OrthoPediatrics(KIDS) - 2020 Q4 - Annual Report

PART I Business OrthoPediatrics Corp. is a global medical device company exclusively focused on pediatric orthopedics, addressing an estimated $3.3 billion global market through its trauma, deformity, scoliosis, and sports medicine product lines - OrthoPediatrics is the only global medical device company exclusively focused on the pediatric orthopedic market, estimated at a $3.3 billion global opportunity[33] - The company markets 35 surgical systems across trauma and deformity correction, scoliosis, and sports medicine categories[36] - In 2020, the company completed strategic acquisitions including Telos Partners, ApiFix, and Band-Lok intellectual property assets[23][24][25] - The company utilizes independent sales agencies in the U.S. and a mix of distributors and direct sales internationally, expanding its direct sales model in key markets[37][81] Revenue by Product Category (2018-2020) | Product Category | 2020 Revenue | 2019 Revenue | 2018 Revenue | | :--- | :--- | :--- | :--- | | Trauma and Deformity | $47.7 million (67%) | $49.4 million (68%) | $39.7 million (69%) | | Scoliosis | $20.7 million (29%) | $21.5 million (30%) | $16.7 million (29%) | | Sports Medicine/Other | $2.7 million (4%) | $1.7 million (2%) | $1.2 million (2%) | - The COVID-19 pandemic negatively impacted business by postponing elective surgeries, though R&D, acquisitions, and capital raises continued in 2020[31][156] Risk Factors The company faces significant risks including the ongoing impact of the COVID-19 pandemic, a history of net losses, intense competition, extensive government regulation, and reliance on third-party sales and manufacturing - The COVID-19 pandemic significantly disrupted business by postponing elective surgeries, with continued impact remaining highly uncertain[155][156] - The company has a history of net losses, including $32.9 million in 2020, and an accumulated deficit of $161.8 million as of December 31, 2020[158] - The business faces intense competition from larger companies with greater financial resources and established distribution networks[179][180] - Operations are subject to extensive and complex government regulation by the FDA and comparable authorities abroad, with non-compliance potentially leading to significant penalties[246] - The company relies on third-party independent sales agencies and distributors, with two U.S. agencies accounting for 14.2% and 13.8% of global revenue in 2020, creating concentration risk[293][297] - Protecting intellectual property is critical, with 28 issued U.S. patents and 56 issued foreign patents as of December 31, 2020, but risks of infringement claims exist[307][308] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None Properties The company owns a 22,000 square foot office in Warsaw, Indiana, undergoing a 20,000 square foot expansion, and maintains offices in the Netherlands and Israel - The main facility is a 22,000 sq. ft. company-owned office in Warsaw, Indiana[350] - An expansion of the Warsaw facility is in process, adding another 20,000 square feet[350] - The company also maintains two offices in the Netherlands and one in Israel[350] Legal Proceedings The company is involved in several legal proceedings, including patent infringement suits by K2M, Inc. and Dr. Mark Barry, a software ownership dispute with IMED Surgical, and has accrued $6.3 million for settlement costs - K2M, Inc. filed a patent infringement suit regarding instruments in the RESPONSE™ spine systems, with settlement negotiations underway post-year-end[352][353] - IMED Surgical, LLC filed a lawsuit claiming ownership of the patented point-and-click planning software for the Orthex Hexapod technology[354] - Dr. Mark Barry filed a patent infringement suit concerning spinal deformity correction systems, with a verbal settlement reached in February 2021[358][359] - The company recorded an accrual of $6.3 million for legal settlement costs related to various litigation matters[359][655] Mine Safety Disclosures This item is not applicable to the company - Not applicable PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq under "KIDS", has never paid cash dividends, and had 19,658,335 shares outstanding as of March 9, 2021, with no equity repurchases in Q4 2020 - The company's common stock is listed on the Nasdaq Global Market under the symbol "KIDS"[364] - The company has never paid cash dividends and does not intend to in the foreseeable future[365] - As of March 9, 2021, there were 19,658,335 shares of common stock outstanding[366] Selected Financial Data This section provides a five-year summary of key financial data, showing $71.1 million in 2020 revenue, consistent net losses, and significant asset growth to $320.4 million in 2020 Selected Financial Data (2016-2020) | (In Thousands) | 2020 | 2019 | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | :--- | :--- | | Net revenue | $71,078 | $72,552 | $57,559 | $45,620 | $37,298 | | Gross profit | $55,031 | $54,619 | $42,680 | $34,450 | $26,367 | | Operating loss | $(26,755) | $(9,077) | $(9,553) | $(6,472) | $(6,127) | | Net loss | $(32,944) | $(13,731) | $(12,025) | $(8,932) | $(6,572) | | Total assets | $320,412 | $194,564 | $112,105 | $82,301 | $30,676 | | Total stockholders' equity (deficit) | $234,768 | $142,361 | $81,732 | $47,495 | $(65,309) | Reconciliation of Net Loss from Continuing Operations to Adjusted EBITDA (2016-2020) | (In Thousands) | 2020 | 2019 | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | :--- | :--- | | Net Loss from Continuing Operations | $(32,944) | $(12,685) | $(12,025) | $(8,932) | $(6,572) | | Interest expense, net | 3,412 | 3,538 | 2,255 | 2,490 | 1,476 | | Depreciation and amortization | 8,010 | 4,671 | 2,892 | 2,405 | 1,902 | | Stock-based compensation | 6,196 | 2,603 | 1,199 | 1,429 | 1,251 | | Fair value adjustment of contingent consideration | 3,520 | — | — | — | — | | Accrued legal settlement costs | 6,342 | — | — | — | — | | Adjusted EBITDA | $(5,871) | $(1,066) | $(3,476) | $(58) | $(995) | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses a 2% decrease in 2020 net revenue to $71.1 million due to COVID-19 and a distributor conversion, alongside increased operating expenses, a $32.9 million net loss, and strengthened liquidity from a $70.2 million equity offering - The COVID-19 pandemic caused significant business disruption, leading to deferred elective surgeries and reduced revenue in 2020[395][399] Results of Operations Comparison (2019 vs. 2020) | (in thousands) | 2020 | 2019 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Net revenue | $71,078 | $72,552 | $(1,474) | (2)% | | Gross profit | $55,031 | $54,619 | $412 | 0.8% | | Operating loss | $(26,755) | $(9,077) | $(17,678) | 194.8% | | Net loss | $(32,944) | $(13,731) | $(19,213) | 140% | - 2020 revenue was adversely affected by a $2.7 million reduction due to inventory repurchase from a European distributor conversion[420] - General and administrative expenses increased 44% in 2020 to $38.3 million, driven by acquisitions, increased stock-based compensation, and legal expenses[424] - The company accrued $6.3 million for legal settlement expenses in 2020[412] - Net cash used in operating activities was $18.4 million in 2020, while net cash provided by financing activities was $46.7 million, primarily from a $70.2 million net follow-on offering[437][438][440] - In August 2020, the company amended its loan agreement with Squadron, increasing its revolving credit facility from $15 million to $25 million and extending maturity to January 2024[444] Quantitative and Qualitative Disclosure about Market Risk The company's primary market risks are minimal interest rate risk and growing foreign currency risk from international business, with no current hedging and an estimated immaterial impact from a 10% adverse exchange rate change - The company's investment portfolio, primarily high-quality, short-term debt instruments, results in no material exposure to interest rate risk[471] - Expanding international business exposes the company to foreign currency exchange risk, primarily with Pound Sterling, Euro, Australian Dollar, Canadian Dollar, and Israeli Shekel[474] - The company does not currently hedge foreign currency exposure, and a hypothetical 10% adverse change in exchange rates would have had an immaterial effect on net loss[474] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for fiscal year 2020, detailing financial position, operations, and cash flows, with $320.4 million in total assets and a $32.9 million net loss Consolidated Balance Sheet Data (as of Dec 31) | (in thousands) | 2020 | 2019 | | :--- | :--- | :--- | | Total Current Assets | $158,429 | $128,058 | | Total Assets | $320,412 | $182,154 | | Total Current Liabilities | $35,028 | $13,663 | | Total Liabilities | $85,644 | $39,793 | | Total Stockholders' Equity | $234,768 | $142,361 | Consolidated Statement of Operations Data (Year Ended Dec 31) | (in thousands) | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Net revenue | $71,078 | $72,552 | $57,559 | | Gross profit | $55,031 | $54,619 | $42,680 | | Operating loss | $(26,755) | $(9,077) | $(9,553) | | Net loss | $(32,944) | $(13,731) | $(12,025) | | Net loss per share | $(1.82) | $(0.94) | $(0.96) | Consolidated Statement of Cash Flows Data (Year Ended Dec 31) | (in thousands) | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Net cash used in operating activities | $(18,442) | $(17,769) | $(15,583) | | Net cash used in investing activities | $(69,834) | $(61,922) | $(5,965) | | Net cash provided by financing activities | $46,732 | $91,019 | $39,657 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no disagreements with its independent registered public accounting firm regarding accounting principles, financial disclosure, or auditing scope - There have been no disagreements with the company's independent registered public accounting firm[661] Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2020, with no auditor attestation required as an emerging growth company - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2020[663] - Based on the COSO framework, management concluded that the company's internal control over financial reporting was effective as of December 31, 2020[666] - No material changes in internal control over financial reporting occurred during the most recent fiscal quarter[667] Other Information There is no other information to report under this item - None PART III Directors, Executive Officers and Corporate Governance Information for this item is incorporated by reference from the company's definitive proxy statement for its 2021 Annual Meeting of Stockholders - Information is incorporated by reference from the registrant's definitive proxy statement[670] Executive Compensation Information for this item is incorporated by reference from the company's definitive proxy statement for its 2021 Annual Meeting of Stockholders - Information is incorporated by reference from the registrant's definitive proxy statement[671] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information for this item is incorporated by reference from the company's definitive proxy statement for its 2021 Annual Meeting of Stockholders - Information is incorporated by reference from the registrant's definitive proxy statement[672] Certain Relationships, Related Transactions and Director Independence Information for this item is incorporated by reference from the company's definitive proxy statement for its 2021 Annual Meeting of Stockholders - Information is incorporated by reference from the registrant's definitive proxy statement[673] Principal Accountant Fees and Services Information for this item is incorporated by reference from the company's definitive proxy statement for its 2021 Annual Meeting of Stockholders - Information is incorporated by reference from the registrant's definitive proxy statement[674] PART IV Exhibits and Financial Statement Schedules This section lists the financial statements filed under Item 8 and provides a detailed list of all exhibits filed with the Form 10-K, including acquisition and loan agreements - This item lists the financial statements and schedules filed with the report[677] - A detailed list of exhibits is provided, including acquisition agreements, charter documents, loan agreements, and compensatory plans[678] Form 10-K Summary No Form 10-K summary is provided - None