OrthoPediatrics(KIDS) - 2020 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) The unaudited Q1 2020 financial statements report a net loss of $4.9 million, a decrease in total assets to $174.2 million, and detail recent acquisitions of Telos Partners and Apifix Ltd Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets (in thousands) | | March 31, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total current assets | $115,121 | $128,058 | | Total assets | $174,199 | $182,154 | | Total current liabilities | $13,832 | $13,663 | | Total liabilities | $34,932 | $39,793 | | Total stockholders' equity | $139,267 | $142,361 | - Cash decreased from $70.8 million at the end of 2019 to $53.6 million as of March 31, 2020[13] - Inventories increased to $44.0 million from $38.0 million at the end of 2019[13] Condensed Consolidated Statements of Operations Condensed Consolidated Statements of Operations (in thousands) | | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :--- | :--- | :--- | | Net revenue | $16,356 | $14,656 | | Gross profit | $12,213 | $10,655 | | Total operating expenses | $16,710 | $13,372 | | Operating loss | $(4,497) | $(2,717) | | Net loss | $(4,945) | $(3,020) | | Net loss per share | $(0.30) | $(0.21) | Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows (in thousands) | | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :--- | :--- | :--- | | Net cash used in operating activities | $(6,956) | $(3,471) | | Net cash used in investing activities | $(5,623) | $(4,982) | | Net cash (used in) provided by financing activities | $(4,530) | $536 | | NET DECREASE IN CASH | $(17,086) | $(7,917) | | Cash and restricted cash, end of period | $54,941 | $52,774 | Notes to Condensed Consolidated Financial Statements Notes detail business operations, key accounting policies, the $3.5 million Telos Partners acquisition, and the subsequent $39 million Apifix Ltd. acquisition - On March 9, 2020, the company purchased Telos Partners, LLC, a regulatory consulting firm, for $3.5 million in total consideration, consisting of cash and common stock[28][79] - On April 1, 2020, subsequent to the quarter end, the company acquired Apifix Ltd. for 934,768 shares of common stock (approx. $37.0 million) and $2.0 million in cash, with additional future payments contingent on milestones and revenue performance[129] Revenue by Category (in thousands) | Product sales by category: | 2020 | 2019 | | :--- | :--- | :--- | | Trauma and deformity | $12,210 | $10,017 | | Scoliosis | $3,711 | $4,258 | | Sports medicine/other | $435 | $381 | | Total | $16,356 | $14,656 | Revenue by Geography (in thousands) | Product sales by geographic location: | 2020 | 2019 | | :--- | :--- | :--- | | U.S. | $13,384 | $10,267 | | International | $2,972 | $4,389 | | Total | $16,356 | $14,656 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q1 2020 performance, noting a 12% net revenue growth to $16.4 million despite COVID-19 impacts, leading to a $4.9 million net loss Summary of Operations (in thousands) | | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | Increase (Decrease) | % Change | | :--- | :--- | :--- | :--- | :--- | | Net revenue | $16,356 | $14,656 | $1,700 | 12% | | Cost of revenue | $4,143 | $4,001 | $142 | 4% | | Sales and marketing expenses | $7,564 | $6,547 | $1,017 | 16% | | General and administrative expenses | $7,881 | $5,612 | $2,269 | 40% | | Net loss | $(4,945) | $(3,020) | $1,925 | 64% | - The COVID-19 pandemic has led to a reduction in revenue due to global delays in elective surgeries. To mitigate supply risks, the company increased certain inventory levels during the quarter[145][146] - Net revenue growth of 12% was primarily driven by a $2.2 million (22%) increase in Trauma and Deformity sales, offset by a $0.5 million (13%) reduction in Scoliosis sales[152] - General and administrative expenses increased by 40% primarily due to increased resources to support business growth, higher quality and regulatory expenses, and increased stock compensation and legal expenses[155] Item 3. Quantitative and Qualitative Disclosures About Market Risk As a "smaller reporting company," the company is exempt from providing market risk disclosures - As a "smaller reporting company," OrthoPediatrics Corp. is not required to provide the information for this item[174] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes in internal control over financial reporting - Management concluded that as of March 31, 2020, the company's disclosure controls and procedures were effective[177] - There were no changes in internal control over financial reporting during the quarter that materially affected, or are reasonably likely to materially affect, the company's internal controls[179] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is vigorously defending a patent infringement lawsuit filed by K2M, Inc. regarding its RESPONSE™ spine systems - The company is defending a patent infringement lawsuit from K2M, Inc. related to its RESPONSE™ spine systems[182] - OrthoPediatrics denies the claims, has filed counterclaims asserting the patents are invalid and not infringed, and views its case as 'particularly strong'[182] Item 1A. Risk Factors A new risk factor highlights the significant negative impact of the COVID-19 pandemic and deferred elective surgeries on business operations - A new risk factor has been added to address the adverse impact of the COVID-19 pandemic on the business and financial results[184][185] - The deferral of elective surgeries, where a majority of the company's products are used, has had and will continue to have a significant negative impact on the business[186] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company issued 36,628 shares for the Telos Partners acquisition and repurchased 4,014 shares in February 2020 - On March 9, 2020, the Company issued 36,628 shares of common stock as part of the acquisition of Telos Partners, LLC[189] - In February 2020, the company purchased 4,014 of its own shares for a total of approximately $187,000[191][192] Item 3. Defaults Upon Senior Securities No defaults upon senior securities were reported - No defaults upon senior securities were reported[193] Item 4. Mine Safety Disclosures No mine safety disclosures were reported - No mine safety disclosures were reported[194] Item 5. Other Information No other information was reported under this item - No other information was reported under this item[195][196][197][198] Item 6. Exhibits This section lists exhibits filed, including the Apifix Ltd. Share Purchase Agreement, corporate governance documents, and officer certifications - The exhibits filed with the report include the Share Purchase Agreement for the acquisition of ApiFix Ltd., loan agreements with Squadron, and certifications by the CEO and CFO[201]