OrthoPediatrics(KIDS) - 2021 Q4 - Annual Report

Forward-Looking Statements The report contains forward-looking statements regarding future results, financial position, business strategy, products, approvals, R&D costs, collaborations, and management plans - The report contains forward-looking statements regarding future results, financial position, business strategy, products, approvals, R&D costs, collaborations, and management plans[14] - These statements involve known and unknown risks, uncertainties, and important factors that may cause actual results to differ materially from those expressed or implied[14] - The company intends these statements to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and does not plan to publicly update or revise them, except as required by law[14][15] Risk Factor Summary The business is subject to numerous risks that could adversely affect operations, financial condition, and stock price - The business is subject to numerous risks that could adversely affect operations, financial condition, and stock price[18] - Key risks include the ongoing COVID-19 pandemic, historical losses and inability to sustain profitability, need for additional capital, challenges in commercializing products and developing new ones, lack of long-term clinical data, declining third-party payor reimbursement, difficulty demonstrating product merits to surgeons, extensive government regulation, reliance on third-party sales networks, and intellectual property protection issues[18] PART I This section details the company's business operations, market, product portfolio, competitive landscape, regulatory environment, and associated risk factors Item 1. Business OrthoPediatrics Corp. is a global medical device company exclusively focused on pediatric orthopedic implants across trauma, scoliosis, and sports medicine General OrthoPediatrics, a Nasdaq-listed Delaware corporation, specializes in pediatric orthopedic implants, expanding globally through acquisitions and partnerships - OrthoPediatrics Corp. is a Delaware corporation, headquartered in Warsaw, Indiana, organized in November 2007, with Common Stock traded on the Nasdaq Global Market under the symbol KIDS[19] - The company designs, develops, and markets anatomically appropriate implants and devices for children with orthopedic conditions, selling to hospitals and medical facilities in the United States (since 2008) and internationally (since 2011)[19] - Strategic acquisitions include Vilex and Orthex (2019, $60 million), Telos Partners (2020, $3 million), ApiFix (2020, $2 million cash + ~$35 million stock), Band-Lok IP (2020, ~$3 million), and Devise Ortho IP (2021, $0.9 million)[20][22][23][24][25] - Partnerships include exclusive distribution rights for FIREFLY Technology and 7D Surgical FLASH Navigation platform for pediatric applications[26] - The company continued to invest in R&D, its people, and innovative solutions during the COVID-19 pandemic, acquiring technologies and deploying instrument sets[29] - OrthoPediatrics is committed to Environmental, Social and Governance (ESG) principles, having impacted over 234,000 children since inception[30] Consolidated Balance Sheet Highlights (in thousands) | Metric | Amount (as of Dec 31, 2021) | | :---------------------- | :-------------------------- | | Consolidated Total Assets | $304,300 | | Consolidated Total Liabilities | $78,900 | | Stockholders' Equity | $225,400 | | Full-time Employees | 133 | The Company OrthoPediatrics, the only global pediatric orthopedic device company, serves a $3.3 billion market with 37 surgical systems and a 25.4% CAGR - OrthoPediatrics is the only global medical device company focused exclusively on providing comprehensive orthopedic solutions to the pediatric market[32] - The company estimates its currently served market portion represents a $3.3 billion opportunity globally, including over $1.5 billion in the United States[32] - It markets 37 surgical systems across trauma and deformity correction, scoliosis, and sports medicine, with proprietary features designed to protect growth plates, fit pediatric anatomy, enable earlier intervention, and ease implant removal[34] - The U.S. sales organization consists of 40 independent sales agencies with over 190 representatives, accounting for 76% of global revenue in 2021[35] - The company is the largest financial contributor to five primary pediatric orthopedic surgical societies and a major sponsor of continuing medical education (CME) courses, conducting over 300 training workshops in 2021[37][38] Key Financial Results (in millions USD) | Metric | 2021 (Million USD) | | :----------------------------------- | :----------------- | | Revenue | $98.0 | | Compound Annual Growth Rate (2011-2021) | 25.4% | | Accumulated Deficit (as of Dec 31, 2021) | $178.0 | Industry Overview The pediatric orthopedic industry addresses unique skeletal characteristics and complex disorders in children, requiring specialized implants for generalist surgeons - Children's skeletal anatomy and physiology differ significantly from adults, with smaller, growing bones containing growth plates, unique composition and vasculature, and changing shapes[42] - Injury to growth plates can lead to growth arrest and deformity, and trauma to blood vessels during surgery can cause bone tissue death[42] - Complex disorders like cerebral palsy (affecting ~500,000 children in the US) pose significant surgical challenges, often requiring multiple surgeries[42][44] - Pediatric orthopedic surgeons are largely generalists, treating a wide range of congenital, developmental, and traumatic conditions, unlike adult orthopedic specialists[46] - In 2021, there were over 1,400 members of the Pediatric Orthopaedic Society of North America (POSNA), compared to approximately 33,400 adult orthopedic surgeons in the US[46] Market Opportunity The company targets a pediatric orthopedic implant market estimated at $3.3 billion globally, with $1.5 billion in the United States, segmented across trauma, scoliosis, and sports medicine - The company serves a portion of the pediatric orthopedic implant market estimated at $3.3 billion globally, including over $1.5 billion in the United States[47] - Approximately 300 U.S. hospitals performed over 62% of all pediatric trauma and deformity and scoliosis procedures in 2015, representing a target market of $0.8 billion[54][55] - Future market expansion is expected in categories such as craniomaxillofacial, upper extremity, pediatric orthopedic oncology, pelvis, and other sports-related injuries[56] U.S. Pediatric Orthopedic Implant Market (Estimated) | Category | Estimated Market Size (Million USD) | | :----------------------- | :---------------------------------- | | Trauma and Deformity | $609 | | Scoliosis (Fusion) | $315 | | Scoliosis (Non-Fusion) | $200 | | Sports Medicine | $187 | | Smart Implants | $140 | Our Exclusive Focus on Pediatric Orthopedic Surgery OrthoPediatrics' exclusive focus on pediatric orthopedics is supported by surgeon involvement, clinical education, a comprehensive 37-system product portfolio, and a scalable business model - The company is the only one with a global sales and product development infrastructure exclusively focused on the pediatric orthopedic implant market[57] - Competitive strengths include participation of pediatric orthopedic surgeons in new product development, leading support for clinical education, exclusive focus on pediatric orthopedics, and a comprehensive portfolio of 37 surgical systems with over 8,600 SKUs[60] - The company's scalable business model targets high-volume children's hospitals, where over 62% of U.S. pediatric trauma and deformity and scoliosis procedures were performed in 2015[62] - Strategic pillars include focusing on high-volume children's hospitals, providing a broad product portfolio, deploying instrument sets, aggressive R&D and acquisitions, and training future pediatric orthopedic surgeons[63][66] Our Product Portfolio OrthoPediatrics offers 37 surgical systems; in 2021, trauma and deformity generated $65.8 million (67%), scoliosis $28.0 million (29%), and sports medicine $4.2 million (4%), with seasonal revenue fluctuations - Scoliosis products include RESPONSE systems, BandLoc, FIREFLY Pedicle Screw Navigation Guides, and the ApiFix Mid-C System[66] - Sports medicine/other products primarily include the ACL, MPFL Reconstruction system, and Telos[68] - Revenue is typically higher in the summer months and holiday periods, influenced by the higher incidence of pediatric surgeries during school breaks[69] Global Revenue by Product Category (in thousands) | Product Category | 2021 Revenue (in thousands) | % of Total Revenue (2021) | 2020 Revenue (in thousands) | % of Total Revenue (2020) | YoY Change (2021 vs 2020) | | :-------------------- | :----------- | :------------------------ | :----------- | :------------------------ | :------------------------ | | Trauma and deformity | $65,829 | 67% | $47,677 | 67% | 38% | | Scoliosis | $28,046 | 29% | $20,738 | 29% | 35% | | Sports medicine/other | $4,174 | 4% | $2,663 | 4% | 57% | Product Pipeline The company's product pipeline focuses on developing new systems, expanding existing lines, and improving quality, with key projects including the Pediatric Nailing Platform | Tibia and Active Growing Implants - Product development objectives include innovative new systems, line extensions for current portfolios, and improvements to quality and cost of existing implants and instruments[70] - Key pipeline projects include the Pediatric Nailing Platform | Tibia (510(k) submission H2 2022, launch 2023), Active Growing Implants for early onset scoliosis and limb deformity, RESPONSE Rib and Pelvic System, Osteogenesis Imperfecta Nail System, Growth Guidance for Scoliosis, Operative Planning Software, and additional External Fixation Systems (Drive Rail launch H1 2022)[72][73][74][75][76][77] - The company aspires to launch at least one new surgical system and/or line extension/product improvement every quarter[70] Research and Product Development OrthoPediatrics leverages its pediatric orthopedic expertise and resources to develop innovative implants and instruments through collaborative R&D teams and continuous improvement - The company leverages its experience in pediatric orthopedics and exclusive rights to the Hamann-Todd Collection for innovative product development[78] - Significant investments are made in product development personnel and infrastructure, driven by a culture of continuous improvement[79] - New products are developed by teams of engineers, commercial personnel, and surgeon advisors through design, prototype, and market-testing phases[79] Sales and Marketing OrthoPediatrics operates a global commercial organization, with 40 U.S. independent sales agencies generating 76% of 2021 revenue, and is expanding direct sales internationally - The company has a robust pediatric-focused global commercial organization, with 40 independent sales agencies and 190 sales representatives in the U.S. (76% of global revenue in 2021)[80] - Internationally, the sales organization includes 40 independent stocking distributors and 14 independent sales agencies in 45 countries[81] - The company is transitioning to direct sales programs in select international markets (e.g., UK, Canada, Belgium, Netherlands, Italy, Germany, Switzerland, Austria) to enhance operations, increase revenue, and improve gross margin[81] - Intensive training programs are provided to the global sales organization to deepen knowledge of pediatric clinical conditions, surgical procedures, and products, aiming to increase effectiveness and surgeon confidence[82][83] Global Pediatric Orthopedic Surgeon Involvement, Education and Training OrthoPediatrics actively partners with pediatric orthopedic surgeons and societies, integrating their input into product development and sponsoring extensive clinical education and research - The company actively involves pediatric orthopedic surgeons in product development and clinical education, aided by its Medical Director[84] - It supports local, regional, and national educational courses, intensive hands-on training programs, and product-based workshops, conducting numerous workshops in 2021[85] - OrthoPediatrics is one of the largest financial contributors to five primary pediatric orthopedic surgical societies and a sponsor of major spine deformity organizations, demonstrating commitment to clinical training and research[86] - The company funds The Foundation for Advancing Pediatric Orthopaedics, a 501(c)3 public charity, to support non-commercial education programs and clinical research[87] Manufacturing and Suppliers OrthoPediatrics uses a contract manufacturing model with third-party ISO 13485 certified suppliers, minimizing capital investment and ensuring sufficient capacity through long-term contracts - Products are manufactured to specifications by third-party suppliers who meet FDA and other country-specific quality standards, including ISO 13485 certification[88][89] - The contract manufacturing model helps minimize capital investment, control costs, and shorten cycle times[88] - The company maintains long-term contracts with key suppliers and has redundant manufacturing capabilities for most products, ensuring sufficient capacity to meet global market demand[90] Intellectual Property OrthoPediatrics protects its intellectual property through 36 issued U.S. patents, 82 foreign patents, and numerous pending applications, along with trademarks and trade secrets - The company relies on patents, trade secrets, copyrights, and trademarks, along with confidentiality agreements, to protect its intellectual property[91][92] - Issued U.S. patents expire between 2024 and 2039[91] Intellectual Property Portfolio (as of Dec 31, 2021) | Category | Number | | :--------------------------- | :----- | | Issued U.S. Patents | 36 | | Issued Foreign Patents | 82 | | Pending U.S. Patent Applications | 25 | | Pending Foreign Patent Applications | 57 | | U.S. Trademark Registrations | 14 | | Foreign Trademark Registrations | 25 | Competition The orthopedic industry is highly competitive, with OrthoPediatrics competing against major players like DePuy Synthes and Medtronic, facing challenges from their extensive resources - The orthopedic industry is competitive, subject to rapid technological change, and affected by new product introductions[93] - Principal competitive factors include improved outcomes, surgeon acceptance, ease of use, reliability, product price, availability of instrument sets, effective marketing, and speed to market[93] - Competitors include DePuy Synthes Companies, Medtronic plc, Smith & Nephew plc, and Orthofix[93] - The company believes it has the broadest pediatric product offering but faces challenges from larger competitors' resources, established distribution networks, and surgeon familiarity with existing products[93] Human Capital and Community Support OrthoPediatrics employs 133 full-time staff, fostering an inclusive culture, supporting local communities, and partnering with organizations like the World Pediatric Project - As of December 31, 2021, the company employed 133 full-time employees, with 23 in research and development and 38 in sales and marketing[96] - The company strives to provide an inclusive, diverse, and safe workplace, with a results-oriented, people-focused corporate culture dedicated to improving children's lives[97] - It supports local communities through philanthropic causes and partners with organizations like the World Pediatric Project, providing surgical products for disadvantaged children[98][99] - Further details on Environmental, Social and Governance (ESG) efforts and current initiatives, including a Diversity & Inclusion Policy, are available on the corporate website[100] Government Regulation OrthoPediatrics' products and operations are extensively regulated by the FDA and foreign authorities, requiring compliance with 510(k), PMA, HDE, QSR, CE Mark, and various fraud, abuse, and privacy laws - The company's products and operations are subject to extensive regulation by the FDA in the United States and comparable authorities in foreign jurisdictions, covering development, manufacturing, labeling, marketing, and post-market activities[101][102] - U.S. medical devices are classified into Class I, II, or III. Most Class II devices require 510(k) clearance, while Class III devices require Premarket Approval (PMA). The ApiFix Mid-C System is approved under a Humanitarian Device Exemption (HDE)[103][104][106] - Post-market regulations include establishment registration, Quality System Regulation (QSR) compliance, medical device reporting, correction/removal/recall reporting, and Unique Device Identifiers (UDI)[109][110] - In the EEA, products must meet essential requirements of the Medical Devices Directive (MDD) and the new Medical Devices Regulation (MDR) for CE Mark. Post-Brexit, the UK requires compliance with UK Medical Device Regulations and the UKCA Mark[112][115][117][118] - The company is subject to federal, state, and foreign healthcare fraud and abuse laws (e.g., Anti-Kickback Statute, False Claims Act, Open Payments/Sunshine program) and data privacy and security laws (e.g., HIPAA, GDPR)[122][132][134][139] - Commercial success depends on adequate coverage and reimbursement from governmental authorities and private health insurers for procedures using its products[147] Item 1A. Risk Factors This section outlines significant financial, business, operational, regulatory, third-party reliance, and intellectual property risks that could adversely impact OrthoPediatrics' business and results Risks Related to Our Financial Condition and Capital Requirements OrthoPediatrics faces financial risks from the COVID-19 pandemic, historical losses ($178.0 million accumulated deficit), potential need for capital, restrictive loan covenants, and NOL limitations - The ongoing COVID-19 pandemic has adversely impacted business and financial results, leading to postponed elective procedures, staffing shortages, and potential supply chain disruptions[158][160][163][165] - The company may need to raise additional capital to fund existing commercial operations, develop new products, and expand, which could dilute existing stockholders or impose restrictive debt covenants[171][172][175] - Loan agreements with Squadron Capital LLC contain covenants that restrict business and financing activities, such as asset disposal, mergers, incurring additional debt, and paying dividends[176][177][178] - The effective tax rate may fluctuate due to changes in profitability mix, audit results, and tax laws. The ability to use net operating losses (NOLs) is limited by Section 382 ownership changes, with estimated annual limitations of $1.1 million (from 2014) and $9.7 million (from 2018)[180][181] Net Losses and Accumulated Deficit (in millions USD) | Metric | 2021 | 2020 | 2019 | As of Dec 31, 2021 | | :--------------------- | :------ | :------ | :------ | :----------------- | | Net Losses | $(16.3) | $(32.9) | $(13.7) | N/A | | Accumulated Deficit | N/A | N/A | N/A | $(178.0) | Risks Related to Our Business and Strategy OrthoPediatrics' growth depends on new product commercialization in a competitive market, facing challenges from quality issues, surgeon adoption, inventory costs, acquisition risks, and regulatory compliance - Long-term growth depends on the ability to commercialize products in development and develop new products in a competitive, rapidly changing industry[182][183] - Quality issues with products could harm brand and reputation, leading to adverse business impacts[187] - The company operates in a highly competitive environment with larger, more established competitors, making it difficult to increase market share and overcome surgeon familiarity with existing products[188][189][191] - Maintaining significant levels of consigned implant and instrument sets consumes resources, reduces cash flows, and can lead to inventory impairment charges due to obsolescence[193][194] - Growth through acquisitions or investments involves risks such as integration difficulties, unanticipated costs, diversion of management attention, and potential dilution of stockholders' ownership[196][197] - Market acceptance depends on gaining support from leading hospitals and key opinion leaders, and successfully demonstrating product merits to orthopedic surgeons, who may be hesitant to change practices[202][204][205] - Misuse or off-label use of products by surgeons, or failure to adequately train them, could result in patient injury, negative publicity, lawsuits, or regulatory sanctions[207][209] - The company has a limited operating history and faces challenges inherent to early-stage companies in evolving markets, including managing rapid growth and expanding sales infrastructure[210][211][215][216][217] - Lack of published long-term data supporting superior clinical outcomes could limit sales and increase regulatory and product liability risks[218][219] - Declining coverage and reimbursement from third-party payors for procedures using its products could reduce sales and increase pricing pressure[220][221] - Misconduct by employees, consultants, or sales partners, including non-compliance with regulatory standards, could lead to significant fines, sanctions, and reputational harm[227][228] - The proliferation of physician-owned distributorships (PODs) could increase pricing pressure or harm the ability to sell products to affiliated physicians[231][232] Risks Related to Administrative, Organizational and Commercial Operations and Growth Rapid growth strains OrthoPediatrics' infrastructure, risking loss of key personnel, exposing international operations (21% of 2021 revenue) to diverse regulations and currency fluctuations, and increasing public company costs - Rapid growth creates strain on organizational, administrative, and operational infrastructure, requiring continuous improvement in controls, systems, and workflow capacity[233][234][235] - The loss of senior management or the inability to attract and retain highly skilled salespeople and engineers could negatively impact business operations and growth[236][237] - International business operations (21% of 2021 revenue) are subject to risks including difficulties in managing foreign operations, compliance with diverse laws (e.g., export control, FCPA), differing regulatory requirements, tariffs, currency fluctuations, political instability, and challenges in intellectual property protection[238][239][240][244] - Violations of anti-corruption laws (FCPA, U.K. Anti-Bribery Act) by the company or its third parties could result in substantial fines, sanctions, civil/criminal penalties, and reputational harm[241][243] - Climate change and related legislative/regulatory initiatives may increase costs and impact business operations[245][246] - Operating as a public company incurs significant legal, accounting, and compliance costs, diverting management time, and requiring effective internal controls over financial reporting[247][248][249] - Disruptions in information technology systems (e.g., upgrades, power outages, cyber-attacks) could adversely affect business operations, data security, and financial results[251][252][253][254] - The company is exposed to various litigation claims and product liability lawsuits, which can result in significant legal fees, damages, reputational harm, and potential product recalls[255][256][258] - Operations are vulnerable to interruption or loss due to natural disasters, power loss, strikes, and other events beyond control, impacting facilities, suppliers, and customers[259][260] Risks Related to Regulatory Matters OrthoPediatrics faces extensive U.S. and international regulatory oversight, with non-compliance or delays in clearances risking severe enforcement actions, product recalls, and increased costs from legislative reforms - The company and its products are subject to extensive government regulation and oversight in the U.S. (FDA) and abroad, covering all aspects from design to post-market surveillance[261] - Failure to comply with applicable regulations can lead to severe enforcement actions, including warning letters, fines, injunctions, product recalls, suspension of production, and refusal of future clearances/approvals[262] - Obtaining necessary clearances or approvals for future products (510(k) or PMA) is critical for growth, and any delays or failures could adversely affect the business[264][266] - Modifications to existing products may require new 510(k) clearances or PMA approvals, and disagreement with FDA's determination could lead to marketing cessation or product recalls[275] - Products must be manufactured in accordance with FDA's Quality System Regulation (QSR) and ISO 13485; non-compliance could result in supply disruptions and enforcement actions[278][279] - Misuse or off-label use of products, or promotion of such uses, can harm reputation, lead to product liability suits, and result in costly investigations, fines, or sanctions[281][282] - Failure to report adverse medical events to regulatory authorities, or the discovery of serious safety issues, could lead to sanctions, product recalls, and negative business impact[283][284][285] - Legislative or regulatory reforms in the U.S. (e.g., changes to 510(k) process), EU (Medical Devices Regulation - MDR), or UK (post-Brexit regulations) may increase costs, lengthen review times, or restrict manufacturing/marketing[289][291][293] - The company is subject to federal, state, and foreign fraud and abuse laws (e.g., Anti-Kickback Statute, False Claims Act, HIPAA) and health information privacy/security laws (e.g., GDPR), with violations potentially leading to substantial penalties and adverse publicity[295][298][300] - Healthcare policy changes, including recently enacted legislation like the Affordable Care Act, could limit reimbursement for products and services, leading to reduced demand or pricing pressure[301][304] Risks Related to Our Reliance on Third Parties OrthoPediatrics heavily relies on third-party sales agencies, distributors, and contract manufacturers, risking sales disruptions, increased costs, and supply chain failures from their performance or loss - The company relies on a network of third-party independent sales agencies and distributors to market and distribute its products in the U.S. and international markets[306] - Risks include the failure of sales agencies/distributors to effectively promote products, inability to maintain strong relationships, loss of key partners (some account for a material portion of sales), and intense competition for their services[307][309][311][312] - The COVID-19 pandemic has adversely affected the ability to market and sell products through the distribution network due to travel restrictions and other measures[309] - The company relies on a small number of third-party contract manufacturers for product assembly; inadequate performance or discontinuation of business could lead to revenue loss, manufacturing delays, and increased costs[314][315] - Performance issues, service interruptions, or price increases by shipping carriers could adversely affect business, harm reputation, and impact timely product delivery[316] - Reliance on a limited number of third-party suppliers for the majority of products creates risks of unreliable supply, price increases, and difficulties in finding or transitioning to alternative suppliers[317][318][319] Risks Related to Intellectual Property OrthoPediatrics' competitive position depends on protecting its intellectual property, facing risks from insufficient patent scope, validity challenges, infringement litigation, and global enforcement difficulties - Commercial success depends on obtaining and maintaining issued patents and other intellectual property rights, and protecting proprietary technology[320] - Risks include patents not having sufficient scope, pending applications not issuing, challenges to patent validity/enforceability, competitors designing around patents, and others developing competing technologies[322][323][326][327] - Reliance on unpatented trade secrets and know-how is vulnerable to unauthorized disclosure or independent discovery by competitors[328][333] - Litigation or other proceedings regarding intellectual property infringement could be costly, divert management attention, and potentially prevent the company from selling its products or impact its stock price[329][330][331] - Enforcing intellectual property rights globally is challenging due to varying legal protections in foreign countries, potentially making it difficult to stop infringement or misappropriation[334][335] - Third parties may assert ownership or commercial rights to inventions developed by the company, or claim wrongful use/disclosure of confidential information, leading to disputes and potential loss of IP rights[337][338] Item 1B. Unresolved Staff Comments There are no unresolved staff comments from the Securities and Exchange Commission Item 2. Properties OrthoPediatrics owns 42,000 square feet of office and warehouse space in Warsaw, Indiana, with additional offices in the Netherlands and Israel, deemed suitable for current needs - The company owns and occupies approximately 42,000 square feet of office and warehouse space in Warsaw, Indiana, following expansions in 2018 and 2021[364] - It also maintains two offices in the Netherlands and one office in Israel[364] - Current facilities are deemed suitable and adequate, with plans for additional or substitute space as needed for expansion[364] Item 3. Legal Proceedings OrthoPediatrics is involved in legal proceedings including the settled K2M and Barry patent suits, a stayed IMED Surgical software dispute, and an ongoing patent infringement lawsuit against Wishbone Medical, Inc - The K2M patent infringement lawsuit, concerning instruments used in RESPONSE spine systems, was settled in June 2021[618] - The IMED Surgical software ownership dispute, regarding the '377 Patent for Orthex Hexapod technology, was stayed pending arbitration in May 2021, with arbitration initiated in November 2021[619][620][622] - The Barry patent infringement suit was settled in March 2021, resulting in a license agreement for $2.858 million, amortized over up to 8 years[624][625] - An ongoing lawsuit against Wishbone Medical, Inc. (filed Oct 2020) involves claims of infringement of the '377 Patent, unfair competition, and breach of contract, with Wishbone filing counterclaims[626][627] - The company is not a party to any other legal proceedings that would individually or in aggregate materially affect its financial position, results of operations, or cash flows[366][628] Item 4. Mine Safety Disclosures This item is not applicable to the company PART II This section covers the company's common stock market, financial condition, results of operations, market risks, and audited financial statements Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities OrthoPediatrics' common stock (KIDS) is listed on Nasdaq, with 19.7 million shares outstanding as of March 1, 2022, no cash dividends paid, and no equity repurchases in Q4 2021 - Common stock (KIDS) listed on Nasdaq Global Market since October 12, 2017[369] - No cash dividends declared or paid; intent to retain all consolidated earnings to finance future growth[370] - As of March 1, 2022, there were 19,745,348 outstanding shares of common stock and 175 stockholders of record[371] - No equity securities were purchased by the issuer or affiliated purchasers for the three months ended December 31, 2021[372] - On October 20, 2021, 4,599 shares of common stock were issued in connection with the purchase of assets from Devise Ortho, Inc[373] Equity Compensation Plan Information (as of Dec 31, 2021) | Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercised price of outstanding options, warrants and rights | Number of securities remaining available for future issuance | | :------------------------------------------------ | :---------------------------------------------------------------------------------------- | :--------------------------------------------------------------------------- | :--------------------------------------------------------- | | Equity compensation plans approved by stockholders | 375,084 | $45.18 | 694,186 | Item 6. [Reserved] This item is intentionally omitted Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes OrthoPediatrics' financial performance, condition, and operational results, covering revenue, profitability, liquidity, cash flows, indebtedness, and critical accounting policies Overview OrthoPediatrics, the sole global pediatric orthopedic device company, serves a $3.3 billion market with 37 surgical systems, maintaining strong liquidity despite COVID-19 impacts - OrthoPediatrics is the only global medical device company exclusively focused on providing comprehensive orthopedic solutions to the pediatric market, estimated at a $3.3 billion global opportunity[380] - The company markets 37 surgical systems across trauma and deformity correction, scoliosis, and sports medicine categories[382] - U.S. sales are primarily through 40 independent sales agencies. International sales are through independent stocking distributors and sales agencies, with a growing direct sales model in select markets (e.g., Germany, Austria, Switzerland converted to direct agency)[383][384][385] - The company has an internal ESG team, is ISO 13485 certified, participates in philanthropic causes (e.g., World Pediatric Project), and is committed to diversity[387][388] - Despite COVID-19's impact (e.g., postponed elective surgeries), the company continued R&D, sales training, technology acquisitions, and deployment of instrument sets, and believes its liquidity position is strong[390][391][395] - Potential impairment charges on intangible assets (goodwill, trademarks) could materially impact financial statements if actual future cash flows differ from estimates[397][398] International Sales as % of Total Revenue | Year | International Sales (% of Total Revenue) | | :--- | :--------------------------------------- | | 2021 | 21% | | 2020 | 11% | | 2019 | 24% | Components of our Results of Operations Revenue recognition varies by sales channel, cost of revenue includes product purchases and inventory adjustments, gross profit is influenced by sales mix, and operating expenses cover sales, marketing, G&A, and R&D - Revenue in the U.S. and direct international markets is recognized when products are used in surgery or shipped to hospitals. For international stocking distributors, revenue is recognized when title passes upon shipment[399][400][401] - Cost of revenue primarily consists of products from third-party suppliers, inbound freight, excess/obsolete inventory adjustments, and royalties, expected to increase with sales volume[402] - Gross margin is impacted by the mix of U.S. sales (higher margin) and international sales (lower margin due to distributor commissions)[403] - Sales and marketing expenses, mainly commissions, are expected to increase with product commercialization and global sales organization expansion[404][405] - General and administrative expenses include personnel costs, facility costs, and depreciation of capitalized instrument sets ($5.6 million in 2021), expected to increase in absolute dollars but at a lower rate than revenue[406] - Research and development expenses, covering engineering, product development, and IP, are expected to increase in absolute dollars and as a percentage of revenue[408] - Other expenses include fair value adjustments of contingent consideration and accreted interest expense related to acquisitions and debt[409] Results of Operations In 2021, net revenue increased 38% to $98.0 million, driven by trauma and scoliosis growth, while gross margin decreased to 75%, and net loss improved 51% to $(16.3) million - Gross margin decreased from 77% in 2020 to 75% in 2021, primarily due to the sales mix to international distributors and a $0.5 million penalty for unachieved purchase commitment minimums[415] - General and administrative expenses increased due to additional personnel, full-year inclusion of ApiFix and Telos acquisitions, and a $2.7 million increase in depreciation and amortization expenses[417] - Total other expenses decreased significantly, primarily driven by a $1.8 million income from fair value adjustment of contingent consideration related to the ApiFix acquisition (compared to $3.5 million expense in 2020) and lower interest expense[419] Key Financial Results (in thousands, except percentages) | Metric | 2021 (in thousands) | 2020 (in thousands) | Increase (Decrease) (in thousands) | % Increase (Decrease) | | :------------------------- | :---------- | :---------- | :------------------ | :-------------------- | | Net revenue | $98,049 | $71,078 | $26,971 | 38% | | Cost of revenue | $24,646 | $16,047 | $8,599 | 54% | | Sales and marketing expenses | $39,673 | $31,854 | $7,819 | 25% | | General and administrative expenses | $46,061 | $38,317 | $7,744 | 20% | | Legal settlement expenses | $150 | $6,342 | $(6,192) | (98)% | | Research and development expenses | $5,543 | $5,273 | $270 | 5% | | Other expenses (Income) | $(636) | $6,912 | $(7,548) | (109)% | | Provision for income taxes (benefit) | $(1,128) | $(723) | $(405) | 56% | | Net loss | $(16,260) | $(32,944) | $16,684 | (51)% | Revenue by Geography (in thousands) | Geography | 2021 Revenue (in thousands) | % of revenue (2021) | 2020 Revenue (in thousands) | % of revenue (2020) | | :------------ | :----------- | :------------------ | :----------- | :------------------ | | U.S. | $77,780 | 79% | $62,966 | 89% | | International | $20,269 | 21% | $8,112 | 11% | Revenue by Product Category (in thousands) | Product Category | 2021 Revenue (in thousands) | % of revenue (2021) | 2020 Revenue (in thousands) | % of revenue (2020) | | :-------------------- | :----------- | :------------------ | :----------- | :------------------ | | Trauma and deformity | $65,829 | 67% | $47,677 | 67% | | Scoliosis | $28,046 | 29% | $20,738 | 29% | | Sports medicine/other | $4,174 | 4% | $2,663 | 4% | Liquidity and Capital Resources OrthoPediatrics has an accumulated deficit of $178.0 million as of December 31, 2021, with $9.0 million in cash and $45.9 million in short-term investments, and may seek additional financing - The company has incurred operating losses and negative cash flows from operating activities since inception, with an accumulated deficit of $178.0 million as of December 31, 2021[420] - Management believes existing cash, borrowing capacity under loan agreements, and anticipated operating cash flows will be sufficient for at least the next 12 months[421] - The company may seek additional financing, which could involve selling equity or convertible debt securities (potentially dilutive) or entering new debt facilities with restrictive covenants[421] Cash, Cash Equivalents, and Short-Term Investments (in thousands) | Metric | As of Dec 31, 2021 (in thousands) | | :--------------------------------------- | :----------------- | | Cash, cash equivalents and restricted cash | $9,006 | | Short-term investments | $45,902 | Cash Flows In 2021, net cash used in operating activities was $(13.1) million, investing activities $(7.4) million, and financing activities was negligible, leading to a decrease in cash to $9.0 million - Primary uses of cash in operating activities for 2021 included the payment of $6.3 million for legal settlements and a $5.1 million increase in inventory[423] - Net cash used in investing activities in 2021 primarily consisted of $7.9 million for license purchases and $8.1 million for property, plant, and equipment (instrument sets), partially offset by $9.3 million from the sale of short-term investments[424] - Net cash provided by financing activities was immaterial in 2021, a significant decrease from prior years which included proceeds from common stock offerings and debt[426] Cash Flow Summary (in thousands) | Activity | 2021 (in thousands) | 2020 (in thousands) | 2019 (in thousands) | | :-------------------------------------- | :---------- | :---------- | :---------- | | Net cash used in operating activities | $(13,063) | $(18,530) | $(17,769) | | Net cash used in investing activities | $(7,411) | $(69,693) | $(61,922) | | Net cash provided by financing activities | $6 | $46,732 | $91,019 | | Net increase (decrease) in cash and restricted cash | $(21,126) | $(41,895) | $11,336 | | Cash and restricted cash, end of period | $9,006 | $30,132 | $72,027 | Indebtedness OrthoPediatrics has a $25.0 million revolving credit facility with Squadron Capital LLC (maturing 2024), with no outstanding balance as of December 31, 2021, and a $1.0 million mortgage note payable - The company has a Third Amended Loan Agreement with Squadron Capital LLC, providing a $25.0 million revolving credit facility[429][430] - The revolving credit facility matures on January 1, 2024, and as of December 31, 2021, there were no outstanding term loan obligations or borrowings under this agreement[432][583] - The interest rate on the revolving credit facility is the greater of (a) six month SOFR plus 8.69% and (b) 10.0%[430] - The loan agreement includes negative covenants restricting actions such as transferring material assets, mergers, incurring additional indebtedness, creating liens, making investments, and paying dividends[433][585] - A mortgage note payable to Tawani Enterprises Inc. (Squadron affiliate) had a balance of $1.0 million as of December 31, 2021, with 5% interest, maturing in August 2028[435][586] Interest Expense (in thousands) | Year | Interest Expense (in thousands) | | :--- | :--------------- | | 2021 | $56 | | 2020 | $1,233 | | 2019 | $4,229 | Contractual Obligations and Commitments OrthoPediatrics' cash requirements include debt, acquisition payables, minimum purchase obligations ($1.9 million for 7D Surgical), lease obligations, and royalties, with a $0.5 million penalty incurred in 2021 - Short-term cash requirements include accounts payable, accrued compensation and benefits, current maturities of long-term debt, current portion of acquisition installment payable, and other current liabilities[436] - Long-term contractual obligations include debt obligations, acquisition installment payables (related to ApiFix), minimum purchase obligations, lease obligations, and royalties[437] - As of December 31, 2021, the remaining minimum purchase commitment for the 7D Surgical FLASH Navigation platform license agreement was $1.9 million[629] - The company recorded a $0.5 million expense in 2021 for not meeting minimum performance metrics under the FIREFLY Technology license agreement[629] - Royalty commitments range from 0.5% to 20% of sales, with minimum annual commitments of $10 thousand through 2026[630] - Milestone payments and royalty commitments for products in development are not yet determinable but are not anticipated to have a material impact on financial results[631] Pediatric Orthopedic Business Seasonality OrthoPediatrics' revenue experiences seasonal fluctuations, typically higher during summer and holiday periods due to increased pediatric surgeries during school breaks - Revenue is typically higher in the summer months and holiday periods[438] - This seasonality is driven by the higher incidence of pediatric surgeries during school breaks, especially for trauma and deformity and scoliosis products[438] Critical Accounting Policies and Significant Judgments and Estimates Financial statement preparation requires significant estimates for revenue recognition, inventory valuation, goodwill and intangible asset impairment, and net operating loss limitations - Revenue recognition involves significant judgment in determining when control of products is transferred to customers, especially for consigned inventory[441][442] - Inventory is valued at the lower of cost or net realizable value (FIFO method), requiring estimates for excess and obsolete inventory based on product demand forecasts, life cycles, and usage patterns within surgical sets[443][444][445][446] - Goodwill and indefinite-lived trademark assets are assessed for impairment annually using fair value measurement techniques (income or market approach), which rely on significant estimates and assumptions regarding future revenues and discount rates[447][448][511][512] - Net operating loss (NOL) carryforwards are subject to valuation allowances (except for Israel) and limitations under Section 382 of the Internal Revenue Code due to ownership changes[449][450] Item 7A. Quantitative and Qualitative Disclosure about Market Risk OrthoPediatrics' interest rate risk is immaterial, while foreign currency exchange risk, though currently immaterial, is expected to increase with international expansion, primarily involving GBP, EUR, AUD, CAD, and ILS - The company has no material exposure to interest rate risk due to the short-term nature and high credit quality of its investment portfolio[451] - Foreign currency exchange risk is currently immaterial but is expected to increase with the expansion of international business in markets primarily using the Pound Sterling, Euro, Australian Dollar, Canadian Dollar, and Israeli Shekel[452] - The company does not currently engage in hedging transactions for foreign currency exposure[452] - An immediate 10% adverse change in foreign exchange rates is estimated to have an immaterial effect on the reported net loss[452] Item 8. Financial Statements and Supplementary Data This section presents OrthoPediatrics' audited consolidated financial statements for 2021, 2020, and 2019, including balance sheets, statements of operations, cash flows, and comprehensive notes Report of Independent Registered Public Accounting Firm Deloitte & Touche LLP issued an unqualified opinion on OrthoPediatrics' consolidated financial statements for 2021, 2020, and 2019, with an emphasis on related party transactions - Deloitte & Touche LLP provided an unqualified opinion on the consolidated financial statements for the periods ended December 31, 2021, 2020, and 2019[455] - The financial statements present fairly, in all material respects, the financial position, results of operations, and cash flows in conformity with U.S. GAAP[455] - An emphasis of matter was included regarding significant transactions and relationships with a related party, as described in Note 14[459] Consolidated Balance Sheets As of December 31, 2021, OrthoPediatrics reported total assets of $304.3 million, total liabilities of $78.9 million, and total stockholders' equity of $225.4 million Consolidated Balance Sheet Highlights (in thousands) | Metric | As of Dec 31, 2021 (in thousands) | As of Dec 31, 2020 (in thousands) | Change (2021 vs 2020) (in thousands) | | :------------------------- | :----------------- | :----------------- | :-------------------- | | Total Assets | $304,274 | $320,412 | $(16,138) | | Current Assets | $133,648 | $158,429 | $(24,781) | | Cash and cash equivalents | $7,641 | $28,758 | $(21,117) | | Restricted cash | $1,365 | $1,374 | $(9) | | Short term investments | $45,902 | $55,141 | $(9,239) | | Inventories, net | $57,569 | $52,989 | $4,580 | | Property and equipment, net | $28,515 | $27,227 | $1,288 | | Amortizable intangible assets, net | $55,494 | $50,284 | $5,210 | | Goodwill | $72,349 | $70,511 | $1,838 | | Total Liabilities | $78,905 | $85,644 | $(6,739) | | Total Stockholders' Equity | $225,369 | $234,768 | $(9,399) | Consolidated Statements of Operations In 2021, net revenue increased 38% to $98.0 million, gross profit reached $73.4 million, and net loss improved 51% to $(16.3) million, with diluted net loss per share at $(0.84) Consolidated Statements of Operations Highlights (in thousands, except per share) | Metric | 2021 (in thousands) | 2020 (in thousands) | 2019 (in thousands) | | :----------------------------------------- | :---------- | :---------- | :---------- | | Net revenue | $98,049 | $71,078 | $72,552 | | Cost of revenue | $24,646 | $16,047 | $17,933 | | Gross profit | $73,403 | $55,031 | $54,619 | | Gross margin | 75% | 77% | 75% | | Operating expenses | $91,427 | $81,786 | $63,696 | | Operating loss | $(18,024) | $(26,755) | $(9,077) | | Total other expenses (income) | $(636) | $6,912 | $3,608 | | Loss before income taxes | $(17,388) | $(33,667) | $(12,685) | | Provision for income taxes (benefit) | $(1,128) | $(723) | $0 | | Net loss | $(16,260) | $(32,944) | $(13,731) | | Weighted average common shares - basic and diluted | 19,268,255 | 18,056,828 | 14,624,194 | | Net loss per share - basic and diluted | $(0.84) | $(1.82) | $(0.94) | Consolidated Statements of Comprehensive Loss OrthoPediatrics' comprehensive loss improved to $(15.7) million in 2021 from $(25.0) million in 2020, driven by a net loss of $(16.3) million and $0.6 million in other comprehensive income Consolidated Statements of Comprehensive Loss Highlights (in thousands) | Metric | 2021 (in thousands) | 2020 (in thousands) | 2019 (in thousands) | | :-------------------------------------- | :---------- | :---------- | :---------- | | Net loss | $(16,260) | $(32,944) | $(13,731) | | Foreign currency translation adjustment | $1,157 | $7,857 | $620 | | Unrealized gain (loss) on short-term investments | $(573) | $53 | $0 | | Other comprehensive income, net of tax | $584 | $7,910 | $620 | | Comprehensive loss | $(15,676) | $(25,034) | $(13,111) | Consolidated Statements of Stockholders' Equity OrthoPediatrics' total stockholders' equity decreased to $225.4 million as of December 31, 2021, reflecting a net loss of $(16.3) million partially offset by stock compensation and other income - Key changes in 2021 include a net loss of $(16.3) million, $5.8 million from restricted stock, $0.3 million from Devise Ortho acquired assets, and $0.6 million in other comprehensive income[470] Consolidated Stockholders' Equity Highlights (in thousands, except shares) | Metric | As of Dec 31, 2021 | As of Dec 31, 2020 | As of Dec 31, 2019 | | :----------------------------------------- | :----------------- | :----------------- | :----------------- | | Common Stock (Shares) | 19,677,214 | 19,560,291 | 16,723,128 | | Common Stock (Value, in thousands) | $5 | $5 | $4 | | Additional Paid-in Capital (in thousands) | $394,899 | $388,622 | $271,182 | | Accumulated Deficit (in thousands) | $(178,026) | $(161,766) | $(128,822) | | Accumulated Other Comprehensive Income (in thousands) | $8,491 | $7,907 | $(3) | | Total Stockholders' Equity (in thousands) | $225,369 | $234,768 | $142,361 | Consolidated Statements of Cash Flows In 2021, net cash used in operating activities was $(13.1) million, investing activities $(7.4) million, and financing activities was negligible, resulting in cash and restricted cash of $9.0 million - Net cash used in operating activities in 2021 was primarily driven by the net loss, $6.3 million in legal settlement payments, and a $5.1 million increase in inventories[423][473] - Net cash used in investing activities in 2021 included $7.9 million for license purchases and $8.1 million for property and equipment, partially offset by $9.3 million from the sale of short-term investments[424][473] - Net cash provided by financing activities was immaterial in 2021, compared to significant inflows in 2020 and 2019 from common stock offerings and debt proceeds[426][473] Consolidated Statements of Cash Flows Highlights (in thousands) | Activity | 2021 (in thousands) | 2020 (in thousands) | 2019 (in thousands) | | :-------------------------------------- | :---------- | :---------- | :---------- | | Net cash used in operating activities | $(13,063) | $(18,530) | $(17,769) | | Net cash used in investing activities | $(7,411) | $(69,693) | $(61,922) | | Net cash provided by financing activities | $6 | $46,732 | $91,019 | | Effect of exchange rate changes on cash | $(658) | $(404) | $8 | | NET INCREASE (DECREASE) IN CASH AND RESTRICTED CASH | $(21,126) | $(41,895) | $11,336 | | Cash and restricted cash, end of period | $9,006 | $30,132 | $72,027 | Notes to Consolidated Financial Statements These notes provide detailed disclosures on OrthoPediatrics' business, accounting policies, acquisitions, goodwill, debt, income taxes, legal proceedings, and unaudited quarterly financial information - Note 1 provides an overview of OrthoPediatrics' business as a medical device company focused on pediatric orthopedics and discusses the impact of the COVID-19 pandemic on its operations[476][477] - Note 2 details significant accounting policies, including basis of presentation, use of estimates, foreign currency transactions, fair value measurements, revenue recognition, inventory valuation, property and equipment, amortizable intangible assets, goodwill, acquisition payable and contingent consideration, shipping and handling costs, sales and marketing expenses, advertising costs, research and development costs, stock-based compensation, the Foundation for Advancing Pediatric Orthopedics, comprehensive income (loss), income taxes, litigation and contingencies, leases, and emerging growth