What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-05-06 compared with 2020-11-05 · 74 added, 88 removed, 123 unchanged (57% 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."

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 are the only global medical device company focused exclusively on providing a comprehensive trauma and deformity correction, scoliosis and sports medicine product offering to the pediatric orthopedic market in order to improve the lives of children with orthopedic conditions.

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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We provide our implants in sets that consist of a range of implant sizes and include the instruments necessary to perform the surgical procedure.

In the United States, our customers typically expect us to have full sets of implants and instruments on site at each hospital but do not purchase the implants until they are used in surgery.

Accordingly, we must make an up-front investment in inventory of consigned implants and instruments before we can generate revenue from a particular hospital and we maintain substantial levels of inventory and instruments at any given time.

In the United States and a few selected international markets, our customers typically expect us to have full sets of implants and instruments on site at each hospital but do not purchase the implants until they are used in surgery.

In the international markets where we sell to stocking distributors, we transfer control of our products to the distributor when title passes upon shipment.

We currently market 35 surgical systems that serve three of the largest categories within the pediatric orthopedic market:

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Our independent distributors manage the billing relationship with each hospital in their respective territories and are responsible for servicing the product needs of their surgeon customers.

In April 2017, we began to supplement our use of independent distributors with direct sales programs in the United Kingdom, Ireland, Australia and New Zealand and further expanded to Canada in September 2018 and Belgium and the Netherlands in January 2019, and in Italy on March 1, 2020.

In 2017, we began to supplement our international stocking distributors with sales agencies using direct sales programs in the United Kingdom, Ireland, Australia and New Zealand where we sell directly to the hospitals.

We began selling direct to Canada in September 2018, Belgium and the Netherlands in January 2019, Italy in March 2020 and Germany, Switzerland and Austria in January 2021.

Additionally, in March 2019, we established an operating company in the Netherlands in order to enhance our operations in Europe.

In these markets, we work through sales agencies that are paid a commission, similar to our U.S.

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provided that the Company may make the determination with respect to anniversary payments and a representative of the former ApiFix shareholders may make the determination with respect to the system sales payment, if any.

On June 10, 2020, we purchased certain intellectual property assets from Band-Lok, LLC, a North Carolina limited liability company ("Band-Lok"), related to its Tether Clamp and Implantation System ("Tether Clamp System") for approximately $3,400 in total consideration.

We use the Tether Clamp System in connection with our Bandloc 5.5/6.0 System.

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A novel strain of the coronavirus disease ("COVID-19") was first identified in Wuhan, China in December 2019, and the related outbreak was subsequently declared a pandemic by the World Health Organization and a national emergency by the President of the United States.

As a result of the pandemic, we have experienced significant business disruption.

For example, in order to meet the demand for COVID-19-related hospitalizations, various governments, governmental agencies and hospital administrators required certain hospitals to postpone some elective procedures.

As a majority of our products are utilized in elective surgeries or procedures, the deferrals of such surgeries and procedures have had, and may continue to have, a significant negative impact on our business and results of operations.

We encourage the readers of this document to read our risk factors in its entirety contained in Item 1A “Risk Factors” in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "SEC") on March 11, 2021 and in other reports filed with the SEC that discuss the risks and factors that may affect our business.

Despite the impact COVID-19 has had on our business, we continue to invest in research and development, invest in our people, and take steps to position ourselves for long-term success.

Health and Safety

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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.

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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 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

(Decrease) % 2020 2019 Increase (Decrease) %

Summary of Statements of Operations for the Three Months Ended March 31, 2021 and 2020

The following table sets forth our results of operations for the three months ended March 31, 2021 and 2020:

Three Months Ended March 31,

2021 2020 Increase (Decrease) %

Net revenue $ 21,462 $ 16,356 $ 5,106 31 %

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Other expenses 4,718 448 4,270 953 %

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

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

Provision for income taxes (benefit) (312) — (312) 100 %

Net loss $ (10,379) $ (4,945) $ 5,434 110 %

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,

The following tables set forth our net revenue by geography and product category for the three months ended March 31, 2021 and 2020:

Three Months Ended March 31,

Product sales by geographic location:

$ 16,839 $ 13,384

$ 19,583 $ 16,785 $ 45,113 $ 40,900

International 4,623 2,972

Total $ 21,462 $ 16,356

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

Three Months Ended March 31,

Product sales by category:

2020 2019 2020 2019

Trauma and deformity $ 14,552 $ 12,210

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Total $ 21,462 $ 16,356

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.

Net revenue increased $5.1 million, or 31%, from $16.4 million for the three months ended March 31, 2020 to $21.5 million for the three months ended March 31, 2021.

The increase during the three months ended March 31, 2021 reflects the continued return to normalization in both the U.S.

and international markets which, during the three months ended March 31, 2020, had begun experiencing the impacts of the COVID-19 pandemic.

Trauma and deformity sales increased $2.3 million, or 19%, during the three months ended March 31, 2021, primarily driven by strong trauma growth, specifically our PNP Femur and PediPlate systems.

Scoliosis sales increased $2.2 million, or 60%, during the three months ended March 31, 2021, primarily driven by increased sales of our RESPONSE 5.5/6.0 system and strong performance of the ApiFix ® Mid-C System.

Sports medicine / other increased $0.5 million, or 120%, during the three months ended March 31, 2021.

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

Cost of Revenue and Gross Margin

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 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.

Cost of revenue increased $1.0 million, or 24%, from $4.1 million for the three months ended March 31, 2020 to $5.1 million for the three months ended March 31, 2021.

The increase was due primarily to increased sales volume in both the U.S.

and international markets.

Gross margin was 75% for the three months ended March 31, 2020 and 76% for the three months ended March 31, 2021.

Sales and Marketing Expenses

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.

Sales and marketing expenses increased $1.4 million, or 18%, to $8.9 million for the three months ended March 31, 2021 from $7.6 million for the three months ended March 31, 2020.

The change in the three month period ended March 31, 2021 was due primarily to fluctuations in sales commission expenses, driven by unit volumes sold.

General and Administrative Expenses

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.

General and administrative expenses increased $4.2 million, or 53%, from $7.9 million for the three months ended March 31, 2020 to $12.0 million for the three months ended March 31, 2021.

The increase for the three month period ended March 31, 2021 was due primarily to the additional expenses associated with the ApiFix and Telos acquisitions, the addition of personnel and resources to support the continued

expansion of our business and an increase in legal and other professional service expense associated with our ongoing litigation and acquisitions.

Depreciation and amortization expenses increased $1.2 million, or 86%, from $1.4 million for the three months ended March 31, 2020 to $2.5 million for the three months ended March 31, 2021.

The increase for the three month period ended March 31, 2021 was primarily due to the 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 $0.3 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 $2.0 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.

Research and development expenses of $1.3 million for the three months ended March 31, 2021 remained flat to a similar amount for the three months ended March 31, 2020.

Total Other Expenses

Other expenses were $4.7 million and $0.4 million for the three months ended March 31, 2021 and 2020, respectively.

The increase in other expense is due to the accretion of interest expense attributable to the acquisition installment payable and the fair value adjustments of contingent consideration related to the ApiFix acquisition.

Total interest expense and fair value adjustments for the three months ended March 31, 2021 were $0.6 million and $4.2 million, 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 $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 have incurred operating losses since inception which resulted in negative cash flows for continuing operations from operating activities of $1.9 million and $7.0 million for the three months ended March 31, 2021 and 2020, respectively.

As of March 31, 2021, we had an accumulated deficit of $172.1 million.

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

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

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

At March 31, 2021, we had cash and cash equivalents, restricted cash and short term investments of $78.0 million.

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

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

Three Months Ended March 31,

Net cash used in operating activities $ (1,915) $ (6,956)

Net cash used in investing activities (5,607) (5,623)

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

Net cash provided by (used in) financing activities 30 (4,530)

Effect of exchange rate changes on cash 155 23

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Cash Used in Operating Activities

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.

Net cash used in operating activities from continuing operations was $1.9 million and $7.0 million for the three months ended March 31, 2021 and 2020, respectively.

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

Net cash used for working capital was $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.

Net cash provided by working capital was $0.1 million and net cash used for working capital was $4.3 million

for the three months ended March 31, 2021 and 2020, respectively.

During the three months ended March 31, 2021, the primary driver of working capital cash usage was the increase in inventory of $2.5 million related to future sales growth and our acquisitions and new agencies and accrued legal settlements.

This cash usage was offset primarily by trade payables which was a source of cash of $2.1 million.

Cash Used in Investing Activities

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.

Net cash used in investing activities was $5.6 million for each of the three months ended March 31, 2021 and 2020, respectively.

Net cash used in investing activities for the three months ended March 31, 2021 consisted of the purchase of a license agreement as a result of the Dr.

Barry legal settlement (see “Part II, Item 1 – Legal Proceedings” of this quarterly report for additional information) and purchases of instrument sets of $2.7 million.

Net cash used in investing activities for the three months ended March 31, 2020 consisted of $1.6 million for the acquisition of Telos, net of cash received, and $4.0 million for purchases of instrument sets.

Cash Provided By Financing Activities

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.

Net cash provided by financing activities was $0.0 million and net cash used in financing activities was $(4.5) million for the three months ended March 31, 2021 and 2020, respectively.

Net cash provided by financing activities for the three months ended March 31, 2021 was immaterial to the results of our operations.

Net cash used in financing activities for the three months ended March 31, 2020 consisted primarily of the payment of $5 million of the revolving credit facility with Squadron and the repurchase of $0.2 million of common shares, offset by $0.7 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%.

In order to finance a portion of the cash consideration for the acquisition of the Vilex Companies, the Company entered into a First Amendment, or the First Amendment, to the Loan Agreement (as so amended, the "First Amended Loan Agreement"), with Squadron.

The First Amended Loan Agreement provided for a new $30.0 million term loan facility, represented by a Term Note B, in addition to the existing $20.0 million Term Note A and $15.0 million revolving credit facility.

Similar to the other facilities under the First Amended Loan Agreement, the Term Note B was subject to interest only payments at an interest rate equal to the greater of (a) three month LIBOR plus 8.61%, and (b) 10.00%.

The Term Note B, which would have matured no later than May 31, 2020, was paid in full on December 31, 2019 using $25.0 million received in exchange for the divestiture of the adult product offerings of Vilex and the related Orthex license agreement, and $5.0 million from the available Squadron revolving credit facility.

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

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”).

Pursuant to the Second Amendment, the First Amended Loan Agreement’s revolving credit commitment was increased from the previously established $15,000 to $25,000.

The Company has agreed to pay Squadron an unused commitment fee in an amount equal to the per annum rate of 0.50% (computed on the basis of a year of 360 days and the actual number of days elapsed) times the daily unused portion of the revolving credit commitment.

The unused commitment fee is payable quarterly in arrears.

Borrowings under the revolving credit facility will be made under a First Amended and Restated Revolving Note, dated August 4, 2020 (the “Amended Revolving Note”), payable, jointly and severally, by the Company and each of its subsidiaries party thereto.

Under the terms of the Loan Agreement, which has been amended by a First Amendment dated as of June 4, 2019 and a Second Amendment dated as of August 4, 2020 (as so amended, the “Second Amended Loan Agreement”), Squadron is providing the Company a revolving credit facility in the amount of $25.0 million.

Borrowings under the revolving credit facility are to be made under a First Amended and Restated Revolving Note, dated August 4, 2020 (the “Amended Revolving Note”), payable, jointly and severally, by the Company and each of its subsidiaries party thereto.

The Amended Revolving Note will mature at the earlier of:

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and (ii) January 1, 2024.

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%

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.

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

On January 4, 2020, the Company repaid Squadron $5.0 million outstanding under the revolving credit facility in effect at that time and, on July 15, 2020, the Company repaid the $20.0 million Term Note A outstanding under the Loan Agreement, together with all unpaid interest and other related amounts payable.

The Company does not currently have any borrowings outstanding under the Second Amended Loan Agreement.

The unused commitment fee is payable quarterly in arrears.

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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Mortgage Note

In August 2013, pursuant to the purchase of our office and warehouse space, we entered into a mortgage note payable to Tawani Enterprises Inc., the owner of which is a member of Squadron’s Managing Committee.

Pursuant to the terms of the mortgage note, we pay Tawani Enterprises Inc.

monthly principal and interest installments of $16 thousand, with interest compounded at 5% until maturity in August 2028, at which time a final payment of remaining principal and interest will become due.

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

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

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

The mortgage balance was $1.1 million and $1.2 million at March 31, 2021 and December 31, 2020, 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