What changed in this filing

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Item 2. Management’s Discussion and Analysis

2025-05-08 compared with 2024-11-07 · 79 added, 85 removed, 95 unchanged (63% of the section changed)

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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.

largely neglected by the orthopedic industry.

We currently serve three of the largest categories in this market.

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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.

We operate approximately 35 orthotic and prosthetic ("O&P") clinics in the United States serving children's hospitals in numerous states.

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 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.

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

We currently market 80 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.

We manufacture the majority of our orthopedic bracing products and we rely on a broad network of third parties to manufacture the components of our surgical 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.

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 41 independent sales agencies employing over 220 sales representatives specifically focused on pediatrics.

The majority of our revenue from implants, instruments, and specialized braces has been generated in the United States.

Our global sales management organization leads a network of sales agencies, stocking distributors as well as direct sales representatives.

We sell our implants and instruments through a network of multiple direct sales representatives as well as over 40 independent sales agencies employing 227 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.

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

The revenue generated in the United States is from selling our bracing products directly to orthopedic surgeons, orthotists, physical therapists or, at certain times, directly to the end customer.

We market and sell our products internationally in over 75 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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In order to further enhance our operations in Europe, we established operating companies in the Netherlands and Germany in March 2019 and April 2022, respectively.

In January 2023, we established a direct sales organization in Germany, the Company's first direct selling organization serving an international market.

In our international markets, excluding Germany, we work through sales agencies that are paid a commission, similar to our U.S.

In 2023 and 2024, we hired operating and sales representatives in Germany as salaried employees to better serve our customers and opened warehouses in Germany and Australia in 2024.

These arrangements have generated an increase in revenue and gross margin.

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, expanding our product offering and expanding clinics to many other childrens hospitals.

Environmental, Social and Governance ("ESG") Activities

and international markets by increasing investments in consigned implant and instrument sets, strengthening our global sales and distribution infrastructure, and expanding our product offering as well as our O&P clinic network.

Social Impact

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

Since inception we have impacted the lives of over 1.1 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.

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

We encourage you to review our ESG page and summary report which can be found under the "About" section of our corporate website for more detailed information regarding our ESG efforts and current initiatives.

On our website, among other information, are the following highlights:

• 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.

Since inception we have impacted the lives of 1,179,000 children, when including those served by our acquired companies.

We believe we should continue to expand our social impact, create an inclusive culture, and ensure good corporate governance practices.

• 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 World Pediatrics - with whom we work to provide access to medical care for children in developing countries.

We also partner with over 40 charitable organizations that provide pediatric orthopedic care around the world.

In 2020, we were named as "Corporate Partner of the Year" by 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 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.

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

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

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

We expect to continue to increase our disclosures and communicate our social impact efforts in future SEC filings.

Nothing on our website shall be deemed part of or incorporated by reference into this Quarterly Report on Form 10-Q.

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During 2024, 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.

Subsequently, the Company completed a quantitative analysis and concluded that the fair value was in fact less than the carrying value and partial impairment losses of $1.8 million, $1.0 million and $3.6 million were recorded in 2024, 2023, and 2022, respectively.

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

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The typical season shows an increase in mid-September, peaks in late December and drops around mid-April;

In 2023 the United States experienced a significant increase in RSV activity outside of the typical peak season as well as a heightened impact during the winter months.

however, in 2022 the United States experienced a significant increase during the summer and fall months and in 2023 the United States experienced a significant increase in January and February as well as October through December.

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 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.

We are unable to accurately determine exactly how this will impact us in the future, but we will continue to monitor this dynamic as we get closer to the traditional peak of RSV season.

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 5, 2025 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 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,

Summary of Statements of Operations for the Three Months Ended March 31, 2025 and 2024

The following table sets forth our results of operations for the three months ended March 31, 2025 and 2024 (dollars in thousands):

Three Months Ended March 31,

2025 2024 Increase

(Decrease) % 2024 2023 Increase (Decrease) %

Net revenue $ 52,411 $ 44,685 $ 7,726 17 %

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General and administrative expenses 30,280 24,730 5,550 22 %

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

Restructuring 40 — 40 100 %

Research and development expenses 2,351 2,998 (647) (22) %

Other expense (income), net 3,571 (766) 4,337 (566) % 4,565 (4,276) 8,841 (207) %

Other (income) expense, net (518) 613 (1,131) (185) %

Provision for income taxes (benefit) 196 (2,531) 2,727 108 %

Net loss $ (10,659) $ (7,805) $ 2,854 37 %

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,

The following tables set forth our net revenue by geography and product category for the three months ended March 31, 2025 and 2024 (dollars in thousands):

Three Months Ended March 31,

Product sales by geographic location:

$ 40,891 $ 34,305

$ 42,714 $ 29,360 $ 118,269 $ 82,748

International 11,520 10,380

Total $ 52,411 $ 44,685

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

Three Months Ended March 31,

Product sales by category:

2024 2023 2024 2023

Trauma and deformity $ 37,867 $ 33,302

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Total $ 52,411 $ 44,685

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.

Net revenue increased $7.7 million, or 17%, from $44.7 million for the three months ended March 31, 2024 to $52.4 million for the three months ended March 31, 2025.

The increase during the three months ended March 31, 2025 was primarily driven by strong performance across global Trauma and Deformity, Scoliosis and OP Specialty Bracing.

Trauma and deformity sales increased $4.6 million, or 14%, from $33.3 million during the three months ended March 31, 2024, to $37.9 million for the three months ended March 31, 2025.

The increase for the three month period ended March 31, 2025 was primarily driven by strong growth across numerous product lines, specifically our Cannulated Screws, PNP Femur, PediPlate, external fixation and Pega systems.

Scoliosis sales increased $3.5 million, or 34%, from $10.2 million during the three months ended

March 31, 2024, to $13.7 million for the three months ended March 31, 2025.

The increase for three month period ended March 31, 2025 was 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 $0.3 million, or 25%, during the three months ended March 31, 2025.

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 $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 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.

Cost of revenue increased $1.6 million, or 13%, from $12.5 million for the three months ended March 31, 2024 to $14.1 million for the three months ended March 31, 2025.

The increases were due primarily to sales volume.

Gross margin was 73% and 72% for the three months ended March 31, 2025 and March 31, 2024, respectively.

Sales and Marketing Expenses

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.

Sales and marketing expenses increased $2.4 million, or 17%, to $16.6 million for the three months ended March 31, 2025 from $14.2 million for the three months ended March 31, 2024.

The increase in the three months ended March 31, 2025 was due primarily to increased sales commission expenses and an overall increase in volume of units sold.

General and Administrative Expenses

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.

General and administrative expenses increased $5.6 million, or 22%, from $24.7 million for the three months ended March 31, 2024 to $30.3 million for the three months ended March 31, 2025.

The increase for the three months ended March 31, 2025 was due primarily to the additional personnel though clinic acquisitions.

Stock compensation increased $ 1.0 million for the three months ended March 31, 2025 due to the increase in personnel.

Depreciation and amortization expenses decreased $0.2 million, or 5% from $5.0 million for the three months ended March 31, 2024 to $4.8 million for the three months ended March 31, 2025.

Restructuring Expense

In 2024, the Company initiated a global restructuring plan aimed at improving operational efficiency, reducing costs by integrating the ApiFix product into the broader OP Scoliosis portfolio, and reducing staff across all of OrthoPediatrics Corp (the "2024 Restructuring Plan").

In connection with the 2024 Restructuring Plan, the Company recorded restructuring expenses of less than $0.1 million for the three months ended March 31, 2025 compared to $0 for the three months ended March 31, 2024 .

Research and Development Expenses

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.

Research and development expenses decreased $0.6 million, or 22%, from $3.0 million for the three months ended March 31, 2024 to $2.4 million for the three months ended March 31, 2025.

The decrease for the three months ended March 31, 2025 was primarily due to the timing of product development during the first quarter of 2024 compared to the first quarter of 2025.

Total Other (Income) Expenses

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.

Other income was $0.5 million for the three months ended March 31, 2025 compared to other expense of $0.6 million for the three months ended March 31, 2024, a change of $1.1 million or 185%.

The change for the three months ended March 31, 2025 was primarily driven by an increase in foreign exchange gain.

Liquidity and Capital Resources

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.

We have incurred operating losses since inception which resulted in negative cash flows used in operating activities of $4.2 million and $6.7 million for the three months ended March 31, 2025 and 2024, respectively.

As of March 31, 2025, we had an accumulated deficit of $246.2 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, 2024, we had cash and cash equivalents, restricted cash and short-term investments of $78.1 million.

At March 31, 2025, we had cash and cash equivalents, restricted cash and short-term investments of $60.8 million.

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

Nine Months Ended September 30,

Three Months Ended March 31,

Net cash used in operating activities $ (4,156) $ (6,690)

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

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

Net cash used in investing activities (5,987) (3,679)

Net cash used in financing activities (126) (573)

Effect of exchange rate changes on cash, cash equivalents and restricted cash (79) 1,479

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

Net decrease in cash, cash equivalents and restricted cash $ (10,348) $ (9,463)

Cash Used in Operating Activities

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.

Net cash used in operating activities was $4.2 million and $6.7 million for the three months ended March 31, 2025 and 2024, 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 $26.0 million for the nine months ended September 30, 2024 compared to $23.4 million for the nine months ended September 30, 2023.

Net cash used for working capital was $1.2 million for the three months ended March 31, 2025 compared to $4.9 million for the three months ended March 31, 2024.

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 (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 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.

Cash Used in Investing Activities

Net cash provided by investing activities for the three months ended March 31, 2025 was $6.0 million compared to $3.7 million for the three months ended March 31, 2024.

Net cash used in investing activities for the three months ended March 31, 2025 consisted primarily of the purchases of property, plant and equipment of $4.2 million, along with the investment in private companies.

The increase in cash related to investing activities is primarily driven by no longer having cash provided by the sale of short term marketable securities to offset cash used in business combinations.

Cash Used in Financing Activities

Net cash used in financing activities for the three months ended March 31, 2025 was $0.1 million compared to $0.6 million for the three months ended March 31, 2024.

Net cash for the three months ended March 31, 2025 consisted of payments on clinic acquisition notes and mortgage notes.

Credit Agreement

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

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.

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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.

No shares have been purchased under this program as of March 31, 2025.

The dollar limit on repurchases under the program after December 21, 2024 was reduced to $250,000 per annum.

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.

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

Tawani Mortgage

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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Our revenue is typically higher in the summer months and holiday periods, driven by higher sales of our trauma and deformity and scoliosis products, which is influenced by the higher incidence of pediatric surgeries during these periods due to recovery time provided by breaks in the school year.

Additionally, our scoliosis patients tend to have additional health challenges that make scheduling their procedures variable in nature.

Additionally,

our scoliosis patients tend to have additional health challenges that make scheduling their procedures variable in nature.

Critical Accounting Policies and Significant Judgments and Estimates

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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