What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-04 compared with 2022-05-05 · 78 added, 56 removed, 143 unchanged (48% of the section changed)

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We estimate that the portion of this market that we currently serve represents a $3.3 billion opportunity globally, including over $1.5 billion in the United States.

We sell implants and instruments to our customers for use by pediatric orthopedic surgeons to treat orthopedic conditions in children.

We sell implants, instruments and braces to our customers for use by pediatric orthopedic surgeons to treat orthopedic conditions in children.

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

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

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

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

We currently market 39 surgical systems that serve three of the largest categories within the pediatric orthopedic market:

(i) trauma and deformity, (ii) scoliosis and (iii) sports medicine/other.

We rely on a broad network of third parties to manufacture the components of our products, which we then inspect and package.

We primarily rely on a broad network of third parties to manufacture the components of our products, which we then inspect and package.

We believe our innovative products promote improved surgical accuracy, increase consistency of outcomes and enhance surgeon confidence in achieving high standards of care.

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

We market and sell our products internationally in 45 countries, through independent stocking distributors and sales agencies.

We market and sell our products internationally in over 70 countries, through independent stocking distributors and sales agencies.

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 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

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

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For example, on April 1, 2022, the Company acquired MD Orthopaedics, Inc., a developer and manufacturer of a portfolio of orthopedic clubfoot products.

The consideration paid by the Company included (a) $8.2 million in cash, and (b) 173,241 shares of its common stock, $0.00025 par value per share, representing approximately $9.7 million (based on the April 1, 2022 closing share price of $56.03).

Also, on July 1, 2022, the Company, along with its newly-formed, indirect wholly-owned subsidiary OrthoPediatrics Canada ULC, purchased all of the issued and outstanding share capital of Pega Medical Inc., which has developed and sells a portfolio of trauma and deformity correction devices for children, including the Fassier-Duval Telescopic Intramedullary System, a well-recognized, innovative implant designed to treat bony deformities in children with osteogenesis imperfecta without disrupting their normal growth.

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 243,000 children.

Since inception we have impacted the lives of over 560,000 children, including MD Ortho.

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

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• OrthoPediatrics cares about our environmental impact while working in a highly regulated industry and we are certified according to ISO 13485.

Our team in Warsaw recently implemented an enhanced recycling program.

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

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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.

In addition, elective procedures are also being delayed in some cases as hospitals continue to struggle with adequate staffing levels.

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.

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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 also installed enhanced HVAC systems across our Warsaw facility to reduce the spreading of germs.

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.

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

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.

Although there is uncertainty related to the anticipated impact of COVID-19 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 expanding our line of credit from $25 million to $50 million and 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, 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.

We continue to monitor the 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.

In these circumstances, there may be developments outside our control requiring us to adjust our operating plan.

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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 Months Ended March 31, 2022 and 2021

The following table sets forth our results of operations for the three months ended March 31, 2022 and 2021:

Three Months Ended March 31,

Summary of Statements of Operations for the Three and Six Months Ended June 30, 2022 and 2021

The following table sets forth our results of operations for the three and six months ended June 30, 2022 and 2021:

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

2022 2021 Increase

(Decrease) % 2022 2021 Increase (Decrease) %

Net revenue $ 32,928 $ 26,695 $ 6,233 23 % $ 56,345 $ 48,157 $ 8,188 17 %

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Research and development expenses 1,747 1,325 422 32 % 3,774 2,633 1,141 43 %

Other (income) expenses 3,031 4,718 (1,687) (36) %

Total other expenses (income) (2,971) 1,196 (4,167) (348) % 60 5,914 (5,854) (99) %

Provision for income taxes (benefit) (439) (286) (153) (53) % (756) (598) (158) (26) %

Net loss $ (333) $ (3,756) $ (3,423) (91) % $ (9,433) $ (14,135) $ (4,702) (33) %

The following tables set forth our net revenue by geography and product category for the three months ended March 31, 2022 and 2021:

Three Months Ended March 31,

The following tables set forth our net revenue by geography and product category for the three and six months ended June 30, 2022 and 2021:

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

Product sales by geographic location:

2022 2021 2022 2021

$ 24,960 $ 21,737 $ 43,148 $ 38,576

International 7,968 4,958 13,197 9,581

Total $ 32,928 $ 26,695 $ 56,345 $ 48,157

Three Months Ended March 31,

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

Product sales by category:

2022 2021 2022 2021

Trauma and deformity $ 22,568 $ 17,933 $ 39,084 $ 32,485

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Total $ 32,928 $ 26,695 $ 56,345 $ 48,157

Net revenue increased $2.0 million, or 9%, from $21.5 million for the three months ended March 31, 2021 to $23.4 million for the three months ended March 31, 2022.

The increase during the three months ended March 31, 2022 was driven primarily by non-elective trauma sales.

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

Trauma and deformity sales increased $2.0 million, or 13%, during the three months ended March 31, 2022, primarily driven by strong trauma and deformity growth across numerous product lines, specifically our PNP Femur, Cannulated Screws and Orthex systems.

Scoliosis sales increased $32 thousand, or 1%, during the three months ended March 31, 2022, primarily driven by increased sales of our RESPONSE 4.5/5.0 and sales of the FireFly surgical guides.

Sports medicine / other decreased $41 thousand, or 4%, during the three months ended March 31, 2022, primarily driven by a decline in sales from our Telos operations.

Net revenue increased $6.2 million, or 23%, from $26.7 million for the three months ended June 30, 2021 to $32.9 million for the three months ended June 30, 2022 and increased $8.2 million, or 17%, from $48.2 million for the six months ended June 30, 2021.

The increase during the three and six months ended June 30, 2022 was driven primarily by non-elective trauma sales.

Additionally, in the second quarter we saw non-organic growth of approximately $2.6 million related to the acquisition of MD Ortho for the three and six month periods ended June 30, 2022.

Trauma and deformity sales, which include the non-organic growth from the MD Ortho acquisition, increased $4.6 million, or 26%, during the three months ended June 30, 2022, and increased $6.6 million,

or 20%, during the six months ended June 30, 2022.

In each case, the increase was primarily driven by strong trauma and deformity growth across numerous product lines, specifically our Cannulated Screws, PediFoot System, and PNP Femur System as well as the non-organic growth from MD Ortho.

Scoliosis sales increased $1.8 million, or 23%, during the three months ended June 30, 2022, and increased $1.8 million, or 13%, during the six months ended June 30, 2022.

In each case, the growth was primarily driven by increased sales of our RESPONSE 4.5/5.0, sales of the FireFly surgical guides, and Bandloc.

Sports medicine / other decreased $0.2 million, or 15%, during the three months ended June 30, 2022, and decreased $0.2 million, or 10%, during the six months ended June 30, 2022.

In each case, the decrease was driven by a decline in sales from our Telos operations.

Nearly all the change in each category was due to an increase or decrease 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 $5.1 million for the three months ended March 31, 2021 to $4.9 million for the three months ended March 31, 2022.

The decrease is due primarily to an increased gross margin rate, offset by an increase in volumes sold.

Gross margin was 76% for the three months ended March 31, 2021 and 79% for the three months ended March 31, 2022.

The change in gross margin is primarily driven by sales through the converted international agencies, favorable purchase price variances, and fewer scoliosis set sales to our international stocking distributors.

Cost of revenue increased $1.7 million, or 27%, from $6.3 million for the three months ended June 30, 2021 to $7.9 million for the three months ended June 30, 2022.

Cost of revenue increased $1.4 million, or 12%, from $11.4 million for the six months ended June 30, 2021 to $12.8 million for the six months ended June 30, 2022.

In both cases, the increase was due primarily to an increase in volumes sold.

Gross margin was 77% for the three months ended June 30, 2021 and 76% for the three months ended June 30, 2022.

Gross margin was 77% for the six months ended June 30, 2022 and 76% for the six months ended June 30, 2021.

Sales and Marketing Expenses

Sales and marketing expenses increased $0.8 million, or 9%, to $9.8 million for the three months ended March 31, 2022 from $8.9 million for the three months ended March 31, 2021.

The change in the three month period ended March 31, 2022 was due primarily to increased sales commission expenses, driven by increased unit volumes sold.

Sales and marketing expenses increased $1.6 million, or 14%, to $12.4 million for the three months ended June 30, 2022 from $10.9 million for the three months ended June 30, 2021.

Sales and marketing expenses increased $2.4 million, or 12%, to $22.2 million for the six months ended June 30, 2022 from $19.8 million for the six months ended June 30, 2021.

The changes in the three and six month periods ended June 30, 2022 were due primarily to increased sales commission expenses, driven by increased unit volumes sold.

General and Administrative Expenses

General and administrative expenses increased $1.1 million, or 9%, from $12.0 million for the three months ended March 31, 2021 to $13.2 million for the three months ended March 31, 2022.

The increase for the three month period ended March 31, 2022 was due primarily to the addition of personnel and resources to support the continued expansion of our business and an increase in legal and other professional service expense.

Depreciation and amortization expenses increased $0.4 million, or 17%, from $2.5 million for the three months ended March 31, 2021 to $3.0 million for the three months ended March 31, 2022.

The increase for the three month period ended March 31, 2022 was primarily due to an increase in depreciation from higher set deployments and the amortization of intangible assets, including licenses which had not yet been put into the market in the first quarter 2021.

General and administrative expenses increased $3.5 million, or 31%, from $11.1 million for the three months ended June 30, 2021 to $14.5 million for the three months ended June 30, 2022.

General and administrative expenses increased $4.6 million, or 20%, to $27.7 million for the six months ended June 30, 2022 from the $23.1 million for the six months ended June 30, 2021.The increases for the three and six month periods ended June 30, 2022 were due primarily to the addition of personnel and resources to support the continued expansion of our business and an increase in legal expenses, driven by two recent acquisitions, and other professional service expenses.

Additionally, the Company saw higher expenses of approximately $0.9 million due to the acquisition of MD Ortho, including standard operating expenses and amortization of intangible assets which began amortizing on the date of acquisition.

Depreciation and amortization expenses increased $0.6 million, or 24%, from $2.6 million for the three months ended June 30, 2021 to $3.2 million for the three months ended June 30, 2022.

Depreciation and amortization expenses increased $1.0 million, or 19%, to $6.1 million for the six months ended June 30, 2022 from $5.1 million for the six months ended June 30, 2021.The increases for the three and six month periods ended June 30, 2022 were primarily due to increases in depreciation from higher set deployments and the amortization of intangible assets, including licenses which had not yet been put into the market in the first half of 2021, as well as the intangible assets included in the acquisition of MD Ortho.

Research and Development Expenses

Research and development expenses increased $0.7 million, or 55%, from $1.3 million for the three months ended March 31, 2021 to $2.0 million for the three months ended March 31, 2022.

The increase for the three month period ended March 31, 2022 was primarily due to incremental product development and the addition of personnel to support the future growth of the business.

Research and development expenses increased $0.4 million, or 32%, from $1.3 million for the three months ended June 30, 2021 to $1.7 million for the three months ended June 30, 2022.

Research and development expenses increased $1.1 million, or 43%, to $3.8 million for the six months ended June 30, 2022 from the $2.6 million for the six months ended June 30, 2021.

The increases for the three and six month periods ended June 30, 2022 were primarily due to incremental product development and the addition of personnel to support the future growth of the business.

Total Other Expenses

Other expenses were $3.0 million and $4.7 million for the three months ended March 31, 2022 and 2021, respectively, a decrease of $1.7 million or 36%.

The decrease in other expense for the three months ended March 31, 2022 was primarily due to the fair value adjustment of contingent consideration, which was driven by the valuation inputs that were lower in comparison to the same period last year.

The aggregate of accreted interest expense and fair value adjustments for the three months ended March 31, 2022 and 2021 were $3.0 million and $4.8 million, respectively.

Total other expenses reflect income of $3.0 million and expense of $1.2 million for the three months ended June 30, 2022 and 2021, respectively, a decrease of $4.2 million or 348%.

Other expenses decreased $5.9 million, or 99%, to $60 thousand for the six months ended June 30, 2022 from the $5.9 million for the six months ended June 30, 2021.

The decrease in total other expenses for each of the three and six months ended June 30, 2022 was primarily due to the fair value adjustments of contingent consideration, which was driven by the valuation inputs that were lower in comparison to the same period last year.

This was offset by additional interest expense of approximately $0.7 million as the result of the finalization of the ApiFix installment paid in the second quarter and increased losses due to foreign currency conversions of approximately $1.1 million and $1.2 million for the three and six months ended June 30, 2022, respectively.

The increased interest expense was driven by the variance in our closing stock price on the payment date compared to the 30 day average used to calculate the number of shares paid, which increase was non-cash in nature.

Liquidity and Capital Resources

We have incurred operating losses since inception which resulted in negative cash flows for continuing operations from operating activities of $4.2 million and $1.9 million for the three months ended March 31, 2022 and 2021, respectively.

As of March 31, 2022, we had an accumulated deficit of $187.1 million.

We have incurred operating losses since inception which resulted in negative cash flows for continuing operations from operating activities of $12.4 million and $10.9 million for the six months ended June 30, 2022 and 2021, respectively.

As of June 30, 2022, we had an accumulated deficit of $187.5 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 March 31, 2022, we had cash and cash equivalents, restricted cash and short term investments of $46.4 million.

At June 30, 2022, we had cash and cash equivalents, restricted cash and short term investments of $52.5 million.

We also currently have $19 million available on our line of credit.

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

Three Months Ended March 31,

Six Months Ended June 30,

Net cash used in operating activities $ (12,367) $ (10,891)

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Cash Used in Operating Activities

Net cash used in operating activities from continuing operations was $4.2 million and $1.9 million for the three months ended March 31, 2022 and 2021, respectively.

Net cash used in operating activities from continuing operations was $12.4 million and $10.9 million for the six months ended June 30, 2022 and 2021, respectively.

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

Net cash used for working capital was $2.3 million for the three months ended March 31, 2022 compared to a source of $0.1 million for the three months ended March 31, 2021.

During the three months ended March 31, 2022, the primary driver of working capital cash usage was the increase in inventory of $6.8 million and the offset related to trade payables of $5.3 million to support future sales growth.

We also saw an increase in the use of cash from the accrued expenses of $0.7 million which was offset by a decrease in prepaid expenses.

Net cash used for working capital was $10.9 million for the six months ended June 30, 2022 compared to

a source of $10.4 million for the six months ended June 30, 2021.

During the six months ended June 30, 2022, the primary driver of working capital cash usage was the increase in inventory of $10.9 million and trade receivables of $6.6 million, offset by trade payables of $5.3 million to support future sales growth.

We also saw an increase in the sourcing of cash from other accrued expenses of $1.1 million.

Cash Provided by (Used in) Investing Activities

Net cash provided by investing activities for the three months ended March 31, 2022 was $14.3 million compared to a use of cash of $5.6 million for the three months ended March 31, 2021.

Net cash provided by investing activities for the three months ended March 31, 2022 consisted primarily of the sale of short-term marketable securities offset by purchases of instrument sets of $4.2 million.

Net cash provided by investing activities for the six months ended June 30, 2022 was $13.8 million compared to a use of cash of $7.3 million for the six months ended June 30, 2021.

Net cash provided by investing activities for the six months ended June 30, 2022 consisted primarily of the sale of short-term marketable securities to fund the acquisition of MD Ortho, which was offset by the purchases of instrument sets of $9.5 million and the cash consideration paid to acquire MD Ortho.

Cash Provided By (Used in) Financing Activities

Net cash used in and provided by financing activities for the three months ended March 31, 2022 and 2021, respectively, was not material to the results of our operations.

Net cash provided by financing activities for the six months ended June 30, 2022 was $27.7 million.

Net cash used in financing activites for the six months ended June 30, 2021 was not material to the results of our operations.

Net cash provided by financing activities for the six months ended June 30, 2022 consisted primarily of the proceeds from the $31 million of debt incurred in connection with the acquisition of Pega Medical Inc., which was offset by the first anniversary installment payment to ApiFix.

Loan Agreement

Effective December 31, 2021, the Company entered into a Third Amendment (the "Third Amendment") to its Fourth Amended and Restated Loan and Security Agreement with Squadron Capital LLC, or Squadron (as so amended, the “Loan Agreement”).

The Loan Agreement provides a $25.0 million revolving credit facility, with interest only payments, at an annual interest rate equal to the greater of (a) six month SOFR plus 8.69% and (b) 10.0%.

On June 13, 2022, the Company entered into a Fourth Amendment (the “Fourth Amendment”) to its Fourth Amended and Restated Loan and Security Agreement with Squadron Capital LLC, or Squadron (as so amended, the “Loan Agreement”).

The Fourth Amendment increased the amount available under the revolving credit facility from $25 million to $50 million in anticipation of using the facility to fund the cash portion of the Company’s July 1, 2022 acquisition of Pega Medical Inc.

The Loan Agreement provides a revolving credit facility, with interest only payments, at an annual interest rate equal to the greater of (a) six month SOFR plus 8.69% and (b) 10.0%.

Prior to December 31, 2021, the interest rate on the facility had been equal to the greater of (a) three month LIBOR plus 8.61% and (b) 10.0%.

The Company pays 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.

Prior to the Third Amendment, the interest rate on the facility had been equal to the greater of (a) three month LIBOR plus 8.61%, and (b) 10.0%.

While the Loan Agreement previously provided for certain term loans, there are no longer any outstanding term loan obligations.

Borrowings under the revolving credit facility are 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.

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There are no traditional financial covenants associated with the Loan Agreement.

However, there are negative covenants that prohibit us from, among other things, transferring any of our material assets, merging with or acquiring another entity, entering into a transaction that would result in a change of control, incurring additional indebtedness, creating any lien on our property, making investments in third parties and redeeming stock or paying dividends, in each case subject to certain exceptions as further detailed in the Loan Agreement.

and redeeming stock or paying dividends, in each case subject to certain exceptions as further detailed in the Loan Agreement.

The 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.

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

As of June 30, 2022 the Company has $31 million outstanding on the line of credit and a remaining $19 million available.

As of December 31, 2021 there was no outstanding debt on the line of credit.

Mortgage Note

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

The mortgage balance was $1.0 million and $1.0 million at March 31, 2022 and December 31, 2021, respectively.

The mortgage balance was $1.0 million and $1.0 million at June 30, 2022 and December 31, 2021, respectively.

Pediatric Orthopedic Business Seasonality

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The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenue and expenses during the reporting periods.

We monitor and analyze these items for changes in facts and circumstances, and material changes in

these estimates could occur in the future.

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.

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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