OrthoPediatrics(KIDS) - 2023 Q3 - Quarterly Report

Note Regarding Forward-Looking Statements This section outlines the nature of forward-looking statements, their inherent risks and uncertainties, and the company's policy on updating such information - Forward-looking statements are identified by words like "anticipate," "believe," "expect," and "plan," and involve risks and uncertainties that may cause actual results to differ materially[8] - Key areas of uncertainty include achieving profitability, raising capital, commercializing products, complying with regulations, expanding sales networks, and protecting intellectual property[10] - The company undertakes no obligation to update or revise forward-looking statements unless required by law[9] PART I. FINANCIAL INFORMATION This part presents the unaudited condensed consolidated financial statements and management's discussion and analysis for OrthoPediatrics Corp Item 1. Financial Statements (unaudited) This section presents the unaudited condensed consolidated financial statements of OrthoPediatrics Corp. for the three and nine months ended September 30, 2023, and December 31, 2022, including balance sheets, statements of operations, comprehensive loss, stockholders' equity, and cash flows, along with detailed notes Condensed Consolidated Balance Sheets The condensed consolidated balance sheets show the company's financial position as of September 30, 2023, compared to December 31, 2022, highlighting changes in assets, liabilities, and stockholders' equity Table: Balance Sheet Summary | Metric | Sep 30, 2023 (in Thousands) | Dec 31, 2022 (in Thousands) | Change (in Thousands) | | :--------------------------------- | :-------------------------- | :-------------------------- | :-------------------- | | Total Assets | $432,444 | $427,727 | +$4,717 | | Total Liabilities | $58,115 | $49,079 | +$9,036 | | Total Stockholders' Equity | $374,329 | $378,648 | -$4,319 | | Cash and Cash Equivalents | $10,640 | $8,991 | +$1,649 | | Short-term Investments | $71,780 | $109,299 | -$37,519 | | Inventories, net | $100,533 | $78,192 | +$22,341 | | Accounts Payable - Trade | $22,587 | $11,150 | +$11,437 | Condensed Consolidated Statements of Operations The condensed consolidated statements of operations show the company's financial performance for the three and nine months ended September 30, 2023, compared to the same periods in 2022, detailing revenue, expenses, and net loss/income Table: Statements of Operations Summary | Metric | 3 Months Ended Sep 30, 2023 (in Thousands) | 3 Months Ended Sep 30, 2022 (in Thousands) | Change (in Thousands) | Change (%) | 9 Months Ended Sep 30, 2023 (in Thousands) | 9 Months Ended Sep 30, 2022 (in Thousands) | Change (in Thousands) | Change (%) | | :--------------------------------- | :----------------------------------------- | :----------------------------------------- | :-------------------- | :--------- | :----------------------------------------- | :----------------------------------------- | :-------------------- | :--------- | | Net Revenue | $39,972 | $34,950 | +$5,022 | +14.37% | $111,119 | $91,295 | +$19,824 | +21.71% | | Gross Profit | $30,953 | $25,889 | +$5,064 | +19.56% | $84,539 | $69,436 | +$15,103 | +21.75% | | Operating Loss | $(4,508) | $(6,961) | +$2,453 | -35.24% | $(18,685) | $(17,090) | -$1,595 | +9.33% | | Net (Loss) Income | $(4,591) | $18,539 | -$23,130 | -124.76% | $(14,283) | $9,106 | -$23,389 | -256.85% | | Basic EPS | $(0.20) | $0.88 | -$1.08 | -122.73% | $(0.63) | $0.44 | -$1.07 | -243.18% | | Diluted EPS | $(0.20) | $0.87 | -$1.07 | -122.99% | $(0.63) | $0.43 | -$1.06 | -246.51% | Condensed Consolidated Statements of Comprehensive Loss This statement presents the net loss and other comprehensive loss components, such as foreign currency translation adjustments and unrealized gains/losses on investments, for the three and nine months ended September 30, 2023 and 2022 Table: Comprehensive Loss Summary | Metric | 3 Months Ended Sep 30, 2023 (in Thousands) | 3 Months Ended Sep 30, 2022 (in Thousands) | Change (in Thousands) | 9 Months Ended Sep 30, 2023 (in Thousands) | 9 Months Ended Sep 30, 2022 (in Thousands) | Change (in Thousands) | | :-------------------------------- | :----------------------------------------- | :----------------------------------------- | :-------------------- | :----------------------------------------- | :----------------------------------------- | :-------------------- | | Net (Loss) Income | $(4,591) | $18,539 | -$23,130 | $(14,283) | $9,106 | -$23,389 | | Other Comprehensive Loss, net of tax | $(4,255) | $(3,411) | -$844 | $(6,766) | $(15,586) | +$8,820 | | Comprehensive (Loss) Income | $(8,846) | $15,128 | -$23,974 | $(21,049) | $(6,480) | -$14,569 | Condensed Consolidated Statements of Stockholders' Equity This statement details the changes in stockholders' equity for the nine months ended September 30, 2023 and 2022, including net loss, other comprehensive loss, restricted stock activity, and acquisitions Table: Stockholders' Equity Summary | Metric | Balance at Jan 1, 2023 (in Thousands) | Balance at Sep 30, 2023 (in Thousands) | Change (in Thousands) | Balance at Jan 1, 2022 (in Thousands) | Balance at Sep 30, 2022 (in Thousands) | Change (in Thousands) | | :-------------------------- | :------------------------------------ | :------------------------------------ | :-------------------- | :------------------------------------ | :------------------------------------ | :-------------------- | | Total Stockholders' Equity | $378,648 | $374,329 | -$4,319 | $225,369 | $383,330 | +$157,961 | | Accumulated Deficit | $(176,768) | $(191,051) | -$14,283 | $(178,026) | $(168,920) | +$9,106 | | Additional Paid-in Capital | $560,810 | $577,540 | +$16,730 | $394,899 | $559,339 | +$164,440 | Condensed Consolidated Statements of Cash Flows This statement outlines the cash flows from operating, investing, and financing activities for the nine months ended September 30, 2023 and 2022, showing the net increase in cash, cash equivalents, and restricted cash Table: Cash Flow Summary | Cash Flow Activity | 9 Months Ended Sep 30, 2023 (in Thousands) | 9 Months Ended Sep 30, 2022 (in Thousands) | Change (in Thousands) | | :----------------------------------------- | :----------------------------------------- | :----------------------------------------- | :-------------------- | | Net cash used in operating activities | $(19,503) | $(18,425) | -$1,078 | | Net cash provided by (used in) investing activities | $23,755 | $(90,144) | +$113,899 | | Net cash (used in) provided by financing activities | $(2,086) | $136,009 | -$138,095 | | Net increase in cash, cash equivalents and restricted cash | $1,770 | $27,866 | -$26,096 | | Cash, cash equivalents and restricted cash, end of period | $12,232 | $36,872 | -$24,640 | Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the condensed consolidated financial statements, covering business overview, significant accounting policies, business combinations, goodwill and intangible assets, fair value measurements, debt, income taxes, stockholders' equity, net loss per share, business segments, related party transactions, employee benefits, and commitments and contingencies NOTE 1 – BUSINESS OrthoPediatrics Corp. is a medical device company focused exclusively on designing, developing, and marketing anatomically appropriate implants and devices for children with orthopedic conditions, serving trauma and deformity correction, scoliosis, and sports medicine markets globally - OrthoPediatrics is the only global medical device company exclusively focused on providing comprehensive orthopedic solutions for children[32] - The company offers specialized products across three major pediatric orthopedic categories: trauma and deformity correction, scoliosis, and sports medicine[32] - Products are sold to hospitals and medical facilities in the U.S. and international markets, utilizing a contract manufacturing model[32] NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This note outlines the basis of presentation for the unaudited interim condensed consolidated financial statements, confirming adherence to GAAP, the use of estimates, and details on financial instruments, credit risk, and recent accounting pronouncements - The financial statements are unaudited, prepared in conformity with GAAP, and include all necessary recurring adjustments for fair presentation[34][35] - The company has an accumulated deficit but believes its cash balance and expected cash flows are sufficient for operations for more than the next twelve months[36] - The company adopted ASU 2016-13 (Credit Losses) and ASU 2021-08 (Business Combinations) effective January 1, 2023, with no material impact on financial statements[40][41] NOTE 3 - BUSINESS COMBINATIONS AND ASSET ACQUISITIONS This note details the company's recent acquisitions, including Rhino Pediatric Orthopedic Designs, Inc. (assets), Medtech Concepts LLC (assets), and Pega Medical Inc. (share capital), outlining the consideration paid and the allocation of purchase prices - On July 1, 2023, OrthoPediatrics acquired assets of Rhino Pediatric Orthopedic Designs for $1,024 thousand, comprising $546 thousand cash and 11,133 common shares[43] - On May 1, 2023, the company acquired Medtech Concepts LLC for approximately $15,274 thousand, treated as an asset acquisition, with consideration including cash, unregistered common stock, and future anniversary payments[44][45][46] - On July 1, 2022, OrthoPediatrics acquired Pega Medical Inc. for approximately $32,042 thousand in cash, expanding its trauma and deformity product portfolio[50][51] NOTE 4 - GOODWILL AND INTANGIBLE ASSETS This note provides details on changes in goodwill and amortizable and non-amortizable intangible assets, including the impact of acquisitions, foreign currency translation, and impairment charges Table: Goodwill Changes | Metric | Jan 1, 2023 (in Thousands) | Sep 30, 2023 (in Thousands) | Change (in Thousands) | | :-------------------------------- | :------------------------- | :-------------------------- | :-------------------- | | Goodwill | $86,821 | $80,894 | -$5,927 | Table: Amortizable Intangible Assets | Amortizable Intangible Assets | Sep 30, 2023 (Net, in Thousands) | Dec 31, 2022 (Net, in Thousands) | Change (in Thousands) | | :---------------------------- | :------------------------------- | :------------------------------- | :-------------------- | | Patents | $34,214 | $38,052 | -$3,838 | | Intellectual Property & Capitalized Software | $13,873 | $4,477 | +$9,396 | | Customer Relationships & Other | $15,748 | $15,457 | +$291 | | License Agreements | $5,678 | $6,994 | -$1,316 | | Total Amortizable Assets | $69,513 | $64,980 | +$4,533 | - A partial impairment charge of $985 thousand was recorded for the ApiFix trademark during the three and nine months ended September 30, 2023, due to lower forecasted revenue[64] NOTE 5 - FAIR VALUE OF FINANCIAL INSTRUMENTS This note describes the company's financial assets and liabilities measured at fair value, categorizing them into Level 1, Level 2, and Level 3 based on the observability of inputs, with a focus on contingent consideration - The company's financial instruments are categorized into Level 1 (quoted prices in active markets), Level 2 (observable market-based inputs), and Level 3 (significant unobservable inputs)[66] - Contingent consideration is a Level 3 liability, with its fair value determined using discounted cash flow or probability simulation models, and a fair value adjustment of $(2,974) thousand was recorded for the nine months ended September 30, 2023[71] Table: Financial Assets Fair Value | Financial Assets (Sep 30, 2023, in Thousands) | Level 1 | Level 2 | Level 3 | Total | | :-------------------------------------------- | :------ | :------ | :------ | :---- | | Certificates of Deposit | $0 | $25,527 | $0 | $25,527 | | Exchange Trade Mutual Funds | $35,991 | $0 | $0 | $35,991 | | Treasury Bonds | $10,261 | $0 | $0 | $10,261 | | Other | $1 | $0 | $0 | $1 | NOTE 6 - DEBT AND CREDIT ARRANGEMENTS This note details the company's long-term debt, including a mortgage payable to an affiliate and a $50 million revolving credit facility with Squadron Capital LLC, noting no outstanding indebtedness under the credit facility as of September 30, 2023 Table: Debt Summary | Debt Type | Sep 30, 2023 (in Thousands) | Dec 31, 2022 (in Thousands) | | :------------------------------------ | :-------------------------- | :-------------------------- | | Mortgage payable to affiliate | $800 | $907 | | Less: current maturities | $150 | $144 | | Long-term debt with affiliate, net | $650 | $763 | - The company has a $50 million revolving credit facility with Squadron Capital LLC, with no outstanding indebtedness as of September 30, 2023[75][149] - Interest expense related to debt with affiliates was $32 thousand for the nine months ended September 30, 2023, significantly down from $512 thousand in the prior year[80] NOTE 7 - INCOME TAXES This note discusses the company's income tax provision or benefit, effective tax rate, and the status of deferred tax assets and valuation allowances Table: Income Tax Data | Metric | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------------- | :-------------------------- | :-------------------------- | | Income Tax Benefit | $126 | $4,899 | | Effective Income Tax Rate | 0.9% | (116.4)% | - Deferred tax assets are fully offset by a valuation allowance, except for certain deferred tax liabilities in a foreign jurisdiction from acquisitions[83] NOTE 8 - STOCKHOLDERS' EQUITY This note details changes in stock options and restricted stock activity, including grants, exercises, forfeitures, and the associated stock-based compensation expense - All stock options outstanding at January 1, 2023, were either exercised or cancelled by September 30, 2023, resulting in no stock-based compensation expense for options in 2023[85][86] Table: Restricted Stock Activity | Restricted Stock Activity | Jan 1, 2023 | Sep 30, 2023 | | :------------------------ | :---------- | :----------- | | Restricted Stock Awards | 403,324 | 565,021 | | Restricted Stock Units | 10,080 | 13,851 | - Stock-based compensation expense on restricted stock increased to $7,779 thousand for the nine months ended September 30, 2023, from $4,978 thousand in 2022, driven by increased plan participants and shares issued for acquisitions[88] NOTE 9 – NET LOSS PER SHARE This note reconciles basic and diluted net loss per share, explaining the application of the two-class method and the exclusion of anti-dilutive securities Table: Net Loss Per Share Data | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :----------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net (Loss) Income | $(4,591) | $18,539 | $(14,283) | $9,106 | | Basic Net (Loss) Income Per Share | $(0.20) | $0.88 | $(0.63) | $0.44 | | Diluted Net (Loss) Income Per Share | $(0.20) | $0.87 | $(0.63) | $0.43 | - For periods with a net loss, basic and diluted weighted average shares outstanding remain consistent as the effect of potentially dilutive securities would be anti-dilutive[90] NOTE 10 – BUSINESS SEGMENT OrthoPediatrics operates as a single business segment focused on pediatric orthopedic devices, with revenue disaggregated by product category (trauma and deformity, scoliosis, sports medicine/other) and geographic location (U.S. and International) - The company operates as one reportable segment, designing, developing, and marketing implants and devices for children with orthopedic problems[92] Table: Product Sales by Geographic Location | Product Sales by Geographic Location | 3 Months Ended Sep 30, 2023 (in Thousands) | 3 Months Ended Sep 30, 2022 (in Thousands) | 9 Months Ended Sep 30, 2023 (in Thousands) | 9 Months Ended Sep 30, 2022 (in Thousands) | | :----------------------------------- | :----------------------------------------- | :----------------------------------------- | :----------------------------------------- | :----------------------------------------- | | U.S. | $29,360 | $26,539 | $82,748 | $69,687 | | International | $10,612 | $8,411 | $28,371 | $21,608 | | Total | $39,972 | $34,950 | $111,119 | $91,295 | Table: Product Sales by Category | Product Sales by Category | 3 Months Ended Sep 30, 2023 (in Thousands) | 3 Months Ended Sep 30, 2022 (in Thousands) | 9 Months Ended Sep 30, 2023 (in Thousands) | 9 Months Ended Sep 30, 2022 (in Thousands) | | :------------------------ | :----------------------------------------- | :----------------------------------------- | :----------------------------------------- | :----------------------------------------- | | Trauma and deformity | $28,806 | $23,892 | $79,715 | $62,976 | | Scoliosis | $10,304 | $9,979 | $28,270 | $25,383 | | Sports medicine/other | $862 | $1,079 | $3,134 | $2,936 | | Total | $39,972 | $34,950 | $111,119 | $91,295 | NOTE 11 - RELATED PARTY TRANSACTIONS This note discloses transactions with related parties, specifically payments to Structure Medical, LLC, an affiliate of Squadron Capital LLC, for inventory purchases Table: Payments to Structure Medical, LLC | Payments to Structure Medical, LLC (in Thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :------------------------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Inventory Purchases | $234 | $218 | $628 | $768 | NOTE 12 - EMPLOYEE BENEFIT PLAN This note describes the OrthoPediatrics 401(k) Retirement Plan, a defined-contribution plan where the company makes discretionary matching contributions up to 4% of employees' salaries (or 3% for MD Ortho employees) - The company offers a 401(k) Retirement Plan with discretionary matching contributions up to 4% of employee salaries, or 3% for MD Ortho employees[96] NOTE 13 – COMMITMENTS AND CONTINGENCIES This note outlines the company's commitments and contingencies, including lease liabilities, ongoing legal proceedings (IMED Surgical and Wishbone Medical), purchase obligations for technology platforms, and royalty agreements - The company is involved in legal proceedings, including a software ownership dispute with IMED Surgical and patent infringement litigation with Wishbone Medical, Inc., which was settled in September 2023 for all claims against Wishbone Medical, Inc[100][105][108] - Remaining purchase commitments under a license agreement for the 7D Surgical FLASH Navigation platform are $1,345 thousand for 2023 and $2,340 thousand for 2024[111] - The company recorded an expense of $1,053 thousand for the nine months ended September 30, 2023, due to an estimated shortfall in meeting minimum performance metrics for the FIREFLY Technology license agreement[111] 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 and condition for the three and nine months ended September 30, 2023, discussing revenue drivers, expense changes, liquidity, capital resources, and key trends and uncertainties Overview OrthoPediatrics is the sole global medical device company dedicated to pediatric orthopedics, offering 52 surgical systems across trauma and deformity, scoliosis, and sports medicine. The company operates with a network of independent sales agencies in the U.S. and distributors/agencies internationally, with a direct sales organization established in Germany in 2023 - OrthoPediatrics is the only global medical device company exclusively focused on pediatric orthopedics, serving a $3.9 billion global market opportunity[115] - The company markets 52 surgical systems across trauma and deformity, scoliosis, and sports medicine, primarily through 38 independent sales agencies in the U.S. and distributors/agencies in over 70 international countries[117][118][119] - A direct sales organization was established in Germany in January 2023 to enhance European operations[120] Environmental, Social and Governance ("ESG") Activities OrthoPediatrics is committed to ESG activities, having impacted over 690,000 children. The company has an internal ESG team, is ISO 13485 certified, participates in philanthropic causes, and focuses on fostering a diverse and inclusive environment - OrthoPediatrics has impacted over 690,000 children and is committed to expanding social efforts, minimizing environmental impact, and ensuring corporate governance[122] - The company is ISO 13485 certified, partners with charitable organizations like the World Pediatric Project, and focuses on diversity and inclusion, having added two diverse directors to its Board since 2022[123] Trends and Uncertainties The company faces uncertainties from potential impairment charges on intangible assets (like the ApiFix trademark), the impact of widespread respiratory illnesses (RSV), and ongoing disruptions from the COVID-19 pandemic on elective procedures and hospital staffing - A partial impairment loss of $1.0 million was recorded for the ApiFix trademark in the three and nine months ended September 30, 2023, due to lower forecasted revenue[126] - Widespread health emergencies, such as RSV and COVID-19, have negatively impacted sales volume and may continue to do so by absorbing hospital capacity and delaying elective procedures[127][128] Summary of Statements of Operations This section provides a detailed analysis of the company's financial performance, including net revenue, cost of revenue, gross margin, and operating expenses (sales and marketing, general and administrative, trademark impairment, and research and development) for the three and nine months ended September 30, 2023 and 2022 Net Revenue Net revenue increased by 14% to $40.0 million for the three months and 22% to $111.1 million for the nine months ended September 30, 2023, primarily driven by strong performance in trauma and deformity, partly due to acquisitions Table: Net Revenue Performance | Metric | 3 Months Ended Sep 30, 2023 (in Thousands) | 3 Months Ended Sep 30, 2022 (in Thousands) | Change (in Thousands) | Change (%) | 9 Months Ended Sep 30, 2023 (in Thousands) | 9 Months Ended Sep 30, 2022 (in Thousands) | Change (in Thousands) | Change (%) | | :----------------------------------- | :----------------------------------------- | :----------------------------------------- | :-------------------- | :--------- | :----------------------------------------- | :----------------------------------------- | :-------------------- | :--------- | | Net Revenue | $39,972 | $34,950 | +$5,022 | +14% | $111,119 | $91,295 | +$19,824 | +22% | | Trauma and deformity sales | $28,806 | $23,892 | +$4,914 | +21% | $79,715 | $62,976 | +$16,739 | +27% | | Scoliosis sales | $10,304 | $9,979 | +$325 | +3% | $28,270 | $25,383 | +$2,887 | +11% | - Trauma and deformity sales growth was driven by Cannulated Screws, PNP Femur, PediPlate, external fixation, and Pega systems, including revenue from prior year acquisitions[134][135] - Scoliosis sales increased due to RESPONSE 5.5/6.0 and ApiFix systems, and revenue from 7D Technology[135] Cost of Revenue and Gross Margin Cost of revenue remained flat for the three months but increased by 22% for the nine months ended September 30, 2023, primarily due to sales volume and acquisitions. Gross margin was 77% for the three months and 76% for the nine months ended September 30, 2023 Table: Cost of Revenue and Gross Margin | Metric | 3 Months Ended Sep 30, 2023 (in Thousands) | 3 Months Ended Sep 30, 2022 (in Thousands) | Change (in Thousands) | Change (%) | 9 Months Ended Sep 30, 2023 (in Thousands) | 9 Months Ended Sep 30, 2022 (in Thousands) | Change (in Thousands) | Change (%) | | :---------------- | :----------------------------------------- | :----------------------------------------- | :-------------------- | :--------- | :----------------------------------------- | :----------------------------------------- | :-------------------- | :--------- | | Cost of Revenue | $9,019 | $9,061 | -$42 | -0.46% | $26,580 | $21,859 | +$4,721 | +22% | | Gross Margin | 77% | 74% | +3% | | 76% | 76% | 0% | | - The increase in cost of revenue for the nine-month period was primarily due to higher sales volume, including costs associated with revenue generated by acquisitions and a mix related to additional international sales[136] Sales and Marketing Expenses Sales and marketing expenses increased by 14% for both the three and nine months ended September 30, 2023, primarily due to higher sales commission expenses Table: Sales and Marketing Expenses | Metric | 3 Months Ended Sep 30, 2023 (in Thousands) | 3 Months Ended Sep 30, 2022 (in Thousands) | Change (in Thousands) | Change (%) | 9 Months Ended Sep 30, 2023 (in Thousands) | 9 Months Ended Sep 30, 2022 (in Thousands) | Change (in Thousands) | Change (%) | | :------------------------ | :----------------------------------------- | :----------------------------------------- | :-------------------- | :--------- | :----------------------------------------- | :----------------------------------------- | :-------------------- | :--------- | | Sales and Marketing Expenses | $13,582 | $11,919 | +$1,663 | +14% | $38,963 | $34,108 | +$4,855 | +14% | - The increase in sales and marketing expenses was primarily driven by increased sales commission expenses[137] General and Administrative Expenses General and administrative expenses increased by 22% for the three months and 30% for the nine months ended September 30, 2023, mainly due to increased personnel, resources for business expansion, and higher stock compensation. Depreciation and amortization also rose due to higher set deployments and acquisitions Table: General and Administrative Expenses | Metric | 3 Months Ended Sep 30, 2023 (in Thousands) | 3 Months Ended Sep 30, 2022 (in Thousands) | Change (in Thousands) | Change (%) | 9 Months Ended Sep 30, 2023 (in Thousands) | 9 Months Ended Sep 30, 2022 (in Thousands) | Change (in Thousands) | Change (%) | | :-------------------------------- | :----------------------------------------- | :----------------------------------------- | :-------------------- | :--------- | :----------------------------------------- | :----------------------------------------- | :-------------------- | :--------- | | General and Administrative Expenses | $18,507 | $15,116 | +$3,391 | +22% | $55,827 | $42,829 | +$12,998 | +30% | | Depreciation and Amortization | $5,000 (approx) | $3,300 (approx) | +$1,700 (approx) | +52% | $12,900 (approx) | $9,600 (approx) | +$3,300 (approx) | +35% | - Increases were primarily driven by the addition of personnel and resources to support business expansion, and higher stock compensation due to increased personnel and service-based vesting conditions from acquisitions[138] Trademark Impairment The company recorded a trademark impairment charge of $1.0 million for the three and nine months ended September 30, 2023, related to the ApiFix trademark, a decrease from $3.6 million in the prior year Table: Trademark Impairment | Metric | 3 Months Ended Sep 30, 2023 (in Thousands) | 3 Months Ended Sep 30, 2022 (in Thousands) | Change (in Thousands) | Change (%) | 9 Months Ended Sep 30, 2023 (in Thousands) | 9 Months Ended Sep 30, 2022 (in Thousands) | Change (in Thousands) | Change (%) | | :---------------- | :----------------------------------------- | :----------------------------------------- | :-------------------- | :--------- | :----------------------------------------- | :----------------------------------------- | :-------------------- | :--------- | | Trademark Impairment | $985 | $3,609 | -$2,624 | -73% | $985 | $3,609 | -$2,624 | -73% | - The impairment charge was associated with the ApiFix trademark due to lower forecasted revenue[64][140] Research and Development Expenses Research and development expenses increased by 8% for the three months and 25% for the nine months ended September 30, 2023, driven by incremental product development and additional personnel Table: Research and Development Expenses | Metric | 3 Months Ended Sep 30, 2023 (in Thousands) | 3 Months Ended Sep 30, 2022 (in Thousands) | Change (in Thousands) | Change (%) | 9 Months Ended Sep 30, 2023 (in Thousands) | 9 Months Ended Sep 30, 2022 (in Thousands) | Change (in Thousands) | Change (%) | | :-------------------------- | :----------------------------------------- | :----------------------------------------- | :-------------------- | :--------- | :----------------------------------------- | :----------------------------------------- | :-------------------- | :--------- | | Research and Development Expenses | $2,387 | $2,206 | +$181 | +8% | $7,449 | $5,980 | +$1,469 | +25% | - The increase was primarily due to incremental product development and the addition of personnel to support future business growth[141] Total Other (Income) Expenses Other income significantly decreased by 96% for the three months and 80% for the nine months ended September 30, 2023, primarily due to a lower fair value adjustment of contingent consideration and a decrease in net interest expense Table: Total Other (Income) Expenses | Metric | 3 Months Ended Sep 30, 2023 (in Thousands) | 3 Months Ended Sep 30, 2022 (in Thousands) | Change (in Thousands) | Change (%) | 9 Months Ended Sep 30, 2023 (in Thousands) | 9 Months Ended Sep 30, 2022 (in Thousands) | Change (in Thousands) | Change (%) | | :---------------------- | :----------------------------------------- | :----------------------------------------- | :-------------------- | :--------- | :----------------------------------------- | :----------------------------------------- | :-------------------- | :--------- | | Total Other Income | $(766) | $(21,357) | +$20,591 | -96% | $(4,276) | $(21,297) | +$17,021 | -80% | - The change was primarily driven by the fair value adjustment of contingent consideration and a decrease in net interest expense[142] Liquidity and Capital Resources The company has incurred operating losses and negative cash flows from operations, with an accumulated deficit of $191.1 million as of September 30, 2023. It funds operations through stock sales, convertible securities, debt, and product sales, maintaining $84.0 million in cash, cash equivalents, and short-term investments Cash Flows This section summarizes the cash flows from operating, investing, and financing activities for the nine months ended September 30, 2023 and 2022 Table: Cash Flow Summary | Cash Flow Activity | 9 Months Ended Sep 30, 2023 (in Thousands) | 9 Months Ended Sep 30, 2022 (in Thousands) | | :----------------------------------------- | :----------------------------------------- | :----------------------------------------- | | Net cash used in operating activities | $(19,503) | $(18,425) | | Net cash provided by (used in) investing activities | $23,755 | $(90,144) | | Net cash (used in) provided by financing activities | $(2,086) | $136,009 | | Net increase in cash, cash equivalents and restricted cash | $1,770 | $27,866 | Cash Used in Operating Activities Net cash used in operating activities increased to $19.5 million for the nine months ended September 30, 2023, primarily due to increased inventory purchases to support sales growth and higher accounts receivable, partially offset by cash from accounts payable Table: Cash Used in Operating Activities | Metric | 9 Months Ended Sep 30, 2023 (in Thousands) | 9 Months Ended Sep 30, 2022 (in Thousands) | Change (in Thousands) | | :-------------------------------- | :----------------------------------------- | :----------------------------------------- | :-------------------- | | Net cash used in operating activities | $(19,503) | $(18,425) | -$1,078 | | Net cash used for working capital | $(23,400) (approx) | $(17,400) (approx) | -$6,000 (approx) | - The increase in cash used was driven by additional inventory purchases for sales growth and accounts receivable from increased sales, partially offset by cash provided by accounts payable[146] Cash Provided by (Used in) Investing Activities Net cash provided by investing activities was $23.8 million for the nine months ended September 30, 2023, a significant shift from $90.1 million used in the prior year, mainly due to the net sale of short-term marketable securities and reduced business combinations Table: Cash Provided by (Used in) Investing Activities | Metric | 9 Months Ended Sep 30, 2023 (in Thousands) | 9 Months Ended Sep 30, 2022 (in Thousands) | Change (in Thousands) | | :----------------------------------------- | :----------------------------------------- | :----------------------------------------- | :-------------------- | | Net cash provided by (used in) investing activities | $23,755 | $(90,144) | +$113,899 | - The change was primarily driven by the net sale of short-term marketable securities and a decrease in cash used for business combinations compared to the prior year[147] Cash (Used in) Provided by Financing Activities Net cash used in financing activities was $2.1 million for the nine months ended September 30, 2023, a reversal from $136.0 million provided in the prior year, primarily due to the cash settlement of the ApiFix installment payment and the absence of a follow-on offering Table: Cash (Used in) Provided by Financing Activities | Metric | 9 Months Ended Sep 30, 2023 (in Thousands) | 9 Months Ended Sep 30, 2022 (in Thousands) | Change (in Thousands) | | :----------------------------------------- | :----------------------------------------- | :----------------------------------------- | :-------------------- | | Net cash (used in) provided by financing activities | $(2,086) | $136,009 | -$138,095 | - The shift was mainly due to the cash settlement of the current year ApiFix installment payment and the absence of proceeds from a common stock issuance (follow-on offering) that occurred in the prior year[148] Indebtedness The company has a $50.0 million revolving credit facility with Squadron Capital LLC, with no outstanding balance as of September 30, 2023, and a mortgage note payable to an affiliate maturing in August 2028 - The company has a $50.0 million revolving credit facility with Squadron Capital LLC, with no outstanding indebtedness as of September 30, 2023[149] - A mortgage note payable to Tawani Enterprises Inc., an affiliate, has monthly principal and interest installments of $15,543 and matures in August 2028[150] Pediatric Orthopedic Business Seasonality The company's revenue is typically higher during summer months and holiday periods, driven by increased pediatric surgeries for trauma and deformity and scoliosis products, which benefit from school breaks for recovery - Revenue is typically higher in summer months and holiday periods due to increased pediatric surgeries, influenced by school breaks for recovery[151] - Scoliosis patients often have additional health challenges, making their procedure scheduling variable[151] Critical Accounting Policies and Significant Judgments and Estimates There were no material changes to the company's critical accounting policies as disclosed in its 2022 Annual Report on Form 10-K - No material changes to critical accounting policies were reported since the 2022 Annual Report on Form 10-K[152] Recent Accounting Pronouncements This section refers to Note 2 for a description of recent accounting pronouncements applicable to the condensed consolidated financial statements - Refer to Note 2 for details on recent accounting pronouncements[153] Item 3. Quantitative and Qualitative Disclosures About Market Risk As a "smaller reporting company," OrthoPediatrics is not required to provide quantitative and qualitative disclosures about market risk - The company is exempt from providing market risk disclosures due to its "smaller reporting company" status[154] Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of September 30, 2023. The company implemented an upgraded ERP system, which is expected to affect internal control over financial reporting as its use expands - Management concluded that disclosure controls and procedures were effective as of September 30, 2023, providing reasonable assurance of timely and accurate information reporting[155][156] - An upgraded ERP system was substantially completed, which is expected to improve efficiency and will likely affect internal control over financial reporting as its use expands[159] PART II. OTHER INFORMATION This part provides additional information including legal proceedings, risk factors, equity security sales, and other disclosures relevant to the company's operations Item 1. Legal Proceedings This section refers to Note 13 for a discussion of legal proceedings, confirming that no other current proceedings would materially affect the company's financial position, results of operations, or cash flows - A discussion of legal proceedings is incorporated by reference from Note 13 of the financial statements[162] - No other legal proceedings are currently pending that would individually or in aggregate materially affect the company's financial position, results of operations, or cash flows[163] Item 1A. Risk Factors This section directs readers to the "Risk Factors" in the company's Annual Report on Form 10-K filed on March 1, 2023, noting no material changes since that filing - Readers should refer to the "Risk Factors" in the Annual Report on Form 10-K filed March 1, 2023, as there have been no material changes[164] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds On July 1, 2023, the company issued 11,133 unregistered common shares as part of the acquisition of assets from Rhino Pediatric Orthopedic Designs, Inc. No proceeds were used from this issuance - On July 1, 2023, 11,133 unregistered common shares were issued for the acquisition of Rhino Pediatric Orthopedic Designs, Inc. assets, valued at $42.91 per share[165] - The issuance was made under an exemption provided by Section 4(a)(2) of the Securities Act of 1933[165] Item 3. Defaults Upon Senior Securities There were no defaults upon senior securities reported - No defaults upon senior securities were reported[170] Item 4. Mine Safety Disclosures No mine safety disclosures were reported - No mine safety disclosures were reported[171] Item 5. Other Information This section states that there is no information required under Form 8-K, no modifications to the nomination process, and no director or officer adopted or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during the quarter - No information required under Form 8-K was reported[173] - No modifications to the nomination process were reported[175] - No director or officer adopted or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during the three months ended September 30, 2023[176] Item 6. Exhibits This section lists all exhibits included in the report or incorporated by reference, such as acquisition agreements, corporate documents, loan agreements, and certifications - The report includes various exhibits, such as acquisition agreements (ApiFix, MD Ortho, MedTech), corporate governance documents, loan agreements with Squadron Capital LLC, and certifications from the CEO and CFO[179][180] Signatures This section provides the official signatures of the company's President, Chief Executive Officer, Chief Financial Officer, and Chief Operating Officer, affirming the report's contents - The report is signed by David R. Bailey, President and Chief Executive Officer, and Fred L. Hite, Chief Financial Officer and Chief Operating Officer, as of November 7, 2023[184]