What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-05-07 compared with 2023-11-07 · 70 added, 91 removed, 98 unchanged (62% of the section changed)

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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.

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 or in the case of our braces, we transfer control of our products to the distributor or customer when title passes upon shipment.

We currently market 52 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 currently market 71 surgical and specialized bracing systems that serve three of the largest categories within the pediatric orthopedic market:

(i) trauma and deformity correction, (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.

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In the future, we expect to expand our product offering within these categories, as well as to address additional categories of the pediatric orthopedic market.

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 200 sales representatives specifically focused on pediatrics.

The majority of our revenue has been generated in the United States, where we sell our products through a network of multiple direct sales representatives as well as 38 independent sales agencies employing more than 210 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.

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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 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.

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.

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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, Indiana recently implemented

an enhanced recycling program and our team in the United Kingdom created a carbon reduction plan.

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

We also partner with charitable organizations that provide pediatric orthopedic care around the world.

In 2020 we were named as "Corporate Partner of the Year" by the World Pediatric Project - with whom we work to provide access to medical care for children in developing countries.

• We are committed to fostering an environment that is respectful, compassionate, and inclusive of everyone in our community.

• The Company and its Board of Directors understand the value of diversity.

Since the conclusion of our 2022 annual meeting of stockholders, the Company has added two diverse Directors to our Board.

In 2020, we were named as "Corporate Partner of the Year" by World Pediatrics - with whom we work to provide access to medical care for children in developing countries.

• We are committed to fostering an environment that is respectful, compassionate, and inclusive of everyone in our community which is communicated in our diversity and inclusion policy.

For eight years we have been recognized by the Indiana Chamber of Commerce - Best Companies to Work in Indiana.

• Th e Company and its Board of Directors understand the value of diversity.

In 2022 and again in 2023, the Company added diverse Directors to our Board and will continue its Board diversity initiative in the future.

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.

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Trends and Uncertainties

From time to time we acquire, make investments in or license other technologies, products and business that may enhance our capabilities, complement our current products or expand the breadth of our

markets or customer base.

From time to time we acquire, make investments in or license other technologies, products and business that may enhance our capabilities, complement our current products or expand the breadth of our markets or customer base.

As a result of these transactions, we may record certain intangible assets, including goodwill and trademarks, which are subject to annual impairment testing.

Fair value is based on our current assessment of the expected future cash flows based on recent results and other specific market factors.

During 2022, we determined that a triggering event had occurred indicating it was more likely than not the fair value of the ApiFix trademark was less than the associated carrying value.

Subsequently, the Company completed a quantitative analysis and concluded that the fair value was in fact less than the carrying value and a partial impairment loss of $3.6 million was recorded during the year ended December 31, 2022.

During 2023, we determined that a triggering event had occurred indicating it was more likely than not the fair value of the ApiFix trademark was less than the associated carrying value.

Subsequently, the Company completed a quantitative analysis and concluded that the fair value was in fact less than the carrying value and a partial impairment loss of $1.0 million was recorded in the three and nine months ended September 30, 2023.

During 2023 and 2022, we determined that a triggering event had occurred indicating it was more likely than not the fair value of the ApiFix trademark was less than the associated carrying value.

Subsequently, the Company completed a quantitative analysis and concluded that the fair value was in fact less than the carrying value and a partial impairment losses of $1.0 million and $3.6 million were recorded in 2023 and 2022, respectively.

We believe that the expected future cash flows in the most recent calculations represent management’s best estimate;

however, if actual results differ materially from these estimates, we could record an additional impairment charge which could be material to our consolidated financial statements and have an adverse impact on our results of operations.

In 2022, there was a significant and unprecedented increase in cases of respiratory syncytial virus, or RSV, and other respiratory illnesses.

In 2022 and 2023, there was a significant and unprecedented increase in cases of respiratory syncytial virus, or RSV, and other respiratory illnesses.

RSV is a common respiratory virus that follows a seasonal pattern.

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The volume of elective procedures utilizing our products were negatively impacted as a significant percent of hospital capacity was absorbed to cover the increase in RSV-related hospitalizations.

This had a negative impact on our sales volume in 2022 and may continue to do so into the future.

This had a negative impact on our sales volume in 2022 and 2023 and may continue to do so into the future.

We are unable to accurately determine exactly how this will impact us in the future.

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Elective procedures were 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.

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.

Throughout the pandemic, we took a variety of steps to address the impact.

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We encourage the readers of this document to read our risk factors in their 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 8, 2024 and in other reports filed with the SEC that discuss the risks and factors that may affect our business.

Smaller Reporting Company Status

We 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, certain exemptions may be available to us.

Summary of Statements of Operations for the Three and Nine Months Ended September 30, 2023 and 2022

The following table sets forth our results of operations for the three and nine months ended September 30, 2023 and 2022:

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

Summary of Statements of Operations for the Three Months Ended March 31, 2024 and 2023

The following table sets forth our results of operations for the three months ended March 31, 2024 and 2023:

Three Months Ended March 31,

2024 2023 Increase

(Decrease) % 2023 2022 Increase (Decrease) %

Net revenue $ 44,685 $ 31,588 $ 13,097 41 %

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General and administrative expenses 24,730 17,157 7,573 44 %

Trademark impairment 985 3,609 (2,624) (73) % 985 3,609 (2,624) (73) %

Research and development expenses 2,998 2,446 552 23 %

Other income (766) (21,357) 20,591 (96) % (4,276) (21,297) 17,021 (80) %

Other expense (income), net 613 (1,211) 1,824 (151) %

Provision for income taxes (benefit) (2,531) (574) (1,957) (341) %

Net (loss) income $ (4,591) $ 18,539 $ 23,130 (125) % $ (14,283) $ 9,106 $ 23,389 (257) %

The following tables set forth our net revenue by geography and product category for the three and nine months ended September 30, 2023 and 2022:

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

Net loss $ (7,805) $ (6,806) $ 999 15 %

The following tables set forth our net revenue by geography and product category for the three months ended March 31, 2024 and 2023:

Three Months Ended March 31,

Product sales by geographic location:

$ 34,305 $ 23,800

$ 29,360 $ 26,539 $ 82,748 $ 69,687

International 10,380 7,788

Total $ 44,685 $ 31,588

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

Three Months Ended March 31,

Product sales by category:

2023 2022 2023 2022

Trauma and deformity $ 33,302 $ 23,395

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Total $ 44,685 $ 31,588

Net revenue increased $5.0 million, or 14%, from $35.0 million for the three months ended September 30, 2022 to $40.0 million for the three months ended September 30, 2023.

Net revenue increased $19.8 million, or 22%, from $91.3 million for the nine months ended September 30, 2022 to $111.1 million for the nine months ended September 30, 2023.

The increases during the three and nine months ended September 30, 2023 were primarily driven by strong performance across trauma and deformity, partially due to acquisitions.

Trauma and deformity sales increased $4.9 million, or 21%, from $23.9 million during the three months ended September 30, 2022, to $28.8 million for the three months ended September 30, 2023.

Sales increased $16.7 million, or 27%, from $63.0 million during the nine months ended September 30, 2022 to $79.7 million for the nine months ended September 30, 2023.

Increases for both the three and nine month periods ended September 30, 2023 were primarily driven by strong growth across numerous product lines, specifically our Cannulated Screws, PNP Femur, PediPlate, external fixation and Pega systems.

Also, as previously mentioned, revenue from the prior year acquisitions is included in trauma and deformity.

Scoliosis sales increased $0.3 million, or 3%, during the three months ended September 30, 2023.

Sales increased $2.9 million, or 11%, from $25.4 million during the nine months ended September 30, 2022 to $28.3 million for the nine months ended September 30, 2023.

Increases for both the three and nine month periods ended September 30, 2023 were primarily driven by increased sales of our RESPONSE 5.5/6.0 and ApiFix systems and revenue generated from 7D Technology.

Sports medicine / other decreased $0.2 million, or 20%, during the three months ended September 30, 2023, and increased $0.2 million, or 7%, during the nine months ended September 30, 2023.

Changes in sports medicine / other were primarily driven by sales from our Telos operations.

Net revenue increased $13.1 million, or 41%, from $31.6 million for the three months ended March 31, 2023 to $44.7 million for the three months ended March 31, 2024.

The increase during the three months ended March 31, 2024 was primarily driven by the addition of Boston O&P sales, as well as strong performance across global Trauma and Deformity, International Scoliosis and OP Specialty Bracing.

Trauma and deformity sales increased $9.9 million, or 42%, from $23.4 million during the three months ended March 31, 2023, to $33.3 million for the three months ended March 31, 2024.

The increase for the three months ended March 31, 2024 was primarily driven by strong growth across numerous product lines, specifically our Cannulated Screws, PNP Femur, PediPlate, external fixation and Pega systems, as well as the addition of Boston O&P .

Scoliosis sales increased $3.1 million, or 44%, during the three months ended March 31, 2024.

The increase for the three months ended March 31, 2024 was primarily driven by increased sales of our RESPONSE 5.5/6.0 and ApiFix systems and revenue generated from 7D Technology, as well as the addition of Boston O&P.

Sports medicine / other increased $0.1 million, or 5%, during the three months ended March 31, 2024.

The change in sports medicine / other was primarily driven by 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 remained substantially flat from $9.1 million for the three months ended September 30, 2022 to $9.0 million for the three months ended September 30, 2023.

Cost of revenue increased $4.7 million, or 22%, from $21.9 million for the nine months ended September 30, 2022 to $26.6 million for the nine months ended September 30, 2023.

The increases are due primarily to sales volume, including the added cost of revenue associated with the revenue generated by acquisitions and mix related to additional international sales.

Gross margin was 77% and 74% for the three months ended September 30, 2023 and September 30, 2022, respectively.

The gross margin was 76% for both the nine months ended September 30, 2023 and September 30, 2022,

Cost of revenue increased $4.5 million, or 56%, from $8.0 million for the three months ended March 31, 2023 to $12.5 million for the three months ended March 31, 2024.

The increase is due primarily to sales volume, including the added cost of revenue associated with the revenue generated by acquisitions and mix related to additional international sales.

Gross margin was 72% and 75% for the three months ended March 31, 2024 and March 31, 2023, respectively.

Sales and Marketing Expenses

Sales and marketing expenses increased $1.7 million, or 14%, to $13.6 million for the three months ended September 30, 2023 from $11.9 million for the three months ended September 30, 2022.

Sales and marketing expense increased $4.9 million, or 14%, to $39.0 million for the nine months ended September 30, 2023 from $34.1 million for the nine months ended September 30, 2022.

The changes in the three and nine month periods ended September 30, 2023 were due primarily to increased sales commission expenses.

Sales and marketing expenses increased $1.6 million, or 13%, to $14.2 million for the three months ended March 31, 2024 from $12.5 million for the three months ended March 31, 2023.

The changes in the three month periods ended March 31, 2024 was due primarily to increased sales commission expenses, as well as the addition of Boston O&P.

General and Administrative Expenses

General and administrative expenses increased $3.4 million, or 22%, from $15.1 million for the three months ended September 30, 2022 to $18.5 million for the three months ended September 30, 2023, and increased $13.0 million, or 30%, from $42.8 million for the nine months September 30, 2022 to $55.8 million for the nine months ended September 30, 2023.

The increases for the three and nine month periods ended September 30, 2023 were due primarily to the addition of personnel and resources to support the continued expansion of our business.

Stock compensation increased in tandem with the increase in personnel, and also as a result of common stock issued to a former MedTech owner that is subject to service-based vesting conditions.

Depreciation and amortization expenses increased $1.7 million, or 52%, from $3.3 million for the three months ended September 30, 2022 to $5.0 million for the three months ended September 30, 2023.

Depreciation and amortization expenses increased $3.3 million, or 35%, from $9.6 million for the nine months ended September 30, 2022 to $12.9 million for the nine months ended September 30, 2023.

The increases in depreciation for the three and nine month periods ended September 30, 2023 were primarily due to higher set deployments and increased amortization associated with acquisitions.

Trademark Impairment

The Company recorded an impairment charge of $1.0 million and $3.6 million associated with the ApiFix trademark for the three and nine months ended September 30, 2023 and 2022, respectively.

See Note 4 - Goodwill and Intangible Assets for further details.

General and administrative expenses increased $7.6 million, or 44%, from $17.2 million for the three months ended March 31, 2023 to $24.7 million for the three months ended March 31, 2024.

The increases for the three month period ended March 31, 2024 was due primarily to the addition of Boston O&P.

Stock compensation increased by $0.5 million with the increase in personnel and also as a result of restricted stock issued as part of the Boston O&P acquisition.

Depreciation and amortization expenses increased $1.2 million, or 31%, from $3.8 million for the three months ended March 31, 2023 to $5.0 million for the three months ended March 31, 2024.

The increase in depreciation for the three month period ended March 31, 2024 was primarily due to higher set deployments and increased amortization associated with acquisitions, as well as the addition of Boston O&P.

Research and Development Expenses

Research and development expenses increased $0.2 million, or 8%, from $2.2 million for the three months ended September 30, 2022 to $2.4 million for the three months ended September 30, 2023.

Research and development expenses increased $1.5 million, or 25%, from $6.0 million for the nine months ended September 30, 2022 to $7.4 million for the nine months ended September 30, 2023.

The increase for the three and nine month periods ended September 30, 2023 were primarily due to incremental product development and the addition of personnel to support the future growth of the business.

Research and development expenses increased $0.6 million, or 23%, from $2.4 million for the three months ended March 31, 2023 to $3.0 million for the three months ended March 31, 2024.

The increase for the three month period ended March 31, 2024 was primarily due to incremental product development and the addition of personnel to support the future growth of the business, including $0.4 million of additional non-cash stock based compensation expense.

Total Other (Income) Expenses

Other income was $0.8 million and $21.4 million for the three months ended September 30, 2023 and 2022, respectively, a change of $20.6 million or 96%.

Other income was $4.3 million $21.3 million for the nine months ended September 30, 2023 and 2022, respectively, resulting in a change of $17.0 million.

The change in other income for the three and nine months ended September 30, 2023 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 in the previous year as well as a decrease in net interest expense.

Other expense was $0.6 million for the three months ended March 31, 2024 compared to other income of $1.2 million for the three months ended March 31, 2023, a change of $1.8 million or 151%.

The change for the three months ended March 31, 2024 was primarily due to the fair value adjustment of contingent

consideration associated with our ApiFix acquisition, as well as an increase to net interest expense related to the new Term Loan with MidCap.

Liquidity and Capital Resources

We have incurred operating losses since inception which resulted in negative cash flows used in operating activities of $19.5 million and $18.4 million for the nine months ended September 30, 2023 and 2022, respectively.

As of September 30, 2023, we had an accumulated deficit of $191.1 million.

We have incurred operating losses since inception which resulted in negative cash flows used in operating activities of $6.7 million and $6.5 million for the three months ended March 31, 2024 and 2023, respectively.

As of March 31, 2024, we had an accumulated deficit of $205.5 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 September 30, 2023, we had cash and cash equivalents, restricted cash and short-term investments of $84.0 million.

At March 31, 2024, we had cash and cash equivalents, restricted cash and short-term investments of $49.7 million.

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

Nine Months Ended September 30,

Three Months Ended March 31,

Net cash used in operating activities $ (6,690) $ (6,461)

Net cash provided by (used in) investing activities 23,755 (90,144)

Net cash (used in) provided by financing activities (2,086) 136,009

Net cash (used in) provided by investing activities (3,679) 32,310

Net cash used in financing activities (573) (36)

Effect of exchange rate changes on cash, cash equivalents and restricted cash 1,479 (138)

Net increase in cash, cash equivalents and restricted cash $ 1,770 $ 27,866

Net (decrease) increase in cash, cash equivalents and restricted cash $ (9,463) $ 25,675

Cash Used in Operating Activities

Net cash used in operating activities was $19.5 million and $18.4 million for the nine months ended September 30, 2023 and 2022, respectively.

Net cash used in operating activities was $6.7 million and $6.5 million for the three months ended March 31, 2024 and 2023, 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 $23.4 million for the nine months ended September 30, 2023 compared to a use of $17.4 million for the nine months ended September 30, 2022.

The increase in cash used in

operating activities was primarily driven by additional inventory purchased to support sales growth as well as accounts receivable from the increased sales which was offset by cash provided by accounts payable associated with the acquired inventory.

Cash Provided by (Used in) Investing Activities

Net cash provided by investing activities for the nine months ended September 30, 2023 was $23.8 million compared to cash used of $90.1 million for the nine months ended September 30, 2022.

Net cash used in investing activities for the nine months ended September 30, 2023 consisted primarily of the sale of short-term marketable securities, when netted against the purchase of similar securities, offset by purchases of property, plant and equipment of $13.0 million, the majority of which is instrument sets.

Net cash used for working capital was $4.5 million for the three months ended March 31, 2024 compared to $4.8 million for the three months ended March 31, 2023.

The increase in cash used in operating activities was primarily driven by additional inventory purchased to support sales growth as well as accounts receivable from the increased sales which was offset by cash provided by accounts payable associated with the acquired inventory.

Cash (Used in) Provided by Investing Activities

Net cash used in investing activities for the three months ended March 31, 2024 was $3.7 million compared to cash provided of $32.3 million for the three months ended March 31, 2023.

Net cash used in investing activities for the three months ended March 31, 2024 consisted primarily of the sale of short-term marketable securities, when netted against the purchase of similar securities, offset by purchases of property, plant and equipment of $6.5 million, the majority of which is instrument sets.

The change in cash related to investing activities is primarily driven by business combinations and the purchase of short term marketable securities which decreased from the prior year.

Cash (Used in) Provided by Financing Activities

Net cash used in financing activities for the nine months ended September 30, 2023 was $2.1 compared to net cash provided by financing activities of $136.0 for the nine months ended September 30, 2022.

The use of cash in 2023 primarily related to the cash settlement of the current year ApiFix installment payment.

The source of cash in the prior year was mainly attributable to the Company's follow-on offering.

The Company is party to a Fourth Amended and Restated Loan and Security Agreement with Squadron, which provides the Company with a $50.0 million revolving credit facility.

As of September 30, 2023, there was no outstanding indebtedness under the Loan Agreement.

Cash Used in Financing Activities

Net cash used in financing activities for the three months e nded March 31, 2024 was $0.6 million consisting primarily of $0.5 million payments on acquisition note payable that was assumed with the

Boston O&P acquisition .

Net cash used in financing activities for the three months ended March 31, 2023 was not material to the results of our operations.

The Company is party to a $80 million Credit, Security and Guaranty Agreement with Midcap Funding IV Trust and Midcap Financial Trust and other parties named therein.

As of March 31, 2024, there was $10 million outstanding indebtedness under the Credit Agreement.

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 management committee.

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See Note 2 - Significant Accounting Policies in Item 1 Financial Statements of Part 1 of this Quarterly report on Form 10-Q for a description of recent accounting pronouncements applicable to our condensed consolidated financial statements.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a "smaller reporting company," we are not required to provide the information required by this item.

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