What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2024-08-06 compared with 2024-05-07 · 70 added, 57 removed, 111 unchanged (53% of the section changed)

3 unchanged sentences

The full description of the history and general development of our business is included in "Item 1.

Description of Business" section of the Company's Annual Report on Form 10-K filed with the SEC on March 8, 2024, which section is incorporated herein by reference.

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.

Description of Business" section

of the Company's Annual Report on Form 10-K filed with the SEC on March 8, 2024, which section is incorporated herein by reference.

We are the only global medical device company focused exclusively on providing a comprehensive trauma and deformity correction, scoliosis, sports medicine and specialty bracing and clinical services 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, instruments and specialized braces to meet the needs of pediatric surgeons or orthotists and their patients, who we believe have been largely neglected by the orthopedic industry.

4 unchanged sentences

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.

4 unchanged sentences

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 multiple direct sales representatives as well as 38 independent sales agencies employing more than 210 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 40 independent sales agencies employing 216 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.

9 unchanged sentences

We believe there are significant opportunities for us to strengthen our position in U.S.

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

and international markets by increasing investments in consigned implant and instrument sets, strengthening our global sales and distribution infrastructure, expanding our product offering and expanding clinics to many other childrens hospitals.

Environmental, Social and Governance ("ESG") Activities

6 unchanged sentences

• 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.

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.

12 unchanged sentences

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

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.

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

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.

10 unchanged sentences

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.

2 unchanged sentences

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.

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,

Summary of Statements of Operations for the Three and Six Months Ended June 30, 2024 and 2023

The following table sets forth our results of operations for the three and six months ended June 30, 2024 and 2023 (dollars in thousands):

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

2024 2023 Increase

(Decrease) % 2024 2023 Increase (Decrease) %

Net revenue $ 52,802 $ 39,559 $ 13,243 33 % $ 97,487 $ 71,147 $ 26,340 37 %

6 unchanged sentences

Net loss $ (6,029) $ (2,886) $ 3,143 109 % $ (13,834) $ (9,692) $ 4,142 43 %

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,

The following tables set forth our net revenue by geography and product category for the three and six months ended June 30, 2024 and 2023 (dollars in thousands):

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

Product sales by geographic location:

2024 2023 2024 2023

$ 41,249 $ 29,587 $ 75,554 $ 53,388

International 11,553 9,972 21,933 17,759

Total $ 52,802 $ 39,559 $ 97,487 $ 71,147

Three Months Ended March 31,

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

Product sales by category:

2024 2023 2024 2023

Trauma and deformity $ 37,771 $ 27,514 $ 71,073 $ 50,909

2 unchanged sentences

Total $ 52,802 $ 39,559 $ 97,487 $ 71,147

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.

Net revenue increased $13.2 million, or 33%, from $39.6 million for the three months ended June 30, 2023 to $52.8 million for the three months ended June 30, 2024.

Net revenue increased $26.3 million, or 37%, from $71.1 million for the six months ended June 30, 2023 to $97.5 million for the six months ended June 30, 2024.

The increase during the three and six month periods ended June 30, 2024 was primarily driven by the addition of Boston O&P sales, as well as strong performance across global Trauma and Deformity, domestic Scoliosis and OP Specialty Bracing.

Trauma and deformity sales increased $10.3 million, or 37%, from $27.5 million during the three months ended June 30, 2023, to $37.8 million for the three months ended June 30, 2024.

Sales increased $20.2 million, or 40%, from $50.9 million during the six months ended June 30, 2023, to $71.1 million for the six months ended June 30, 2024.

The increase for the three and six month periods ended June 30, 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 $2.8 million, or 26%, from $10.9 million during the three months ended June 30, 2023, to $13.7 million for the three months ended June 30, 2024.

Sales increased $5.9 million, or 33%, from $18.0 million during the six months ended June 30, 2023, to $23.9 million for the six months ended June 30, 2024.

The increase for three and six month period ended June 30, 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 $0.2 million, or 17%, during the three months ended June 30, 2024.

Revenue increased $0.3 million, or 11%, during the six months ended June 30, 2024.

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 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.

Cost of revenue increased $2.5 million, or 26%, from $9.5 million for the three months ended June 30, 2023 to $12.0 million for the three months ended June 30, 2024.

Cost of revenue increased $7.0 million, or 40%, from $17.6 million for the six months ended June 30, 2023 to $24.5 million for the six months ended June 30, 2024.

The increases were due primarily to sales volume, including the added cost of revenue associated with the revenue generated by acquisitions.

Gross margin was 77% and 76% for the three months ended June 30, 2024 and June 30, 2023, respectively.

The gross margin was 75% for each of the six months ended June 30, 2024 and June 30, 2023.

Sales and Marketing 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.

Sales and marketing expenses increased $3.1 million, or 23%, to $16.6 million for the three months ended June 30, 2024 from $13.5 million for the three months ended June 30, 2023.

Sales and marketing expenses increased $4.7 million, or 18%, to $30.8 million for the six months ended June 30, 2024 from $26.1 million for the six months ended June 30, 2023.

The changes in the three and six month periods ended June 30, 2024 were 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 $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.

General and administrative expenses increased $8.2 million, or 43%, from $19.1 million for the three months ended June 30, 2023 to $27.3 million for the three months ended June 30, 2024, and increased $15.8 million, or 44%, from $36.3 million for the six months ended June 30, 2023 to $52.1 million for the six months ended June 30, 2024.

The increases for the three and six month periods ended June 30, 2024 were due primarily to the addition of Boston O&P.

Stock compensation increased $0.3 million for the six months ended June 30, 2024 due to 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 $0.7 million, or 17%, from $4.1 million for the three months ended June 30, 2023 to $4.8 million for the three months ended June 30, 2024, and increased $1.9 million, or 24%, from $7.9 million for the six months ended June 30, 2023 to $9.8 million for the six months ended June 30, 2024.

The increase in depreciation for the three and six month periods ended June 30, 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 $0.6 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.

Research and development expenses decreased $0.4 million, or 14%, from $3.0 million for the three months ended June 30, 2023 to $2.5 million for the three months ended June 30, 2024, and increased $0.1 million, or 2%, from $5.4 million for the six months ended June 30, 2023 to $5.5 million for the six months ended June 30, 2024.

The fluctuations for the three and six month periods ended June 30, 2024 were primarily due to the timing of product development and the addition of personnel to support the future growth of the business during the first quarter of 2024.

Total Other (Income) Expenses

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.

Other expense was $0.4 million for the three months ended June 30, 2024 compared to other income of $2.3 million for the three months ended June 30, 2023, a change of $2.7 million or 117%, and other expense was $1.0 million for the six months ended June 30, 2024 compared to other income of $3.5 million for the six months ended June 30, 2023, a change of $4.5 million or 128%.

The change for both periods ended June 30, 2024 was primarily due to the fair value adjustment of contingent consideration associated with our ApiFix acquisition, which generated income in the comparative prior year period, partially offset by 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 $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 have incurred operating losses since inception which resulted in negative cash flows used in operating activities of $12.8 million and $10.8 million for the six months ended June 30, 2024 and 2023, respectively.

As of June 30, 2024, we had an accumulated deficit of $211.6 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, 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:

Three Months Ended March 31,

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, 2024, we had cash and cash equivalents, restricted cash and short-term investments of $30.9 million.

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

Six Months Ended June 30,

Net cash used in operating activities $ (12,782) $ (10,834)

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

Net cash provided by investing activities 16,018 14,087

Net cash used in financing activities (4,842) (2,071)

2 unchanged sentences

Cash Used in Operating Activities

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.

Net cash used in operating activities was $12.8 million and $10.8 million for the six months ended June 30, 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 $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.

Net cash used for working capital was $12.1 million for the six months ended June 30, 2024 compared to $11.3 million for the six months ended June 30, 2023.

The increase in cash used in operating activities was primarily driven by inventory purchases to support sales growth as well as changes in accounts receivable and accounts payable associated with the increased sales and acquired inventory, respectively.

Cash Provided by Investing Activities

Net cash provided by investing activities for the six months ended June 30, 2024 was $16.0 million compared to $14.1 million for the six months ended June 30, 2023.

Net cash provided by investing activities for the six months ended June 30, 2024 consisted primarily of the sale of short-term marketable securities offset by purchases of property, plant and equipment of $13.1 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 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.

Net cash used in financing activities for the six months e nded June 30, 2024 was $4.8 million consisting of $2.3 million related to the ApiFix fourth and final anniversary payment and $1.3 million related to the MedTech first year anniversary payment.

Net cash used in financing activities for the six months ended June 30, 2023 was $2.1 million consisting of $2.0 million related to the ApiFix third year anniversary payment.

On August 2, 2024, the Board of Directors of the Company approved a limited stock repurchase program of up to $5.0 million in aggregate investment of the Company’s outstanding common stock, $0.00025 par value per share.

On a share basis, using the closing price of the Company's common stock on August 2, 2024 of $29.56 the amount of common stock subject to the repurchase program represents approximately 0.7 percent of the Company’s outstanding shares.

The Company has not yet repurchased any shares of its common stock pursuant to the repurchase program.

In August 2022, the Inflation Reduction Act of 2022 (the “IRA”) was enacted.

Among other things, the IRA imposes a new 1.0 percent excise tax on the fair market value of stock repurchased after December 31, 2022 by publicly traded U.S.

corporations (like the Company).

With certain exceptions, the value of stock repurchased is determined net of stock issued in the year, including shares issued pursuant to compensatory arrangements.

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.

As of June 30, 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.

10 unchanged sentences

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