What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-05 compared with 2020-08-06 · 66 added, 60 removed, 145 unchanged (46% of the section changed)

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This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the condensed consolidated financial statements and related notes thereto contained elsewhere in this quarterly report, as well as the information under "Note Regarding Forward-Looking Statements."

We are the only medical device company focused exclusively on providing a comprehensive product offering to the pediatric orthopedic market in order to improve the lives of children with orthopedic conditions.

OrthoPediatrics Corp.

(the "Company," "we," "our" or "us") is the only medical device company focused exclusively on providing a comprehensive product offering to the pediatric orthopedic market in order to improve the lives of children with orthopedic conditions.

We design, develop and commercialize innovative orthopedic implants and instruments to meet the specialized needs of pediatric surgeons and their patients, who we believe have been largely neglected by the orthopedic industry.

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and (iii) $9.0 million on the fourth anniversary of the closing date.

In addition, to the extent that the product of the Company’s revenues from the ApiFix System for the twelve months ended June 30, 2024 multiplied by 2.25 exceeds the anniversary payments actually made for the third and fourth years (subject to certain limitations), the Company has agreed to pay the selling shareholders a system sales payment in the amount of such

The anniversary payments and the system sales payment may each be made in cash or cash and common stock, subject to certain limitations;

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We enacted rigorous safety measures in all applicable locations, including implementing social distancing protocols, requiring working from home for those employees that do not need to be physically present on the warehouse floor, suspending travel, extensively and frequently disinfecting our workspaces and providing masks to those employees who must be physically present.

We expect to continue to implement these measures until we determine that the COVID-19 pandemic is adequately contained for purposes of our business, and we may take further actions as government authorities require or recommend or as we determine to be in the best interests of our employees, customers, partners and suppliers.

We will continue to utilize some or all of these measures until we determine that the COVID-19 pandemic is adequately contained for purposes of our business.

We may also take further actions as government authorities require or recommend or as we determine to be in the best interests of our employees, customers, partners and suppliers.

We have not yet experienced any significant impacts or interruptions to our supply chain as a result of the COVID-19 pandemic.

To mitigate the risk of any potential supply interruptions from the COVID-19 pandemic, we chose to increase certain inventory levels during the quarter.

To mitigate the risk of any potential supply interruptions from the COVID-19

pandemic, we chose to increase certain inventory levels during the quarter.

We may decide to take similar actions going forward.

Additionally, restrictions or disruptions of transportation, such as reduced availability of air transport, port closures and increased border controls or closures, have started to result in higher costs and delays.

Additionally, restrictions or disruptions of transportation, such as reduced availability of air transport, port closures and increased border controls or closures, have resulted in higher costs and delays.

The outbreak has significantly increased economic and demand uncertainty.

We anticipate that the current outbreak or continued spread of COVID-19, and the actions taken by governmental authorities and other third parties to contain the virus, will cause a global economic slowdown, and it is possible that it could cause a global recession.

We anticipate that the current outbreak or continued spread of COVID-19, and the actions taken by governmental authorities and other third parties to contain the virus, may cause a global economic slowdown, and it is possible that it could cause a global recession.

In the event of a recession, demand for our products would decline and our business would be adversely effected.

We have experienced a reduction in revenue as a result of global delays in elective surgeries.

taken to strengthen our balance sheet, including our June 2020 and December 2019 equity offerings, leave us well-positioned to manage our business through this crisis as it continues to unfold.

Although there is uncertainty related to the anticipated impact of the recent COVID-19 outbreak on our future results, we believe our business model, our current cash reserves and the recent steps we have taken to strengthen our balance sheet, including our June 2020 and December 2019 equity offerings, leave us well-positioned to manage our business through this crisis as it continues to unfold.

We believe our existing balances of cash and our currently anticipated operating cash flows will be sufficient to meet our cash needs arising in the ordinary course of business for the next twelve months.

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Emerging Growth Company and Smaller Reporting Company Status

The condensed consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and reflect the financial position, results of operations, and cash flows of OrthoPediatrics Corp (the "Company," “we,” "our" or "us").

We qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”).

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We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we are subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

Summary of Statements of Operations for the Three and Six Months Ended June 30, 2020 and 2019

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

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

Summary of Statements of Operations for the Three and Nine Months Ended September 30, 2020 and 2019

The following table sets forth our results of operations for the three and nine months ended September 30, 2020 and 2019:

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

2020 2019 Increase

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Net loss from continuing operations $ (4,539) $ (2,877) $ 1,662 58 % $ (18,931) $ (8,356) $ 10,575 127 %

Net loss from discontinued operations $ — $ (159) $ 159 — % $ — $ (159) $ 159 — %

Net income from discontinued operations $ — $ 213 $ (213) — % $ — $ 54 $ (54) — %

Net loss $ (4,539) $ (2,664) $ 1,875 70 % $ (18,931) $ (8,302) $ 10,629 128 %

The following tables set forth our net revenue by geography and product category for the three and six months ended June 30, 2020 and 2019:

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

The following tables set forth our net revenue by geography and product category for the three and nine months ended September 30, 2020 and 2019:

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

Product sales by geographic location:

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Total $ 22,205 $ 20,744 $ 52,154 $ 53,600

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

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

Product sales by category:

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Total $ 22,205 $ 20,744 $ 52,154 $ 53,600

Net revenue decreased $4.6 million, or 25%, from $18.2 million for the three months ended June 30, 2019 to $13.6 million for the three months ended June 30, 2020 and decreased $2.9 million, or 9%, from $32.9 million for the six months ended June 30, 2019 to $29.9 million for the six months ended June 30, 2020.

The decrease was due to the global suspension of elective surgeries related to the COVID-19 pandemic.

International revenue decreased at a higher rate than U.S revenue, and international markets continue to be impacted by COVID-19, as there are fewer stand-alone pediatric hospitals internationally and elective procedures have been slower to return.

Trauma and deformity sales declined $2.7 million, or 22%, and $0.5 million, or 2%, during the three and six months ended June 30, 2020, respectively, primarily driven by lower sales of our deformity correction product portfolio, specifically our PNP Femur and two new cannulated screw systems.

Scoliosis sales declined $2.0 million, or 35%, and $2.6 million, or 25%, during the three and six months ended June 30, 2020, respectively, primarily driven by lower sales of our RESPONSE 5.5/6.0 system and FIREFLY ® Pedicle Screw Navigation Guides.

These sales declines were offset by sports medicine / other growth of $0.1 million, or 20%, and $0.1 million, or 17%, during the three and six months ended June 30, 2020, respectively.

Net revenue increased $1.5 million, or 7%, from $20.7 million for the three months ended September 30, 2019 to $22.2 million for the three months ended September 30, 2020 and decreased $1.4 million, or 3%, from $53.6 million for the nine months ended September 30, 2019 to $52.2 million for the nine months ended September 30, 2020.

The increase during the three months ended September 30, 2020 reflected the continued progress of the U.S.

market towards normalization from the global suspension of elective surgeries related to the COVID-19 pandemic.

International revenue remained soft as international markets continue to be impacted by COVID-19, as there are fewer stand-alone pediatric hospitals internationally and elective procedures have been slower to return.

Trauma and deformity sales increased $1.1 million, or 8%, and $0.7 million, or 2%, during the three and nine months ended September 30, 2020, respectively, primarily driven by strong trauma growth and encouraging signs of recovery in elective deformity correction surgeries, specifically our PNP Femur and

cannulated screw systems.

Scoliosis sales increased $0.1 million, or 1% during the three months ended September 30, 2020 and declined $2.5 million, or 15%, during the nine months ended September 30, 2020, respectively, primarily driven by lower sales of our RESPONSE 5.5/6.0 system and FIREFLY ® Pedicle Screw Navigation Guides.

Sports medicine / other increased $0.2 million, or 55%, and $0.4 million, or 31%, during the three and nine months ended September 30, 2020, respectively.

Nearly all the change in each category was due to a decrease in the unit volume sold and not a result of price changes.

Cost of Revenue and Gross Margin

Cost of revenue decreased $1.0 million, or 23%, from $4.6 million for the three months ended June 30, 2019 to $3.5 million for the three months ended June 30, 2020.

Cost of revenue decreased $0.9 million, or 11%, from $8.6 million for the six months ended June 30, 2019 to $7.7 million for the six months ended June 30, 2020.

Cost of revenue decreased $0.3 million, or 6%, from $4.8 million for the three months ended September 30, 2019 to $4.6 million for the three months ended September 30, 2020.

Cost of revenue decreased $1.2 million, or 9%, from $13.4 million for the nine months ended September 30, 2019 to $12.2 million for the nine months ended September 30, 2020.

The decrease was due primarily to decreased sales volume in both the U.S.

and international markets resulting from the suspension of elective surgeries related to the COVID-19 pandemic.

Gross margin was 75% for the three months ended June 30, 2019, 74% for the three months ended June 30, 2020 and 74% for the six months ended June 30, 2019 and June 30, 2020, respectively.

Gross margin was 77% for the three months ended September 30, 2019, 79% for the three months ended September 30, 2020, 75% for the nine months ended September 30, 2019 and 77% for the nine months ended September 30, 2020, respectively.

Sales and Marketing Expenses

Sales and marketing expenses decreased $2.0 million, or 26%, to $5.6 million for the three months ended June 30, 2020 from $7.6 million for the three months ended June 30, 2019.

Sales and marketing expenses decreased $1.0 million, or 7%, to $13.2 million for the six months ended June 30, 2020 from $14.2 million for the six months ended June 30, 2019.

The decrease for the three and six month periods

ended June 30, 2020 were due primarily to decreased sales commission expenses, driven by the decrease in unit volume sold, related to the suspension of elective surgeries due to the COVID-19 pandemic.

Sales and marketing expenses increased $0.5 million, or 5%, to $9.2 million for the three months ended September 30, 2020 from $8.8 million for the three months ended September 30, 2019.

Sales and marketing expenses decreased $0.5 million, or 2%, to $22.4 million for the nine months ended September 30, 2020 from $22.9 million for the nine months ended September 30, 2019.

The changes in the three and nine month periods ended September 30, 2020 were due primarily to fluctuations in sales commission expenses, driven by unit volume sold, related to the volatility of elective surgeries due to the COVID-19 pandemic.

General and Administrative Expenses

General and administrative expenses increased $4.0 million, or 61%, from $6.6 million for the three months ended June 30, 2019 to $10.6 million for the three months ended June 30, 2020.

General and administrative expenses increased $6.3 million, or 52%, from $12.2 million for the six months ended June 30, 2019 to $18.5 million for the six months ended June 30, 2020.

The increase for the three and six month periods ended June 30, 2020 were due primarily to increased stock compensation of $2.3 million related to a one-time stock grant of $1.3 million to our Chief Executive Officer and the increase of our stock price on new stock grants, increased legal expenses of $0.8 million related to our ongoing litigation and acquisitions, and increased general and administrative expenses associated with the acquisitions of ApiFix and Telos.

Depreciation and amortization expenses increased $0.9 million, or 80%, from $1.1 million for the three months ended June 30, 2019 to $1.9 million for the three months ended June 30, 2020.

Depreciation and amortization expenses increased $1.4 million, or 74%, from $1.9 million for the six months ended June 30, 2019 to $3.3 million for the six months ended June 30, 2020.

The increase for the three and six month periods ended June 30, 2020 were primarily due to increased investments in consigned surgical instrument sets and amortization of intangible assets acquired through the Vilex, Telos and ApiFix acquisitions and the purchase of the Band-Lok intellectual property.

General and administrative expenses increased $2.6 million, or 35%, from $7.3 million for the three months ended September 30, 2019 to $9.8 million for the three months ended September 30, 2020.

General and administrative expenses increased $8.8 million, or 45%, from $19.4 million for the nine months ended September 30, 2019 to $28.3 million for the nine months ended September 30, 2020.

The increase for the three and nine month periods ended September 30, 2020 were due primarily to increased stock compensation of $2.8 million related to a one-time stock grant of $1.3 million to our Chief Executive Officer and the increase of our stock price on new stock grants, increased legal expenses related to our ongoing litigation and acquisitions, and increased general and administrative expenses associated with the acquisitions of ApiFix and Telos.

Depreciation and amortization expenses increased $1.1 million, or 79%, from $1.3 million for the three months ended September 30, 2019 to $2.4 million for the three months ended September 30, 2020.

Depreciation and amortization expenses increased $2.4 million, or 75%, from $3.3 million for the nine months ended September 30, 2019 to $5.7 million for the nine months ended September 30, 2020.

The increase for the three and nine month periods ended September 30, 2020 were primarily due to increased investments in consigned surgical instrument sets and amortization of intangible assets acquired through the Vilex, Telos and ApiFix acquisitions and the purchase of the Band-Lok intellectual property.

Research and Development Expenses

Research and development expenses decreased $0.4 million, or 29%, from $1.2 million for the three months ended June 30, 2019 to $0.9 million for the three months ended June 30, 2020.

Research and development expenses decreased $0.3 million, or 12%, from $2.4 million for the six months ended June 30, 2019 to $2.1 million for the six months ended June 30, 2020.The decrease for the three and six month periods ended June 30, 2020 were driven by a reduced investment in research and development project expenses as a result of the sales decline related to the COVID-19 pandemic and the reversal of the Bandloc minimum royalty.

Research and development expenses decreased $0.3 million, or 23%, from $1.4 million for the three months ended September 30, 2019 to $1.1 million for the three months ended September 30, 2020.

Research and development expenses decreased $0.6 million, or 16%, from $3.8 million for the nine months ended September 30, 2019 to $3.2 million for the nine months ended September 30, 2020.The

decrease for the three and nine month periods ended September 30, 2020 were driven by a reduced investment in research and development project expenses as a result of the sales decline related to the COVID-19 pandemic and the reversal of the Band-Lok minimum royalty.

Other Expenses

Other expenses were $2.4 million and $0.7 million for the three months ended June 30, 2020 and 2019, respectively.

Other expenses were $2.9 million and $1.0 million for the six months ended June 30, 2020 and 2019, respectively.

The increase in other expenses is due to fair value adjustment of $1.8 million related to the ApiFix contingent consideration payment.

Other expenses were $2.0 million and $1.3 million for the three months ended September 30, 2020 and 2019, respectively.

Other expenses were $4.9 million and $2.3 million for the nine months ended September 30, 2020 and 2019, respectively.

The increase in other expenses is due to fair value adjustments of $0.9 million and $1.8 million related to the ApiFix contingent consideration payment for the three and nine months ended September 30, 2020, respectively.

Liquidity and Capital Resources

We have incurred operating losses since inception which resulted in negative cash flows for continuing operations from operating activities of $14.7 million and $10.8 million for the six months ended June 30, 2020 and 2019, respectively.

As of June 30, 2020, we had an accumulated deficit of $143.2 million.

We have incurred operating losses since inception which resulted in negative cash flows for continuing operations from operating activities of $18.4 million and $11.4 million for the nine months ended September 30, 2020 and 2019, respectively.

As of September 30, 2020, we had an accumulated deficit of $147.8 million.

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

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

At June 30, 2020, we had cash and restricted cash of $114.4 million.

At September 30, 2020, we had cash and restricted cash of $89.7 million.

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

Six Months Ended June 30,

Nine Months Ended September 30,

Net cash used in operating activities - continuing operations $ (18,373) $ (11,433)

Net cash provided by operating activities - discontinued operations — 590

Net cash used in investing activities - continuing operations (9,349) (58,610)

Net cash used in investing activities - discontinued operations — (47)

Net cash used in investing activities (10,637) (60,393)

Net cash provided by financing activities 46,748 31,053

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Cash Used in Operating Activities

Net cash used in operating activities from continuing operations was $14.7 million and $10.8 million for the six months ended June 30, 2020 and 2019, respectively.

Net cash used in operating activities from continuing operations was $18.4 million and $11.4 million for the nine months ended September 30, 2020 and 2019, respectively.

The primary use of this cash was to fund our operations related to the development and commercialization of our products in each of these years.

Net cash used for working capital was $8.8 million and $8.2 million for the six months ended June 30, 2020 and 2019, respectively.

During the six months ended June 30, 2020, the primary driver of working capital cash usage was the increase in inventory of $9.6 million related to future sales growth and our acquisitions and new agencies.

Net cash used for working capital was $13.4 million and $8.3 million for the nine months ended September 30, 2020 and 2019, respectively.

During the nine months ended September 30, 2020, the primary driver of working capital cash usage was the increase in inventory of $12.3 million related to future sales growth and our acquisitions and new agencies.

Cash Used in Investing Activities

Net cash used in investing activities from continuing operations was $9.3 million and $58.6 million for the six months ended June 30, 2020 and 2019, respectively.

Net cash used in investing activities consisted primarily of the acquisition of Telos of $1.7 million, net of cash received, the acquisition of ApiFix for $1.7 million, net of cash received, the acquisition of the Band-Lok intellectual propoerty of $0.8 million, the acquisition of Vilex and Orthex of $49.9 million, net of cash received, and the purchases of instrument sets, which were consigned in the United States, United Kingdom, Australia, New Zealand, Belgium and the Netherlands of $5.2 million and $8.5 million for the six months ended June 30, 2020 and 2019, respectively.

Net cash used in investing activities was $10.6 million and $60.4 million for the nine months ended September 30, 2020 and 2019, respectively.

Net cash used in investing activities consisted primarily of the acquisition of Telos of $1.7 million, net of cash received, the acquisition of ApiFix of $1.7 million, net of cash received, the acquisition of the Band-Lok intellectual property of $0.8 million, the acquisition of Vilex

and Orthex of $49.7 million, net of cash received, and the purchases of instrument sets, which were consigned in the United States, United Kingdom, Australia, New Zealand, Belgium and the Netherlands of $6.4 million and $10.5 million for the nine months ended September 30, 2020 and 2019, respectively.

Cash Provided By Financing Activities

Net cash provided by financing activities was $66.4 million and $30.6 million for the six months ended June 30, 2020 and 2019, respectively.

Net cash provided by financing activities for the six months ended June 30, 2020 consisted primarily of the proceeds from the issuance of common stock of $70.2 million, net of issuance costs and $1.3 million from the exercise of stock options, offset by the payment of $5.0 million of the revolving credit facility with Squadron.

Net cash provided by financing activities was $46.7 million and $31.1 million for the nine months ended September 30, 2020 and 2019, respectively.

Net cash provided by financing activities for the nine months ended September 30, 2020 consisted primarily of the proceeds from the issuance of common stock of $70.2 million, net of issuance costs and $1.6 million from the exercise of stock options, offset by the payment of $25.0 million of the revolving credit facility and term loan with Squadron.

Net cash provided by financing activities for the nine months ended September 30, 2019 consisted primarily of $30.0 million in proceeds from the issuance of debt from Squadron and $1.1 million from the exercise of stock options.

Loan Agreement

On December 31, 2017, we entered into a Fourth Amended and Restated Loan and Security Agreement, or the Loan Agreement, with Squadron Capital LLC, or Squadron, the Company's largest investor.

Under the terms of the Loan Agreement, Squadron provided us a term loan in the principal amount of $20.0 million, represented by a Term Note A, and a revolving loan in an aggregate principal amount to not

exceed $15.0 million, represented by a Revolving Note.

Interest on the Term Note A and Revolving Note accrued at the greater of (a) three month LIBOR plus 8.61% and (b) 10.0%.

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On January 4, 2020, the Company repaid $5.0 million on the revolving credit facility with Squadron.

At June 30, 2020, we had approximately $19.9 million in outstanding indebtedness under the First Amended Loan Agreement.

On August 4, 2020, the Company entered into a Second Amendment (the “Second Amendment”) to its First Amended Loan Agreement with Squadron (as so further amended, the “Second Amended Loan Agreement”).

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Prior to the Second Amendment, the revolving credit facility was to have matured on January 31, 2023.

The Second Amended Loan Agreement continues to provide for interest only payments, which are payable monthly, with interest rates equal to the greater of (a) three month LIBOR plus 8.61%, and (b) 10.00%

The Second Amended Loan

Agreement continues to provide for interest only payments, which are payable monthly, with interest rates equal to the greater of (a) three month LIBOR plus 8.61%, and (b) 10.00%

On July 15, 2020, the Company repaid the $20,000 principal amount outstanding under the Loan Agreement’s Term Note A, together with all unpaid interest and other related amounts payable.

Following such repayment, there are no outstanding term loan obligations under the Second Amended Loan Agreement.

Borrowings under the Second Amended Loan Agreement are secured by substantially all of the Company's assets and are unconditionally guaranteed by each of its subsidiaries with the exception of Vilex.

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The Second Amended Loan Agreement includes events of default, the occurrence and continuation of any of which provides Squadron with the right to exercise remedies against us and the collateral securing the loans, including cash.

These events of default include, among other things, the failure to pay amounts due under the credit facilities, insolvency, the occurrence of a material adverse event, which includes a material adverse change in our business, operations or properties (financial or otherwise) or a material impairment of the prospect of repayment of any portion of the obligations, the occurrence of any default under certain other indebtedness and a final judgment against us in an amount greater than $250

The occurrence of a material adverse change could result in the acceleration of payment of the debt.

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

The mortgage balance was $1.2 million and $1.3 million at June 30, 2020 and December 31, 2019, respectively.

The mortgage balance was $1.2 million and $1.3 million at September 30, 2020 and December 31, 2019, respectively.

Pediatric Orthopedic Business Seasonality

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We monitor and analyze these items for changes in facts and circumstances, and material changes in these estimates could occur in the future.

We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.

We base our estimates on historical experience and on various

other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.

Changes in estimates are reflected in reported results for the period in which they become known.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis