What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-11-07 compared with 2024-08-06 · 73 added, 74 removed, 107 unchanged (58% of the section changed)

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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, 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.

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, specialty bracing and clinical services 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.

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

We currently market over 70 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.

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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 multiple direct sales representatives as well as 40 independent sales agencies employing 216 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 41 independent sales agencies employing over 220 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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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.

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.

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

Since inception we have impacted the lives of over 1,000,000 children, when including those served by our acquired companies.

Since inception we have impacted the lives of over 1.1 million children, when including those served by our acquired companies.

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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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

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.

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

As a result of the COVID-19 pandemic, we experienced significant business disruption throughout the last several years.

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.

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

We continue to monitor the impact of the pandemic on our employees and customers and the markets in which we operate and will take further actions that are considered prudent to address the pandemic.

We cannot accurately predict with certainty the full extent to which the pandemic will impact demand for our products in the future.

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 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,

Summary of Statements of Operations for the Three and Nine Months Ended September 30, 2024 and 2023

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

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

2024 2023 Increase

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General and administrative expenses 26,299 17,973 8,326 46 % 78,358 54,242 24,116 44 %

Trademark impairment — 985 (985) (100) % — 985 (985) (100) %

Research and development expenses 2,577 2,561 16 1 % 8,118 7,973 145 2 %

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Net loss $ (7,919) $ (4,591) $ 3,328 72 % $ (21,753) $ (14,283) $ 7,470 52 %

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,

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

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

Product sales by geographic location:

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Total $ 54,573 $ 39,972 $ 152,060 $ 111,119

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 $ 54,573 $ 39,972 $ 152,060 $ 111,119

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.

Net revenue increased $14.6 million, or 37%, from $40.0 million for the three months ended September 30, 2023 to $54.6 million for the three months ended September 30, 2024.

Net revenue increased $40.9 million, or 37%, from $111.1 million for the nine months ended September 30, 2023 to $152.1 million for the nine months ended September 30, 2024.

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

Trauma and deformity sales increased $8.8 million, or 31%, from $28.8 million during the three months ended September 30, 2023, to $37.6 million for the three months ended September 30, 2024, and sales increased $29.0 million, or 36%, from $79.7 million during the nine months ended September 30, 2023, to $108.7 million for the nine months ended September 30, 2024.

The increase for the three and nine month periods ended September 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 $5.3 million, or 52%, from $10.3 million during the three months ended September 30, 2023, to $15.6 million for the three months ended September 30, 2024.

Sales increased $11.3 million, or 40%, from $28.3 million during the nine months ended September 30, 2023, to $39.5 million for the nine months ended September 30, 2024.

The increase for three and nine month period ended September 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 $0.4 million, or 50%, during the three months ended September 30, 2024, and $0.7 million, or 22%, during the nine months ended September 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 $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.

Cost of revenue increased $5.5 million, or 61%, from $9.0 million for the three months ended September 30, 2023 to $14.5 million for the three months ended September 30, 2024.

Cost of revenue increased $12.4 million, or 47%, from $26.6 million for the nine months ended September 30, 2023 to $39.0 million for the nine months ended September 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.

Gross margin was 73% and 77% for the three months ended September 30, 2024 and September 30,

2023, respectively.

The gross margin was 74.3% and 76.1% for the nine months ended September 30, 2024 and September 30, 2023, respectively.

Sales and Marketing Expenses

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.

Sales and marketing expenses increased $2.8 million, or 20%, to $16.8 million for the three months ended September 30, 2024 from $13.9 million for the three months ended September 30, 2023.

Sales and marketing expenses increased $7.5 million, or 19%, to $47.5 million for the nine months ended September 30, 2024 from $40.0 million for the nine months ended September 30, 2023.

The changes in the three and nine month periods ended September 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 $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.

General and administrative expenses increased $8.3 million, or 46%, from $18.0 million for the three months ended September 30, 2023 to $26.3 million for the three months ended September 30, 2024, and increased $24.1 million, or 44%, from $54.2 million for the nine months ended September 30, 2023 to $78.4 million for the nine months ended September 30, 2024.

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

Stock compensation increased $1.9 million for the nine months ended September 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 $0.5 million, or 12%, from $4.6 million for the three months ended September 30, 2023 to $5.1 million for the three months ended September 30, 2024, and increased $2.9 million, or 24%, from $12.2 million for the nine months ended September 30, 2023 to $15.1 million for the nine months ended September 30, 2024.

The increase in depreciation for the three and nine month periods ended September 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 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.

Research and development expenses remained flat from $2.6 million year over year, and increased $0.1 million, or 2%, from $8.0 million for the nine months ended September 30, 2023 to $8.1 million for the nine months ended September 30, 2024.

The fluctuations for the three and nine month periods ended September 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 $0.4 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.

Other expense was $3.6 million for the three months ended September 30, 2024 compared to other income of $0.8 million for the three months ended September 30, 2023, a change of $4.3 million or 566%, and other expense was $4.6 million for the nine months ended September 30, 2024 compared to other income of $4.3 million for the nine months ended September 30, 2023, a change of $8.8 million or 207%.

The change for the three and nine months ended September 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, and the early extinguishment of the MidCap Credit Agreement in the third quarter, partially offset by an increase to net interest expense related to the new Term Loan and Convertible Note with Braidwell.

Liquidity and Capital Resources

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 June 30, 2024, we had cash and cash equivalents, restricted cash and short-term investments of $30.9 million.

We have incurred operating losses since inception which resulted in negative cash flows used in operating activities of $23.1 million and $19.5 million for the nine months ended September 30, 2024 and 2023, respectively.

As of September 30, 2024, we had an accumulated deficit of $219.5 million.

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, 2024, we had cash and cash equivalents, restricted cash and short-term investments of $78.1 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,

Nine Months Ended September 30,

Net cash used in operating activities $ (23,061) $ (19,503)

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

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

Net cash (used in) provided by investing activities (10,750) 23,755

Net cash provided by (used in) financing activities 53,676 (2,086)

Effect of exchange rate changes on cash, cash equivalents and restricted cash 153 (396)

Net (decrease) increase in cash, cash equivalents and restricted cash $ (2,137) $ 847

Net increase in cash, cash equivalents and restricted cash $ 20,018 $ 1,770

Cash Used in Operating Activities

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.

Net cash used in operating activities was $23.1 million and $19.5 million for the nine months ended September 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 $12.1 million for the six months ended June 30, 2024 compared to $11.3 million for the six months ended June 30, 2023.

Net cash used for working capital was $26.0 million for the nine months ended September 30, 2024 compared to $23.4 million for the nine months ended September 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.

Cash (Used in) Provided by Investing Activities

Net cash provided by investing activities for the nine months ended September 30, 2024 was $10.8 million compared to $23.8 million for the nine months ended September 30, 2023.

Net cash used in investing activities for the nine months ended September 30, 2024 consisted primarily of the sale and purchase of short-term marketable securities offset by purchases of property, plant and equipment of $14.5 million, the majority of which is instrument sets and the acquisition of Boston O&P and related clinics.

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 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 June 30, 2024, there was $10 million outstanding indebtedness under the Credit Agreement.

Cash Provided by (Used in) Financing Activities

Net cash used in financing activities for the nine months ended September 30, 2024 was $53.7 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, and $60.2 million related to the new debt agreement with Braidwell, replacing the term loan with MidCap.

Credit Agreement

On August 05, 2024, the Company signed an $100 million term loan and private placement arrangement with Braidwell LP by and among (i) the Company and other borrowers party to the Credit Agreement, (ii)

Braidwell LP, and (iii) the financial institutions or other entities from time to time party thereto as Lenders.

Terms of the financing include a $50 million term loan and $50 million of convertible notes.

The term loan consists of an initial term loan of $25 million and access to a delayed draw term loan facility for an additional $25 million, subject to certain terms and conditions.

The interest rate on the term loan is SOFR + 6.50% with the Company having the option to make a payment-in-kind interest payment equal to 1.00% per annum of the rate.

Payments are interest only until the maturity date in August 2029.

Included in the term loan are financial covenants to maintain cash in certain pledged accounts of at least 25% of the outstanding principal amount of the loan and to maintain certain minimum net product sales during the loan period.

The $50 million of convertible notes will accrue interest at a rate of 4.75% per annum.

Payments will consist of interest only until the maturity date in February 2030.

The notes are convertible into common stock of the Company at an initial conversion price of $40.98, which represents a 30% premium to the Company’s volume weighted average common stock price for the thirty trading days ended August 2, 2024.

In connection with its approval of the financing, the Company’s Board approved a stock repurchase program of up to $5 million in value of the Company’s outstanding common stock.

Using the closing price on August 2, 2024, of $29.56, the amount of common stock subject to the repurchase program represents approximately 169,000 shares or 0.7% of the Company’s outstanding common stock.

The proceeds from the financing will be used to repay the Company’s outstanding debt of approximately $10 million, transaction fees incurred in connection with the financing, potential stock repurchases under the program described above, and for general corporate purposes and working capital needs.

The debt facilities replace the $80 million Credit, Security, and Guaranty Agreement with MidCap Funding IV Trust and MidCap Financial Trust and other parties named therein.

There was approximately $10 million outstanding under the MidCap Credit Agreement and it was terminated in connection with the Term Loan 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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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