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 Securities and Exchange Commission ("SEC") on March 4, 2026, 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 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 26 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 over 50 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 90 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 30 independent sales agencies employing 240 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. In 2025, we opened a warehouse in the Netherlands. In November 2025, we established a legal entity in Brazil to sell and distribute directly to the local market. 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. Our global inventory, which primarily consists of implants and instruments held in our warehouses, with third-party independent sales agencies or distributors, or consigned directly with hospitals, are considered finished goods and are purchased from third parties. The majority of this inventory is non- sterile, metallic implants and instruments that do not have an expiration date or shelf life. We continuously monitor our global inventory for excess or obsolete items in relation to estimated forecasted product demand and product life cycles. Revenue is not recognized at the time of consignment, as we maintain control over the 27 inventory. Revenue is recognized only upon implantation, at which point an invoice is issued. During 2026, the Company recorded adjustments to revenue related to finalization of payer reimbursement rates applicable to prior-period services. For the six months ended June 30, 2026, consignment sales accounted for approximately 60% of our total net sales. Inventory held on consignment at sales agencies, distributors, or other customers is approximately 60% of gross inventory. 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 1,382,000 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 businesses 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 2025, 2024, 2023, and 2022, we determined that a triggering event had occurred indicating it was more likely than not the fair value of certain of our trademark assets were 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 $4.2 million, $1.8 million, $1.0 million and $3.6 million were recorded in 2025, 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. 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 SEC on March 4, 2026 and in other reports filed with the SEC that discuss the risks and factors that may affect our business. 28 Summary of Statements of Operations for the Three and Six Months Ended June 30, 2026 and 2025 The following table sets forth our results of operations for the three and six months ended June 30, 2026 and 2025 (dollars in thousands): Three Months Ended June 30, Six Months Ended June 30, 2026 2025 Increase (Decrease) % 2026 2025 Increase (Decrease) % Net revenue $ 70,508 $ 61,082 $ 9,426 15 % $ 129,869 $ 113,493 $ 16,376 14 % Cost of revenue 18,142 17,063 1,079 6 % 34,113 31,212 2,901 9 % Sales and marketing expenses 21,294 19,103 2,191 11 % 39,764 35,675 4,089 11 % General and administrative expenses 32,814 30,443 2,371 8 % 63,837 60,723 3,114 5 % Restructuring 1 2,971 (2,970) (100) % 1 3,011 (3,010) (100) % Research and development expenses 2,325 2,159 166 8 % 4,556 4,510 46 1 % Other expense (income), net 2,861 (3,593) 6,454 180 % 5,385 (4,111) 9,496 231 % Provision for income taxes 234 49 185 378 % 63 245 (182) (74) % Net loss $ (7,163) $ (7,113) $ 50 1 % $ (17,850) $ (17,772) $ 78 — % Net Revenue The following tables set forth our net revenue by geography and product category for the three and six months ended June 30, 2026 and 2025 (dollars in thousands): Three Months Ended June 30, Six Months Ended June 30, Product sales by geographic location: 2026 2025 2026 2025 U.S. $ 54,791 $ 48,147 $ 100,100 $ 89,039 International 15,717 12,935 29,769 24,454 Total $ 70,508 $ 61,082 $ 129,869 $ 113,493 Three Months Ended June 30, Six Months Ended June 30, Product sales by category: 2026 2025 2026 2025 Trauma and deformity $ 52,632 $ 41,655 $ 95,677 $ 79,521 Scoliosis 16,876 18,522 32,319 32,186 Sports medicine/other 1,000 905 1,873 1,786 Total $ 70,508 $ 61,082 $ 129,869 $ 113,493 Net revenue increased $9.4 million, or 15%, from $61.1 million for the three months ended June 30, 2025 to $70.5 million for the three months ended June 30, 2026. Net revenue increased $16.4 million, or 14%, from $113.5 million for the six months ended June 30, 2025 to $129.9 million for the six months ended June 30, 2026. The increase during the three and six months ended June 30, 2026 was primarily driven by strong performance across global Trauma and Deformity and OP Specialty Bracing. Trauma and deformity sales increased $11.0 million, or 26%, from $41.7 million during the three months ended June 30, 2025, to $52.6 million for the three months ended June 30, 2026, and sales increased $16.2 million, or 20%, from $79.5 million for the six months ended June 30, 2025 to $95.7 million for the six months ended June 30, 2026. The increase for the three and six month periods ended June 30, 2026 was primarily driven by strong growth across numerous product lines, specifically our Cannulated Screws, PNP Femur, PediPlates, and Pega systems, the addition of 3P Hip, as well as continued OPSB growth. Scoliosis sales decreased $1.6 million, or 9%, from $18.5 million during the three months ended June 30, 2025, to $16.9 million for the three months ended June 30, 2026, and sales remained relatively flat for the 29 six months ended June 30, 2026 compared to the six months ended June 30, 2025. The decrease for the three month period ended June 30, 2026 was primarily driven by decreased revenue generated from 7D Technology as well as lower set sales to our international stocking distributors. These declines were partially offset by increased Response fusion revenue as well as the addition of Verteglide. Sports medicine / other increased $0.1 million, or 10%, during the three months ended June 30, 2026 compared to the three months ended June 30, 2025, and $0.1 million, or 5%, during the six months ended June 30, 2026 compared to the six months ended June 30, 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 $1.1 million, or 6%, from $17.1 million for the three months ended June 30, 2025 to $18.1 million for the three months ended June 30, 2026. Cost of revenue increased $2.9 million, or 9%, from $31.2 million for the six months ended June 30, 2025 to $34.1 million for the six months ended June 30, 2026. The increase was due primarily to sales volume. Gross margin was 74% and 72% for the three months ended June 30, 2026 and June 30, 2025, respectively. Gross margin was 74% and 72% for the six months ended June 30, 2026 and June 30, 2025, respectively. Sales and Marketing Expenses Sales and marketing expenses increased $2.2 million, or 11%, to $21.3 million for the three months ended June 30, 2026 from $19.1 million for the three months ended June 30, 2025. Sales and marketing expenses increased $4.1 million, or 11%, to $39.8 million for the six months ended June 30, 2026 from $35.7 million for the six months ended June 30, 2025. The increase in the three and six months ended June 30, 2026 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 $2.4 million, or 8%, from $30.4 million for the three months ended June 30, 2025 to $32.8 million for the three months ended June 30, 2026, and increased $3.1 million, or 5%, from $60.7 million for the six months ended June 30, 2025 to $63.8 million for the six months ended June 30, 2026. The increase for the three and six months ended June 30, 2026 was primarily due to the additional personnel supporting clinic expansions and small-scale acquisitions. General and administrative stock compensation decreased $0.2 million for the six months ended June 30, 2026 compared to the six months ended June 30, 2025. Depreciation and amortization expenses increased $0.4 million, or 7%, from $4.9 million for the three months ended June 30, 2025 to $5.3 million for the three months ended June 30, 2026, and increased $1.0 million, or 10%, from $9.7 million for the six months ended June 30, 2025 to $10.7 million for the six months ended June 30, 2026. 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 nominal restructuring expenses for the three and six months ended June 30, 2026 compared to $3.0 million for the three and six months ended June 30, 2025 . 30 Research and Development Expenses Research and development expenses increased $0.1 million, or 8%, from $2.2 million for the three months ended June 30, 2025 to $2.3 million for the three months ended June 30, 2026, and slightly increased by 1%, from $4.5 million for the six months ended June 30, 2025 to $4.6 million for the six months ended June 30, 2026. Total Other Expense (Income) Other expense was $2.9 million for the three months ended June 30, 2026 compared to other income of $3.6 million for the three months ended June 30, 2025, a change of $6.5 million or 180%, and other expense was $5.4 million for the six months ended June 30, 2026 compared to other income of $4.1 million for the six months ended June 30, 2025, a change of $9.5 million, or 231%. The change for the three and six months ended June 30, 2026 was driven by additional interest expense in 2026 compared to 2025 and less interest income earned due to having less cash invested in 2026 compared to 2025, as well as changes in foreign exchange gains and losses. We incurred a foreign exchange transaction loss for the six months ended June 30, 2026 driven largely by the strengthening of the US Dollar against the Euro, whereas we incurred a foreign exchange transaction gain for the six months ended June 30, 2025 when the US Dollar weakened against the Euro. Liquidity and Capital Resources We have incurred operating losses since inception which resulted in negative cash flows used in operating activities of $2.4 million and $14.6 million for the six months ended June 30, 2026 and 2025, respectively. As of June 30, 2026, we had an accumulated deficit of $293.1 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. As of June 30, 2026, the Company is in compliance with all debt covenants. At June 30, 2026, we had cash and cash equivalents, restricted cash and short-term investments of $47.9 million. Cash Flows 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, 2026 2025 Net cash used in operating activities $ (2,359) $ (14,618) Net cash provided by (used in) investing activities 1,213 (9,532) Net cash (used in) provided by financing activities (1,351) 24,674 Effect of exchange rate changes on cash, cash equivalents and restricted cash (68) 304 Net (decrease) increase in cash, cash equivalents and restricted cash $ (2,565) $ 828 Cash Used in Operating Activities Net cash used in operating activities was $2.4 million and $14.6 million for the six months ended June 30, 2026 and 2025, respectively. Net cash used for working capital was $3.5 million for the six months ended June 30, 2026 compared to $14.6 million for the six months ended June 30, 2025. The decrease in cash used in operating activities was primarily driven by lower inventory purchases as well as strong accounts receivable collections compared to the six months ended June 30, 2025. 31 Cash Provided by (Used in) Investing Activities Net cash provided by investing activities for the six months ended June 30, 2026 was $1.2 million compared to cash used in investing activities of $9.5 million for the six months ended June 30, 2025. Net cash used in investing activities for the six months ended June 30, 2026 consisted primarily of the acquisitions of $5.9 million, purchases of property, plant and equipment of $5.8 million, offset by $13.0 million of proceeds from the sale of short-term marketable securities. Cash (Used in) Provided by Financing Activities Net cash used in financing activities for the six months ended June 30, 2026 was $1.4 million compared to cash provided by financing activities of $24.7 million for the six months ended June 30, 2025. The increase in cash used in financing activities was primarily driven by not drawing on debt compared to the six months ended June 30, 2025. Indebtedness Term Loan Agreement and Convertible Notes On August 5, 2024, the Company signed a $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 and Guaranty, (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 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 represented 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 were repurchased under the program which reduced to $0.25 million on December 31, 2024. The proceeds from the financing were used to repay the Company’s outstanding debt of approximately $10 million with MidCap, 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. On March 31, 2026, the Company and its wholly owned domestic subsidiaries, as borrowers (collectively, the “Credit Parties”), entered into a First Amendment (the “Braidwell Amendment”) to that certain Credit Agreement and Guaranty (the “Term Loan Agreement”) dated August 5, 2024, by and among the Credit Parties, any additional borrowers from time to time party thereto, any guarantors from time to time party thereto, one or more funds managed by Braidwell LP, as lenders, the other lenders from time to time party thereto, and Wilmington Trust, National Association, as agent. The Braidwell Amendment provides the 32 Company with incremental committed financing capacity by establishing a new delayed draw term loan facility in an aggregate principal amount not to exceed $20.0 million, which, subject to certain conditions set forth in the Braidwell Amendment, may be drawn until June 30, 2027, in minimum $10.0 million increments. The delayed draw structure allows the Company to access capital only as needed, supporting disciplined liquidity management and capital deployment. The facility features similar terms to those previously contained in the Term Loan Agreement, including: interest at a rate per annum equal to the SOFR Interest Rate (with a floor of 3.25%) plus 6.50%; a Company election to make a payment-in-kind interest payment equal to 1.00% per annum of the interest rate; interest-only until the August 5, 2029 maturity date; and certain financial covenants. The Company believes these terms provide an efficient and flexible source of capital while preserving near-term cash flow and is not required to draw on the delayed draw facility in connection with the Braidwell Amendment. The Company is also obligated to pay a 1.00% upfront fee, a 0.05% per annum delayed draw ticking fee, and certain exit fees and prepayment fees generally consistent with those contained in 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, 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, 2025 filed with the SEC on March 4, 2026. 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.