, equal to $1.06 plus all unpaid Series A accruing dividends through the date of redemption. The Series B preferred stock accrue dividends from the date of issuance at the rate of 12% per annum (computed on the basis of a 365-day year and the actual days elapsed) on the Series B original issue price (initially $1.00 per share), whether or not declared, and are cumulative and compound on a quarterly basis. All accumulated and unpaid Series B accruing dividends accrete to and increase the Series B original issue price on a quarterly basis. The Series B preferred stock is convertible into common stock as described below upon the vote or written consent of the holders of a majority of the then outstanding shares of Series B preferred stock.

We may not declare, pay or set aside any dividends on shares of our capital stock unless the holders of the Series B preferred stock first receive, or simultaneously receive, a dividend on each outstanding share of Series B preferred stock in an amount equal to the Series B accruing dividends then accrued on such share of Series B preferred stock and not previously paid. Similarly, other than the Series B accruing dividends referred to in the immediately preceding sentence, we may not declare, pay or set aside any dividends on shares of our capital stock unless the holders of the Series A preferred stock first receive, or simultaneously receive, a dividend on each outstanding share of Series A preferred stock in an amount equal to the Series A accruing dividends then accrued on such share of Series A preferred stock and not previously paid. In addition, each share of Series B preferred stock, first, and Series A preferred stock, second, is entitled to a preferential payment upon any liquidating distribution by us to holders of our capital stock in an amount equal to, in the case of each share of Series B preferred stock, the greater of the Series B original issue price (as adjusted to reflect any Series B accruing dividends accrued and unpaid thereon, whether or not declared) and the amount per share that would have been payable had such Series B preferred stock converted to common stock immediately prior to such liquidation, distribution or winding up (or deemed liquidation event), and, in the case of each share of Series A preferred stock, $1.06 plus any unpaid Series A accruing dividends, whether or not declared. On any matter presented to our stockholders at any meeting of stockholders (or by written consent in lieu of a meeting), each holder of outstanding shares of Series A preferred stock is entitled to cast, in respect of the shares of Series A preferred stock held by such stockholder, the number of votes equal to 0.5 times the number of shares of Series A preferred stock held by such stockholder and each holder of outstanding shares of Series B preferred stock is entitled to cast, in respect of the shares of Series B preferred stock held by such stockholder, the number of votes equal to the number of shares of Series B preferred stock held by such stockholder.

Immediately prior to the closing of this offering, we will convert the outstanding shares of Series B preferred stock into approximately 6,601,955 shares of common stock, determined by multiplying the number of shares of Series B preferred stock held by a stockholder by a fraction, the numerator of which is the Series B original issue price (as adjusted to reflect all Series B accruing dividends accrued and unpaid through the date of conversion) that is currently estimated to be $1.52, and the denominator of which is the Series B conversion price (as adjusted to reflect the 1-for-12.6013 reverse split of our common stock), equal to $12.60, rounded down to eliminate any fractional shares (which fractional share amount will be paid in cash based on our initial public offering price), which conversion price amount is based on an assumed closing date of October 19, 2020. The estimated Series B accruing dividends amount is based upon an assumed closing date for this offering of October 19, 2020. To the extent that the pricing date for this offering occurs before or after such date, the aggregate Series B accruing dividends amount will be less or more, as applicable, than such estimated amount by approximately $28,468.55 per day (or approximately $0.0005 per share per day).

 

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We intend to use a portion of the net proceeds from this offering to redeem all of our outstanding shares of Series A preferred stock. We estimate that the aggregate redemption price for the 2,222,022 outstanding shares of Series A preferred stock will be approximately $3.4 million. The estimated Series A redemption price is based upon an assumed closing date for this offering of October 19, 2020 and an assumed redemption date for the Series A preferred stock of November 30, 2020. To the extent that the redemption date for this offering occurs before or after such date, the aggregate Series A redemption price will be less or more, as applicable, than such estimated amount by approximately $730.53 per day (or approximately $0.0003 per share per day).

In addition, in connection with the closing of this offering, we have offered to exchange all outstanding Series A Notes, Series C Notes and Series A Warrants into shares of our common stock pursuant to an exchange offer that we have made to all holders of Series A Notes, Series C Notes and Series A Warrants. The number of shares that will be issued in connection with the exchange offer will be determined by dividing (i) the sum of the principal amount of the Series A Notes, Series C Notes and the Series A Notes underlying the Series A Warrants that are tendered plus any unpaid interest accrued thereon to, but not including, the date of issuance of the common stock minus, solely in the case of the Series A Warrants, the applicable exercise price, divided by (ii) the initial public offering price per share in this offering. As of October 6, 2020, holders of approximately $0.9 million in aggregate principal amount of Series A Notes, Series C Notes and Series A Notes underlying Series A Warrants have tendered their Series A Notes, Series C Notes or Series A Warrants pursuant to the exchange offer. Assuming that (i) the closing date for this offering is October 19, 2020 and (ii) the initial public offering price per share is $14.00, which is the midpoint of the price range set forth on the cover page of this prospectus, the approximately $0.9 million in aggregate principal amount of Series A Notes, Series C Notes and Series A Warrants that has been tendered as of October 6, 2020 will be exchanged for approximately 67,967 shares of our common stock. Additionally, if all outstanding Series A Notes, Series C Notes and Series A Warrants are tendered in connection with the exchange offer and assuming the same closing date and initial public offering price per share referred to above, approximately $8.1 million in aggregate principal amount of Series A Notes, Series C Notes and Series A Notes underlying Series A Warrants will be exchanged for approximately 705,027 shares of our common stock. To the extent that the closing date for this offering occurs before or after the assumed closing date, the unpaid interest on all outstanding Series A Notes and Series C Notes and the Series A Notes underlying all outstanding Series A Warrants will be less or more, as applicable, than such estimated unpaid interest amount by approximately $2,530 per day (or approximately 180 shares per day). To the extent that the assumed initial public offering price is increased or decreased by $1.00, the number of shares that will be issued in connection with the exchange offer will be less or more, as applicable, than such estimated number of shares. For example, assuming that all outstanding Series A Notes, Series C Notes and Series A Warrants are tendered in the exchange offer, the closing date for this offering is October 19, 2020 and the assumed initial public offering price per share is $13.00, 759,260 shares will be issued in connection with the exchange offer, and if the assumed initial public offering price per share is $15.00, 658,026 shares will be issued in connection with the exchange offer.

References to the “recapitalization” throughout this prospectus refer to the 1-for-12.6013 reverse stock split of our common stock, the conversion of our Series B preferred stock into our common stock, the redemption of our Series A preferred stock for cash and the exchange of the tendered Series A Notes, Series C Notes and Series A Warrants for our common stock.

Assuming a closing date for this offering of October 19, 2020, the Series B accruing dividends amount specified above, an assumed initial public offering price per share of $14.00, which is the midpoint of the price range set forth on the cover page of this prospectus and all outstanding Series A Notes, Series C Notes and Series A Warrants are tendered for exchange in the exchange offer, 14,161,810 shares of common stock will be outstanding immediately after the recapitalization but before this offering. The actual number of shares of common stock that will be issued as a result of the recapitalization is subject to change based on the actual pricing date for this offering, the actual amount of Series A Notes, Series C Notes and Series A Warrants tendered and the related number of shares of common stock issued in, the exchange offer and the actual initial public offering price and related impact on the amount of Series B accruing dividends. See “Description of Capital Stock.”

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and our capitalization as of June 30, 2020, as follows:

 

   

on an actual basis;

 

   

on a pro forma basis giving effect to (i) the conversion, immediately prior to this offering, of all of our outstanding shares of Series B preferred stock into an aggregate of 6,349,011 shares of our common stock, as if such conversion had occurred on June 30, 2020 and (ii) the redemption of all outstanding shares of our Series A preferred stock, in connection with this offering, at a redemption price currently estimated to be approximately $3.3 million as of June 30, 2020, as if such redemption had occurred on June 30, 2020. The pro forma amounts do not give effect to the payment in cash of the redemption price of our Series A preferred stock given our intention that such payment will occur on the 40th day following the closing of this offering; and

 

   

on a pro forma as adjusted basis, giving effect to the pro forma adjustments described above, and giving further effect to (i) the sale of 7,700,000 shares of our common stock in this offering, assuming an initial public offering price of $14.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us, (ii) the sale of 6,000,000 shares of our common stock at an assumed price of $14.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, in a private placement that would close immediately following the pricing of this offering, (iii) the application of the net proceeds from this offering and the concurrent private placement as described in the section entitled “Use of Proceeds,” including the repayment of the First Lien Credit Facilities and the Second Lien Notes, the payment of the redemption price to the holders of the outstanding shares of Series A preferred stock, the repayment of all amounts outstanding under Series A Notes and Series C Notes, assuming no notes are tendered to us for exchange into shares of our common stock pursuant to the tender offer that we have made to all holders of the Series A Notes and Series C Notes and (iv) the debt refinancing, excluding warrants expected to be issued, as described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Refinancing of First Lien Credit Facilities and Second Lien Notes.” To the extent any Series A Notes, Series C Notes or Series A Warrants are tendered in the exchange offer, we will issue shares of our common stock in satisfaction of our obligations outstanding under such Series A Notes, Series C Notes and Series A Warrants. See “Recapitalization.”

 

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You should read this information together with our unaudited condensed consolidated financial statements and the related notes included elsewhere in this prospectus and the information set forth in the sections titled “Use of Proceeds,” “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

     As of June 30, 2020  

(in thousands, except par value amounts)

   Actual     Pro Forma     Pro Forma As
Adjusted(1)
 

Cash and cash equivalents

   $ 12,637     $ 12,637     $ 43,664  
  

 

 

   

 

 

   

 

 

 

Debt:

      

Term Loan (including PIK Interest)(2)

     66,992       66,992       —    

Revolving Credit Facility (including PIK Interest)(2)

     21,918       21,918       —    

LIFO Revolving Credit Facility(2)

     50,000       50,000       —    

Second Lien Notes (including PIK Interest)(2)

     27,140       27,140       —    

Series A Notes(2)

     6,912       6,912       —    

Series C Notes(2)

     390       390       —    

Less: Unamortized debt issuance costs

     (1,143     (1,143     —    

Senior Secured Term Loans(3)

     —         —         35,000  
  

 

 

   

 

 

   

 

 

 

Total debt

     172,209       172,209       35,000  

Series A Warrants

     399       399       —    
  

 

 

   

 

 

   

 

 

 

Total debt and Series A Warrants

     172,608       172,608       35,000  
  

 

 

   

 

 

   

 

 

 

Preferred stock:

      

Series A Stock, $0.001 par value; 50,000 shares authorized; 2,222 shares issued and outstanding (Liquidation preference of $3,486), actual; 0 shares authorized, 0 shares issued and outstanding, pro forma; 0 shares authorized, 0 shares issued and outstanding, pro forma as adjusted

   $ 2,561     $ —       $ —    

Series B Stock, $0.001 par value; 60,000 shares authorized; 54,949 shares issued and outstanding (Liquidation preference of $80,070), actual; 0 shares authorized, 0 shares issued and outstanding, pro forma; 0 shares authorized, 0 shares issued and outstanding, pro forma as adjusted

     55,011       —         —    

Stockholders’ (deficit) equity:

      

Common stock, $0.001 par value; 255,000 shares authorized; 6,853 shares issued and outstanding, actual; 450,000 shares authorized, 13,202 shares issued and outstanding, pro forma; 450,000 shares authorized, 26,902 shares issued and outstanding, pro forma as adjusted

     7       13       27  

Additional paid-in capital

     90,228       144,507       320,303  

Accumulated deficit

     (233,128     (233,128     (234,271
  

 

 

   

 

 

   

 

 

 

Total stockholders’ (deficit) equity

     (142,893     (88,608     86,059  
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ 87,287     $ 84,000     $ 121,059  
  

 

 

   

 

 

   

 

 

 

 

(1)

The pro forma as adjusted data is illustrative only, and our capitalization following this offering will depend on the actual initial public offering price, the number of shares we sell in this offering and the concurrent private placement and other terms of this offering determined at pricing, including the closing date of this offering, and the amount, if any, of Series A Notes, Series C Notes and Series A Warrants tendered in the exchange offer. Each $1.00 increase (decrease) in the assumed initial public offering price of $14.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) our pro forma as adjusted cash, additional paid-in capital, total stockholders equity and total capitalization by $13.2 million, assuming the number of shares offered by us, as set forth on the cover page

 

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of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. Each increase (decrease) by 1,000,000 shares in the number of shares offered by us would increase (decrease) our pro forma as adjusted cash, additional paid-in capital, total stockholders equity and total capitalization by $13.0 million, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, assuming (a) the initial public offering price of $14.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus and (b) the sale of 6,000,000 shares of our common stock at an assumed price of $14.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, in a private placement that would close immediately following the pricing of this offering.

(2)

As of June 30, 2020, there was (i) approximately $67.0 million outstanding under the Term Loan, (ii) approximately $21.9 million outstanding under the Revolving Credit Facility, (iii) approximately $50.0 million outstanding under the LIFO Revolving Facility, (iv) approximately $27.1 million of debt outstanding under the Second Lien Notes, (v) approximately $6.9 million of debt outstanding under Series A Notes and (vi) approximately $0.4 million of debt outstanding under Series C Notes. We intend to use the net proceeds from this offering, together with the net proceeds from the concurrent private placement and Senior Secured Term Loans, to repay all of our current debt. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Refinancing of First Lien Credit Facilities and Second Lien Notes” and “Use of Proceeds” for more information. The Actual and Pro Forma information shows amounts that exclude any original issue discount and debt issuance costs, which amounted to $1.1 million for all of our current long-term debt as of June 30, 2020. Historical interest expense, including the amortization of debt issuance costs, for the year ended December 31, 2019 and the six months ended June 30, 2020, related to our current total debt and Series A Warrants that will be repaid in connection with the offering, was $12.3 million and $6.7 million, respectively.

(3)

We intend to enter into the Senior Secured Term Loans, including an Initial Term Loan of $35.0 million. The Pro Forma As Adjusted information shows the amount of the Initial Term Loan, excluding any original issue discount and debt issuance costs. We expect that interest expense under the Initial Term Loan will be approximately $3.6 million on an annual basis. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Refinancing of First Lien Credit Facilities and Second Lien Notes.” for more information.

The number of shares of our common stock outstanding shown in the foregoing table and calculations excludes:

 

   

1,379,355 shares of our common stock issuable upon the exercise of stock options under our 2016 Plan at a weighted average exercise price of $12.60 per share;

 

   

2,600,000 shares of our common stock issued or reserved for future issuance under our 2020 Plan that will go into effect immediately prior to this offering;

 

   

the impact of any additional shares issued as a result of accrued interest on the Series B preferred stock for any days after June 30, 2020; and

 

   

the impact to the redemption price paid for the Series A preferred stock as a result of accrued interest for any days after June 30, 2020.

 

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DILUTION

If you invest in our common stock in this offering, your ownership interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock immediately after this offering.

As of June 30, 2020, our historical net tangible book value (deficit) was $(187.7) million, or $(27.39) per share. Our historical net tangible book value (deficit) represents the amount of our total tangible assets less the amount of our total liabilities and our preferred stock, and our historical net tangible book value (deficit) per share is that number divided by the number of shares of common stock outstanding as of June 30, 2020.

As of June 30, 2020, our pro forma net tangible book value was $(122.9) million, or $(8.85) per share. Our pro forma net tangible book value (deficit) represents the amount of our total tangible assets less the amount of our total liabilities and divided by the total number of shares of our common stock outstanding as of June 30, 2020, assuming the conversion of all outstanding shares of our Series B preferred stock into 6,349,011 shares of our common stock and the exchange of our Series A Notes, Series C Notes and Series A Notes underlying the Series A Warrants into shares of our common stock.

After giving effect to our sale of shares of common stock in this offering at an assumed initial public offering price of $14.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and the recapitalization, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, and after giving effect to the sale of 6,000,000 shares of our common stock at an assumed price of $14.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, in a private placement that would close immediately following the pricing of this offering, our pro forma as adjusted net tangible book value as of June 30, 2020 would have been $52.7 million, or $1.91 per share. This represents an immediate increase in pro forma net tangible book value of $10.76 per share to existing stockholders and an immediate dilution of $12.09 per share to purchasers of common stock in this offering and the private placement. Dilution per share to purchasers of common stock in this offering and the private placement is determined by subtracting pro forma as adjusted net tangible book value per share after this offering and the private placement from the initial public offering price per share paid by purchasers of common stock in this offering and the private placement. The following table illustrates this dilution on a per share basis:

 

Assumed initial public offering price per share

     $ 14.00  

Historical net tangible book (deficit) per share at June 30, 2020, before giving effect to this offering and the private placement

   $ (27.39  

Pro forma increase in historical net tangible book value per share attributable to the pro forma adjustment described above

     18.54    
  

 

 

   

Pro forma net tangible book value per share at June 30, 2020, before giving effect to this offering and the private placement

     (8.85  

Increase (decrease) in pro forma net tangible book value per share attributable to purchasers of common stock participating in this offering and the private placement

     10.76    
  

 

 

   

Pro forma as adjusted net tangible book value per share after this offering and the private placement

     $ 1.91  
    

 

 

 

Dilution per share to purchasers of common stock in this offering and the private placement

     $ 12.09  
    

 

 

 

The pro forma as adjusted dilution information discussed above is illustrative only and will depend on the actual initial public offering price.

Each $1.00 increase (decrease) in the assumed initial public offering price of $14.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) our pro

 

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forma as adjusted net tangible book value by $13.2 million, or $0.48 per share, and dilution per share to purchasers of common stock in this offering by $0.52 per share, assuming that the number of shares offered by us, as set forth on the cover of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares offered by us. Each increase by 1,000,000 shares in the number of shares offered by us would increase our pro forma as adjusted net tangible book value by $13.0 million, or $0.39 per share, and would decrease dilution per share to purchasers of common stock in this offering by $0.39 per share, and each decrease by 1,000,000 shares in the number of shares offered by us would decrease our pro forma as adjusted net tangible book value by $13.0 million, or $0.42 per share, and would increase dilution per share to purchasers of common stock in this offering by $0.42 per share, assuming the assumed initial public offering price per share remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. The foregoing scenarios assume the sale of 6,000,000 shares of our common stock at an assumed price of $14.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, in a private placement that would close immediately following the pricing of this offering.

If the underwriters’ option to purchase additional shares from us is exercised in full, the pro forma as adjusted net tangible book value per share after this offering would be $2.36 per share, the increase in pro forma as adjusted net tangible book value per share to existing stockholders would be $0.45 per share and the dilution to purchasers of common stock in this offering would be $11.64 per share, based on the assumed initial public offering price of $14.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The following table summarizes on a pro forma as adjusted basis, as of June 30, 2020, (but before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us), the differences between the existing stockholders and the purchasers of shares of common stock in this offering with respect to the number of shares purchased from us, the total consideration paid (in thousands, except per share amounts):

 

     Shares Purchased     Total Consideration     Weighted-
average
Price Per Share
 
     Number      Percent     Amount      Percent  

Existing stockholders(1)

     19,886        72.1   $ 229,606      68.1   $ 11.55

Purchasers of common stock in this offering

     7,700        27.9       107,800        31.9       14.00  
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

     27,586        100   $ 337,406        100  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

(1)

Includes the sale of 6,000,000 shares of our common stock at an assumed price of $14.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, in a private placement that would close immediately following the pricing of this offering.

Each $1.00 increase (decrease) in the assumed initial public offering price of $14.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the total consideration paid by purchasers of common stock in this offering and by the Kohlberg Funds in connection with the private placement that would close immediately following the pricing of this offering by $13.2 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares offered by us. Each increase (decrease) by 1,000,000 shares in the number of shares offered by us would increase (decrease) each of the total consideration paid by purchasers of common stock in this offering and the total consideration paid by all stockholders by $13.0 million, assuming the assumed initial public offering price of $14.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

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The table above does not include:

 

   

1,379,355 shares of our common stock issuable upon the exercise of stock options under our 2016 Plan at a weighted average exercise price of $12.60 per share;

 

   

2,600,000 shares of our common stock issued or reserved for future issuance under our 2020 Plan that will go into effect immediately prior to this offering;

 

   

the impact of any additional shares issued as a result of accrued interest on the Series B preferred stock for any days after June 30, 2020; and

 

   

the impact to the redemption price paid for the Series A preferred stock as a result of accrued interest for any days after June 30, 2020.

To the extent that outstanding stock options are exercised, new stock options or warrants are issued, or we issue additional shares of common stock in the future, there will be further dilution to purchasers of common stock in this offering. In addition, we may choose to raise additional capital due to market conditions or strategic considerations, even if we believe we have sufficient funds for our current or future operating plans. If we raise additional capital through the sale of equity or convertible debt securities, the issuance of these securities could result in further dilution to our stockholders.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the audited and unaudited consolidated financial statements and the related notes included elsewhere in this prospectus. The selected consolidated financial data included in this section are not intended to replace the audited and unaudited consolidated financial statements and are qualified in their entirety by the audited and unaudited consolidated financial statements and the related notes included elsewhere in this prospectus.

The selected Consolidated Statements of Operations data for the years ended December 31, 2019 and 2018 and the selected Consolidated Balance Sheet data at December 31, 2019 and 2018, respectively, are derived from our audited consolidated financial statements and the related notes included elsewhere in this prospectus. The Consolidated Statements of Operations data for the six months ended June 30, 2020 and 2019, respectively, and the Consolidated Balance Sheet data at June 30, 2020 are derived from our unaudited condensed consolidated financial statements and related notes included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results to be expected for any period in the future and our results for the six months ended June 30, 2020 are not necessarily indicative of the results that may be expected for the full fiscal year ended December 31, 2020 or for any other interim period.

 

     Six Months Ended
June 30,
    Year Ended
December 31,
 

(in thousands, except per share data)

   2020     2019     2019     2018  

Consolidated statements of operations data:

        

Revenue

   $ 42,694     $ 46,050     $ 95,916     $ 90,752  

Cost of goods sold

     13,550       16,988       32,801       32,159  
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     29,144       29,062       63,115       58,593  

Operating expenses:

        

Selling, general and administrative

     41,788       43,010       85,320       81,068  

Research and development

     2,626       3,372       6,014       6,961  

Loss/(gain) on disposal of assets

     —         1,998       1,993       (66

Loss on impairment of goodwill

     —         —         —         6,611  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     44,414       48,380       93,327       94,574  
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (15,270     (19,318     (30,212     (35,981

Interest expense

     (6,795     (6,178     (12,585     (10,453

Other (expense) income, net

     (75     141       27       54  
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (22,140     (25,355     (42,770     (46,380

Income tax (benefit) expense

     (648     18       70       (550
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (21,492     (25,373     (42,840     (45,830

Cumulative undeclared dividends earned on redeemable convertible preferred stock

     (4,668     (4,121     (8,580     (7,631
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

   $ (26,160   $ (29,494   $ (51,420   $ (53,461
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share, basic and diluted

   $ (3.82     (4.30   $ (7.50     (7.71

Weighted-average shares used to compute basic and diluted net loss per share

     6,853       6,853       6,853       6,931  

Pro forma net loss per share, basic and diluted (unaudited)(1)

   $ (1.60     $ (3.19  

Pro forma weighted-average shares used to compute basic and diluted pro forma net loss per share (unaudited)(1)

     13,437         13,437    

 

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     As of June 30,     As of December 31  

(in thousands)

   2020     2019     2018  

Consolidated balance sheet data:

 

 

Cash and cash equivalents

   $ 12,637     $ 1,134     $ 2,457  

Working capital(2)

     9,224       22,762       28,051  

Total assets

     119,361       105,921       125,090  

Total long-term debt

     152,209       144,353       124,497  

Total liabilities

     204,682       170,037       147,997  

Series A preferred stock

     2,561       2,561       1,791  

Series B preferred stock

     55,011       55,011       54,698  

Accumulated deficit

     (233,128     (211,636     (168,796

Total stockholders’ deficit

     (142,893     (121,688     (79,396

 

(1)

See Note 11 of our unaudited condensed consolidated financial statements and Note 15 of our audited consolidated financial statements included elsewhere in this prospectus for the method used to calculate pro forma net loss per common share, basic and diluted, and pro forma weighted-average shares used to compute basic and diluted pro forma net loss per share.

(2)

Working capital is defined as current assets less current liabilities. Working capital as of June 30, 2020 includes $20.0 million of short-term debt. See our audited and unaudited consolidated financial statements and the related notes included elsewhere in this prospectus.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with “Selected Consolidated Financial Data” and our audited and unaudited consolidated financial statements and the related notes included elsewhere in this prospectus. This discussion and other parts of this prospectus contain forward-looking statements that involve risks, uncertainties and assumptions, such as our plans, objectives, expectations, intentions and beliefs. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section entitled “Risk Factors.” Some of the numbers included herein have been rounded for convenience of presentation.

Overview

We are a medical device company focused on the design, development and commercialization of a comprehensive portfolio of systems, products and technologies for spine surgery procedures, with a strategic focus on MIS procedures. We are an innovation-driven company with a track-record of delivering pioneering and differentiated products and technologies. Our product portfolio consists of innovative spinal fixation systems, interbody implants, surgical instruments and biologics used across a broad spectrum of spine surgery procedures. We offer a comprehensive product portfolio that can address approximately 95% of the spine surgery procedures performed worldwide in 2018 and our systems, products and technologies cover a wide variety of spine disorders, including degenerative conditions, deformities and trauma. We expect to continue to complement our existing product portfolio with new product offerings based on innovative technologies. We believe our comprehensive product portfolio has the potential to enhance the way surgeons operate and to disrupt the spine surgery market.

Our culture of innovation has enabled us to design, develop and commercialize 15 systems representing over 850 products and biologics since the beginning of 2016 that feature our MIS Ultra, Ti-Bond or other differentiated technologies. We plan to continue expanding our portfolio with systems and products that feature our disruptive technologies. In addition to systems and products that feature our MIS Ultra or Ti-Bond technologies, our comprehensive product portfolio includes well-established, innovative hardware products, including cervical and thoracolumbar spinal implant devices and fixation systems, surgical instruments and biologics, each of which are designed to promote healing and recovery.

We have funded our operations primarily through the sales of our products and systems, sales of equity securities and through the incurrence of debt. We generated total revenue of $95.9 million and $90.8 million in the years ended December 31, 2019 and 2018, respectively, representing an annual growth rate of 5.7%, and generated revenue from our Featured Products of $83.0 million and $71.4 million in the years ended December 31, 2019 and 2018, respectively, representing an annual growth rate of 16.2%. We generated total revenue of $42.7 million and $46.1 million for the six months ended June 30, 2020 and 2019, respectively, representing a decrease of 7.3%, and generated revenue from our Featured Products of $38.3 million and $39.2 million for the six months ended June 30, 2020 and 2019, respectively, representing a decrease of 2.5%. The decrease in revenue for the six months ended June 30, 2020 was primarily the result of the largely government imposed delay in elective spine surgery procedures in an attempt to free up medical resources to address the COVID-19 pandemic. We incurred net losses of $42.8 million and $45.8 million for the years ended December 31, 2019 and 2018, respectively, and $21.5 million and $25.4 million for the six months ended June 30, 2020 and 2019, respectively. We expect to continue to incur net losses for the foreseeable future as we to continue to incur significant product development, clinical and regulatory, sales and marketing and other expenses.

 

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Components of Results of Operations

Revenue

We derive our revenues primarily from the sale of spinal fixation systems, interbody implants and biologics used in the treatment of spine disorders, which we sell to three types of customers: (i) hospitals, (ii) ambulatory surgery centers and (iii) stocking distributors. Revenue is recognized when control of the promised goods is transferred to the customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods. Transfer of control generally occurs when the product has been used in a surgical procedure or upon shipment to third-party customers who immediately accept title to such product. We generally do not allow returns of products, and therefore do not reduce revenue by estimates of potential future product returns and other allowances for our sales to hospitals and surgery centers. For our sales to stocking distributors, we do make certain accommodations with regard to replenishment and reduce revenue by estimates of potential future product returns and other allowances. Provisions for product returns and other allowances are recorded as a reduction to revenue in the period sales are recognized. We estimate the amount of sales returns and allowances that will eventually be incurred based on historical experience and current/forecasted performance. There are no other forms of variable consideration such as discounts, list price discounts, rebates, volume discounts and customer payment penalties that we estimated to reduce our transaction price.

As part of the Combination, we designated each product in our product portfolio as either a “Featured Product” or a “Certain Legacy Product.” Featured Products are our leading products and systems, as well as any future products and systems we commercialize, in which we are or have been actively marketing and investing since 2018. Investments in Featured Products include, but are not limited to, investments in (i) additional instrument sets, (ii) research and development of system improvements and line extensions, (iii) commercial, marketing and branding campaigns and (iv) real-world analysis and clinical studies. Certain Legacy Products are products and systems that we continue to sell, but have not actively invested in, other than production costs, since 2018.

Cost of Goods Sold and Gross Profit

Cost of goods sold includes all direct product costs, manufacturing costs and royalties on the sale of certain products. Depreciation expense is included in manufacturing costs for all of 2018 and through June 13, 2019 due to manufacturing that was previously performed at our Marietta Facility. On June 13, 2019, we sold certain tangible assets associated with manufacturing capabilities of our Marietta Facility (as described in Note 3 to our audited consolidated financial statements included elsewhere in this prospectus), therefore, for the period from June 13, 2019 to December 31, 2019, there was no depreciation expense included in manufacturing costs. Specific provisions for excess or obsolete inventory are also included in cost of goods sold.

Operating Expenses

Selling, General and Administrative

Our selling, general and administrative expenses consist primarily of sales commissions to independent sales agents, cost of medical education and training, payroll and other headcount related expenses and maintenance expense, stock-based compensation, marketing expenses, expenses for information technology, legal, human resources, insurance, finance, facilities and management.

Research and Development

Research and development expense consists of costs associated with the design, development, testing and enhancement of our products and includes salaries and related employee benefits, research-related overhead expenses and fees paid to external service providers. We expect to incur additional research and development costs as we continue to design and commercialize new products.

 

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Non-Operating Expenses

Interest Expense

Interest expense includes cash paid for interest, accrued interest and non-cash interest expense related to the amortization of deferred financing costs and other non-cash charges associated with our Credit Facilities. Interest expense also includes the amortization of certain capitalized costs associated with debt modifications that we undertook in 2020, 2019 and 2018.

Results of Operations for the Six Months Ended June 30, 2020 and 2019

The following table sets forth our results of operations for the six months ended June 30, 2020 and 2019:

 

     Six Months Ended June 30,        

(in thousands)

   2020     % of
Revenue
    2019     % of
Revenue
    % Change  

Revenue

   $ 42,694       —       $ 46,050       —         (7.3 )% 

Cost of goods sold

     13,550       31.7     16,988       36.9     (20.2
  

 

 

     

 

 

     

Gross profit

     29,144       68.3       29,062       63.1       0.3  

Operating expenses:

          

Selling, general and administrative

     41,788       97.9       43,010       93.4       (2.8

Research and development

     2,626       6.2       3,372       7.3       (22.1

Loss on disposal of assets

     —         —         1,998       4.3       (100.0
  

 

 

     

 

 

     

Total operating expenses

     44,414       104.0       48,380       105.1       (8.2
  

 

 

     

 

 

     

Loss from operations

     (15,270     (35.8     (19,318     (42.0     (21.0

Interest expense

     (6,795     (15.9     (6,178     (13.4     10.0  

Other (expense) income, net

     (75     *       141       *       *  

Loss before income taxes

     (22,140     (51.9     (25,355     (55.1     (12.7

Income tax (benefit) expense

     (648     *       18       *       *  
  

 

 

     

 

 

     

Net loss

   $ (21,492     (50.3   $ (25,373     (55.1     (15.3
  

 

 

     

 

 

     

 

*

Not meaningful.

Six Months Ended June 30, 2020 Compared to the Six Months Ended June 30, 2019

Revenue

Revenue was $42.7 million for the six months ended June 30, 2020 compared to $46.1 million for the six months ended June 30, 2019, representing a decrease of $3.4 million, or 7.3%. Overall revenue and product volume decreased primarily due to the largely government imposed delay in elective spine surgery procedures in an attempt to free up medical resources to address the COVID-19 pandemic. Revenues from Featured Products were $38.3 million for the six months ended June 30, 2020 compared to $39.2 million for the six months ended June 30, 2019, representing a decrease of $1.0 million, or 2.5%. This decline is similarly the result of the largely government imposed delay in elective spine surgery procedures as a result of the COVID-19 pandemic. Certain Legacy Products also declined during the period by $2.4 million, or 35.0%. We experienced a decline in product volume of Certain Legacy Products primarily as a result of the successful transition of a number of existing surgeon customers using Certain Legacy Products to comparable systems within our portfolio of Featured Products.

 

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The following table presents total revenues for our Featured Products and Certain Legacy Products for the six months ended June 30, 2020 and 2019:

 

     Six Months Ended June 30,        

(in thousands)

   2020      % of
Revenue
    2019      % of
Revenue
    % Change  

Featured Products

   $ 38,267        89.6   $ 39,239        85.2     (2.5 )% 

Certain Legacy Products

     4,427        10.4       6,811        14.8       (35.0
  

 

 

      

 

 

      

Total

   $ 42,694        $ 46,050       
  

 

 

      

 

 

      

Cost of Goods Sold

Cost of goods sold were $13.6 million and $17.0 million for the six months ended June 30, 2020 and June 30, 2019, respectively, representing a decrease of $3.4 million, or 20.2%. The primary driver of the decrease was lower sales volume as a result of the COVID-19 pandemic. As a percentage of revenue, cost of goods sold also decreased as a result of a reduction in variable production costs as we transitioned from in-house manufacturing of some of our products to outsourced contract manufacturing during the six months ended June 30, 2019.

Operating Expenses

Selling, General, and Administrative

Selling, general, and administrative expenses were $41.8 million for the six months ended June 30, 2020 compared to $43.0 million for the six months ended June 30, 2019, representing a decrease of $1.2 million, or 2.8%. The decrease was primarily driven by the reduction in costs associated with the shut-down of our manufacturing facility located in Marietta, Georgia (the “Marietta Facility”) in June 2019, including associated depreciation and amortization and employee-related expenses, as well as lower sales commission expense as a result of decreased sales resulting from the COVID-19 pandemic. These expense reductions were partially offset by increased consulting and professional fees associated with the preparation for this offering and other strategic initiatives.

Research and Development

Research and development expenses were $2.6 million for the six months ended June 30, 2020 compared to $3.4 million for the six months ended June 30, 2019, representing a decrease of $0.7 million, or 22.1%. The decrease was primarily attributable to multiple disruptive new technologies moving from development to initial surgical cases and commercialization phases, including the Lucent XP Interbody Device System, Karma Fixation System and Katana Lateral Access System, as well as a reduction in the number of onsite surgeon labs as a result of the COVID-19 pandemic.

Loss on Disposal of Assets

In June 2019, in connection with an internal reorganization and the finalization of the Combination, we sold all real and personal property, other than certain products and equipment, from the Marietta Facility, and outsourced all products that were manufactured at that facility to third-party manufacturers. As a result, we recorded a loss of approximately $1.0 million on tangible property with a total net book value of $2.5 million plus an additional $0.3 million loss related to transaction expenses and the carrying value of certain raw materials included in the sale of the Marietta Facility.

In connection with the sale, we entered into a sublease agreement with the buyer for 48,848 square feet of the 87,248 total square feet facility. Leasehold improvements with a carrying value of approximately $0.6 million relating to the Marietta Facility have been written off as of June 2019 and are included in Loss on disposal of assets for the six months ended June 30, 2019.

 

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Non-Operating Expenses

Interest Expense

Interest expense was $6.8 million for the six months ended June 30, 2020 compared to $6.2 million for the six months ended June 30, 2019, representing an increase of $0.6 million, or 10.0%. The increase was primarily driven by an increase in our line of credit during the period, which was used to finance investments in new instrument sets and inventory and other general corporate purposes.

Results of Operations for the Years Ended December 31, 2019 and 2018

The following table sets forth our results of operations for the years ended December 31, 2019 and 2018:

 

     Year Ended December 31,        

(in thousands)

   2019     % of
Revenue
    2018     % of
Revenue
    % YoY
Change
 

Revenue

   $ 95,916       —       $ 90,752       —         5.7

Cost of goods sold

     32,801       34.2     32,159       35.4     2.0  
  

 

 

     

 

 

     

Gross profit

     63,115       65.8       58,593       64.6       7.7  

Operating expenses:

          

Selling, general and administrative

     85,320       89.0       81,068       89.3       5.2  

Research and development

     6,014       6.3       6,961       7.7       (13.6

Loss/(gain) on disposal of assets

     1,993       2.1       (66     *       *  

Loss on impairment of goodwill

     —         *       6,611       7.3       *  
  

 

 

     

 

 

     

Total operating expenses

     93,327       97.3       94,574       104.2       (1.3
  

 

 

     

 

 

     

Loss from operations

     (30,212     (31.5     (35,981     (39.6     (16.0

Interest expense

     (12,585     (13.1     (10,453     (11.5     20.4  

Other income, net

     27       *       54       *       *  

Loss before income taxes

     (42,770     (44.6     (46,380     (51.1     (7.8

Income tax expense (benefit)

     70       *       (550     *       *  
  

 

 

     

 

 

     

Net loss

   $ (42,840     (44.7   $ (45,830     (50.5     (6.5
  

 

 

     

 

 

     

 

*

Not meaningful.

Year Ended December 31, 2019 Compared to the Year Ended December 31, 2018

Revenue

Revenue was $95.9 million for the year ended December 31, 2019 compared to $90.8 million for the year ended December 31, 2018, representing an increase of $5.2 million, or 5.7%. Revenue growth was primarily driven by volume growth from our Featured Products and was partially offset by an expected decrease in volume from our Certain Legacy Products. Revenues from Featured Products were $83.0 million for the year ended December 31, 2019 compared to $71.4 million for the year ended December 31, 2018, representing an increase of $11.5 million, or 16.2%. This increase was partially offset by a year over year decline in revenue of $6.4 million, or 33.2%, for Certain Legacy Products.

Factors driving this growth were investments in new instrument sets and inventory for the existing Featured Products, as well as the commercial launch of several disruptive new technologies. We invested in a number of additional instrument sets for existing flagship product systems, including the Overwatch and Mercury Thoracolumbar Fixation Systems, Magnum+ Standalone Lumbar Interbody System, and Lucent Lumbar Interbody System. In addition, the first full year of commercialization of the Lucent XP Interbody Device

 

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System, as well as the initial launch of the Katana Lateral Access System provided additional revenue streams as compared to the prior year. Revenue growth from the Featured Products was partially offset by the expected decline of Certain Legacy Products from the prior year, as we transitioned a number of existing surgeon customers using Certain Legacy Products to comparable systems within our portfolio of the Featured Products.

The following table presents total revenues for our Featured Products and Certain Legacy Products for the year ended December 31, 2019 and 2018:

 

      Year Ended December 31,        

(in thousands)

   2019      % of
Revenue
    2018      % of
Revenue
    % YoY
Change
 

Featured Products

   $ 82,978        86.5   $ 71,388        78.7     16.2

Certain Legacy Products

     12,938        13.5       19,364        21.3       (33.2
  

 

 

      

 

 

      

Total

   $ 95,916        $ 90,752       
  

 

 

      

 

 

      

Cost of Goods Sold & Gross Profit

Cost of goods sold were $32.8 million and $32.2 million for the years ended December 31, 2019 and December 31, 2018, respectively, representing an increase of $0.6 million, or 2.0%. The primary driver of the increase was increased sales volume and the associated variable production costs. This was offset by the realization of cost savings resulting from the Combination and the resulting transition to a fully outsourced manufacturing model.

Gross profit was $63.1 million for the year ended December 31, 2019 compared to $58.6 million for the year ended December 31, 2018, representing an increase of $4.5 million, or 7.7%. Gross profit margin percentage increased to 65.8% from 64.6% for the year ended December 31, 2019 compared to December 31, 2018. The increase in gross profit was due primarily to the increased volume of sales achieved in the year ended December 31, 2019 resulting from the investment in additional instrument sets and inventory for our Featured Products discussed above. The increase in gross profit margin percentage was due primarily to greater operating leverage over our fixed expenses resulting from the higher volume of sales in the year ended December 31, 2019 and the realization of cost savings resulting from the Combination.

Operating Expenses

Selling, General, and Administrative

Selling, general, and administrative expenses were $85.3 million for the year ended December 31, 2019 compared to $81.1 million for the year ended December 31, 2018, representing an increase of $4.3 million, or 5.2%. The increase was primarily driven by higher sales commission expense, as well as higher sales compensation expense resulting from headcount additions to the internal sales management team. Headcount additions were strategically made to drive revenue growth from Featured Products and new technology launches.

Research and Development

Research and development expenses were $6.0 million for the year ended December 31, 2019 compared to $7.0 million for the year ended December 31, 2018, representing a decrease of $1.0 million, or 13.6%. The decrease was primarily attributable to multiple disruptive new technologies moving from development to initial surgical cases and commercialization phases, including the Lucent XP Interbody Device System, Karma Fixation System and Katana Lateral Access System.

Loss on Impairment of Goodwill

Our loss on impairment of goodwill was $6.6 million for the year ended December 31, 2018. In the year ended December 31, 2018, we impaired all of the goodwill associated with the legacy Amendia reporting unit, as

 

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discussed further in Note 1 of our audited consolidated financial statements included elsewhere in this prospectus.

Non-Operating Expenses

Interest Expense

Interest expense was $12.6 million for the year ended December 31, 2019 compared to $10.5 million for the year ended December 31, 2018, representing an increase of $2.1 million, or 20.4%. The increase was primarily driven by an increase in our line of credit during the year, which was used to finance investments in new instrument sets and inventory, as well as increases in sales commission expense, research and development, clinical, and marketing expenses related to new product launches, and increases to payroll and benefits related to new hires.

Liquidity and Capital Resources

Since our inception, we have incurred significant operating losses and anticipate that our losses will continue in the near term. We have incurred recurring losses since inception, including net losses of $21.5 million and $25.4 million for the six months ended June 30, 2020 and 2019, respectively, and $42.8 million and $45.8 million for the fiscal years ended December 31, 2019 and December 31, 2018, respectively. We expect our operating expenses will continue to grow as we expand our product portfolio and penetrate further into new and existing markets. In addition, the COVID-19 pandemic has resulted in patients delaying or foregoing non-urgent spine surgery procedures to avoid hospitals and other healthcare facilities and comply with quarantine and similar directives from local and national health and government officials which has had a significant impact on our operations in the form of a rapid decrease in revenue and cash flows beginning in March 2020, as compared to prior periods and original expectations. Despite some recovery, this reduction in sales, as compared to original expectations, continued into June 2020. Specifically, the COVID-19 pandemic had a negative impact on our business, results of operations and financial position for the six months ended June 30, 2020 and, we expect it may have a negative impact on our business, results of operations and financial position in future periods, including the remainder of the fiscal year ended December 31, 2020. To date, our primary sources of liquidity have been cash generated from sales of products, historical equity and debt financings, and borrowings under our revolving lines of credit. As of June 30, 2020, we had total long-term debt of $152.2 million and total short-term debt of $20.0 million, which has been under a forbearance agreement since July 2018 for failure to make principal and interest payments, an accumulated deficit of $233.1 million and $9.2 million of working capital, including $12.6 million of cash and cash equivalents and $20.0 million of short-term debt. As of June 30, 2020, our LIFO Revolving Facility is fully drawn. Our revolving line of credit is available for working capital requirements, capital expenditures and other general corporate purposes.

As we have incurred operating losses, a successful transition to profitability is dependent upon achieving a level of revenues adequate to support our cost structure. This may not occur and, unless and until it does, we will continue to need to raise additional capital.

Our management assessed our liquidity position and cash requirements as part of the audited and unaudited consolidated financial statement preparation process and concluded that there is substantial doubt about our ability to continue as a going concern. See Note 1 of our audited and unaudited consolidated financial statements included elsewhere in this prospectus. Additionally, our auditors have issued a going concern opinion on our audited consolidated financial statements for the year ended December 31, 2019, expressing substantial doubt that we can continue as an ongoing business due to our limited amount of liquidity, recurring losses from operations incurred since inception, expectation of continuing operating losses for the foreseeable future and our long-term debt that has been under a forbearance agreement since July 2018 for failure to make principal and interest payments. We have implemented programs designed to improve results and future cash flows such as product rationalization, inventory management, product branding and pricing, customer incentives and personnel

 

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management, as well as outsourced manufacturing previously performed at our Marietta Facility to third-party contract manufacturers. Based on our current strategic business plan, we believe our current cash and cash receipts from sales of our products will be sufficient to meet our anticipated cash requirements into the fourth quarter of 2020. The future viability of the Company beyond that point is dependent on our ability to raise additional capital to finance the Company’s operations. We believe that the net proceeds from this offering and the concurrent private placement, anticipated borrowing capacity under our new senior credit facilities, cash and cash receipts from sales of our products will be sufficient to meet our anticipated cash requirements through fiscal year 2021, but we may need additional funding to meet our anticipated cash requirements in the future. If we are unable to obtain needed funding, we will be required to delay, reduce or eliminate some or all of the Company’s research and development programs, product expansion or commercialization efforts, or we may be unable to continue operations. Although our management continues to pursue financing plans, there is no assurance that we will be successful in obtaining sufficient funding on terms acceptable to us, or at all. For more information about our new senior credit facilities, see “—Refinancing of First Lien Credit Facilities and Second Lien Notes.”

As described elsewhere in this prospectus, we intend to consummate a debt refinancing in connection with this offering pursuant to which we intend to refinance all amounts outstanding under the First Lien Credit Facilities and the Second Lien Notes, each of which is subject to existing events of default as further described below, including accrued and unpaid interest, prepayment penalties, fees and expenses related thereto, with the proceeds from the Senior Secured Term Loans and a portion of the proceeds from this offering. See “—Refinancing of First Lien Credit Facilities and Second Lien Notes.” Following such debt refinancing, all outstanding commitments under the Amended Credit Agreement governing the First Lien Credit Facilities and the Amended Note Purchase Agreement governing the Second Lien Notes will be terminated. Additionally, we intend to use a portion of the net proceeds from this offering to repay all amounts outstanding under Series A Notes and Series C Notes. For more information, see “Use of Proceeds.”

Existing Indebtedness

First Lien Credit Facilities

In April 2016, in connection with the Initial Acquisition, we entered into (i) an initial credit agreement (the “Initial Credit Agreement”) consisting of a $50.0 million term loan and a $6.0 million delayed draw term loan, and (ii) the Revolving Credit Facility for a $15.0 million commitment. We used all of the proceeds from the term loan to finance the Initial Acquisition. Both term loans bear interest at LIBOR + 5% subject to a 1% LIBOR floor. The deferred draw term loan agreement incurred a 1% interest charge on the unused portion. The Initial Credit Agreement was secured by substantially all of our property and assets and provided for certain financial covenants including a maximum capital expenditures limit, leverage ratio and fixed charge coverage ratio.

In April 2017, in connection with the Combination, we entered into the Credit Agreement which amended and restated the Initial Credit Agreement and resulted in an increase of the Term Loan and the retirement of the delayed draw term loan, which had its $2.6 million outstanding balance rolled into the Term Loan and an increase of the borrowing capacity under the Revolving Credit Facility. The Credit Agreement was subsequently amended in July 2018, May 2019, June 2019 and March 2020 to, among other things, increase the amount of revolving loans available thereunder, adjust financial covenants, extend the deadline for delivery of certain financial statements and permit the disposition of certain assets owned by us. See “Description of Certain Indebtedness” for more information. After giving effect to these amendments, the Amended Credit Agreement provides for the First Lien Credit Facilities consistent of (i) a $62.7 million Term Loan, (ii) a $20.0 million Revolving Credit Facility and (iii) a $50.0 million LIFO Revolving Facility. See “—Term Loan,” “Revolving Credit Facility,” “LIFO Revolving Facility” and “Description of Certain Indebtedness” for more information.

In July 2018, we had an event of default, which included our failure to pay principal and interest under the Credit Agreement. Following this event of default, the lenders agreed to forbear from exercising its rights with respect to the existing events of default. We entered into a forbearance agreement and first amendment to the Credit Agreement (the “Forbearance Agreement”) whereby principal and interest payments are not due until the

 

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occurrence of one of the termination events (as defined in the Forbearance Agreement) and the lender agreed to make revolving loans subject to the terms and conditions of the Forbearance Agreement. Among other things, the Forbearance Agreement: (i) modified the original principal payment schedule for the Term Loan; (ii) included a PIK Interest option in which we, at our discretion, may elect to pay up to 4.1% per annum of the applicable interest rate in kind by adding the amount of the applicable accrued interest to the outstanding principal amount. All interest due under the Forbearance Agreement that was payable on or after July 1, 2018, which was not paid in cash was deemed to have been paid in kind by adding the amount to the then outstanding principal balance of the First Lien Credit Facilities and therefore constitute PIK Interest; PIK Interest was payable on the earlier of June 30, 2020 or the maturity date of the applicable Term Loan, Revolving Credit Facility or LIFO Revolving Facility; (iii) prohibited us from making any related-party management fee payments; and (iv) modified certain covenants by granting us a waiver for delivery of our financial statements until September 2019.

Under the Forbearance Agreement, we are required to comply with certain covenants including a maximum capital expenditures limit for the first fiscal year ending after June 30, 2020 and any applicable fiscal year thereafter, a leverage ratio calculated quarterly and minimum fixed charge coverage ratio calculated quarterly.

In May 2019 and June 2019, the Credit Agreement was further amended to provide for additional time to deliver audited financial statements. In June 2019, the Credit Agreement was amended to add provisions relating to the sale of certain assets from our Marietta Facility in connection with the internal reorganization that was completed in June 2019 requiring us to reinvest proceeds from the sale back into the company. In June 2019, we also entered into a first amendment to the Forbearance Agreement and another amendment to the Credit Agreement, which provided (i) an 18-month extension to the covenant forbearance period to December 31, 2021, (ii) for the first net leverage measurement period to commence upon the quarter ended March 31, 2021, (iii) for an expansion of the LIFO Revolving Facility by an incremental $15.0 million, (iv) for the PIK Interest option to expire on June 30, 2021 and for the quarterly interest to be paid in cash to resume thereafter, and (v) for the accumulated PIK Interest payment to extend to December 31, 2021.

On March 13, 2020, we entered into another amendment to the Credit Agreement and certain other agreements entered into in connection therewith. This amendment increased available line of credit by $20.0 million under the LIFO Revolving Facility to provide us with additional liquidity, with the increase guaranteed by an affiliate of Kohlberg, and extended our compliance with the leverage ratio and minimum fixed charge coverage ratio to March 31, 2022. The additional $20.0 million is payable, under certain conditions and events, at the earlier of a sale event, including an initial public offering, or March 31, 2021.

Term Loan

The Initial Credit Agreement provided for a $50.0 million Term Loan. In connection with the Combination, the Term Loan was increased to approximately $62.7 million in April 2017. As of June 30, 2020, approximately $67.0 million was outstanding under the Term Loan and the interest rates ranged from 6.5% to 7.3%. The Term Loan matures on April 13, 2023.

Revolving Credit Facility

In April 2016, in connection with the Initial Acquisition and as part of the Credit Agreement, we entered into a $15.0 million Revolving Credit Facility. In connection with the Combination, the maximum borrowing capacity under the Revolving Credit Facility was increased to $20.0 million in April 2017. In July 2018, a 4.1% PIK Interest option was added and in 2019, the PIK option was extended to June 30, 2021 with PIK Interest payable on December 31, 2021. As of June 30, 2020, approximately $21.9 million was outstanding under the Revolving Credit Facility and the interest rate was 6.5%. As of June 30, 2020, $1.9 million of PIK interest remained outstanding. The Revolving Credit Facility matures on April 13, 2022.

LIFO Revolving Facility

In July 2018, in connection with the Forbearance Agreement, we entered into the LIFO Revolving Facility. The LIFO Revolving Facility was originally issued for a $15.0 million commitment and was guaranteed by an

 

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affiliate of Kohlberg. In 2019, the maximum borrowing capacity under the LIFO Revolving Facility was increased to $30.0 million and remained guaranteed by an affiliate of Kohlberg. In March 2020, the available line of credit under the LIFO Revolving Facility was increased by $20.0 million, all of which was drawn. As of June 30, 2020, approximately $50.0 million (which included $20.0 million of short-term debt) was outstanding under the LIFO Revolving Facility and interest rates ranged from 6.0% to 6.6%. The $20.0 million of short-term debt is payable, under certain conditions and events, at the earlier of a sale event, including an initial public offering, or March 31, 2021. The $30.0 million of long-term debt under the LIFO Revolving Facility matures on December 31, 2021.

Second Lien Notes

In April 2016, in connection with the Initial Acquisition, we entered into the Note Purchase Agreement governing the Second Lien Notes. We used all of the net proceeds from the Second Lien Notes to finance the Initial Acquisition. The Note Purchase Agreement was amended in April 2017, July 2018, May 2019, June 2019 and March 2020 to, among other things, permit an increase in the Term Loan and the establishment of the LIFO Revolving Facility, adjust financial covenants, extend the deadline for delivery of certain financial statements, and permit the disposition of certain assets owned by us. The first amendment in April 2017 extended the maturity date of the Second Lien Notes to October 31, 2023. The second amendment in July 2018 was entered into in connection with the Forbearance Agreement referenced above as we were in default regarding required interest payments that were due, which provided that all interest be added to the principal through June 2020 rather than paid in cash. The sixth amendment in June 2019 extended the PIK Interest provision for all interest to December 2021 and the requirements to meet certain financial covenants to March 2021.

After giving effect to these amendments, the Amended Note Purchase Agreement provides for $20.0 million in the Second Lien Notes that mature on October 31, 2023, all of which were outstanding as of June 30, 2020. As of June 30, 2020, the interest rate was 11.9%. The Second Lien Notes include a 1% PIK Interest option that must be elected on a quarterly basis. The Second Lien Notes are secured by substantially all of our property and other assets and provide for certain financial covenants including a leverage ratio and fixed charge ratio.

Covenant Compliance

Our Credit Agreement and Second Lien Notes include a covenant that required us to deliver our audited consolidated financial statements within 120 days of the end of the fiscal year and, in connection therewith, also include an automatic five-business day cure period for us to deliver our audited consolidated financial statements before an event of default would be deemed to occur. Beginning on April 29, 2020 and continuing until May 6, 2020, we were not in compliance with the covenant requiring us to deliver our audited consolidated financial statements within the 120-day time period. However, upon the issuance of our audited consolidated financial statements on May 6, 2020, we delivered our audited consolidated financial statements, which was within the five-business day cure period so no event of default occurred under our Credit Agreement and Second Lien Notes. We were in compliance with all other applicable covenants under our Credit Agreement and Second Lien Notes as of December 31, 2019 and as of the issuance of our audited consolidated financial statements on May 6, 2020.

Series A Notes

On March 5, 2018, we issued Series A Notes in an aggregate principal amount of approximately $7.6 million to certain stockholders who were physicians or entities for the benefit of physicians in exchange for the shares of our common stock and Series A preferred stock held by such stockholder. As of June 30, 2020, we had outstanding approximately $6.9 million in aggregate principal amount of Series A Notes. The unpaid principal balance of each Series A Note bears simple interest from the March 5, 2018 at a fixed annual rate of 12% accruing daily, based on a 365-day year, and the principal amount of each Series A Note together with all unpaid interest accrued thereon is due and payable on March 5, 2025. Series A Notes may be prepaid at any time without premium or penalty.

 

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In March 2019 and April 2019, two holders of Series A Notes exchanged their notes with principal balances of $0.4 million and $0.2 million, respectively, for 341,680 shares and 190,342 shares, respectively, of the Series A Preferred Stock. The Series A Notes exchanged were owned by non-physicians who had purchased them from the physician-owner at the carrying value prior to the exchange.

Series C Notes

On March 5, 2018, we issued Series C Notes in an aggregate principal amount of approximately $0.7 million to certain physician stockholders in exchange for the shares of our Series B preferred stock held by such stockholder. As of June 30, 2020, we had outstanding approximately $0.4 million in aggregate principal amount of Series C Notes. The unpaid principal balance of each Series C Note bears simple interest from the March 5, 2018 at a fixed annual rate of 12% accruing daily, and compounding quarterly, based on a 365-day year, and the principal amount of each Series C Note together with all unpaid interest accrued thereon is due and payable on March 5, 2025. Series C Notes may be prepaid at any time without premium or penalty.

In March 2019, a holder of Series C Notes exchanged his notes with a principal balance of approximately $0.3 million for 250,711 shares of the Series B Preferred Stock. The Series C Notes exchanged were owned by a non-physician who had purchased them from the physician-owner at the carrying value prior to the exchange.

Series A Warrants

In connection with the issuance of Series A Notes and Series C Notes, we also issued Series A Warrants to purchase Series A Notes to certain physician stockholders in exchange for vested options to purchase shares of our common stock. As of June 30, 2020, we had outstanding Series A Warrants to purchase an aggregate of approximately $0.8 million in aggregate principal amount of Series A Notes. Series A Warrants are exercisable until dates ranging from June 2026 through August 2027, subject to earlier termination in accordance with the terms of Series A Warrants. The exercise price per $1.00 principal amount of Series A Notes underlying Series A Warrants is $1 and any Series A Notes issuable upon exercise of Series A Warrants will pay interest accrued from March 5, 2018 through the maturity date, March 5, 2025, or earlier date of prepayment.

Refinancing of First Lien Credit Facilities and Second Lien Notes

We intend to consummate a debt refinancing in connection with this offering pursuant to which we intend to refinance all amounts outstanding under the First Lien Credit Facilities and the Second Lien Notes with the proceeds from the Senior Secure Term Loans and a portion of the proceeds from this offering. We do not expect to consummate this offering unless we concurrently consummate the debt refinancing.

General

We expect that Spinal Elements, Inc., our indirect wholly-owned subsidiary, will enter into a senior secured credit agreement with Runway Growth Credit Fund Inc. (the “New Credit Agreement”), as administrative agent and the lenders from time to time party thereto. The New Credit Agreement is expected to provide for (i) a $35,000,000 initial term loan (the “Initial Term Loan”) and (ii) $15,000,000 in delayed draw term loan commitments which are available in two tranches of $7,500,000 each, subject to compliance by Spinal Elements, Inc. of certain minimum revenue thresholds (the “DDTL Commitments” and together with the Initial Term Loan, collectively, the “Senior Secured Term Loans”). Based on negotiations to date with the prospective lenders under the proposed New Credit Agreement, we expect the terms of the new Senior Secured Term Loans to include the following:

Interest Rates and Fees

The Senior Secured Term Loans are expected to bear interest at a rate per annum equal to LIBOR (subject to a floor of 0.50%) plus 9.65% with a 30-month interest only period, which interest only period may be extended for 6 months if we achieve a trailing twelve-month Adjusted EBITDA of at least $5,000,000.

 

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In addition to paying interest, we expect to be required to pay a closing fee, customary transaction expenses and a fee payable on the total funded amount of the facility simultaneously with the payment of the final principal installment.

Mandatory Repayments

The New Credit Agreement is not expected to require us to prepay outstanding loans in any amount at any time.

Voluntary Repayments

We expect to be permitted to voluntarily repay in full, but not in part, any outstanding Senior Secured Term Loans, subject to a prepayment premium equal to 3% of the prepaid amount during the interest only period and 1% of the prepaid amount thereafter.

Amortization and Final Maturity

The New Credit Agreement is expected to require us to repay the principal beginning on the 31st month after the closing date under the New Credit Agreement, in an amount equal to 1/30th of the outstanding principal amount of the Senior Secured Term Loans per month. In the event of an extension to the interest only period, the New Credit Agreement is expected to provide for amortization to begin on the 37th month after the closing date under the New Credit Agreement, in an amount equal to 1/24th of the outstanding principal amount of the Senior Secured Term Loans per month. The Senior Secured Term Loans are expected to have a 60-month maturity.

Guarantees and Security

The Senior Secured Term Loans are expected to be guaranteed by KAMD Buyer, Inc. (“KAMD”), our direct wholly-owned subsidiary, as well as Spinal Elements, Inc.’s direct and indirect wholly-owned domestic subsidiaries, and certain of Spinal Elements, Inc.’s future domestic wholly-owned subsidiaries. All obligations under the Senior Secured Term Loans and the guarantees of those obligations, subject to certain exceptions, are expected to be secured by a first priority lien on substantially all of the assets of Spinal Elements, Inc., KAMD, and its wholly-owned subsidiaries, including the equity interests of Spinal Elements, Inc. and its subsidiaries, as well as 65% of the voting (and 100% of non-voting) equity interests of certain first-tier foreign subsidiaries. In addition to the above, we expect to provide a pledge of 100% of the stock of KAMD and to grant a security interest to the administrative agent for the benefit of the lenders on all our cash and we expect that all cash maintained by us will be subject to control agreements in favor of the administrative agent.

Covenants and Other Matters

The Senior Secured Term Loans are expected to contain a number of covenants that, among other things and subject to certain exceptions, will restrict the ability of Spinal Elements, Inc. and KAMD and its and their subsidiaries to:

 

   

make dispositions;

 

   

changes their business without notice;

 

   

make changes in management or ownership;

 

   

enter into mergers or acquisitions;

 

   

incur additional indebtedness;

 

   

incur liens;

 

   

maintenance of collateral accounts;

 

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make distributions;

 

   

make investments;

 

   

enter into transactions with affiliates; and

 

   

incur subordinated debt.

In addition, the New Credit Agreement governing the Senior Secured Term Loans is expected to require Spinal Elements, Inc., KAMD and their subsidiaries to comply with the following financial covenants:

 

   

a minimum liquidity amount at all times of no less than $5,000,000; and

 

   

a minimum trailing twelve-month net revenue amount of at least 80% of projected revenues, tested as of the last day of each fiscal quarter.

The New Credit Agreement governing the Senior Secured Term Loans is also expected to contain customary representations and warranties, affirmative and negative covenants and events of default.

In connection with the borrowings under the Senior Secured Term Loans, we expect to issue warrants to the administrative agent to purchase shares of our common stock at an exercise price per share equal to the initial public offering price in this offering. The number of shares that will be issuable upon exercise of the warrants will equal $2.5 million divided by the initial public offering price in this offering. The warrants will expire on the tenth anniversary of their issuance date.

The terms of the Senior Secured Term Loans and the New Credit Agreement have not been finalized and all of the participating lenders have not yet been identified. As a result, no assurance can be given that such Senior Secured Term Loans and the New Credit Agreement will be consummated on the terms described above and the terms may differ from those set forth above and such differences could be material.

Commitments and Contractual Obligations

In the normal course of business, we enter into various contractual obligations that impact, or could impact, our liquidity. The table below outlines our projected cash payments for material obligations at December 31, 2019. Also refer to Note 10 to our audited consolidated financial statements included elsewhere in this prospectus for further information on our commitments and contractual obligations. The following table sets forth our commitments and contractual obligations as of December 31, 2019 for the periods indicated:

 

     Payments Due by Period:  

(in thousands)

   Total      Less than 1
year
     1 to 3
years
     3 to 5
years
     More than 5
years
 

Long-term debt obligations(1)

   $ 98,498        —        $ 15,670      $ 75,526      $ 7,302  

Lines of credit(2)

     47,180        —          47,180        —          —    

Interest expense on long-term debt(3)(4)

     48,783      $ 4,443        26,129        12,072        6,139  

Operating lease obligations

     2,004        1,124        880        —          —    

Purchase commitments(5)

     12,565        12,565        —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 209,030      $ 18,132      $ 89,859      $ 87,598      $ 13,441  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Represents the aggregate principal amount due under the Term Loan (including PIK Interest as of December 31, 2019), Second Lien Notes (including PIK Interest as of December 31, 2019), Series A Notes and Series C Notes.

(2)

Represents the aggregate principal amount due under the Revolving Credit Facility (including PIK Interest as of December 31, 2019) and LIFO Revolving Facility.

 

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(3)

The interest rate expense date on the debt includes interest due on our lines of credit. It is calculated based on the amounts outstanding as of December 31, 2019, and is based on the rates in effect at that time for each form of debt obligations.

(4)

The obligations shown above for future interest expense on long-term debt include the element of interest expense that is considered PIK. PIK Interest involves the deferral of cash interest payments until a specified future point in time, as the interest payments are capitalized into principal. The future PIK Interest payments are included in the table as an obligation in the appropriate periods based on when they are due according to terms of the specific debt arrangement.

(5)

Represents open purchase orders in the ordinary course of business.

The table above does not include the impact of our outstanding Series A Warrants to purchase approximately $0.8 million in aggregate principal amount of additional Series A Notes, as the timing of settlement is uncertain. The fair value of these Series A Warrants is $0.4 million and is included in Other long-term liabilities in our audited consolidated financial statements included elsewhere in this prospectus.

In February 2020, we entered into a new lease agreement for our Carlsbad, California facility. The total noncancelable commitment under the new lease agreement is $8.2 million.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Cash and Cash Equivalents

We had cash and cash equivalents totaling approximately $12.6 million and $2.1 million at June 30, 2020 and 2019, respectively, and $1.1 million and $2.5 million at December 31, 2019 and December 31, 2018, respectively. The following table sets forth our cash flows from operating, investing and financing activities for the periods indicated:

 

     Six Months Ended
June 30,
    Year Ended
December 31,
 

(in thousands)

         2020                 2019                 2019                 2018        

Net cash used in operating activities

   $  (9,668   $ (6,185   $ (10,422   $ (14,876

Net cash used in investing activities

     (2,456     (636     (4,403     (4,244

Net cash provided by financing activities

     23,627       6,424       13,502       20,246  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

   $ 11,503     $ (397   $ (1,323   $ 1,126  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Cash Used in Operating Activities

Net cash used in operating activities was $9.7 million for the six months ended June 30, 2020 compared to $6.2 million for the six months ended June 30, 2019. The $3.5 million increase in cash used in operations was primarily the result of decreases in the non-cash components of net loss, which are recorded as add-backs to operating cash used in an indirect-method cash flow statement. The total of reconciling non-cash add-backs decreased by $10.2 million for the six months ended June 30, 2020 compared to the six months ended June 30, 2019. This decrease was offset by a decrease in net loss of $3.9 million and the results of working capital items, primarily accounts receivable and unbilled revenue, which were $2.8 million favorable to cash flows for the six months ended June 30, 2020 compared to the six months ended June 30, 2019.

Net cash used in operating activities was $10.4 million for the year ended December 31, 2019 compared to $14.9 million for the year ended December 31, 2018. The improvement in cash used in operations was

 

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primarily the result of working capital items, which in the aggregate were $14.5 million favorable to cash flows year over year, as well as a $3.0 million reduction in net loss in the year ended December 31, 2019 compared to December 31, 2018. These two positive impacts were partially offset by a decrease in the non-cash components of net loss, which are recorded as add-backs to operating cash used in an indirect-method cash flow statement. The total of reconciling non-cash add-backs decreased by $13.0 million in the year ended December 31, 2019 as compared to the year ended December 31, 2018.

Net Cash Used in Investing Activities

Net cash used in investing activities was $2.5 million for the six months ended June 30, 2020 compared to $0.6 million for the six months ended June 30, 2019. The $1.8 million increase in cash used in investing was due primarily to the receipt of proceeds from disposals of $1.5 million in the six months ended June 30, 2019, coupled with increased purchases of property and equipment of $0.3 million in the six months ended June 30, 2020 compared to the six months ended June 30, 2019. The disposals related to the sale of certain assets from our Marietta Facility in connection with the internal reorganization that was completed in June 2019.

Net cash used in investing activities was $4.4 million for the year ended December 31, 2019 compared to $4.2 million for the year ended December 31, 2018. The $0.2 million increase was due primarily to the receipt of proceeds from disposals of $1.5 million in the year ended December 31, 2019, which was offset by increased asset purchases of $1.6 million in the year ended December 31, 2019. The disposals related to the sale of certain assets from our Marietta Facility in connection with the internal reorganization that was complete in June 2019. The increased asset purchases related to the acquisition of more instrument sets in the year ended December 31, 2019.

Net Cash Provided by Financing Activities

Net cash provided by financing activities was $23.6 million for the six months ended June 30, 2020 compared to $6.4 million for the six months ended June 30, 2019. The $17.2 million increase in cash provided by financing was primarily due to increased drawdowns on our line of credit that occurred in the first quarter of 2020.

Net cash provided by financing activities was $13.5 million for the year ended December 31, 2019 compared to $20.2 million for the year ended December 31, 2018. The $6.7 million decrease was primarily due to reduced drawdowns on our line of credit.

Seasonality

Our quarterly operating results experience some seasonal variations. Historically, we have experienced lower sales in the summer months, in part due to patients’ or surgeons’ vacations, and higher sales in the last quarter of the fiscal year, in part driven by patients’ tendency to schedule larger, more complex surgeries closer to the end of the year after they have largely or fully paid their insurance deductibles. Our quarterly operating results may fluctuate in the future depending on these and other factors and our historical results are not necessarily indicative of current or future results.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We evaluate our estimates on an ongoing basis, based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Application of these accounting policies involves the exercise of judgment and use of

 

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assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. While our significant accounting policies are described in more detail in Note 1 to our audited and unaudited consolidated financial statements included elsewhere in this prospectus, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our audited and unaudited consolidated financial statements.

Revenue Recognition

We recognize revenue from product sales in accordance with Financial Accounting Standards Board (“FASB”) ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”). This standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaboration arrangements and financial instruments. Under ASC 606, we recognize revenue when our customer obtains control of promised goods or services, in an amount that reflects the consideration that we expect to receive in exchange for those goods or services. To determine revenue recognition for arrangements that are determined to be within the scope of ASC 606, we perform the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, we assess the goods or services promised within each contract and determine those that are performance obligations and assess whether each promised good or service is distinct. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

We derive our revenues primarily from the sale of spinal surgery implants used in the treatment of spine disorders which fall under two broad product categories: (i) Featured Products and (ii) Certain Legacy Products. We sell these products to three types of customers: (i) hospitals, (ii) ambulatory surgery centers and (iii) stocking distributors (distributors that are the Company’s end customer). We generate the majority of our revenue from the sale of inventory to hospitals and ambulatory surgery centers that is initially consigned to independent sales distributors who then sell our products to the end user. The sales distributors facilitate sales to hospitals and ambulatory surgery centers, but we have determined that we are the principal as we are primarily responsible for fulfillment and acceptability, have inventory risk and have discretion in setting the price for the products, and therefore recognize revenue gross in those transactions. For these surgical implant sales, we recognize revenue at the time the product has been used or implanted by the hospitals or ambulatory surgery centers, which is when control is transferred to the customers, and all other revenue recognition criteria have been met. When we bill the hospitals or ambulatory surgery centers, the unbilled revenue is then recorded as accounts receivable. The remainder of our revenue is generated from sales to distributors, for which, we recognize revenue upon shipment which is typically when control of the underlying product is transferred to the customer and all other revenue recognition criteria have been met.

For our sales to stocking distributors, provisions for product returns and other allowances are recorded, for product returns that are initiated and shipped back to us within 30 days, as a reduction to revenue in the period sales are recognized. We estimate the amount of sales returns and allowances that will eventually be incurred based on historical experience and current/forecasted performance. Historically, returns are generally not significant given the nature of the product and the 30-day return period. We offer a standard quality assurance warranty on our products. Warranty reserves were not material as of December 31, 2019 or December 31, 2018. There are no other forms of variable consideration such as discounts, rebates or volume discounts that we estimated to reduce our transaction price.

 

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Inventories

Inventories are stated at the lower of cost or net realizable value, with cost for manufactured inventory determined using standard costs which approximates the first-in, first-out (“FIFO”) method. Manufactured inventory consists of raw material, direct labor and manufacturing overhead cost components. Inventories purchased from third-party manufacturers are stated at the lower of cost or market using the FIFO method. We review the carrying value of inventory on a periodic basis for excess or obsolete items based on historical turnover and assumptions about future product demand, considering the current state of the product in relationship to support, promotion, and continuing supply, and by analyzing the current selling price for purposes of accounting for inventory at the lower of cost or net realizable value. If we determine the quantities exceed the estimated forecast, that an item is obsolete, or the expected net realizable value upon sale is lower than the currently recorded cost, we record a write-down, charged to cost of goods sold, to reduce the value of the inventory to its net realizable value and establishes a new cost basis. Any adjustments, as required, are included as a component of cost of goods sold.

Property and Equipment and Long-Lived Assets

Property and equipment, including surgical instrument sets and leasehold improvements, is stated at cost, less accumulated depreciation and amortization. Property and equipment are depreciated using the straight-line method over the estimated useful lives of the assets, which range from three to ten years. Leasehold improvements are amortized over the shorter of their estimated useful lives or the related lease term, between three to fifteen years. The cost of purchased spinal instrument sets which we consign to hospitals and independent sales agents to support surgeries is initially capitalized as property and equipment with depreciation initiated when instruments are put together in a newly built set with spinal implants. For instruments that are used to replace damaged instruments in an existing set, depreciation is generally initiated in the month following acquisition of the replacement instrument.

Long-lived assets to be held and used are tested for recoverability whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be recoverable. Factors we consider important which could trigger an impairment review include, but are not limited to, significant underperformance relative to historical or projected future operating results, significant changes in the manner of its use of acquired assets or its overall business strategy, and significant industry or economic trends. When we determines that the carrying value of a long-lived asset may not be recoverable based upon the existence of one or more of the above indicators, we first determine the recoverability by comparing the carrying amount of the asset to net future undiscounted cash flows that the asset is expected to generate. If the asset’s carrying value exceeds undiscounted cash flows, we recognize an impairment charge equal to the amount by which the carrying amount exceeds the fair market value of the asset. We have not recognized any impairment loss for any tangible long-lived assets for the years ended December 31, 2019 and 2018.

Intangible Assets

Intangible assets with a finite life consist of trade names, customer relationships, patented and unpatented technology, non-compete agreements, trademarks, and licenses. These amortizable intangible assets were recorded at estimated fair value in conjunction with the Initial Acquisition and the Combination. These assets are amortized on a straight-line basis over a period of three to twenty years, which approximates the economic useful lives of the intangible assets to us. In determining the useful lives of intangible assets, we consider the expected use of the assets and the effects of obsolescence, demand, competition, anticipated technological advances, changes in surgical techniques, market influences and other economic factors. Customer relationships are amortized over the periods in which we expect to generate positive cash flows form identified relationships. For technology-based intangible assets, we consider the expected life cycles of products which incorporate the corresponding technology. Intangible assets with a finite life are tested for impairment whenever events or circumstances indicate that the carrying amount may not be recoverable. Trademarks that are related to products

 

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are assigned lives consistent with the period in which the products bearing each brand are expected to be sold. Amortization expense is included as a component of selling, general and administrative expenses in the Consolidated Statements of Operations.

Goodwill

Goodwill represents the excess of purchase price over estimated fair value of net tangible and identifiable intangible assets acquired. Goodwill has an indefinite life; however, we test goodwill for impairment annually as of December 31, or whenever events or changes in circumstances indicate that goodwill may be impaired. We initially assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more-likely-than-not that the estimated fair value of a reporting unit is less than its carrying amount. If determined that it is more-likely-than-not the estimated fair value of a reporting unit is less than its carrying amount, a quantitative assessment is performed, whereby the fair value of reporting units is estimated using a combination of market earnings multiples and discounted cash flow methodologies. However, under FASB Topic ASC 350 Intangibles—Goodwill and Other, entities have an unconditional option to bypass the qualitative assessment described in the preceding sentences for any reporting unit in any period and proceed directly to performing the quantitative goodwill impairment test. An entity may resume performing the qualitative assessment in any subsequent period. For both of the years ended December 31, 2019 and 2018, we elected to bypass the qualitative assessment and performed a quantitative assessment for purposes of our goodwill impairment testing.

This requires significant judgments including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth of the business, the useful life over which cash flows will occur and determination of the weighted average cost of capital. Changes in these estimates and assumptions could materially affect the determination of estimated fair value and/or goodwill impairment. When evaluating whether goodwill is impaired, we compare the estimated fair value of each reporting unit to the carrying amount, including goodwill. If goodwill is considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying value of the reporting unit exceeds the estimated fair value.

For purposes of goodwill impairment testing, following the acquisition of Spinal Elements in 2017 and for the entirety of the year ended December 31, 2018, we determined that we had two reporting units, Amendia and Spinal Elements, which was consistent with our operating structure during that period. The assets and liabilities were assigned to the two reporting units at the date of the Spinal Elements acquisition based on their relative fair value using a combination of market earnings multiples and discounted cash flow methodologies. As of December 31, 2018, it was determined that goodwill related to the Amendia reporting unit was impaired and we recorded an impairment charge of $6.6 million. The impairment was primarily due to revised projections for the Amendia reporting unit, which had not achieved the revenue growth and profitability originally anticipated at the acquisition date.

In June 2019, we sold certain assets of our Marietta Facility in connection with both the internal reorganization launched to outsource the majority of our manufacturing to third-party contract manufacturers and the finalization of the Combination. This method of contract manufacturing is similar to how the Spinal Elements reporting unit is operated. As a result of these changes, we reevaluated our reporting units and have determined that we have only one reporting unit as of June 13, 2019. We assigned all of the remaining intangible assets and goodwill to the singular reporting unit. We completed a qualitative assessment of any potential impairment for our reporting unit at the date of the reassessment and determined that no impairment existed. No further impairment charges were recognized as a result of the annual impairment assessment for the year ended December 31, 2019.

Income Taxes

We account for income taxes using the asset and liability method whereby deferred tax asset and liability account balances are determined based on differences between financial reporting and tax basis of assets and

 

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liabilities and are measured using the enacted tax rates and laws expected to be in effect when the asset or liability is expected to be realized or settled. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount that is deemed more likely than not to be realized. Nearly all of our net deferred tax assets have a valuation allowance due to a recurring history and expected future losses.

In the ordinary course of business, there may be transactions for which the ultimate tax outcome is uncertain. We assess uncertain tax positions in each of the tax jurisdictions in which we have operations and accounts for the related financial statement implications. Unrecognized tax benefits are reported using the two-step approach under which tax effects of a position are recognized only if it is more likely than not to be sustained and the amount of the tax benefit recognized is equal to the largest tax benefit that is greater than fifty percent likely of being realized upon ultimate settlement of the tax position.

Determining the appropriate level of unrecognized tax benefits requires us to exercise judgment regarding the uncertain application of tax law. The amount of unrecognized tax benefits is adjusted when information becomes available or when an event occurs indicating a change is appropriate. We include interest and penalties related to our uncertain tax positions as part of income tax expense, if any.

Stock-Based Compensation

In 2016, we adopted our 2016 Plan and in April 2020 we amended and restated the 2016 Plan, effective as of April 13, 2017. The 2016 Plan is administered by our Board of Directors. Under the 2016 Plan, the Board may grant awards for the issuance of up to an aggregate of 21,000,000 shares of common stock in the form of non-qualified stock options. The exercise price of a stock option granted under the 2016 Plan may not be less than the fair market value of a share of our common stock on the grant date of such stock option. Options granted under the 2016 Plan may be granted to employees and other service providers to the Company and its subsidiaries.

Awards of stock options to employees have been granted with both service-based and performance-based vesting conditions. Awards with performance-based vesting have been granted primarily to members of our sales organization and may be earned by meeting established individual sales targets. If an award recipient achieves an annual sales target, the award is then eligible to vest over a service period following the performance period, generally four years. Awards subject only to service-based vesting typically vest over three- or four-year periods. For unvested awards with performance-vesting features, we assess the probability of the recipient attaining the performance trigger at each reporting period. Awards that are deemed probable of attainment are recognized in expense over the requisite service period of the grant, using a graded attribution model. The expense associated with stock options with service-based vesting conditions is recognized on a straight-line basis over the requisite service period.

We have also granted performance awards to non-employee service providers. These awards have been granted to our distributors as a means of additional incentive to meet company-determined annual sales targets. In addition to having performance-vesting criteria based on the achievement of individual sales targets, these awards are also subject to service-based vesting, pursuant to which the awards will vest in four annual installments over a four-year period beginning on January 1 following the achievement of the initial sales target. For unvested awards with performance-vesting features, we assess the probability of the recipient attaining the performance trigger at each reporting period. Awards that are deemed probable of attainment are recognized in expense over the requisite service period of the grant, using a graded attribution model.

Our Board of Directors may determine to accelerate the vesting of stock options granted under the 2016 Plan in connection with a “Covered Transaction,” as defined in the 2016 Plan.

All stock-based compensation awards have a contractual life of 10 years and are recognized in the financial statements based on their grant date fair value. The fair value of each stock option award is estimated using an

 

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appropriate valuation method. Valuing these awards is complex and relies on subjective inputs. We use an option pricing method or a hybrid of the probability-weighted expected return method and the option pricing method to value our common stock. Each of these methods allocates the fair value of total equity to the various components of equity based on estimated liquidity events. The probability-weighted expected return method (“PWERM”) is a scenario-based analysis that estimates value per share based on the probability-weighted present value of expected future investment returns, considering each of the possible outcomes, as well as the economic and control rights of each share class. The option pricing method first values our company at the enterprise level, and then values breakpoints based on the liquidation preferences of the Series B and Series A preferred shares, the exercise prices of the options (for each equity component) and the conversion of Series B shares to common shares. An allocation of total equity (enterprise value) is then performed to the various equity components based on the relative rights and privileges of the Series B preferred stock, Series A preferred stock, common stock and common stock options. To estimate the fair value of total equity, we utilized a combination of the income approach as well as market approaches. We were assisted by independent valuation experts to apply the above models to calculate the fair value estimate.

Upon adoption of Accounting Standards Update (“ASU”) ASU 2016-09—Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Accounting, we have continued to estimate forfeitures. If the estimate of forfeitures exceeds the rate of pre-vesting cancellations, we record a true-up to ensure that expense is fully recognized for awards that have vested.

Net Loss per Share of Common Stock

The computation of basic net loss per share of common stock, or EPS, is based on the weighted average number of shares that were outstanding during the period, including shares of common stock that are issuable at the end of the reporting period. The computation of diluted EPS is based on the number of basic weighted-average shares outstanding plus the number of common shares that would be issued assuming the exercise of all potentially dilutive common stock equivalents. For purposes of the diluted net loss per share calculation, redeemable convertible preferred stock and common stock options are considered to be potentially dilutive securities.

To calculate the basic EPS numerator, income available to common stockholders must be computed by deducting both the dividends declared in the period on preferred stock (whether or not paid) and the dividends accumulated for the period on cumulative preferred stock (whether or not earned) from income from continuing operations (if that amount appears in the income statement) and also from net income. If there is a loss from continuing operations or a net loss, the amount of the loss shall be increased by those preferred dividends. The outstanding Series A and Series B Preferred Stock each have cumulative dividends, whether or not declared. Accordingly, we have reduced the numerator for Basic EPS by deducting/(increasing) the amount of cumulative preferred dividend from net income/(loss) in each period presented.

The Series B Preferred Stock contains a contingent beneficial conversion feature based on the accumulation of dividends. When the beneficial conversion feature becomes in the money, the related increase in the intrinsic value of the feature will be included as a reduction of income available to common stockholders.

Because we have reported a net loss for the periods presented and redeemable convertible preferred stock and common stock options are anti-dilutive, diluted net loss per common share is the same as basic net loss per common share for the periods.

Recently Adopted Accounting Standards

A discussion of recently issued accounting standards applicable to us is described in Note 1 to our audited and unaudited consolidated financial statements included elsewhere in this prospectus, and we incorporate such discussion by reference herein.

 

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Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

Our outstanding indebtedness consists of fixed and floating rate instruments, including debt outstanding under the First Lien Credit Facilities, the Second Lien Notes, Series A Notes and Series C Notes.

Our borrowings under the First Lien Credit Facilities and the Second Lien Notes expose us to market risk related to changes in interest rates. As of December 31, 2019, our outstanding floating rate indebtedness totaled $145.7 million. The primary base interest rate on this indebtedness is LIBOR. Using the amount outstanding as of December 31, 2019 and a weighted-average rate of all outstanding floating rate indebtedness, a hypothetical 100 basis point increase in our effective interest rate would result in additional annual expense of $1.5 million.

Foreign Currency

While we sell a small portion of our products to countries other than the U.S., we bill all of our sales outside of the U.S. in U.S. dollars. We therefore believe the risk of a significant impact on our operating income from foreign currency fluctuations is not significant. As the impact of foreign currency exchange rates has not been material to our historical operating results, we have not entered into derivative or hedging transactions, but we may do so in the future if our exposure to foreign currency becomes more significant. We estimate that an immediate hypothetical 10% change in foreign exchange rates not currently pegged to the U.S. dollar would not have had a material impact on our operating results for the years ended December 31, 2019 and 2018.

Other Company Information

Emerging Growth Company Status and JOBS Act Accounting Election

We qualify as an EGC, as defined in the JOBS Act. As an EGC, we may take advantage of specified reduced disclosure and other requirements that are otherwise applicable generally to public companies. These provisions include, but are not limited to:

 

   

being permitted to present only two years of audited financial statements and only two years of related “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this prospectus;

 

   

not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act;

 

   

reduced disclosure obligations regarding executive compensation in our periodic reports, proxy statements and registration statements, including in this prospectus; and

 

   

exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.

We may take advantage of these exemptions until we are no longer an EGC. We will cease to be an EGC on the date that is the earliest of (i) the last day of the fiscal year in which we have total annual gross revenues of $1.07 billion or more; (ii) the last day of the fiscal year following the fifth anniversary of the completion of this offering; (iii) the date on which we have issued more than $1.0 billion in nonconvertible debt during the previous three years; or (iv) the last day of the fiscal year in which we are deemed to be a large accelerated filer under the rules of the SEC. We may choose to take advantage of some but not all of these exemptions. We have taken advantage of reduced reporting requirements in this prospectus. Accordingly, the information contained herein may be different from the information you receive from other public companies in which you hold stock.

In addition, the JOBS Act provides that an EGC can take advantage of an extended transition period for complying with new or revised accounting standards. This provision allows an EGC to delay the adoption of

 

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some accounting standards until those standards would otherwise apply to private companies. We have elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we (i) are no longer an EGC or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our audited and unaudited consolidated financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.

We are also a “smaller reporting company” as defined in Item 10(f)(1) of Regulation S-K. We may continue to be a smaller reporting company after this offering if either (i) the market value of our stock held by non-affiliates is less than $250 million or (ii) our annual revenue is less than $100 million during the most recently completed fiscal year and the market value of our stock held by non-affiliates is less than $700 million. If we are a smaller reporting company at the time we cease to be an EGC, we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies. Specifically, as a smaller reporting company we may choose to present only the two most recent fiscal years of audited financial statements in our Annual Report on Form 10-K and, similar to emerging growth companies, smaller reporting companies have reduced disclosure obligations regarding executive compensation.

Internal Control Over Financial Reporting

In connection with the audits of our consolidated financial statements for the years ended December 31, 2019 and 2018, we have identified material weaknesses in our internal control over financial reporting. The material weaknesses we identified include that we lack a sufficient number of professionals with the appropriate level of knowledge, training and experience to appropriately analyze, record and disclose accounting matters timely and accurately in accordance with GAAP. This material weakness contributed to the Company not being able to (i) design and maintain formal accounting policies, procedures and controls over the fair presentation of our financial statements; (ii) design and maintain formal accounting policies, processes and controls to analyze, account for and disclose complex transactions; (iii) design and maintain controls over the preparation and review of account reconciliations, journal entries and financial statements, including maintaining appropriate segregation of duties; and (iv) design and maintain information technology general controls over the integrity of the data and processes in the information systems used for financial reporting. Each of these control deficiencies could result in a misstatement of accounts or disclosures that would result in a material misstatement of our financial statements that would not be prevented or detected, and accordingly, it was determined that these control deficiencies constitute material weaknesses. The material weaknesses resulted in material errors to previously issued financial statements, which required a restatement of such historical previously issued financial statements. See “Risk Factors—We have identified material weaknesses in our internal control over financial reporting. If we are unable to remediate these material weaknesses, or if we identify additional material weaknesses in the future or otherwise fail to maintain an effective system of internal controls, we may not be able to accurately or timely report our financial condition or results of operations, which may adversely affect investor confidence in us, our business and the market price of our common stock.”

We are currently evaluating and implementing additional procedures to enhance our internal control over financial reporting and address these material weaknesses, including by hiring additional financial reporting personnel with technical accounting and financial reporting experience and by supplementing our resources through the use of third party advisors. We intend to continue evaluating the implementation of additional procedures to address these material weaknesses as well as continue utilizing third-party advisors until we have hired an appropriate number of skilled professionals. However, we cannot assure you that these or other measures will fully remediate the material weaknesses described above in a timely manner, if at all.

COVID-19

Market factors and disruptions in global markets may also affect our future operating results and cash flows. The COVID-19 pandemic has severely restricted the level of economic activity around the world. On January 30,

 

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2020, the WHO declared the COVID-19 outbreak a Public Health Emergency of International Concern, and on March 13, 2020, the COVID-19 pandemic was declared a national emergency. Almost all U.S. states, including California where our headquarters is located, issued, and others in the future may issue, “shelter-in-place” orders, quarantines, executive orders and similar government orders, restrictions and recommendations for their residents to control the spread of COVID-19. As a result of those orders, restrictions and recommendations, temporary closures of businesses were ordered and numerous other businesses temporarily closed voluntarily. Additionally, authorities in some instances forced hospitals, ambulatory surgical centers and surgeons to delay elective spine surgery procedures in an attempt to free up medical resources to address the COVID-19 pandemic, and it is unknown when these hospitals and ambulatory surgical centers will be fully reopened for elective spine surgery procedures or whether more hospitals, ambulatory surgical centers and surgeons will be similarly impacted.

We have experienced disruptions to our revenue and may experience further business disruptions, including disruptions to our supply chain, distributors, customers and regulatory processes. Further, patients continue to delay or forego non-urgent spine surgery procedures to avoid hospitals and ambulatory surgical centers and comply with quarantine and/or similar directives from local and national health and government officials. The delayed or foregone spine surgeries have had a significant impact on our operations and resulted in a rapid decrease in revenue and cash flows beginning in March 2020, as compared to prior periods and original expectations. Despite some recovery, this reduction in sales, as compared to original expectations, continued into June 2020. We expect the negative impacts to continue and may worsen in at least the short-term during the COVID-19 pandemic. While we cannot reasonably estimate the duration or severity of the COVID-19 pandemic, we expect that it will continue to have a material adverse impact on our business, results of operations, financial position and liquidity for at least the remainder of 2020. Specifically, the COVID-19 pandemic had a negative impact on our business, results of operations and financial position for the six months ended June 30, 2020 and, despite some recovery, we expect it may have a negative impact on our business, results of operations and financial position in future periods, including the remainder of the fiscal year ended December 31, 2020. Moreover, the COVID-19 pandemic has contributed to significant volatility in global financial markets, potentially reducing our ability to access capital, which could in the future negatively affect our liquidity.

As of October 8, 2020, we have not furloughed any employees, but we have implemented various measures to reduce the spread of COVID-19, including working from home and restricting visitors from our facilities. Workers who cannot work from home are encouraged to adhere to prevention measures recommended by the Center for Disease Control and Prevention and the WHO. Additional actions may be necessary depending on the duration and severity of the COVID-19 pandemic, and such actions could adversely impact our operations and financial performance in the near term.

 

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BUSINESS

Overview

We are a medical device company focused on the design, development and commercialization of a comprehensive portfolio of systems, products and technologies for spine surgery procedures, with a strategic focus on MIS procedures. We are an innovation-driven company with a track-record of delivering pioneering and differentiated products and technologies. Our product portfolio addresses a broad spectrum of spine surgery procedures and consists of innovative spinal fixation systems (implantable hardware systems that are mechanically attached to the spine and provide stability), interbody implants (devices implanted between the vertebral bodies of the spine), surgical instruments (instruments used to prepare the spine and implant our devices) and biologics (allograft or synthetic biomaterials intended to augment or replace the normal capacity of such tissue in the body). We offer a comprehensive product portfolio that can address approximately 95% of the spine surgery procedures performed worldwide in 2018 and our systems, products and technologies cover a wide variety of spine disorders, including degenerative conditions, deformities and trauma. We expect to continue to complement our existing product portfolio with new product offerings based on innovative technologies. We believe our comprehensive product portfolio has the potential to enhance the way surgeons operate and to disrupt the spine surgery market.

The majority of our product portfolio and all of our current pipeline technologies are developed for MIS procedures. MIS procedures generally address similar clinical conditions as open surgery procedures, but with reduced trauma to the muscles and soft tissues, less blood loss, smaller incisions, shorter procedure time, reduced hospitalization, lower post-operative medication use, faster patient recovery and other benefits for patients and surgeons.

We believe our novel technologies are a leap forward in MIS access systems and implantable devices. Our transformative suite of MIS technologies, branded MIS Ultra, is designed to enable minimal surgical disruption to the patient’s healthy anatomy and to improve surgeon workflow in a manner that is logical and reproducible. We believe that the benefits of our MIS Ultra technologies include a reduced need for intraoperativex-rays and reduced risk of nerve injury due to requiring fewer passes by neural structures during surgical access, as compared to conventional options.

We designate each of the products in our product portfolio as either a “Featured Product” or a “Certain Legacy Product.” We began using these designations in 2018 as part of the integration process stemming from our combination with Amendia, Inc. Featured Products are our leading products and systems, as well as any future products and systems we commercialize, in which we are or have been actively marketing and investing since 2018. Investments in Featured Products include, but are not limited to, investments in (i) additional instrument sets, (ii) research and development of system improvements and line extensions, (iii) commercial, marketing and branding campaigns and (iv) real-world analysis and clinical studies. Certain Legacy Products are products and systems that we continue to sell, but have not actively invested in, other than production costs, since 2018.

All of the products in our product portfolio that feature our MIS Ultra technology are designated as Featured Products. Our key systems that feature MIS Ultra technologies include:

 

   

Karma Fixation System—unique, metal-free posterior fixation device that is less rigid and rests well under the patient’s musculature while still stabilizing the spine and requiring only a limited number of surgical instruments, with an estimated addressable U.S. market in excess of $2.7 billion in 2019;

 

   

Katana Lateral Access System—a retractor and access system for MIS that offers a novel approach by allowing surgeons to gain lateral access in fewer steps and that is designed to prevent damage to neural structures and reduce patient’s post-operative pain;

 

   

Lucent XP Expandable Interbody Device System—made from PEEK, a high-performance polymer, and covered with our proprietary Ti-Bond titanium porous coating, that provides support for up to three millimeters of vertical expansion and up to 15 degrees of curvature while requiring simple

 

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instrumentation and implantation procedure that is designed to restore height and balance of the spine as well as to create stability;

 

   

OmegaLIF Posterior Oblique Access and Interbody Device Implant System—allows for minimally invasive single position interbody fusion and posterior fixation while requiring simple instrumentation and designed to enable efficient surgical flow and limit blood loss;

 

   

Sapphire X Anterior Cervical Plate System (which we anticipate commercially launching in late 2020)—a cervical plate and interbody delivery system that allows for a smaller incision and operative corridor while still providing for a safe, accurate and reproducible procedure; and

 

   

TeleGraft Bone Graft Delivery System (a version of which is being evaluated in early-stage clinical preference and usability testing with the expectation of commercially launching an improved version of this system in late 2020)—results in a precise and reproducible placement of bone graft material.

Additionally, a significant portion of our product portfolio features our proprietary Ti-Bond technology. Ti-Bond is a titanium porous coating applied to products to create a favorable environment for bone healing during fusion. It is made from commercially pure titanium particles that are mechanically adhered to the bone-contacting surfaces of the implant. The randomly structured porous titanium and increased surface area of Ti-Bond are designed to create an ideal bone apposing surface for peri-implant bone growth while stimulating the proliferation of osteoblasts, which are the building blocks of bone formation. In addition, Ti-Bond features differentiated characteristics, such as scratch fit, that has been demonstrated to reduce migration and therefore may enhance long-term fixation. A 2015 animal study comparing Ti-Bond-coated PEEK to non-coated PEEK demonstrated Ti-Bond’s improved bone-implant interface strength at four weeks with continued improvement at 12 weeks. All of the products in our product portfolio that feature our Ti-Bond technology are designated as Featured Products.

Our culture of innovation has enabled us to design, develop and commercialize 15 systems representing over 850 products and biologics since the beginning of 2016 that feature our MIS Ultra, Ti-Bond or other differentiated technologies. We plan to continue expanding our portfolio with systems and products that feature our disruptive technologies. In addition to systems and products that feature our MIS Ultra or Ti-Bond technologies, our comprehensive product portfolio includes well-established, innovative hardware products, including cervical and thoracolumbar spinal implant devices and fixation systems, surgical instruments (which are typically loaned to the surgeon or hospital, as applicable, and are generally necessary to perform procedures using our products) and biologics, each of which are designed to promote healing and recovery.

We intend to remain at the forefront of spine surgery solutions through our focus on innovation, research and development and technology pipeline expansion capabilities. Our forthcoming launches of disruptive and next generation technologies are expected to include the TeleGraft Bone Graft Delivery System, Sapphire X Anterior Cervical Plate System, Lucent XP Curved Expandable Interbody Device System, 3D printed interbody devices, Dimension MIS TLIF Retractor and the next generation of our OmegaLIF Posterior Oblique Access and Interbody Device Implant System, subject to obtaining the requisite regulatory clearances from the FDA, as applicable. To support our culture of innovation and protect our differentiated product portfolio, we have accumulated an extensive IP portfolio, with approximately 316 issued patents and 50 pending patents in the U.S. and approximately 97 issued patents and 50 pending patents in other parts of the world, as of September 30, 2020.

Market Opportunity

According to iData Research, the estimated size of the global spine surgery market was approximately $17.6 billion in 2018 and is expected to grow to $22.5 billion by 2024. Currently, we primarily serve the U.S. spine surgery market, which was estimated to be approximately $10.0 billion in 2018, with a strategic focus on addressing the MIS segment, one of the fastest growing spine surgery segments of the overall spine surgery market. For example, our proprietary Katana Lateral Access System serves the MIS LLIF U.S. market, which is

 

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expected to grow at an average annual rate of 11.6% from 2018 through 2024 according to research completed by healthcare consultancy firm, Millennium Research Group. Moreover, our recently introduced proprietary Karma Fixation System, which has been cleared to address a wide range of thoracolumbar procedures, will serve a market we estimate to be in excess of $2.7 billion in the U.S. in 2019.

We believe we are well-positioned to grow faster than the underlying spine surgery market. Spine-focused companies like us have taken significant market share in the spine surgery market from larger, more diversified orthopedic companies, in part by prioritizing innovation and new product development. According to Orthopedic News Network, market share for the top five spine companies declined from 87% in 2004 to 58% in 2018, driven partially by share gains from smaller, innovative spine-focused companies. In addition, as the spine surgery market and spine surgery procedures evolve, we expect that certain industry dynamics will continue to benefit us, including a focus on minimizing use of pain medications, improved technologies leading to increased use of spinal fusion procedures, favorable patient demographics, disruptive technologies driving earlier interventions and creating an expanded patient base and shift to ambulatory surgery centers. We believe we are well-positioned to take advantage of these industry dynamics with our differentiated technologies.

Our commercial sales organization and relationships with surgeons and key opinion leaders have also been instrumental to our ability to capitalize on these industry dynamics. Our sales management team maintains relationships with a network of over 200 independent distributors and over 400 surgeons across more than 500 hospitals and ambulatory surgery centers.

We generated total revenue of $95.9 million and $90.8 million in the years ended December 31, 2019 and 2018, respectively, representing an annual growth rate of 5.7%, and $42.7 million and $46.1 million for the six months ended June 30, 2020 and 2019, respectively, representing a decrease of 7.3%. Our net losses for the years ended December 31, 2019 and 2018 were $42.8 million and $45.8 million, respectively, and $21.5 million and $25.4 million for the six months ended June 30, 2020 and 2019, respectively. Additionally, we generated revenue from our Featured Products of $83.0 million and $71.4 million in the years ended December 31, 2019 and 2018, respectively, representing an annual growth rate of 16.2%, and $38.3 million and $39.2 million for the six months ended June 30, 2020 and 2019, respectively, representing a decrease of 2.5%. The decrease in revenue for the six months ended June 30, 2020 was primarily the result of the largely government imposed delay in elective spine surgery procedures in an attempt to free up medical resources to address the COVID-19 pandemic. For additional details regarding our product revenue by product category, see “—Our Technology Portfolio.”

Industry Background

Overview of Spine Anatomy

The spine consists of interlocking bones, called vertebrae, stacked on top of one another. Vertebrae are separated from each other by intervertebral discs, which act as shock absorbers, and are connected to each other by facet joints, which provide constraint. Supportive soft tissues, including ligaments, tendons and muscles, are attached to two laminae that stabilize the vertebral segment. The spinal cord runs through the center of the spine, or spinal canal, carrying nerves that exit through openings between the vertebrae, referred to as foramen, and deliver sensation and control to the entire body.

The spine is comprised of five regions, of which there are three primary regions: the cervical, thoracic and lumbar regions. The cervical region consists of the first seven vertebrae (C1-C7) that extend from the base of the skull to the shoulders and facilitate movement of the head and neck. The thoracic region consists of the 12 vertebrae in the middle of the back (T1-T12) and each vertebra in this region is connected to two ribs that protect the body’s vital organs. The lumbar region consists of five vertebrae in the lower back (L1-L5) and is the primary load-bearing region of the spine. In addition to the primary regions, the other two regions of the spine, the sacrum (S1-S5) and coccyx, consist of naturally fused vertebrae connected to the hip bones to provide support and protect organs in the pelvic area. With regard to anatomical terms of surgical location, anterior refers to the front, posterior refers to the back and lateral refers the side.

 

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Spine Anatomy

 

LOGO

Overview of Spine Disorders

Spine disorders are one of the largest contributors to rising healthcare costs with the most significant portion of such costs attributed to patients requiring surgical intervention. In 2018 alone, approximately 4.2 million spine surgery procedures were performed globally, of which 1.6 million were performed in the U.S., according to iData Research. Spine disorders range in severity from mild pain and loss of feeling to extreme pain and paralysis. These disorders are primarily caused by degenerative disc disease, stenosis, deformity, osteoporosis, tumors and trauma.

Degenerative disc disease is the most common type of spine disorder and it primarily results from repetitive stresses experienced during the normal aging process. Disc degeneration occurs as the inner cores of intervertebral discs lose elasticity and shrink. Over time, these changes can cause the discs to lose their normal height and shock-absorbing characteristics, which leads to back pain and reduced flexibility. Herniated discs are a common form of degenerative disc disease and occur when the intervertebral disc material protrudes from the annulus. Symptomatic cervical disc disease is a gradual deterioration of the spongy discs in the neck leading to problems related to nerve function that can cause pain and limit movement.

Spinal stenosis is a condition attributed to the narrowing of space around the nerves in the lumbar spine. The resulting compression can lead to back and leg pain. This condition is often caused by the degenerative process in the spine and facet joints. Lumbar stenosis is a condition whereby either the spinal canal or vertebral foramen becomes narrowed in the lower back. If the narrowing is substantial, it causes compression of the nerves and can result in severe pain, tingling, numbness and muscle weakness.

Spine deformity is a term used to describe any variation in the natural curvature of the spine. Natural curvature helps the upper body maintain proper balance and alignment over the pelvis. Common forms of deformi