OrthoPediatrics(KIDS) - 2022 Q4 - Annual Report

FORM 10-K General Information Registrant Information OrthoPediatrics Corp. is a Delaware corporation, headquartered in Warsaw, Indiana, with common stock traded on the Nasdaq Global Market under the symbol KIDS, classified as a non-accelerated filer and a smaller reporting company - OrthoPediatrics Corp. is a Delaware corporation, headquartered in Warsaw, Indiana[2] - Common Stock is traded on the Nasdaq Global Market under the symbol KIDS[3] - The registrant is a non-accelerated filer and a smaller reporting company[3] Market Value and Shares Outstanding As of June 30, 2022, the aggregate market value of common stock held by non-affiliates was approximately $471.5 million, with 22,993,446 outstanding shares by February 27, 2023 Common Stock Market Value and Shares Outstanding | Metric | Value | | :----- | :---- | | Market Value (non-affiliates, June 30, 2022) | $471.5 million | | Outstanding Shares (Feb 27, 2023) | 22,993,446 | | Par Value per Share | $0.00025 | Documents Incorporated by Reference Portions of the registrant's definitive proxy statement for its 2023 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K - Portions of the 2023 Annual Meeting of Stockholders proxy statement are incorporated by reference into Part III of this Form 10-K[8] Glossary of Acronyms and Defined Terms This section provides a glossary of acronyms and defined terms used throughout the report, including medical terms, regulatory bodies, and company-specific entities or products - The glossary defines terms such as ACL (Anterior cruciate ligament), ApiFix (acquired company), FDA (U.S. Food and Drug Administration), and Squadron (Company's largest investor)[13][14] Forward-Looking Statements The report contains forward-looking statements regarding future operations, financial position, business strategy, and product development, which are subject to known and unknown risks and uncertainties, with actual results potentially differing materially from projections - Forward-looking statements cover future results, financial position, business strategy, products, and R&D costs[16] - These statements are subject to known and unknown risks, uncertainties, and important factors that may cause actual results to differ materially[16] - The company intends these statements to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995[16] Risk Factor Summary The company's business faces numerous risks, including widespread health emergencies, unfavorable economic conditions, historical losses, the need for additional capital, and challenges in commercializing products and competing effectively, alongside regulatory compliance, intellectual property protection, and reliance on third-party sales networks - Business is subject to risks from widespread health emergencies (COVID-19, RSV) and unfavorable economic conditions (inflation, interest rates, recession)[22] - The company has incurred past losses and may struggle to achieve or sustain profitability, requiring additional capital[22] - Challenges include commercializing products, demonstrating product merits against competitors, and complying with extensive government regulations[22] - Reliance on third-party sales agencies and distributors, and protecting intellectual property rights, are also key risks[22] PART I Item 1. Business OrthoPediatrics Corp. is a medical device company exclusively focused on designing, developing, and marketing orthopedic implants, instruments, and specialized braces for children, serving three major pediatric orthopedic market categories with an estimated global market opportunity of $3.9 billion, emphasizing a direct sales model in key international markets and strategic acquisitions General Company Overview OrthoPediatrics Corp., founded in 2007, is a Delaware corporation specializing in pediatric orthopedic medical devices, which has expanded its international presence since 2011 and actively pursues acquisitions and partnerships to enhance its product offerings, reporting total assets of $427.7 million and 203 full-time employees as of December 31, 2022, with a commitment to ESG initiatives - OrthoPediatrics Corp. is a medical device company focused on anatomically appropriate implants, instruments, and braces for children with orthopedic conditions[23] - The company has expanded internationally since 2011, establishing direct sales in the UK, Australia, New Zealand, Canada, Belgium, Netherlands, Italy, Germany, Switzerland, and Austria[23] - Strategic acquisitions include Telos and ApiFix in 2020, and MD Ortho and Pega Medical in 2022, to complement product lines[24] Key Financial and Operational Data (as of Dec 31, 2022) | Metric | Value | | :----- | :---- | | Total Assets | $427.7 million | | Total Liabilities | $49.1 million | | Stockholders' Equity | $378.6 million | | Full-time Employees | 203 | - The company has an internal ESG team and focuses on environmental impact, philanthropic causes, and diversity on its Board of Directors[29][33] Company Mission and Market OrthoPediatrics is the only global medical device company exclusively focused on pediatric orthopedics, offering 46 surgical and bracing systems across trauma and deformity correction, scoliosis, and sports medicine, designed to protect growth plates, fit pediatric anatomy, and ease implant removal, with an estimated global market opportunity of $3.9 billion and $1.7 billion in the U.S. - OrthoPediatrics is the only global medical device company exclusively focused on pediatric orthopedics[33] - The company markets 46 surgical and bracing systems for trauma and deformity correction, scoliosis, and sports medicine[36] - Products are designed to protect growth plates, fit pediatric anatomy, enable earlier intervention, and ease implant removal[36][40] - The estimated global market opportunity served is $3.9 billion, with over $1.7 billion in the United States[34] Industry Overview Children's skeletal characteristics differ significantly from adults, featuring smaller, growing bones with growth plates, unique composition and vasculature, and changing shapes, while complex disorders like cerebral palsy further complicate surgical management, making specialized pediatric implants and instruments crucial for generalist pediatric orthopedic surgeons - Children's bones are smaller, growing (with growth plates), have unique composition/vasculature, and change shape as they mature[43] - Injury to growth plates can lead to growth arrest and deformity[43] - Pediatric orthopedic surgeons are generalists, treating a wide range of congenital, developmental, and traumatic conditions[44] Market Opportunity The pediatric orthopedic implant market represents a $3.9 billion global opportunity, with $1.7 billion in the U.S., segmented into trauma and deformity ($609M surgical implants, $303M specialty bracing), scoliosis ($334M fusion, $75M non-fusion), sports medicine ($249M), and smart implants ($162M), with a target market of $0.9 billion in approximately 300 U.S. pediatric hospitals performing over 62% of procedures - The pediatric orthopedic implant market is estimated at $3.9 billion globally, with $1.7 billion in the United States[45] Estimated U.S. Addressable Market Opportunity (2022) | Category | Sub-Category | Estimated Market Size (Millions) | | :----------------------- | :---------------- | :----------------------------- | | Trauma and Deformity | Surgical Implants | $609 | | | Specialty Bracing | $303 | | Scoliosis | Fusion | $334 | | | Non-Fusion | $75 | | Sports Medicine | | $249 | | Smart Implants | | $162 | - Approximately 300 U.S. hospitals perform over 62% of all pediatric trauma and deformity and scoliosis procedures, representing a target market of $0.9 billion[52][53] Competitive Advantages and Strategy OrthoPediatrics' competitive strengths include its exclusive focus on pediatric orthopedics, a comprehensive product portfolio, deep partnerships with surgeons and societies, a scalable business model, and a unique, people-focused corporate culture, with a strategy involving focusing on high-volume children's hospitals, providing a broad product portfolio, deploying instrument sets with unparalleled sales support, aggressive R&D and acquisitions, and training the next generation of pediatric orthopedic surgeons - Competitive strengths include exclusive focus on pediatric orthopedics, comprehensive product portfolio (46 systems, 11,200 SKUs), partnerships with surgeons and societies, scalable business model, and a unique culture[60] - Strategy pillars: focus on high-volume children's hospitals, broad product portfolio, deploy instrument sets with sales support, aggressive R&D and acquisitions, and training future surgeons[62][66] - The company aims to launch at least one new surgical system and multiple product line extensions annually[66] Product Portfolio and Pipeline The company's product portfolio includes 46 surgical and specialized bracing systems across trauma and deformity correction, scoliosis, and sports medicine, with 2022 revenue of $85.1 million (70% of total) for trauma and deformity, $33.4 million (27%) for scoliosis, and $3.8 million (3%) for sports medicine/other, while the product pipeline focuses on innovative new systems, line extensions, and improvements, with projects like Pediatric Nailing Platform | Tibia, Active Growing Implants, and RESPONSE Rib and Pelvic System expected for future launch Global Revenue by Product Category (2022 vs 2021) | Product Category | 2022 Revenue (Millions) | % of Total Revenue (2022) | 2021 Revenue (Millions) | % of Total Revenue (2021) | YoY Change (%) | | :----------------- | :---------------------- | :------------------------ | :---------------------- | :------------------------ | :------------- | | Trauma and Deformity | $85.1 | 70% | $65.8 | 67% | +29% | | Scoliosis | $33.4 | 27% | $28.0 | 29% | +19% | | Sports Medicine/Other | $3.8 | 3% | $4.2 | 4% | -9% | - Revenue is typically higher in summer months and holiday periods due to increased pediatric surgeries[68] - Product development objectives include innovative new systems, line extensions, and quality/cost improvements[69] - Key pipeline projects include Pediatric Nailing Platform | Tibia (beta launch 2023, full launch 2024), Active Growing Implants (smart implants for scoliosis/limb deformity), and RESPONSE Rib and Pelvic System (beta launch 2023)[71][72][73] Research and Product Development The company leverages its pediatric orthopedic experience and exclusive rights to the Hamann-Todd Collection for innovative implant and instrument development, making significant investments in R&D personnel and infrastructure with a focus on continuous improvement and efficient product development through cross-functional teams - Leverages exclusive rights to the Hamann-Todd Collection for product designs[77] - Significant investments in R&D personnel and infrastructure, with a culture of continuous improvement[78] - New products are developed by teams of engineers, commercial personnel, and surgeon advisors[78] Sales and Marketing OrthoPediatrics operates a dedicated global commercial organization, with 41 independent sales agencies and 197 sales representatives in the U.S., accounting for 68% of global revenue in 2022, and internationally works with over 70 independent stocking distributors and 14 sales agencies in 70+ countries, emphasizing intensive training programs for its sales force to deepen clinical expertise and support surgeons in the operating room - U.S. sales organization: 41 independent sales agencies, 197 sales representatives[79] - Sales from U.S. agencies represented 68% of global revenue in 2022 (vs. 76% in 2021)[79] - International sales organization: over 70 independent stocking distributors and 14 independent sales agencies in over 70 countries[80] - Intensive training programs for global sales organization to enhance clinical expertise and operating room support[81] Surgeon Involvement, Education and Training The company actively involves pediatric orthopedic surgeons in product development and clinical education, supported by its Medical Director and an extensive network of contacts, and is a leading financial contributor to major pediatric orthopedic surgical societies, sponsoring numerous training workshops and CME courses to advance the field and build loyalty among surgeons - Utilizes surgeon input for product development and clinical education programs, aided by a Medical Director[82] - Supports local, regional, and national educational courses, hands-on training, and product-based workshops[83] - One of the largest financial contributors to pediatric orthopedic surgical societies (POSNA, IPOS, EPOS, AACPDM) and spine deformity organizations (SRS, IMAST)[85] - Funds The Foundation for Advancing Pediatric Orthopaedics, a 501(c)3 public charity for non-commercial education and clinical research[86] Manufacturing and Suppliers OrthoPediatrics primarily uses a contract manufacturing model for implants and surgical instrumentation, while MD Ortho's specialized bracing products are manufactured in-house, with all third-party manufacturers required to meet FDA and country-specific quality standards (ISO 13485 certified), and the company maintains long-term contracts with key suppliers and has redundant manufacturing capabilities for most products - Primarily uses third-party contract manufacturers for implants and surgical instrumentation[87] - MD Ortho's specialized bracing products are manufactured in-house at the Iowa facility[87] - Manufacturers must be ISO 13485 certified and FDA registered, with internal quality management conducting audits[88] - Maintains long-term contracts with key suppliers and redundant manufacturing capabilities to meet demand[89] Intellectual Property The company protects its intellectual property through patents, trade secrets, copyrights, and trademarks, owning 61 issued U.S. patents (expiring 2024-2039), 115 issued foreign patents, and numerous pending applications as of December 31, 2022, along with 31 U.S. trademark registrations and 77 foreign registrations, relying on confidentiality agreements to protect proprietary information - Relies on patents, trade secrets, copyrights, and trademarks for intellectual property protection[90] Intellectual Property Portfolio (as of Dec 31, 2022) | IP Type | U.S. | Foreign | | :-------------------- | :--- | :------ | | Issued Patents | 61 | 115 | | Pending Patent Applications | 33 | 166 | | Trademark Registrations | 31 | 77 | | Patent Expiration (U.S.) | 2024-2039 | N/A | - Protects proprietary rights through confidentiality agreements with suppliers, employees, and consultants[91] Competition The orthopedic industry is highly competitive and rapidly changing, with key factors including improved outcomes, surgeon acceptance, ease of use, product price, and speed to market, and major competitors include DePuy Synthes, Medtronic, Smith & Nephew, and Orthofix, requiring continuous innovation and a dedicated sales organization for effective competition - The orthopedic industry is competitive, with rapid technological change and new product introductions[92] - Principal competitive factors include improved outcomes, surgeon acceptance, ease of use, product price, and effective marketing/distribution[92] - Competitors include DePuy Synthes, Medtronic plc, Smith & Nephew plc, and Orthofix[92] - Success depends on developing proprietary, cost-effective, safe, and effective products, supported by a dedicated selling organization[92] Human Capital and Community Support As of December 31, 2022, OrthoPediatrics employed 203 full-time staff, with 27 in R&D and 64 in sales/marketing, prioritizing attracting, retaining, and engaging skilled employees through an inclusive, diverse, and safe workplace culture focused on improving children's lives, and supporting local communities and global charitable organizations like the World Pediatric Project Employee Count by Department (as of Dec 31, 2022) | Department | Number of Employees | | :----------- | :------------------ | | Total | 203 | | R&D | 27 | | Sales & Marketing | 64 | - Fosters an inclusive, diverse, and safe workplace culture dedicated to improving children's lives[94] - Participates in philanthropic causes and partners with organizations like the World Pediatric Project to provide pediatric orthopedic care globally[95][96] Government Regulation The company's products and operations are subject to extensive regulation by the FDA in the U.S. and comparable authorities internationally, including premarket clearance (510(k)) or approval (PMA), with most products being Class I/II or approved via Humanitarian Device Exemption (HDE) for the ApiFix Mid-C System, alongside post-market requirements such as QSR compliance, adverse event reporting, and recalls, while European regulations involve CE Mark compliance under the Medical Devices Directive (MDD) and the stricter Medical Devices Regulation (MDR), with specific UKCA Mark requirements for the United Kingdom post-Brexit - Products are regulated as medical devices by the FDA in the U.S. and comparable foreign authorities[99][100] - U.S. devices require 510(k) clearance (Class II) or PMA (Class III), or HDE approval (ApiFix Mid-C System)[102] - Post-market regulations include QSR, labeling, marketing, adverse event reporting, and recall requirements[108][109] - In the EEA, products must meet MDD essential requirements and obtain CE Mark; the stricter MDR is being phased in with extended application dates for certain device classes[112][115] - Post-Brexit, UK sales require compliance with UK Medical Device Regulations, appointment of a UK Responsible Person, and UKCA Mark[117][118] Healthcare Regulations The company is subject to federal, state, and foreign healthcare fraud and abuse laws, including the Anti-Kickback Statute and False Claims Act, which prohibit improper remuneration and false claims related to federal healthcare programs, while data privacy laws like HIPAA in the U.S. and GDPR in the EU regulate patient health information, and healthcare reform initiatives, such as the Affordable Care Act, and anti-bribery laws like the FCPA, also impact operations, potentially leading to increased costs or reduced demand - Subject to federal Anti-Kickback Statute and False Claims Act, prohibiting improper payments and fraudulent claims related to federal healthcare programs[123][126] - HIPAA and HITECH in the U.S., and GDPR in the EU, regulate the privacy and security of patient health information[132][137] - The federal Open Payments ('Sunshine') program requires reporting of payments to healthcare providers[131] - U.S. Foreign Corrupt Practices Act (FCPA) and similar international laws prohibit bribery[143] - Healthcare reform measures, like the Affordable Care Act, can impact coverage and reimbursement for products[138][139] Coverage and Reimbursement Commercial success depends on adequate coverage and reimbursement from governmental and private third-party payors for procedures using the company's products, which often require products to be medically necessary, appropriate, cost-effective, and non-experimental, while changes in CPT codes, managed care programs, and international reimbursement systems can significantly impact demand and pricing, with an increasing trend for clinical evidence requirements for reimbursement in some countries - Commercial success relies on adequate coverage and reimbursement from third-party payors (Medicare, Medicaid, private insurers)[144] - Reimbursement decisions depend on factors like medical necessity, appropriateness, cost-effectiveness, and whether the product is considered experimental[146] - Changes in CPT codes or managed care programs can adversely affect reimbursement[149][150] - International reimbursement systems vary, with some countries instituting price ceilings and increasing clinical evidence requirements for clearance and reimbursement[152][153] Item 1A. Risk Factors The company faces a broad range of risks, including financial vulnerabilities such as the impact of health emergencies and economic downturns, historical losses, and the need for additional capital, operational and strategic risks involving challenges in product commercialization, intense competition, managing inventory, and integrating acquisitions, regulatory compliance, particularly with FDA and international medical device regulations, and potential legal liabilities from product claims or intellectual property disputes, and risks related to international operations, IT system disruptions, and stock ownership volatility Financial Condition and Capital Requirements Risks The company's financial health is vulnerable to widespread health emergencies (COVID-19, RSV) and unfavorable economic conditions (inflation, rising interest rates), with a history of losses and an accumulated deficit of $176.8 million as of December 31, 2022, potentially struggling to achieve sustained profitability and necessitating additional capital, while sales volumes can fluctuate seasonally, loan covenants impose restrictions, the effective tax rate may vary, and the ability to use net operating losses (NOLs) is subject to limitations - Widespread health emergencies (COVID-19, RSV) can adversely impact business and financial results by postponing elective procedures and absorbing hospital capacity[156][157][158] - Unfavorable economic conditions, including prolonged inflation and rising interest rates, could increase operating costs and limit access to capital[159][160] Net Income (Loss) and Accumulated Deficit | Metric | 2022 (Millions) | 2021 (Millions) | 2020 (Millions) | | :------------------ | :-------------- | :-------------- | :-------------- | | Net Income (Loss) | $1.3 | $(16.3) | $(32.9) | | Accumulated Deficit | $(176.8) | N/A | N/A | - The company may need to raise additional capital to fund operations, develop new products, and expand, which could dilute existing stockholders[165][166] - Loan covenants with Squadron Capital LLC restrict business and financing activities, including asset disposal, mergers, and dividend payments[168][170] - Ability to use net operating losses (NOLs) of $117.1M (federal), $74.8M (state), and $24.4M (foreign) is subject to limitations due to ownership changes[172] Business and Strategy Risks Long-term growth depends on successful commercialization of products in development and new product introductions, which face intense competition and rapid technological change, with product quality issues potentially harming reputation, and overcoming established competitors' practices proving challenging, while maintaining sufficient inventory for consigned sets is resource-intensive and carries obsolescence risk, and acquisitions and strategic alliances involve integration difficulties and financial risks, with gaining support from key opinion leaders and effectively training surgeons being crucial for market acceptance, and the company's limited operating history in evolving markets and seasonal sales fluctuations also posing risks, as does securing hospital approvals and expanding sales infrastructure - Long-term growth depends on successful commercialization of products in development and new product introductions, facing intense competition and rapid technological changes[173][174][175] - Product quality issues could harm brand and reputation, and the company operates in a highly competitive environment with larger, more established competitors[177][178][179] - Maintaining significant levels of consigned implant and instrument sets consumes resources, reduces cash flows, and risks inventory obsolescence[183] - Growth through acquisitions or investments carries risks of integration difficulties, unanticipated costs, and diversion of management attention[186][187] - Success depends on demonstrating product merits to orthopedic surgeons, overcoming their hesitancy to adopt new products, and providing adequate training[193][194][197] - Lack of published long-term data supporting superior clinical outcomes could limit sales and adoption[206] - Seasonal fluctuations in sales, particularly higher in summer and holiday periods, impact financial results[200] - Difficulty in obtaining approval from hospital value analysis committees (VACs) can increase operating costs and decrease sales[201] - If third-party payor coverage and reimbursement decline, orthopedic surgeons and hospitals may be reluctant to use products, leading to reduced sales[208][209] - The proliferation of physician-owned distributorships (PODs) could increase pricing pressure and harm sales ability[219][220] Administrative, Organizational and Commercial Operations and Growth Risks Rapid growth can strain organizational infrastructure, including supply chain, quality control, and IT systems, potentially impacting product quality and customer satisfaction, while the loss of senior management or inability to attract skilled personnel could negatively affect operations, and international business exposes the company to diverse regulatory requirements, currency fluctuations, and political instability, with compliance with anti-corruption laws being critical, and violations potentially leading to substantial fines, and disruptions to IT systems, including cyber-security threats and system upgrades, posing risks to business efficiency and data integrity, and the company also being vulnerable to litigation, product liability claims exceeding insurance coverage, and operational interruptions from natural disasters or other events - Inability to effectively manage rapid growth could strain organizational, administrative, and operational infrastructure, impacting product quality and customer demand[221] - Loss of senior management or inability to attract and retain highly skilled salespeople and engineers could negatively impact business operations[223][225] - International business operations (24% of 2022 revenue) are subject to risks including compliance with foreign laws, currency fluctuations, and economic/political instability[226][232] - Violations of anti-corruption laws (e.g., FCPA) or internal ethics policies could result in substantial fines, sanctions, and reputational harm[229][231] - Significant disruptions in information technology systems, including cyber-security threats and ERP system upgrades, could adversely affect business operations and data integrity[239][242][243] - Exposure to product liability claims, inherent in medical device manufacturing, could result in significant damages exceeding insurance coverage and harm business[245][247] - Operations are vulnerable to interruption or loss due to natural disasters, power loss, strikes, and other events beyond control[248] Regulatory Risks The company's products and operations are subject to extensive and increasingly stringent government regulation in the U.S. (FDA) and abroad (EEA, UK), with failure to comply with requirements for design, manufacturing, testing, labeling, and post-market surveillance, including HDE and MDD/MDR regulations, potentially leading to enforcement actions, product recalls, or inability to market products, and modifications to products possibly requiring new clearances, causing delays, while misuse or off-label promotion could result in investigations and penalties, and healthcare policy changes, fraud and abuse laws, and data privacy regulations (HIPAA, GDPR) imposing significant compliance burdens and potential liabilities - Extensive government regulation by FDA and foreign counterparts covers all aspects of medical device lifecycle, from design to post-market surveillance[249][250] - Failure to comply with regulations (e.g., HDE, MDD/MDR) can lead to severe enforcement actions, including fines, injunctions, product recalls, or suspension of production[251][252] - Obtaining necessary clearances or approvals for future products or modifications can be delayed or denied, impacting business growth[253][255] - Manufacturing must comply with FDA's QSR and ISO 13485; non-compliance could lead to recalls or production termination[265][266] - Misuse or off-label promotion of products can harm reputation, lead to product liability suits, or result in costly investigations and sanctions[268][269] - Adverse medical events require reporting to regulatory authorities; failure to do so can lead to sanctions and product recalls[270][271] - Legislative or regulatory reforms (e.g., MDR, UK Medical Device Regulations) can increase costs and complexity for obtaining approvals and marketing products[276][278][280] - Subject to federal, state, and foreign fraud and abuse laws (Anti-Kickback, False Claims, Sunshine Act) and health information privacy laws (HIPAA, HITECH), with potential for substantial penalties for violations[282][283][284] - Healthcare policy changes, such as the Affordable Care Act, could limit reimbursement and reduce demand for products[288][289] - Business involves hazardous materials, requiring compliance with environmental laws, which may be expensive and restrict operations[291] Reliance on Third Parties Risks The company heavily relies on a network of third-party independent sales agencies and distributors for marketing and distribution, both domestically and internationally, where the loss or underperformance of these partners, or difficulties in collecting payments, could significantly impact sales, and dependence on a small number of third-party contract manufacturers for product assembly and limited suppliers for components creates risks of supply chain disruptions, quality issues, increased costs, and delays if replacements are needed, while performance issues or price increases by shipping carriers could also adversely affect operations - Relies on 41 independent sales agencies in the U.S. and 70 independent stocking distributors/14 sales agencies internationally; loss or underperformance could impair business[292][293][294][295] - Sales through two U.S. independent sales agencies accounted for 11.4% and 10.7% of global revenue in 2022[296] - Relies on a small number of third-party contract manufacturers for product assembly, posing risks if they fail to perform or discontinue business[300] - Reliance on a limited number of third-party suppliers for the majority of products creates vulnerability to supply disruptions, price increases, and difficulties in finding replacements[302][303][304] - Performance issues or price increases by shipping carriers could adversely affect operations and reputation[301] Intellectual Property Risks The company's competitive position depends on adequately protecting its intellectual property (patents, trade secrets) and avoiding infringement of others' rights, as patents may be challenged, invalidated, or circumvented, and enforcing rights can be difficult and costly, especially in foreign countries with weaker protections, while litigation or claims of infringement could divert resources, lead to substantial damages or royalties, and prevent product sales, and the confidentiality of trade secrets is also vulnerable to unauthorized disclosure or independent discovery - Inability to adequately protect intellectual property rights (patents, trade secrets) could harm competitive position[305] - Issued patents may be challenged, deemed unenforceable, invalidated, or circumvented, and pending applications may not issue[307] - Litigation or third-party claims of intellectual property infringement could be costly, divert management attention, and potentially prevent product sales or require substantial damages/royalties[313][315][316] - Failure to protect trade secrets through confidentiality agreements or independent discovery by competitors could harm business[318] - Enforcing intellectual property rights globally is challenging due to varying laws and potential for compulsory licensing[309][319] Common Stock Ownership Risks The price of the company's common stock is subject to volatility due to various factors, including financial performance, competitive developments, and market sentiment, and may be vulnerable to manipulation through short selling, with securities litigation being a potential risk, and as a 'smaller reporting company,' reduced disclosure requirements might make the stock less attractive, while increased focus on ESG responsibilities could lead to additional costs or reputational harm, and future sales of common stock could cause price declines, and the absence of an active trading market could impair liquidity, with principal stockholders and management exerting significant control, and charter provisions potentially delaying or preventing acquisitions, limiting stockholder influence - Stock price is volatile due to financial fluctuations, competitive success, regulatory actions, and sales by officers/directors[324][325] - The common stock may be vulnerable to manipulation, including short selling efforts and publication of negative information[327][328] - As a 'smaller reporting company,' reduced disclosure requirements might make common stock less attractive to investors[330] - Increased investor focus on ESG responsibilities could result in additional costs, reputational harm, and impact employee/customer relations[331][332] - Future sales of common stock could cause price declines, and an inactive trading market could impair liquidity[333][334] - Principal stockholders and management (beneficially owning ~32.7%) can exert significant control over corporate actions[337][338] - Charter documents and Delaware law provisions could delay or prevent acquisitions, even if beneficial to stockholders[339][340][341] - No cash dividends are anticipated in the foreseeable future; capital appreciation is the sole source of gain[344] Item 1B. Unresolved Staff Comments There are no unresolved staff comments from the SEC - No unresolved staff comments[346] Item 2. Properties The company owns and occupies approximately 42,000 square feet of office space in Warsaw, Indiana, expanded in 2018 and 2021, and following acquisitions, also operates over 20,000 square feet of manufacturing and office space in Iowa (MD Ortho) and approximately 9,000 square feet of warehouse and office space in Canada (Pega), additionally maintaining an office in Israel and flex office spaces in Europe, deeming current facilities adequate for present needs - Owns and occupies 42,000 sq ft of office space in Warsaw, Indiana[347] - Acquired over 20,000 sq ft of manufacturing and office space in Iowa (MD Ortho acquisition)[347] - Maintains 9,000 sq ft of warehouse and office space in Canada (Pega acquisition)[347] - Also has an office in Israel and flex office spaces in Europe[347] Item 3. Legal Proceedings The company is involved in various legal proceedings in the ordinary course of business, with specific ongoing litigation including a software ownership dispute with IMED Surgical, LLC, and a patent infringement lawsuit against Wishbone Medical, Inc. and Nick A. Deeter, where the IMED lawsuit is stayed pending arbitration (which was terminated due to non-payment by Plaintiff), and the Wishbone litigation involves claims of infringement and counterclaims of non-infringement and invalidity, with the outcomes of these proceedings potentially materially affecting the company's business - Involved in a software ownership dispute with IMED Surgical, LLC, regarding the '377 Patent, currently stayed pending arbitration[586][587][589] - Filed a patent infringement lawsuit against Wishbone Medical, Inc. and Nick A. Deeter, with Wishbone filing counterclaims of non-infringement and invalidity[591][592] - The company believes these lawsuits are without merit but acknowledges that adverse resolutions could materially affect its business[590][592] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[350] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock has been listed on the Nasdaq Global Market under 'KIDS' since October 12, 2017, with no cash dividends declared or paid, and an intention to retain earnings for future growth, while as of February 27, 2023, there were 22,993,446 outstanding shares held by 211 stockholders of record, and no equity securities were purchased by the issuer or affiliated purchasers in Q4 2022 - Common stock listed on Nasdaq Global Market under 'KIDS' since October 12, 2017[353] - No cash dividends declared or paid; intent to retain earnings for future growth[354] Common Stock Holders and Purchases | Metric | Value | | :-------------------------- | :---- | | Outstanding Shares (Feb 27, 2023) | 22,993,446 | | Stockholders of Record (Feb 27, 2023) | 211 | | Equity Purchases by Issuer (Q4 2022) | None | Item 6. [Reserved] This item is intentionally omitted - Item 6 is intentionally omitted[359] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides an overview of OrthoPediatrics' financial condition and operational results, highlighting its exclusive focus on pediatric orthopedic medical devices and its market opportunity, discussing the impact of acquisitions, health emergencies, and economic conditions on its performance, and detailing revenue growth, cost of revenue, operating expenses, and liquidity, emphasizing the company's strategy for continued expansion and the critical accounting policies underlying its financial reporting Company Overview OrthoPediatrics is the sole global medical device company dedicated to pediatric orthopedics, offering implants, instruments, and braces across trauma, scoliosis, and sports medicine, operating with a consignment model in the U.S. and direct sales/stocking distributors internationally, with international sales growing to 24% of revenue in 2022, and a strategy to strengthen its market position through investment in inventory, sales infrastructure, and product expansion - OrthoPediatrics is the only global medical device company exclusively focused on pediatric orthopedics, serving a $3.9 billion global market opportunity[362] - Operates a consignment model in the U.S. for implants and instruments, requiring upfront inventory investment[363] - International sales accounted for 24% of revenue in 2022, up from 21% in 2021 and 11% in 2020[367] - Strategy includes increasing investment in consigned sets, strengthening global sales infrastructure, and expanding product offerings[367] ESG Activities OrthoPediatrics is committed to ESG, having impacted over 630,000 children since inception, with an internal ESG team reporting to the Board's Governance Committee to identify disclosure topics, and key highlights including ISO 13485 certification, enhanced recycling, philanthropic community involvement (e.g., World Pediatric Project), fostering an inclusive environment, and increasing Board diversity - Impacted over 630,000 children since inception, including those served by acquired companies[368] - Established an internal ESG team in 2021, reporting to the Board's Governance Committee[368] - Highlights include ISO 13485 certification, enhanced recycling, philanthropic partnerships (e.g., World Pediatric Project), and commitment to diversity on the Board[369] Trends and Uncertainties The company's financial results are influenced by strategic acquisitions, which may lead to intangible asset impairment (e.g., $3.6 million impairment for ApiFix trademark in 2022), and widespread health emergencies, such as the unprecedented increase in RSV cases in 2022 and ongoing COVID-19 impacts, have negatively affected sales volume by absorbing hospital capacity and delaying elective procedures, creating uncertainty for future demand and financial performance - Acquisitions may result in intangible asset impairment; a $3.6 million impairment loss was recorded for the ApiFix trademark in 2022 due to lower forecasted revenue[371] - Unprecedented increase in RSV cases in 2022 negatively impacted sales volume by absorbing hospital capacity for elective procedures[372][373] - Ongoing COVID-19 pandemic continues to cause business disruption, delaying elective procedures due to staffing shortages[374] Components of Results of Operations Revenue is recognized when control of products transfers to customers, typically upon implantation for consigned U.S. products or shipment for international sales and braces, with cost of revenue including product purchases, freight, and inventory adjustments, expected to increase with sales volume, and gross profit influenced by sales mix between higher-margin U.S. sales and lower-margin international distributor sales, while operating expenses comprise sales and marketing (commissions, personnel), general and administrative (personnel, facility, depreciation of instrument sets), legal settlement expenses, and research and development (engineering, product development), and other expenses include fair value adjustments of contingent consideration and interest expense - Revenue recognition: U.S. implants/instruments upon implantation; international sales and braces upon shipment[376][377] - Cost of revenue includes third-party product purchases, inbound freight, excess/obsolete inventory adjustments, and royalties[378] - Gross profit is impacted by the mix of U.S. (higher margin) vs. international stocking distributor sales (lower margin)[379][380] - Sales and marketing expenses primarily consist of commissions and personnel costs, expected to increase with commercialization and global expansion[381] - General and administrative expenses include personnel, facility costs, and depreciation of capitalized instrument sets ($6.2M in 2022)[382] - Research and development expenses (engineering, product development, IP) are expected to increase with new product development[384] - Other expenses include fair value adjustments of contingent consideration and interest expense[385] Results of Operations Comparison (2022 vs 2021) Net revenue increased by 25% to $122.3 million in 2022, driven by COVID-19 recovery and $11.2 million from MD Ortho and Pega acquisitions, partially offset by respiratory illnesses and foreign currency impact, with trauma and deformity revenue growing 29% to $85.1 million, and scoliosis revenue increasing 19% to $33.4 million, while gross margin slightly decreased to 74%, and operating expenses rose across sales and marketing (13.6%), general and administrative (29%), and R&D (45%), and total other income significantly increased due to a $25.9 million fair value adjustment of contingent consideration, leading to a net income of $1.3 million in 2022 compared to a net loss of $16.3 million in 2021 Consolidated Results of Operations (2022 vs 2021) | Metric (in thousands) | 2022 | 2021 | Increase (Decrease) | % Change | | :---------------------- | :--- | :--- | :------------------ | :------- | | Net revenue | $122,289 | $98,049 | $24,240 | 25% | | Cost of revenue | $31,629 | $24,646 | $6,983 | 28% | | Sales and marketing expenses | $45,053 | $39,673 | $5,380 | 14% | | General and administrative expenses | $59,383 | $46,061 | $13,322 | 29% | | Trademark impairment | $3,609 | $0 | $3,609 | 100% | | Legal settlement expenses | $0 | $150 | $(150) | -100% | | Research and development expenses | $8,014 | $5,543 | $2,471 | 45% | | Other expenses (income) | $(21,710) | $(636) | $(21,074) | 3314% | | Provision for income taxes (benefit) | $(4,947) | $(1,128) | $(3,819) | 339% | | Net income (loss) | $1,258 | $(16,260) | $17,518 | -108% | - Net revenue increased 25% to $122.3 million, driven by COVID-19 recovery and $11.2 million from acquisitions, offset by respiratory illnesses and foreign currency impact[388] Revenue by Product Category (2022 vs 2021) | Product Category | 2022 Revenue (Thousands) | % of Revenue | 2021 Revenue (Thousands) | % of Revenue | | :----------------- | :----------------------- | :----------- | :----------------------- | :----------- | | Trauma and deformity | $85,055 | 70% | $65,829 | 67% | | Scoliosis | $33,428 | 27% | $28,046 | 29% | | Sports medicine/other | $3,806 | 3% | $4,174 | 4% | - Gross margin slightly decreased from 75% in 2021 to 74% in 2022, due to higher set sales to international distributors and minimum performance obligation fees[390] - Total other income increased significantly by $21.1 million, primarily due to a $25.9 million decrease in the fair value of contingent consideration related to the ApiFix acquisition[394] Liquidity and Capital Resources The company has historically incurred operating losses, with an accumulated deficit of $176.8 million as of December 31, 2022, but achieved net income in 2022, ending the year with $10.5 million in cash and $109.3 million in short-term investments, and existing cash, borrowing capacity, and proceeds from a public offering are expected to cover anticipated cash requirements for at least the next 12 months, though the company may seek additional financing, which could lead to dilution or restrictive covenants - Incurred operating losses since inception, with an accumulated deficit of $176.8 million as of December 31, 2022[395] Cash and Investments (as of Dec 31, 2022) | Metric | Amount (Millions) | | :-------------------- | :---------------- | | Cash, Cash Equivalents, Restricted Cash | $10.5 | | Short-Term Investments | $109.3 | - Believes existing cash, borrowing capacity, and public offering proceeds will meet cash requirements for at least the next 12 months[397] - May seek additional financing, which could result in stockholder dilution or unfavorable terms[397] Cash Flows Analysis Net cash used in operating activities was $21.8 million in 2022, primarily due to increases in inventory ($16.9 million) and accounts receivable ($3.9 million), while net cash used in investing activities was $113.4 million, driven by $40.1 million for MD Ortho and Pega acquisitions and $110.1 million in short-term investments, partially offset by $46.9 million from sales of short-term securities, and net cash provided by financing activities was $136.0 million, mainly from $139.3 million in proceeds from common stock and pre-funded warrant issuance, offset by debt payments Cash Flows Summary (in thousands) | Activity | 2022 | 2021 | 2020 | | :-------------------------- | :----- | :----- | :----- | | Net cash used in operating activities | $(21,766) | $(13,063) | $(18,530) | | Net cash used in investing activities | $(113,371) | $(7,411) | $(69,693) | | Net cash provided by financing activities | $135,974 | $6 | $46,732 | | Net increase (decrease) in cash and restricted cash | $1,456 | $(21,126) | $(41,895) | - Operating cash outflow in 2022 was primarily due to increases in inventory ($16.9M) and accounts receivable ($3.9M)[399] - Investing cash outflow in 2022 was driven by $40.1M for acquisitions (MDO, Pega) and $110.1M in short-term investments, partially offset by $46.9M from sales of short-term securities[400] - Financing cash inflow in 2022 was mainly from $139.3M in proceeds from common stock and pre-funded warrants, offset by $31.0M debt repayment[402] Indebtedness The company has a $50.0 million revolving credit facility with Squadron Capital LLC, with no outstanding indebtedness as of December 31, 2022, which accrues interest at SOFR plus 8.69% (or 10.0%) and matures by January 1, 2024, secured by company assets and including negative covenants restricting various corporate actions, and additionally, a mortgage note payable to an affiliate, Tawani Enterprises Inc., had a balance of $0.9 million as of December 31, 2022, with monthly principal and interest payments at 5% until maturity in August 2028 - Has a $50.0 million revolving credit facility with Squadron Capital LLC; no outstanding indebtedness as of Dec 31, 2022[403] - Revolving facility interest rate: greater of six-month SOFR + 8.69% or 10.0%; matures by January 1, 2024[404][405] - Loan Agreement is secured by company assets and includes negative covenants restricting asset transfers, mergers, and dividends[406] Mortgage Note Payable (as of Dec 31, 2022) | Metric | Amount (Millions) | | :---------------- | :---------------- | | Mortgage Balance | $0.9 | | Interest Rate | 5% | | Maturity | August 2028 | Contractual Obligations and Commitments The company's short-term cash requirements include accounts payable, accrued compensation, and current debt maturities, while long-term obligations encompass debt, acquisition installment payables (e.g., ApiFix), minimum purchase commitments (e.g., 7D Surgical FLASH Navigation platform, FIREFLY Technology), lease obligations, and royalty commitments, with minimum purchase commitments for the 7D Surgical FLASH Navigation platform being $3.12 million for 2023 and $2.34 million for 2024, and the company incurred $1.104 million in 2022 for not meeting FIREFLY minimum performance metrics - Short-term cash requirements include accounts payable, accrued compensation, and current debt maturities[410] - Long-term obligations include debt, acquisition installment payables, minimum purchase obligations, lease obligations, and royalties[412] Minimum Purchase Commitments (7D Surgical FLASH Navigation platform) | Year Ending December 31 | Amount (Millions) | | :------------------------ | :---------------- | | 2023 | $3.12 | | 2024 | $2.34 | - Incurred $1.104 million in 2022 for not meeting minimum performance metrics for the FIREFLY Technology license agreement[594] - Has minimum royalty commitments of $10,000 annually through 2026[595] Pediatric Orthopedic Business Seasonality The company's revenue experiences seasonal fluctuations, typically being higher during summer months and holiday periods, driven by increased pediatric surgeries for trauma and deformity and scoliosis products, influenced by recovery time available during school breaks - Revenue is typically higher in summer months and holiday periods[411] - Higher sales are driven by increased pediatric surgeries for trauma and deformity and scoliosis products, influenced by school breaks[411] Critical Accounting Policies and Significant Judgments and Estimates The preparation of financial statements requires significant estimates and judgments, particularly in revenue recognition (timing of control transfer), inventory valuation (lower of cost or net realizable value, excess/obsolete adjustments), goodwill and other intangible assets impairment testing (fair value measurements, forecasted revenue, discount rates), and net operating losses (NOLs) valuation allowance, with changes in these estimates potentially materially affecting reported financial results - Revenue recognition involves estimates for control transfer, typically upon implantation for U.S. consigned products or shipment for international sales/braces[414][415] - Inventory valuation requires estimates for product demand and life cycle, impacting excess and obsolete inventory charges ($1.011M in 2022)[417][418][482] - Goodwill and indefinite-lived trademark assets are assessed for impairment annually or upon triggering events, using fair value measurements (discounted cash flow models) that rely on significant estimates like forecasted revenue and discount rates[420][421][492] - A $3.609 million impairment charge was recorded for the ApiFix trademark in 2022 due to lower forecasted revenue[422][493] - Net operating losses (NOLs) of $117.1M (federal), $74.8M (state), and $24.4M (foreign) are subject to valuation allowances and Section 382 limitations[424][425] Quantitative and Qualitative Disclosures about Market Risk The company's market risk exposure is primarily related to interest rates and foreign currency fluctuations, with interest rate risk assessed as immaterial due to the short-term nature of its investment portfolio, while increasing international operations expose the company to foreign currency exchange risk, particularly with the Pound Sterling, Euro, Australian Dollar, Canadian Dollar, and Israeli Shekel, and the company does not currently hedge foreign currency exposure, but an immediate 10% adverse change in exchange rates would have an immaterial impact on net loss - Investment portfolio consists of short-term debt instruments of high-quality corporate issuers, resulting in immaterial exposure to interest rate risk[426] - Increasing international operations expose the company to foreign currency exchange risk, primarily with Pound Sterling, Euro, Australian Dollar, Canadian Dollar, and Israeli Shekel[427] - The company does not currently hedge foreign currency exposure[427] - An immediate 10% adverse change in foreign exchange rates would have an immaterial impact on reported net loss[428] Item 7A. Quantitative and Qualitative Disclosure about Market Risk This section is covered within Item 7, 'Management's Discussion and Analysis of Financial Condition and Results of Operations,' under the sub-section 'Quantitative and Qualitative Disclosures about Market Risk' Item 8. Financial Statements and Supplementary Data This section presents the audited consolidated financial statements for OrthoPediatrics Corp., including the balance sheets as of December 31, 2022 and 2021, and the statements of operations, comprehensive loss, stockholders' equity, and cash flows for the three years ended December 31, 2022, along with the Independent Registered Public Accounting Firm's opinion and detailed notes to the financial statements, covering significant accounting policies, business combinations, goodwill, intangible assets, fair value measurements, debt, income taxes, and commitments Report of Independent Registered Public Accounting Firm Deloitte & Touche LLP provided an unqualified opinion on the consolidated financial statements for the periods ended December 31, 2022, 2021, and 2020, stating they present fairly the financial position and results of operations in conformity with GAAP, and highlighting the ApiFix trademark impairment as a critical audit matter due to the significant estimates and assumptions involved in its fair value determination - Deloitte & Touche LLP issued an unqualified opinion on the consolidated financial statements[430] - The impairment of the ApiFix trademark asset was identified as a critical audit matter due to significant estimates in its fair value determination (forecasted revenue, royalty rate, d