What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-11-04 compared with 2021-08-05 · 74 added, 63 removed, 130 unchanged (51% of the section changed)

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In the United States and multiple 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.

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

inventory at any given time.

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

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

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The majority of our revenue has been generated in the United States, where we sell our products through a network of 38 independent sales agencies employing more than 185 sales representatives specifically focused on pediatrics.

These independent sales agents are trained by us, distribute our products and are compensated through sales-based commissions and performance bonuses.

These independent sales agents are trained by us, distribute our products and are

compensated through sales-based commissions and performance bonuses.

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

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and international markets by increasing investments in consigned implant and instrument sets, strengthening our global sales and distribution infrastructure and expanding our product offering.

Environmental, Social and Governance ("ESG") Activities

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

Since inception we have impacted the lives of over 226,000 children.

We believe we should continue to expand our social efforts while minimizing our impact to the environment and ensuring corporate governance.

In 2021, we created an internal ESG team, which reports directly to our Board’s Governance and Nominating Committee, to identify ESG topics for disclosure by assessing both the impact on our business and the importance to our stakeholders.

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

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

Impact of COVID-19 on our Business

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We also expect medical procedure rates to continue to vary by type and country, and could be impacted by regional COVID-19 case volumes, hospital and clinical occupancy and staffing levels, the willingness of patients to schedule elective procedures, travel and quarantine restrictions, vaccine immunization rates, and new COVID-19 variants.

While COVID-19 case volumes appear to be decreasing in the U.S.

and certain other countries as a result of higher vaccination rates, the global COVID-19 outlook remains uncertain as vaccination rates have slowed and the spread of new variants has accelerated.

While we have seen the positive impact that higher vaccination rates have had on curbing the spread of the virus in the U.S.

and certain other countries, the global COVID-19 outlook remains uncertain as vaccination rates have slowed and the spread of new variants has accelerated.

While the impact of COVID-19 has had, and may continue to have, an adverse effect on our business, results of operations, financial condition and cash flows, the nature and extent of such impact is unknown, as we cannot predict with confidence the ultimate duration or further severity of the pandemic.

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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.

We believe our existing balances of cash, including our short-term investments, 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.

We continue to monitor the rapidly evolving situation and guidance from international and domestic authorities, including federal, state and local public health authorities and may take additional actions based on their recommendations.

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We will qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”) until December 31, 2022.

For as long as a company is deemed to be an emerging growth company, it may take advantage of specified reduced reporting and other regulatory requirements

that are generally unavailable to other public companies.

For as long as a company is deemed to be an emerging growth company, it may take advantage of specified reduced reporting and other regulatory requirements that are generally unavailable to other public companies.

We also qualify as a "smaller reporting company," as such term is defined in Rule 12b-2 under the Exchange Act.

To the extent that we continue to qualify as a smaller reporting company, after we cease to qualify as an emerging growth company, certain of the exemptions available to us as an emerging growth company may continue to be available to us as a smaller reporting company.

To the extent that we continue

to qualify as a smaller reporting company, after we cease to qualify as an emerging growth company, certain of the exemptions available to us as an emerging growth company may continue to be available to us as a smaller reporting company.

The JOBS Act also provides that an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies.

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, 2021 and 2020

The following table sets forth our results of operations for the three and six months ended June 30, 2021 and 2020:

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

Summary of Statements of Operations for the Three and Nine Months Ended September 30, 2021 and 2020

The following table sets forth our results of operations for the three and nine months ended September 30, 2021 and 2020:

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

2021 2020 Increase

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Research and development expenses 1,302 1,077 225 21 % 3,935 3,223 712 22 %

Other expenses 1,196 2,430 (1,234) (51) % 5,914 2,878 3,036 105 %

Other (income) expenses (1,155) 2,041 (3,196) (157) % 4,759 4,919 (160) (3) %

Provision for income taxes (benefit) (292) — (292) 100 % (890) — (890) 100 %

Net loss $ (2,197) $ (4,539) $ (2,342) (52) % $ (16,332) $ (18,931) $ (2,599) (14) %

The following tables set forth our net revenue by geography and product category for the three and six months ended June 30, 2021 and 2020:

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, 2021 and 2020:

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

Product sales by geographic location:

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Total $ 25,079 $ 22,205 $ 73,236 $ 52,154

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 $ 25,079 $ 22,205 $ 73,236 $ 52,154

Net revenue increased $13.1 million, or 96%, from $13.6 million for the three months ended June 30, 2020 to $26.7 million for the three months ended June 30, 2021 and increased $18.2 million, or 61%, from $29.9 million for the six months ended June 30, 2020 to $48.2 million for the six months ended June 30, 2021.

The increase during the three and six months ended June 30, 2021 reflects the continued

return to normalization in both the U.S.

and international markets which, during the three months ended June 30, 2020, experienced the most significant impacts from the COVID-19 pandemic.

Net revenue increased $2.9 million, or 13%, from $22.2 million for the three months ended September 30, 2020 to $25.1 million for the three months ended September 30, 2021 and increased $21.1 million, or 40%, from $52.2 million for the nine months ended September 30, 2020 to $73.2 million for the nine months ended September 30, 2021.

The increase during the three months ended September 30, 2021 was primarily driven by the recovery in our international markets as the COVID pandemic, including the Delta variant, continues to reach the world at varying times and to varying degrees.

The increase during

the nine months ended September 30, 2021 reflects the continued return to normalization in both the U.S.

and international markets.

Additionally, we continue to see the benefit of converting Germany, Austria, and Switzerland to a direct agency sales model.

Trauma and deformity sales increased $8.7 million, or 95%, during the three months ended June 30, 2021, and increased $11.1 million, or 52%, during the six months ended June 30, 2021, in each case, primarily driven by strong trauma and deformity growth across numerous product lines, specifically our PNP Femur, Cannulated Screws and Orthex systems.

Scoliosis sales increased $3.8 million, or 100%, during the three months ended June 30, 2021, and increased $6.1 million, or 80%, during the six months ended June 30, 2021, in each case , primarily driven by increased sales of our RESPONSE 5.5/6.0 system and FIREFLY ® Pedicle Screw Navigation Guides, and additional sales contributed from the ApiFix acquisition.

Sports medicine / other increased $0.6 million, or 106%, during the three months ended June 30, 2021, and increased $1.1 million, or 112%, during the six months ended June 30, 2021, in each case, primarily driven by the additional sales contributed from Telos.

Trauma and deformity sales increased $1.8 million, or 12%, during the three months ended September 30, 2021, and increased $12.9 million, or 35%, during the nine months ended September 30, 2021, in each case, primarily driven by strong trauma and deformity growth across numerous product lines, specifically our PNP Femur, Cannulated Screws and Orthex systems.

Scoliosis sales increased $0.7 million, or 11%, during the three months ended September 30, 2021, and increased $6.8 million, or 48%, during the nine months ended September 30, 2021, in each case , primarily driven by increased sales of our RESPONSE 4.5/5.0 and 5.5/6.0 systems and additional sales contributed from the ApiFix acquisition.

Sports medicine / other increased $0.3 million, or 46%, during the three months ended September 30, 2021, and increased $1.4 million, or 85%, during the nine months ended September 30, 2021, in each case, primarily driven by the additional sales contributed from Telos.

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 increased $2.7 million, or 77%, from $3.5 million for the three months ended June 30, 2020 to $6.3 million for the three months ended June 30, 2021.

Cost of revenue increased $3.7 million, or 48%, from $7.7 million for the six months ended June 30, 2020 to $11.4 million for the six months ended June 30, 2021.

Cost of revenue increased $2.0 million, or 43%, from $4.6 million for the three months ended September 30, 2020 to $6.5 million for the three months ended September 30, 2021.

Cost of revenue increased $5.7 million, or 46%, from $12.2 million for the nine months ended September 30, 2020 to $17.9 million for the nine months ended September 30, 2021.

The increases were due primarily to increased sales volume in both the U.S.

and international markets.

Gross margin was 74% for the three months ended June 30, 2020 and 77% for the three months ended June 30, 2021.

Gross margin was 74% for the six months ended June 30, 2020 and 76% for the six months ended June 30, 2021.

Gross margin was 79% for the three months ended September 30, 2020 and 74% for the three months ended September 30, 2021.

Gross margin was 77% for the nine months ended September 30, 2020 and 76% for the nine months ended September 30, 2021.

The change in gross margin is primarily driven by the sales mix as a we saw an increase in the international market as a percentage of total revenue.

Sales and Marketing Expenses

Sales and marketing expenses increased $5.3 million, or 94%, to $10.9 million for the three months ended June 30, 2021 from $5.6 million for the three months ended June 30, 2020.

Sales and marketing expenses increased $6.6 million, or 50%, to $19.8 million for the six months ended June 30, 2021 from $13.2 million for the six months ended June 30, 2020.

The changes in the three and six month periods ended June 30, 2021 were due primarily to increased sales commission expenses, driven by increased unit volumes sold.

Sales and marketing expenses increased $0.6 million, or 7%, to $9.9 million for the three months ended September 30, 2021 from $9.2 million for the three months ended September 30, 2020.

Sales and marketing expenses increased $7.3 million, or 32%, to $29.7 million for the nine months ended September 30, 2021 from $22.4 million for the nine months ended September 30, 2020.

The changes in the three and nine month periods ended September 30, 2021 were due primarily to increased sales commission expenses, driven by increased unit volumes sold.

General and Administrative Expenses

General and administrative expenses increased $0.5 million, or 5%, from $10.6 million for the three months ended June 30, 2020 to $11.1 million for the three months ended June 30, 2021.

General and administrative expenses increased $4.7 million, or 25%, from $18.5 million for the six months ended June 30, 2020 to $23.1 million for the six months ended June 30, 2021.

The increases for the three and six month periods ended June 30, 2021 were 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 litigation.

Depreciation and amortization expenses increased $0.7 million, or 34%, from $1.9 million for the three months ended June 30, 2020 to $2.6 million for the three months ended June 30, 2021.

Depreciation and amortization expenses increased $1.8 million, or 54%, from $3.3 million for the six months ended June 30, 2020 to $5.1 million for the six months ended June 30, 2021.

The increases for the three and six month periods ended June 30, 2021 were 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.

General and administrative expenses increased $1.2 million, or 12%, from $9.8 million for the three months ended September 30, 2020 to $11.0 million for the three months ended September 30, 2021.

General and administrative expenses increased $5.9 million, or 21%, from $28.3 million for the nine months ended September 30, 2020 to $34.2 million for the nine months ended September 30, 2021.

The increases for the three and nine month periods ended September 30, 2021 were 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 litigation.

Depreciation and amortization expenses increased $0.3 million, or 13%, from $2.4 million for the three months ended September 30, 2020 to $2.7 million for the three months ended September 30, 2021.

Depreciation and amortization expenses increased $2.2 million, or 38%, from $5.7 million for the nine months ended September 30, 2020 to $7.9 million for the nine months ended September 30, 2021.

The increases for the three and nine month periods ended September 30, 2021 were primarily due to the amortization of intangible assets acquired through the Vilex, Telos and ApiFix acquisitions, the purchase

of the Band-Lok intellectual property and the purchases of licensing agreements, including the 7D Surgical FLASH TM Navigation platform, FIREFLY, and the license from Dr.

See Note 4 – Goodwill and Intangible Assets of the notes to the condensed consolidated financial statements included in Item 1.

Financial Statements of this Part I for additional information.

Research and Development Expenses

Research and development expenses increased $0.4 million, or 50%, from $0.9 million for the three months ended June 30, 2021 to $1.3 million for the three months ended June 30, 2021.

Research and development expenses increased $0.5 million, or 23%, from $2.1 million for the six months ended June 30, 2020 to $2.6 million for the six months ended June 30, 2021.

The increases for the three and six month periods ended June 30, 2021 were primarily due to incremental product development including the addition of personnel and the growth of our business.

Total Other Expenses

Other expenses were $1.2 million and $2.4 million for the three months ended June 30, 2021 and 2020, respectively, and $5.9 million and $2.9 million for the six months ended June 30, 2021 and 2020, respectively.

The decrease in other expense for the three months ended June 30, 2021 was primarily due to the decrease in interest expense after repaying all outstanding debt with Squadron.

The increase in other expense for the six months ended June 30, 2021 is primarily 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.

The aggregate of accreted interest expense and fair value adjustments for the three and six months ended June 30, 2021 were $1.6 million and $6.4 million, respectively, and for both the three and six months ended June 30, 2020, was $1.8 million.

Research and development expenses increased $0.2 million, or 21%, from $1.1 million for the three months ended September 30, 2020 to $1.3 million for the three months ended September 30, 2021.

Research and development expenses increased $0.7 million, or 22%, from $3.2 million for the nine months ended September 30, 2020 to $3.9 million for the nine months ended September 30, 2021.

The increases for the three and nine month periods ended September 30, 2021 were primarily due to incremental product development including the addition of personnel and the growth of our business.

Total Other (Income) Expenses

Other (income) expenses were income of $1.2 million and expense of $2.0 million for the three months ended September 30, 2021 and 2020, respectively, and expense of $4.8 million and $4.9 million for the nine months ended September 30, 2021 and 2020, respectively.

The increase in other income for the three months ended September 30, 2021 was primarily due to the recording of income as a result of the fair value adjustment of contingent consideration.The decrease in other expense for the nine months ended September 30, 2021 is primarily due to the to the recording of income as a result of the fair value adjustment in the third quarter offset by the additional accretion of interest expense attributable to the acquisition installment payable.

The aggregate of accreted interest expense and fair value adjustments for the three and nine months ended September 30, 2021 were income of $0.9 million and expense of $5.4 million, respectively, and for the three and nine months ended September 30, 2020 were expense of $1.7 million and $3.5, 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 $10.9 million and $14.7 million for the six months ended June 30, 2021 and 2020, respectively.

As of June 30, 2021, we had an accumulated deficit of $175.9 million.

We have incurred operating losses since inception which resulted in negative cash flows for continuing operations from operating activities of $11.8 million and $18.4 million for the nine months ended September 30, 2021 and 2020, respectively.

As of September 30, 2021, we had an accumulated deficit of $178.1 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 June 30, 2021, we had cash and cash equivalents, restricted cash and short term investments of $67.2 million.

At September 30, 2021, we had cash and cash equivalents, restricted cash and short term investments of $59.1 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 $ (11,828) $ (18,373)

Net cash used in investing activities (10,376) (10,637)

Net cash provided by (used in) financing activities (2) 66,427

Net cash provided by financing activities 40 46,748

Effect of exchange rate changes on cash (266) (24)

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Cash Used in Operating Activities

Net cash used in operating activities from continuing operations was $10.9 million and $14.7 million for the six months ended June 30, 2021 and 2020, respectively.

Net cash used in operating activities from continuing operations was $11.8 million and $18.4 million for the nine months ended September 30, 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 $10.4 million and $8.8 million for the six months ended June 30, 2021 and 2020, respectively.

During the six months ended June 30, 2021, the primary driver of working capital cash usage was the increase in accounts receivable of $1.8 million due to increased sales during the

period, the increase in inventory of $3.3 million to support future sales growth, and legal settlements of $6.3 million.

This cash usage was offset primarily by other accrued expenses which was a source of cash of $1.1 million.

Net cash used for working capital was $12.1 million and $13.4 million for the nine months ended September 30, 2021 and 2020, respectively.

During the nine months ended September 30, 2021, the primary driver of working capital cash usage was the increase in accounts receivable of $0.7 million due to increased sales during the period, the increase in inventory of $3.2 million and the related trade payables of $1.0 million to support future sales growth, and legal settlements of $6.3 million.

Cash Used in Investing Activities

Net cash used in investing activities was $7.3 million and $9.3 million for the six months ended June 30, 2021 and 2020, respectively.

Net cash used in investing activities for the six months ended June 30, 2021 consisted of the purchase of a license agreement as a result of the Dr.

Barry legal settlement and purchases of instrument sets of $4.5 million.

Net cash used in investing activities for the six months ended June 30, 2020 consisted of $1.7 million for the acquisition of Telos, 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 and $5.2 million for purchases of instrument sets.

Net cash used in investing activities was $10.4 million and $10.6 million for the nine months ended September 30, 2021 and 2020, respectively.

Net cash used in investing activities for the nine months ended September 30, 2021 consisted of the purchase of multiple license agreements including the license which came from the Dr.

Barry legal matter, extension of the FIREFLY agreement and a new agreement for the 7D Surgical FLASH TM Navigation platform and purchases of instrument sets of $6.5 million.

These uses of cash were offset by the conversion of short-term investments to cash.

Net cash used in investing activities for the nine months ended September 30, 2020 consisted of $1.7 million for the acquisition of Telos, net of cash received, the acquisition of ApiFix for $1.7 million, net of cash received, the acquisition of the Band-Lok intellectual property of $0.8 million and $6.4 million for purchases of instrument sets.

Cash Provided By Financing Activities

Net cash used in financing activities for the six months ended June 30, 2021 was immaterial to the results of our operations.

Net cash provided by financing activities for the six months ended June 30, 2020 was $66.4 million, consisting primarily of the proceeds from the issuance of common stock of $70.2 million and $1.3 million from the exercise of stock options and offset by the payment of $5.0 million of the revolving credit facility with Squadron.

Net cash used in financing activities for the nine months ended September 30, 2021 was immaterial to the results of our operations.

Net cash provided by financing activities for the nine months ended September 30, 2020 was $46.7 million, consisting primarily of the proceeds from the issuance of common stock of $70.2 million and $1.6 million from the exercise of stock options and offset by the payment of $25.0 million of the revolving credit facility with Squadron.

Loan Agreement

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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.

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

The mortgage balance was $1.1 million and $1.2 million at June 30, 2021 and December 31, 2020, respectively.

The mortgage balance was $1.1 million and $1.2 million at September 30, 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