OrthoPediatrics(KIDS) - 2020 Q2 - Quarterly Report

Note Regarding Forward-Looking Statements All non-historical statements are forward-looking, subject to risks and uncertainties, including the COVID-19 pandemic's impact - All statements in this report, other than historical facts, are forward-looking and involve known and unknown risks, uncertainties, and other factors, including the impact of the COVID-19 pandemic, that may cause actual results to differ materially[9] - Key areas of forward-looking statements include the company's ability to achieve or sustain profitability, raise additional capital, commercialize new products, comply with government regulations, maintain and expand its sales network, and protect intellectual property rights[11] PART I. FINANCIAL INFORMATION This section presents the company's unaudited condensed consolidated financial statements and management's financial analysis ITEM 1. Financial Statements (Unaudited) This section presents OrthoPediatrics Corp.'s unaudited condensed consolidated financial statements and related notes Condensed Consolidated Balance Sheets This section presents the company's financial position, detailing assets, liabilities, and equity at specific dates Condensed Consolidated Balance Sheets | Metric | June 30, 2020 (in Thousands) | December 31, 2019 (in Thousands) | | :--- | :--- | :--- | | Total Assets | $328,491 | $182,154 | | Total Liabilities | $86,029 | $39,793 | | Total Stockholders' Equity | $242,462 | $142,361 | | Cash | $113,054 | $70,777 | | Inventories, net | $48,875 | $38,000 | | Goodwill | $68,420 | $13,773 | - Total assets increased by $146.3 million from December 31, 2019, to June 30, 2020, primarily driven by a $42.3 million increase in cash and a $54.6 million increase in goodwill[14] Condensed Consolidated Statements of Operations This section details the company's financial performance, including revenue, gross profit, and net loss Condensed Consolidated Statements of Operations | Metric (in Thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Change (YoY) | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | Change (YoY) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Net Revenue | $13,593 | $18,200 | $(4,607) (-25.3%) | $29,949 | $32,856 | $(2,907) (-8.8%) | | Gross Profit | $10,061 | $13,619 | $(3,558) (-26.1%) | $22,274 | $24,274 | $(2,000) (-8.2%) | | Operating Loss | $(7,017) | $(1,790) | $(5,227) | $(11,514) | $(4,507) | $(7,007) | | Net Loss | $(9,447) | $(2,618) | $(6,829) | $(14,392) | $(5,638) | $(8,754) | | Net Loss Per Share (Basic & Diluted) | $(0.54) | $(0.18) | $(0.36) | $(0.85) | $(0.39) | $(0.46) | - Net revenue decreased by 25% for the three months and 9% for the six months ended June 30, 2020, primarily due to the global suspension of elective surgeries related to the COVID-19 pandemic[16][168] - Net loss significantly widened, increasing by 261% for the three months and 155% for the six months ended June 30, 2020, compared to the prior year periods[16] Condensed Consolidated Statements of Comprehensive Loss This section presents the company's comprehensive loss, including net loss and other comprehensive income/loss Condensed Consolidated Statements of Comprehensive Loss | Metric (in Thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Net Loss | $(9,447) | $(2,618) | $(14,392) | $(5,638) | | Foreign currency translation adjustment | $1,522 | $(133) | $164 | $168 | | Comprehensive Loss | $(7,925) | $(2,751) | $(14,228) | $(5,470) | - The foreign currency translation adjustment positively impacted comprehensive loss in Q2 2020 by $1.5 million, compared to a negative impact of $0.1 million in Q2 2019[19] Condensed Consolidated Statements of Stockholders' Equity This section outlines changes in the company's stockholders' equity, including common stock and accumulated deficit Condensed Consolidated Statements of Stockholders' Equity | Metric (in Thousands) | Balance at January 1, 2020 | Balance at June 30, 2020 | | :--- | :--- | :--- | | Common Stock Value | $4 | $5 | | Additional Paid-in Capital | $271,182 | $385,510 | | Accumulated Deficit | $(128,822) | $(143,214) | | Total Stockholders' Equity | $142,361 | $242,462 | - Total stockholders' equity increased by $100.1 million from January 1, 2020, to June 30, 2020, primarily due to $70.2 million in net proceeds from common stock issuance and $37.6 million from the ApiFix acquisition consideration[22][41] Condensed Consolidated Statements of Cash Flows This section details the company's cash flows from operating, investing, and financing activities Condensed Consolidated Statements of Cash Flows | Metric (in Thousands) | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | | Net cash used in operating activities | $(14,707) | $(10,414) | | Net cash used in investing activities | $(9,349) | $(58,657) | | Net cash provided by financing activities | $66,427 | $30,598 | | Net increase (decrease) in cash | $42,388 | $(38,473) | | Cash and restricted cash, end of period | $114,415 | $22,218 | - Net cash provided by financing activities more than doubled in H1 2020 to $66.4 million, primarily driven by $70.2 million in proceeds from common stock issuance[24][182] - Net cash used in investing activities significantly decreased to $9.3 million in H1 2020 from $58.7 million in H1 2019, mainly due to lower acquisition spending compared to the Vilex and Orthex acquisition in 2019[24][181] Notes to Condensed Consolidated Financial Statements This section provides detailed explanations of accounting policies, business combinations, debt, and other financial details NOTE 1 – BUSINESS This note describes OrthoPediatrics Corp.'s business, focus on pediatric orthopedic devices, and recent acquisitions - OrthoPediatrics Corp. is a medical device company focused on designing, developing, and marketing anatomically appropriate implants and devices for children with orthopedic conditions[28] - The company expanded its direct sales operations internationally to the United Kingdom, Australia, New Zealand (2017), Canada (2018), Belgium, Netherlands (2019), and Italy (2020)[29] - Recent acquisitions include Telos Partners, LLC (regulatory consulting, March 2020), ApiFix, Ltd. (minimally invasive scoliosis system, April 2020), and intellectual property assets from Band-Lok, LLC (Tether Clamp System, June 2020)[32][33][35] NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES This note outlines the significant accounting policies used in preparing the condensed consolidated financial statements - The condensed consolidated financial statements are prepared in conformity with GAAP and include all wholly-owned subsidiaries, with intercompany balances and transactions eliminated[37][38] - Revenue is recognized when control of promised goods or services is transferred to customers, typically upon implantation or shipment, with specific policies for U.S. (consigned to independent sales agencies) and international sales (direct or through stocking distributors)[46][48][49] - The company has an accumulated deficit of $143.2 million as of June 30, 2020, but believes its cash balance and expected cash flows are sufficient to maintain operations for more than the next twelve months[40][41] NOTE 3 – BUSINESS COMBINATION This note details the accounting for recent business combinations, including the ApiFix and Telos acquisitions ApiFix Acquisition (April 1, 2020) | Item | Amount (in Thousands) | | :--- | :--- | | Total Acquisition Consideration | $87,379 | | Cash Acquired | $344 | | Common Stock Issued | $35,176 | | Anniversary Payments (Contingent) | $30,000 | | System Sales Payment (Contingent) | $41,741 | | Goodwill Recognized | $53,423 | | Identifiable Intangible Assets | $32,950 | Telos Acquisition (March 9, 2020) | Item | Amount (in Thousands) | | :--- | :--- | | Total Acquisition Consideration | $3,318 | | Cash Acquired | $81 | | Common Stock Issued | $1,750 | | Goodwill Recognized | $1,912 | | Identifiable Intangible Assets | $1,160 | - The company divested Vilex's adult product offerings on December 31, 2019, for a $25 million reduction in a term note owed to Squadron, along with an exclusive license arrangement for certain intellectual property[96] NOTE 4 - GOODWILL AND INTANGIBLE ASSETS This note provides details on the company's goodwill and amortizable and non-amortizable intangible assets Goodwill Changes (in Thousands) | Period | Amount | | :--- | :--- | | Goodwill at January 1, 2020 | $13,773 | | Telos acquisition | $1,912 | | ApiFix acquisition | $53,423 | | Goodwill at June 30, 2020 | $68,420 | Amortizable Intangible Assets (June 30, 2020, in Thousands) | Asset Type | Gross Intangible Assets | Accumulated Amortization | Net Intangible Assets | Weighted-Average Amortization Period | | :--- | :--- | :--- | :--- | :--- | | Patents | $33,182 | $(1,019) | $32,163 | 15.3 years | | Intellectual Property | $8,950 | $(473) | $8,477 | 10.8 years | | License Agreements | $2,765 | $(1,199) | $1,566 | 3.1 years | | Total | $44,897 | $(2,691) | $42,206 | | - Non-amortizing trademarks increased from $4.49 million at December 31, 2019, to $13.36 million at June 30, 2020, primarily due to the acquisition of ApiFix and Telos trademarks[104] NOTE 5 - DISCONTINUED OPERATIONS This note details financial information for Vilex's adult product offerings, reported as discontinued operations after divestiture Discontinued Operations (Three and Six Months Ended June 30, 2019, in Thousands) | Metric | Amount | | :--- | :--- | | Revenue | $414 | | Operating expenses | $507 | | Depreciation and amortization | $66 | | Operating loss | $(159) | | Loss from discontinued operations | $(159) | - The financial information for Vilex's adult product offerings, divested on December 31, 2019, has been segregated and reported as discontinued operations for the three and six months ended June 30, 2019[105][106] NOTE 6 - DEBT AND CREDIT ARRANGEMENTS This note outlines the company's long-term debt, credit facilities, and related interest expenses Long-term Debt (in Thousands) | Debt Type | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Note payable to Squadron | $19,907 | $19,891 | | Revolving credit facility with Squadron | $0 | $5,000 | | Mortgage payable to affiliate | $1,238 | $1,300 | | Total Debt | $21,145 | $26,191 | - The $30 million Term Note B with Squadron, used to finance a portion of the Vilex Companies acquisition, was fully repaid on December 31, 2019[109] - Interest expense related to notes payable to Squadron and Tawani was $1.4 million for the three months ended June 30, 2020, and $1.8 million for the six months ended June 30, 2020, reflecting an increase from prior year periods[16][113] NOTE 7 - STRATEGIC ARRANGEMENTS This note describes the company's strategic research and development agreement with Case Western Reserve University - The company has a ten-year agreement with Case Western Reserve University (CASE) for research and development, leveraging the Hamann-Todd Collection for pediatric implant design[114] - CASE receives a minimum annual royalty of $10,000 or 3% of net sales, plus milestone payments for FDA approval ($5,000) and general product launch ($10,000) for new products[115] Royalty Expense to CASE (in Thousands) | Period | Amount | | :--- | :--- | | Three Months Ended June 30, 2020 | $24 | | Three Months Ended June 30, 2019 | $37 | | Six Months Ended June 30, 2020 | $55 | | Six Months Ended June 30, 2019 | $74 | NOTE 8 - INCOME TAXES This note explains the company's income tax provision, deferred tax assets, and the impact of the CARES Act - The CARES Act, enacted in March 2020, did not result in any material adjustments to the company's income tax provision for the three or six months ended June 30, 2020[117][118] - The company has a zero tax provision due to recurring losses and a full valuation allowance offsetting deferred tax assets[119][120] - As of December 31, 2019, the company had federal and state tax loss carryforwards of $86.8 million and $64.0 million, respectively, subject to Section 382 limitations[120] NOTE 9 - STOCKHOLDERS' EQUITY This note details changes in stockholders' equity, including stock option and restricted stock activity and compensation Stock Option Activity | Metric | Options | Weighted-Average Exercise Price | | :--- | :--- | :--- | | Outstanding at January 1, 2020 | 70,628 | $30.97 | | Exercised | (41,370) | $30.97 | | Outstanding at June 30, 2020 | 29,258 | $30.97 | Restricted Stock Activity | Metric | Restricted Stock | Weighted-Average Remaining Contractual Terms (in Years) | | :--- | :--- | :--- | | Outstanding at January 1, 2020 | 318,002 | 1.7 | | Granted | 158,310 | | | Forfeited | (568) | | | Vested | (38,397) | | | Outstanding at June 30, 2020 | 437,347 | 1.6 | - Stock-based compensation expense on restricted stock increased significantly to $2.5 million for the three months and $3.5 million for the six months ended June 30, 2020, primarily due to a one-time $1.3 million stock grant to the CEO[127] NOTE 10 – NET LOSS PER SHARE This note presents the calculation of basic and diluted net loss per share for the reported periods Net Loss Per Share (Basic and Diluted) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Net Loss | $(9,447) | $(2,618) | $(14,392) | $(5,638) | | Weighted Average Shares | 17,549,118 | 14,451,979 | 16,986,485 | 14,409,752 | | Net Loss Per Share | $(0.54) | $(0.18) | $(0.85) | $(0.39) | - Diluted net loss per common share is the same as basic net loss per common share for all periods presented due to the company incurring a net loss[130] - 467,009 contingently issuable and convertible equity shares (restricted stock, stock options, warrants) were excluded from the diluted net loss per share calculation for the six months ended June 30, 2020, as their effect would have been anti-dilutive[131] NOTE 11 – BUSINESS SEGMENT This note identifies the company's single operating segment and provides product sales data by region and category - The company operates as one operating and reporting segment, OrthoPediatrics Corp., focused on designing, developing, and marketing implants and devices for children with orthopedic problems[132] Product Sales by Geographic Location (in Thousands) | Region | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | U.S. | $12,146 | $13,848 | $25,530 | $24,115 | | International | $1,447 | $4,352 | $4,419 | $8,741 | | Total | $13,593 | $18,200 | $29,949 | $32,856 | Product Sales by Category (in Thousands) | Category | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Trauma and deformity | $9,220 | $11,887 | $21,430 | $21,904 | | Scoliosis | $3,836 | $5,866 | $7,547 | $10,124 | | Sports medicine/other | $537 | $447 | $972 | $828 | | Total | $13,593 | $18,200 | $29,949 | $32,856 | NOTE 12 - RELATED PARTY TRANSACTIONS This note details transactions with related parties, including payments to Structure Medical and the Vilex divestiture Payments to Structure Medical (in Thousands) | Period | Amount | | :--- | :--- | | Three Months Ended June 30, 2020 | $934 | | Three Months Ended June 30, 2019 | $1,729 | | Six Months Ended June 30, 2020 | $2,135 | | Six Months Ended June 30, 2019 | $2,493 | - The company divested Vilex to an affiliate of Squadron for a $25 million reduction in a term note and an exclusive perpetual license agreement for Orthex intellectual property, valued at $12.41 million[137] NOTE 13 - EMPLOYEE BENEFIT PLAN This note describes the company's 401(k) Retirement Plan and its matching contribution policy - The company offers a 401(k) Retirement Plan with discretionary matching contributions, which increased from 3% to 4% of employees' salary effective January 1, 2020[138] NOTE 14 – COMMITMENTS AND CONTINGENCIES This note outlines the company's lease liabilities, ongoing patent litigation, and royalty commitments - As of June 30, 2020, the company recorded a lease liability of $120,000 and a corresponding right-of-use asset of $123,000[140] - The company is involved in an ongoing patent infringement lawsuit with K2M, Inc. regarding its RESPONSE™ spine systems, with a trial date set for April 12, 2021[141] - Royalty commitments range from 0.5% to 20% of sales, with minimum annual commitments of $500,000 through 2026 ceasing upon the purchase of Band-Lok assets in June 2020[143] NOTE 15 – SUBSEQUENT EVENTS This note discloses significant events after the reporting period, including changes to credit facilities and debt repayment - On August 4, 2020, the revolving credit commitment with Squadron Capital LLC was increased from $15 million to $25 million, and its maturity date was extended to January 1, 2024[145][146] - On July 15, 2020, the $20 million principal amount outstanding under Term Note A of the Loan Agreement was fully repaid[146] ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial performance, condition, and future outlook Overview This section provides an overview of OrthoPediatrics Corp.'s business, market focus, products, and recent strategic activities - OrthoPediatrics Corp. is the only medical device company exclusively focused on providing comprehensive product offerings to the pediatric orthopedic market, estimated at a $3.2 billion global opportunity[147] - The company markets 35 surgical systems across three main categories: trauma and deformity, scoliosis, and sports medicine/other, primarily through independent sales agencies in the U.S. and independent stocking distributors internationally[149][150][151] - Recent strategic activities include the acquisitions of Telos (regulatory consulting), ApiFix (minimally invasive scoliosis system), and Band-Lok intellectual property, following the 2019 acquisition of Vilex/Orthex and divestiture of Vilex's adult products[154][155][157] Impact of COVID-19 on our Business This section discusses the adverse impact of the COVID-19 pandemic on the company's operations, revenue, and liquidity - The company implemented rigorous safety measures, including social distancing, remote work, and travel suspensions, to protect employees, customers, partners, and suppliers[160] - No significant supply chain interruptions have been experienced, but the company increased certain inventory levels to mitigate potential risks[161] - Revenue has been reduced due to global delays in elective surgeries, particularly impacting international markets where elective procedures have been slower to return[162][168] - Despite uncertainties, the company believes its current cash reserves and recent equity offerings provide sufficient liquidity to manage the business for the next twelve months[163][164] Emerging Growth Company and Smaller Reporting Company Status This section explains the company's status as an emerging growth and smaller reporting company, and its accounting standard election - The company qualifies as an 'emerging growth company' and 'smaller reporting company,' which allows for specified reduced reporting and regulatory requirements[166] - The company has irrevocably elected not to avail itself of the exemption from new or revised accounting standards, thus adhering to the same standards as other public companies[166] Summary of Statements of Operations for the Three and Six Months Ended June 30, 2020 and 2019 This section summarizes the company's statements of operations for the three and six months ended June 30, 2020 and 2019 Summary of Statements of Operations for the Three and Six Months Ended June 30, 2020 and 2019 | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Change (YoY) | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | Change (YoY) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Net Revenue | $13,593 | $18,200 | $(4,607) (-25%) | $29,949 | $32,856 | $(2,907) (-9%) | | Cost of Revenue | $3,532 | $4,581 | $(1,049) (-23%) | $7,675 | $8,582 | $(907) (-11%) | | Sales and Marketing Expenses | $5,620 | $7,606 | $(1,986) (-26%) | $13,184 | $14,153 | $(969) (-7%) | | General and Administrative Expenses | $10,577 | $6,569 | $4,008 (61%) | $18,458 | $12,181 | $6,277 (52%) | | Research and Development Expenses | $881 | $1,234 | $(353) (-29%) | $2,146 | $2,447 | $(301) (-12%) | | Other Expenses | $2,430 | $669 | $1,761 (263%) | $2,878 | $972 | $1,906 (196%) | | Net Loss | $(9,447) | $(2,618) | $6,829 (261%) | $(14,392) | $(5,638) | $8,754 (155%) | Net Revenue This section analyzes the company's net revenue performance and factors influencing changes, particularly the COVID-19 pandemic Net Revenue Performance (in Thousands) | Period | Net Revenue (2020) | Net Revenue (2019) | Change (YoY) | | :--- | :--- | :--- | :--- | | Three Months Ended June 30 | $13,593 | $18,200 | $(4,607) (-25%) | | Six Months Ended June 30 | $29,949 | $32,856 | $(2,907) (-9%) | - The decrease in net revenue was primarily due to the global suspension of elective surgeries related to the COVID-19 pandemic, with international revenue decreasing at a higher rate than U.S. revenue[168] - Trauma and deformity sales declined by 22% (Q2) and 2% (H1), and Scoliosis sales declined by 35% (Q2) and 25% (H1), mainly driven by lower unit volume[169] Cost of Revenue and Gross Margin This section analyzes the company's cost of revenue and gross margin, highlighting the impact of sales volume changes Cost of Revenue and Gross Margin (in Thousands) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Cost of Revenue | $3,532 | $4,581 | $7,675 | $8,582 | | Gross Margin | 74% | 75% | 74% | 74% | - Cost of revenue decreased by 23% (Q2) and 11% (H1) due to decreased sales volume from the COVID-19 pandemic, while gross margin remained relatively stable at 74-75%[170] Sales and Marketing Expenses This section analyzes changes in sales and marketing expenses, primarily driven by sales commission fluctuations Sales and Marketing Expenses (in Thousands) | Period | 2020 | 2019 | Change (YoY) | | :--- | :--- | :--- | :--- | | Three Months Ended June 30 | $5,620 | $7,606 | $(1,986) (-26%) | | Six Months Ended June 30 | $13,184 | $14,153 | $(969) (-7%) | - Sales and marketing expenses decreased primarily due to lower sales commission expenses, driven by the decrease in unit volume sold as a result of suspended elective surgeries[172] General and Administrative Expenses This section analyzes changes in general and administrative expenses, including stock compensation and acquisition-related costs General and Administrative Expenses (in Thousands) | Period | 2020 | 2019 | Change (YoY) | | :--- | :--- | :--- | :--- | | Three Months Ended June 30 | $10,577 | $6,569 | $4,008 (61%) | | Six Months Ended June 30 | $18,458 | $12,181 | $6,277 (52%) | - The increase was primarily due to $2.3 million in increased stock compensation (including a $1.3 million one-time grant to the CEO), $0.8 million in legal expenses, and general and administrative expenses associated with the ApiFix and Telos acquisitions[173] - Depreciation and amortization expenses increased by 80% (Q2) and 74% (H1) due to increased investments in consigned surgical instrument sets and amortization of intangible assets from recent acquisitions[174] Research and Development Expenses This section analyzes changes in research and development expenses, influenced by sales decline and royalty reversals Research and Development Expenses (in Thousands) | Period | 2020 | 2019 | Change (YoY) | | :--- | :--- | :--- | :--- | | Three Months Ended June 30 | $881 | $1,234 | $(353) (-29%) | | Six Months Ended June 30 | $2,146 | $2,447 | $(301) (-12%) | - The decrease in R&D expenses was driven by a reduced investment in research and development project expenses as a result of sales decline related to the COVID-19 pandemic and the reversal of the Bandloc minimum royalty[175] Other Expenses This section analyzes the significant increase in other expenses, primarily due to fair value adjustments for contingent consideration Other Expenses (in Thousands) | Period | 2020 | 2019 | Change (YoY) | | :--- | :--- | :--- | :--- | | Three Months Ended June 30 | $2,430 | $669 | $1,761 (263%) | | Six Months Ended June 30 | $2,878 | $972 | $1,906 (196%) | - The significant increase in other expenses was primarily due to a $1.8 million fair value adjustment related to the ApiFix contingent consideration payment[176] Liquidity and Capital Resources This section discusses the company's liquidity, capital resources, accumulated deficit, and ability to meet cash needs - The company has incurred operating losses and negative cash flows from operations since inception, resulting in an accumulated deficit of $143.2 million as of June 30, 2020[177] - Despite recurring losses, the company believes its cash balance of $114.4 million at June 30, 2020, and expected operating cash flows, are sufficient to meet its cash needs for the next twelve months, supported by recent equity offerings[164][177] Cash Flows This section analyzes the company's cash flows from operating, investing, and financing activities for the reported periods Cash Flow Summary (Six Months Ended June 30, in Thousands) | Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash used in operating activities | $(14,707) | $(10,414) | | Net cash used in investing activities | $(9,349) | $(58,657) | | Net cash provided by financing activities | $66,427 | $30,598 | | Net increase (decrease) in cash | $42,388 | $(38,473) | - Operating cash usage was primarily driven by an increase in inventory of $9.6 million related to future sales growth and acquisitions[180] - Net cash provided by financing activities in H1 2020 was significantly boosted by $70.2 million from the issuance of common stock, net of issuance costs[182] Indebtedness This section details the company's loan agreements, credit facilities, and recent debt repayments - The company has a loan agreement with Squadron Capital LLC, including a Term Note A and a revolving credit facility, and a mortgage note with an affiliate[183][191] - The $30 million Term Note B, used for the Vilex acquisition, was fully repaid on December 31, 2019[185] - Subsequent to the quarter, on August 4, 2020, the revolving credit commitment was increased from $15 million to $25 million, and its maturity extended to January 1, 2024. Term Note A was repaid on July 15, 2020[146][187][188] Pediatric Orthopedic Business Seasonality This section explains the typical seasonality of the company's revenue, with higher sales during summer and holiday periods - The company's revenue is typically higher in the summer months and holiday periods, driven by increased pediatric surgeries for trauma, deformity, and scoliosis during school breaks[192] Critical Accounting Policies and Significant Judgments and Estimates This section highlights critical accounting policies and significant judgments and estimates used in financial statement preparation - The preparation of financial statements requires significant estimates and assumptions, which are inherently uncertain and could lead to material differences from actual results[193] ITEM 3. Quantitative and Qualitative Disclosures About Market Risk As a 'smaller reporting company,' OrthoPediatrics Corp. is not required to provide detailed market risk disclosures - The company is exempt from providing detailed market risk disclosures due to its 'smaller reporting company' status[194] ITEM 4. Controls and Procedures Management concluded disclosure controls were effective as of June 30, 2020, with no material changes in internal control - Management concluded that disclosure controls and procedures were effective as of June 30, 2020, providing reasonable assurance for timely and accurate reporting[196][197] - There were no material changes in the company's internal control over financial reporting during the period covered by this quarterly report[199] PART II. OTHER INFORMATION This section provides additional information, including legal proceedings, risk factors, and equity security sales ITEM 1. Legal Proceedings The company is involved in a patent infringement lawsuit with K2M, Inc., and an adverse outcome could materially affect its financial condition - The company is defending against a patent infringement lawsuit filed by K2M, Inc. related to its RESPONSE™ spine systems, with a trial date set for April 12, 2021[141][201] - An adverse resolution of this intellectual property litigation could have a material adverse effect on the company's business, operating results, and financial condition[141][201] - No other legal proceedings are currently pending that would individually or in the aggregate materially affect the company's financial position, results of operations, or cash flows[142][202] ITEM 1A. Risk Factors This section updates risk factors, highlighting the adverse impact of the COVID-19 pandemic on business operations and sales - The ongoing COVID-19 pandemic and measures to prevent its spread have adversely impacted the company's business and financial results, particularly through the postponement of elective surgeries, which utilize a majority of its products[204][206] - Governmental measures to contain COVID-19, such as travel bans and social distancing, have negatively impacted sales professionals' ability to reach physicians[206] - The ultimate impact of COVID-19 is highly uncertain and could lead to further sales declines, increased accounts receivable reserves, lower gross margins, and regional, national, or global economic slowdowns or recessions[206][207] ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds The company issued common stock for ApiFix Ltd. and Band-Lok, LLC acquisitions under Section 4(a)(2), with no proceeds used - The company issued 934,783 shares of common stock (valued at approximately $35.2 million) on April 1, 2020, for the acquisition of ApiFix Ltd[208] - The company issued 54,371 shares of common stock (valued at approximately $2.6 million) on June 10, 2020, for the purchase of certain intellectual property assets from Band-Lok, LLC[209] - Both issuances were made in reliance upon an exemption provided under Section 4(a)(2) of the Securities Act of 1933, and no proceeds were used from these sales[208][209][211] ITEM 3. Defaults Upon Senior Securities The company reported that there were no defaults upon senior securities during the period - No defaults upon senior securities were reported[215] ITEM 4. Mine Safety Disclosures The company reported that there are no mine safety disclosures - No mine safety disclosures were reported[216] ITEM 5. Other Information The company reported no failures to file under Form 8-K and no modifications to its nomination process - No failures to file under Form 8-K were reported[218] - No modifications to the nomination process were reported[220] ITEM 6. Exhibits This section lists all exhibits included or incorporated by reference, such as the ApiFix Share Purchase Agreement and certifications - The report includes various exhibits, such as the Share Purchase Agreement for ApiFix, organizational documents, registration rights agreements, loan agreements, and certifications[223] Signatures This section contains the official signatures of the company's Chief Executive Officer, President, and Chief Financial Officer - The report is officially signed by Mark C. Throdahl (Chief Executive Officer), David S. Bailey (President), and Fred L. Hite (Chief Financial Officer and Chief Operating Officer) on August 6, 2020[230]