ORTHOPEDIATRICS CORP 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the condensed consolidated financial statements and related notes thereto contained elsewhere in this quarterly report, as well as the information under "Note Regarding Forward-Looking Statements." The description of our business included in this quarterly report is summary in nature and only includes material developments that have occurred since the latest full description. 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 5, 2025, which section is incorporated herein by reference. Overview 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 25 largely neglected by the orthopedic industry. We currently serve three of the largest categories in this market. We estimate that the portion of this market that we currently serve represents a $6.2 billion opportunity globally, including over $2.8 billion in the United States. We sell implants, instruments and specialized braces to our customers for use by pediatric orthopedic surgeons, orthotists or physical therapists to treat orthopedic conditions in children. We provide our implants in sets that consist of a range of implant sizes and include the instruments necessary to perform the surgical procedure. 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. 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 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 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. 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. 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 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, and expanding our product offering as well as our O&P clinic network. 26 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 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 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 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. 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. 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 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 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; 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 2023 and 2022, 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. The typical season shows an increase in mid-September, peaks in late December and drops around mid-April; 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, but we will continue to monitor this dynamic as we get closer to the traditional peak of RSV season. 27 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 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) % Net revenue $ 52,411 $ 44,685 $ 7,726 17 % Cost of revenue 14,149 12,511 1,638 13 % Sales and marketing expenses 16,572 14,169 2,403 17 % General and administrative expenses 30,280 24,730 5,550 22 % Restructuring 40 — 40 100 % Research and development expenses 2,351 2,998 (647) (22) % 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 % Net Revenue 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: 2025 2024 U.S. $ 40,891 $ 34,305 International 11,520 10,380 Total $ 52,411 $ 44,685 Three Months Ended March 31, Product sales by category: 2025 2024 Trauma and deformity $ 37,867 $ 33,302 Scoliosis 13,664 10,203 Sports medicine/other 880 1,180 Total $ 52,411 $ 44,685 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 28 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 $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 $2.4 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 $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 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 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. 29 Liquidity and Capital Resources 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 March 31, 2025, we had cash and cash equivalents, restricted cash and short-term investments of $60.8 million. Cash Flows The following table sets forth our cash flows from operating, investing and financing activities for the periods indicated (dollars in thousands): Three Months Ended March 31, 2025 2024 Net cash used in operating activities $ (4,156) $ (6,690) 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 decrease in cash, cash equivalents and restricted cash $ (10,348) $ (9,463) Cash Used in Operating Activities 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 $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 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. 30 Indebtedness 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. 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. 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. 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. Pursuant to the terms of the mortgage note, we pay Tawani Enterprises Inc. monthly principal and interest installments of $15,543, with interest compounded at 5% until maturity in August 2028, at which time a final payment of remaining principal and interest will become due. See Note 6 - Debt and Credit Arrangements in Item 1 for further detail regarding our debt. Pediatric Orthopedic Business Seasonality 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, 31 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 There were no material changes to our critical accounting policies that are disclosed in our audited consolidated financial statements for the year ended December 31, 2024 filed with the SEC on March 5, 2025. Recent Accounting Pronouncements 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.