ANNUAL
REPORT
2023
FOCUSED EXCLUSIVELY
ON IMPROVING THE LIVES OF CHILDREN
www.orthopediatrics.com
From Little KIDS to Big KIDS
Training and Education
Non-Operative Care & Digital Health
Together, we are advancing healthcare for children around the world.
We are making a difference for kids and their families, and we will
leave our own children and families, reason to be proud and carry our
efforts forward.
Product Development
David R. Bailey
President & CEO
2 | OrthoPediatrics Annual Report 2023
Financial Performance
Total revenue for the full year 2023 was a record
$148.7 million, a 22% increase over full year 2022.
Growth was led by Pega, Trauma, Ex-Fix, OPSB,
Response as well as ApiFix non-fusion scoliosis
products. U.S. revenue was 75% and international
revenue was 25% of total year 2023 revenue.
Trauma and Deformity revenue was 72%, Scoliosis
revenue was 25% and Sports
Med/Other was 3% of total
year 2023 revenue. Adjusted
EBITDA for the full year 2023
was $5.0 million compared to
Your Support
David R. Bailey
President & CEO
As we enter 2024, I am confident
OrthoPediatrics is in a position of
$0.2 million for full year 2022.
in our ability to continue success-
We had approximately $82
fully executing our
long-term
million of cash as of year-end
strategy of being a global leader
tremendous strength, and we are
confident we can continue to make
share gains, grow revenue, improve
2023 and approximately $10.0
in pediatric healthcare with the
profitability, and most importantly
million of debt. We also
signed a new $80 million
debt
agreement.
Strong
revenue growth, profitability
growth, and our long-term
plans are supported by our
robust balance sheet, strong
cash position and access to
debt.
aspiration to one day help 1
positively
impact
the
lives of
million kids a year. Our capacity to
children and their families. On
help even more kids is rooted in a
behalf of the leadership team, I
corporate culture that places
would like to thank our investors for
people first and has led us to
your continued support.
again be named one of the “Best
Places to Work in Indiana” now for
a 7th time.
2023 ANNUAL REPORT CEO LETTEROur impressive engineering teams were extremely productive in 2023! Collectively, we launched 8 new products in the US and released several legacy products into new international markets. This included the long-awaited PNP Tibia, a first of its kind, rigid tibial nail for pediatric indications. This system had a limited launch in Q4 but has received overwhelmingly positive feedback in its early days, and we are looking forward to a full commercial launch in 2024. We added a new system to our physeal tethering portfolio – the GIRO® system, which was developed by our team in Montreal. This, combined with our industry leading PediPlates® system give surgeons multiple different treatment options for utilizing guided growth for deformity correction in kids. Within our Scoliosis business we launched the RESPONSE™ Power System as well as RESPONSE™ Cannulated Screws, with both systems helping attract new users to our spinal fusion portfolio. Lastly, development initiatives at MD Orthopaedics (“MDO”) in Iowa resulted in some of the first new club foot bracing products to hit the market since our acquisition was completed and integrated in 2022. With our robust R&D initiative progressing rapidly, we expect to launch several additional products in 2024 and beyond, further cementing our place as the only substantial company innovating within the pediatric orthopedic industry. Beyond our implants, instruments and specialty braces, Training & Education has long been a key service we provide to our surgeon customers. As a company that is leading innovation, and advancing the field of pediatric orthopedics, we continue to make significant investments in non-commercial training and education for residents, fellows, and early-career surgeons. In 2023, we hosted nearly 400 educational experiences for healthcare professionals around the world. Additionally, we increased our financial support for the major surgical societies, including the Pediatric Orthopedic Society of North American (POSNA), where we created a new tier of industry support as the first ever “Emerald Sponsor”. This 3-year commitment will ensure the organization has the resources and support it needs to continue providing world-class education, mentoring and leadership for years to come. Further, our Women in Pediatric Orthopedics affinity group grew in 2023, and we began partnering with the Ruth Jackson Orthopedic Society, among many others. Our ongoing commitment to support clinical education and training is possibly the most impactful way we can impact the lives of children, and as we grow it remains our intention to scale our educational initiatives globally. In 2023 we further expanded our Total Addressable Market through partnerships and acquisitions. Following the acquisition of Iowa-based, clubfoot bracing leader, MDO in 2022, we have since announced the formation of a new division called OrthoPediatrics Specialty Bracing (OPSB) and have increased our investments in this space. In addition to the aforementioned product launches, we acquired additional products to build the portfolio, including the January 2024 acquisition of Boston Orthotics & Prosthetics, and their line of 17 pediatric-specific braces to treat children with scoliosis, cerebral palsy and other musculoskeletal disorders. The entrance into non-operative care is the first step in expanding into other near-adjacencies in pediatric healthcare, and we expect this franchise to outpace our legacy growth rate in 2024 and beyond – growing into a $100m business within the next few years!As technology plays an increasingly vital role in healthcare, we made investments in 2023 establishing a digital health strategy. Through the acquisition of MedTech Concepts, we are well positioned to launch “Playbook”, a digital system designed to increase efficiencies in the OR and aid surgeons through pre-operative planning and standardization. This system will likely launch in Q2 and is currently being evaluated by surgeons at key accounts in the US. On behalf of my colleagues, at OrthoPediatrics – I’d like to thank you for another year of support for our organization and our cause of helping KIDS. In 2023, OP again helped a record-number of children with orthopedic conditions - over 82,000 – bringing the total number of children we have helped since inception to over 712,000 around the world. This remains the best measure of our success, and I couldn’t be more pleased with the overall performance of the organization this past year. We have remained laser-focused on addressing unmet needs in pediatric healthcare, and our progress executing on our 5 key pillars, have allowed us to grow and scale our business in new ways. I’m pleased to report our movement is continuing to gain momentum and we are well positioned to realize our vision of helping over 1 million children a year in the near future! From Little KIDS to Big KIDS
Training and Education
Non-Operative Care & Digital Health
Together, we are advancing healthcare for children around the world.
We are making a difference for kids and their families, and we will
leave our own children and families, reason to be proud and carry our
efforts forward.
Product Development
Financial Performance
David R. Bailey
President & CEO
Your Support
Total revenue for the full year 2023 was a record
$148.7 million, a 22% increase over full year 2022.
Growth was led by Pega, Trauma, Ex-Fix, OPSB,
Response as well as ApiFix non-fusion scoliosis
products. U.S. revenue was 75% and international
revenue was 25% of total year 2023 revenue.
Trauma and Deformity revenue was 72%, Scoliosis
revenue was 25% and Sports
Med/Other was 3% of total
year 2023 revenue. Adjusted
EBITDA for the full year 2023
was $5.0 million compared to
$0.2 million for full year 2022.
We had approximately $82
million of cash as of year-end
2023 and approximately $10.0
million of debt. We also
signed a new $80 million
Strong
agreement.
debt
revenue growth, profitability
growth, and our long-term
plans are supported by our
robust balance sheet, strong
cash position and access to
debt.
As we enter 2024, I am confident
in our ability to continue success-
fully executing our
long-term
strategy of being a global leader
in pediatric healthcare with the
aspiration to one day help 1
million kids a year. Our capacity to
help even more kids is rooted in a
corporate culture that places
people first and has led us to
again be named one of the “Best
Places to Work in Indiana” now for
a 7th time.
OrthoPediatrics is in a position of
tremendous strength, and we are
confident we can continue to make
share gains, grow revenue, improve
profitability, and most importantly
positively
lives of
children and their families. On
behalf of the leadership team, I
would like to thank our investors for
your continued support.
impact
the
OrthoPediatrics Annual Report 2023 | 3
David R. Bailey
President & CEO
2023 ANNUAL REPORT CEO LETTEROur impressive engineering teams were extremely productive in 2023! Collectively, we launched 8 new products in the US and released several legacy products into new international markets. This included the long-awaited PNP Tibia, a first of its kind, rigid tibial nail for pediatric indications. This system had a limited launch in Q4 but has received overwhelmingly positive feedback in its early days, and we are looking forward to a full commercial launch in 2024. We added a new system to our physeal tethering portfolio – the GIRO® system, which was developed by our team in Montreal. This, combined with our industry leading PediPlates® system give surgeons multiple different treatment options for utilizing guided growth for deformity correction in kids. Within our Scoliosis business we launched the RESPONSE™ Power System as well as RESPONSE™ Cannulated Screws, with both systems helping attract new users to our spinal fusion portfolio. Lastly, development initiatives at MD Orthopaedics (“MDO”) in Iowa resulted in some of the first new club foot bracing products to hit the market since our acquisition was completed and integrated in 2022. With our robust R&D initiative progressing rapidly, we expect to launch several additional products in 2024 and beyond, further cementing our place as the only substantial company innovating within the pediatric orthopedic industry. Beyond our implants, instruments and specialty braces, Training & Education has long been a key service we provide to our surgeon customers. As a company that is leading innovation, and advancing the field of pediatric orthopedics, we continue to make significant investments in non-commercial training and education for residents, fellows, and early-career surgeons. In 2023, we hosted nearly 400 educational experiences for healthcare professionals around the world. Additionally, we increased our financial support for the major surgical societies, including the Pediatric Orthopedic Society of North American (POSNA), where we created a new tier of industry support as the first ever “Emerald Sponsor”. This 3-year commitment will ensure the organization has the resources and support it needs to continue providing world-class education, mentoring and leadership for years to come. Further, our Women in Pediatric Orthopedics affinity group grew in 2023, and we began partnering with the Ruth Jackson Orthopedic Society, among many others. Our ongoing commitment to support clinical education and training is possibly the most impactful way we can impact the lives of children, and as we grow it remains our intention to scale our educational initiatives globally. In 2023 we further expanded our Total Addressable Market through partnerships and acquisitions. Following the acquisition of Iowa-based, clubfoot bracing leader, MDO in 2022, we have since announced the formation of a new division called OrthoPediatrics Specialty Bracing (OPSB) and have increased our investments in this space. In addition to the aforementioned product launches, we acquired additional products to build the portfolio, including the January 2024 acquisition of Boston Orthotics & Prosthetics, and their line of 17 pediatric-specific braces to treat children with scoliosis, cerebral palsy and other musculoskeletal disorders. The entrance into non-operative care is the first step in expanding into other near-adjacencies in pediatric healthcare, and we expect this franchise to outpace our legacy growth rate in 2024 and beyond – growing into a $100m business within the next few years!As technology plays an increasingly vital role in healthcare, we made investments in 2023 establishing a digital health strategy. Through the acquisition of MedTech Concepts, we are well positioned to launch “Playbook”, a digital system designed to increase efficiencies in the OR and aid surgeons through pre-operative planning and standardization. This system will likely launch in Q2 and is currently being evaluated by surgeons at key accounts in the US. On behalf of my colleagues, at OrthoPediatrics – I’d like to thank you for another year of support for our organization and our cause of helping KIDS. In 2023, OP again helped a record-number of children with orthopedic conditions - over 82,000 – bringing the total number of children we have helped since inception to over 712,000 around the world. This remains the best measure of our success, and I couldn’t be more pleased with the overall performance of the organization this past year. We have remained laser-focused on addressing unmet needs in pediatric healthcare, and our progress executing on our 5 key pillars, have allowed us to grow and scale our business in new ways. I’m pleased to report our movement is continuing to gain momentum and we are well positioned to realize our vision of helping over 1 million children a year in the near future! THIS PAGE LEFT INTENTIONALLY BLANK
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[Mark One]
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2023
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 001-38242
ORTHOPEDIATRICS CORP.
(Exact name of registrant as specified in its charter)
Delaware
26-1761833
(State or other jurisdiction of incorporation or
organization)
(I.R.S. Employer Identification Number)
2850 Frontier Drive
Warsaw, Indiana
(Address of principal executive offices)
46582
(Zip Code)
Registrant’s telephone number, including area code: (574) 268-6379
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.00025 par value per share
KIDS
Nasdaq Global Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No ☒
Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes ☒ No ¨
Indicate by check mark whether the registrant has submitted electronically every interactive data file required to be submitted pursuant to Rule 405
of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit
such files) Yes ☒ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or
an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth
company” in Rule 12b-2 of the Exchange Act. Large accelerated filer ¨ Accelerated filer ☒ Non-accelerated filer ¨ Smaller Reporting Company
☒ Emerging Growth Company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any
new or revised financial accounting standards provided to Section 7(a)(2)(B) of the Securities Act. ¨
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its
internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm
that prepared or issued its audit report ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in
the filing reflect the correction of an error to previously issued financial statements. ¨
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation
received by any of the registrant's executive officers during the relevant recovery period pursuant to §240.10D-1(b). ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes ☐ No ☒
The aggregate market value of the registrant's common stock held by non-affiliates of the registrant was approximately $445.1 million as of the last
business day of the registrant's most recently completed second fiscal quarter (June 30, 2023), based upon the closing sale price for the
registrant's common stock on that day as reported by the Nasdaq Global Market. Shares of common stock held by each officer and director of the
registrant and by each person who owns 10 percent or more of outstanding common stock on June 30, 2023 have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status is not necessarily conclusive for other purposes.
OrthoPediatrics Annual Report 2023 | 5
As of March 1, 2024, the registrant had 23,549,496 outstanding shares of common stock, $0.00025 par value per share.
Portions of the registrant’s definitive proxy statement for its 2024 Annual Meeting of Stockholders are incorporated by reference into Part III of this
Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
6 | OrthoPediatrics Annual Report 2023
2
Statement Regarding Forward-Looking Statements
Risk Factor Summary
Item 1.
Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 1C. Cybersecurity
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4. Mine Safety Disclosures
PART I
PART II
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Item 6.
[Reserved]
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosure about Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
PART III
6
7
8
31
69
69
70
70
70
71
71
72
82
83
118
118
119
120
120
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
120
Item 13. Certain Relationships, Related Transactions and Director Independence
Item 14. Principal Accountant Fees and Services
Item 15. Exhibits and Financial Statement Schedules
Item 16. Form 10-K Summary
PART IV
3
120
120
121
123
OrthoPediatrics Annual Report 2023 | 7
ACL
ApiFix
Approved Body
Band-Lok
CE Mark
CME
CMS
Company
Credit Agreement
Devise Ortho
DHHS
EEA
EU
Exchange Act
FDA
FDASIA
FDCA
FERA
Foundation
GAAP
GDPR
HCP
HDE
HIPAA
IPO
IRB
LLD
MDD
Glossary of Acronyms and Defined Terms
Anterior cruciate ligament
The combination of ApiFix, Ltd and ApiFix, Inc., which were acquired by the
Company April 1, 2020
An approved body under UK medical Device Regulations
Band-Lok, LLC, which sold certain intellectual property assets to the Company on
June 10, 2020
Conformite Europeene Mark used for medical devices in the EEA; a product with
such a mark is referred to herein as a "CE-Marked" product.
Continuing medical education
Centers for Medicare and Medicaid Services
OrthoPediatrics Corp.
Credit, Security and Guaranty Agreement with MidCap Financial Trust, as
amended from time to time, which provides the Company with a $50 million line of
credit and a $30 million term loan
Devise Ortho, Inc. which sold certain assets and intellectual property to the
Company on October 20, 2021
U.S. Department of Health and Human Services
European Economic Area
European Union
U.S. Securities Exchange Act of 1934
U.S. Food and Drug Administration
Food and Drug Administration Safety and Innovation Act
Federal Food, Drug and Cosmetic Act
Fraud Enforcement Recovery Act of 2009
The Foundation for Advancing Pediatric Orthopedics
U.S. Generally Accepted Accounting Principles
EU General Data Protection Regulation
Healthcare providers
Humanitarian Device Exemption under FDA regulation
Health Insurance Portability and Accountability Act of 1996
Company’s initial public offering of its common stock on October 11, 2017
Institutional Review Board utilized by the FDA
Limb length discrepancies
Medical Devices Directive
MD Ortho or MDO
MD Orthopaedics, which was acquired by the Company on April 1, 2022
MDR
MHRA
MPFL
Orthex
PMA
EU’s Medical Device Regulation
Medicines and Healthcare products Regulatory Agency of the United Kingdom
Medial petellofemoral ligament
Orthex, LLC, which was acquired by the Company on June 4, 2019
Premarket Approval Application with the FDA
Pega Medical or Pega
Pega Medical Inc., which was acquired by the Company on July 1, 2022
POD
POSNA
QSR
RSV
Physician-owned distributorships
Pediatric Orthopaedic Society of North America
FDA’s Quality System Regulation
Respiratory Syncytial Virus, a respiratory virus commonly impacting children
8 | OrthoPediatrics Annual Report 2023
4
SEC
Squadron
Loan Agreement
United States Securities and Exchange Commission
Squadron Capital LLC, which is the Company’s largest investor
Fourth Amended and Restated Loan and Security Agreement with Squadron
Capital LLC (terminated effective as of December 29, 2023), which provided the
Company with a $50.0 million revolving credit facility
Structure Medical
Structure Medical, LLC
Telos
UK or United Kingdom
UKCA Mark
Vilex
Telos Partners, LLC, which was acquired by the Company on March 9, 2020
The United Kingdom of Great Britain and Northern Ireland
UK Conformity Assessed marking is a new UK product marking that is used for
goods being placed on the market in Great Britain (England, Wales and Scotland)
Vilex in Tennesee, Inc., which was acquired by the Company on June 4, 2019 and
substantially all its assets were sold on December 31, 2019 to a wholly-owned
subsidiary of Squadron Capital, LLC
5
OrthoPediatrics Annual Report 2023 | 9
FORWARD-LOOKING STATEMENTS
The Company from time to time includes forward-looking statements in its oral and written communication. The
Company may include forward-looking statements in filings with the SEC, such as its Annual Reports on Form
10-K and its Quarterly Reports on Form 10-Q, in other written materials and oral statements made by senior
management to analysts, investors, representatives of the media and others. All statements other than
statements of historical facts contained in this report, including statements regarding our future results of
operations and financial position, business strategy, current and prospective products, product approvals,
research and development costs, prospective collaborations, timing and likelihood of success, plans and
objectives of management for future operations and future results of anticipated products, are forward-looking
statements. These statements involve known and unknown risks, uncertainties and other important factors that
may cause our actual results, performance or achievements to be materially different from any future results,
performance or achievements expressed or implied by the forward-looking statements. The Company intends
these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995, and the Company is including this statement for
purposes of these safe harbor provisions.
In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,”
“plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplates,” “believes,” “estimates,” “predicts,”
“potential” or “continue” or the negative of these terms or other similar expressions. We have based these
forward-looking statements largely on our current expectations and projections about future events and financial
trends that we believe may affect our business, financial condition and results of operations. These forward-
looking statements speak only as of the date of this report. The events and circumstances reflected in our
forward-looking statements may not be achieved or occur and actual results could differ materially from those
projected in the forward-looking statements. Moreover, we operate in an evolving environment. New risk factors
and uncertainties may emerge from time to time, and it is not possible for us to predict all risk factors and
uncertainties. Except as required by applicable law, we do not plan to publicly update or revise any forward-
looking statements contained herein, whether as a result of any new information, future events, changed
circumstances or otherwise.
These forward-looking statements are subject to significant risks, assumptions and uncertainties, including,
among other things, those discussed in Item 1A, “RISK FACTORS”.
Because of these and other uncertainties, the Company’s actual future results may be materially different from
the results indicated by these forward-looking statements. In addition, the Company’s past results of operations
do not necessarily indicate its future results.
10 | OrthoPediatrics Annual Report 2023
6
RISK FACTOR SUMMARY
Our business is subject to numerous risks, including risks that may prevent us from achieving our business
objectives or may adversely affect our business, operating results, financial condition, and the trading price of our
common stock. We encourage you to carefully review the full risk factors contained in Item 1A “Risk Factors” of
this Annual Report on Form 10-K in their entirety. These risks include the following, among others:
• We are unable to predict the extent to which widespread health emergencies, such as COVID-19 and
respiratory syncytial virus, or RSV, or other pandemics, epidemics and infectious disease outbreaks, may
adversely impact our business and financial results.
Unfavorable economic conditions such as prolonged inflation, rising interest rates or a recession could
adversely affect our business, financial condition or results of operations.
•
• We have incurred losses in the past and may be unable to achieve or sustain profitability in the future.
• We may be unable to generate sufficient revenue from the commercialization of our products to achieve
profitability.
• We may need to raise additional capital to fund our existing commercial operations, develop and
commercialize new products and expand our operations.
• Our long-term growth depends on our ability to commercialize our products in development and to
develop and commercialize additional products through our research and development efforts, and if we
fail to do so, we may be unable to compete effectively.
• We lack published long-term data supporting superior clinical outcomes by our products, which could limit
•
sales.
If coverage and reimbursement from third-party payors for procedures using our products significantly
decline, orthopedic surgeons, hospitals and other healthcare providers may be reluctant to use our
products and our sales may decline.
• We may be unable to successfully demonstrate to orthopedic surgeons the merits of our products
compared to those of our competitors.
• Our products and our operations are subject to extensive government regulation and oversight both in the
United States and abroad, and our failure to comply with applicable requirements, including but not limited
to the HDE requirements and IRB regulations, could harm our business.
• We rely on a network of third-party independent sales agencies and distributors to market and distribute
our products, and if we are unable to maintain and expand this network, we may be unable to generate
anticipated sales.
If we are unable to adequately protect our intellectual property rights or if we are accused of infringing on
the intellectual property rights of others, our competitive position could be harmed or we could be required
to incur significant expenses to enforce or defend our rights.
Integration risks from significant future acquisitions.
•
•
7
OrthoPediatrics Annual Report 2023 | 11
PART I
ITEM 1. BUSINESS
GENERAL
OrthoPediatrics Corp. (the "Company") is a Delaware corporation, headquartered in Warsaw, Indiana, and
organized in November 2007. The Company’s Common Stock is traded on the Nasdaq Global Market under
the symbol KIDS. OrthoPediatrics Corp. is a medical device company committed to designing, developing and
marketing anatomically appropriate implants, instruments and specialized braces for children with orthopedic
conditions, giving pediatric orthopedic surgeons and caregivers the ability to treat children with technologies
specifically designed to meet their needs. Initially organized as an Indiana limited liability company on August
31, 2006, OrthoPediatrics Corp. was converted to a Delaware corporation on November 30, 2007. We sell our
specialized products, including PediLoc®, PediPlates®, Cannulated Screws, PediFlexTM nail, PediNailTM, PediLoc®
Tibia, ACL Reconstruction System, Locking Cannulated Blade, Locking Proximal Femur, Spica Tables,
RESPONSETM Spine, BandLocTM, Pediatric Nailing Platform | Femur, Devise Rail, Orthex®, The Fassier-Duval
Telescopic Intramedullary System®, SLIMTM Nail, The GAP NailTM, The Free Gliding SCFE Screw SystemTM,
GIRO® Growth Modulation System, PNP Tibia System, ApiFix® Mid-C System and Mitchell Ponseti® specialized
bracing products to various hospitals and medical facilities throughout the United States and various
international markets. We currently use a contract manufacturing model for the manufacturing of implants and
related surgical instrumentation while our clubfoot orthopedic products are manufactured in house.
The Company began selling its products in the United States in 2008 and internationally in 2011. In 2017, we
expanded operations and established legal entities in the United Kingdom (UK), Australia and New Zealand,
permitting us to sell under an agency model directly to local hospitals in these countries. We began selling direct
to Canada in September 2018, Belgium and the Netherlands in January 2019, Italy in March 2020, and Germany,
Switzerland and Austria in January 2021. In order to further enhance our operations in Europe, we established
operating companies in the Netherlands and Germany in March 2019 and April 2022, respectively. In 2023, we
hired operating and sales representatives in Germany to better serve our customers.
The Company routinely explores opportunities to acquire or invest in complementary products, technologies or
businesses. For example, in 2020, we acquired ApiFix, Ltd., the developer of a minimally invasive deformity
correction system for patients with adolescent idiopathic scoliosis ("ApiFix System"). In 2022, we acquired MD
Ortho, a manufacturer of orthopedic clubfoot products, and Pega Medical, a medical device company which sells
a portfolio of trauma and deformity correction devices for children, including the Fassier-Duval Telescopic
Intramedullary System designed to treat osteogenesis imperfecta.
In 2023, we acquired MedTech Concepts LLC and their digital healthcare hardware and software designed to
improve operating room efficiencies, as well as assets from Rhino Pediatric Orthopedic Designs, Inc. which offers
specialty braces.
In addition to acquisitions, we also look for partnerships which can provide us with complementary enabling
technologies. For example, in 2021 we extended our license agreement for our exclusive distribution rights of the
FIREFLY® Technology. Also in 2021, we entered into a license agreement resulting in exclusive distribution rights
of the 7D Surgical FLASHTM Navigation platform for pediatric applications. In 2023, we entered into a license
agreement with Ora Medical resulting in exclusive distribution rights of the Levity gait assist device. These
partnerships allow for exclusive distribution in children's hospitals across the United States and serve as
supporting avenues for us to focus on high-volume children's hospitals.
On August 15, 2022, we raised net proceeds of approximately $139.3 million from a public offering of (a)
1,091,250 shares our common stock, and (b) pre-funded warrants exercisable for an aggregate of up to
1,525,000 shares of common stock to Squadron Capital LLC (“Squadron”), our largest investor. The net
proceeds reflect the Company’s payment of $4.3 million in underwriting discounts and commissions and $0.3
million in other offering costs. A portion of the net proceeds were used to repay $31 million of borrowings
previously outstanding under the Company’s revolving credit facility with Squadron. On September 20, 2022, the
Company issued an aggregate of 1,525,000 shares of common stock to Squadron upon exercise of the pre-
funded warrants.
12 | OrthoPediatrics Annual Report 2023
8
On December 29, 2023, the Company replaced a $50 million line of credit agreement with Squadron Capital, LLC
which was scheduled to expire on January 1, 2024 with a new $80 million credit agreement with MidCap Financial
which includes a $50 million line of credit and a $30 million term loan.
Our largest investor is Squadron, a private investment firm based in Granby, Connecticut.
As of December 31, 2023, the Company had consolidated total assets of $438.7 million, consolidated total
liabilities of $61.7 million and stockholders’ equity of $377.0 million. As of December 31, 2023, the Company and
its subsidiaries had 247 full-time equivalent employees.
Environmental, Social and Governance ("ESG")
OrthoPediatrics was founded on the cause of impacting the lives of children with orthopedic conditions. Since
inception we have impacted the lives of over 710,000 children, when including those served by our acquired
companies. We believe we should continue to expand our social efforts while minimizing our impact to the
environment and ensuring corporate governance. In 2021, we created an internal ESG team, which reports
directly to our Board’s Governance Committee, to identify ESG topics for disclosure by assessing both the impact
on our business and the importance to our stakeholders.
We encourage you to review our ESG page and summary report which can be found under the "About" section of
our corporate website for more detailed information regarding our ESG efforts and current initiatives. On our
website, among other information, are the following highlights:
• OrthoPediatrics cares about our environmental impact while working in a highly regulated industry and we
are certified according to ISO 13485. Our team in Warsaw, Indiana recently implemented an enhanced
recycling program and our team in the United Kingdom created a carbon reduction plan.
•
The Company and its associates regularly participate in philanthropic causes important to our local
communities. We also partner with charitable organizations that provide pediatric orthopedic care around
the world. In 2020, we were named as "Corporate Partner of the Year" by the World Pediatric Project -
with whom we continue to work with to provide access to medical care for children in developing
countries.
• We are committed to fostering an environment that is respectful, compassionate, and inclusive of
everyone in our community, which is communicated in our diversity and inclusion policy. For seven years
we have been recognized by the Indiana Chamber of Commerce - Best Companies to Work in Indiana.
•
The Company and its Board of Directors understand the value of diversity. In 2022 and again in 2023, the
Company added diverse Directors to our Board and will continue its Board diversity initiative in the future.
We believe effectively managing our priorities, as well as increasing our transparency related to ESG programs,
will help create long-term value for our stakeholders. We expect to continue to increase our disclosures and
communicate our ESG efforts in future SEC filings.
Nothing on our website shall be deemed part of or incorporated by reference into this Annual Report on Form 10-
K.
AVAILABLE INFORMATION
The Company makes its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form
8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended, available on its website under the Investors tab at
http://www.orthopediatrics.com without charge, as soon as reasonably practicable, after such reports are
electronically filed with, or furnished to, the Securities and Exchange Commission. The SEC maintains an internet
site that contains reports, proxy and information statements, and other information regarding issuers that file
electronically with the SEC, including the Company. Those filings are accessible on the SEC’s website at http://
www.sec.gov.
9
OrthoPediatrics Annual Report 2023 | 13
The Company
We are the only global medical device company focused exclusively on providing a comprehensive trauma and
deformity correction, scoliosis and sports medicine product offering to the pediatric orthopedic market in order to
improve the lives of children with orthopedic conditions. We design, develop and commercialize innovative
orthopedic implants, instruments and specialty braces to meet specific needs of pediatric surgeons and their
patients, who we believe have been largely neglected by the orthopedic industry. We currently serve three of the
largest categories in this market. We estimate that the portion of this market that we currently serve represents a
$3.9 billion opportunity globally, including over $1.7 billion in the United States.
Historically, there have been a limited number of implants and instruments specifically designed for the unique
needs of children. As a result, pediatric orthopedic surgeons often improvise with adult implants repurposed for
use in children, resort to freehand techniques with adult instruments and use implants that can be difficult to
remove after being temporarily implanted. These improvisations may lead to undue surgical trauma and
morbidity.
We address this unmet market need and sell the broadest product offering specifically designed for children
with orthopedic conditions. We currently market 53 surgical and bracing systems that serve three of the
largest categories within the pediatric orthopedic market: (i) trauma and deformity correction, (ii) scoliosis and
(iii) sports medicine procedures. Our products have proprietary features designed to:
•
•
•
•
•
•
protect a child’s growth plates;
fit a wide range of pediatric anatomy;
enable earlier surgical intervention;
enable precise and reproducible surgical techniques;
ease implant removal;
provide correction with specialized bracing.
We believe our innovative products promote improved surgical accuracy or improved bracing solutions, increase
consistency of patient outcomes and enhance surgeon confidence in achieving high standards of care. In the
future, we expect to expand our product offering to address additional categories of the pediatric orthopedic
market, such as active growing implants for early onset scoliosis, limb length discrepancies and other orthopedic
trauma and deformity applications.
Our global sales organization focuses exclusively on pediatric orthopedics. Our organization has a deep
understanding of the unique nature of children’s clinical conditions and surgical procedures as well as an
appreciation of the tremendous sense of responsibility pediatric orthopedic surgeons feel for the children whom
parents have entrusted to their care. We provide these surgeons with dedicated support, both in and out of the
operating room. Our global sales management organization leads a network of sales agencies, stocking
distributors as well as direct sales representatives. As of December 31, 2023, our U.S. sales organization
consisted of multiple direct sales representatives as well as nearly 40 independent sales agencies employing
approximately 200 focused sales representatives. Increasingly, these sales agencies are making us the anchor
line in their businesses or representing us exclusively. Sales from such sales agencies represented 66% and
68% of our global revenue in 2023 and 2022, respectively. Outside of the United States, our sales organization
consisted of a network of more than 70 independent stocking distributors, 14 independent sales agencies and
multiple direct sales representatives. We sell our products in over 70 countries outside of the United States.
We collaborate with pediatric orthopedic surgeons in developing new surgical and bracing systems that improve
the quality of care. We have an efficient product development process that relies upon teams of engineers,
commercial personnel and surgeon advisors. We believe our products are characterized by stable pricing, few
reimbursement issues and attractive gross margins.
We believe clinical education is critical to advancing the field of pediatric orthopedics. Cumulatively, we are the
largest financial contributor to the five primary pediatric orthopedic surgical societies that conduct pediatric
14 | OrthoPediatrics Annual Report 2023
10
clinical education and research. We are a major sponsor of continuing medical education, or CME, courses in
pediatric spine and pediatric orthopedics, which are focused on fellows and young surgeons. In 2023, we
conducted numerous training workshops. We believe these workshops help surgeons recognize our
commitment to their field. We believe our commitment to clinical education has helped to increase our account
presence while promoting familiarity with our products and loyalty among fellows and young surgeons.
We have established a corporate culture built on the cause of improving the lives of children with orthopedic
conditions. We believe our higher corporate purpose captures the imagination of our employees and makes
them committed to doing everything better, faster and at lower cost. This culture allows us to attract and retain
talented, high-performing individuals.
We have grown our revenue from approximately $10.2 million for the year ended December 31, 2011 to $148.7
million for the year ended December 31, 2023. The compound annual growth rate for the Company from 2011
through 2023 is 25.0%. This growth was partially obtained through strategic acquisitions. For the years ended
December 31, 2023, 2022 and 2021, our revenue was $148.7 million, $122.3 million and $98.0 million,
respectively. As of December 31, 2023, our accumulated deficit was $197.7 million.
We believe we have a history of efficient capital utilization, and we intend to scale our business model by
continuing to implement the successful strategy that has sustained our growth. This strategy includes increasing
investment in consigned implant and instrument sets in the United States and select international markets,
expanding our innovative product lines of specialized surgical and bracing products by leveraging our efficient
product development process, strengthening our global sales and distribution infrastructure, broadening our
commitment to clinical education and research, and deepening our culture of continuous improvement. Due to
the high concentration of pediatric orthopedic surgeons in comparatively few hospitals, we believe we can
accelerate the penetration of our addressable market in a capital-efficient manner and further strengthen our
position as the category leader in pediatric orthopedics. The primary challenges to maintaining our growth in a
market that has not historically relied on age-specific implants and instruments have been insufficient implant/
instrument sets and overcoming older surgeons’ familiarity with repurposing adult implants for use in children as
well as expanding our specialty bracing offerings. Our efforts in surgeon training, collaboration and marketing
address the inertia of using repurposed adult products, particularly with younger surgeons.
Industry Overview
Children Have Unique Skeletal Characteristics
Their skeletal anatomy and physiology differs significantly from adults, which affects the way in which children
with orthopedic conditions are managed surgically and through bracing. These differences include:
•
•
•
•
Children’s Bones Are Smaller. Children’s bones are significantly smaller than adult bones. Bone
size and strength increases rapidly during childhood and adolescence.
Children's Bones Are Growing. Children’s bones contain growth plates, or physes, that consist of
developing cartilage tissue at the end of the bone, enabling skeletal growth. Bones grow
lengthwise from the ends of the growth plates until skeletal maturity is reached and the growth
plates close. As this occurs, some bones fuse together, reducing the 270 bones children have at
birth to 206 bones by adulthood. Injury to the growth plates, including fracture or surgical trauma,
can lead to growth arrest and subsequent deformity.
The Composition and Vasculature of Children’s Bones Is Unique. Children’s bones are more
porous and respond to injury and infection differently than adult bones. Children also have blood
vessels that supply oxygen and nutrients to bones as they grow, which disappear when the
growth plates close and the child reaches adulthood. Trauma to these blood vessels during
surgery may cut off blood supply to the bone, resulting in death of the bone tissue.
Children’s Bones Change Shape as They Grow. Children’s bones are more curved than adult
bones. As children grow into adulthood, their bones change shape. For example, the curvature of
the femur decreases up to 30% as a child matures.
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OrthoPediatrics Annual Report 2023 | 15
•
Complex Disorders in Children Pose Unique Clinical Challenges. Complex disorders such as
cerebral palsy, scoliosis, brittle bone disease and hip disorders can pose significant challenges
for surgical treatment. The most common such disorder is cerebral palsy, which affects
approximately 500,000 children under the age of 18 in the United States and approximately three
out of every 1,000 live births. Spastic cerebral palsy is the most common form, making up the
majority of all cerebral palsy cases. Spastic cerebral palsy can produce skeletal deformities such
as curvature of the spine, hip dislocation, gait abnormalities and other conditions involving joints
and bones. Children suffering from these disorders often require multiple surgeries into
adulthood.
We believe the challenges resulting from the unique characteristics of children’s skeletal anatomy and physiology,
as well as the complex disorders affecting them, are best addressed by the use of implants, instruments and
specialized bracing specifically designed for the treatment of children.
Pediatric Orthopedic Surgeons Are Generalists
Unlike orthopedic surgeons focused on treating adults, pediatric orthopedic surgeons are, for the most part,
generalists treating a wide range of congenital, developmental and traumatic orthopedic conditions, including
limb and spine deformities, gait abnormalities, bone and joint infections, sports injuries and orthopedic trauma
cases. These conditions are often times treated first with specialized bracing and then by surgical intervention, if
required. Accordingly, they generally represent a single call point for our broad range of pediatric orthopedic
implants, instruments and specialty bracing. In 2023, there were more than 1,520 members of Pediatric
Orthopaedic Society of North America (POSNA), as compared to approximately 33,400 practicing orthopedic
surgeons in the United States focused on the treatment of adults. The number of fellowships in pediatric
orthopedics continues to grow. As generalists, these surgeons have a deep understanding of the unique nature
of children’s clinical conditions and surgical procedures. We believe they feel a tremendous sense of
responsibility for the children whom parents have entrusted to their care.
Market Opportunity
We currently serve a portion of the pediatric orthopedic implant market that we estimate represents a $3.9 billion
opportunity globally, including over $1.7 billion in the United States. The chart below provides the estimated sizes
of the categories of our U.S. addressable market opportunity, based on third-party data (including data compiled
by IMS Health, Inc. and Life Science Intelligence, Inc. in studies that we commissioned) regarding the number of
procedures performed in 2015 and our average revenue per procedure or, in the case of smart implants, our
estimated average revenue per procedure based on industry data. We then updated this data in 2024 based on
management estimates and typical industry growth rates.
Trauma and
Deformity
Surgical
Implants
Fusion
$610 million
$340 million
Scoliosis
Non-Fusion
$80 million
Specialty
Bracing
Sports Medicine
Smart Implants
$775 million
$250 million
$165 million
We estimate that the United States represented approximately 45% of the total global orthopedic implant market,
both adult and pediatric, and that this geographic segmentation similarly applies to the global pediatric orthopedic
implant market.
Overviews of the three categories of the trauma and deformity, scoliosis and sports medicine markets that we
currently serve, and the smart implant market that we are planning to enter, are as follows:
Trauma and Deformity Correction
Trauma and deformity correction surgical procedures involve placing metal plates and screws on the outside of
the bone or long nails inside the canal of the bone, known as flexible and rigid intramedullary nails, to stabilize
fractures and allow them to heal. Trauma and deformity procedures also include osteotomies, or surgical cutting
of the bone, the use of metal implants or external fixation to correct angular bone deformities or limb length
discrepancies. Trauma and deformity also includes specialized bracing products which are non-surgical in
nature.
16 | OrthoPediatrics Annual Report 2023
12
Scoliosis
Scoliosis procedures involve the use of spinal implants, such as pedicle screws and rods, to correct curvature of
the spine as a result of scoliosis, trauma or tumors.
Sports Medicine
Sports medicine procedures include reconstruction of the anterior cruciate ligament, or ACL, and medial
patellofemoral ligament, or MPFL. These reconstruction procedures refer to the replacement of the ACL or
MPFL ligaments, as applicable, with a surgical tissue graft to restore function to the knee after injury. According
to Life Science Intelligence, Inc., in a study that we commissioned, approximately 29% of ACL reconstruction
procedures completed in the United States in 2015 were in patients under the age of 18. The vast majority of
these procedures were performed in ambulatory surgery centers.
Smart Implants
We are developing a new generation of adjustable implant systems, which we refer to as our Active Growing
Implants, which will utilize a mechanized motor and are adjustable at the time of implantation and non-invasively
over the course of treatment to accommodate the clinical needs of patients with early onset scoliosis and limb
length discrepancies, or LLDs, as they heal, grow and age.
LLDs can occur for a variety of reasons, including congenital deformities and previous injury to the bone. Larger
LLDs often result in debilitating pain and difficulty to walk.
Early onset scoliosis refers to severe spinal deformities in skeletally immature patients under the age of ten.
Despite its low incidence rate, early onset scoliosis is a challenging health issue and can lead to significant
morbidity.
High Procedural Concentration in Trauma and Deformity and Scoliosis
According to IMS Health, Inc., 3,425 hospitals performed pediatric trauma and deformity or scoliosis procedures in
the United States in 2015. Approximately 300 of these hospitals performed over 62% of all pediatric trauma and
deformity and scoliosis procedures. We believe that this high concentration of pediatric trauma and deformity and
scoliosis procedures and our focused sales organization will enable us to address the pediatric orthopedic surgery
market in a capital-efficient manner.
We estimate that these 300 U.S. pediatric centers represent a target market of $1.2 billion. The table below
provides the estimated sizes of the categories of this target market, based on third-party data (including data
compiled by IMS Health, Inc. and Life Science Intelligence, Inc. in studies that we commissioned) which was then
updated in 2024 with management estimates based on typical industry growth rates.
Trauma and
Deformity
Surgical
Implants
Scoliosis
Fusion
Non-Fusion
Specialty
Bracing
Sports Medicine
U.S. High-Volume
Children's Hospitals
Target Market
$375 million
$210 million
$70 million
$500 million
$80 million
In the future, we expect to expand our market opportunity by addressing additional categories of the pediatric
orthopedic market, such as craniomaxilloacial, upper extremity, pediatric orthopedic oncology, pelvis, and other
sports-related injuries along with numerous specialty bracing categories.
Our Exclusive Focus on Pediatric Orthopedic Surgery and Bracing
We believe we are the only company that has committed the resources necessary to create a global sales and
product development infrastructure focused on the pediatric orthopedic implant and bracing market. Our goal is to
build an enduring company committed to addressing this market’s unmet needs.
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OrthoPediatrics Annual Report 2023 | 17
Only Commercial Infrastructure Dedicated to Pediatric Orthopedic Surgeons
•
•
•
Dedicated Sales Support to Pediatric Orthopedic Surgeons. Our sales and marketing personnel
provide dedicated sales support to pediatric orthopedic surgeons, both in and out of the operating
room, to guide them through the optimal selection and use of implants, instruments and
specialized bracing to achieve desired clinical outcomes.
Participation of Pediatric Orthopedic Surgeons in New Product Development. With the
assistance of our Medical Director, a highly respected former pediatric orthopedic surgeon, we
engage with pediatric orthopedic surgeons to understand their clinical needs and develop new
implants, instruments, surgical techniques and specialized braces that will allow them to better
serve their patients. We also respond to surgeons’ requests for customized implants and
instruments to improve their workflows and enhance their clinical outcomes.
Leading Supporter of Pediatric Orthopedic Surgical Societies and Clinical Education.
Cumulatively, we donate more than any of our competitors to the five primary pediatric orthopedic
surgical societies that conduct pediatric clinical education and research. In 2023, we conducted
numerous training workshops focused on fellows and surgeons early in their careers. We believe
our commitment to clinical education advances pediatric orthopedic surgery and increases our
account presence, while promoting familiarity with our products and loyalty among fellows and
young surgeons. We aspire to be viewed as the partner of pediatric orthopedic surgeons around
the world.
Our Competitive Strengths
We believe our focus and experience in pediatric orthopedic surgery and bracing, combined with the following
principal competitive strengths, will allow us to continue to grow our sales and expand our market opportunity.
•
•
•
Exclusive Focus on Pediatric Orthopedics. We were founded with the mission of improving the
lives of children with orthopedic conditions, a patient population which we believe has been
largely neglected by the orthopedic industry. We believe we are the first diversified orthopedic
company to focus exclusively on the pediatric market. Our core competencies are the
development and commercialization of innovative products and technologies specifically
designed to address the unmet clinical needs of pediatric orthopedic patients and satisfy the
demands of the surgeons who treat them. We have developed and sell the broadest product
offering specifically designed for pediatric orthopedic patients. We believe we are the only
orthopedic company to have established a robust pediatric-focused infrastructure, including
product development and a dedicated global commercial organization. We believe our exclusive
focus on pediatric orthopedics has generated strong brand equity in the pediatric orthopedic
surgeon community.
Comprehensive Portfolio of Innovative Orthopedic Products Designed Specifically for Children.
We have developed a comprehensive portfolio of implants, instruments and specialty braces
specifically designed to treat children with orthopedic conditions. In 2023, we estimate that our
products were used to help approximately 82,000 children, and over 710,000 since inception,
when including those served by our acquired companies. We currently market 53 surgical and
specialized bracing systems, which address pediatric trauma and deformity, scoliosis and sports
medicine procedures. Our products include features that provide specific advantages for pediatric
orthopedic surgeons and their patients, such as surgical instrumentation specifically designed for
use in children, proper anatomical sizes and contouring, and proprietary designs that address the
unique skeletal anatomy and physiology of a growing child. Our broad product offering has made
us, within the three categories of the market that we currently serve, the only provider of
comprehensive solutions to pediatric orthopedic surgeons, who for the most part are generalists
performing a wide range of orthopedic surgeries.
Partnership with Pediatric Orthopedic Surgeons and Pediatric Surgical Societies. We have
devoted significant time and resources to developing deep relationships with pediatric orthopedic
surgeons and supporting clinical education to advance the practice of pediatric orthopedic
medicine. This enables us to engage and collaborate with thought-leading surgeons and
academic institutions around the world in order to develop products and technologies specifically
18 | OrthoPediatrics Annual Report 2023
14
•
•
designed to meet the needs of pediatric orthopedic surgeons and their patients. Our dedication to
the pediatric orthopedic community is evidenced by our leading support of the five major pediatric
orthopedic surgical societies that conduct pediatric clinical education and research. In 2023, we
conducted numerous training workshops focused on fellows and surgeons early in their careers.
We are a major sponsor of CME courses in pediatric spine and pediatric orthopedics. We believe
collaborating with pediatric orthopedic surgeons has helped to promote familiarity with our
products and loyalty among fellows and surgeons early in their careers.
Scalable Business Model. Our ability to identify and respond quickly to the needs of pediatric
orthopedic surgeons and their patients is central to our culture and critical to our continued
success. Our global sales management organization leads a network of sales agencies, stocking
distributors as well as direct sales representatives. As of December 31, 2023, our U.S. sales
organization consisted of multiple direct sales representatives as well as nearly 40 independent
sales agencies employing approximately 200 sales representatives. Outside of the United States,
we work with a network of more than 70 independent stocking distributors, 14 independent sales
agencies and multiple direct sales representatives. We sell our products in over 70 countries
outside of the United States. We estimate that over 62% of U.S. pediatric trauma and deformity
and scoliosis procedures in 2015 were performed in approximately 300 hospitals. We believe that
this high concentration of procedures and our focused sales organization will enable us to
address the pediatric orthopedic surgery market in a capital-efficient manner. In addition, we
believe our exclusive focus on hospitals that perform pediatric orthopedic surgery will allow us to
grow our revenue while leveraging investment in a smaller number of consigned implant and
instrument sets. As we continue to broaden our product offering, we believe the scalability of our
business model will allow us simultaneously to increase our reach, deepen our relationships with
pediatric orthopedic surgeons and help us to achieve significant returns on our investments in
implant and instrument sets, product development and commercial infrastructure.
Unique Culture: A Different Kind of Orthopedic Company. We have established a results-
oriented, people-focused corporate culture dedicated to improving the lives of children with
orthopedic conditions. Our senior management team provides engaging leadership and believes
that the only hierarchy is that of good ideas, which can come from everywhere in our company.
Our Trauma and Deformity and Scoliosis businesses are each led by a President, who chairs a
business team composed of representatives from the research and development, quality and
regulatory, operations, sales, human resources and finance functions. These teams meet
frequently and make decisions regarding new products, inventory builds and promotional
activities, thus enhancing our agility and the speed of decision making. We believe this culture
allows us to attract and retain talented, high performing professionals. For seven years we have
been recognized by the Indiana Chamber of Commerce - Best Companies to Work in Indiana.
We believe our focus and commitment to pediatric orthopedics has also enhanced our reputation
among pediatric orthopedic surgeons as the only diversified orthopedic company focused on their
specialty.
We believe that our exclusive focus on pediatric orthopedic surgeons, our comprehensive product portfolio, our
collaborations with surgeons, our scalable business model and our engaging culture are all sources of
significant competitive advantage. We believe these sources of competitive advantage provide us with the
means to expand and defend our position as category leader and constitute barriers to entry that would require
significant time, focus, and investment for a competitor to overcome.
Our Strategy
Our goal is to continue to enhance our leadership in the pediatric orthopedic market and thereby improve the
lives of children with orthopedic conditions. To achieve this goal, we have implemented a strategy that has five
pillars:
•
Continue our laser focus on high-volume children’s hospitals that treat the majority of pediatric
patients. According to IMS Health, Inc., 3,425 hospitals performed pediatric trauma and deformity
or scoliosis procedures in the United States in 2015. Approximately 300 of these hospitals
performed over 62% of all pediatric trauma and deformity and scoliosis procedures. This high
concentration of procedures and our focused sales organization will enable us to address the
pediatric orthopedic surgery market in a capital-efficient manner.
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OrthoPediatrics Annual Report 2023 | 19
•
•
•
•
Provide a broad product portfolio of implant systems, specialty braces, and enabling technologies
uniquely designed to treat children by surrounding pediatric orthopedic surgeons with all the
products they need. We intend to leverage our market knowledge and our relationships with
leading pediatric orthopedic surgeons to continue developing innovative technologies and
bringing them to market quickly. When appropriate, we will also partner with complimentary,
enabling technology which will allow for greater coverage of orthopedic surgeon needs. We
believe broadening our product offering will strengthen our position as the comprehensive
solution provider for pediatric orthopedic surgeons, deepen our relationships with existing
customers, lead to the conversion of new customers and enhance our reputation.
Deploy instrument sets and provide unparalleled sales support. We intend to increase our
investment in implant and instrument sets consigned to hospitals in the United States and select
international markets to satisfy market demand and accelerate our product sales worldwide. Due
to the high concentration of pediatric orthopedic surgeons in comparatively few hospitals, we
believe we can accelerate the penetration of our addressable market efficiently while supporting
our customers with the only global sales and distribution channel focused exclusively on pediatric
orthopedics.
Expand addressable market through aggressive investment in research and development and
select acquisition opportunities. We have a track record of introducing innovative products that
meet the clinical needs of pediatric orthopedic surgeons and their patients. We believe many of
these products are becoming the standard of care in pediatric orthopedic surgery, and we intend
to increase our investment in research and development of new products. We aspire to launch at
least one new surgical system and multiple product line extensions in our trauma and deformity
and scoliosis businesses as well as multiple specialty bracing products each year for the
foreseeable future. We will also continue to seek partnership and select acquisition opportunities
that expand our total available market and serve new unmet needs in pediatric orthopedics.
Train the next generation of pediatric orthopedic surgeons. We want pediatric orthopedic
surgeons to view us as their partner in advancing the entire field of pediatric orthopedic surgery.
Beyond working with them to develop innovative products, we intend to deepen our partnership
with surgeons by leveraging the experience of our senior management team, including our
Medical Director, to expand our clinical education programs and partnerships with teaching
hospitals, sponsor surgical workshops for residents and fellows and support worthwhile clinical
research projects. We believe our commitment to clinical education and research enables us to
advance the practice of pediatric orthopedic surgery and provides surgeons with access to
sophisticated training in pediatric orthopedics that is not available through traditional residents’
training programs. We believe these efforts will continue to promote familiarity with our products
and loyalty among fellows and young surgeons and generate new product ideas that will
contribute to growth, enhance our competitive position, and expand our market opportunity.
Our Product Portfolio
We have developed a comprehensive portfolio of implants, instruments and specialty bracing solutions
specifically designed to treat children with orthopedic conditions within the three categories of the pediatric
orthopedic market that we currently serve. We currently market 53 surgical and specialized bracing systems that
address pediatric trauma and deformity correction, scoliosis and sports medicine/other procedures. Many of our
products are available in a variety of sizes and configurations to address a wide range of patient conditions and
surgical requirements. These surgical systems are summarized below.
Trauma and Deformity Correction
Our trauma and deformity correction product line includes more than 7,000 implants, external fixation,
specialized braces and bone graft substitutes for the femur, tibia, upper and lower extremities. Our global
revenue from this category for the year ended December 31, 2023 was $106.8 million, an increase of 26% over
the prior year, and represented 72% of total revenue. Global revenue from this category for the years ended
December 31, 2022 and 2021 was $85.1 million and $65.8 million or 70% and 67% of total revenue,
respectively.
20 | OrthoPediatrics Annual Report 2023
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Scoliosis
Our scoliosis product category includes our RESPONSETM systems for treating spinal deformity in children, the
BandLocTM 5.5mm/6.0mm sub-laminar banding system, FIREFLY® Pedicle Screw Navigation Guides, 7D
FlashTM Naviation image guidance system and ApiFix® Mid-C System. Our global revenue from this category for
the year ended December 31, 2023 was $37.9 million, or 25% of total revenue, which represented an increase
of 13% over the prior year. Global revenue from this category for the years ended December 31, 2022 and 2021
was $33.4 million and $28.0 million or 27% and 29% of total revenue, respectively.
In addition to our direct product offering, we invest in complementary enabling technologies that allow us to
better serve the children's hospitals in which we sell. Enabling technologies in our scoliosis space include the
FIREFLY® Technology, a 3D printed and patient-specific Pedicle Screw Navigation Guide as well as the 7D
FLASHTM Navigation image guidance system. We have exclusive distribution rights to both of these
complementary technologies, allowing for exclusive distribution in children's hospitals across the United States.
Sports Medicine/Other
Our sports medicine/other product category primarily includes our ACL, MPFL Reconstruction system and Telos.
Our global revenue from this category for the year ended December 31, 2023 was $4.0 million, or 3% of total
revenue, which represented an increase of 6% over the prior year. Global revenue from this category for the
years ended December 31, 2022 and 2021 was $3.8 million and $4.2 million or 3% and 4% of total revenue,
respectively.
Our revenue is typically higher in the summer months and holiday periods, driven by higher sales of our trauma
and deformity and scoliosis products, which is influenced by the higher incidence of pediatric surgeries during
these periods due to recovery time provided by breaks in the school year.
Product Pipeline
Generally speaking, we have three product development objectives across the organization: (i) develop innovative
new systems that enable surgeons to advance the field of pediatric orthopedics and allow us to focus on
categories of the pediatric orthopedic market we are not currently addressing; (ii) build-out our current portfolio of
products with line extensions that allow these systems to be used in more types of surgeries or non-surgical
applications; and (iii) make improvements to our current implants, instruments, and specialty braces that improve
quality and reduce their cost. We have a large number of new product ideas under development within the areas
of spinal implants, active growing smart implants, trauma implant systems, limb deformity implant systems, and
non-surgical devices. We aspire to launch at least one new system and/or line extension/product improvement
every quarter across the Company.
We have a deep pipeline of new systems that are currently under development, including the following
projects.
Pediatric Nailing Platform | Tibia
We anticipate a full-scale launch in the first half of 2024 for our recently introduced innovative Pediatric Nailing
Platform | Tibia, that will use a similar instrument platform to the Pediatric Nailing Platform | Femur system, which
was introduced in 2018. This new to the market system will treat deformities and traumatic injuries of the tibia.
Active Growing Implants
We are developing a new generation of smart implants, which we refer to as our Active Growing Implants. Our
Active Growing Implants will utilize a power source of significantly greater strength and control than current
magnetic technology and will be adjustable at the time of implantation and non-invasively over the course of
treatment to accommodate the changing clinical needs of patients as they heal, grow and age. We made
significant development progress on this in 2023. This new technology will be available for early onset scoliosis
and potentially limb deformity.
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RESPONSETM Rib and Pelvic System
Our RESPONSETM Rib and Pelvic System is designed to aid surgeons in the treatment of early onset scoliosis, a
debilitating form of scoliosis that affects very young children. We expect to beta launch the system in early 2024
with a full-scale launch in late 2024.
Growth Guidance for Scoliosis - VerteGlide
We are developing VerteGlide, a next-generation growth guidance technology for treating certain forms of early
onset scoliosis. This procedure uses rods and pedicle screws attached to specific points in the spine and
configured similar to a “track and trolley” system which allows the spine to grow naturally while correcting a spinal
curve. We expect a beta launch of this system in 2024 and a full-scale launch in 2025.
Development of Operative Planning Software
We have a number of initiatives underway involving the development of both pre-operative planning and
intraoperative use software to assist surgeons in the treatment of spinal, trauma and deformity correction
conditions as well as the utilization of the Company’s product solutions for these conditions. These projects
encompass both educational and software as a medical device type offerings leveraging MedTech Concepts
LLC's Playbook product offering.
External Fixation Systems
We plan to continue development to support the strengthening of our external fixation product portfolio. In 2023,
we launched our enhanced software and surgical planning software. Further development will focus on hardware
and software upgrades as well as a completely new system for emergency fracture management.
Research and Product Development
We seek to leverage our considerable experience in pediatric orthopedics to develop innovative implants,
instruments and specialty bracing that serve the unmet needs of pediatric orthopedic surgeons and their
patients. Some of our product designs leverage our exclusive rights to the Hamann-Todd Collection of the
Cleveland Natural History Museum, the world’s largest pediatric osteological collection.
We have made significant investments in product development personnel and infrastructure, and we believe
that ongoing research and development efforts are essential to our success. Our culture of continuous
improvement challenges us to develop better products efficiently and at lower cost. New products are
developed by teams of engineers, commercial personnel and surgeon advisors, who work closely together
through the design, prototype and market-testing phases of a product’s development.
Sales and Marketing
We believe we are the only orthopedic company with a robust pediatric-focused infrastructure, including a
dedicated global commercial organization. Our global sales management organization leads a network of sales
agencies, stocking distributors as well as direct sales representatives. As of December 31, 2023, our U.S. sales
organization consisted of multiple direct sales representatives as well as nearly 40 independent sales agencies
employing approximately 200 focused sales representatives. Increasingly, these sales agencies are making us
the anchor line in their businesses or representing us exclusively. Sales to customers from such agencies
represented 66% of our global revenue in 2023 and 68% in 2022.
Outside of the United States, our sales organization consisted of a network of more than 70 independent stocking
distributors, 14 independent sales agencies and multiple direct sales representatives. We sell our products in over
70 countries outside of the United States, including the largest markets in the European Union, Latin America and
the Middle East, as well as South Africa, Australia and Japan. We believe our distributors are well regarded by
pediatric orthopedic surgeons in their respective markets. To support our international distribution organization, we
have hired a number of regional market managers, whose product and clinical expertise deepens our
relationships with both surgeons and our distributors. In the near term, we expect to selectively expand the
number of international markets we serve, as well as to deepen our penetration of important existing markets
such as Brazil and Germany. In 2023, we hired operating and sales representatives in Germany to better serve
our customers.
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We have developed intensive training programs for our global sales organization. We expect our sales agencies
and distributors to continue to deepen their knowledge of pediatric clinical conditions, surgical procedures and
our products, thus increasing their effectiveness. Our domestic and international sales representatives are
usually present in the operating room during surgeries in which our products are used. We believe the clinical
expertise of our global sales organization and their presence both in and out of the operating room will enable
them to increase pediatric orthopedic surgeons’ confidence in using our products, deepen their relationships with
existing customers and lead to the acquisition of new customers.
Global Pediatric Orthopedic Surgeon Involvement, Education and Training
We are dedicated to the cause of improving the lives of children with orthopedic conditions. We want pediatric
orthopedic surgeons throughout the world to view us as their partner in advancing their field. Therefore, we
utilize surgeon input when developing products and clinical education programs. These efforts are aided by our
Medical Director, a highly respected former pediatric orthopedic surgeon. Our entire organization, including our
senior executive team and sales representatives, maintains an extensive network of contacts with pediatric
orthopedic surgeons. These relationships help us understand clinical needs, respond quickly to customer ideas
and support new developments in the field of pediatric orthopedics.
We are committed to advancing pediatric orthopedic care by supporting clinical education. We support local,
regional and national educational courses, intensive hands-on training programs and product-based workshops
that enable surgeons to practice surgical procedures using our products. In 2023, we conducted numerous
training workshops focused on fellows and surgeons early in their careers. We are also a major sponsor of CME
courses in pediatric spine and pediatric orthopedics. Annually, we sponsor the largest industry meetings including
the Annual International Children's Spine Symposium, Annual Pediatric Orthopedic Surgical Techniques Course,
Akron Pediatric Orthopedic Residents Review Course and the annual PediOrthoWest resident review program.
We have a growing commitment to the clinical research performed by surgeons. This commitment ranges from
providing our products for clinical outcome studies to providing advanced research grants.
Cumulatively, we are one of the largest financial contributors to pediatric orthopedic surgical societies that conduct
pediatric clinical education and research: the Pediatric Orthopaedic Society of North America, the International
Pediatric Orthopaedic Symposium, the European Pediatric Orthopaedic Society and the American Academy for
Cerebral Palsy and Developmental Medicine. Additionally, we are a sponsor of the two major spine deformity
organizations, the Scoliosis Research Society and the International Meeting on Advanced Spine Techniques. We
are also the founding and leading sponsor of the Pediatric Research in Sports Medicine Society and have
significantly increased our sponsorship of the Baltimore Limb Deformity Course. In addition to these
organizations, we support eight pediatric orthopedic fellowships. Our support of these organizations and
fellowships demonstrates our commitment to the clinical training and research they sponsor. We believe this
support enhances our reputation as the category leader in pediatric orthopedics.
Additionally, during 2021, 2022 and 2023, we funded The Foundation for Advancing Pediatric Orthopaedics
("Foundation") as a 501(c)3 public charity. The Foundation channels OrthoPediatrics' clinical education funding
together with contributions from the general public to support non-commercial education programs and clinical
research.
Manufacturing and Suppliers
Our products are primarily manufactured to our specifications by third-party suppliers who meet our manufacturer
qualification standards. MD Ortho's specialized bracing products are manufactured on-site in our Iowa facility.
Our third-party manufacturers meet FDA and other country-specific quality standards, supported by our internal
specifications and procedures. We believe these manufacturing relationships allow us to work with suppliers who
have well-developed specialized competencies, minimize our capital investment, control costs and shorten cycle
times, all of which we believe allow us to compete with larger volume manufacturers of orthopedic implants. We
work closely with our suppliers with a goal of ensuring our inventory needs are met while maintaining high quality
and reliability.
All of our device contract manufacturers are required to be ISO 13485 certified and are registered establishments
with the FDA. Our internal quality management group conducts comprehensive on-site inspection audits of our
suppliers to ensure they meet FDA and other country-specific requirements, as necessary. In addition, we and our
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suppliers are subject to periodic unannounced inspections by U.S. and international regulatory authorities to
ensure compliance with quality regulations.
We maintain certain long-term contracts with our key suppliers. The majority of our suppliers do not require
guaranteed minimum purchases. In most cases, we have redundant manufacturing capabilities for each of our
products. To date, we have not experienced significant difficulty obtaining the materials necessary to meet
demand for our products, and we believe manufacturing capacity is sufficient to meet global market demand for
our products for the foreseeable future.
Intellectual Property
Our success depends upon our ability to protect our intellectual property. We rely on a combination of
intellectual property rights, including patents, trade secrets, copyrights and trademarks, as well as customary
confidentiality and other contractual protections. We own numerous issued patents and pending patent
applications that relate to our technology. As of December 31, 2023, we owned 67 issued U.S. patents and
198 issued foreign patents and we had 38 pending U.S. patent applications and 92 foreign patent applications.
As of December 31, 2023, 14 of our U.S. issued patents have pending continuation or divisional applications in
process which may provide additional intellectual property protection if issued as U.S. patents. Our issued U.S.
patents expire between 2024 and 2040, subject to payment of required maintenance fees, annuities and other
charges. As of December 31, 2023, we owned 33 U.S. trademark registrations and 10 pending U.S. trademark
applications, as well as 81 registrations in other jurisdictions worldwide.
We also rely upon trade secrets, know-how and continuing technological innovation, and may in the future rely
upon licensing opportunities, to develop and maintain our competitive position. We protect our proprietary rights
through a variety of methods, including confidentiality agreements and proprietary information agreements with
suppliers, employees, consultants and others who may have access to proprietary information.
Competition
The orthopedic industry is competitive, subject to rapid technological change and significantly affected by new
product introductions and market activities of other participants. Our currently marketed products are, and any
future products we commercialize will be, subject to competition. We believe the principal competitive factors
in our markets include:
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improved outcomes for medical conditions;
acceptance by orthopedic surgeons;
ease of use and reliability;
acceptance by the patient community;
product price;
availability of implant-specific instrument sets;
effective marketing and distribution; and
speed to market.
We have competitors in each of our three product categories, including the DePuy Synthes Companies (a
subsidiary of Johnson & Johnson), Medtronic plc, Smith & Nephew plc and Orthofix. We believe we have the
broadest pediatric product offering across these categories relative to these competitors. Our ability to compete
successfully will depend on our ability to develop proprietary products that reach the market in a timely manner,
are cost effective and are safe and effective. They also require a dedicated selling organization that is viewed by
pediatric orthopedic surgeons as a consultative resource that can attend surgery.
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Human Capital and Community Support
We believe that maintaining a sufficient number of skilled employees in all departments of our Company is a
key focus of our human capital. We employ a number of strategies to best enable us to attract, retain, and
engage our employees. As of December 31, 2023, we employed 247 full-time employees, 37 of whom were
engaged in research and development and 74 of whom were engaged in sales and marketing. None of our
employees are subject to a collective bargaining agreement, and we consider our employee relations to be
good.
We strive to provide an inclusive, diverse, and safe workplace, filled with opportunities for our employees to
grow and develop. We believe that culture can be a company’s most powerful source of competitive
advantage. Cultures are unique, cannot be reverse-engineered and are impossible to duplicate. We have
established a corporate culture that is results-oriented and people-focused. It is built on the cause of improving
the lives of children with orthopedic conditions.
We believe our culture is bolstered not only by our compensation and benefits plans, but also by programs that
support our local communities. This is demonstrated by both the Company's and its associates' regular
participation in philanthropic causes. We recognize that building connections between our employees, their
families, and the communities we serve creates a fulfilling and positive workplace.
We also partner with organizations around the world that provide pediatric orthopedic care for the
disadvantaged. Specifically, we have partnered with the World Pediatric Project, to whom we provide surgical
products and treatment for children in developing countries, some of whom are flown to the United States for
surgery. In 2020, we were named as "Corporate Partner of the Year" by the World Pediatric Project and we
continued our support of this cause in subsequent years.
We encourage you to review our Environmental, Social and Governance ("ESG") page under the "About"
section of our corporate website for more detailed information regarding our ESG efforts and current initiatives,
including a link to our Diversity & Inclusion Policy. Nothing on our website, including our Diversity & Inclusion
Policy, shall be deemed part of or incorporated by reference into this Annual Report on Form 10-K.
Government Regulation
Our products and our operations are subject to extensive regulation by the FDA and other federal and state
authorities in the United States, as well as comparable authorities in foreign jurisdictions. Our products are
subject to regulation as medical devices under the Federal Food, Drug, and Cosmetic Act ("FDCA"), as
implemented and enforced by the FDA. The FDA regulates the development, design, non-clinical and clinical
research, manufacturing, safety, efficacy, labeling, packaging, storage, installation, servicing, recordkeeping,
premarket clearance or approval, adverse event reporting, advertising, promotion, marketing and distribution,
and import and export of medical devices to ensure that medical devices distributed domestically are safe and
effective for their intended uses and otherwise meet the requirements of the FDCA.
In addition to U.S. regulations, we are subject to a variety of regulations in other jurisdictions governing clinical
trials and commercial sales and distribution of our products. Whether or not we obtain FDA clearance or approval
for a product, we must obtain authorization before commencing clinical trials or obtain marketing authorization or
approval of our products under the comparable regulatory authorities of countries outside of the United States.
The approval process varies from country to country and the time may be longer or shorter than that required for
FDA clearance or approval.
Regulation of Medical Devices in the United States
Premarket Clearance and Approval Requirements
Unless an exemption applies, each medical device commercially distributed in the United States requires either
FDA clearance of a premarket notification ("510(k)") or premarket approval ("PMA"). Under the FDCA, medical
devices are classified into one of three classes — Class I, Class II or Class III — depending on the degree of risk
associated with each medical device and the extent of manufacturer and regulatory control needed to ensure its
safety and effectiveness. Class I includes devices with the lowest risk to the patient and are those for which safety
and effectiveness can be assured by adherence to the FDA’s General Controls for medical devices, which include
compliance with the applicable portions of the Quality System Regulation (QSR), facility registration and product
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listing, reporting of adverse medical events, and truthful and non-misleading labeling, advertising, and promotional
materials. Class II devices are subject to the FDA’s General Controls, and special controls as deemed necessary
by the FDA.
These special controls can include performance standards, post-market surveillance, patient registries and FDA
guidance documents. While most Class I devices are exempt from the 510(k) premarket notification requirement,
manufacturers of most Class II devices are required to submit to the FDA a premarket notification under Section
510(k) of the FDCA requesting permission to commercially distribute the device. The FDA’s permission to
commercially distribute a device subject to a 510(k) premarket notification is generally known as 510(k) clearance.
Devices deemed by the FDA to pose the greatest risks, such as life-sustaining, life-supporting or some
implantable devices, or devices that have a new intended use, or use advanced technology that is not
substantially equivalent to that of a legally marketed device, are placed in Class III, requiring approval of a PMA.
Our currently marketed products are Class I and exempted from premarket notification, or Class II devices subject
to 510(k) clearance with the exception of the ApiFix Mid-C System which is an unclassified, approved device
under the Humanitarian Device Exemption ("HDE") regulation.
Approval under the HDE regulation is contingent upon the submission of periodic reports at intervals of one year
(unless otherwise specified) from the date of approval of the original HDE (August 2019). The purpose of the HDE
provision is to encourage the discovery and use of devices intended to benefit patients in the treatment and
diagnosis of diseases or conditions that affect not more than 8,000 individuals in the United States per year. The
FDA may grant an HDE, which is an exemption from the effectiveness requirements of sections 514 and 515 of
the FDCA Act, if the FDA determines that the device meets certain criteria. After HDE approval, the medical
device may only be used after Institutional Review Board ("IRB") approval has been obtained. Under FDA
regulations, an IRB is an appropriately constituted group that has been formally designated to review and monitor
biomedical research involving human subjects. The purpose of IRB review is to assure, both in advance and by
periodic review, that appropriate steps are taken to protect the rights, safety and welfare of humans participating
as subjects in the research.
510(k) Marketing Clearance Pathway
Our Class II products are subject to 510(k) clearance under the FDCA. To obtain 510(k) clearance, we must
submit to the FDA a 510k submission demonstrating that the proposed device is “substantially equivalent” to a
predicate device already on the market. A predicate device is a legally marketed device that is not subject to
premarket approval, i.e., a device that was legally marketed prior to May 28, 1976 (pre-amendments device). The
FDA’s 510(k) review process usually takes from three to six months. The FDA may require additional information
following their review.
If the FDA agrees that the device is substantially equivalent to the predicate device presented in the 510(k)
submission, it will grant clearance to commercially market the device. If the FDA determines that the device is “not
substantially equivalent” to the predicate device, we may be required to fulfill more rigorous requirements,
including those associated with the PMA process, to gain approval to commercialize.
After a device receives 510(k) marketing clearance, any modification that could significantly affect its safety or
effectiveness, or that would constitute a major change or modification in its intended use, will require a new 510(k)
submission. Minor modifications may be accomplished by a manufacturer documenting the change in an internal
letter-to-file. The FDA can always review these letters to file during an inspection. If the FDA disagrees with a
manufacturer’s determination on major versus minor modifications, the FDA can require the manufacturer to
cease marketing and/or request the recall of the modified device until additional actions are completed. Also, in
these circumstances, we may be subject to significant regulatory fines or penalties.
Post-Market Regulation
Numerous and pervasive regulatory requirements apply to commercialized devices. These include:
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establishment registration and device listing with the FDA;
QSR requirements, which require manufacturers, including third-party manufacturers, to follow
stringent design, testing, control, documentation and other quality assurance procedures during
all aspects of the design and manufacturing process;
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labeling and marketing regulations, which require that promotion is truthful, not misleading, fairly
balanced and provide adequate directions for use and that all claims are substantiated, and also
prohibit the promotion of products for unapproved or “off-label” uses and impose other restrictions
on labeling;
the federal Open Payments ("Sunshine") program and various state and foreign laws on reporting
remunerative relationships with healthcare providers (HCPs);
the federal Anti-Kickback Statute (and similar state laws) prohibiting, among other things,
soliciting, receiving, offering or providing remuneration intended to induce the purchase or
recommendation of an item or service reimbursable under a federal healthcare program, such as
Medicare or Medicaid;
the federal False Claims Act (and similar state laws) prohibiting, among other things, knowingly
presenting, or causing to be presented, claims for payment or approval to the federal government
that are false or fraudulent, knowingly making a false statement material to an obligation to pay or
transmit money or property to the federal government or knowingly concealing, or knowingly and
improperly avoiding or decreasing, an obligation to pay or transmit money to the federal
government. The government may assert that claim includes items or services resulting from a
violation of the federal Anti-Kickback Statute and constitutes a false or fraudulent claim for
purposes of the false claims statute;
clearance or approval of product modifications to 510(k)-cleared devices that could significantly
affect safety or effectiveness or that would constitute a major change in intended use of one of
our cleared devices;
medical device reporting regulations, which require that a manufacturer report to the FDA if a
device it markets may have caused or contributed to a death or serious injury, or has
malfunctioned and the device or a similar device that it markets would be likely to cause or
contribute to a death or serious injury, if the malfunction were to recur;
correction, removal and recall reporting regulations, which require that manufacturers report to
the FDA field corrections and product recalls or removals if undertaken to reduce a risk to health
posed by the device or to remedy a violation of the FDCA that may present a risk to health;
complying with the new federal law and regulations requiring Unique Device Identifiers (UDI) on
devices and also requiring the submission of certain information about each device to the FDA’s
Global Unique Device Identification Database (GUDID);
the FDA’s recall authority, whereby the agency can order device manufacturers to recall from the
market a product that is in violation of governing laws and regulations; and
post-market surveillance activities and regulations, which apply when deemed by the FDA to be
necessary to protect the public health or to provide additional safety and effectiveness data for
the device.
Our manufacturing processes are required to comply with the applicable portions of the QSR, which cover the
methods, facilities and controls for the design, manufacture, testing, production, processes, controls, quality
assurance, labeling, packaging, distribution, installation and servicing of finished devices intended for human
use. Our failure to maintain compliance with the QSR requirements could result in the shut-down of, or
restrictions on, our manufacturing operations and the recall or seizure of our products. The discovery of
previously unknown problems with any of our products, including unanticipated adverse events or adverse
events of increasing severity or frequency, whether resulting from the use of the device within the scope of its
clearance or off-label by a physician in the practice of medicine, could result in restrictions on the device,
including the removal of the product from the market or voluntary or mandatory device recalls.
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Enforcement Powers
The FDA has broad regulatory enforcement powers. If the FDA determines that we failed to comply with
applicable regulatory requirements, it can take a variety of actions, which may result in any of the following
sanctions:
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warning letters, untitled letters, fines, injunctions, consent decrees and civil penalties;
recalls, withdrawals, or administrative detention or seizure of our products;
operating restrictions or partial suspension or total shutdown of production;
refusing or delaying requests for 510(k) clearance or PMA approvals of new products or modified
products;
withdrawing 510(k) clearances or PMA approvals that have already been granted;
refusal to grant export or import approvals for our products; or
criminal prosecution.
Regulation of Medical Devices in the EEA
All medical devices placed on the market in the EEA must meet the relevant essential requirements laid down in
Annex I of Directive 93/42/EEC concerning medical devices, or the Medical Devices Directive ("MDD"). There is
also a directive specifically addressing Active Implantable Medical Devices (Directive 90/385/EEC). The most
fundamental essential requirement is that a medical device must be designed and manufactured in such a way
that it will not compromise the clinical condition or safety of patients, or the safety and health of users and others.
In addition, the device must achieve the performance intended by the manufacturer and be designed,
manufactured and packaged in a suitable manner. The European Commission has adopted various standards
applicable to medical devices. These include standards governing common requirements, such as sterilization
and safety of medical electrical equipment, and product standards for certain types of medical devices. There are
also harmonized standards relating to design and manufacture. While not mandatory, compliance with these
standards is viewed as benchmarks to satisfy the essential requirements.
To demonstrate compliance with the essential requirements laid down in Annex I to the MDD, medical device
manufacturers must undergo a conformity assessment procedure, which varies according to the type of medical
device and its classification. Conformity assessment procedures require an assessment of available clinical
evidence, literature data for the product and post-market experience in respect of similar products already
marketed. Except for low-risk medical devices (Class I non-sterile, non-measuring devices), where the
manufacturer can self-declare the conformity of its products with the essential requirements (except for any parts
which relate to sterility or metrology), a conformity assessment procedure requires the intervention of a notified
body. Notified bodies are separate entities from government that are authorized by government authorities to
perform conformity assessments. The notified body also audits and examines a product’s technical dossiers and
the manufacturers’ quality system. If satisfied that the assessed devices conform to the relevant essential
requirements, the notified body issues a certificate of conformity, which the manufacturer uses as a basis for its
own declaration of conformity. The manufacturer may then apply the CE Mark to the device, which allows the
device to be placed on the market throughout the EEA. Once the product has been placed on the market in the
EEA, the manufacturer must comply with requirements for reporting incidents and field safety corrective actions
associated with the medical device.
In order to demonstrate safety and performance for their medical devices, manufacturers must evaluate
applicable clinical data in accordance with the requirements of Annex X to the MDD and applicable European and
International Organization for Standardization standards, as implemented or adopted in the EEA member states.
Clinical data may be in the form of relevant scientific literature of an equivalent device, clinical investigations of
the device, or both. Clinical investigations for medical devices usually require the approval of an ethics review
board and approval by or notification to the national regulatory authorities. Both regulators and ethics committees
also require the submission of serious adverse event reports during a study and may request a copy of the final
study report.
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The Medical Devices Regulation ("MDR") entered into force in May 2017 and, due to the COVID-19 pandemic,
was postponed from its original application date of May 2020 to May 2021. The application date refers to the time
by which the MDR goes into effect. On January 6, 2023, the European Commission sent a proposal to the
European Parliament for extending the application date to December 31, 2027 for the Class III and IIb
implantable devices. The proposal also seeks to extend the application date to December 31, 2028 for select
Class IIb, Class IIa and Class I devices. On February 16, 2023, the European Parliament approved, in part, the
extension of the application date for Class III and IIb implantable devices to December 31, 2027. The MDR
imposes significant additional reporting requirements on manufacturers of all medical devices, imposes an
obligation on manufacturers to appoint a “qualified person” responsible for regulatory compliance, and provides
for more strict clinical evidence requirements.
The MDR includes further controls and requirements on the following activities:
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high level of request for premarket clinical evidence for high risk devices;
increased scrutiny of technical files for implantable devices;
monitoring of notified bodies, by independent auditors;
increased requirements regarding vigilance and product traceability (specifically related to
labeling requirements);
increased regulation for non-traditional roles such as importer and distributor; and
Post-Market Clinical Follow-up that requires significantly greater clinical data specific to
our devices, which leads to greater costs for collecting such data than under the MDD.
Regulations in the United Kingdom
Effective January 31, 2020, the United Kingdom of Great Britain and Northern Ireland, or the UK, withdrew from
the European Union, or EU. New regulations specific to the UK went into effect beginning January 1, 2021 with a
transitional period through June 30, 2025. These regulations may impact our ability to sell our products in the UK.
During the transition period, devices with CE Markings may continue to be sold within the UK. Devices sold in
Northern Ireland will be required to keep the CE Marking after the transition period ends.
In order to comply with the new regulations and continue selling medical devices in the UK following the transition
period, the Company must appoint a UK Responsible Person and register the medical devices with the UK's
Medicines and Healthcare product Regulatory Agency, or MHRA. A new conformity assessment must be
completed by a UK Approved Body, or UKAB. The UKAB will audit and examine a product’s technical dossiers
and the manufacturers’ quality system. If satisfied that the relevant product conforms to the relevant essential
requirements, the UKAB issues a certificate of conformity, which the manufacturer uses as a basis for its own
declaration of conformity. The manufacturer may then apply the UKCA Mark to the device, which allows the device
to be placed on the market throughout the UK. Once the product has been placed on the market in the UK, the
manufacturer must comply with requirements for reporting incidents and field safety corrective actions associated
with the medical device.
Regulation of Medical Devices in Other Foreign Countries
We are subject to regulations and product registration requirements in many foreign countries in which we may
sell our products, including in the areas of:
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product standards;
product safety;
product safety reporting;
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marketing, sales and distribution;
packaging and storage requirements;
labeling requirements;
content and language of instructions for use;
clinical trials;
record keeping procedures;
advertising and promotion;
recalls and field corrective actions;
post-market surveillance, including reporting of deaths or serious injuries and malfunctions that, if
they were to recur, could lead to death or serious injury;
import and export restrictions;
tariff regulations, duties and tax requirements;
registration for reimbursement; and
necessity of testing performed in country by distributors for licensees.
Healthcare Regulations
Federal, State and Foreign Fraud and Abuse and Physician Payment Transparency Laws
In addition to FDA restrictions on marketing and promotion of drugs and devices, other federal and state laws
restrict our business practices. These laws include, without limitation, foreign, federal, and state anti-kickback
and false claims laws, as well as transparency laws regarding payments or other items of value provided to
healthcare providers.
The federal Anti-Kickback Statute prohibits, among other things, knowingly and willfully offering, paying,
soliciting or receiving any remuneration (including any kickback, bribe or rebate), directly or indirectly, overtly or
covertly, in cash or in kind to induce or in return for purchasing, leasing, ordering or arranging for or
recommending the purchase, lease or order of any good, facility, item or service reimbursable, in whole or in
part, under Medicare, Medicaid or other federal healthcare programs. The term “remuneration” has been
broadly interpreted to include anything of value, including stock, stock options, and the compensation derived
through ownership interests.
Recognizing that the federal Anti-Kickback Statute is broad and may prohibit many innocuous or beneficial
arrangements within the healthcare industry, the DHHS issued regulations in July 1991, which the Department
has referred to as “safe harbors.” These safe harbor regulations set forth certain provisions which, if met in form
and substance, will assure medical device manufacturers, HCPs and other parties that they will not be
prosecuted under the federal Anti-Kickback Statute. Additional safe harbor provisions providing similar
protections have been published intermittently since 1991. Although there are a number of statutory exceptions
and regulatory safe harbors protecting some common activities from prosecution, the exceptions and safe
harbors are drawn narrowly. Practices that involve remuneration that may be alleged to be intended to induce
prescribing, purchases or recommendations may be subject to scrutiny if they do not qualify for an exception or
safe harbor. Failure to meet all of the requirements of a particular applicable statutory exception or regulatory
safe harbor does not make the conduct per se illegal under the federal Anti-Kickback Statute. Instead, the
legality of the arrangement will be evaluated on a case-by-case basis based on a cumulative review of all its
facts and circumstances. Several courts have interpreted the statute’s intent requirement to mean that if any one
purpose of an arrangement involving remuneration is to induce referrals of federal healthcare covered business,
the federal Anti-Kickback Statute has been violated. In addition, a person or entity does not need to have actual
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marketing, sales and distribution;
packaging and storage requirements;
labeling requirements;
content and language of instructions for use;
clinical trials;
record keeping procedures;
advertising and promotion;
recalls and field corrective actions;
import and export restrictions;
tariff regulations, duties and tax requirements;
registration for reimbursement; and
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post-market surveillance, including reporting of deaths or serious injuries and malfunctions that, if
they were to recur, could lead to death or serious injury;
necessity of testing performed in country by distributors for licensees.
Healthcare Regulations
Federal, State and Foreign Fraud and Abuse and Physician Payment Transparency Laws
In addition to FDA restrictions on marketing and promotion of drugs and devices, other federal and state laws
restrict our business practices. These laws include, without limitation, foreign, federal, and state anti-kickback
and false claims laws, as well as transparency laws regarding payments or other items of value provided to
healthcare providers.
The federal Anti-Kickback Statute prohibits, among other things, knowingly and willfully offering, paying,
soliciting or receiving any remuneration (including any kickback, bribe or rebate), directly or indirectly, overtly or
covertly, in cash or in kind to induce or in return for purchasing, leasing, ordering or arranging for or
recommending the purchase, lease or order of any good, facility, item or service reimbursable, in whole or in
part, under Medicare, Medicaid or other federal healthcare programs. The term “remuneration” has been
broadly interpreted to include anything of value, including stock, stock options, and the compensation derived
through ownership interests.
Recognizing that the federal Anti-Kickback Statute is broad and may prohibit many innocuous or beneficial
arrangements within the healthcare industry, the DHHS issued regulations in July 1991, which the Department
has referred to as “safe harbors.” These safe harbor regulations set forth certain provisions which, if met in form
and substance, will assure medical device manufacturers, HCPs and other parties that they will not be
prosecuted under the federal Anti-Kickback Statute. Additional safe harbor provisions providing similar
protections have been published intermittently since 1991. Although there are a number of statutory exceptions
and regulatory safe harbors protecting some common activities from prosecution, the exceptions and safe
harbors are drawn narrowly. Practices that involve remuneration that may be alleged to be intended to induce
prescribing, purchases or recommendations may be subject to scrutiny if they do not qualify for an exception or
safe harbor. Failure to meet all of the requirements of a particular applicable statutory exception or regulatory
safe harbor does not make the conduct per se illegal under the federal Anti-Kickback Statute. Instead, the
legality of the arrangement will be evaluated on a case-by-case basis based on a cumulative review of all its
facts and circumstances. Several courts have interpreted the statute’s intent requirement to mean that if any one
purpose of an arrangement involving remuneration is to induce referrals of federal healthcare covered business,
the federal Anti-Kickback Statute has been violated. In addition, a person or entity does not need to have actual
knowledge of the statute or specific intent to violate it in order to have committed a violation. Moreover, a claim
including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or
fraudulent claim for purposes of the federal civil False Claims Act (described below).
Violations of the federal Anti-Kickback Statute can result in imprisonment, exclusion from Medicare, Medicaid
or other governmental programs, as well as civil and criminal penalties, including criminal fines. Civil
penalties for such conduct can further be assessed under the federal False Claims Act, including penalties of
up to three times the amounts paid for such claims. Conduct and business arrangements that do not fully
satisfy one of these safe harbor provisions may result in increased scrutiny by government enforcement
authorities. The majority of states also have anti-kickback laws which establish similar prohibitions and in
some cases may apply more broadly to items or services covered by any third-party payor, including
commercial insurers and self-pay patients.
The federal civil False Claims Act prohibits, among other things, any person or entity from knowingly presenting,
or causing to be presented, a false or fraudulent claim for payment or approval to the federal government or
knowingly making, using or causing to be made or used a false record or statement material to a false or
fraudulent claim to the federal government. A claim includes “any request or demand” for money or property
presented to the U.S. government. The federal civil False Claims Act also applies to false submissions that
cause the government to be paid less than the amount to which it is entitled, such as a rebate. Intent to deceive
is not required to establish liability under the civil federal civil False Claims Act.
In addition, private parties may initiate “qui tam” whistleblower lawsuits against any person or entity under the
federal civil False Claims Act in the name of the government and share in the proceeds of the lawsuit. Penalties
for federal civil False Claim Act violations include fines for each false claim, plus up to three times the amount of
damages sustained by the federal government and, most critically, may provide the basis for exclusion from the
federally funded healthcare program. On May 20, 2009, the Fraud Enforcement Recovery Act of 2009, or FERA,
was enacted, which modifies and clarifies certain provisions of the federal civil False Claims Act. In part, the
FERA amends the federal civil False Claims Act such that penalties may now apply to any person, including an
organization that does not contract directly with the government, who knowingly makes, uses or causes to be
made or used, a false record or statement material to a false or fraudulent claim paid in part by the federal
government. The government may further prosecute conduct constituting a false claim under the federal criminal
False Claims Act. The criminal False Claims Act prohibits the making or presenting of a claim to the government
knowing such claim to be false, fictitious or fraudulent and, unlike the federal civil False Claims Act, requires
proof of intent to submit a false claim.
The Civil Monetary Penalty Act of 1981 imposes penalties against any person or entity that, among other things,
is determined to have presented or caused to be presented a claim to a federal healthcare program that the
person knows or should know is for an item or service that was not provided as claimed or is false or fraudulent,
or offering or transferring remuneration to a federal healthcare beneficiary that a person knows or should know is
likely to influence the beneficiary’s decision to order or receive items or services reimbursable by the government
from a particular provider or supplier.
HIPAA also created additional federal criminal statutes that prohibit among other actions, knowingly and willfully
executing, or attempting to execute, a scheme to defraud any healthcare benefit program, including private third-
party payors, knowingly and willfully embezzling or stealing from a healthcare benefit program, willfully
obstructing a criminal investigation of a healthcare offense, and knowingly and willfully falsifying, concealing or
covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the
delivery of or payment for healthcare benefits, items or services. Similar to the federal Anti-Kickback Statute, a
person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to
have committed a violation.
Many foreign countries have similar laws relating to healthcare fraud and abuse. Foreign laws and regulations
may vary greatly from country to country. For example, the advertising and promotion of our products is subject
to EU Directives concerning misleading and comparative advertising and unfair commercial practices, as well as
other EEA Member State legislation governing the advertising and promotion of medical devices. These laws
may limit or restrict the advertising and promotion of our products to the general public and may impose
limitations on our promotional activities with healthcare professionals. Also, many U.S. states have similar fraud
and abuse statutes or regulations that may be broader in scope and may apply regardless of payor, in addition
to items and services reimbursed under Medicaid and other state programs.
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Additionally, there has been a recent trend of increased foreign, federal, and state regulation of payments and
transfers of value provided to healthcare professionals or entities. The federal Open Payment ("Sunshine")
program imposes annual reporting requirements on certain drug, biologics, medical supplies and device
manufacturers for which payment is available under Medicare, Medicaid or CHIP for payments and other transfers
of value provided by them, directly or indirectly, to physicians (including physician family members) and teaching
hospitals, as well as ownership and investment interests held by physicians and their immediate family members.
A manufacturer’s failure to submit timely, accurately and completely the required information for all payments,
transfers of value or ownership or investment interests may result in civil monetary penalties. Manufacturers must
submit reports by the 90th day of each calendar year. Certain foreign countries and U.S. states also mandate
implementation of commercial compliance programs, impose restrictions on device manufacturer marketing
practices and require tracking and reporting of gifts, compensation and other remuneration to healthcare
professionals and entities.
Data Privacy and Security Laws
We may also become subject to various federal, state and foreign laws that protect the confidentiality of certain
patient health information, including patient medical records, and restrict the use and disclosure of patient
health information by healthcare providers, such as HIPAA, as amended by HITECH, in the United States.
Under HIPAA, the DHHS has issued regulations to protect the privacy and security of protected health
information used or disclosed by covered entities including certain healthcare providers and their business
associates. HIPAA also regulates standardization of data content, codes and formats used in healthcare
transactions and standardization of identifiers for health plans and providers. HIPAA violations carry civil and
criminal penalties, and, in certain circumstances, criminal penalties. State attorneys general can also bring a
civil action to enjoin a HIPAA violation or to obtain statutory damages on behalf of residents of his or her state.
In the European Union, we may be subject to laws relating to our collection, control, processing and other use of
personal data (i.e. data relating to an identifiable living individual). We process personal data in relation to our
operations. We process data of both our employees and our customers, including health and medical information.
The data privacy regime in the EU includes the EU Data Protection Directive (95/46/EC) regarding the processing
of personal data and the free movement of such data, the E-Privacy Directive 2002/58/EC and national laws
implementing each of them. Each EU Member State has transposed the requirements laid down by the Data
Protection Directive and E-Privacy Directive into its own national data privacy regime and therefore the laws may
differ significantly by jurisdiction. We need to ensure compliance with the rules in each jurisdiction where we are
established or are otherwise subject to local privacy laws.
The requirements include that personal data may only be collected for specified, explicit and legitimate purposes
based on legal grounds set out in the local laws, and may only be processed in a manner consistent with those
purposes. Personal data must also be adequate, relevant, not excessive in relation to the purposes for which it is
collected, be secure, not be transferred outside of the EEA unless certain steps are taken to ensure an adequate
level of protection and must not be kept for longer than necessary for the purposes of collection. To the extent
that we process, control or otherwise use sensitive data relating to living individuals (for example, patients’ health
or medical information), more stringent rules apply, limiting the circumstances and the manner in which we are
legally permitted to process that data and transfer that data outside of the EEA. In particular, in order to process
such data, explicit consent to the processing (including any transfer) is usually required from the data subject
(being the person to whom the personal data relates).
We are subject to the supervision of local data protection authorities in those jurisdictions where we are
established or otherwise subject to applicable law.
Local laws are amended from time to time, and guidance is issued frequently by regulators. Any changes in law
and new guidance may impact, and require changes to, our current operations. Additionally, on January 25, 2012,
the European Commission published its draft EU General Data Protection Regulation ("GDPR"). On March 12,
2014, the European Parliament formally passed a revised proposal of the Regulation, and the Council of the
European Union published its general approach on June 15, 2015. Trilogue discussion between the European
Commission, European Parliament and Council of the European Union have concluded and the GDPR came into
force May 25, 2018. The Regulation implements significant changes to the EU data protection regime. Unlike the
E-Privacy and Data Protection Directives, the Regulation has direct effect in each EU Member State, without the
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need for further enactment. The Regulation strengthened individuals’ rights and imposed stricter requirements on
companies processing personal data and increases financial penalties for non-compliance.
Going forward we are subject to newly enacted SEC requirements to report any material breach of our IT systems
and to disclose our processes for assessing, identifying, and managing material risks from cybersecurity threats.
Healthcare Reform
The United States and some foreign jurisdictions are considering or have enacted a number of legislative and
regulatory proposals to change the healthcare system in ways that could affect our ability to sell our products
profitably. Among policy makers and payors in the United States and elsewhere, there is significant interest in
promoting changes in healthcare systems with the stated goals of containing healthcare costs, improving quality
or expanding access. Current and future legislative proposals to further reform healthcare or reduce healthcare
costs may limit coverage of or lower reimbursement for the procedures associated with the use of our products.
The cost containment measures that payors and providers are instituting and the effect of any healthcare reform
initiative implemented in the future could impact our revenue from the sale of our products.
The implementation of the Affordable Care Act in the United States, for example, has changed healthcare
financing and delivery by both governmental and private insurers substantially, and affected medical device
manufacturers significantly. The Affordable Care Act imposed, among other things, a new federal excise tax on the
sale of certain medical devices (which was permanently repealed December 20, 2019), provided incentives to
programs that increase the federal government’s comparative effectiveness research, and implemented payment
system reforms including a national pilot program on payment bundling to encourage hospitals, physicians and
other providers to improve the coordination, quality and efficiency of certain healthcare services through bundled
payment models. Additionally, the Affordable Care Act has expanded eligibility criteria for Medicaid programs and
created a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct
comparative clinical effectiveness research, along with funding for such research. Since its enactment, there have
been judicial, Congressional and executive branch challenges to certain aspects of the Affordable Care Act, and
we expect there will be additional challenges and amendments to the Affordable Care Act in the future. While
Congress has not passed comprehensive repeal legislation, it has enacted laws that modify certain provisions of
the Affordable Care Act such as removing or delaying penalties, starting January 1, 2019, for not complying with
the Affordable Care Act’s individual mandate to carry health insurance and delaying the implementation of certain
Affordable Care Act-mandated fees.
In addition, other legislative changes have been proposed and adopted since the Affordable Care Act was
enacted. For example, the Budget Control Act of 2011, among other things, reduced Medicare payments to
providers by 2% per fiscal year, effective on April 1, 2013 and, due to subsequent legislative amendments to the
statute, will remain in effect through 2030 unless additional Congressional action is taken. However, the
Coronavirus Aid, Relief and Economic Security Act, or CARES Act, which was signed into law in March 2020 and
is designed to provide financial support and resources to individuals and businesses affected by the COVID-19
pandemic, suspended the 2% Medicare sequester from May 1, 2020 through December 31, 2020, and extended
the sequester by one year, through 2030. The Consolidated Appropriations Act, 2021, signed into law on
December 27, 2020, extended the suspension period to March 31, 2021. In April 2021 it was suspended again
through December 31, 2021. Additionally, the American Taxpayer Relief Act of 2012, among other things, reduced
Medicare payments to several providers, including hospitals, and increased the statute of limitations period for the
government to recover overpayments to providers from three to five years. The Medicare Access and CHIP
Reauthorization Act of 2015 repealed the formula by which Medicare made annual payment adjustments to
physicians and replaced the former formula with fixed annual updates and a new system of incentive payments
beginning January 1, 2020 that are based on various performance measures and physicians’ participation in
alternative payment models, such as accountable care organizations.
We expect additional state and federal healthcare reform measures to be adopted in the future, any of which
could limit the amounts that federal and state governments will pay for healthcare products and services,
which could result in reduced demand for our products or additional pricing pressure.
Anti-Bribery and Corruption Laws
Our U.S. operations are subject to the U.S. Foreign Corrupt Practices Act of 1977 or FCPA. We are required to
comply with the FCPA, which generally prohibits covered entities and their intermediaries from engaging in
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bribery or making other prohibited payments to foreign officials for the purpose of obtaining or retaining business
or other benefits. In addition, the FCPA imposes accounting standards and requirements on publicly traded U.S.
corporations and their foreign affiliates, which are intended to prevent the diversion of corporate funds to the
payment of bribes and other improper payments, and to prevent the establishment of “off books” slush funds
from which such improper payments can be made. We also are subject to similar anticorruption legislation
implemented in Europe under the Organization for Economic Co-operation and Development’s Convention on
Combating Bribery of Foreign Public Officials in International Business Transactions.
Coverage and Reimbursement
In the United States, our currently approved products are commonly treated as general supplies utilized in
orthopedic surgery and if covered by third-party payors, are paid for as part of the surgical procedure. Outside of
the United States, there are many reimbursement programs through private payors as well as government
programs. In some countries, government reimbursement is the predominant program available to patients and
hospitals. Our commercial success depends in part on the extent to which governmental authorities, private
health insurers and other third-party payors provide coverage for and establish adequate reimbursement levels
for the procedures during which our products are used. Failure by physicians, hospitals, ambulatory surgery
centers and other users of our products to obtain sufficient coverage and reimbursement from third-party payors
for procedures in which our products are used, or adverse changes in government and private third-party payors’
coverage and reimbursement policies.
Based on our experience to date, third-party payors generally reimburse for the surgical procedures in which our
products are used only if the patient meets the established medical necessity criteria for surgery. Some payors
are moving toward a managed care system and control their healthcare costs by limiting authorizations for
surgical procedures, including elective procedures using our devices. Although no uniform policy of coverage
and reimbursement among payors in the United States exists and coverage and reimbursement for procedures
can differ significantly from payor to payor, reimbursement decisions by particular third-party payors may depend
upon a number of factors, including the payor’s determination that use of a product is:
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a covered benefit under its health plan;
appropriate and medically necessary for the specific indication;
cost effective; and
neither experimental nor investigational.
Third-party payors are increasingly auditing and challenging the prices charged for medical products and
services with concern for upcoding, miscoding, using inappropriate modifiers, or billing for inappropriate care
settings. Some third-party payors must approve coverage for new or innovative devices or procedures before
they will reimburse healthcare providers who use the products or therapies. Even though a new product may
have been cleared for commercial distribution by the FDA, we may find limited demand for the product unless
and until reimbursement approval has been obtained from governmental and private third-party payors.
The Centers for Medicare and Medicaid Services ("CMS") is responsible for administering the Medicare program
and sets coverage and reimbursement policies for the Medicare program in the United States. The CMS, in
partnership with state governments, also administers the Medicaid program and CHIP. CMS policies may alter
coverage and payment related to our product portfolio in the future. These changes may occur as the result of
national coverage determinations issued by CMS or as the result of local coverage determinations by
contractors under contract with CMS to review and make coverage and payment decisions. Medicaid programs
are funded by both federal and state governments and may vary from state to state and from year to year and
will likely play an even larger role in healthcare funding pursuant to the Affordable Care Act.
A key component in ensuring whether the appropriate payment amount is received for physician and other
services, including those procedures using our products, is the existence of a Current Procedural Terminology,
or CPT, code, to describe the procedure in which the product is used. To receive payment, healthcare
practitioners must submit claims to insurers using these codes for payment for medical services. CPT codes
are assigned, maintained and annually updated by the American Medical Association and its CPT Editorial
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Board. If the CPT codes that apply to the procedures performed using our products are changed or deleted,
reimbursement for performances of these procedures may be adversely affected.
In the United States, some insured individuals enroll in managed care programs, which monitor and often require
pre-approval of the services that a member will receive. Some managed care programs pay their providers on a
per capita (patient) basis, which puts the providers at financial risk for the services provided to their patients by
paying these providers a predetermined payment per member per month and, consequently, may limit the
willingness of these providers to use our products.
We believe the overall escalating cost of medical products and services being paid for by the government and
private health insurance has led to, and will continue to lead to, increased pressures on the healthcare and
medical device industry to reduce the costs of products and services. All third-party reimbursement programs
are developing increasingly sophisticated methods of controlling healthcare costs through prospective
reimbursement and capitation programs, group purchasing, redesign of benefits, requiring second opinions
prior to major surgery, careful review of bills, encouragement of healthier lifestyles and other preventative
services and exploration of more cost-effective methods of delivering healthcare.
In international markets, reimbursement and healthcare payment systems vary significantly by country, and
many countries have instituted price ceilings on specific product lines and procedures. There can be no
assurance that procedures using our products will be covered for a specific indication, that our products will be
considered cost-effective by third party payors, that an adequate level of reimbursement will be available or that
the third-party payors’ reimbursement policies will not adversely affect our ability to sell our products profitably.
More and more, local, product specific reimbursement law is applied as an overlay to medical device regulation,
which has provided an additional layer of clearance requirement. Specifically, Australia now requires clinical
data for clearance and reimbursement be in the form of prospective, multi-center studies, a high bar not
previously applied. In addition, in France, certain innovative devices have been identified as needing to provide
clinical evidence to support a “mark-specific” reimbursement.
It is our intent to complete the requisite clinical studies and obtain coverage and reimbursement approval in
countries where it makes economic sense to do so.
In addition to uncertainties surrounding coverage policies, there are periodic changes to reimbursement levels.
Third-party payors regularly update reimbursement amounts and from time to time revise the methodologies
used to determine reimbursement amounts. This includes routine updates to payments to physicians, hospitals
and ambulatory surgery centers for procedures during which our products are used. These updates could
directly impact the demand for our products.
ITEM 1A. RISK FACTORS
Our business is subject to many risks. This section includes a discussion of important factors that could affect our
business, operating results, financial condition and the trading price of our common stock. You should carefully
consider these risk factors, together with all of the other information included in this Annual Report on Form 10-K
as well as our other publicly available filings with the SEC.
Risks Related to Our Financial Condition and Capital Requirements
We are unable to predict the extent to which widespread health emergencies, such as COVID-19 and
respiratory syncytial virus, or RSV, or other pandemics, epidemics and infectious disease outbreaks, may
adversely impact our business and financial results.
At the onset of, and at various times during, the COVID-19 pandemic, hospitals postponed certain elective
procedures, diverted resources to patients suffering from COVID-19, and limited access for non-patients,
including our sales professionals and distributors. As a majority of our products are utilized in elective surgeries
or procedures, the deferrals of such surgeries and procedures have had, and may continue to have, a significant
negative impact on our business and results of operations. In addition, these circumstances have negatively
impacted, and may continue to negatively impact, the ability of our sales professionals and distributors to
effectively market and sell our products, which has had and may continue to have a material adverse effect on our
revenues.
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In 2023 and 2022, the United States also experienced a significant and unprecedented increase in cases of
respiratory syncytial virus, or RSV. The volume of elective procedures utilizing our products were negatively
impacted as a significant percent of hospital capacity was absorbed to cover the increase in RSV-related
hospitalizations. This had a negative impact on our sales volume in 2023 and 2022 and may continue to do so
into the future.
Widespread health emergencies, such as COVID-19 and RSV, or other pandemics, epidemics or infectious
disease outbreaks, may adversely impact the global macroeconomic environment, resulting in periods of regional,
national or global economic slowdown or regional, national or global recessions. The extent to which COVID-19,
RSV, or other pandemics, epidemics and infectious disease outbreaks impact our business, results of operations
and financial condition is highly uncertain and difficult to predict. Moreover, the continuing effects of COVID-19
and RSV and the potential for other pandemics, epidemics or infectious disease outbreaks, may heighten many of
the other risks identified within this Annual Report on Form 10-K. Depending on the continued severity and
ultimate duration of any widespread health emergency, the negative effects on our business, results of operations
and financial condition could be material.
Unfavorable economic conditions could adversely affect our business, financial condition or results of
operations.
Our results of operations could be adversely affected by general conditions in the U.S. and global economies, the
U.S. and global financial markets and adverse macroeconomic developments. U.S. and global market and
economic conditions have been, and continue to be, disrupted and volatile due to many factors, including the
COVID-19 pandemic, material shortages and related supply chain challenges, geopolitical developments such as
the conflicts between Ukraine and Russia as well as Israel and Palestine, and increasing inflation rates and the
responses by central banking authorities to control such inflation, among others.
Furthermore, a severe or prolonged global economic downturn or recession could result in a variety of risks to our
business. For example, inflation rates, particularly in the United States, recently increased to levels not seen in
years, and increased inflation over a prolonged period may result in increases in our operating costs (including
our labor costs), reduced liquidity and limits on our ability to access credit or otherwise raise capital on acceptable
terms, if at all. In addition, the U.S. Federal Reserve has raised, and may again raise or lower, interest rates in
response to changing inflation rates, which coupled with reduced government spending and volatility in financial
markets may have the effect of further increasing economic uncertainty and heightening these risks. A weak or
declining economy could also strain our suppliers and manufacturers, possibly resulting in supply disruption. Any
of the foregoing could harm our business and we cannot anticipate all of the ways in which the current economic
climate and financial market conditions could adversely impact our business.
We have incurred losses in the past and may be unable to achieve or sustain profitability in the future.
We incurred operating losses in all fiscal years since inception. We had operating losses of $26.8 million, $25.4
million and $18.0 million for the years ended December 31, 2023, 2022 and 2021, respectively. As a result of
ongoing losses, as of December 31, 2023, we had an accumulated deficit of $197.7 million. We expect to
continue to incur significant product development, clinical and regulatory, sales and marketing and other
expenses. The operating losses we incur may fluctuate significantly from quarter to quarter. We will need to
generate significant additional revenue to achieve and sustain profitability, and even if we achieve profitability, we
cannot be sure that we will remain profitable for any substantial period of time. Our failure to achieve or maintain
profitability could negatively impact the value of our common stock.
We may be unable to generate sufficient revenue from the commercialization of our products and
services to achieve profitability.
At present, we rely solely on the commercialization of our products and services to generate revenue, and we
expect to generate substantially all of our revenue in the foreseeable future from sales of these products and
services. In order to successfully commercialize our products and services, we will need to continue to expand
our marketing efforts to develop new relationships and expand existing relationships with customers, to obtain
regulatory clearances or approvals for our products in additional countries, to achieve and maintain compliance
with all applicable regulatory requirements and to develop and commercialize our products and services with new
features or for additional indications. If we fail to successfully commercialize our products or services, we may
never receive a return on the substantial investments in product development, sales and marketing, regulatory
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compliance, manufacturing and quality assurance we have made, as well as further investments we intend to
make, which may cause us to fail to generate revenue and gain economies of scale from such investments.
In addition, potential customers may decide not to purchase our products or services, or our customers may
decide to cancel orders due to changes in treatment offerings, research and development plans, adverse
clinical outcomes, difficulties in obtaining coverage or reimbursement for procedures using our products,
difficulties obtaining approval from a hospital, complications with manufacturing or the utilization of technology
developed by other parties, all of which are circumstances outside of our control.
In addition, demand for our products or services may not increase as quickly as we predict, and we may be
unable to increase our revenue levels as we expect. Even if we succeed in increasing adoption of these systems
by physicians, hospitals and other healthcare providers, maintaining and creating relationships with our existing
and new customers and developing and commercializing new features or indications for these systems, we may
be unable to generate sufficient revenue to achieve profitability.
We may need to raise additional capital to fund our existing commercial operations, develop and
commercialize new products and expand our operations.
Based on our current business plan, we believe our current cash, borrowing capacity under our Credit Agreement
and cash receipts from sales of our products will be sufficient to meet our anticipated cash requirements for at
least the next 12 months. If our available cash balances, borrowing capacity, net proceeds from prior stock
offerings and anticipated cash flow from operations are insufficient to satisfy our liquidity requirements, including
because of lower demand for our products as a result of the risks described in this Annual Report on Form 10-K,
we may seek to sell common or preferred equity or convertible debt securities, enter into an additional credit
facility or another form of third-party funding or seek other debt financing.
We may consider raising additional capital in the future to expand our business, to pursue strategic
investments, to take advantage of financing opportunities or for other reasons, including to:
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increase our sales and marketing efforts to increase market adoption of our products and address
competitive developments;
provide for supply and inventory costs associated with plans to accommodate potential increases
in demand for our products;
fund development and marketing efforts of any future products or additional features to then-
current products;
acquire, license or invest in new technologies;
acquire or invest in complementary businesses or assets; and
finance capital expenditures and general and administrative expenses.
Our present and future funding requirements will depend on many factors, including:
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our ability to achieve revenue growth and gross margins;
our rate of progress in establishing coverage and reimbursement arrangements with domestic
and international commercial third-party payors and government payors;
the cost of expanding our operations and offerings, including our sales and marketing efforts;
our rate of progress in, and cost of the sales and marketing activities associated with, establishing
adoption of our products;
the cost of research and development activities;
the effect of competing technological and market developments;
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costs related to international expansion; and
the potential cost of and delays in product development as a result of any regulatory oversight
applicable to our products.
Additional capital may not be available at such times or in amounts as needed by us. Even if capital is available,
it might be available only on unfavorable terms. Any additional equity or convertible debt financing into which we
enter could be dilutive to our existing stockholders. Any future debt financing into which we enter may impose
covenants upon us that restrict our operations, including limitations on our ability to incur liens or additional debt,
pay dividends, repurchase our stock, make certain investments and engage in certain merger, consolidation or
asset sale transactions. Any debt financing or additional equity that we raise may contain terms that are not
favorable to us or our stockholders. If we raise additional funds through collaboration and licensing
arrangements with third parties, it may be necessary to relinquish some rights to our technologies or our
products, or grant licenses on terms that are not favorable to us. If access to sufficient capital is not available as
and when needed, our business will be materially impaired and we may be required to cease operations, curtail
one or more product development or commercialization programs, or we may be required to significantly reduce
expenses, sell assets, seek a merger or joint venture partner, file for protection from creditors or liquidate all our
assets.
Our sales volumes and our results of operations may fluctuate over the course of the year.
We have experienced and continue to experience meaningful variability in our sales and gross profit among
quarters, as well as within each quarter, as a result of a number of factors, which may include, among other
things:
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the number of products sold in the quarter;
the unpredictability of sales of full sets of implants and instruments to our international
distributors;
the demand for, and pricing of, our products and the products of our competitors;
the timing of or failure to obtain regulatory clearances or approvals for our products;
the costs, benefits and timing of new product introductions;
increased competition;
the availability and cost of components and materials;
the number of selling days in the quarter;
fluctuation and foreign currency exchange rates; or
impairment and other special charges.
Our loan and security agreement with MidCap Financial contains covenants that may restrict our
business and financing activities.
On December 29, 2023, we entered into an $80 million Credit, Security and Guaranty Agreement (the “Credit
Agreement”) by and among (i) the Company and other borrowers party to the Credit Agreement (collectively, the
“Borrowers”), (ii) MidCap Funding IV Trust, as Agent (“Agent”), (iii) MidCap Financial Trust, as Term Loan
Servicer (“Servicer”), and (iv) the financial institutions or other entities from time to time party thereto as Lenders
(collectively, “Lenders”). The Credit Agreement restricts our ability to, among other things:
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dispose of or sell our assets;
modify our organizational documents;
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merge with or acquire other entities or assets;
incur additional indebtedness;
create liens on our assets;
pay dividends; and
make certain investments.
The covenants in the Credit Agreement, as well as any future financing agreements into which we may enter, may
restrict our ability to finance our operations and engage in, expand or otherwise pursue our business activities and
strategies. Our ability to comply with these covenants may be affected by events beyond our control, and future
breaches of any of these covenants could result in a default under the Credit Agreement. If not waived, future
defaults could cause all of the outstanding indebtedness under the Credit Agreement to become immediately due
and payable and terminate all commitments to extend further credit. See “Management’s Discussion and Analysis
of Financial Condition and Results of Operations — Indebtedness — Credit Agreement.”
If we do not have or are unable to generate sufficient cash available to repay our debt obligations when they
become due and payable, either upon maturity or in the event of a default, we may be unable to obtain
additional debt or equity financing on favorable terms, if at all, which may negatively impact our ability to operate
and continue our business as a going concern.
Our effective tax rate may fluctuate, and we may incur obligations in tax jurisdictions in excess of
accrued amounts.
We are subject to taxation in numerous U.S. states and territories, as well as certain countries outside the U.S. As
a result, our effective tax rate is derived from a combination of applicable tax rates in the various tax jurisdictions
that we operate. In preparing our financial statements, we estimate the amount of tax that will become payable in
each of such places. Nevertheless, our effective tax rate may be different than experienced in the past due to
numerous factors, including passage of the newly enacted U.S. federal income tax law, changes in the mix of our
profitability from jurisdiction to jurisdiction, the results of examinations and audits of our tax filings, our inability to
secure or sustain acceptable agreements with tax authorities, changes in accounting for income taxes and
changes in tax laws. Any of these factors could cause us to experience an effective tax rate significantly different
from previous periods or our current expectations and may result in tax obligations in excess of amounts accrued
in our financial statements.
Our ability to use net operating losses to offset future taxable income may be subject to limitations.
As of December 31, 2023, we had federal, state and foreign net operating loss carryforwards, or NOLs, of
$118.9 million, $76.9 million and $26.3 million, respectively. The federal, state and foreign net operating loss
carryforwards will begin to expire, if not utilized, beginning in 2028. The deferred tax assets, except for those
recorded in Canada and Israel, were fully offset by a valuation allowance as of December 31, 2023 and 2022, and
no income tax benefit has been recognized in continuing operations related to the NOLs which have valuation
allowances. Under federal income tax law, federal net operating losses incurred in years beginning after
December 31, 2017 may be carried forward indefinitely; but the deductibility of such federal net operating losses
is limited to 80% of taxable income. Each state and foreign jurisdiction has its own net operating loss carryforward
and carryback rules with varying conformity to the newly enacted federal tax law. In addition, under Section 382 of
the Internal Revenue Code of 1986, as amended, and corresponding provisions of state law, if a corporation
undergoes an “ownership change,” which is generally defined as a greater than 50% change, by value, in its
equity ownership over a three-year period, the corporation’s ability to use its pre-change net operating loss
carryforwards and other pre-change tax attributes to offset its post-change income or taxes may be limited. We
determined that an ownership change occurred on May 30, 2014, resulting in a limitation of approximately $1.1
million per year being imposed on the use of our pre-change NOLs of approximately $45.2 million. A second
ownership change occurred on December 11, 2018. The estimated annual limitation is $9.7 million, which is
increased by $22.4 million over the first five years as a result of an unrealized built in gain. It is possible that we
have experienced other ownership changes. We may experience ownership changes in the future as a result of
subsequent shifts in our stock ownership, some of which may be outside of our control. If an ownership change
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occurs and our ability to use our net operating loss carryforwards is materially limited, it would harm our future
operating results by effectively increasing our future tax obligations.
Our goodwill, intangible assets and fixed assets are subject to potential impairment; we have recorded
significant intangible asset impairment charges and may be required to record additional charges to
future earnings if our goodwill or remaining intangible assets become impaired.
A significant portion of our assets consists of goodwill, intangible assets and fixed assets. The carrying value of
these assets may be reduced if we determine that those assets are impaired, including intangible assets from
recent acquisitions. Most of our intangible and fixed assets have finite useful lives and are amortized or
depreciated over their useful lives on a straight-line basis. The underlying assumptions regarding the estimated
useful lives of these intangible assets are analyzed on at least an annual basis and more often if an event or
circumstance occurs making it likely that the carrying value of the assets may not be recoverable. Any such
changes are adjusted through accelerated amortization, if necessary. Whenever events or changes in
circumstances indicate that the carrying value of the assets may not be recoverable, we test intangible assets for
impairment based on estimates of future cash flows. Factors that may be considered a change in circumstances
indicating that the carrying value of our intangible assets and/or goodwill may not be recoverable include a decline
in stock price and market capitalization, slower growth rates in our industry, the introduction of newer technology
or competing products that may cannibalize future sales, or other materially adverse events that have implications
on the profitability of our business. When testing for impairment of finite-lived intangible assets held for use, we
group assets at the lowest level for which cash flows are separately identifiable. If an intangible asset is
considered to be impaired, the amount of the impairment will equal the excess of the carrying value over the fair
value of the asset.
Goodwill and indefinite-lived intangible assets are required to be tested for impairment at least annually. We
review our two reporting units for potential goodwill impairment along with each of our indefinite-lived intangible
assets in the fourth quarter of each year as part of our annual impairment testing, and more often if an event or
circumstance occurs making it likely that impairment exists. During the third quarter of 2023 and 2022, we
recorded an impairment charge of $1.0 million and $3.6 million, respectively, related to the ApiFix trademark
asset. If actual results differ from the assumptions and estimates used in the goodwill and intangible asset
calculations, we could incur future impairment or amortization charges, which could negatively impact our financial
condition and results of operations.
Risks Related to Our Business and Strategy
Our long-term growth depends on our ability to commercialize our products in development and to
develop and commercialize additional products through our research and development efforts, and if
we fail to do so we may be unable to compete effectively.
In order to increase our market share in the pediatric orthopedic markets, we must successfully
commercialize our current products in development, enhance our existing product offerings and introduce
new products in response to changing customer demands and competitive pressures and technologies. Our
industry is characterized by intense competition, rapid technological changes, new product introductions and
enhancements and evolving industry standards. Our business prospects depend in part on our ability to
develop and commercialize new products and applications for our technology, including in new markets that
develop as a result of technological and scientific advances, while improving the performance and cost-
effectiveness of our products. New technologies, techniques or products could emerge that might offer better
combinations of price and performance than our products. It is important that we anticipate changes in
technology and market demand, as well as physician, hospital and healthcare provider practices to
successfully develop, obtain clearance or approval, if required, and successfully introduce new, enhanced
and competitive technologies to meet our prospective customers’ needs on a timely and cost-effective basis.
We might be unable to successfully commercialize our current products with domestic or international
regulatory clearances or approvals or develop or obtain regulatory clearances or approvals to market new
products. Additionally, these products and any future products might not be accepted by the orthopedic
surgeons or the third-party payors who reimburse for the procedures performed with our products or may not
be successfully commercialized due to other factors. The success of any new product offering or
enhancement to an existing product will depend on numerous factors, including our ability to:
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properly identify and anticipate clinician and patient needs;
develop and introduce new products or product enhancements in a timely manner;
adequately protect our intellectual property and avoid infringing upon the intellectual property
rights of third parties;
demonstrate the safety and efficacy of new products; and
obtain the necessary regulatory clearances or approvals for new products or product
enhancements.
If we do not develop and obtain regulatory clearances or approvals for new products or product enhancements
in time to meet market demand, or if there is insufficient demand for these products or enhancements, our
results of operations will suffer. Our research and development efforts may require a substantial investment of
time and resources before we are adequately able to determine the commercial viability of a new product,
technology, material or other innovation. In addition, even if we are able to develop enhancements or new
generations of our products successfully, these enhancements or new generations of products may not produce
sales in excess of the costs of development and they may be quickly rendered obsolete by changing customer
preferences or the introduction by our competitors of products embodying new technologies or features.
Nevertheless, we must carefully manage our introduction of new products. If potential customers believe such
products will offer enhanced features or be sold for a more attractive price, they may delay purchases until such
products are available. We may also have excess or obsolete inventory as we transition to new products, and
we have no experience in managing product transitions.
If the quality of our products does not meet the expectations of physicians or patients, then our brand
and reputation could suffer and our business could be adversely impacted.
In the course of conducting our business, we must adequately address quality issues that may arise with our
products, as well as defects in third-party components included in our products. Furthermore, a malfunction by
one of our products may not be detected for an extended period of time, which may result in delay or failure to
remedy the condition for which the product was prescribed. Although we have established internal procedures
to minimize risks that may arise from quality issues, we may be unable to eliminate or mitigate occurrences of
these issues and associated liabilities.
We operate in a very competitive business environment and if we are unable to compete successfully
against our existing or potential competitors, our sales and operating results may be negatively affected
and we may not grow.
Our currently marketed products are, and any future products we develop and commercialize will be, subject to
intense competition. The industry in which we operate is intensely competitive, subject to rapid change and highly
sensitive to the introduction of new products or other market activities of industry participants. Our ability to
compete successfully will depend on our ability to develop products that reach the market in a timely manner,
receive adequate coverage and reimbursement from third-party payors, and are safer, less invasive and more
effective than competing products and treatments. Because of the size of the potential market, we anticipate that
companies will dedicate significant resources to developing competing products.
We have competitors in each of our three product categories, including the DePuy Synthes Companies (a
subsidiary of Johnson and Johnson), Medtronic plc, Smith & Nephew plc and OrthoFix. At any time, these and
other potential market entrants may develop new devices or treatment alternatives that may render our products
obsolete or uncompetitive. In addition, they may gain a market advantage by developing and patenting
competitive products or processes earlier than we can or by obtaining regulatory clearances or market
registrations more rapidly than we can. Many of our current and potential competitors have substantially greater
sales and financial resources than we do. In addition, these companies may have more established distribution
networks, entrenched relationships with orthopedic surgeons and greater experience in launching, marketing,
distributing and selling products.
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In addition, new market participants continue to enter the orthopedic industry. Many of these new
competitors specialize in a specific product or focus on a particular market sector, making it more difficult
for us to increase our overall market position. The frequent introduction by competitors of products that are
or claim to be superior to our products or that are alternatives to our existing or planned products may also
create market confusion that may make it difficult to differentiate the benefits of our products over
competing products. In addition, the entry of multiple new products and competitors may lead some of our
competitors to employ pricing strategies that could adversely affect the pricing of our products and pricing
in the orthopedic surgery market generally.
We also face a particular challenge of overcoming the long-standing practices by some orthopedic surgeons
of using the products of our larger, more established competitors. Orthopedic surgeons who have completed
many successful, complex surgeries using the products made by these competitors may be disinclined to
adopt new products with which they are less familiar. Further, orthopedic surgeons may choose to use the
products of our larger, more established competitors because of their broad and comprehensive adult
orthopedic offerings. If these orthopedic surgeons do not adopt our products, then our revenue growth may
slow or decline and our stock price may decline.
Our competitors may also develop and patent processes or products earlier than we can or obtain domestic or
international regulatory clearances or approvals for competing products more rapidly than we can, which could
impair our ability to develop and commercialize similar processes or products. We also compete with our
competitors in acquiring technologies and technology licenses complementary to our products or
advantageous to our business. In addition, we compete with our competitors to engage the services of
independent sales agencies and distributors, both those presently working with us and those with whom we
hope to work as we expand.
We provide implant and instrument sets for the majority of surgeries performed using our products,
and maintaining sufficient levels of inventory could consume a significant amount of our resources,
reduce our cash flows and lead to inventory impairment charges.
We are required to maintain significant levels of implant and instrument sets for consignment to our customers.
The amount of this investment is driven by the number of orthopedic surgeons or hospitals using our products,
and as the number of different orthopedic surgeons and hospitals that use our products increases, the number
of implant and instrument sets required to meet this demand will increase. Because we do not have the sales
volume of some larger companies, we may be unable to utilize our instrument sets as often and our return on
assets may be lower when compared to such companies. In addition, because fewer than all of the
components of each set are used in a typical surgery, certain portions of the set may become obsolete before
they can be used. In the event that a substantial portion of our inventory becomes obsolete, the resulting costs
associated with the inventory impairment charges and costs required to replace such inventory could have a
material adverse effect on our earnings and cash flows. In addition, as we introduce new products, new implant
and instrument sets may be required, with a significant initial investment required to accommodate the launch
of the product.
The provision of loaned instrument sets to our customers may implicate certain federal and state fraud
and abuse laws.
In the United States, we typically loan instrument sets for each surgery performed using our products at no
additional charge to the customer. The provision of these instruments at no charge to our customers may
implicate certain federal and state fraud and abuse laws. Because the provision of loaned instrument sets may
result in a benefit to our customers, the government could view this practice as a prohibited transfer of value
intended to induce customers to purchase our products that are used in procedures reimbursed by a federal
healthcare program. For further discussion of these laws, see “Risks Related to Regulatory Matters."
We are subject to certain federal, state and foreign fraud and abuse laws and health information privacy and
security laws, which, if violated, could subject us to substantial penalties. Additionally, any challenge to or
investigation into our practices under these laws could cause adverse publicity and be costly to respond to, and
thus could harm our business.
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We may seek to grow our business through acquisitions or investments in new or complementary
businesses, products or technologies, through the licensing of products or technologies from third
parties or other strategic alliances, and the failure to manage acquisitions, investments, licenses or other
strategic alliances, or the failure to integrate them with our existing business, could have a material
adverse effect on our operating results, dilute our stockholders’ ownership, increase our debt or cause
us to incur significant expense.
Our success depends on our ability to continually enhance and broaden our product offerings in response to
changing customer demands, competitive pressures, technologies and market pressures. Accordingly, from time
to time we may consider opportunities to acquire, make investments in or license other technologies, products
and businesses that may enhance our capabilities, complement our current products or expand the breadth of
our markets or customer base. Potential and completed acquisitions, strategic investments, licenses and other
alliances involve numerous risks, including:
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difficulty assimilating or integrating acquired or licensed technologies, products or business
operations;
issues maintaining uniform standards, procedures, controls and policies;
unanticipated costs associated with acquisitions or strategic alliances, including the assumption
of unknown or contingent liabilities and the incurrence of debt or future write-offs of intangible
assets or goodwill;
diversion of management’s attention from our core business and disruption of ongoing
operations;
adverse effects on existing business relationships with suppliers and customers;
risks associated with entering new markets in which we have limited or no experience;
potential losses related to investments in other companies;
potential loss of key employees of acquired businesses; and
increased legal and accounting compliance costs.
We do not know if we will be able to identify acquisitions or strategic relationships we deem suitable, whether
we will be able to successfully complete any such transactions on favorable terms or at all or whether we will be
able to successfully integrate any acquired business, product or technology into our business or retain any key
personnel, suppliers or distributors. Our ability to successfully grow through strategic transactions depends
upon our ability to identify, negotiate, complete and integrate suitable target businesses, technologies or
products and to obtain any necessary financing. These efforts could be expensive and time-consuming and may
disrupt our ongoing business and prevent management from focusing on our operations.
Foreign acquisitions involve unique risks in addition to those mentioned above, including those related to
integration of operations across different cultures, languages and legal and regulatory environments, currency
risks and the particular economic, political and regulatory risks associated with specific countries.
To finance any acquisitions, investments or strategic alliances, we may choose to issue shares of our common
stock as consideration, which could dilute the ownership of our stockholders. Additional funds may not be
available on terms that are favorable to us, or at all. If the price of our common stock is low or volatile, we may
be unable to consummate any acquisitions, investments or strategic alliances using our stock as consideration.
As discussed above, acquisitions of, or investments in, new or complementary businesses, products or
technologies are inherently risky. We cannot guarantee that any acquisition or investment will be successful or
will not have a material unfavorable impact on us. We also cannot be certain that the businesses, products or
technologies we acquire or invest in will become or remain profitable.
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We may be unable to gain the support of leading hospitals and key opinion leaders, which may make it
difficult to establish our products as a standard of care and achieve market acceptance.
Our strategy includes educating leading hospitals and key opinion leaders in the industry. If these hospitals and
key opinion leaders determine that alternative technologies are more effective or that the benefits offered by our
products are not sufficient to justify their higher cost, or if we encounter difficulty promoting adoption or
establishing these systems as a standard of care, our ability to achieve market acceptance of the products we
introduce could be significantly limited.
We may be unable to maintain adequate working relationships with healthcare professionals.
We seek to maintain close working relationships with respected orthopedic surgeons and medical personnel in
hospitals and other healthcare organizations who assist in product research and development. We rely on these
professionals to assist us in the development and improvement of our proprietary products. As a result of the
COVID-19 pandemic and RSV, our access to these professionals has been limited at times as hospitals have
restricted access for non-patients, including our research and development specialists and other employees, and
we have experienced certain pandemic-related travel limitations, which has adversely affected our ability to
develop, market and sell products. If we are unable to maintain these relationships, our ability to develop, market
and sell new and improved products could be further adversely affected.
We may be unable to successfully demonstrate to orthopedic surgeons the merits of our
products compared to those of our competitors.
Orthopedic surgeons play a significant role in determining the course of treatment and, ultimately, the type of
products that will be used to treat a patient. As a result, our success depends, in large part, on our ability to
effectively market to them and demonstrate to orthopedic surgeons the merits of our products compared to those
of our competitors for use in treating patients. Acceptance of our products depends on educating orthopedic
surgeons as to the distinctive characteristics, perceived clinical benefits, safety and cost-effectiveness of our
products as compared to our competitors’ products, and on training orthopedic surgeons in the proper use of our
products. If we are not successful in convincing orthopedic surgeons of the merits of our products or educating
them on the use of our products, they may not use our products or use them effectively and we may be unable to
increase our sales, sustain our growth or achieve and sustain profitability.
Furthermore, we believe many orthopedic surgeons may be hesitant to adopt our products unless they
determine, based on experience, clinical data and published peer-reviewed journal articles, that our products
provide benefits or are attractive alternatives to our competitors’ products. Orthopedic surgeons may be hesitant
to change their surgical treatment practices for the following reasons, among others:
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lack of experience with our products;
existing relationships with competitors and sales distributors that sell competitive products;
lack or perceived lack of evidence supporting additional patient benefits;
perceived liability risks generally associated with the use of new products and procedures;
less attractive availability of coverage and reimbursement within healthcare payment systems
compared to procedures using other products and techniques;
costs associated with the purchase of new products and equipment; and
the time commitment that may be required for training.
In addition, we believe recommendations and support of our products by influential orthopedic surgeons are
essential for market acceptance and adoption. If we do not receive support from such orthopedic surgeons or
long-term data does not show the benefits of using our products, orthopedic surgeons may not use our products.
In such circumstances, we may not achieve expected sales, growth or profitability.
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If orthopedic surgeons fail to safely and appropriately use our products, or if we are unable to train
orthopedic surgeons on the safe and appropriate use of our products, we may be unable to achieve our
expected growth.
An important part of our sales process includes the ability to screen for and identify orthopedic surgeons who
have the requisite training and experience to safely and appropriately use our products. If orthopedic surgeons
are not properly trained, they may misuse or ineffectively use our products. This may also result in unsatisfactory
patient outcomes, patient injury, negative publicity or lawsuits against us. If we are unable to successfully identify
orthopedic surgeon customers who will be able to successfully deploy our products, we may be unable to achieve
our expected growth.
There is a learning process involved for orthopedic surgeons to become proficient in the use of our products. It
is critical to the success of our commercialization efforts with respect to future products to train a sufficient
number of orthopedic surgeons and to provide them with adequate instruction in the use of our products. This
training process may take longer than expected and may therefore affect our ability to increase sales.
Convincing orthopedic surgeons to dedicate the time and energy necessary for adequate training is
challenging, and we may not be successful in these efforts.
Although we believe our interactions with orthopedic surgeons are conducted in compliance with FDA, federal
and state fraud and abuse and other applicable laws and regulations developed both nationally and in foreign
countries, if the FDA or other competent authority determines that any of our activities constitute promotion of an
unapproved use or promotion of an intended purpose not covered by FDA approved labeling or the current
European Union product certification, or CE Mark, affixed to our product, they could request that we modify our
activities, issue corrective advertising or subject us to regulatory enforcement actions, including the issuance of
a warning letter, injunction, seizure, civil fine and criminal penalty. It is also possible that other federal, state or
foreign enforcement authorities might take action under other regulatory authority, such as false claims laws, if
they consider our business activities to constitute promotion of an off-label use, which could result in significant
penalties, including, but not limited to, criminal, civil and administrative penalties, damages, fines, disgorgement,
exclusion from participation in government healthcare programs and the curtailment of our operations.
We have a limited operating history and may face difficulties encountered by early stage companies in
new and evolving markets.
We began operations in 2007. Accordingly, we have a limited operating history upon which to base an
evaluation of our business and prospects. In assessing our prospects, you must consider the risks and
difficulties frequently encountered by early stage companies in new and evolving markets. These risks include
our ability to:
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manage rapidly changing and expanding operations;
establish and increase awareness of our brand and strengthen customer loyalty;
increase the number of our independent sales agencies and international distributors to expand
sales of our products in the United States and in targeted international markets;
implement and successfully execute our business and marketing strategy;
respond effectively to competitive pressures and developments;
continue to develop and enhance our products and products in development;
obtain regulatory clearance or approval to commercialize new products and enhance our existing
products;
expand our presence in existing and commence operations in new international markets; and
attract, retain and motivate qualified personnel.
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Our business is subject to seasonal fluctuations.
Our business is subject to seasonal fluctuations in that our revenue is typically higher in the summer months and
holiday periods, driven by higher sales of our scoliosis and trauma and deformity products, which is influenced
by the higher incidence of pediatric surgeries during these periods due to recovery time provided by breaks in
the school year. Additionally, our scoliosis patients tend to have additional health challenges that make
scheduling their procedures variable in nature. As a result of these factors, our financial results for any single
quarter or for periods of less than a year are not necessarily indicative of the results that may be achieved for a
full fiscal year.
If we are unable to convince hospital facilities to approve the use of our products, our sales may
decrease.
In the United States, in order for orthopedic surgeons to use our devices, the hospital facilities where these
orthopedic surgeons treat patients will typically require us to obtain approval from the facility’s value analysis
committee, or VAC. VACs typically review the comparative effectiveness and cost of medical devices used in the
facility. The makeup and evaluation processes for VACs vary considerably, and it can be a lengthy, costly and
time-consuming effort to obtain approval by the relevant VAC. For example, even if we have an agreement with a
hospital system for the purchase of our products, in most cases, we must obtain VAC approval by each hospital
within the system to sell at that particular hospital. Additionally, hospitals typically require separate VAC approval
for each specialty in which our products are used, which may result in multiple VAC approval processes within the
same hospital even if such product has already been approved for use by a different specialty group. We may
need VAC approval for each different device to be used by the orthopedic surgeons in that specialty. In addition,
hospital facilities and group purchasing organizations, or GPOs, which manage purchasing for multiple facilities,
may also require us to enter into a purchase agreement and satisfy numerous elements of their administrative
procurement process, which can also be a lengthy, costly, and time-consuming effort. If we do not obtain access
to hospital facilities in a timely manner, or at all, via these VAC and purchase contract processes, or otherwise, or
if we are unable to secure contracts in a timely manner, or at all, our operating costs will increase, our sales may
decrease, and our operating results may be harmed. Furthermore, we may expend significant effort in these
costly and time-consuming processes and still may not obtain VAC approval or a purchase contract from such
hospitals or GPOs.
We have limited experience in marketing and selling our products, and if we are unable to successfully
expand our sales infrastructure and adequately address our customers’ needs, it could negatively impact
sales and market acceptance of our products and we may never generate sufficient revenue to achieve or
sustain profitability.
We have limited experience in marketing and selling our products. We began selling our products in the United
States in 2008 and internationally in 2011. In 2017, we began to supplement our use of independent stocking
distributors with direct sales programs in the United Kingdom, Ireland, Australia and New Zealand. We began
selling direct to Canada in September 2018, Belgium and the Netherlands in January 2019, Italy in March 2020
and Germany, Switzerland and Austria in January 2021. In these markets, we work through sales agencies that
are paid a commission. In order to further enhance our operations in Europe, we established operating companies
in the Netherlands and Germany in March 2019 and April 2022, respectively. In 2023, we hired operating and
sales representatives in Germany as salaried employees to better serve our customers. As of December 31,
2023, our international sales organization consisted of a network of more than 70 independent stocking
distributors, 14 independent sales agencies and multiple direct sales representatives. We sell our products in over
70 countries outside of the United States.
Our operating results are directly dependent upon the sales and marketing efforts of our independent sales
agencies and distributors. If our independent sales agencies or distributors fail to adequately promote, market and
sell our products, our sales could significantly decrease.
In addition, our future sales will largely depend on our ability to increase our marketing efforts and adequately
address our customers’ needs. We believe it is necessary to utilize a sales force that includes sales agencies
with specific technical backgrounds that can support our customers’ needs. We will also need to attract
independent sales personnel and attract and develop marketing personnel with industry expertise.
Competition for such independent sales agencies, distributors and marketing employees is intense and we
may be unable to attract and retain sufficient personnel to maintain an effective sales and marketing force. If
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we are unable to adequately address our customers’ needs, it could negatively impact sales and market
acceptance of our products, and we may not generate sufficient revenue to sustain profitability.
As we launch new products and increase our marketing efforts with respect to existing products, we will need to
expand the reach of our marketing and sales networks. Our future success will depend largely on our ability to
continue to hire, train, retain and motivate skilled independent sales agencies and distributors with significant
technical knowledge in various areas. New hires require training and take time to achieve full productivity. If we
fail to train new hires adequately, or if we experience high turnover in our sales force in the future, new hires may
not become as productive as may be necessary to maintain or increase our sales. If we are unable to expand
our sales and marketing capabilities domestically and internationally, we may be unable to effectively
commercialize our products.
We lack published long-term data supporting superior clinical outcomes enabled by our products,
which could limit sales.
We lack published long-term data supporting superior clinical outcomes enabled by our products. For this
reason, orthopedic surgeons and other clinicians may be slow to adopt our products, we may not have
comparative data that our competitors have or are generating, and we may be subject to greater regulatory
and product liability risks. Further, future patient studies or clinical experience may indicate that treatment with
our products does not improve patient outcomes. Such results would slow the adoption of our products by
orthopedic surgeons, would significantly reduce our ability to achieve expected sales and could prevent us
from achieving and maintaining profitability.
In addition, because certain of our products have only been on the market for a few years, we have limited data
with respect to treatment using these products. If future patient studies or clinical testing do not support our
belief that our products offer a more advantageous treatment for a broad spectrum of pediatric orthopedic
conditions, market acceptance of our products could fail to increase or could decrease.
If coverage and reimbursement from third-party payors for procedures using our products significantly
decline, orthopedic surgeons, hospitals and other healthcare providers may be reluctant to use our
products and our sales may decline.
In the United States, healthcare providers who purchase our products generally rely on third-party payors,
including Medicare, Medicaid and private health insurance plans, to pay for all or a portion of the cost of our
products in the procedures in which they are employed. Because there is often no separate reimbursement for
products used in surgical procedures, the additional cost associated with the use of our products can impact the
profit margin of the hospital or surgery center where the surgery is performed. Some of our target customers may
be unwilling to adopt our products in light of the additional associated cost. Further, any decline in the amount
payors are willing to reimburse our customers for the procedures using our products may make it difficult for
existing customers to continue using, or to adopt, our products and could create additional pricing pressure for
us. We may be unable to sell our products on a profitable basis if third-party payors deny coverage or reduce
their current levels of reimbursement.
To contain costs of new technologies, governmental healthcare programs and third-party payors are increasingly
scrutinizing new and existing treatments by requiring extensive evidence of favorable clinical outcomes.
Orthopedic surgeons, hospitals and other healthcare providers may not purchase our products if they do not
receive satisfactory reimbursement from these third-party payors for the cost of the procedures using our
products. Payors continue to review their coverage policies carefully for existing and new therapies and can,
without notice, deny coverage for treatments that include the use of our products. If third-party payors issue non-
coverage policies or if our customers are not reimbursed at adequate levels, this could adversely affect sales of
our products.
In addition to uncertainties surrounding coverage policies, there are periodic changes to reimbursement rates
and policies. Third-party payors regularly update reimbursement amounts and also from time to time revise the
methodologies used to determine reimbursement amounts. This includes routine updates to payments to
physicians, hospitals and ambulatory surgery centers for procedures during which our products are used.
These updates could directly impact the demand for our products. For example, the Medicare Access and CHIP
Reauthorization Act of 2015, or MACRA, provided for a 0.5% annual increase in payment rates under the
Medicare Physician Fee Schedule, or PFS, through 2019, but no annual update from 2020 through 2025.
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MACRA also introduced a Quality Payment Program, or QPP, for Medicare physicians, nurses and other
“eligible clinicians” beginning in 2019. At this time, it is unclear how the introduction of the QPP will impact
overall reimbursement under the PFS. While MACRA applies only to Medicare reimbursement, Medicaid and
private payors often follow Medicare payment limitations in setting their own reimbursement rates, and any
reduction in Medicare reimbursement may result in a similar reduction in payments from private payors, which
may result in reduced demand for our products. However, there is no uniform policy of coverage and
reimbursement among payors in the United States. Therefore, coverage and reimbursement for procedures can
differ significantly from payor to payor.
Moreover, some healthcare providers in the United States have adopted or are considering a managed care
system in which the providers contract to provide comprehensive healthcare for a fixed cost per person.
Healthcare providers may attempt to control costs by authorizing fewer surgical procedures or by requiring the
use of the least expensive clinically appropriate products available. Additionally, as a result of reform of the U.S.
healthcare system, changes in reimbursement policies or healthcare cost containment initiatives may limit or
restrict coverage and reimbursement for our products and cause our revenue to decline.
Outside of the United States, reimbursement systems vary significantly by country. Many foreign markets have
government-managed healthcare systems that govern reimbursement for orthopedic implants and procedures.
Additionally, some foreign reimbursement systems provide for limited payments in a given period and therefore
result in extended payment periods. If adequate levels of reimbursement from third-party payors outside of the
United States are not obtained, international sales of our products may decline.
The marketability of our products may suffer if government and commercial third-party payors fail to provide
adequate coverage and reimbursement. Even if favorable coverage and reimbursement status is attained, less
favorable coverage policies and reimbursement rates may be implemented in the future.
Our employees, consultants, independent sales agencies, stocking distributors or other commercial
partners may engage in misconduct or other improper activities, including non-compliance with
regulatory standards and requirements.
We are exposed to the risk that our employees, consultants, independent sales agencies and distributors and
other commercial partners may engage in fraudulent or illegal activity. Misconduct by these parties could include
intentional, reckless or negligent conduct or other unauthorized activities that violate the regulations of the FDA
and other U.S. healthcare regulators, as well as non-U.S. regulators, including those laws requiring the reporting
of true, complete and accurate information to such regulators, manufacturing standards, healthcare fraud and
abuse laws and regulations in the United States and abroad or laws that require the true, complete and accurate
reporting of financial information or data. In particular, sales, marketing and business arrangements in the
healthcare industry, including the sale of medical devices, are subject to extensive laws and regulations intended
to prevent fraud, misconduct, kickbacks, self-dealing and other abusive practices. These laws and regulations
may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission,
customer incentive programs and other business arrangements. It is not always possible to identify and deter
misconduct by our employees, sales agencies, distributors and other third parties, and the precautions we take
to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in
protecting us from governmental investigations or other actions or lawsuits stemming from a failure to comply
with these laws or regulations. If any such actions are instituted against us and we are not successful in
defending ourselves or asserting our rights, those actions could result in the imposition of significant fines or
other sanctions, including the imposition of civil, criminal and administrative penalties, damages, monetary fines,
possible exclusion from participation in government healthcare programs, contractual damages, reputational
harm, diminished profits and future earnings and curtailment of operations. Whether or not we are successful in
defending against such actions or investigations, we could incur substantial costs, including legal fees, and divert
the attention of management in defending ourselves against any of these claims or investigations.
Our insurance policies are expensive and protect us only from some business risks, which will leave us
exposed to significant uninsured liabilities.
We do not carry insurance for all categories of risk that our business may encounter. Some of the policies we
currently maintain include general liability, foreign liability, employee benefits liability, property, umbrella, workers’
compensation, products liability and directors’ and officers’ insurance. We do not know, however, if these policies
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will provide us with adequate levels of coverage. Any significant uninsured liability may require us to pay
substantial amounts, which would adversely affect our cash position and results of operations.
We bear the risk of warranty claims on our products.
While we have no history of warranty claims, have no warranty reserves and had no warranty expense for the
years ended December 31, 2023, 2022 or 2021, we bear the risk of warranty claims on the products we supply.
We may not be successful in claiming recovery under any warranty or indemnity provided to us by our suppliers
or vendors in the event of a successful warranty claim against us by a customer or that any recovery from such
vendor or supplier would be adequate. In addition, warranty claims brought by our customers related to third-
party components may arise after our ability to bring corresponding warranty claims against such suppliers
expires, which could result in costs to us.
The proliferation of physician-owned distributorships could result in increased pricing pressure on our
products or harm our ability to sell our products to physicians who own or are affiliated with those
distributorships.
Physician-owned distributorships, or PODs, are product distributors that are owned, directly or indirectly, by
physicians. PODs derive a portion, or substantially all, of their revenue from selling, or arranging for the sale
of, products ordered by the physician-owners for use in procedures the physician-owners perform on their
own patients at hospitals and other facilities that purchase from or through the POD, or otherwise generate
revenue based directly or indirectly on product orders arranged for by physician-owners.
On March 26, 2013, the Office of Inspector General of the U.S. Department of Health and Human Services, or
the DHHS, issued a special fraud alert on PODs and stated that it views PODs as inherently suspect under the
federal Anti-Kickback Statute and is concerned about the proliferation of PODs. Notwithstanding the DHHS’s
concern about PODs, the number of PODs in the spinal surgery industry may continue to grow as economic
pressures increase throughout the industry, hospitals, insurers and physicians search for ways to reduce costs
and, in the case of the physicians, search for ways to increase their incomes. PODs and the physicians who
own, or partially own, them have significant market knowledge and access to the orthopedic surgeons who use
our products and the hospitals that purchase our products and thus the growth of PODs may reduce our ability
to compete effectively for business from orthopedic surgeons who own such distributorships.
Risks Related to Administrative, Organizational and Commercial Operations and Growth
We may be unable to manage our anticipated growth effectively, which could make it difficult to
execute our business strategy.
We have been growing rapidly and have a relatively short history of operating as a commercial company. For
example, our revenue grew from $122.3 million for the year ended December 31, 2022 to $148.7 million for the
year ended December 31, 2023. We intend to continue to grow our business operations and may experience
periods of rapid growth and expansion. This anticipated growth could create a strain on our organizational,
administrative and operational infrastructure, including our supply chain operations, quality control, technical
support and customer service, sales force management and general and financial administration. We may be
unable to maintain the quality of or delivery timelines of our products or satisfy customer demand as it grows. Our
ability to manage our growth properly will require us to continue to improve our operational, financial and
management controls, as well as our reporting systems and procedures. We may implement new enterprise
software systems in a number of areas affecting a broad range of business processes and functional areas. The
time and resources required to implement these new systems is uncertain and failure to complete this in a timely
and efficient manner could harm our business.
As our commercial operations and sales volume grow, we will need to continue to increase our workflow capacity
for our supply chain, customer service, billing and general process improvements and expand our internal quality
assurance program, among other things. These increases in scale or expansion of personnel may not be
successfully implemented.
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The loss of our senior management or our inability to attract and retain highly skilled salespeople and
engineers could negatively impact our business.
Our success depends on the skills, experience and performance of the members of our executive management
team. The individual and collective efforts of these employees will be important as we continue to develop our
products and as we expand our commercial activities. We believe there are only a limited number of individuals
with the requisite skills to serve in many of our key positions, and the loss or incapacity of existing members of our
executive management team could negatively impact our operations if we experience difficulties in hiring qualified
successors. We do not maintain key man life insurance with any of our employees. We have employment
agreements with each of the members of our senior management; however, the existence of these employment
agreement does not guarantee our retention of these employees for any period of time.
Our commercial, supply chain and research and development programs and operations depend on our ability to
attract and retain highly skilled salespeople and engineers. We may be unable to attract or retain qualified
managers, salespeople or engineers in the future due to the competition for qualified personnel among medical
device businesses. We also face competition from universities and public and private research institutions in
recruiting and retaining highly qualified scientific personnel. Recruiting and retention difficulties can limit our
ability to support our commercial, supply chain and research and development programs. All of our employees
are at-will, which means that either we or the employee may terminate his or her employment at any time. The
loss of key employees, the failure of any key employee to perform or our inability to attract and retain skilled
employees, as needed, or an inability to effectively plan for and implement a succession plan for key employees
could harm our business.
We face risks associated with our international business.
We market and sell our products in over 70 countries outside of the United States. For the years ended
December 31, 2023, 2022 and 2021, approximately 25%, 24% and 21% of our revenue was attributable to our
international customers, respectively. These customers are generally allowed to return products, and some are
thinly capitalized. The sale and shipment of our products across international borders, as well as the purchase of
components and products from international sources, subjects us to extensive U.S. and other foreign
governmental trade, import and export and customs regulations and laws. Compliance with these regulations and
laws is costly and exposes us to penalties for non-compliance. We expect our international activities will be
dynamic over the foreseeable future as we continue to pursue opportunities in international markets. Our
international business operations are subject to a variety of risks, including:
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difficulties in staffing and managing foreign and geographically dispersed operations;
having to comply with various U.S. and international laws, including export control laws and the
U.S. Foreign Corrupt Practices Act of 1977, or the FCPA, and anti-money laundering laws;
differing regulatory requirements for obtaining clearances or approvals to market our products;
changes in, or uncertainties relating to, foreign rules and regulations that may impact our ability to
sell our products, perform services or repatriate profits to the United States;
tariffs and trade barriers, export regulations and other regulatory and contractual limitations on
our ability to sell our products in certain foreign markets;
fluctuations in foreign currency exchange rates;
imposition of limitations on or increase of withholding and other taxes on remittances and other
payments by foreign subsidiaries or joint ventures;
differing multiple payor reimbursement regimes, government payors or patient self-pay systems;
imposition of differing labor laws and standards;
economic, political or social instability in foreign countries and regions;
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an inability, or reduced ability, to protect our intellectual property, including any effect of
compulsory licensing imposed by government action; and
availability of government subsidies or other incentives that benefit competitors in their local
markets that are not available to us.
We expect we will continue expanding into other international markets; however, our expansion plans may not
be realized, or if realized, may not be successful. We expect each market to have particular regulatory and
funding hurdles to overcome and future developments in these markets, including the uncertainty relating to
governmental policies and regulations, could harm our business.
We could be negatively impacted by violations of applicable anti-corruption laws or violations of our
internal policies designed to ensure ethical business practices.
We operate in a number of countries throughout the world, including in countries that do not have as strong a
commitment to anti-corruption and ethical behavior that is required by U.S. laws or by corporate policies. We are
subject to the risk that we, our U.S. employees or our employees located in other jurisdictions or any third parties
such as our sales agencies and distributors that we engage to do work on our behalf in foreign countries may take
action determined to be in violation of anti-corruption laws in any jurisdiction in which we conduct business,
including the FCPA and the Bribery Act of 2010, or the U.K. Anti-Bribery Act. The FCPA generally prohibits
covered entities and their intermediaries from engaging in bribery or making other prohibited payments, offers or
promises to foreign officials for the purpose of obtaining or retaining business or other advantages. In addition, the
FCPA imposes recordkeeping and internal controls requirements on publicly traded corporations and their foreign
affiliates, which are intended to, among other things, prevent the diversion of corporate funds to the payment of
bribes and other improper payments, and to prevent the establishment of “off books” slush funds from which such
improper payments can be made.
As a substantial portion of our revenue is, and we expect will continue to be, from jurisdictions outside of the
United States, we face significant risks if we fail to comply with the FCPA and other laws that prohibit improper
payments, offers or promises of payment to foreign governments and their officials and political parties by us
and other business entities for the purpose of obtaining or retaining business or other advantages. In many
foreign countries, particularly in countries with developing economies, it may be a local custom that businesses
operating in such countries engage in business practices that are prohibited by the FCPA or other laws and
regulations. Although we have implemented a company policy requiring our employees and consultants to
comply with the FCPA and similar laws, such policy may not be effective at preventing all potential FCPA or
other violations. Although our agreements with our international distributors clearly state our expectations for
our distributors’ compliance with U.S. laws, including the FCPA, and provide us with various remedies upon
any non-compliance, including the ability to terminate the agreement, our distributors may not comply with U.S.
laws, including the FCPA.
In addition, we operate in certain countries in which the government may take an ownership stake in an
enterprise and such government ownership may not be readily apparent, thereby increasing potential anti-
corruption law violations. Any violation of the FCPA and U.K. Anti-Bribery Act or any similar anti-corruption law or
regulation could result in substantial fines, sanctions, civil and/or criminal penalties and curtailment of operations
in certain jurisdictions and might harm our business, financial condition or results of operations. In addition, we
have internal ethics policies with which we require our employees to comply in order to ensure that our business
is conducted in a manner that our management deems appropriate. If these anti-corruption laws or internal
policies were to be violated, our reputation and operations could also be substantially harmed. Further,
detecting, investigating and resolving actual or alleged violations is expensive and can consume significant time
and attention of our senior management. As a result of our focus on managing our growth, our development of
infrastructure designed to identify FCPA matters and monitor compliance is at an early stage.
Our results may be impacted by changes in foreign currency exchange rates.
We have international operations and, as a result, an increase in the value of the U.S. dollar relative to foreign
currencies could require us to reduce our selling price or risk making our products less competitive in
international markets or our costs could increase. Also, if our international sales increase, we may enter into a
greater number of transactions denominated in non-U.S. dollars, which could expose us to foreign currency
risks, including changes in currency exchange rates. We do not currently engage in any hedging transactions. If
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we are unable to address these risks and challenges effectively, our international operations may not be
successful and our business could be harmed.
Climate change and related legislative and regulatory initiatives may materially affect the Company's
business and results of operations.
We recognize there are inherent risks wherever business is conducted; however, there are certain natural
disasters including drought, wildfires and other events that are potentially impacted by climate change effects.
These events have the ability to impact our employees', our selling agents' and hospital workers' abilities to
commute to work or to work from home and stay connected effectively globally. Climate-related events may
cause us to experience higher attrition, losses and additional costs to maintain our business operations.
Furthermore, the global business community has increased its political and social awareness regarding climate
change. The United States has entered into international agreements in an attempt to reduce global
temperatures, including reentering the Paris Agreement. Additionally, the U.S. Congress, state legislatures and
federal and state regulatory agencies continue to propose initiatives to combat climate change. We recognize
that these initiatives may require additional costs in order to comply with new regulatory requirements, either
directly imposed on us, our selling organizations, or our suppliers.
We incur significant costs as a result of operating as a public company and our management is required
to devote substantial time to public company compliance programs.
As a public company, we incur significant legal, accounting and other expenses due to our compliance with
regulations and disclosure obligations applicable to us, including compliance with the Sarbanes-Oxley Act, as well
as rules implemented by the Securities and Exchange Commission, or the SEC, and The Nasdaq Global Market,
or Nasdaq. Our management and other personnel devote a substantial amount of time to these compliance
programs and monitoring of public company reporting obligations. With further regulations and disclosure
obligations expected in the future, we will likely need to devote additional time and costs to comply with such
compliance programs and rules. These rules and regulations may cause us to incur significant legal and financial
compliance costs and may make some activities more time-consuming and costly.
As a public company, we are obligated to maintain proper and effective internal controls over financial
reporting and any failure to maintain the adequacy of these internal controls may adversely affect
investor confidence in our company and, as a result, the value of our common stock.
As a public company, the Sarbanes-Oxley Act requires that we maintain effective disclosure controls and
procedures and internal control over financial reporting. Our disclosure controls and other procedures have been
designed to ensure that information required to be disclosed by us in the reports that we file with the SEC is
recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that
information required to be disclosed in reports under the Securities Exchange Act of 1934, or the Exchange Act, is
accumulated and communicated to our principal executive and financial officers. Our current controls and any
new controls that we develop may become inadequate and weaknesses in our internal control over financial
reporting may be discovered in the future. Any failure to maintain effective controls could negatively impact the
results of periodic management evaluations and annual independent registered public accounting firm attestation
reports regarding the effectiveness of our internal control over financial reporting that we may be required to
include in our periodic reports we will file with the SEC under Section 404 of the Sarbanes-Oxley Act, harm our
operating results, cause us to fail to meet our reporting obligations or result in a restatement of our prior period
financial statements. In the event that we are not able to demonstrate compliance with the Sarbanes-Oxley Act,
that our internal control over financial reporting is perceived as inadequate or that we are unable to produce timely
or accurate financial statements, investors may lose confidence in our operating results and the price of our
common stock could decline. In addition, if we are unable to continue to meet these requirements, we may be
unable to remain listed on Nasdaq.
We became an accelerated filer, which will impose additional costs on us.
As a result of our public float as of June 30, 2023 and revenues for the year ended December 31, 2022, we have
become an accelerated filer and are no longer qualified as a “smaller reporting company” as defined in the
Exchange Act. However, we are not required to reflect the change in our smaller reporting company status, and
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comply with the associated increased disclosure obligations, until our quarterly report for the three-month period
ending March 31, 2024.
As an accelerated filer, we are subject to certain disclosure and compliance requirements that apply to other
public companies but did not previously apply to us due to our status as a non-accelerated filer, such as the
necessity of our independent registered public accounting firm providing an attestation on our internal control over
financial reporting.
We expect that compliance with the additional requirements of being an accelerated filer will increase our legal
and financial compliance costs and may cause management and other personnel to devote more time to public
company reporting requirements. In addition, if we are not able to comply with changing requirements in a timely
manner, the market price of our stock could decline and we could be subject to sanctions or investigations by the
stock exchange on which our common stock is listed, the SEC, or other regulatory authorities, which would
require additional financial and management resources.
If we experience significant disruptions in our information technology systems, our business may be
adversely affected.
We depend on our information technology systems for the efficient functioning of our business, including
accounting, data storage, compliance, purchasing and inventory management. We do not have redundant
systems at this time. While we will attempt to mitigate interruptions, we may experience difficulties in
implementing some upgrades, which would impact our business operations, or experience difficulties in
operating our business during the upgrade, either of which could disrupt our operations, including our ability to
timely ship and track product orders, project inventory requirements, manage our supply chain and otherwise
adequately service our customers. In the event we experience significant disruptions as a result of the current
implementation of our information technology systems, we may be unable to repair our systems in an efficient
and timely manner. Accordingly, such events may disrupt or reduce the efficiency of our entire operation and
have a material adverse effect on our results of operations and cash flows.
We are increasingly dependent on sophisticated information technology for our infrastructure. Our information
systems require an ongoing commitment of significant resources to maintain, protect and enhance existing
systems. Failure to maintain or protect our information systems and data integrity effectively could have a
materially adverse effect on our business. For example, third parties may attempt to hack into our systems and
obtain proprietary information.
The Company’s information technology systems, some of which are dependent on services provided by third
parties, serve an important role in the operation of the business. These systems could be damaged or cease to
function properly due to any number of causes, such as catastrophic events, power outages, security breaches,
computer viruses or cyber-based attacks. The Company has contingency plans in place to prevent or mitigate the
impact of these events, however, if they are not effective on a timely basis, business interruptions could occur
which may adversely impact results of operations.
Increased cyber-security threats also pose a potential risk to the security of the Company’s information technology
systems, as well as the confidentiality, integrity and availability of data stored on these systems. In addition, as a
number of our employees began working remotely during the COVID-19 pandemic, and some continue to work
that way, we have been and may continue to be exposed to greater risks related to cyber-security. Any breach of
our systems could result in disclosure or misuse of confidential or proprietary information, including sensitive
customer, vendor, employee or financial information. Such events could cause damage to the Company’s
reputation and result in significant recovery or remediation costs, which may adversely impact results of
operations.
Our business depends on the availability, reliability, and security of our information systems, networks, data, and
intellectual property. Any disruption, compromise, or breach of our systems or data due to a cybersecurity threat
or incident could adversely affect our operations, customer service, product development, and competitive
position. They may also result in a breach of our contractual obligations or legal duties to protect the privacy and
confidentiality of our stakeholders. Such a breach could expose us to business interruption, lost revenue, ransom
payments, remediation costs, liabilities to affected parties, cybersecurity protection costs, lost assets, litigation,
regulatory scrutiny and actions, reputational harm, customer dissatisfaction, harm to our vendor relationships, or
loss of market share.
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We may be subject to various litigation claims and legal proceedings.
We, as well as certain of our officers and distributors, may be subject to other claims or lawsuits. Regardless of
the outcome, these lawsuits may result in significant legal fees and expenses and could divert management’s
time and other resources. If the claims contained in these lawsuits are successfully asserted against us, we
could be liable for damages and be required to alter or cease certain of our business practices or product
lines.
If product liability lawsuits are brought against us, our business may be harmed, and we may be required
to pay damages that exceed our insurance coverage.
Our business exposes us to potential product liability claims that are inherent in the testing, manufacture and sale
of medical devices for orthopedic surgery procedures. These surgeries involve significant risk of serious
complications, including bleeding, nerve injury, paralysis and even death. Furthermore, if orthopedic surgeons are
not sufficiently trained in the use of our products, they may misuse or ineffectively use our products, which may
result in unsatisfactory patient outcomes or patient injury. We could become the subject of product liability lawsuits
alleging that component failures, malfunctions, manufacturing flaws, design defects or inadequate disclosure of
product-related risks or product-related information resulted in an unsafe condition or injury to patients.
We have had, and continue to have, a small number of product liability claims relating to our products, and in
the future, we may be subject to additional product liability claims.
Regardless of the merit or eventual outcome, product liability claims may result in:
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decreased demand for our products;
injury to our reputation;
significant litigation costs;
substantial monetary awards to or costly settlements with patients;
product recalls;
material defense costs;
loss of revenue;
the inability to commercialize new products or product candidates; and
diversion of management attention from pursuing our business strategy.
Our existing product liability insurance coverage may be inadequate to protect us from any liabilities we might
incur. If a product liability claim or series of claims is brought against us for uninsured liabilities or in excess of our
insurance coverage, our business could suffer. Any product liability claim brought against us, with or without
merit, could result in the increase of our product liability insurance rates or the inability to secure coverage in the
future. In addition, a recall of some of our products, whether or not the result of a product liability claim, could
result in significant costs and loss of customers. In addition, we may be unable to maintain insurance coverage
at a reasonable cost or in sufficient amounts or scope to protect us against losses. Any claims against us,
regardless of their merit, could severely harm our financial condition, strain our management and other resources
and adversely affect or eliminate the prospects for commercialization or sales of a product or product candidate
that is the subject of any such claim.
Our operations are vulnerable to interruption or loss due to natural or other disasters, power loss,
strikes and other events beyond our control.
A major earthquake, fire or other disaster (such as a major flood, tsunami, volcanic eruption or terrorist attack)
affecting our facilities, or those of our suppliers, could significantly disrupt our operations, and delay or prevent
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product shipment or installation during the time required to repair, rebuild or replace our suppliers’ damaged
manufacturing facilities; these delays could be lengthy and costly. If any of our customers’ facilities are negatively
impacted by a disaster, shipments of our products could be delayed. Additionally, customers may delay
purchases of our products until operations return to normal. Even if we are able to quickly respond to a disaster,
the ongoing effects of the disaster could create some uncertainty in the operations of our business. In addition,
our facilities may be subject to a shortage of available electrical power and other energy supplies. Any shortages
may increase our costs for power and energy supplies or could result in blackouts, which could disrupt the
operations of our affected facilities and harm our business. In addition, concerns about terrorism, the effects of a
terrorist attack, political turmoil or an outbreak of epidemic diseases could have a negative effect on our
operations, those of our suppliers and customers and the ability to travel.
Risks Related to Regulatory Matters
Our products and operations are subject to extensive government regulation and oversight both in the
United States and abroad, and our failure to comply with applicable requirements, including but not
limited to the HDE requirements and MDD/MDR regulations, could harm our business.
We and our products are subject to extensive regulation in the United States and elsewhere, including by the
FDA and its foreign counterparts. The FDA and foreign regulatory agencies regulate, among other things, with
respect to medical devices: design, development and manufacturing; testing, labeling, content and language of
instructions for use and storage; clinical trials; product safety; marketing, sales and distribution; premarket
clearance and approval; record keeping procedures; advertising and promotion; recalls and field safety corrective
actions; post-market surveillance, including reporting of deaths or serious injuries and malfunctions that, if they
were to recur, could lead to death or serious injury; post-market approval studies; and product import and export.
The regulations to which we are subject are complex and have tended to become more stringent over time.
Regulatory changes could result in restrictions on our ability to carry on or expand our operations, higher than
anticipated costs or lower than anticipated sales. The FDA and our accredited Notified Body enforces these
regulatory requirements through periodic unannounced inspections. We do not know whether we will pass any
future inspections. Failure to comply with applicable regulations could jeopardize our ability to sell our products
and result in enforcement actions such as: warning letters; fines; injunctions; civil penalties; termination of
distribution; recalls or seizures of products; delays in the introduction of products into the market; total or partial
suspension of production; refusal to grant future clearances or approvals; withdrawals or suspensions of current
clearances or approvals, resulting in prohibitions on sales of our products; and in the most serious cases,
criminal penalties.
In addition, our ApiFix Mid-C System is an approved device under the Humanitarian Device Exemption (HDE)
regulation. Approval under the HDE regulation is contingent upon the submission of periodic reports at intervals
of one year (unless otherwise specified) from the date of approval of the original HDE (August 2019). The FDA
may grant an HDE, which is an exemption from the effectiveness requirements of sections 514 and 515 of the
Federal Food, Drug, and Cosmetic Act, or the FDCA, if the FDA determines that the device meets certain criteria.
After HDE approval, the medical device may only be used after approval by an institutional review board, or IRB,
has been obtained. Under FDA regulations, an IRB is an appropriately constituted group that has been formally
designated to review and monitor biomedical research involving human subjects. In accordance with FDA
regulations, an IRB has the authority to approve, require modifications in (to secure approval), or disapprove
research. Failure to submit the necessary reports, IRB required modifications or IRB disapproval could cancel or
delay our exemption which would cause our sales to decline.
We may not receive the necessary clearances or approvals for our future products, and failure to timely
obtain necessary clearances or approvals for our future products would adversely affect our ability to
grow our business.
An element of our strategy is to continue to upgrade our products, add new features and expand clearance or
approval of our current products to new indications. In the United States, before we can market a new medical
device, or a new use of, new claim for or significant modification to an existing product, we must first receive
either clearance under Section 510(k) of the FDCA or approval of a premarket approval application, or PMA,
from the FDA, unless an exemption applies. In the 510(k) clearance process, before a device may be
marketed, the FDA must determine that a proposed device is “substantially equivalent” to a legally-marketed
“predicate” device, which includes a device that has been previously cleared through the 510(k) process, a
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device that was legally marketed prior to May 28, 1976 (pre-amendments device), a device that was originally
on the U.S. market pursuant to an approved PMA and later down-classified, or a 510(k)-exempt device. To be
“substantially equivalent,” the proposed device must have the same intended use as the predicate device, and
either have the same technological characteristics as the predicate device or have different technological
characteristics and not raise different questions of safety or effectiveness than the predicate device. Clinical
data are sometimes required to support substantial equivalence. In the PMA process, the FDA must determine
that a proposed device is safe and effective for its intended use based, in part, on extensive data, including, but
not limited to, technical, pre-clinical, clinical trial, manufacturing and labeling data. The PMA process is typically
required for devices that are deemed to pose the greatest risk, such as life-sustaining, life-supporting or
implantable devices.
Despite the time, effort and cost, a device may not be approved or cleared by the FDA. Any delay or failure to
obtain necessary regulatory approvals could harm our business. Furthermore, even if we are granted regulatory
clearances or approvals, they may include significant limitations on the indicated uses for the device, which may
limit the market for the device.
In the United States, we have obtained 510(k) premarket clearance from the FDA to market each of our products
requiring such clearance. Any modifications to these existing products may require new 510(k) clearance;
however, future modifications may be subject to the substantially more costly, time-consuming and uncertain
PMA process. If the FDA requires us to go through a lengthier, more rigorous examination for future products or
modifications to existing products than we had expected, product introductions or modifications could be delayed
or canceled, which could cause our sales to decline.
In addition, the FDA may change its clearance and approval policies, adopt additional regulations or revise
existing regulations, or take other actions, which may prevent or delay approval or clearance of our future
products under development or impact our ability to modify our currently cleared products on a timely basis.
Such policy or regulatory changes could impose additional requirements upon us that could delay our ability
to obtain new 510(k) clearances, increase the costs of compliance or restrict our ability to maintain our current
clearances. For example, in response to industry and healthcare provider concerns regarding the
predictability, consistency and rigor of the 510(k) clearance process, the FDA initiated an evaluation, and in
January 2011, announced several proposed actions intended to reform the 510(k) clearance process. The
FDA intends these reform actions to improve the efficiency and transparency of the clearance process, as
well as bolster patient safety. In addition, as part of the Food and Drug Administration Safety and Innovation
Act, or FDASIA, enacted in 2012, Congress reauthorized the Medical Device User Fee Amendments with
various FDA performance goal commitments and enacted several “Medical Device Regulatory Improvements”
and miscellaneous reforms, which are further intended to clarify and improve medical device regulation both
pre- and post-clearance and approval. Some of these proposals and reforms could impose additional
regulatory requirements upon us that could delay our ability to obtain new 510(k) clearances, increase the
costs of compliance or restrict our ability to maintain our current clearances.
In order to sell our products in member countries of the EEA our products must comply with the essential
requirements of the EU Medical Devices Directive (Council Directive 93/42/EEC). Compliance with these
requirements is a prerequisite to be able to affix the CE Mark to our products, without which they cannot be sold
or marketed in the EEA. To demonstrate compliance with the essential requirements we must undergo a
conformity assessment procedure, which varies according to the type of medical device and its classification.
Except for low-risk medical devices (Class I non-sterile, non-measuring devices), where the manufacturer can
issue an EC Declaration of Conformity based on a self-assessment of the conformity of its products with the
essential requirements of the EU Medical Devices Directive, a conformity assessment procedure requires the
intervention of an organization accredited by a Member State of the EEA to conduct conformity assessments, or
a Notified Body. Depending on the relevant conformity assessment procedure, the Notified Body would typically
audit and examine the technical file and the quality system for the manufacture, design and final inspection of
our devices. The Notified Body issues a certificate of conformity following successful completion of a conformity
assessment procedure conducted in relation to the medical device and its manufacturer and their conformity
with the essential requirements. This certificate entitles the manufacturer to affix the CE Mark to its medical
devices after having prepared and signed a related EC Declaration of Conformity.
The Medical Devices Regulation ("MDR") entered into force in May 2017 and, due to the COVID-19 pandemic,
was postponed from its original application date of May 2020 to May 2021. On February 16, 2023, the European
Parliament approved, in part, the extension of the application date for Class III and IIb implantable devices to
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December 31, 2027. The MDR imposes significant additional reporting requirements on manufacturers of all
medical devices. It imposes an obligation on manufacturers to appoint a "qualified person" responsible for
regulatory compliance, and provides for more strict clinical evidence requirements. In addition to increased
financial burden of complying with the MDR, we do not yet have an MDR certificate that is required to place
additional devices on the market in the EU. Failure to obtain the MDR certificate by a certain time could prevent
us from placing additional devices on the EU market and/or result in expiration of the existing MDD certificate
which could result in our inability to sell any products that are currently on the EU market until the MDR
certificate is obtained.
In order to sell our products in the UK (England, Wales and Scotland) our products must comply with the
requirements of the UK Medical Device Regulations when they go into effect in 2025. Compliance with these
requirements is a prerequisite to be able to affix the UKCA Mark to our products, without which they cannot be
sold or marketed in the UK. To demonstrate compliance with the essential requirements we must undergo a
conformity assessment procedure, which varies according to the type of medical device and its classification. A
conformity assessment procedure requires the intervention of an organization accredited by an Approved Body
under UK Medical Device Regulations, or Approved Body. Depending on the relevant conformity assessment
procedure, the Approved Body would typically audit and examine the technical file and the quality system for the
manufacture, design and final inspection of our devices. The Approved Body issues a certificate of conformity
following successful completion of a conformity assessment procedure conducted in relation to the medical
device and its manufacturer and their conformity with the essential requirements. This certificate entitles the
manufacturer to affix the UKCA Mark to its medical devices after having prepared and signed a related UK
Declaration of Conformity.
As a general rule, demonstration of conformity of medical devices and their manufacturers with the essential
requirements must be based, among other things, on the evaluation of clinical data supporting the safety and
performance of the products during normal conditions of use. Specifically, a manufacturer must demonstrate that
the device achieves its intended performance during normal conditions of use, that the known and foreseeable
risks, and any adverse events, are minimized and acceptable when weighed against the benefits of its intended
performance, and that any claims made about the performance and safety of the device are supported by
suitable evidence. If we fail to remain in compliance with applicable European and United Kingdom laws and
directives, we would be unable to continue to affix the CE or UKCA Marks to our surgical systems, which would
prevent us from selling them within the EEA and the United Kingdom, respectively.
We or our distributors will also need to obtain regulatory approval in other foreign jurisdictions in which we plan to
market and sell our products.
Modifications to our products may require new 510(k) clearances or PMA approvals, and may require
us to cease marketing or recall the modified products until clearances are obtained.
Any modification to a 510(k)-cleared product that could significantly affect its safety or effectiveness, or that
would constitute a major change in its intended use, design or manufacture, requires a new 510(k) clearance or,
possibly, approval of a PMA. The FDA requires every manufacturer to make this determination in the first
instance, but the FDA may review any manufacturer’s decision. The FDA may not agree with our decisions
regarding whether new clearances or approvals are necessary. We have made modifications to our products in
the past and have determined based on our review of the applicable FDA regulations and guidance that in certain
instances new 510(k) clearances were not required. We may make similar modifications or add additional
features in the future that we believe do not require a new 510(k) clearance or approval of a PMA. If the FDA
disagrees with our determination and requires us to submit new 510(k) notifications or PMAs for modifications to
our previously cleared products for which we have concluded that new clearances or approvals are unnecessary,
we may be required to cease marketing or to recall the modified product until we obtain clearance or approval,
and we may be subject to significant regulatory fines or penalties. In addition, the FDA may not approve or clear
our products for the indications that are necessary or desirable for successful commercialization or could require
clinical trials to support any modifications. Any delay or failure in obtaining required clearances or approvals
would adversely affect our ability to introduce new or enhanced products in a timely manner, which in turn would
harm our future growth.
Furthermore, the FDA’s ongoing review of the 510(k) clearance process may make it more difficult for us to make
modifications to our previously cleared products, either by imposing more strict requirements on when a new
510(k) notification for a modification to a previously cleared product must be submitted, or applying more onerous
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review criteria to such submissions. The FDA continues to review its 510(k) clearance process, which could result
in additional changes to regulatory requirements or guidance documents, which could increase the costs of
compliance or restrict our ability to maintain current clearances.
Our products must be manufactured in accordance with federal and state regulations, and we could be
forced to recall our installed systems or terminate production if we fail to comply with these regulations.
The methods used in, and the facilities used for, the manufacture of our products must comply with the FDA’s
QSR and ISO 13485, which is a complex regulatory scheme that covers the procedures and documentation of
the design, testing, production, process controls, quality assurance, labeling, packaging, handling, storage,
distribution, installation, servicing and shipping of medical devices. Furthermore, we are required to verify that
our suppliers maintain facilities, procedures and operations that comply with our quality standards and applicable
regulatory requirements. The FDA and our Notified Body enforces the QSR through periodic announced or
unannounced inspections of medical device manufacturing facilities, which may include the facilities of
subcontractors. Our products are also subject to similar state regulations and various laws and regulations of
foreign countries governing manufacturing.
Our third-party manufacturers or our own specialty brace manufacturing in Iowa may be found to be non-
compliant with applicable regulations, which could cause delays in the delivery of our products. In addition,
failure to comply with applicable QSR requirements or later discovery of previously unknown problems with our
products or manufacturing processes could result in, among other things: warning letters or untitled letters;
fines, injunctions or civil penalties; suspension or withdrawal of approvals or clearances; seizures or recalls of
our products; total or partial suspension of production or distribution; administrative or judicially imposed
sanctions; the FDA’s or Notified Body's refusal to grant pending or future clearances or approvals for our
products; clinical holds; refusal to permit the import or export of our products; and criminal prosecution of us or
our employees.
Any of these actions could significantly and negatively impact supply of our products. If any of these events
occurs, our reputation could be harmed, we could be exposed to product liability claims and we could lose
customers and suffer reduced revenue and increased costs.
The misuse or off-label use of our products may harm our reputation in the marketplace, result in
injuries that lead to product liability suits or result in costly investigations, fines or sanctions by
regulatory bodies if we are deemed to have engaged in the promotion of these uses, any of which could
be costly to our business.
We train our marketing personnel and independent sales agencies and distributors to not promote our
products for uses outside of the cleared indications for use, known as “off-label uses.” We cannot, however,
prevent a physician from using our products off-label, when in the physician’s independent professional
medical judgment he or she deems it appropriate. There may be increased risk of injury to patients if
physicians attempt to use our products off-label. Furthermore, the use of our products for indications other
than those which have been cleared or approved by any regulatory body may not effectively treat such
conditions, which could harm our reputation in the marketplace among physicians and patients.
If any regulatory body determines that our promotional materials or training constitute promotion of an off-label
use, it could request that we modify our training or promotional materials or subject us to regulatory or
enforcement actions, including the issuance or imposition of an untitled letter, which is used for violators that do
not necessitate a warning letter, injunction, seizure, civil fine or criminal penalties. It is also possible that other
federal, state or foreign enforcement authorities might take action under other regulatory authority, such as false
claims laws, if they consider our business activities to constitute promotion of an off-label use, which could result
in significant penalties, including, but not limited to, criminal, civil and administrative penalties, damages, fines,
disgorgement, exclusion from participation in government healthcare programs and the curtailment of our
operations.
Our products may cause or contribute to adverse medical events that we are required to report to the
regulatory authorities, and if we fail to do so, we would be subject to sanctions that could harm our
reputation, business, financial condition and results of operations. The discovery of serious safety
issues with our products, or a recall of our products either voluntarily or at the direction of a regulatory
authority, could have a negative impact on us.
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We are subject to several adverse event reporting regulations, which require us to report after we receive or
become aware of information that reasonably suggests that one or more of our products may have caused or
contributed to a death or serious injury or malfunctioned in a way that, if the malfunction were to recur, it could
cause or contribute to a death or serious injury. The timing of our obligation to report is triggered by the date we
become aware of the adverse event as well as the nature of the event. We may fail to report adverse events of
which we become aware within the prescribed timeframe. We may also fail to recognize that we have become
aware of a reportable adverse event, especially if it is not reported to us as an adverse event or if it is an adverse
event that is unexpected or removed in time from the use of the product. If we fail to comply with our reporting
obligations, the regulatory authority could take action, including warning letters, untitled letters, administrative
actions, criminal prosecution, imposition of civil monetary penalties, revocation of our device clearance, seizure
of our products or delay in clearance of future products.
Regulatory authorities may require the recall of commercialized products in the event of material deficiencies or
defects in design or manufacture of a product or in the event that a product poses an unacceptable risk to health.
We may also choose to voluntarily recall a product if any material deficiency is found. We have in the past
conducted several voluntary recalls of devices with lot-specific quality issues. A government-mandated or
voluntary recall by us could occur as a result of an unacceptable risk to health, component failures, malfunctions,
manufacturing defects, labeling or design deficiencies, packaging defects or other deficiencies or failures to
comply with applicable regulations. Product defects or other errors may occur in the future.
Depending on the corrective action we take to redress a product’s deficiencies or defects, the regulatory
authority may require, or we may decide, that we will need to obtain new approvals or clearances for the device
before we may market or distribute the corrected device. Seeking such approvals or clearances may delay our
ability to replace the recalled devices in a timely manner. Moreover, if we do not adequately address problems
associated with our devices, we may face additional regulatory enforcement action, including warning letters,
product seizure, injunctions, administrative penalties or civil or criminal fines.
If we or our distributors or other third-parties do not obtain and maintain international regulatory
registrations or approvals for our products, we will be unable to market and sell our products outside of
the United States.
Sales of our products outside of the United States are subject to foreign regulatory requirements that vary widely
from country to country. In addition, the FDA regulates exports of medical devices from the United States. While
the regulations of some countries may not impose barriers to marketing and selling our products or only require
notification, others require that we or our distributors obtain the approval of a specified regulatory body.
Complying with foreign regulatory requirements, including obtaining registrations or approvals, can be expensive
and time-consuming, and we or our distributors may not receive regulatory approvals in each country in which
we plan to market our products or we may be unable to do so on a timely basis. The time required to obtain
registrations or approvals, if required by other countries, may be longer than that required for FDA clearance,
and requirements for such registrations, clearances or approvals may significantly differ from FDA requirements.
If we modify our products, we or our distributors may need to apply for additional regulatory approvals before we
are permitted to sell the modified product. In addition, we may not continue to meet the quality and safety
standards required to maintain the authorizations that we or our distributors have received. If we or our
distributors or other third-parties are unable to maintain our authorizations in a particular country, we will no
longer be able to sell the applicable product in that country.
Regulatory clearance or approval by the FDA does not ensure clearance or approval by regulatory authorities in
other countries, and clearance or approval by one or more foreign regulatory authorities does not ensure
clearance or approval by regulatory authorities in other foreign countries or by the FDA. However, a failure or
delay in obtaining regulatory clearance or approval in one country may have a negative effect on the regulatory
process in others.
Legislative or regulatory reforms in the United States, the United Kingdom or the European Union may
make it more difficult and costly for us to obtain regulatory clearances or approvals for our products
or to manufacture, market or distribute our products after clearance or approval is obtained.
From time to time, legislation is drafted and introduced in Congress that could significantly change the statutory
provisions governing the regulation of medical devices. In addition, FDA regulations and guidance are often
revised or reinterpreted by the FDA in ways that may significantly affect our business and our products. Any new
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statutes, regulations or revisions or reinterpretations of existing regulations may impose additional costs or
lengthen review times of any future products or make it more difficult to manufacture, market or distribute our
products. We cannot determine what effect changes in regulations, statutes, legal interpretation or policies, when
and if promulgated, enacted or adopted may have on our business in the future. Such changes could, among
other things, require: additional testing prior to obtaining clearance or approval; changes to manufacturing
methods; recall, replacement or discontinuance of our products; or additional record keeping.
In September 2012, the European Commission published proposals for the revision of the EU regulatory
framework for medical devices. The proposal would replace the EU Medical Devices Directive and the Active
Implantable Medical Devices Directive with a new regulation, the Medical Devices Regulation. Unlike the
Directives that must be implemented into national laws, the Regulation would be directly applicable in all EEA
Member States and so is intended to eliminate current national differences in regulation of medical devices.
The Medical Devices Regulation, or MDR, entered into force in May 2017 and, due to the COVID-19 pandemic,
was postponed from its original application date of May 2020 to May 2021. The application date refers to the time
by which the MDR goes into effect. On January 6, 2023, the European Commission sent a proposal to the
European Parliament for extending the application date to December 31, 2027 for the Class III and IIb implantable
devices. The proposal also seeks to extend the application date to December 31, 2028 for select Class IIb, Class
IIa and Class I devices. On February 16, 2023, the European Parliament approved, in part, the extension of the
application date for Class III and IIb implantable devices to December 31, 2027. The Company can continue
marketing existing CE-marked products under the previous regulation until June 2024 so long as a certification
extension is granted by its notified body. Any products not yet CE-marked or products with significant changes
that require additional notified review are subject to the MDR as of May 2021, including the requirement of
obtaining QSR certification under the MDR. The MDR among other things, imposes additional reporting
requirements on manufacturers of high risk medical devices, imposes an obligation on manufacturers to appoint a
“qualified person” responsible for regulatory compliance, and provides for more strict clinical evidence
requirements.
Effective January 31, 2020, the United Kingdom withdrew from the EU. New regulations specific to the UK went
into effect beginning January 1, 2021 with a transitional period through June 30, 2024. These regulations may
impact our ability to sell our products in the UK. During the transition period devices with CE Markings may
continue to be sold within the UK. Devices sold in Northern Ireland will be required to keep the CE Marking after
the transition period ends.
In order to comply with the new regulations and continue selling medical devices in Great Britain (England, Wales
and Scotland) following the transition period, the Company must appoint a UK Responsible Person and register
the medical devices with the MHRA. A new conformity assessment must be completed by a UK Approved Body.
The Approved Body will audit and examine a product’s technical dossiers and the manufacturers’ quality system.
If satisfied that the relevant product conforms to the relevant essential requirements, the Approved Body issues a
certificate of conformity, which the manufacturer uses as a basis for its own declaration of conformity. The
manufacturer may then apply the UKCA Mark to the device, which allows the device to be placed on the market
throughout Great Britain. Once the product has been placed on the market in Great Britain, the manufacturer must
comply with requirements for reporting incidents and field safety corrective actions associated with the medical
device.
We are subject to certain federal, state and foreign fraud and abuse laws, health information privacy
and security laws and transparency laws, which, if violated, could subject us to substantial penalties.
Additionally, any challenge to or investigation into our practices under these laws could cause adverse
publicity and be costly to respond to, and thus could harm our business.
There are numerous U.S. federal and state, as well as foreign, laws pertaining to healthcare fraud and abuse,
including anti-kickback, false claims and physician transparency laws. Our business practices and relationships
with providers and hospitals are subject to scrutiny under these laws. We may also be subject to patient
information privacy and security regulation by both the federal government and the states and foreign
jurisdictions in which we conduct our business. The healthcare laws and regulations that may affect our ability to
operate include:
•
the federal Anti-Kickback Statute, which prohibits, among other things, persons and entities from
knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or
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indirectly, in cash or in kind, to induce either the referral of an individual or furnishing or arranging
for a good or service, for which payment may be made, in whole or in part, under federal
healthcare programs, such as Medicare and Medicaid. A person or entity does not need to have
actual knowledge of the statute or specific intent to violate it to have committed a violation.
Moreover, the government may assert that a claim including items or services resulting from a
violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes
of the federal civil False Claims Act. Violations of the federal Anti-Kickback Statute may result in
substantial civil or criminal penalties, civil penalties under the Civil Monetary Penalties Law, civil
penalties under the federal False Claims Act and exclusion from participation in government
healthcare programs, including Medicare and Medicaid;
the federal civil and criminal false claims laws and civil monetary penalties laws, including the
federal civil False Claims Act, which prohibit, among other things, individuals or entities from
knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid or
other federal healthcare programs that are false or fraudulent. Private individuals can bring False
Claims Act “qui tam” actions, on behalf of the government and such individuals, commonly known
as “whistleblowers,” may share in amounts paid by the entity to the government in fines or
settlement. When an entity is determined to have violated the federal civil False Claims Act, the
government may impose civil penalties, including treble damages, and exclude the entity from
participation in Medicare, Medicaid and other federal healthcare programs;
the federal Civil Monetary Penalties Law, which prohibits, among other things, offering or
transferring remuneration to a federal healthcare beneficiary that a person knows or should know
is likely to influence the beneficiary’s decision to order or receive items or services reimbursable
by the government from a particular provider or supplier;
the Health Insurance Portability and Accountability Act of 1996, or HIPAA, which created
additional federal criminal statutes that prohibit, among other things, executing a scheme to
defraud any healthcare benefit program and making false statements relating to healthcare
matters. Similar to the federal Anti-Kickback Statute, a person or entity does not need to have
actual knowledge of the statute or specific intent to violate it to have committed a violation;
the federal Physician Sunshine Act under the Patient Protection and Affordable Care Act, as
amended by the Health Care and Education Reconciliation Act, collectively referred to as the
Affordable Care Act, which require certain manufacturers of drugs, devices, biologics and medical
supplies for which payment is available under Medicare, Medicaid or the Children’s Health
Insurance Program, or CHIP, to report annually to the DHHS Centers for Medicare and Medicaid
Services, or CMS, information related to payments and other transfers of value to physicians,
which is defined broadly to include other healthcare providers and teaching hospitals, and
applicable manufacturers and group purchasing organizations, to report annually ownership and
investment interests held by physicians and their immediate family members. Manufacturers are
required to submit annual reports to CMS and failure to do so may result in civil monetary
penalties for all payments, transfers of value or ownership or investment interests not reported in
an annual submission, and may result in liability under other federal laws or regulations;
HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act
of 2009, or HITECH, and their respective implementing regulations, which impose requirements
on certain covered healthcare providers, health plans and healthcare clearinghouses as well as
their business associates that perform services for them that involve individually identifiable
health information, relating to the privacy, security and transmission of individually identifiable
health information without appropriate authorization, including mandatory contractual terms as
well as directly applicable privacy and security standards and requirements. Failure to comply
with the HIPAA privacy and security standards can result in civil monetary penalties, and, in
certain circumstances, criminal penalties. State attorneys general can also bring a civil action to
enjoin a HIPAA violation or to obtain statutory damages on behalf of residents of his or her state;
and
•
•
•
•
•
•
analogous state and foreign law equivalents of each of the above federal laws, such as anti-
kickback and false claims laws which may apply to items or services reimbursed by any third-
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party payor, including commercial insurers or patients; state laws that require device companies
to comply with the industry’s voluntary compliance guidelines and the applicable compliance
guidance promulgated by the federal government or otherwise restrict payments that may be
made to healthcare providers and other potential referral sources; state laws that require device
manufacturers to report information related to payments and other transfers of value to physicians
and other healthcare providers or marketing expenditures; state laws governing the privacy and
security of health information in certain circumstances, many of which differ from each other in
significant ways and may not have the same effect, thus complicating compliance efforts; and
state laws related to insurance fraud in the case of claims involving private insurers.
These laws and regulations, among other things, constrain our business, marketing and other promotional
activities by limiting the kinds of financial arrangements, including sales programs, we may have with hospitals,
physicians or other potential purchasers of our products. We have a variety of arrangements with our customers
that could implicate these laws, including, among others, our consignment arrangements and our practice of
loaning instrument sets to customers at no additional cost. We have also entered into consulting agreements and
royalty agreements with physicians, including some who have influence on the ordering of or use our products in
the procedures they perform. We could be adversely affected if regulatory agencies determine our financial
relationships with such physicians to be in violation of applicable laws. Due to the breadth of these laws, the
narrowness of statutory exceptions and regulatory safe harbors available, and the range of interpretations to
which they are subject, it is possible that some of our current or future practices might be challenged under one
or more of these laws.
To enforce compliance with the healthcare regulatory laws, certain enforcement bodies have recently
increased their scrutiny of interactions between healthcare companies and healthcare providers, which has
led to a number of investigations, prosecutions, convictions and settlements in the healthcare industry.
Responding to investigations can be time-and resource-consuming and can divert management’s attention
from the business. Additionally, as a result of these investigations, healthcare providers and entities may have
to agree to additional compliance and reporting requirements as part of a consent decree or corporate
integrity agreement. Any such investigation or settlement could increase our costs or otherwise have an
adverse effect on our business. Even an unsuccessful challenge or investigation into our practices could
cause adverse publicity, and be costly to respond to.
If our operations are found to be in violation of any of the healthcare laws or regulations described above or
any other healthcare regulations that apply to us, we may be subject to penalties, including administrative,
civil and criminal penalties, damages, fines, exclusion from participation in government healthcare programs,
such as Medicare and Medicaid, imprisonment, contractual damages, reputational harm, disgorgement and
the curtailment or restructuring of our operations.
Healthcare policy changes, including recently enacted legislation reforming the U.S. healthcare system,
could harm our cash flows, financial condition and results of operations.
In March 2010, the Affordable Care Act was enacted in the United States, which made a number of substantial
changes in the way healthcare is financed by both governmental and private insurers. Among other ways in
which it may impact our business, the Affordable Care Act:
•
•
•
established a new Patient-Centered Outcomes Research Institute to oversee and identify
priorities in comparative clinical effectiveness research in an effort to coordinate and develop
such research;
implemented payment system reforms including a national pilot program on payment bundling to
encourage hospitals, physicians and other providers to improve the coordination, quality and
efficiency of certain healthcare services through bundled payment models; and
expanded the eligibility criteria for Medicaid programs.
The Biden Administration and the U.S. Congress may take further action regarding the Affordable Care Act,
including, but not limited to, repeal or replacement. Additionally, all or a portion of the Affordable Care Act and
related subsequent legislation may be modified, repealed or otherwise invalidated through judicial challenge,
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which could result in lower numbers of insured individuals, reduced coverage for insured individuals and
adversely affect our business.
In addition, other legislative changes have been proposed and adopted since the Affordable Care Act was
enacted. On August 2, 2011, the Budget Control Act of 2011 was signed into law, which, among other things,
reduced Medicare payments to providers by 2% per fiscal year, effective on April 1, 2013 and, due to
subsequent legislative amendments to the statute, will remain in effect through 2025 unless additional
Congressional action is taken. On January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into
law, which, among other things, reduced Medicare payments to several providers, including hospitals, and
increased the statute of limitations period for the government to recover overpayments to providers from three to
five years. On March 27, 2020, the CARES Act was signed into law, which, among other things, includes a
program for providers to receive accelerated or advanced Medicare payments.
We expect additional state and federal healthcare reform measures to be adopted in the future, any of which
could limit reimbursement for healthcare products and services, which could result in reduced demand for our
products or additional pricing pressure.
Our business involves the use of hazardous materials and we and our third-party manufacturers must
comply with environmental laws and regulations, which may be expensive and restrict how we do
business.
The activities of our third-party manufacturers and our specialty brace manufacturing in Iowa may involve the
controlled storage, use and disposal of hazardous materials. Our manufacturers are subject to federal, state, local
and foreign laws and regulations governing the use, generation, manufacture, storage, handling and disposal of
these hazardous materials. We currently carry no insurance specifically covering environmental claims relating to
the use of hazardous materials, but we do reserve funds to address these claims at both the federal and state
levels. Although we believe the safety procedures of our manufacturers for handling and disposing of these
materials and waste products comply with the standards prescribed by these laws and regulations, we cannot
eliminate the risk of accidental injury or contamination from the use, storage, handling or disposal of hazardous
materials. In the event of an accident, state or federal or other applicable authorities may curtail our use of these
materials and interrupt our business operations. In addition, if an accident or environmental discharge occurs, or if
we discover contamination caused by prior operations, including by prior owners and operators of properties we
acquire, we could be liable for cleanup obligations, damages and fines, which could be substantial.
Risks Related to Our Reliance on Third Parties
We rely on a network of third-party independent sales agencies and distributors to market and
distribute our products, and if we are unable to maintain and expand this network, we may be unable to
generate anticipated sales.
Our global sales management organization leads a network of sales agencies, stocking distributors as well as
direct sales representatives. We rely on our network of independent sales agencies and distributors to market
and distribute our products in both the United States and international markets.
In the United States, our products are primarily sold by multiple direct sales representatives as well as a
network of nearly 40 independent sales agencies. We may not be successful in maintaining strong
relationships with our independent sales agencies. In addition, our independent sales agencies are not
required to sell our products on an exclusive basis and also are not required to sell any minimum quantity of
our products. The failure of our network of independent sales agencies to generate U.S. sales of our products
and promote our brand effectively would impair our business and results of operations.
We also sell our products in international markets, primarily through a network of more than 70 independent
stocking distributors, 14 independent sales agencies and multiple direct sales representatives. We sell our
products in over 70 countries outside of the United States, and we expect a significant amount of our revenue to
come from international sales for the foreseeable future. In the past, we have experienced issues collecting
payments from certain of our independent stocking distributors and we may again experience such issues in the
future.
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Our ability to market, distribute, and sell our products through our network of distributors and agencies has been
adversely affected as a result of precautionary responses to the COVID-19 pandemic, including travel restrictions,
suspension and shutdown orders and other measures intended to limit person-to-person contact. We also face
other significant challenges and risks in managing our geographically dispersed distribution network and retaining
the individuals who make up that network. We cannot control the efforts and resources our third-party sales
agencies and distributors will devote to marketing our products. Our sales agencies and stocking distributors may
be unable to successfully market and sell our products and may not devote sufficient time and resources to
support the marketing and selling efforts that enable the products to develop, achieve or sustain market
acceptance in their respective jurisdictions. Additionally, in some international jurisdictions, we rely on our
distributors to manage the regulatory process, while complying with all applicable rules and regulations, and we
are dependent on their ability to do so effectively. If we are unable to attract additional international distributors,
our international revenue may not grow.
If any of our independent sales agencies or distributors were to cease to do business with us, our sales could be
adversely affected. Some of our independent sales agencies and distributors have historically accounted for a
material portion of our sales volume. Sales through two of our independent sales agencies in the United States
accounted for 10.8% and 10.7%, respectively, of our global revenue in 2023. Sales through two of our
independent sales agencies in the United States accounted for 11.4% and 10.7%, respectively, of our global
revenue in 2022. Sales through two of our independent sales agencies in the United States accounted for 12.9%
and 10.9%, respectively, of our global revenue in 2021. If any such agency or distributor were to cease to sell
and market our products, our sales could be adversely affected. In addition, if a dispute arises with a sales
agency or distributor or if a sales agency or distributor is terminated by us or goes out of business, it may take
time to locate an alternative sales agency or distributor, to seek appropriate regulatory approvals and to train
new personnel to market our products, and our ability to sell those systems in the region formerly serviced by
such terminated agent or distributor could be harmed. Any of our sales agencies or distributors could become
insolvent or otherwise become unable to pay amounts owed to us when due. Any of these factors could reduce
our revenue from affected markets, increase our costs in those markets or damage our reputation. If an
independent sales agency or distributor were to depart and be retained by one of our competitors, we may be
unable to prevent them from helping competitors solicit business from our existing customers, which could
further adversely affect our sales.
In any such situation in which we lose the services of an independent sales agency or distributor, we may need
to seek alternative sales agencies or distributors, and our sales may be adversely affected. Because of the
intense competition for their services, we may be unable to recruit or retain additional qualified independent
sales agencies or distributors to work with us. We may be unable to enter into agreements with them on
favorable or commercially reasonable terms, if at all. Failure to hire or retain qualified independent sales
agencies or distributors would prevent us from expanding our business and generating sales.
As a result of our reliance on third-party sales agencies and distributors, we may be subject to disruptions and
increased costs due to factors beyond our control, including labor strikes, third-party error and other issues. If the
services of any of these third-party sales agencies or distributors become unsatisfactory, including the failure of
such sales agencies or distributors to properly train orthopedic surgeons in the utilization of our products, we may
experience delays in meeting our customers’ product demands and we may be unable to find a suitable
replacement on a timely basis or on commercially reasonable terms. Any failure to deliver products in a timely
manner may damage our reputation and could cause us to lose current or potential customers.
We rely on third-party contract manufacturers to assemble our products, and a loss or degradation in
performance of these contract manufacturers could have a material adverse effect on our business and
financial condition.
We rely on a small number of third-party contract manufacturers in the United States to assemble our products. If
any of these contract manufacturers fails to adequately perform, our revenue and profitability could be adversely
affected. Inadequate performance could include, among other things, the production of products that do not meet
our quality standards, which could cause us to seek additional sources of manufacturing. Additionally, our contract
manufacturers may decide in the future to discontinue or reduce the level of business they conduct with us. If we
are required to change contract manufacturers due to any termination of our relationships with our contract
manufacturers, we may lose revenue, experience manufacturing delays, incur increased costs or otherwise suffer
impairment to our customer relationships. We cannot guarantee that we will be able to establish alternative
manufacturing relationships on similar terms or without delay. Furthermore, our contract manufacturers could
require us to move to another one of their production facilities. This could disrupt our ability to fulfill orders during
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a transition and impact our ability to utilize our current supply chain. In addition, we currently use Structure
Medical, LLC and Vilex, LLC, Squadron-affiliated entities, as suppliers for some of the components of our
products.
Performance issues, service interruptions or price increases by our shipping carriers could
adversely affect our business and harm our reputation and ability to provide our services on a timely
basis.
Expedited, reliable shipping is essential to our operations. We rely heavily on providers of transport services for
reliable and secure point-to-point transport of our products to our customers and for tracking of these shipments.
Should a carrier encounter delivery performance issues such as loss, damage or destruction of any systems, it
would be costly to replace such systems in a timely manner and such occurrences may damage our reputation
and lead to decreased demand for our products and increased cost and expense to our business. In addition,
any significant increase in shipping rates could adversely affect our operating margins and results of operations.
Similarly, strikes, severe weather, natural disasters or other service interruptions affecting delivery services we
use would adversely affect our ability to process orders for our products on a timely basis.
We rely on a limited number of third-party suppliers for the majority of our products and may be
unable to find replacements or immediately transition to alternative suppliers.
We rely on several suppliers for the majority of our products and we maintain certain long-term contracts with
these key suppliers. These suppliers may be unwilling or unable to supply these products to us reliably and at
the prices and levels we anticipate or are required by the market, including the need to carry extra inventory as
a result of restrictions or limitations arising from pandemics, epidemics or other widespread illnesses. For us to
be successful, our suppliers must be able to provide us with products in substantial quantities, in compliance
with regulatory requirements, in accordance with agreed upon specifications, at acceptable costs and on a
timely basis. An interruption in our commercial operations could occur if we encounter delays or difficulties in
securing these products, and if we cannot obtain an acceptable substitute. If we are required to transition to new
third-party suppliers for certain products, the use of products furnished by these alternative suppliers could
require us to alter our operations.
Furthermore, if we are required to change the manufacturer of our products, we will be required to verify that the
new manufacturer maintains facilities, procedures and operations that comply with our quality and applicable
regulatory requirements, which could further impede our ability to manufacture our products in a timely manner.
Transitioning to a new supplier could be time-consuming and expensive, may result in interruptions in our
operations and product delivery, could affect the performance specifications of our products or could require that
we modify the design of those products. If the change in manufacturer results in a significant change to any
product, a new 510(k) clearance from the FDA or similar international regulatory authorization may be necessary
before we implement the change, which could cause substantial delays. The occurrence of any of these events
could harm our ability to meet the demand for our products in a timely or cost-effective manner.
Risks Related to Intellectual Property
If we are unable to adequately protect our intellectual property rights, or if we are accused of infringing
on the intellectual property rights of others, our competitive position could be harmed or we could be
required to incur significant expenses to enforce or defend our rights.
Our commercial success will depend in part on our success in obtaining and maintaining issued patents and
other intellectual property rights in the United States and elsewhere and protecting our proprietary technology. If
we do not adequately protect our intellectual property and proprietary technology, competitors may be able to
use our technologies and erode or negate any competitive advantage we may have, which could harm our
business and ability to achieve profitability.
We own numerous issued patents and pending patent applications that relate to our platform technology. As of
December 31, 2023, we owned 67 issued U.S. patents and 198 issued foreign patents and we had 38 pending
U.S. patent applications and 92 pending foreign patent applications. Assuming all required fees continue to be
paid, issued U.S. patents owned by us will expire between 2024 and 2040.
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We cannot provide any assurances that any of our patents have, or that any of our pending patent applications
that mature into issued patents will include, claims with a scope sufficient to protect our products, any additional
features we develop for our products or any new products. Other parties may have developed technologies that
may be related or competitive to our platform, may have filed or may file patent applications and may have
received or may receive patents that overlap or conflict with our patent applications, either by claiming the same
methods or devices or by claiming subject matter that could dominate our patent position. The patent positions of
medical device companies, including our patent position, may involve complex legal and factual questions, and,
therefore, the scope, validity and enforceability of any patent claims that we may obtain cannot be predicted with
certainty. Patents, if issued, may be challenged, deemed unenforceable, invalidated or circumvented.
Proceedings challenging our patents could result in either loss of the patent or denial of the patent application or
loss or reduction in the scope of one or more of the claims of the patent or patent application. In addition, such
proceedings may be costly. Thus, any patents that we may own may not provide any protection against
competitors. Furthermore, an adverse decision in a derivation proceeding can result in a third party receiving the
patent right sought by us, which in turn could affect our ability to commercialize our products.
Furthermore, though an issued patent is presumed valid and enforceable, its issuance is not conclusive as to its
validity or its enforceability and it may not provide us with adequate proprietary protection or competitive
advantages against competitors with similar products. Competitors may also be able to design around our
patents. Other parties may develop and obtain patent protection for more effective technologies, designs or
methods. We may be unable to prevent the unauthorized disclosure or use of our technical knowledge or trade
secrets by consultants, suppliers, vendors, former employees and current employees. The laws of some foreign
countries do not protect our proprietary rights to the same extent as the laws of the United States, and we may
encounter significant problems in protecting our proprietary rights in these countries.
Our ability to enforce our patent rights depends on our ability to detect infringement. It may be difficult to detect
infringers who do not advertise the components that are used in their products. Moreover, it may be difficult or
impossible to obtain evidence of infringement in a competitor’s or potential competitor’s product. We may not
prevail in any lawsuits that we initiate and the damages or other remedies awarded if we were to prevail may
not be commercially meaningful.
In addition, proceedings to enforce or defend our patents could put our patents at risk of being invalidated, held
unenforceable or interpreted narrowly. Such proceedings could also provoke third parties to assert claims
against us, including that some or all of the claims in one or more of our patents are invalid or otherwise
unenforceable. If any of our patents covering our products are invalidated or found unenforceable, or if a court
found that valid, enforceable patents held by third parties covered one or more of our products, our competitive
position could be harmed or we could be required to incur significant expenses to enforce or defend our rights.
The degree of future protection for our proprietary rights is uncertain, and we cannot ensure that:
•
•
•
•
•
•
•
•
any of our patents, or any of our pending patent applications, if issued, will include claims having
a scope sufficient to protect our products;
any of our pending patent applications may issue as patents;
we will be able to successfully commercialize our products on a substantial scale, if approved,
before our relevant patents we may have expire;
we were the first to make the inventions covered by each of our patents and pending patent
applications;
we were the first to file patent applications for these inventions;
others will not develop similar or alternative technologies that do not infringe our patents;
any of our patents will be found to ultimately be valid and enforceable;
any patents issued to us will provide a basis for an exclusive market for our commercially viable
products, will provide us with any competitive advantages or will not be challenged by third
parties;
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•
•
we will develop additional proprietary technologies or products that are separately patentable; or
our commercial activities or products will not infringe upon the patents of others.
We rely upon unpatented trade secrets, unpatented know-how and continuing technological innovation to develop
and maintain our competitive position, which we seek to protect, in part, by confidentiality agreements with our
employees and our collaborators and consultants. We also have agreements with our employees and selected
consultants that obligate them to assign their inventions to us and have non-compete agreements with some, but
not all, of our consultants. It is possible that technology relevant to our business will be independently developed
by a person that is not a party to such an agreement. Furthermore, if the employees and consultants who are
parties to these agreements breach or violate the terms of these agreements, we may not have adequate
remedies for any such breach or violation, and we could lose our trade secrets through such breaches or
violations. Further, our trade secrets could otherwise become known or be independently discovered by our
competitors.
Litigation or other proceedings or third-party claims of intellectual property infringement could require
us to spend significant time and money and could prevent us from selling our products or impact our
stock price.
Our commercial success will depend in part on not infringing the patents or violating the other proprietary
rights of others. Significant litigation and administrative proceedings regarding patent rights occur in our
industry. Our competitors in both the United States and abroad, many of which have substantially greater
resources and have made substantial investments in patent portfolios and competing technologies, may have
applied for or obtained or may in the future apply for and obtain, patents that will prevent, limit or otherwise
interfere with our ability to make, use and sell our products. We do not always conduct independent reviews
of patents issued to third parties. In addition, patent applications in the United States and elsewhere can be
pending for many years before issuance, or unintentionally abandoned patents or applications can be
revived, so there may be applications of others now pending or recently revived patents of which we are
unaware. These applications may later result in issued patents, or the revival of previously abandoned
patents, that will prevent, limit or otherwise interfere with our ability to make, use or sell our products. Third
parties may, in the future, assert claims that we are employing their proprietary technology without
authorization, including claims from competitors or from non-practicing entities that have no relevant product
revenue and against whom our own patent portfolio may have no deterrent effect. As we continue to
commercialize our products in their current or updated forms, launch new products and enter new markets,
we expect competitors may claim that one or more of our products infringe their intellectual property rights as
part of business strategies designed to impede our successful commercialization and entry into new markets.
The large number of patents, the rapid filing rate of new patent applications and issuances, the complexities
of the technology involved, and the uncertainty of litigation and administrative proceedings may increase the
risk of business resources and management’s attention being diverted to patent administration and litigation.
We have, and we may in the future, receive letters or other threats or claims from third parties inviting us to
take licenses under, or alleging that we infringe, their patents. See “Item 3. — Legal Proceedings.”
Moreover, we may become party to future adversarial proceedings regarding our patent portfolio or the patents
of third parties. Such proceedings could include supplemental examination or contested post-grant proceedings
such as review, reexamination, interference or derivation proceedings before the U.S. Patent and Trademark
Office and challenges in U.S. District Court or before the U.S. International Trade Commission. Patents may be
subjected to opposition, post-grant review or comparable proceedings lodged in various foreign, both national
and regional, patent offices. The legal threshold for initiating litigation or contested proceedings may be low, so
that even lawsuits or proceedings with a low probability of success might be initiated. Litigation and contested
proceedings can also be expensive and time-consuming, and our adversaries in these proceedings may have
the ability to dedicate substantially greater resources to prosecuting these legal actions than we can.
Any lawsuits resulting from such allegations could subject us to significant liability for damages and invalidate
our proprietary rights. Any potential intellectual property litigation also could force us to do one or more of the
following:
•
stop making, selling, importing or using products or technologies that allegedly infringe the
asserted intellectual property;
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•
•
•
•
•
lose the opportunity to license our technology to others or to collect royalty payments based upon
successful protection and assertion of our intellectual property rights against others; incur
significant legal expenses;
pay substantial damages or royalties to the party whose intellectual property rights we may be
found to be infringing;
pay the attorney’s fees and costs of litigation to the party whose intellectual property rights we
may be found to be infringing;
redesign those products that contain the allegedly infringing intellectual property, which could be
costly, disruptive or infeasible; and
attempt to obtain a license to the relevant intellectual property from third parties, which may not
be available on reasonable terms or at all, or from third parties who may attempt to license rights
that they do not have.
Any litigation or claim against us, even those without merit, may cause us to incur substantial costs, and could
place a significant strain on our financial resources, divert the attention of management from our core business
and harm our reputation. If we are found to infringe the intellectual property rights of third parties, we could be
required to pay substantial damages (which may be increased up to three times of awarded damages) and/or
substantial royalties and could be prevented from selling our products unless we obtain a license or are able to
redesign our products to avoid infringement. Any such license may not be available on reasonable terms, if at all,
and there can be no assurance that we would be able to redesign our products in a way that would not infringe
the intellectual property rights of others. We could encounter delays in product introductions while we attempt to
develop alternative methods or products. If we fail to obtain any required licenses or make any necessary
changes to our products or technologies, we may have to withdraw existing products from the market or may be
unable to commercialize one or more of our products.
In addition, we generally indemnify our customers and international distributors with respect to infringement by
our products of the proprietary rights of third parties. Third parties may assert infringement claims against our
customers or distributors. These claims may require us to initiate or defend protracted and costly litigation on
behalf of our customers or distributors, regardless of the merits of these claims. If any of these claims succeed or
settle, we may be forced to pay damages or settlement payments on behalf of our customers or distributors or
may be required to obtain licenses for the products they use. If we cannot obtain all necessary licenses on
commercially reasonable terms, our customers may be forced to stop using our products.
If we are unable to protect the confidentiality of our trade secrets, our business and competitive position
could be harmed.
In addition to patent protection, we rely upon copyright and trade secret protection, as well as non-disclosure
agreements and invention assignment agreements with our employees, consultants and third parties, to protect
our confidential and proprietary information. In addition to contractual measures, we try to protect the
confidential nature of our proprietary information using commonly accepted physical and technological security
measures. Such measures may not, for example, in the case of misappropriation of a trade secret by an
employee or third party with authorized access, provide adequate protection for our proprietary information.
Our security measures may not prevent an employee or consultant from misappropriating our trade secrets and
providing them to a competitor, and recourse we take against such misconduct may not provide an adequate
remedy to protect our interests fully. Unauthorized parties may also attempt to copy or reverse engineer certain
aspects of our products that we consider proprietary. Enforcing a claim that a party illegally disclosed or
misappropriated a trade secret can be difficult, expensive and time-consuming, and the outcome is
unpredictable. Even though we use commonly accepted security measures, trade secret violations are often a
matter of state law, and the criteria for protection of trade secrets can vary among different jurisdictions. In
addition, trade secrets may be independently developed by others in a manner that could prevent legal
recourse by us. If any of our confidential or proprietary information, such as our trade secrets, were to be
disclosed or misappropriated, or if any such information was independently developed by a competitor, our
business and competitive position could be harmed.
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We may be unable to enforce our intellectual property rights throughout the world.
The laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of
the United States. Many companies have encountered significant problems in protecting and defending
intellectual property rights in certain foreign jurisdictions. This could make it difficult for us to stop infringement of
our foreign patents, if obtained, or the misappropriation of our other intellectual property rights. For example,
some foreign countries have compulsory licensing laws under which a patent owner must grant licenses to third
parties. In addition, some countries limit the enforceability of patents against third parties, including government
agencies or government contractors. In these countries, patents may provide limited or no benefit. Patent
protection must ultimately be sought on a country-by-country basis, which is an expensive and time-consuming
process with uncertain outcomes. Patent protection available in one country may not be available in other
countries. Accordingly, we may choose not to seek patent protection in certain countries, and we will not have the
benefit of patent protection in such countries.
Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our
efforts and attention from other aspects of our business. Accordingly, our efforts to protect our intellectual property
rights in such countries may be inadequate. In addition, changes in the law and legal decisions by courts in the
United States and foreign countries may affect our ability to obtain adequate protection for our technology and the
enforcement of our intellectual property.
Third parties may assert ownership or commercial rights to inventions we develop.
Third parties may in the future make claims challenging the inventorship or ownership of our intellectual property.
We have written agreements with collaborators that provide for the ownership of intellectual property arising from
our collaborations. In addition, we may face claims by third parties that our agreements with employees,
contractors or consultants obligating them to assign intellectual property to us are ineffective or in conflict with
prior or competing contractual obligations of assignment, which could result in ownership disputes regarding
intellectual property we have developed or will develop and interfere with our ability to capture the commercial
value of such intellectual property. Litigation may be necessary to resolve an ownership dispute, and if we are
not successful, we may be precluded from using certain intellectual property or may lose our exclusive rights in
that intellectual property. Either outcome could harm our business and competitive position.
Third parties may assert that our employees or consultants have wrongfully used or disclosed
confidential information or misappropriated trade secrets.
We employ individuals who previously worked with other companies, including our competitors or potential
competitors. Although we try to ensure that our employees and consultants do not use the proprietary information
or know-how of others in their work for us, we may be subject to claims that we or our employees, consultants or
independent contractors have inadvertently or otherwise used or disclosed intellectual property, including trade
secrets or other proprietary information, of a former employer or other third party. Litigation may be necessary to
defend against these claims. If we fail in defending any such claims or settling those claims, in addition to paying
monetary damages or a settlement payment, we may lose valuable intellectual property rights or personnel. Even
if we are successful in defending against such claims, litigation could result in substantial costs and be a
distraction to management and other employees.
Risks Related to Ownership of Our Common Stock
The price of our common stock may be volatile.
Our stock price has been and is likely to continue to be volatile. The stock market in general has experienced
extreme volatility that has often been unrelated to the operating performance of particular companies. As a result
of this volatility, investors may not be able to sell their shares of our common stock at or above the price at which
they purchased their shares. Factors that could cause volatility in the market price of our common stock include,
but are not limited to:
•
•
•
actual or anticipated fluctuations in our financial condition and operating results;
actual or anticipated changes in our growth rate relative to our competitors;
commercial success and market acceptance of our products;
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•
•
•
•
•
•
•
•
•
•
•
•
•
•
success of our competitors in developing or commercializing products;
ability to commercialize or obtain regulatory approvals for our products, or delays in
commercializing or obtaining regulatory approvals;
strategic transactions undertaken by us;
additions or departures of key personnel;
product liability claims;
prevailing economic conditions;
disputes concerning our intellectual property or other proprietary rights;
FDA or other U.S. or foreign regulatory actions affecting us or the healthcare industry;
healthcare reform measures in the United States;
sales of our common stock by our officers, directors or significant stockholders;
future sales or issuances of equity or debt securities by us;
business disruptions caused by earthquakes, fires or other natural disasters;
issuance of new or changed securities analysts’ reports or recommendations regarding us; and
short interest reports and or trading.
In addition, the stock markets in general, and the markets for companies like ours in particular, have from time
to time experienced extreme volatility that have has been often unrelated to the operating performance of the
issuer. A certain degree of stock price volatility can be attributed to being a newly public company. These broad
market and industry fluctuations may negatively impact the price or liquidity of our common stock, regardless of
our operating performance.
The price of our stock may be vulnerable to manipulation, including through short sales.
We believe our common stock has been the subject of short selling efforts by certain market participants. Short
sales are transactions in which a market participant sells a security that it does not own. To complete the
transaction, the market participant must borrow the security to make delivery to the buyer. The market participant
is then obligated to replace the security borrowed by purchasing the security at the market price at the time of
required replacement. If the price at the time of replacement is lower than the price at which the security was
originally sold by the market participant, then the market participant will realize a gain on the transaction. Thus, it
is in the market participant’s interest for the market price of the underlying security to decline as much as possible
during the period prior to the time of replacement. Short selling may negatively affect the value of our stock to the
detriment of our stockholders.
In addition, market participants with disclosed short positions in our stock have published, and may in the future
continue to publish, negative information regarding us that we believe is inaccurate and misleading. We believe
that the publication of this negative information, and other efforts by certain market participants to manipulate the
price of our common stock for their personal financial gain, may in the future lead to downward pressure on the
price of our stock to the detriment of our stockholders.
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We may be subject to securities litigation, which is expensive and could divert our management’s
attention.
The market price of our securities may be volatile, and in the past companies that have experienced volatility in
the market price of their securities have been subject to securities class action litigation. We may be the target
of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert
our management’s attention from other business concerns.
Increased interest from investors and others regarding environmental, social, and governance (“ESG”)
responsibilities could result in additional costs and risks, and adversely impact our reputation, employee
retention, and willingness of customers and suppliers to do business with us.
Investor advocacy groups, certain investment funds, institutional investors, stockholders, and other market
participants have increasingly focused on the ESG practices of companies. Select stakeholders have placed
increased importance on the implications of the social cost of their investments. While we are increasing our ESG
efforts and related disclosures, if our ESG efforts do not meet stakeholder expectations and standards, which
continue to evolve, our reputation and employee retention may be negatively impacted based on an assessment
of our ESG practices. Our future disclosures may include our efforts on a variety of social and ethical matters,
including corporate governance, environmental compliance, employee health and safety practices, supply chain,
human capital management, and workforce inclusion and diversity. It is possible that stakeholders may not be
satisfied with our ESG efforts or the speed of adoption. We could also incur additional costs and require
additional resources to monitor, report, and comply with various ESG practices. Also, our failure, or perceived
failure, to meet the standards included in any ESG disclosure could negatively impact our reputation, employee
retention, and the willingness of our customers and suppliers to do business with us.
Future sales of our common stock may cause our stock price to decline.
Sales of a substantial number of shares of our common stock in the public market could occur at any time, subject
to certain restrictions described below. These sales, or the perception in the market that holders of a large number
of shares intend to sell shares, could reduce the market price of our common stock. As of December 31, 2023, we
had a total of 23,378,408 outstanding shares of common stock, all of which may be resold in the public market
immediately without restriction, other than shares owned by our affiliates, which may be sold pursuant to Rule 144
under the Securities Act, subject to the conditions of Rule 144 including volume limitations. In addition, holders of
an aggregate of approximately 7,304,605 shares of our common stock will have rights, subject to some
conditions, to require us to file registration statements covering their shares or to include their shares in
registration statements that we may file for ourselves or other stockholders. We have registered all shares of
common stock that we may issue under our equity compensation plans on a Registration Statement on Form S-8.
These shares can be freely sold in the public market upon issuance, subject to volume limitations applicable to
affiliates and the lock-up agreements described above.
If there is no viable public market for our common stock, you may be unable to sell your shares.
Although our common stock is listed on Nasdaq, an active trading market for our shares may not be sustained.
You may be unable to sell your shares quickly or at the market price if trading in shares of our common stock is
not active. Further, an inactive market may also impair our ability to raise capital by selling shares of our common
stock and may impair our ability to enter into strategic partnerships or acquire companies or products by using
our shares of common stock as consideration.
Our operating results for a particular period may fluctuate significantly or may fall below the
expectations of investors or securities analysts, each of which may cause our stock price to fluctuate
or decline.
We expect our operating results to be subject to fluctuations. Our operating results will be affected by numerous
factors, including: variations in the level of expenses related to our products or future development programs;
level of underlying demand for our products; addition or termination of clinical trials; our execution of any
collaborative, licensing or similar arrangements, and the timing of payments we may make or receive under
these arrangements; any intellectual property infringement lawsuit or opposition, interference or cancellation
proceeding in which we may become involved; and regulatory developments affecting our products or our
competitors.
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OrthoPediatrics Annual Report 2023 | 71
If our operating results for a particular period fall below the expectations of investors or securities analysts, the
price of our common stock could decline substantially. Furthermore, any fluctuations in our operating results may,
in turn, cause the price of our common stock to fluctuate substantially. We believe comparisons of our financial
results from various reporting periods are not necessarily meaningful and should not be relied upon as an
indication of our future performance.
Our principal stockholders and management own a significant percentage of our stock and will be able
to exert control over matters subject to stockholder approval.
Based on the beneficial ownership of our common stock as of December 31, 2023, our officers and directors,
together with holders of 5% or more of our outstanding common stock and their respective affiliates, beneficially
own approximately 32.5% of our outstanding common stock. Accordingly, these stockholders will continue to have
significant influence over the outcome of corporate actions requiring stockholder approval, including the election
of directors, merger, consolidation or sale of all or substantially all of our assets or any other significant corporate
transaction. The interests of these stockholders may not be the same as or may even conflict with your interests.
For example, these stockholders could attempt to delay or prevent a change in control of the company, even if
such a change in control would benefit our other stockholders, which could deprive our stockholders of an
opportunity to receive a premium for their common stock as part of a sale of the company or our assets and might
affect the prevailing price of our common stock. The significant concentration of stock ownership may negatively
impact the price of our common stock due to investors’ perception that conflicts of interest may exist or arise. In
addition, pursuant to an agreement with the Company, Squadron has the right to designate up to four nominees
for election to the Company’s board of directors, depending on the percentage of capital stock beneficially owned
by Squadron. Currently, three members of our board are Squadron designees.
Provisions of our charter documents or Delaware law could delay or prevent an acquisition of the company,
even if the acquisition would be beneficial to our stockholders, which could make it more difficult for you to
change management.
Provisions in our amended and restated certificate of incorporation and our amended and restated bylaws may
discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider
favorable, including transactions in which stockholders might otherwise receive a premium for their shares. In
addition, these provisions may frustrate or prevent any attempt by our stockholders to replace or remove our
current management by making it more difficult to replace or remove our board of directors. These provisions
include:
•
•
•
•
•
•
•
•
a classified board of directors so that not all directors are elected at one time;
a prohibition on stockholder action through written consent;
no cumulative voting in the election of directors;
the exclusive right of our board of directors to elect a director to fill a vacancy created by the
expansion of the board of directors or the resignation, death or removal of a director;
a requirement that special meetings of stockholders be called only by the board of directors, the
chairman of the board of directors, the chief executive officer or, in the absence of a chief
executive officer, the president;
an advance notice requirement for stockholder proposals and nominations;
the authority of our board of directors to issue preferred stock with such terms as our board of
directors may determine; and
a requirement of approval of not less than 66 2⁄3% of all outstanding shares of our capital stock
entitled to vote to amend any bylaws by stockholder action, or to amend specific provisions of our
amended and restated certificate of incorporation.
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In addition, Delaware law prohibits a publicly held Delaware corporation from engaging in a business
combination with an interested stockholder, generally a person who, together with its affiliates, owns, or within
the last three years has owned, 15% or more of our voting stock, for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the business combination is approved
in a prescribed manner. Accordingly, Delaware law may discourage, delay or prevent a change in control of our
company.
Provisions in our charter documents and other provisions of Delaware law could limit the price that
investors are willing to pay in the future for shares of our common stock.
Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of
Delaware is the exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action
asserting a claim of breach of a fiduciary duty or other wrongdoing by any of our directors, officers, employees
or agents to us or our stockholders, (iii) any action asserting a claim arising pursuant to any provision of the
DGCL or our amended and restated certificate of incorporation or amended and restated bylaws or (iv) any
action asserting a claim governed by the internal affairs doctrine. This choice of forum provision may limit a
stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors,
officers or other employees, which may discourage such lawsuits against us and our directors, officers and other
employees. Alternatively, if a court were to find the choice of forum provision contained in our amended and
restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional
costs associated with resolving such action in other jurisdictions.
We do not anticipate paying any cash dividends on our common stock in the foreseeable future;
therefore, capital appreciation, if any, of our common stock will be your sole source of gain for the
foreseeable future.
We have never declared or paid any cash dividends on our common stock and do not intend to do so in the
foreseeable future. We currently intend to retain all available funds and any future earnings to finance the growth
and development of our business. In addition, the Credit Agreement contains, and the terms of any future credit
agreements we enter into may contain, terms prohibiting or limiting the amount of dividends that may be declared
or paid on our common stock. As a result, capital appreciation, if any, of our common stock will be your sole
source of gain for the foreseeable future.
If securities or industry analysts do not publish research, or publish inaccurate or unfavorable research,
about our business, our stock price and trading volume could decline.
The trading market for our common stock depends, in part, on the research and reports that securities or industry
analysts publish about us or our business. If no securities or industry analysts maintain coverage of the company,
the price for our common stock could be negatively impacted. If one or more of the analysts who cover us
downgrade our common stock or publish inaccurate or unfavorable research about our business, our stock price
could decline. In addition, if our operating results fail to meet the forecast of analysts, our stock price could
decline. If one or more of these analysts cease coverage of the company or fail to publish reports on us regularly,
demand for our common stock could decrease, which might cause our stock price and trading volume to decline.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 1C. CYBERSECURITY
To combat the ever-present cyber risks, the Company maintains a comprehensive cybersecurity program, which
includes ongoing employee training, annual risk assessments and a comprehensive cybersecurity environment
meant to detect, prevent, and limit unauthorized or harmful actions across our information technology
environment. We operate in the medical device sector, which is subject to various cybersecurity risks that could
adversely affect our business, financial condition, and results of operations, including intellectual property theft;
fraud; extortion; harm to employees or customers; violation of privacy laws and other litigation and legal risk; and
reputational risk. We have implemented a risk-based approach to identify and assess the cybersecurity threats
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OrthoPediatrics Annual Report 2023 | 73
that could affect our business and information systems and partner with a third-party hosted provider. Our
cybersecurity program is aligned with industry standards, such as the National Institute of Standards and
Technology (“NIST”) Cybersecurity Framework. We use various tools and methodologies to manage
cybersecurity risk that are tested on a regular cadence. We also monitor and evaluate our cybersecurity
performance on an ongoing basis through regular vulnerability scans, penetration tests and threat intelligence
feeds. We require third-party service providers with access to personal, confidential, or proprietary information to
implement and maintain comprehensive cybersecurity practices consistent with applicable legal standards.
Our VP of Information Technology has expertise in the following areas which assist in assessing and managing
applicable cybersecurity risk: 36 years of IT experience including endpoint detection, security, incident
management and response, vulnerability management and response, event management and response, and
network security segmentation. The VP of Information Technology provides regular reports on ongoing risk and
mitigation practices to our COO and CFO, who then reports to the Board. Our incident response policy, which is
updated from time to time, provides that management reports to the Board in the event of any detected material
incident and regularly updates them on the mitigation and remediation steps being taken in connection with the
Company’s response.
The Board considers cybersecurity risks in business strategy by getting updates on cybersecurity risk
assessment. It assesses the experience of management personnel responsible for preventing, mitigating,
detecting, and remediating any cyber incidents, including the VP of Information Technology as well as third-party
providers. The Company has not experienced any cybersecurity threats, including as a result of any previous
cybersecurity incidents, that have materially affected the Company, including its business strategy, results of
operations or financial condition.
In 2023, we upgraded our enterprise resource planning system to enhance operating efficiencies and provide
more effective management of our business operations. The upgrade was substantially completed in the third
quarter of 2023. The upgrade included training of personnel, migration of data, and maintaining effective internal
controls.
ITEM 2. PROPERTIES
We own and occupy approximately 42,000 square feet of office space in Warsaw, Indiana, following expansions
of our existing warehouse facilities in 2018 and again in 2021. As a part of its acquisition of MD Ortho, in April
2022, the Company acquired over 20,000 square feet of manufacturing and office space in Iowa, which it
currently operates and occupies. We also maintain approximately 9,000 square feet of warehouse and office
space in Canada associated with the Pega acquisition in July 2022. In addition, the Company maintains an office
in Israel, warehouses in Germany and Australia and several flex office spaces in Europe, which allow us access
to office space when needed. We believe our current facilities are suitable and adequate to meet our current
needs. We may add new facilities or expand existing facilities as we add employees, and we believe suitable
additional or substitute space will be available as needed to accommodate any such expansion of our operations.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we are involved in various legal proceedings arising in the ordinary course of our business. A
discussion of certain of those legal proceedings is contained in Note 15 – Commitments and Contingencies
(under the heading “Legal Proceedings”) of the notes to the consolidated financial statements included in Item 8.
Financial Statements of Part II of this Annual Report on Form 10-K, which discussion is incorporated herein by
reference.
We are not presently a party to any other legal proceedings the outcome of which, if determined adversely to us,
would individually or in the aggregate materially affect our financial position, results of operations or cash flows.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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70
PART II
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET INFORMATION
Our common stock has been listed on the Nasdaq Global Market under the symbol "KIDS" since October 12,
2017. Prior to that date, there was no established public trading market for our common stock.
DIVIDEND POLICY
We have not declared or paid any cash dividends on our common stock. We have no present intention to pay
dividends in the foreseeable future, but rather intend to retain all of our consolidated earnings to finance future
growth. Any future determination to pay dividends will be made at the discretion of our Board of Directors. See
the “CAPITAL” section of “Management's Discussion & Analysis of Financial Condition and Results of Operations”
included as Item 7 of this Annual Report on Form 10-K and Note 8 of the Notes to Consolidated Financial
Statements included as Item 8 of this Annual Report on Form 10-K for a discussion regarding dividend
restrictions.
HOLDERS OF RECORD
At the close of business on March 1, 2024, the number of shares outstanding was 23,549,496. There were 377
stockholders of record on that date.
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
There were no equity securities purchased by the issuer or any affiliated purchaser for the three months
ended December 31, 2023.
RECENT SALES OF UNREGISTERED SECURITIES
None, except as otherwise described in a Current Report on Form 8-K or a Quarterly Report on Form 10-Q filed
with respect to the period covered by this Annual Report on Form 10-K.
EQUITY COMPENSATION PLAN INFORMATION
See Item 12 of Part III of this Annual Report on Form 10-K for information regarding Securities Authorized for
Issuance Under Equity Compensation Plans.
ITEM 6. [Reserved]
Intentionally omitted.
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OrthoPediatrics Annual Report 2023 | 75
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations
together with our consolidated financial statements and the related notes thereto and other financial information
included elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and
analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our
plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You
should review the ‘‘Risk Factors’’ section of this Annual Report on Form 10-K for a discussion of important factors
that could cause our actual results to differ materially from the results described in or implied by the forward-
looking statements contained in the following discussion and analysis.
This section discusses our results of operations for the year ended December 31, 2023 as compared to the year
ended December 31, 2022. For a discussion and analysis of the year ended December 31, 2022 compared to
December 31, 2021, please refer to “Management’s Discussion and Analysis of Financial Condition and Results
of Operations” included in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2022,
filed with the SEC on March 1, 2023.
Overview
We are the only global medical device company focused exclusively on providing a comprehensive trauma and
deformity correction, scoliosis and sports medicine product offering to the pediatric orthopedic market in order to
improve the lives of children with orthopedic conditions. We design, develop and commercialize innovative
orthopedic implants, instruments and specialized braces to meet the needs of pediatric surgeons or orthotists
and their patients, who we believe have been largely neglected by the orthopedic industry. We currently serve
three of the largest categories in this market. We estimate that the portion of this market that we currently serve
represents a $3.9 billion opportunity globally, including over $1.7 billion in the United States.
We sell implants, instruments and specialized braces to our customers for use by pediatric orthopedic surgeons,
orthotists or physical therapists to treat orthopedic conditions in children. We provide our implants in sets that
consist of a range of implant sizes and include the instruments necessary to perform the surgical procedure. In
the United States and a few selected international markets, our customers typically expect us to have full sets of
implants and instruments on site at each hospital but do not purchase the implants until they are used in surgery.
Accordingly, we must make an up-front investment in inventory of consigned implants and instruments before we
can generate revenue from a particular hospital and we maintain substantial levels of inventory at any given
time. In the international markets where we sell to stocking distributors or in the case of our braces, we transfer
control of our products to the distributor or customer when title passes upon shipment.
We currently market 53 surgical and specialized bracing systems that serve three of the largest categories within
the pediatric orthopedic market: (i) trauma and deformity correction, (ii) scoliosis and (iii) sports medicine. We
rely on a broad network of third parties to manufacture the components of our products, which we then inspect
and package. We believe our innovative products promote improved surgical accuracy, increase consistency of
outcomes and enhance surgeon confidence in achieving high standards of care. In the future, we expect to
expand our product offering within these categories, as well as to address additional categories of the pediatric
orthopedic market.
The majority of our revenue from implants, instruments and specialized braces has been generated in the United
States. Our global sales management organization leads a network of sales agencies, stocking distributors as
well as direct sales representatives. We sell our implants and instruments through a network of multiple direct
sales representatives as well as nearly 40 independent sales agencies employing approximately 200 sales
representatives specifically focused on pediatrics. These independent sales agents are trained by us, distribute
our products and are compensated through sales-based commissions and performance bonuses. We do not sell
our products through or participate in physician-owned distributorships, or PODs. The revenue generated in the
United States from our bracing products is sold directly to orthopedic surgeons, orthotists, physical therapists or,
at certain times, directly to the end customer.
We market and sell our products internationally in over 70 countries through independent stocking distributors and
sales agencies. Our independent stocking distributors manage the billing relationship with each hospital in their
respective territories and are responsible for servicing the product needs of their surgeon customers. In 2017, we
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began to supplement our international stocking distributors with sales agencies using direct sales programs in the
United Kingdom, Ireland, Australia and New Zealand where we sell directly to the hospitals. We began selling
direct to Canada in September 2018, Belgium and the Netherlands in January 2019, Italy in March 2020 and
Germany, Switzerland and Austria in January 2021. In these markets we work through sales agencies that are
paid commissions. In order to further enhance our operations in Europe, we established operating companies in
the Netherlands and Germany in March 2019 and April 2022, respectively. In 2023, we hired operating and sales
representatives in Germany as salaried employees to better serve our customers. These arrangements have
generated an increase in revenue and gross margin. For the years ended December 31, 2023, 2022 and 2021,
international sales accounted for approximately 25%, 24% and 21% of our revenue, respectively.
We believe there are significant opportunities for us to strengthen our position in U.S. and international markets by
increasing investments in consigned implant and instrument sets, strengthening our global sales and distribution
infrastructure and expanding our product offering.
Environmental, Social and Governance ("ESG") Activities
OrthoPediatrics was founded on the cause of impacting the lives of children with orthopedic conditions. Since
inception we have impacted the lives of over 710,000 children, when including those served by our acquired
companies. We believe we should continue to expand our social efforts while minimizing our impact to the
environment and ensuring corporate governance. In 2021, we created an internal ESG team, which reports
directly to our Board’s Governance Committee, to identify ESG topics for disclosure by assessing both the impact
on our business and the importance to our stakeholders.
We encourage you to review our ESG page under the "About" section of our corporate website for more detailed
information regarding our ESG efforts and current initiatives. On our website, among other information, are the
following highlights:
• OrthoPediatrics cares about our environmental impact while working in a highly regulated industry and we
are certified according to ISO 13485.
•
The Company and its associates regularly participate in philanthropic causes important to our local
communities. We also partner with charitable organizations that provide pediatric orthopedic care around
the world. In 2020, we were named as "Corporate Partner of the Year" by the World Pediatric Project -
with whom we work to provide access to medical care for children in developing countries.
• We are committed to fostering an environment that is respectful, compassionate, and inclusive of
everyone in our community which is communicated in our diversity and inclusion policy. For seven years
we have been recognized by the Indiana Chamber of Commerce - Best Companies to Work in Indiana.
•
The Company and its Board of Directors understand the value of diversity. In 2022 and again in 2023, the
Company added diverse Directors to our Board and will continue its Board diversity initiative in the future.
We believe effectively managing our priorities, as well as increasing our transparency related to ESG programs,
will help create long-term value for our stakeholders. We expect to increase our disclosures and communicate
our ESG efforts in future SEC filings.
Nothing on our website shall be deemed part of or incorporated by reference into this Annual Report on Form 10-
K.
Trends and Uncertainties
From time to time we acquire, make investments in or license other technologies, products and business that may
enhance our capabilities, complement our current products or expand the breadth of our markets or customer
base. As a result of these transactions, we may record certain intangible assets, including goodwill and
trademarks, which are subject to annual impairment testing. Fair value is based on our current assessment of the
expected future cash flows based on recent results and other specific market factors. During 2023 and 2022, we
determined that a triggering event had occurred indicating it was more likely than not the fair value of the ApiFix
trademark was less than the associated carrying value. Subsequently, the company completed a quantitative
analysis and concluded that the fair value was in fact less than the carrying value and impairment losses of $1.0
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OrthoPediatrics Annual Report 2023 | 77
million and $3.6 million were recorded in 2023 and 2022, respectively. We believe that the expected future cash
flows in the most recent calculations represent management’s best estimate; however, if actual results differ
materially from these estimates, we could record an additional impairment charge which could be material to our
consolidated financial statements and have an adverse impact on our results of operations.
In 2023 and 2022, there was a significant and unprecedented increase in cases of respiratory syncytial virus, or
RSV, and other respiratory illnesses. RSV is a common respiratory virus that follows a seasonal pattern. The
typical season shows an increase in mid-September, peaks in late December and drops around mid-April;
however, in 2022 the United States experienced a significant increase during the summer and fall months and in
2023 the United States experienced a significant increase in January and February as well as October through
December months. The volume of elective procedures utilizing our products were negatively impacted as a
significant percent of hospital capacity was absorbed to cover the increase in RSV-related hospitalizations. This
had a negative impact on our sales volume in 2023 and 2022 and may continue to do so into the future. We are
unable to accurately determine exactly how this will impact us in the future, but we will continue to monitor this
dynamic as we get closer to the traditional peak of RSV season.
We encourage the readers of this document to read our risk factors in its entirety contained in Item 1A “Risk
Factors” where there is additional information regarding epidemics, pandemics or other illnesses such as RSV
and COVID-19.
Components of our Results of Operations
Revenue
Revenue in the United States is generated primarily from the sale of our implants, specialized braces and, to a
much lesser extent, from the sale of our instruments. Sales of our implants and instruments in the United
States are primarily to hospital accounts through independent sales agencies. We recognize revenue when our
performance obligations under the terms of a contract with our customer are satisfied. This typically occurs
when we transfer control of our products to the customer, generally upon implantation or when title passes
upon shipment. The products are generally consigned to our independent sales agencies, and revenue is
recognized when the products are used by or shipped to the hospital for surgeries on a case by case basis. On
rare occasions, hospitals purchase products for their own inventory, and revenue is recognized when the
hospital obtains control of the product, typically either upon shipment or delivery of the product dependent on
the terms of the contract. We consider our performance obligation of our braces to be settled upon shipment,
and revenue is therefore recognized at that time.
Outside of the United States, we sell our products directly to hospitals through independent sales agencies or
to independent stocking distributors. Generally, the distributors are allowed to return products, and some are
thinly capitalized. Based on a history of reliable collections, we have concluded that a contract exists and
revenue should be recognized when we transfer control of our products to the customer, generally when title
passes upon shipment. Additionally, based on our history of immaterial returns from international customers,
we have historically estimated no reserve for returns.
Cost of Revenue and Gross Profit
Our cost of revenue consists primarily of products purchased from third-party suppliers, inbound freight, excess
and obsolete inventory adjustments and royalties. Our implants and instruments are manufactured to our
specifications by third-party suppliers. We purchase the raw materials to make our specialized bracing products
in our own facility in Iowa. The majority of our implants and instruments are produced in the United States. We
recognize cost of revenue for consigned implants at the time the implant is used in surgery and the related
revenue is recognized. Prior to their use in surgery, the cost of consigned implants is recorded as inventory in our
balance sheet. The costs of instruments are typically capitalized and not included in cost of revenue unless sold
as a set to our international stocking distributors or directly to hospitals. We expect our cost of revenue to
increase in absolute dollars due primarily to increased sales volume and changes in the geographic mix of our
sales as our international operations tend to have a higher cost of revenue as a percentage of sales.
Our gross profit is calculated by subtracting our cost of revenue from revenue and is expected to increase in
absolute dollars due primarily to increased sales volume and sales mix to customers based in the United States.
Our gross profit as a percentage of total revenue, or gross margin, was similar across all periods presented. Our
gross margin is impacted by the mix of revenue between the United States, where we earn a higher gross
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74
margin that is required to pay sales commissions, and international stocking distributors, where we earn a lower
gross margin because the distributor is responsible for paying sales commissions.
Sales and Marketing Expenses
Our sales and marketing expenses primarily consist of commissions to our domestic and international
independent sales agencies, as well as compensation, commissions, benefits and other related personnel
costs to our global sales management team. Commissions and bonuses are generally based on a percentage
of sales. Our international independent stocking distributors purchase implant and instrument sets and
replenishment stock for resale, and we do not pay commissions or any other sales-related costs for these
international sales. We expect our sales and marketing expenses to continue to increase in absolute dollars
with the commercialization of our current and pipeline products and continued investment in our global sales
organization to reach new customers.
General and Administrative Expenses
Our general and administrative expenses primarily consist of compensation, benefits and other related costs for
personnel employed in our executive management, administration, finance, legal, quality and regulatory, product
management, warehousing, information technology and human resources departments, including stock-based
compensation for all personnel, as well as facility costs. We include insurance expenses in general and
administrative expenses, as well as costs related to the maintenance and protection of our intellectual property
portfolio. Our general and administrative expenses also include the depreciation of our capitalized instrument
sets, which represented $7.9 million, $6.2 million and $5.6 million for the years ended December 31, 2023, 2022
and 2021, respectively. We expect our general and administrative expenses to continue to increase in absolute
dollars as we hire additional personnel to support the growth of our business as well as increased set
deployment. We expect the growth rate of our general and administrative expenses will be lower than the
growth rate of our revenue.
Legal Settlement Expenses
The Company is involved in various legal proceedings from time-to-time. Liabilities for estimated losses are
accrued if the potential loss from any claim or legal proceeding is considered probable and the amount can be
reasonably estimated. No accrual or adjustments were made during the years ended December 31, 2023 or
2022.
Research and Development Expenses
Our research and development expenses primarily consist of costs associated with engineering, product
development, consulting services, outside prototyping services, outside research activities, materials and
development of our intellectual property portfolio. We also include related personnel and consultants’
compensation expense. We expect research and development expenses to continue to increase both in
absolute dollars and as a percentage of revenue as we continue to develop new products to expand our
product offering, broaden our intellectual property portfolio and add research and development personnel.
Other Income (Expense)
Our other income (expense) primarily consists of fair value adjustments of contingent consideration, accreted
interest expense related to the acquisition installment payables, borrowing costs and expenses related to debt.
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OrthoPediatrics Annual Report 2023 | 79
Results of Operations
Comparison of the Years Ended December 31, 2023 and 2022
The following table sets forth our results of operations for the years ended December 31, 2023 and 2022:
(in thousands, except percentages)
Net revenue
Cost of revenue
Sales and marketing expenses
General and administrative expenses
Trademark impairment
Research and development expenses
Other income
Provision for income taxes (benefit)
Net (loss) income
Revenue
2023
2022
Increase
(Decrease)
% Increase
(Decrease)
$ 148,732 $ 122,289 $
26,443
37,479
51,402
75,421
985
10,196
31,629
45,053
59,383
3,609
8,014
(5,439)
(21,710)
(338)
(4,947)
5,850
6,349
16,038
(2,624)
2,182
16,271
4,609
22 %
18 %
14 %
27 %
(73) %
27 %
(75) %
(93) %
$
(20,974) $
1,258 $
(22,232)
(1,767) %
The following tables set forth our revenue by geography and product category for the years ended December 31,
2023 and 2022:
(in thousands, except percentages)
U.S.
International
Total
(in thousands, except percentages)
Trauma and deformity
Scoliosis
Sports medicine/other
Total
Revenue by Geography
Year Ended December 31,
2023
$ 111,010
37,722
% of
revenue
75%
25%
2022
$
92,419
29,870
% of
revenue
76%
24%
$ 148,732
100%
$ 122,289
100%
Revenue by Product Category
Year Ended December 31,
2023
$ 106,781
37,933
4,018
% of
revenue
72%
25%
3%
2022
$
85,055
33,428
3,806
% of
revenue
70%
27%
3%
$ 148,732
100%
$ 122,289
100%
Net revenue increased $26.4 million, or 22%, from $122.3 million for the year ended December 31, 2022 to
$148.7 million for the year ended December 31, 2023. The increase was primarily driven by increased market
share across our product offerings as well as $5.3 million of growth as a result of the MDO and Pega acquisitions.
Revenue from current year acquisitions is included in our trauma and deformity business.
Trauma and deformity revenue, which includes the impact from acquired businesses, increased $21.7 million, or
26%, primarily driven by increased sales in our Pega, PNP Femur, Cannulated Screws, Orthex systems and $5.3
million of sales generated from acquired businesses. Scoliosis revenue increased $4.5 million, or 13%, primarily
driven by increased sales of our 4.5/5.0 and 5.5/6.0 RESPONSE systems and ApiFix as well as the sale and pull
through of 7D. Sports medicine / other increased $0.2 million, or 6%. Nearly all the change in each category was
due to a change in the unit volume sold and not a result of price changes.
Cost of Revenue and Gross Margin
Cost of revenue was $37.5 million and $31.6 million for the years ended December 31, 2023 and 2022,
respectively. Gross margin was 75% for the year ended December 31, 2023 and 74% for the year ended
December 31, 2022. The increase in cost of revenue was primarily driven by volume of units sold which included
approximately $1.7 million from the result of acquisitions. The gross margin includes a minimum performance
obligation fee on the Firefly licensing agreement. See Note 15 - Commitments and Contingencies in Item 8 for
additional details of our purchase commitments and performance obligations.
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Sales and Marketing Expenses
Sales and marketing expenses increased $6.3 million, or 14%, from $45.1 million for the year ended
December 31, 2022 to $51.4 million for the year ended December 31, 2023. The increase was due
primarily to increased sales commission expenses and an overall increase in volume of units sold. Sales
and marketing expenses also increased by approximately $0.7 million as a result of the acquisitions. Sales
and marketing expenses for the year ended December 31, 2023 were approximately 35% of revenue
compared to 37% for 2022. The lower rate was driven by MD Ortho e-Commerce sales, which is sold
without sales commissions, and lower commissions on other newly acquired products.
General and Administrative Expenses
General and administrative expenses increased $16.0 million, or 27%, from $59.4 million for the year ended
December 31, 2022 to $75.4 million for the year ended December 31, 2023. The increase was due primarily to
the addition of personnel and resources to support the continued expansion of our business and stock
compensation expense of $3.8 million. Depreciation and amortization expenses increased $4.3 million, or
33%, from $13.1 million for the year ended December 31, 2022 to $17.4 million for the year ended
December 31, 2023. The increase was primarily due to a full year of amortization on intangible assets acquired
through the MD Ortho and Pega acquisitions as well as the addition of MedTech Concepts and Rhino
acquisitions.
Research and Development Expenses
Research and development expenses increased $2.2 million, or 27%, from $8.0 million for the year ended
December 31, 2022 to $10.2 million for the year ended December 31, 2023. The increase was primarily due to
incremental product development including the addition of personnel and the support of future growth of our
business as well as the research and development associated from the newly acquired businesses.
Trademark Impairment
The Company recorded a partial impairment charge of $1.0 million and $3.6 million associated with the ApiFix
trademark during the years ended December 31, 2023 and 2022, respectively. See Note 4 - Goodwill and
Intangible Assets for further details.
Total Other Income
Total other income decreased $16.3 million from $21.7 million for the year ended December 31, 2022 to $5.4
million for the year ended December 31, 2023. The change is driven primarily by the decrease in fair value of the
contingent consideration related to the ApiFix acquisition in 2022. For the year ended December 31, 2023, the
change in fair value resulted in income of $3.0 million, compared to income of $25.9 million for the year ended
December 31, 2022. Interest expense for the year ended December 31, 2023 was less than $0.1 million
compared to $0.7 million for the year ended December 31, 2022.
Liquidity and Capital Resources
We have incurred operating losses since inception and negative cash flows from operating activities of $27.0
million, $21.8 million and $13.1 million for the years ended December 31, 2023, 2022 and 2021, respectively. As
of December 31, 2023, we had an accumulated deficit of $197.7 million. We anticipate that our losses will
continue in the near term as we continue to expand our product portfolio and invest in additional consigned
implant and instrument sets to support our expansion into existing and new markets. Since inception, we have
funded our operations primarily with proceeds from the sales of our common and preferred stock, convertible
securities and debt, as well as through sales of our products. As of December 31, 2023, we had cash, cash
equivalents and restricted cash of $33.0 million and short-term investments of $49.3 million for a total of $82.3
million.
We believe our existing cash and cash equivalents, amounts available under our new Credit Agreement, cash
receipts from sales of our products and net proceeds from our August 2022 public securities offering will be
sufficient to meet our anticipated cash requirements for at least the next 12 months. Nonetheless, from time to
time, we may seek additional financing sources to meet our working capital requirements, make continued
research and development investments and make capital expenditures needed for us to maintain and grow our
business. We may not be able to obtain additional financing on terms favorable to us, if at all. It is also possible
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that we may allocate significant amounts of capital toward products or technologies for which market demand is
lower than anticipated and, as a result, abandon such efforts. If we are unable to obtain adequate financing or
financing on terms satisfactory to us when we require it, or if we expend capital on products or technologies that
are unsuccessful, our ability to continue to support our business growth and to respond to business challenges
could be significantly limited, or we may have to scale back our operations. If we raise additional funds through
further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution,
and any new equity securities we issue could have rights, preferences and privileges superior to those of holders
of our common stock.
Cash Flows
The following table sets forth our cash flows from operating, investing and financing activities for the periods
indicated:
(in thousands)
Net cash used in operating activities
Net cash provided by (used in) investing activities
Net cash provided by financing activities
Effect of exchange rate changes on cash
Net increase in cash and restricted cash
Cash Used in Operating Activities
Year Ended December 31,
2023
2022
$
(27,046) $
(21,766)
41,677
(113,371)
7,301
633
135,974
619
$
22,565 $
1,456
Net cash used in operating activities was $27.0 million and $21.8 million for the years ended December 31, 2023
and 2022, respectively. The primary use of this cash was for working capital. Net cash used for working capital
was $32.2 million and $17.8 million for the years ended December 31, 2023 and 2022, respectively. During
2023, the primary uses of cash included an increase in inventory of $26.3 million as we deployed additional
inventory and an increase in accounts receivable of $9.7 million. These uses of cash were partially offset by cash
inflows from other accrued expenses of $6.9 million, related primarily to accrued compensation, and an increase
in accounts payable of $1.5 million. During 2022, we increased inventory by $16.9 million as we deployed
additional inventory and accounts receivable increased by $3.9 million. We had a net loss of $21.0 million for the
year ended December 31, 2023, compared to net income of $1.3 million for the year ended December 2022.
Cash Provided by (Used in) Investing Activities
Net cash provided by (used in) investing activities was $41.7 million and $(113.4) million for the years ended
December 31, 2023 and 2022, respectively. Net cash provided by investing activities in 2023 was primarily
related to the sales of short-term marketable securities of $112.9 million which was offset by the purchase of
short-term investments of $48.6 million and the cash portion paid in the acquisitions of MedTech of $3.1 million
and Rhino of $0.5 million. We also invested $16.9 million in property, plant and equipment, primarily instrument
sets which were consigned in the United States and select international markets.
Net cash used in 2022 was primarily related to the cash portions paid in the acquisitions of MDO and Pega in the
aggregate amount of $40.1 million and purchases of short term investments of $110.1 million, both of which were
offset by sales of short term securities of $46.9 million. We also invested $10.0 million in property, plant and
equipment, primarily instrument sets which were consigned in the United States and select international markets.
Cash Provided By Financing Activities
Net cash provided by financing activities was $7.3 million and $136.0 million for the years ended December 31,
2023 and 2022, respectively. Net cash provided by financing activities in 2023 consisted of the proceeds of $9.4
million, net of issuance costs, from our new loan agreement with MidCap Financial Trust. This was offset by the
cash paid for the acquisition installment to ApiFix. Net cash provided by financing activities for 2022 consisted
primarily of the proceeds from the issuance of common stock and pre-funded warrants of $139.3 million, net of
issuance costs. This was offset by the cash paid for the acquisition installment to ApiFix. The Company also
utilized $31.0 million of its revolving credit facility with Squadron to fund the Pega acquisition. This was
subsequently paid off in 2022.
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Indebtedness
Credit Agreement
On December 29, 2023, the Company entered into an $80 million Credit, Security and Guaranty Agreement by
and among (i) the Company and other borrowers party to the Credit Agreement, (ii) MidCap Funding IV Trust,
(iii) MidCap Financial Trust, and (iv) the financial institutions or other entities from time to time party thereto as
Lenders. Under the terms of the Credit Agreement, the Lenders have provided to Borrowers a term loan in an
aggregate principal amount that will not exceed $30 million available in three tranches of $10 million (the "Term
Loan") each subject to certain draw conditions and a revolving loan in an aggregate principal amount that will
not exceed $50 million (the "Revolving Loan"). Borrowings are available subject to certain levels of working
capital for the Revolving Loan. The second tranche of the Term Loan is eligible to be drawn between July 1,
2024 through June 30, 2025. The third tranche of the Term Loan is eligible to be drawn between January 1,
2025 through June 30, 2025. The Company must meet certain cash usage requirements at the time of each
draw to be eligible to access these term loans. Interest on the Term Loan will accrue at the greater of (a) One
Month Term SOFR plus 6.50% or (b) 9.0% and interest on the Revolving Loan will accrue at the greater of (a)
One Month Term SOFR plus 4.0% or (b) 6.50% and will be payable monthly by the Company. The Term Loans
may be prepaid in full through December 29, 2024 with payment of a 3.00% prepayment premium, after which
they may be prepaid in full through December 29, 2025 with payment of a 2.00% prepayment premium, after
which they may be prepaid in full through December 29, 2026 with payment of a 1.00% prepayment premium,
after which they may be prepaid in full with no prepayment premium. An additional final payment of 3.00% of the
amount of the Term Loans advanced by the Lenders will be due upon prepayment or repayment of the Terms
Loan in full. The first tranche of $10 million was issued under the Term Loan upon execution. Payments of
principal and all accrued but unpaid interest will be due and payable upon the earlier of December 1, 2028, or (i)
the occurrence of any transaction or series of transactions pursuant to which any person or entity in the
aggregate acquire(s) 35% or more of the voting capital stock of the Company, (ii) a change in the majority of the
Company’s Board of Directors over a 12-month period; (iii) the Company ceases to own directly or indirectly,
100% of the capital stock of any of its subsidiaries (with the exception of any subsidiaries permitted to be
dissolved, merged or otherwise disposed of by the Credit Agreement), or (iv) the occurrence of a change in
control, fundamental change, deemed liquidation event or terms of similar import under any document or
instrument governing or relating to debt of or equity interests of the Company. The loans under the Credit
Agreement are secured by a security interest in the Company’s and other Borrower’s assets. The Credit
Agreement provides for customary events of default. If an event of default is not cured within the time periods
specified (if any), the Lenders and Agent have the right to accelerate the Company’s payment of principal and
interest in addition to other rights and remedies.
The Term Loan includes certain customary non-financial covenants, and also includes certain financial
covenants related to the Company achieving minimum revenue targets over a trailing twelve-month period. The
Company was in compliance with all covenants under the Credit Agreement as of December 31, 2023.
The debt facilities available under the Credit Agreement replace the Fourth Amended and Restated Loan and
Security Agreement with Squadron (as amended, the “Squadron Loan Agreement”), which provided the
Company with a $50 million revolving credit facility. There was no indebtedness outstanding under the Squadron
Loan Agreement and it was terminated in connection with the Credit Agreement.
Contractual Obligations and Commitments
The Company's cash requirements within the next twelve months include accounts payable, accrued
compensation and benefits, current maturities of long-term debt, current portion of acquisition installment payable
and other current liabilities. The acquisition installment payable is related to the acquisition of ApiFix and MedTech
- See Note 3. Business Combinations and Asset Acquisitions in Item 8 for further detail of the acquisition and the
acquisition installment payables.
Our long-term cash requirements under various contractual obligations and commitments include:
•
Debt obligations and interest payments - See Note 8. Debt and Credit Arrangements in Item 8 for further
detail regarding our debt and the timing of expected future principal and interest payments.
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•
Acquisition installment payables, net of current portion and contingent consideration - See Note 3.
Business Combinations and Asset Acquisitions in Item 8 for further detail regarding our obligations and
timing of expected future payments.
• Minimum purchase obligations - Purchase obligations include agreements for purchases of product in the
normal course of business, including minimum quantities required pursuant to our license agreements.
See Note 15. Commitments and Contingencies in Item 8 for further detail regarding these requirements.
•
•
Lease Obligations - See Note 15. Commitments and Contingencies in Item 8 for further detail regarding
our lease obligations.
Royalties - See Note 15. Commitments and Contingencies in Item 8 for further detail regarding minimum
royalty obligations.
Pediatric Orthopedic Business Seasonality
Our revenue is typically higher in the summer months and holiday periods, driven by higher sales of our trauma
and deformity and scoliosis products, which is influenced by the higher incidence of pediatric surgeries during
these periods due to recovery time provided by breaks in the school year. Additionally, our scoliosis patients
tend to have additional health challenges that make scheduling their procedures variable in nature.
Critical Accounting Policies and Significant Judgments and Estimates
This management’s discussion and analysis of financial condition and results of operations is based on our
financial statements, which have been prepared in accordance with accounting principles generally accepted in
the United States, or GAAP. The preparation of these financial statements requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements, as well as the reported revenue and expenses during the
reporting periods. We monitor and analyze these items for changes in facts and circumstances, and material
changes in these estimates could occur in the future. We base our estimates on historical experience and on
various other factors that we believe are reasonable under the circumstances, the results of which form the basis
for making judgments about the carrying value of assets and liabilities that are not readily apparent from other
sources. Changes in estimates are reflected in reported results for the period in which they become known.
Actual results may differ materially from these estimates under different assumptions or conditions.
While our significant accounting policies are more fully described in the notes to our consolidated financial
statements appearing elsewhere in this annual report, we believe the following accounting policies are most
critical to understanding and evaluating our reported financial results and require significant or complex
judgment and estimates on the part of management.
Revenue Recognition
In the United States and in fourteen international markets, we primarily sell our implants, and to a much lesser
extent our instruments, through third-party independent sales agencies to medical facilities and hospitals. For
such sales, revenue and associated cost of revenue is recognized when a product is used in a procedure. In a
few cases, hospitals purchase our products for their own inventory, and such revenue and associated cost of
revenue is recognized when a product is shipped or delivered and the title and risk of loss passes to the
customer. Sales of our bracing products are sold to stocking distributors, hospitals, orthotist and other medical
professionals or directly to end customers. Revenue is recognized for braces generally when title passes upon
shipment.
Outside of the United States, we sell our products directly to hospitals through independent sales agencies or to
independent stocking distributors. Generally, the distributors are allowed to return products, and some are thinly
capitalized. Based on a history of reliable collections, we have concluded that a contract exists and revenue
should be recognized when we transfer control of our products to the customer, generally when title passes upon
shipment. Additionally, based on our history of immaterial returns from international customers, we have
historically estimated no reserve for returns.
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Inventory Valuation
Inventory is stated at the lower of cost or net realizable value, with cost determined using the first-in-first-out
method. Inventory, which consists of implants and instruments included in deployed sets in the field or held in
our warehouse, is considered finished goods and is purchased from third parties.
We evaluate the carrying value of our inventory in relation to the estimated forecast of product demand, which
takes into consideration the life cycle of the products. A significant decrease in demand could result in an
increase in the amount of excess inventory on hand, which could lead to additional charges for excess and
obsolete inventory.
The need to maintain substantial levels of inventory impacts our estimates for excess and obsolete inventory.
Each of our systems are designed to include implantable products that come in different sizes and shapes to
accommodate the surgeon’s needs. Typically, a small number of the set components are used in each surgical
procedure. Certain components within each set may become obsolete before other components based on the
usage patterns. We adjust inventory values to reflect these usage patterns and life cycle.
In addition, we continue to introduce new products, which we believe will increase our revenue. As a result,
we may be required to take additional charges for excess and obsolete inventory in the future.
Goodwill and Other Intangible Assets
Our goodwill represents the excess of the cost over the fair value of net assets acquired. The determination of the
value of goodwill and intangible assets arising from acquisitions requires extensive use of accounting estimates
and judgments to allocate the purchase price to the fair value of net tangible and intangible assets acquired.
Goodwill is not amortized and is assessed for impairment using fair value measurement techniques on an annual
basis or more frequently if facts and circumstances warrant such a review. The goodwill is considered to be
impaired if we determine that the carrying value of either of our reporting units exceeds its respective fair value.
We have indefinite lived trademark assets that are reviewed for impairment by performing a quantitative analysis,
which occurs annually in the fourth quarter or whenever events or changes in circumstances indicate that the
carrying value of an asset may not be recoverable. Recoverability is measured by a comparison of the carrying
amount to future net discounted cash flows expected to be generated by the associated asset. Calculating net
discounted cash flows requires us to make significant estimates and assumptions related to forecasts of future
revenues and discount rates. Changes in these assumptions could have a significant impact on the fair value of of
trademarks. If such assets are determined to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount exceeds the fair market value of the assets. The calculation of the fair value
of the trademark assets involves Level 3 fair value measurements. To estimate the fair value of the trademark
asset and associated impairment, we utilized an income approach, or discounted cash flow model. This approach
requires us to make significant estimates and assumptions including preparation of forecasted revenue, selection
of a royalty rate and discount rate and estimate of the terminal year revenue growth rate.
During 2023 and 2022, management determined that a triggering event occurred, indicating that it was more likely
than not the fair value of the ApiFix trademark asset was less than the carrying value. As such, the company
completed a quantitative analysis whereby we determined the fair value of the ApiFix trademark asset was below
the carrying value. The primary reason for the impairment is the lower forecasted revenue of our ApiFix product
than previously expected. We recorded impairment charges of $1.0 million and $3.6 million for the years ended
December 31, 2023 and 2022, respectively, to reduce the carrying amount of the intangible asset to its estimated
fair value. Following the impairment, the newly calculated fair value becomes the new accounting basis and
carrying value of the trademark.
As of October 1, 2023, the date of our last impairment review, the fair value of three of our trademarks exceeded
their respective carrying values by less than 15%, excluding ApiFix described above. As of December 31, 2023,
the carrying value of these three trademarks was $10.4 million.
Net Operating Losses
As of December 31, 2023, we had federal, state and foreign tax net operating loss carryforwards, or NOLs, of
approximately $118.9 million, $76.9 million and $26.3 million, respectively, which begin to expire in 2028 unless
utilized. The deferred tax assets, except for those recorded in Canada and Israel, were fully offset by a
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valuation allowance as of December 31, 2023 and 2022 and no income tax benefit has been recognized in
continuing operations related to the NOLs which have valuation allowances.
Pursuant to Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, annual use of our pre-
change NOLs may be limited in the post-change period in the event that an ‘‘ownership change’’ occurs, which is
generally defined as a cumulative change in equity ownership by ‘‘5% shareholders’’ that exceeds 50 percentage
points over a rolling three-year period. We determined that an ownership change occurred on May 30, 2014,
resulting in a limitation of approximately $1.1 million per year being imposed on the use of our pre-change NOLs
of approximately $45.2 million. An additional Section 382 ownership change was deemed to have occurred
following our follow-on offering in December 2018 resulting in a limitation of approximately $9.7 million per year.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Our cash and short term investment balances as of December 31, 2023 and 2022 are related to our investment
portfolio which consists largely of debt instruments of high quality corporate issuers. Due to the short-term nature
of these investments, we have assessed that there is no material exposure to interest rate risk arising from our
investments. Fixed rate investments and borrowings may have their fair market value adversely impacted from
changes in interest rates. Based upon our overall interest rate exposure as of December 31, 2023, a change of
10% in interest rates, assuming the amount of our investment portfolio and overall economic environment remains
constant, would not have a material effect on interest income. The primary objective of our investment activities is
to preserve the principal while at the same time maximizing yields without significantly increasing the risk. To
achieve this objective, we maintain our portfolio of cash equivalents and investments in instruments that meet
high credit quality standards, as specified in our investment policy. None of our investments are held for trading
purposes. Our policy also limits the amount of credit exposure to any one issue, issuer and type of instrument. As
of December 31, 2023, we only held investments in securities of a short-term nature classified as cash
equivalents or short-term investments. During the periods presented, we did not hold any investments that were in
a significant unrealized loss position and no impairment charges were recorded. Realized gains and losses and
interest income related to short term investments were immaterial during all periods presented.
Foreign Currency
A substantial portion of our operations are located in the United States, and the majority of our sales since
inception have been made in United States dollars. Accordingly, we have assessed that we do not have any
material net exposure to foreign currency rate fluctuations. However, as our business in markets outside of the
United States continues to increase, we will be exposed to foreign currency exchange risk related to our foreign
operations. Fluctuations in the rate of exchange between the United States dollar and foreign currencies,
primarily the Pound Sterling, the Euro, Australian Dollar, Canadian Dollar and Israeli Shekel, could adversely
affect our financial results, including our revenues, revenue growth rates, gross margins, income and losses as
well as assets and liabilities. We do not currently hedge our exposure to foreign currency exchange rate
fluctuations, but we may choose to do so in the future. We estimate that an immediate 10% adverse change in
foreign exchange rates not currently pegged to the U.S. dollar would have increased our reported net loss by an
immaterial amount for the years ended December 31, 2023, 2022 and 2021.
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82
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of OrthoPediatrics Corp.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of OrthoPediatrics Corp. and subsidiaries (the
“Company”) as of December 31, 2023 and 2022, the related consolidated statements of operations,
comprehensive loss, stockholders' equity and cash flows, for each of the three years in the period ended
December 31, 2023, and the related notes (collectively referred to as the "financial statements"). We also have
audited the Company’s internal control over financial reporting as of December 31, 2023, based on criteria
established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial
position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2023, in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31, 2023, based on criteria established
in Internal Control — Integrated Framework (2013) issued by COSO.
Basis for Opinions
The Company’s management is responsible for these financial statements, for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal
control over financial reporting based on our audits. We are a public accounting firm registered with the Public
Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect
to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was
maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material
misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to
those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the financial statements. Our audits also included evaluating the accounting principles used and
significant estimates made by management, as well as evaluating the overall presentation of the financial
statements. Our audit of internal control over financial reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on the assessed risk. Our audits also included
performing such other procedures as we considered necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
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OrthoPediatrics Annual Report 2023 | 87
being made only in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of
the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Emphasis of Matter
The Company has significant transactions and relationships with related parties that are described in Note 13 to
the consolidated financial statements. Our opinion is not modified with respect to this matter.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial
statements that was communicated or required to be communicated to the audit committee and that (1) relates to
accounts or disclosures that are material to the financial statements and (2) involved our especially challenging,
subjective, or complex judgments. The communication of critical audit matters does not alter in any way our
opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter
below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it
relates.
Other Intangible Assets – Trademarks – Refer to Notes 2 and 4 to the financial statements
Critical Audit Matter Description
As described in Notes 2 and 4 of the consolidated financial statements, the Company records trademarks within
their consolidated balance of Other Intangible Assets. We identified the specific trademarks related to Pega
Medical, MD Ortho, Orthex and ApiFix, which are components of the Other Intangible Assets consolidated
balance, as our critical audit matter. Impairment testing of the trademarks is performed on an annual basis, and
more frequently if events and circumstances indicated that the asset might be impaired. The fair values of the
trademarks are based on a relief from royalty method, and an impairment of $985,000 was recorded related to the
ApiFix trademark during 2023. This approach requires significant estimates and assumptions including
preparation of forecasted revenue, selection of a royalty rate and discount rate and estimate of the terminal year
revenue growth rate.
The principal considerations for our determination that performing procedures related to the annual trademark
impairment assessments of Pega Medical, MD Ortho, Orthex and ApiFix is a critical audit matter are (i) the
significant judgments required to be exercised by management when developing the fair value estimates of its
trademarks; (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating
management’s significant assumptions related to revenue growth rates, discount rates, and royalty rates for the
trademarks; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.
The determination and extent of audit procedures related to these assumptions required a high degree of auditor
judgment and an increased extent of effort, including the need to involve fair value specialists, when performing
audit procedures to evaluate the reasonableness of management’s assessment of the fair value of these specific
trademarks.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the estimate of the fair value of the Pega Medical, MD Ortho, Orthex and ApiFix
trademarks included the following, among others:
• We tested the effectiveness of controls over management’s evaluation of the fair value of its trademarks,
including those over the selection of the discount rates, royalty rates and management’s development of
future revenues.
88 | OrthoPediatrics Annual Report 2023
84
• We evaluated the reasonableness of management’s forecast of future revenue by comparing the forecast
for each trademark to:
◦
◦
◦
◦
Historical revenues.
Projected revenues.
Publicly available industry information.
Evidence obtained in other areas of the audit.
• With the assistance of fair value specialists, we evaluated the reasonableness of the Company’s estimate
of fair value for each trademark by:
◦
◦
◦
◦
◦
Assessing the appropriateness of the Company’s valuation methodology.
Testing the source information underlying the determination of the discount rate and the
mathematical accuracy of the calculation.
Comparing the Company’s selected discount rate to an independently estimated range of
discount rates using a process consistent with generally accepted valuation practices.
Evaluating the reasonableness of the terminal growth rate through comparison to industry
reports.
Assessing the reasonableness of the selected royalty rate used in the fair value analysis by
comparing against an independently-sourced set of comparable licensing agreements.
/s/ Deloitte & Touche LLP
Indianapolis, Indiana
March 8, 2024
We have served as the Company's auditor since 2015.
85
OrthoPediatrics Annual Report 2023 | 89
ORTHOPEDIATRICS CORP.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share information)
ASSETS
Current assets:
Cash and cash equivalents
Restricted cash
Short term investments
Accounts receivable - trade, net of allowances of $1,373 and $1,056, respectively
Inventories, net
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Other assets:
Amortizable intangible assets, net
Goodwill
Other intangible assets
Other non-current assets
Total other assets
Total assets
Current liabilities:
Accounts payable - trade
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued compensation and benefits
Current portion of long-term debt with affiliate
Current portion of acquisition installment payable
Other current liabilities
Total current liabilities
Long-term liabilities:
Long-term debt, net of current portion
Long-term debt with affiliate, net of current portion
Acquisition installment payable, net of current portion
Contingent consideration
Deferred income taxes
Other long-term liabilities
Total long-term liabilities
Total liabilities
Commitments and contingencies (Note 15)
Stockholders' equity:
Common stock, $0.00025 par value; 50,000,000 shares authorized; 23,378,408 shares and 22,877,962
shares issued and outstanding as of December 31, 2023 and December 31, 2022
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive loss
Total stockholders' equity
Total liabilities and stockholders' equity
See notes to consolidated financial statements.
As of December 31,
2023
2022
$
31,055 $
1,972
49,251
34,617
105,851
3,750
8,991
1,471
109,299
24,800
78,192
3,966
226,496
226,719
41,048
34,286
69,275
83,699
15,287
2,940
64,980
86,821
14,921
—
171,201
166,722
$ 438,745 $ 427,727
$
12,649 $
11,150
11,325
152
10,149
7,391
41,666
9,297
611
3,551
—
5,483
1,112
20,054
61,720
6,744
144
7,815
5,018
30,871
—
763
8,019
2,980
5,954
492
18,208
49,079
6
6
580,287
560,810
(197,742)
(176,768)
(5,526)
(5,400)
377,025
378,648
$ 438,745 $ 427,727
90 | OrthoPediatrics Annual Report 2023
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ORTHOPEDIATRICS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share information)
Net revenue
Cost of revenue
Gross profit
Operating expenses:
Sales and marketing
General and administrative
Legal settlement expenses
Trademark impairment
Research and development
Total operating expenses
Operating loss
Other (income) expenses:
Interest (income) expense, net
Fair value adjustment of contingent consideration
Other (income) expense, net
Total other income
Loss before income taxes
Provision for income taxes (benefit)
Net (loss) income
Weighted average shares outstanding
Basic
Diluted
Net (loss) income per share
Basic
Diluted
Year Ended December 31,
2023
2022
2021
$ 148,732 $ 122,289 $
98,049
37,479
111,253
51,402
75,421
—
985
10,196
138,004
31,629
90,660
45,053
59,383
—
3,609
8,014
116,059
24,646
73,403
39,673
46,061
150
—
5,543
91,427
(26,751)
(25,399)
(18,024)
(198)
(2,980)
(2,261)
(5,439)
(21,312)
(338)
2,424
(25,930)
1,796
(21,710)
(3,689)
(4,947)
2,247
(1,800)
(1,083)
(636)
(17,388)
(1,128)
$
(20,974) $
1,258 $
(16,260)
22,675,477
20,704,556
19,268,255
22,675,477
20,947,727
19,268,255
$
$
(0.92) $
0.06 $
(0.92) $
0.06 $
(0.84)
(0.84)
See notes to consolidated financial statements.
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OrthoPediatrics Annual Report 2023 | 91
ORTHOPEDIATRICS CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
Net (loss) income
Other comprehensive (loss) income:
Foreign currency translation adjustment
Unrealized gain (loss) on short-term investments
Adjustment for realized gain on securities
Other comprehensive (loss) income, net of tax
Comprehensive loss
Year Ended December 31,
2023
2022
2021
$
(20,974) $
1,258 $
(16,260)
(1,631)
(14,570)
68
1,437
(126)
(871)
1,550
(13,891)
1,157
(573)
—
584
$
(21,100) $
(12,633) $
(15,676)
See notes to consolidated financial statements.
92 | OrthoPediatrics Annual Report 2023
88
ORTHOPEDIATRICS CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share information)
Common Stock
Shares
Value
Additional Paid-in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income (Loss)
Total
Stockholders'
Equity
Balance at January 1, 2021
19,560,291 $
5 $
388,622 $
(161,766) $
7,907 $
234,768
Net loss
Restricted stock
Stock option exercise
Consideration for Devise Ortho
acquired assets
Other comprehensive income
—
107,902
4,422
4,599
—
—
—
—
—
—
—
5,842
137
298
—
(16,260)
—
—
—
—
—
—
—
—
584
(16,260)
5,842
137
298
584
Balance at December 31, 2021
19,677,214 $
5 $
394,899 $
(178,026) $
8,491 $
225,369
Net income
Restricted stock
Stock option exercise
Consideration for MD Ortho
and Pega acquisitions
Stock portion of ApiFix
anniversary installment
payment
Issuance of common stock, net
of issuance cost
Other comprehensive loss
—
188,537
2,010
208,140
185,811
2,616,250
—
—
—
—
—
—
1
—
—
6,449
63
9,707
10,410
139,282
—
1,258
—
—
—
—
—
—
—
—
—
—
—
—
(13,891)
1,258
6,449
63
9,707
10,410
139,283
(13,891)
Balance at December 31, 2022
22,877,962 $
6 $
560,810 $
(176,768) $
(5,400) $
378,648
Net loss
Restricted stock
Stock option exercise
Consideration for MedTech
and Rhino acquisitions
Stock portion of ApiFix
anniversary installment
payment
Other comprehensive loss
—
304,889
670
54,884
140,003
—
—
—
—
—
—
—
—
10,526
21
2,752
6,178
—
(20,974)
—
—
—
—
—
—
—
—
—
—
(126)
(20,974)
10,526
21
2,752
6,178
(126)
Balance at December 31, 2023
23,378,408 $
6 $
580,287 $
(197,742) $
(5,526) $
377,025
See notes to consolidated financial statements.
89
OrthoPediatrics Annual Report 2023 | 93
ORTHOPEDIATRICS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
OPERATING ACTIVITIES
Net (loss) income
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Trademark impairment
Depreciation and amortization
Stock-based compensation
Fair value adjustment of contingent consideration
Accretion of acquisition installment payable
Deferred income taxes
Changes in certain current assets and liabilities:
Accounts receivable - trade
Inventories
Prepaid expenses and other current assets
Accounts payable - trade
Accrued legal settlements
Accrued expenses and other liabilities
Other
Net cash used in operating activities
INVESTING ACTIVITIES
Acquisition of MedTech, net of cash acquired
Acquisition of Rhino assets
Acquisition of MDO, net of cash acquired
Acquisition of Pega, net of cash acquired
Acquisition of Devise Ortho assets
Purchases of licenses
Sale of short-term marketable securities
Purchase of short-term marketable securities
Purchases of property and equipment
Net cash provided by (used in) investing activities
FINANCING ACTIVITIES
Payments on debt with affiliate
Proceeds from issuance of debt with affiliate
Proceeds from issuance of debt
Proceeds from issuance of common stock, net of issuance costs
Proceeds from exercise of stock options
Installment payment for ApiFix
Payments on mortgage notes
Net cash provided by financing activities
Effect of exchange rate changes on cash
NET INCREASE (DECREASE) IN CASH AND RESTRICTED CASH
Cash and restricted cash, beginning of period
Cash and restricted cash, end of period
Year Ended December 31,
2023
2022
2021
$
(20,974) $
1,258 $
(16,260)
985
17,385
10,526
3,609
13,099
6,679
(2,980)
(25,930)
1,372
(1,163)
2,307
(5,032)
(9,724)
(3,983)
(26,279)
(16,938)
94
1,491
—
6,852
(4,631)
(506)
(209)
—
3,344
536
—
10,680
5,842
(1,800)
2,154
(1,128)
(466)
(5,050)
(637)
(567)
(6,342)
1,095
(584)
(27,046)
(21,766)
(13,063)
(3,097)
(546)
—
—
—
(2,106)
—
—
(8,360)
(31,730)
—
—
112,904
46,872
(48,600)
(110,122)
(16,878)
(10,031)
41,677
(113,371)
—
—
9,424
—
21
(2,000)
(144)
7,301
633
22,565
10,462
(31,000)
31,000
—
139,282
63
(3,234)
(137)
135,974
619
1,456
9,006
—
—
—
—
(650)
(7,908)
9,250
—
(8,103)
(7,411)
—
—
—
—
137
—
(131)
6
(658)
(21,126)
30,132
$
33,027 $
10,462 $
9,006
94 | OrthoPediatrics Annual Report 2023
90
SUPPLEMENTAL DISCLOSURES
Cash paid for interest
Transfer of instruments between property and equipment and inventory
Issuance of common shares for ApiFix acquisition installment
Issuance of common shares to acquire MedTech
Issuance of common shares to acquire Rhino assets
Issuance of common shares to acquire MDO
Issuance of common shares to purchase Devise Ortho assets
Right-of-use assets obtained in exchange for lease liabilities
Debt issuance costs not yet paid
$
$
$
$
$
$
$
$
$
See notes to consolidated financial statements.
2023
2022
2021
56
453
—
—
—
—
42 $
57 $
700 $
(234) $
6,178 $
10,410 $
2,274 $
478 $
— $
— $
706 $
127 $
— $
— $
9,707 $
— $
298
213 $
— $
—
—
91
OrthoPediatrics Annual Report 2023 | 95
ORTHOPEDIATRICS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2023 and 2022 and for the three years in the period ended
December 31, 2023
(dollars in thousands, except per share information)
NOTE 1 – BUSINESS
OrthoPediatrics Corp., a Delaware corporation, is a medical device company committed to designing, developing
and marketing anatomically appropriate implants, instruments and specialized braces for children with orthopedic
conditions, giving pediatric orthopedic surgeons and caregivers the ability to treat children with technologies
specifically designed to meet their needs, including PediLoc®, PediPlates®, Cannulated Screws, PediFlexTM nail,
PediNailTM, PediLoc® Tibia, ACL Reconstruction System, Locking Cannulated Blade, Locking Proximal Femur,
Spica Tables, RESPONSETM Spine, BandLocTM, Pediatric Nailing Platform | Femur, Devise Rail, Orthex®, The
Fassier-Duval Telescopic Intramedullary System®, SLIMTM Nail, The GAP NailTM, The Free Gliding SCFE Screw
SystemTM, GIROTM Growth Modulation System, PNP Tibia System, ApiFix® Mid-C System and Mitchell Ponseti®
specialized bracing products to various hospitals and medical facilities throughout the United States and various
international markets. We currently use a contract manufacturing model for the manufacturing of implants and
related surgical instrumentation while our clubfoot orthopedic products are manufactured in-house.
We are the only global medical device company focused exclusively on providing a comprehensive trauma and
deformity correction, scoliosis and sports medicine product offering to the pediatric orthopedic market in order to
improve the lives of children with orthopedic conditions. We design, develop and commercialize innovative
orthopedic implants, instruments and braces to meet the specialized needs of pediatric surgeons and their
patients, who we believe have been largely neglected by the orthopedic industry. We currently serve three of the
largest categories in this market.
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements include the accounts of OrthoPediatrics Corp. and its
wholly-owned subsidiaries (collectively, the “Company,” “we,” “our” or “us”). All intercompany balances and
transactions have been eliminated.
We have prepared the accompanying consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America (“GAAP”). The accompanying consolidated financial
statements have been prepared assuming our Company will continue as a going concern. We have experienced
recurring losses from operations since our inception and had an accumulated deficit of $197,742 and $176,768 as
of December 31, 2023 and 2022, respectively.
Use of Estimates
Preparation of our consolidated financial statements requires the use of estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses, as of the date of the consolidated financial
statements. By their nature, these judgments are subject to an inherent degree of uncertainty. We use historical
experience and other assumptions as the basis for our judgments and estimates. Because future events and their
effects cannot be determined with precision, actual results could differ significantly from these estimates. Any
changes in these estimates will be reflected in our consolidated financial statements.
Foreign Currency Transactions
We currently bill our international stocking distributors in U.S. dollars, resulting in minimal foreign exchange
transaction expense.
Beginning in early 2017 and continuing through 2023, we expanded operations and established legal entities
outside the United States, permitting us to sell under an agency model direct to local hospitals internationally. The
countries we serve under the agency model include the United Kingdom, Ireland, Australia, New Zealand,
Canada, Belgium, the Netherlands, Poland, Italy, Israel, Germany, Switzerland, and Austria. In order to further
96 | OrthoPediatrics Annual Report 2023
92
enhance our operations in Europe, we established operating companies in the Netherlands and Germany in
March 2019 and April 2022, respectively. In 2023, we hired operating and sales representatives in Germany to
better serve our customers. The financial statements of our foreign subsidiaries are accounted for in local
functional currencies and have been translated into U.S. dollars using end-of-period exchange rates for assets
and liabilities and average exchange rates during each reporting period for results of operations. Foreign currency
translation adjustments have been recorded as a separate component of the consolidated statements of
comprehensive loss.
Fair Value of Financial Instruments
The accounting standards related to fair value measurements define fair value and provide a consistent
framework for measuring fair value under the authoritative literature. Valuation techniques are based on
observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources,
while unobservable inputs reflect market assumptions. This guidance only applies when other standards require
or permit the fair value measurement of assets and liabilities. The guidance does not expand the use of fair value
measurements. A fair value hierarchy was established, which prioritizes the inputs used in measuring fair value
into three broad levels.
Level 1 – Quoted prices in active markets for identical assets or liabilities;
Level 2 – Observable market-based inputs or unobservable inputs that are corroborated by market data; and
Level 3 – Significant unobservable inputs that are not corroborated by market data. Generally, these fair value
measures are model-based valuation techniques such as discounted cash flows, and are based on the best
information available, including our own data.
The Company's financial instruments include cash, restricted cash, cash equivalents, short-term investments,
accounts receivable, accounts payable, acquisition installment payables, contingent consideration and long-term
debt. The carrying amounts of accounts receivable, accounts payable, acquisition installment payables and long-
term debt approximate the fair value due to the short-term nature or market rates of these instruments. The
company bases the fair value of short-term investments on quoted market prices for identical or comparable
assets except for investments classified as asset backed securities or certificates of deposit which we identify as
Level 2. These securities are predominately priced by third parties, either a pricing vendor or dealer. When a
quoted price in an active market for an identical security is not available these third parties will utilize an
alternative market approach, such as a recent trade or matrix pricing, or an income approach, such as a
discounted cash flow pricing model that calculates values from observable inputs such as quoted interest rates,
yield curves and other observable market information. Contingent consideration represents the system sales
payment the Company is obligated to make. The fair value of the contingent consideration payment is considered
a level 3 fair value measurement and was determined with the assistance of an independent valuation specialist
at the original issuance date and as of the balance sheet date. See Note 5 for further discussion of financial
instruments that carried a fair value on a recurring and nonrecurring basis.
Revenue from Contracts with Customers
In accordance with ASC 606, "Revenue from Contracts with Customers," revenue is recognized when our
performance obligations under the terms of a contract with our customer are satisfied. This typically occurs when
we transfer control of our products to the customers, generally upon implantation or when title passes upon
shipment. The amount of revenue recognized reflects the consideration to which the Company expects to be
entitled to receive in exchange for these goods or services, and excludes any sales incentives or taxes collected
from a customer which are subsequently remitted to government authorities.
Revenue Recognition – United States
Revenue in the United States is generated primarily from the sale of our implants, specialized braces and, to a
much lesser extent, from the sale of our instruments. Sales of our implants and instruments in the United States
are primarily to hospital accounts through independent sales agencies. Sales of our braces are primarily direct to
hospital, orthotist or end customers. We recognize revenue when our performance obligations under the terms of
a contract with our customer are satisfied. The implants and instruments are generally consigned to our
independent sales agencies, and revenue is recognized when the products are used by or shipped to the hospital
93
OrthoPediatrics Annual Report 2023 | 97
for surgeries on a case by case basis. On rare occasions, hospitals purchase product for their own inventory, and
revenue is recognized when the products are shipped and the title and risk of loss passes to the customer.
Generally, we consider our performance obligation related to the sale of our braces to be settled upon shipment,
and revenue is therefore recognized at that time.
Revenue Recognition – International
Outside of the United States, we sell our products, including our specialized braces, directly to hospitals through
independent sales agencies or to independent stocking distributors. Generally, the distributors are allowed to
return products, and some are thinly capitalized. Based on a history of reliable collections, we have concluded
that a contract exists and revenue should be recognized when we transfer control of our products to the customer,
generally when title passes upon shipment. Additionally, based on our history of immaterial returns from
international customers, we have historically estimated no reserve for returns.
Beginning in early 2017 and continuing through 2023, we expanded operations and established legal entities
outside the United States, permitting us to sell under an agency model direct to local hospitals internationally. The
products are generally consigned to our independent sales agencies, and revenue is recognized when the
products are used by or shipped to the hospital for surgeries on a case by case basis. On rare occasions,
hospitals purchase products for their own inventory, and revenue is recognized when title passes upon shipment.
Cash, Cash Equivalents and Short Term Investments
We maintain cash in bank deposit accounts which, at times, may exceed federally insured limits. To date, we
have not experienced any loss in such accounts. We consider all highly liquid investments with original maturity
of three months or less at inception to be cash equivalents. The carrying amounts reported in the balance sheets
for cash are valued at cost, which approximates fair value.
The Company invests in both certificate of deposits and available-for-sale short term investments. The Company
has the ability, if necessary, to liquidate without penalty any of its short term investments to meet its liquidity needs
in the next twelve months. As such, those investments with contractual maturities greater than one year from the
date of purchase are classified as short-term on the accompanying Consolidated Balance Sheets. The Company
includes unrealized gains or losses, as a component of other comprehensive income in stockholders' equity. If
the adjustment to fair value reflects a decline in the value of the investment, the Company evaluates whether any
impairment is a result of a credit loss or other factors. This evaluation includes, but is not limited to, significant
quantitative and qualitative assessments and estimates regarding credit ratings, significance of a security's loss
position, adverse conditions specifically related to the security, and the payment structure of the security. There
were no such losses recognized in the accompanying Consolidated Statements of Operations. Additionally, the
Company recognizes any previously unrealized gain or loss at the time the Company liquidates any of its
investments based on the value at the time of liquidation. In 2023 and 2022, the Company recognized gains of
$1,437 and $1,550, respectively, that were previously unrealized. No such gains or losses were recognized for the
year ended December 31, 2021.
Restricted Cash
In conjunction with the sale of Vilex, $1,250 was placed into a separate escrow account. This cash is reported as
restricted cash on the December 31, 2023 and 2022 Consolidated Balance Sheets. These funds were to remain
restricted until August 31, 2021 at which time, they were to be released to the Company subject to no claims
related to the purchase; however, due to the pending IMED Surgical litigation, the cash remains reported as
restricted until the conclusion of the legal matter. See Note 15 - Commitments and Contingencies for further detail.
The Company also maintains restricted cash of 650 Euro at its Netherlands entity for potential Italian tenders.
Accounts Receivable
Accounts receivable are uncollateralized customer obligations due under normal trade terms, generally requiring
payment within 30 days from the invoice date in the United States and within 90 days internationally. Account
balances with invoices over 30 or 90 days past due for domestic and international accounts, respectively, are
considered delinquent. No interest is charged on past due accounts. Payments of accounts receivable are applied
to the specific invoices identified on the customer's remittance advice or, if unspecified, to the customer's account
as an unapplied credit.
98 | OrthoPediatrics Annual Report 2023
94
The carrying amount of accounts receivable is reduced by an allowance that reflects management's best estimate
of the amounts that will not be collected, determined principally on the basis of historical experience,
management's assessment of the collectability of specific customer accounts and the aging of the accounts
receivable. All accounts or portions thereof deemed to be uncollectible or to require an excessive collection cost
are written off against the established reserve.
The following table summarizes activity in our reserves recorded against accounts receivable:
Balance at beginning of year
Adjustments charged to expense (income)
Write-offs & other adjustments
Carrying amount as a result of acquisitions
Balance at end of year
Inventories, net
$
$
2023
December 31,
2022
2021
1,056
$
347
$
499
182
—
723
174
160
1,373
$
1,056
$
433
(5)
81
—
347
Inventories are stated at the lower of cost or net realizable value, with cost determined using the first-in-first-out
method. Inventories, which consist of implants and instruments held in our warehouse, with third-party
independent sales agencies or distributors, or consigned directly with hospitals, are considered finished goods
and are purchased from third parties.
We evaluate the carrying value of our inventories in relation to the estimated forecast of product demand, which
takes into consideration the life cycle of the product. A significant decrease in demand could result in an increase
in the amount of excess inventory on hand, which could lead to additional charges for excess and obsolete
inventory.
The need to maintain substantial levels of inventory impacts our estimates for excess and obsolete inventory.
Each of our implant systems are designed to include implantable products that come in different sizes and shapes
to accommodate the surgeon’s needs. Typically, a small number of the set components are used in each surgical
procedure. Certain components within each set may become obsolete before other components based on the
usage patterns. We adjust inventory values, as needed, to reflect these usage patterns and life cycle.
In addition, we continue to introduce new products, which may require us to take additional charges for excess
and obsolete inventory in the future.
Charges for excess and obsolete inventory are included in cost of revenue and were $995, $1,011 and $1,100 for
the years ended December 31, 2023, 2022 and 2021, respectively.
Costs Related to Common Stock Offerings
On August 15, 2022, we completed a public offering of our common stock and pre-funded warrants exercisable
for an aggregate of up to 1,525,000 shares of common stock to Squadron Capital LLC (“Squadron”), our largest
investor. Offering expenses of $293, primarily consisting of legal, accounting and other direct fees and costs
related to the offering were recorded in stockholders' equity at the conclusion of our offering.
Property and Equipment, net
Property and equipment are carried at cost less accumulated depreciation. Depreciation is computed using the
straight-line method over the estimated useful life of the assets. When assets are retired or otherwise disposed of,
costs and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is
recognized in operations for the period. Maintenance and repairs that prolong or extend the useful life are
capitalized, whereas standard maintenance, replacements, and repair costs are expensed as incurred.
Instruments are hand-held devices, specifically designed for use with our implants and are used by surgeons
during surgery. Instruments deployed in the field are carried at cost less accumulated depreciation and are
recorded in property and equipment, net on the consolidated balance sheets.
95
OrthoPediatrics Annual Report 2023 | 99
Sample inventory consists of our implants and instruments, and is maintained to market and promote our
products. Sample inventory is carried at cost less accumulated depreciation.
Depreciable lives are generally as follows:
Building and building improvements
Furniture and fixtures
Computer equipment
Business software
Office and other equipment
Instruments
Sample inventory
Amortizable Intangible Assets, net
25 to 30 years
5 to 7 years
3 to 5 years
3 years
5 to 7 years
5 years
2 years
Amortizable intangible assets include fees necessary to secure various patents and licenses, including Band-Lok,
the value of internally developed software, customer relationships, and non-competition agreements related to the
acquisition of Orthex, and customer relationships and non-competition agreements related to the acquisitions of
Telos, ApiFix, MD Ortho, Pega Medical, MedTech Concepts and Rhino. Amortization is calculated on a straight-
line basis over the estimated useful life of the asset. Amortization for patents and licenses commences at the time
of patent approval, and for licenses upon market launch, respectively. Amortization for assets acquired
commences upon acquisition. Intangible assets are amortized over a 3 to 20 year period.
Amortizable intangible assets are assessed for impairment upon triggering events that indicate that the carrying
value of an asset may not be recoverable. Recoverability is measured by a comparison of the carrying amount to
future net undiscounted cash flows expected to be generated by the associated asset. If such assets are
determined to be impaired, the impairment to be recognized is measured by the amount by which the carrying
amount exceeds the fair market value of the intangible assets. No impairment charges were recorded in any of
the periods presented.
Goodwill and Other Intangible Assets
Our goodwill represents the excess of the cost over the fair value of net assets acquired. The determination of the
value of goodwill and intangible assets arising from acquisitions requires extensive use of accounting estimates
and judgments to allocate the purchase price to the fair value of net tangible and intangible assets acquired.
Goodwill is not amortized and is assessed for impairment using fair value measurement techniques on an annual
basis or more frequently if facts and circumstances warrant such a review. Goodwill is tested at the reporting unit
level as defined in the Glossary to ASC 350. Per this definition, a reporting unit is an operating segment or one
level below an operating segment. The Company has determined the reporting units to be our legacy surgical
implants unit and the bracing reporting unit established with the acquisition of MD Ortho. The goodwill is
considered to be impaired if we determine that the carrying value of either of our reporting units exceeds its
respective fair value. No impairment charges were recorded in any of the years presented.
The Company tests goodwill for impairment annually in the fourth quarter by either performing a qualitative
evaluation or a quantitative test. The quantitative assessment for goodwill requires us to estimate the fair value of
our two reporting units using either an income or market approach or a combination thereof.
We have indefinite lived trademark assets that are reviewed for impairment by performing a quantitative analysis,
which occurs annually in the fourth quarter, utilizing balances as of October 1, or whenever events or changes in
circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability is measured by
a comparison of the carrying amount to future net discounted cash flows expected to be generated by the
associated asset. If such assets are determined to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount exceeds the fair market value of the assets. The calculation of the fair
value of the trademark assets involves Level 3 fair value measurements. To estimate the fair value of the
trademark asset and associated impairment, we utilized the relief-from-royalty method, which is a form of the
income approach. This approach requires us to make significant estimates and assumptions including preparation
100 | OrthoPediatrics Annual Report 2023
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of forecasted revenue, selection of a royalty rate and discount rate and estimate of the terminal year revenue
growth rate.
During 2023 and 2022, management determined that a triggering event occurred, indicating that it was more likely
than not the fair value of the ApiFix trademark asset was less than the carrying value. As such, the company
completed a quantitative analysis whereby we determined the fair value of the ApiFix trademark asset associated
was below the carrying value. The primary reason for the impairment is the lower forecasted revenue of our ApiFix
product than previously expected. We recorded a $985 and $3,609 impairment charge for the years ended
December 31, 2023 and 2022, respectively, to reduce the carrying amount of the intangible asset to its estimated
fair value. No impairment charges were recorded in any of the other periods presented or for any other indefinite
lived trademark assets.
Investments in Privately Held Companies
The Company determines whether its investments in privately held companies are debt or equity based on their
characteristics. The Company also evaluates the investee to determine if the entity is a variable interest entity
(“VIE”) and, if so, whether the Company is the primary beneficiary of the VIE, in order to determine whether
consolidation of the VIE is required. If consolidation is not required and the Company does not have voting control
of the entity, the investment is evaluated to determine if the equity method of accounting should be applied. The
equity method applies to investments in common stock or in substance common stock where the Company
exercises significant influence over the investee.
Investments in privately held companies determined to be equity securities are accounted for as non-marketable
securities. The Company adjusts the carrying value of its non-marketable equity securities for changes from
observable transactions for identical or similar investments of the same issuer, less impairment. All gains and
losses on non-marketable equity securities, realized and unrealized, are recognized as a component of other
(income) expenses in the consolidated statements of operations.
Investments in privately held companies determined to be debt securities are accounted for as available-for-sale
or held-to-maturity securities unless the fair value option is elected. The Company has investments of $1,855 as
of December 31, 2023 which are recorded within other non-current assets on its consolidated balance sheet.
Acquisition Payable and Contingent Consideration
Upon the completion of an acquisition the Company may record an acquisition installment payable, contingent
consideration or both. Both are recorded at their fair values as determined by management with the assistance of
an independent valuation specialist at the original issuance date and are adjusted on a recurring basis. Accretion
of interest expense attributable to the acquisition installment payable are recorded as a component of interest
(income) expense, net. Changes in the fair value of the contingent consideration are included in fair value
adjustments of contingent consideration. Both are included as a component of other (income) expenses on the
consolidated statement of operations. The amount of expense recorded was $1,372, $2,307 and $2,155 for the
years ended December 31, 2023, 2022 and 2021, respectively. Adjustments in the fair value of the contingent
consideration payment were recognized as income of $2,980, $25,930 and $1,800 for the years ended
December 31, 2023, 2022 and 2021, respectively.
Shipping and Handling Costs
Shipping and handling costs that are billed to the customer are included in net revenue and were $1,244, $1,027
and $803, for the years ended December 31, 2023, 2022 and 2021, respectively. Shipping and handling costs that
are not billed to the customer are included in sales and marketing expenses and were $5,655, $4,270 and $2,899,
for the years ended December 31, 2023, 2022 and 2021, respectively.
Cost of Revenue
Cost of revenue consists primarily of products purchased from third-party suppliers, excess and obsolete
inventory adjustments, inbound freight, and royalties. Our implants and instruments are manufactured to our
specifications by third-party suppliers who meet our manufacturer qualifications standards. Our third-party
manufacturers are required to meet Food and Drug Administration (the “FDA”), International Organization for
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OrthoPediatrics Annual Report 2023 | 101
Standardization and other country-specific quality standards. The majority of our implants and instruments are
produced in the United States.
Sales and Marketing Expenses
Sales and marketing expenses primarily consist of commissions to our domestic and select international
independent sales agencies and consignment distributors, as well as compensation, commissions, benefits and
other related costs for personnel we employ. Commissions and bonuses are generally based on a percentage of
sales. Our international independent stocking distributors purchase instrument sets and replenishment stock for
resale, and we do not pay commissions or any other sales related costs for international sales to distributors.
Advertising Costs
Advertising costs consist primarily of print advertising, trade shows, and other related expenses. Advertising costs
are expensed as incurred and are recorded as a component of sales and marketing expense. Advertising costs
were $2,409, $1,906 and $898 for the years ended December 31, 2023, 2022 and 2021, respectively.
Research and Development Costs
Research and development costs are expensed as incurred. Our research and development expenses primarily
consist of costs associated with engineering, product development, consulting services, outside prototyping
services, outside research activities, materials, development and protection of our intellectual property portfolio,
as well as other costs associated with development of our products. Research and development costs also
include related personnel and consultants’ compensation expense.
Stock-Based Compensation
Prior to our IPO, we maintained an Amended and Restated 2007 Equity Incentive Plan (the “2007 Plan”) that
provides for grants of options and restricted stock to employees, directors and associated third-party
representatives of our company as determined by the Board of Directors. The 2007 Plan had authorized
1,585,000 shares for award.
Immediately prior to our IPO, we adopted our 2017 Incentive Award Plan (the “2017 Plan”) which replaced the
2007 Plan. The 2017 Plan provides for grants of options and restricted stock to officers, employees, consultants or
directors of our Company. The 2017 Plan has authorized 1,832,460 shares for award.
Options holders, upon vesting, may purchase common stock at the exercise price, which is the estimated fair
value of our common stock on the date of grant. Option grants generally vest immediately or over a three-year
period. No stock options were granted in any of the periods presented.
Restricted stock may not be transferred prior to the expiration of the restricted period. The restricted stock that
has been granted under the 2007 Plan has restriction periods that generally last until the earlier of six years from
the date of grant, or an initial public offering or change in control, as defined in the 2007 Plan. All restricted stock
granted prior to May 2014 vested upon our IPO and the remaining grants under the 2007 Plan vested in April
2018. Generally under the 2017 plan, restricted stock vests at the end of a three-year period. We have elected to
recognize the reversal of stock compensation expense when a restricted stock forfeiture occurs as opposed to
estimating future forfeitures.
We record the fair value of restricted stock at the grant date. Stock-based compensation is recognized ratably
over the requisite service period, which is generally the restriction period for restricted stock.
Foundation for Advancing Pediatric Orthopedics
The Company may periodically make contributions to the Foundation for Advancing Pediatric Orthopedics (the
"Foundation"). The Foundation was incorporated in 2018 exclusively for pediatric orthopedic research and
education and qualifies under IRC 501(c)(3) as an exempt private foundation. The mission of the Foundation is to
enhance the knowledge and experience, through education and research, of surgical trainees or practicing
surgeons who are involved in helping children with orthopaedic disorders and injuries. The Foundation is a
separate legal entity and is not a subsidiary of the Company; therefore, its results are not included in these
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98
consolidated financial statements. The Company contributed $286, $524 and $88 to the Foundation during the
years ended December 31, 2023, 2022 and 2021, respectively. These contributions were recorded in general and
administrative expenses.
Comprehensive Loss
Comprehensive loss is defined as the change in equity during a period from transactions and other events and
circumstances from non-owner sources. Comprehensive loss includes foreign currency translation adjustments
and unrealized gains (losses) on marketable securities.
Income Taxes
We account for income taxes under the asset and liability method, which requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that have been included in the financial
statements. Under this method, we determine deferred tax assets and liabilities on the basis of the differences
between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the
year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets
and liabilities is recognized in income in the period that includes the enactment date.
We recognize deferred tax assets to the extent that we believe that these assets are more likely than not to be
realized. In making such a determination, we consider all available positive and negative evidence. If we
determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded
amount, we would make an adjustment to the valuation allowance.
We record uncertain tax positions on the bases of a two-step process in which (1) we determine whether it is
more likely than not that the tax positions will be sustained on the basis of the technical merits of the positions and
(2) for those tax positions that do not meet the more-likely-than-not recognition threshold, we recognize the
largest amount of tax benefit that is more than 50% likely to be realized upon ultimate settlement with the related
tax authority.
Litigation and Contingencies
Accruals for litigation and contingencies are reflected in the consolidated financial statements based on
management’s assessment, including advice of legal counsel, of the expected outcome of litigation or other
dispute resolution proceedings and/or the expected resolution of contingencies. Liabilities for estimated losses are
accrued if the potential loss from any claim or legal proceeding is considered probable and the amount can be
reasonably estimated. Significant judgment is required in both the determination of probability of loss and the
determination as to whether the amount is reasonably estimable. Accruals are based only on information available
at the time of the assessment due to the uncertain nature of such matters. As additional information becomes
available, management reassesses potential liabilities related to pending claims and litigation and may revise its
previous estimates, which could materially affect the Company’s results of operations in a given period.
Debt Issuance Costs
Debt issuance costs are deferred and presented as a reduction to long-term debt. Debt issuance costs are
amortized using the effective interest rate method over the term of the loan. Amortization of deferred debt
issuance costs are included within interest (income) expense, net in the consolidated statements of operations.
Leases
At the inception of a contractual arrangement, the Company determines whether the contract contains a lease by
assessing whether there is an identified asset and whether the contract conveys the right to control the use of the
identified asset in exchange for consideration over a period of time. If both criteria are met, the Company
calculates the associated lease liability and corresponding right-of-use asset upon lease commencement using a
discount rate based on a borrowing rate commensurate with the term of the lease.
The Company records lease liabilities within current liabilities or long-term liabilities based upon the length of time
associated with the lease payments. The Company records its operating lease right-of-use assets within other
non-current assets.
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OrthoPediatrics Annual Report 2023 | 103
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13 "Financial Instruments - Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments". The ASU is intended to improve financial reporting by
requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions
and other organizations. The ASU requires the measurement of all expected credit losses for financials assets
including trade receivables held at the reporting date based on historical experience, current conditions, and
reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking
information to better inform their credit loss estimates. The Company adopted ASU 2016-16 effective January 1,
2023. The adoption is on a prospective basis and did not have a significant impact on the Company's
consolidated financial statements and related disclosures.
In October 2021, the FASB issued ASU No. 2021-08 "Business Combinations (Topic 805)-Accounting for Contract
Assets and Contract Liabilities from Contracts with Customers". The amendments in this Update address diversity
and inconsistency related to the recognition and measurement of contract assets and contract liabilities acquired
in a business combination. The amendments in this Update require that an acquirer recognize and measure
contract assets and contract liabilities acquired in a business combination in accordance with Topic 606, Revenue
from Contracts with Customers. For public business entities, the amendments in this Update are effective for
fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. For all other
entities, the amendments are effective for fiscal years beginning after December 15, 2023, including
interim periods within those fiscal years. The amendments in this Update should be applied prospectively to
business combinations occurring on or after the effective date of the amendments. Early adoption of the
amendments is permitted, including adoption in an interim period. An entity that early adopts in an interim period
should apply the amendments (1) retrospectively to all business combinations for which the acquisition date
occurs on or after the beginning of the fiscal year that includes the interim period of early application and (2)
prospectively to all business combinations that occur on or after the date of initial application. The Company
adopted ASU 2021-08 effective January 1, 2023. The adoption will be applied prospectively to business
combinations that occur after January 1, 2023, resulting in no material impacts to the consolidated financial
statements.
In October 2023, the FASB issued ASU No. 2023-06 "Disclosure Improvements - Codification Amendments in
Response to SEC's Disclosure Update and Simplification Initiative." This amendment modifies the disclosure or
presentation requirements of a variety of Topics in the Codification. Certain of the amendments represent
clarifications to or technical corrections of the current requirements. For entities subject to the SEC's existing
disclosure requirements and entities required to file or furnish financial statements with or to the SEC in
preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on
transfer, the effective date for each amendment will be the date on which the SEC's removal of that related
disclosure from Regulation S-X or Regulation S-K becomes effective, with early adoption prohibited. For all other
entities, the amendments will be effective two years later. Amendments in this Update should be applied
prospectively. The Company continues to analyze this ASU. The update is specific to disclosures and, therefore,
is not expected to have a material impact to the consolidated financial statements.
In November 2023, the FASB issued ASU No. 2023-07, "Segment Reporting (Topic 280): Improvements to
Reportable Segment Disclosures." The standard requires disclosure of significant segment expenses that are
regularly provided to the chief operating decision maker ("CODM") and included within each reported measure of
segment profit or loss, an amount and description of its composition for other segment items to reconcile to
segment profit or loss, and the title and position of the entity's CODM. The amendments in this update also
expand the interim segment disclosure requirements. This authoritative guidance will be effective for us in fiscal
2025 for annual periods and in the first quarter of fiscal 2026 for interim periods, with early adoption permitted. We
are currently evaluating the effect of this new guidance on our consolidated financial statements and disclosures.
In December 2023, the FASB issued ASU No. 2023-09, "Income Taxes (Topic 740): Improvements to Income Tax
Disclosures" (ASU 2023-09), which enhances the transparency and decision usefulness of income tax
disclosures. The ASU is effective for public companies for fiscal years beginning on or after December 15, 2024,
with early adoption permitted. The amendments in ASU 2023-09 should be applied on a prospective basis.
Retrospective application is permitted. We are currently evaluating the effect of this new guidance on our
consolidated financial statements and disclosures.
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NOTE 3 – BUSINESS COMBINATIONS AND ASSET ACQUISITIONS
Rhino Pediatric Orthopedic Designs, Inc.
On July 1, 2023, the Company completed an acquisition of assets, including inventory and certain intangible
assets, of Rhino Pediatric Orthopedic Designs, Inc. ("Rhino"). Rhino's product portfolio included several pediatric
orthopedic products in the bracing and soft goods space, including the CruiserTM, KickerTM, and Rhino StomperTM.
The Company paid $1,024 in total consideration for the assets which was comprised of $546 of cash, including
$46 of transactions costs, and 11,133 shares of the Company’s common stock, par value $0.00025 per share,
representing approximately $478 (based on closing price of $42.91 on July 1, 2023).
Medtech Concepts LLC
On May 1, 2023, the Company purchased all of the issued and outstanding membership interest of Medtech
Concepts LLC, a Delaware limited liability company (“MedTech”). MedTech has developed an early-stage, pre-
commercial enabling technology platform designed to increase efficiency in the perioperative environment. The
solution combines hardware, software, and data analytics to help streamline operative care and support better
decision making in the operating room. In the future, the Company believes this enabling technology platform will
provide valuable intraoperative resources for surgeons that will improve decision making, drive operating room
efficiency, and ultimately improve healthcare for children. The Company also expects that the acquisition will
further support future market share gains for its implant systems, similar to what the Company has experienced
with the FIREFLY® Technology and the 7D Surgical FLASHTM Navigation platform. No revenue was recorded
from this platform in 2023.
The sellers of MedTech are being paid a purchase price of approximately $15,274 in the following manner: (i)
cash in the aggregate amount of $3,000 was paid on May 1, 2023, the transaction closing date (the “Closing
Date”); (ii) 43,751 unregistered shares of the Company’s common stock, par value $0.00025 per share,
representing approximately $2,274 (based on a closing share price of $51.98 on May 1, 2023), were issued on
the Closing Date; and (iii) an aggregate of $2,500 payable 50% in cash and 50% in shares of unregistered
common stock, will be paid on each of the first four anniversaries of the Closing Date, all subject to the conditions
set forth in the Membership Interest Purchase Agreement (as amended, the "Purchase Agreement") relating to the
transaction.
The Company concluded that the business acquired did not comprise an integrated set of activities that meet the
definition of a business and therefore did not result in the acquisition of a business. Instead, the Company
accounted for the transaction as an asset acquisition for accounting purposes.
Under the Purchase Agreement, a number of future payments in the form of common stock are contingent on
continued service through each applicable payment anniversary date. As such, these amounts have been
excluded from measuring the cost of the acquisition. The result is $4,500 of stock compensation which will be
recognized on a straight-line basis over the four-year service period. Future cash payments and stock issuances
that are not contingent on continuous service are included in the calculation of consideration. The total
consideration is $10,043 after discounting the future guaranteed fixed payments to their present value.
Additionally, since this was treated as an asset acquisition, the Company included $97 of transaction costs in the
total consideration. The table below reconciles the payments and issuances to total consideration transferred after
discounting the future payments to present value.
Cash consideration
Issuance of common stock
Anniversary payments
Transaction costs
Total consideration transferred
Consideration
Present Value
$
$
3,000
$
2,274
5,500
97
3,000
2,274
4,672
97
10,871
$
10,043
As result of this asset acquisition, the Company recorded a trademark asset in the amount of $520 with an
indefinite useful life and an intellectual property asset relating to software acquired of $9,523 which will be
amortized over a useful life of ten years.
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OrthoPediatrics Annual Report 2023 | 105
Kevin Unger, a member of the Company’s Board of Directors (the “Board”) through April 28, 2023, was one of the
sellers in the transaction. As a result, the Board formed a special committee comprised of independent and
disinterested directors (the “Special Committee”) with the exclusive authority to review, evaluate, and negotiate, or
reject, the potential MedTech acquisition. The Purchase Agreement and the transactions contemplated thereby
were approved by both the Special Committee and the full Board (with Mr. Unger abstaining).
Pega Medical
On July 1, 2022, the Company purchased all of the issued and outstanding share capital of Pega Medical Inc., a
corporation incorporated under the Canada Business Corporations Act (“Pega Medical”). Pega Medical has
developed and sells a portfolio of trauma and deformity correction devices for children, including the Fassier-
Duval Telescopic Intramedullary System, a well-recognized, innovative implant designed to treat bone deformities
in children with osteogenesis imperfecta without disrupting their normal growth. Pega's product portfolio increases
our total systems and increases the percentage of total trauma and deformity cases we can treat.
The Company acquired Pega Medical for approximately $32,042 in cash. Approximately $1,052 of the cash
consideration was deposited into escrow and will be held for a period of up to eighteen (18) months to cover
certain indemnification obligations of the selling shareholders of Pega Medical. Additionally, 34,899 shares of
unregistered common stock, $0.00025 par value per share, of the Company, representing approximately $1,497
(based on the July 1, 2022 closing share price of $42.90) were issued to the selling shareholders. The common
stock issued to the selling shareholders is not considered part of the purchase consideration and is subject to a
repurchase right. The Company will recognize expense over the three-year service period at which point the right
to repurchase will expire. In the event the repurchase right is triggered, the Company will have the right to
repurchase the shares of common stock issued to such selling shareholder at a price of $0.10 per share. As of
December 31, 2023, 13,851 of these shares were still subject to the repurchase feature. Pursuant to the terms of
the transaction, the Company also issued $499 in restricted stock units to employees of Pega Medical, which are
subject to an approximate three-year vesting schedule. The restricted stock units are not considered part of the
purchase consideration. The Company incurred approximately $382 of acquisition-related costs that are included
in general and administrative expenses on the consolidated statement of operations for the year ended December
31, 2022.
The following table summarizes the total consideration paid for Pega Medical and the final allocation of purchase
price to the estimated fair value of the assets acquired and liabilities assumed at the acquisition date:
Fair value of estimated total acquisition consideration
$
32,042
Assets
Cash
Accounts receivable - trade
Inventories
Prepaid expenses and other current assets
Property and equipment
Amortizable intangible assets
Other intangible assets
Total assets
Liabilities
Accounts payable-trade
Other current liabilities
Deferred tax liability
Total liabilities
Less: total net assets
Goodwill
106 | OrthoPediatrics Annual Report 2023
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312
2,100
4,875
509
600
12,286
3,878
24,560
1,682
1,393
4,035
7,110
17,450
14,592
$
The fair value of identifiable intangible assets was based on valuations using a combination of the income and
cost approach, inputs which would be considered Level 3 under the fair value hierarchy. The estimated fair value
and useful life of identifiable intangible assets are as follows:
Amount
Remaining Economic Useful Life
Trademarks / Names
Patents
Customer Relationships & Other
$
$
3,878
3,545
8,741
16,164
Indefinite
10 years
15 years
The fair value estimates and purchase price allocation included above are considered final. For the year ended
December 31, 2023, the Company recorded measurement period adjustments. The adjustments were primarily
the result of updated valuations of the intangible assets and updated estimates of certain liabilities and assets.
The adjustment to the intangible assets also resulted in an adjustment to the deferred tax liability. Additionally, the
increase in the value of intangible assets resulted in additional amortization expense of approximately $133 for
the year ended December 31, 2023. Goodwill declined as a net result of these adjustments.
MD Orthopaedics
On April 1, 2022, OrthoPediatrics Iowa Holdco, Inc., a newly-formed, wholly-owned subsidiary of the Company,
merged with and into MD Orthopaedics, Inc., an Iowa corporation (“MD Ortho”). MD Ortho has developed and
manufactures a portfolio of orthopedic clubfoot products. The acquisition expands our total addressable market,
serving as a specialty bracing platform company within our Trauma and Deformity business.
Under the terms of the related merger agreement, the Company paid to the indirect, sole shareholder of MD Ortho
consideration of (a) $8,781 in cash, after adjusting for closing net working capital, and (b) 173,241 shares of
unregistered common stock, $0.00025 par value per share, of the Company, representing approximately $9,707
(based on the April 1, 2022 closing share price of $56.03). The Company incurred approximately $381 of
acquisition-related costs, that are included in general and administrative expenses on the consolidated statement
of operations for the year ended December 31, 2022.
The following table summarizes the total consideration paid for MD Ortho and the final allocation of purchase
price to the estimated fair value of the assets acquired and liabilities assumed at the acquisition date:
Fair value of estimated total acquisition consideration
$
18,487
Assets
Cash
Accounts receivable - trade
Inventories
Prepaid expenses and other current assets
Property and equipment
Amortizable intangible assets
Other intangible assets
Total assets
Liabilities
Accounts payable and accrued liabilities
Other current liabilities
Deferred tax liability
Total liabilities
Less: total net assets
Goodwill
420
1,062
1,126
100
2,444
9,120
2,410
16,682
45
586
3,014
3,645
13,037
5,450
$
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OrthoPediatrics Annual Report 2023 | 107
The fair value of identifiable intangible assets was based on final valuations using a combination of the income
and cost approach, inputs which would be considered Level 3 under the fair value hierarchy. The estimated fair
value and useful life of identifiable intangible assets are as follows:
Trademarks / Names
Patents
Customer Relationships
Amount
Remaining Economic Useful Life
$
$
2,410
2,660
6,460
11,530
Indefinite
10 years
15 years
The following table represents the pro forma net revenue and net income (loss) assuming the acquisitions of MD
Ortho and Pega Medical occurred on January 1, 2021.
Net revenue
Net income (loss)
Devise Ortho
December 31,
2022
2021
$ 128,648 $ 113,899
$
2,110 $
(12,810)
On October 20, 2021, we purchased certain intellectual property assets from Devise Ortho, Inc. related to its Drive
Rail external fixation system. We recorded $840 which will be amortized over the life of the patents, or
approximately 16 years. In addition to the intellectual property, the Company purchased $108 of inventory from
Devise Ortho, Inc. The total consideration of $948 was paid using $650 in cash and 4,599 shares of the
Company's common stock, representing approximately $298 (based on the closing share price of $64.83 on
October 20, 2021).
ApiFix
On April 1, 2020, the Company purchased all the issued and outstanding membership interest of ApiFix for $2,000
in cash, including $344 of cash acquired, 934,783 shares of the Company's common stock, $0.00025 par value
per share, representing approximately $35,176 (based on a closing share price of $37.63 on April 1, 2020),
approximately $30,000 in anniversary payments, and approximately $41,741 in a contingent system sales
payment. ApiFix, a corporation organized under the laws of Israel, has developed a minimally invasive deformity
correction system for patients with Adolescent Idiopathic Scoliosis ("ApiFix System").
The Company is obligated to make anniversary payments of: (i) approximately $13,000 on the second
anniversary of the closing date, provided that such payment will be paid earlier if 150 clinical procedures using the
ApiFix System are completed in the United States before such anniversary date, (ii) $8,000 on the third
anniversary of the closing date; and (iii) $9,000 on the fourth anniversary of the closing date, subject to
adjustments. The Company anticipates making the fourth anniversary payment of $9,000 on the anniversary date.
In addition, to the extent that the product of our revenues from the ApiFix System for the twelve months ended
March 31, 2024 multiplied by 2.25 exceeds the anniversary payments actually made for the third and fourth years,
we have agreed to pay the selling shareholders a system sales payment in the amount of such excess. The
anniversary payments and system sales payment may each be made in cash or cash and common stock, subject
to certain limitations; provided that the Company makes the determination with respect to anniversary payments
and a representative of the former ApiFix shareholders may make the determination with respect to the system
sales payment, if any. Pursuant to the acquisition agreement, both the anniversary installments and the system
sales payment require a minimum cash payment of 25 percent of the total amount due. The remaining 75 percent
may be paid with common stock.
The fair value of the contingent consideration payment is considered a Level 3 fair value measurement and was
determined with the assistance of an independent valuation specialist at the original issuance date using an
option pricing model and a Monte Carlo simulation based on forecasted annual revenue, expected volatility and
discount rates. The fair value of the payment will continue to be adjusted as additional information becomes
available regarding the progress toward achievement of the revenue forecast. The adjustments in the fair value of
the contingent consideration payment were recognized as income of $2,980, $25,930 and $1,800 for the years
ended December 31, 2023, 2022 and 2021, respectively, within other (income) expenses on the consolidated
statements of operations. An additional $970, $2,307 and $2,155 was recognized as interest expense for the
108 | OrthoPediatrics Annual Report 2023
104
years ended December 31, 2023, 2022 and 2021, respectively, on the consolidated statements of operations for
the accretion of the acquisition installment payable.
Presented below is a summary of the present value of the anniversary payments and fair value of the system
sales payment related to the ApiFix acquisition:
Anniversary Payments:
Third Year Payment
Fourth Year Payment
Total acquisition installment payable
Less: current portion of acquisition installment payable
Acquisition installment payable, net of current portion
System sales payment
December 31, 2023
December 31, 2022
$
— $
8,804
8,804
8,804
—
—
7,815
8,019
15,834
7,815
8,019
2,980
ApiFix future consideration, net of current portion
$
— $
10,999
Pre-acquisition revenues and earnings for ApiFix were not material to the consolidated operations.
NOTE 4 - GOODWILL AND INTANGIBLE ASSETS
Goodwill
The Company tests goodwill for impairment by either performing a qualitative evaluation or a quantitative test.
The qualitative evaluation is an assessment of factors including reporting unit specific operating results as well as
industry, market and general economic conditions, to determine whether it is more likely than not that the fair
values of a reporting unit is less than its carrying amount, including goodwill. The Company may elect to bypass
the qualitative assessment for its two reporting units, a legacy surgical implants unit and a bracing reporting unit
established with the acquisition of MD Ortho, and perform a quantitative test on each. The assumptions used in
evaluating goodwill for impairment are subject to change and are tracked against historical results by
management.
The Company elected to perform a qualitative analysis for its reporting units as of October 1, 2023. The Company
determined, after performing the qualitative analysis that there was no evidence that it is more likely than not that
the fair value of its reporting units were less than the carrying amount, therefore, it was not necessary to perform a
quantitative impairment test.
Changes in the carrying amount of goodwill were as follows:
Goodwill at January 1, 2022
Pega Medical measurement period adjustment
Pega acquisition
Foreign currency translation impact
Goodwill at December 31, 2022
Pega Medical measurement period adjustment
Foreign currency translation impact
Goodwill at December 31, 2023
Total
72,349
5,450
16,528
(7,506)
86,821
(1,936)
(1,186)
83,699
$
$
$
105
OrthoPediatrics Annual Report 2023 | 109
Intangible Assets
As of December 31, 2023, the balances of amortizable intangible assets were as follows:
Patents
11.2 years
$
45,646 $
(11,008) $
— $
34,638
Weighted-Average
Amortization Period
Gross Intangible
Assets
Accumulated
Amortization
Impairment
Net Intangible
Assets
Intellectual Property and
Capitalized Software
Customer Relationships &
Other
License agreements
Total amortizable assets
9.1 years
12.4 years
3.8 years
16,026
18,862
10,733
(2,524)
(3,270)
(5,190)
—
—
—
$
91,267 $
(21,992) $
— $
13,502
15,592
5,543
69,275
As of December 31, 2022, the balances of amortizable intangible assets were as follows:
Weighted-Average
Amortization Period
Gross Intangible
Assets
Accumulated
Amortization
Impairment
Net Intangible
Assets
Patents
12.2 years
$
46,005 $
Intellectual Property
9.8 years
Customer Relationships &
Other
License agreements
Total amortizable assets
13.4 years
4.5 years
5,859
17,262
10,697
(7,953) $
(1,382)
(1,805)
(3,703)
— $
—
—
—
$
79,823 $
(14,843) $
— $
38,052
4,477
15,457
6,994
64,980
Amortization expense was $7,149, $5,977 and $4,531 for the years ended December 31, 2023, 2022 and 2021,
respectively. Future amortization expenses are expected as follows:
Year Ending December 31:
2024
2025
2026
2027
2028
Thereafter
$
7,577
7,379
7,339
6,908
6,281
33,791
$
69,275
Licenses are tied to product launches and do not begin amortizing until the product is launched to the market.
Anticipated market launch is in 2024 through 2026 for products for which we previously obtained licensing.
On September 3, 2021, we entered into a five-year license agreement, resulting in exclusive distribution rights of
the 7D Surgical FLASHTM Navigation platform for pediatric applications. We paid $750 which will be amortized
over the initial three years of the agreement.
On July 20, 2021, we entered into an amended license agreement, resulting in a five-year extension of our
exclusive distribution rights of the FIREFLY Technology in children's hospitals across the United States. We paid
$4,300 for the amended agreement and the amount will be amortized over the life of the agreement.
On March 19, 2021, we recorded a license agreement in the amount of $2,858 in settlement of an alleged patent
infringement suit related to scoliosis derotation. Amortization is recorded based on the cases completed in the
given period.
Trademarks are recorded as indefinite-lived intangible assets in the amounts of $15,287 and $14,921 as of
December 31, 2023 and 2022, respectively. Concurrently with our acquisition of each company, we acquired the
trademark of Telos on March 9, 2020 valued at $210 and the trademark of ApiFix on April 1, 2020 valued at
$8,640. In 2022 we acquired trademarks associated with MD Ortho and Pega Medical for approximately $2,410
and $3,878, respectively. In 2023 we acquired trademarks associated with MedTech and Rhino for approximately
$520 and $140, respectively. Trademarks are recorded in Other Intangible assets on the Consolidated Balance
Sheets.
110 | OrthoPediatrics Annual Report 2023
106
During 2023 and 2022, management determined that a triggering event occurred for our ApiFix trademark,
indicating that it was more likely than not the fair value of the trademark assets is less than the carrying value. As
such, the company completed a quantitative analysis whereby we determined the fair value of the trademark
asset associated with our ApiFix acquisition was below the carrying value. We recorded impairment charges of
$985 and $3,609 for the years ended December 31, 2023 and 2022, respectively, to reduce the carrying amount
of the intangible asset to its estimated fair value.
NOTE 5 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company measures certain financial assets and liabilities at fair value. The accounting standards related to
fair value measurements define fair value and provide a consistent framework for measuring fair value under the
authoritative literature.
The following tables summarize the assets and liabilities measured at fair value on a recurring basis as of
December 31, 2023 and 2022, respectively.
Level 1
Level 2
Level 3
Total
December 31, 2023
Financial Assets
Short term investments
Certificates of Deposit
Exchange Trade Mutual Funds
Treasury Bonds
Other
Financial Assets
Short term investments
Certificates of Deposit
Corporate Bonds
Treasury Bonds
Other
Financial Liabilities
Contingent Consideration
$
$
$
$
$
$
$
$
$
— $
25,792 $
5,015 $
18,235 $
207 $
— $
— $
— $
December 31, 2022
— $
— $
— $
— $
Level 1
Level 2
Level 3
Total
— $
25,148 $
18,939 $
65,040 $
172 $
— $
— $
— $
— $
— $
— $
— $
25,792
5,015
18,235
207
25,148
18,939
65,040
172
— $
— $
2,980 $
2,980
The Company's level 1 assets consist of short-term, liquid investments with original maturity of three months or
less at inception and other short term investments which are comprised of exchange traded mutual funds and
marketable securities with a maturity date greater than 3 months.
The Company's level 2 assets pertain to certificates of deposit. These securities are predominately priced by third
parties, either by a pricing vendor or dealer with significant inputs observable in active markets.
The Company's Level 3 instruments consist of contingent consideration. The fair value of the contingent
consideration liability assumed in business combinations is recorded as part of the purchase price consideration
of the acquisition and is determined using a discounted cash flow model or probability simulation model. The
significant inputs of such models are not always observable in the market, such as forecasted annual revenues,
expected volatility and discount rates. The adjustments in the fair value of the contingent consideration payments
resulted in income of $2,980, $25,930 and $1,800 for the years ended December 31, 2023, 2022 and 2021,
respectively.
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OrthoPediatrics Annual Report 2023 | 111
The following table summarizes the change in fair value of the Level 3 instrument:
Balance at December 31, 2021
Change in fair value of contingent consideration
Balance at December 31, 2022
Change in fair value of contingent consideration
Balance at December 31, 2023
Total
28,910
(25,930)
2,980
(2,980)
—
$
$
The recurring Level 3 fair value measurements of the contingent consideration liability associated with the ApiFix
system sales milestone include the following significant unobservable inputs as of December 31, 2023, 2022 and
2021, respectively:
Valuation techniques
Present value discount rate(1)
Volatility factor
Expected Years
December 31,
2023
December 31,
2022
December 31,
2021
Discounted cash flow, Monte Carlo
— %
— %
16.6 %
48.0 %
18.4 %
50.3 %
0.4 years
1.4 years
2.4 years
(1) The present value discount rate includes estimated risk premium.
NOTE 6 - PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of the following:
Land
Building and building improvements
Computer equipment and software
Office and other equipment
Instruments
Sample inventory
Construction in progress
Less: accumulated depreciation
Total property and equipment, net
December 31,
2023
2022
$
1,725 $
1,725
5,870
5,828
5,821
5,729
3,319
4,328
53,093
43,596
2,780
5,519
2,674
3,719
80,636
65,090
(39,588)
(30,804)
$
41,048 $
34,286
Depreciation expense is included in general and administrative expenses and was $10,236, $7,121 and $6,148
for the years ended December 31, 2023, 2022 and 2021, respectively.
NOTE 7 – ACCRUED COMPENSATION AND BENEFITS
Accrued compensation and benefits consisted of the following:
Accrued compensation and related costs
Accrued commissions
Total accrued compensation and benefits
December 31,
2023
2022
$
4,279 $
7,046
$
11,325 $
3,282
3,462
6,744
112 | OrthoPediatrics Annual Report 2023
108
NOTE 8 - DEBT AND CREDIT ARRANGEMENTS
Long-term debt consisted of the following:
Term loan and Final Payment
Mortgage payable to affiliate
Total debt
Less: debt discount and issuance costs
Less: current maturities
Long-term debt, net of current maturities
December 31,
2023
2022
$
10,300 $
763
11,063
1,003
152
$
9,908 $
—
907
907
—
144
763
On December 29, 2023, the Company entered into a $80 million Credit, Security and Guaranty Agreement (the
“Credit Agreement”) by and among (i) the Company and other borrowers party to the Credit Agreement
(collectively, the “Borrowers”), (ii) MidCap Funding IV Trust, as Agent (“Agent”), (iii) MidCap Financial Trust, as
Term Loan Servicer (“Servicer”), and (iv) the financial institutions or other entities from time to time party thereto
as Lenders (collectively, “Lenders”). Under the terms of the Credit Agreement, the Lenders have provided to
Borrowers a term loan in an aggregate principal amount that will not exceed $30 million available in three
tranches of $10 million each subject to certain draw conditions (the “Term Loan”) and a revolving loan in an
aggregate principal amount that will not exceed $50 million (the “Revolving Loan”). Borrowings are available
subject to certain levels of working capital for the Revolving Loan. The second tranche of the Term Loan is
eligible to be drawn between July 1, 2024 through June 30, 2025. The third tranche of the Term Loan is eligible
to be drawn between January 1, 2025 through June 30, 2025. The Company must meet certain cash usage
requirements at the time of each draw to be eligible to access these term loans. Interest on the Term Loan will
accrue at the greater of (a) One Month Term SOFR plus 6.50% or (b) 9.0% and interest on the Revolving Loan
will accrue at the greater of (a) One Month Term SOFR plus 4.0% or (b) 6.50% (the “Applicable Rate”) and will
be payable monthly by the Borrowers. The Term Loans may be prepaid in full through December 29, 2024 with
payment of a 3.00% prepayment premium, after which they may be prepaid in full through December 29, 2025
with payment of a 2.00% prepayment premium, after which they may be prepaid in full through December 29,
2026 with payment of a 1.00% prepayment premium, after which they may be prepaid in full with no prepayment
premium. An additional final payment of 3.00% ("Final Payment") of the amount of the Terms Loans advanced
by the Lenders will be due upon prepayment or repayment of the Terms Loans in full, and is accounted for as
debt discount. The first tranche of $10 million was issued under the Term Loan upon execution. Payments of
principal and all accrued but unpaid interest will be due and payable upon the earlier of: (i) December 1, 2028;
(ii) the occurrence of any transaction or series of transactions pursuant to which any person or entity in the
aggregate acquire(s) 35% or more of the voting capital stock of the Company; (iii) a change in the majority of the
Company’s Board of Directors over a 12-month period; (iv) the Company ceases to own directly or indirectly,
100% of the capital stock of any of its subsidiaries (with the exception of any subsidiaries permitted to be
dissolved, merged or otherwise disposed of by the Credit Agreement), or (v) the occurrence of a change in
control, fundamental change, deemed liquidation event or terms of similar import under any document or
instrument governing or relating to debt of or equity interests of Company. The loans under the Credit
Agreement are secured by a security interest in the Company’s and other Borrowers' assets. The Credit
Agreement provides for customary events of default. If an event of default is not cured within the time periods
specified (if any), the Lenders and Agent have the right to accelerate the Company’s payment of principal and
interest in addition to other rights and remedies.
The Credit Agreement includes certain customary non-financial covenants, and also include certain financial
covenants related to the Company achieving minimum revenue targets over a trailing twelve month period. The
Company was in compliance with all covenants under the Credit Agreement as of December 31, 2023.
The debt facilities available under the Credit Agreement replace the Fourth Amended and Restated Loan and
Security Agreement with Squadron (as amended, the “Squadron Loan Agreement”), which provided the
Company with a $50 million revolving credit facility. During the year ended December 31, 2023 and as of
December 31, 2022, there was no indebtedness outstanding under the Squadron Loan Agreement and it was
terminated in connection with the Credit Agreement.
Borrowings under the Squadron Loan Agreement accrued interest at an annual rate equal to the greater of (a) six
month SOFR plus 8.69% and (b) 10.0%, and the Company was permitted to make interest only payments on
109
OrthoPediatrics Annual Report 2023 | 113
amounts outstanding. Prior to December 31, 2021, the interest rate on the facility had been equal to the greater
of (a) three month LIBOR plus 8.61% and (b) 10.0%. The Company paid Squadron an unused commitment fee in
an amount equal to the per annum rate of 0.50% (computed on the basis of a year of 360 days and the actual
number of days elapsed) times the daily unused portion of the revolving credit commitment. The unused
commitment fee was payable quarterly in arrears.
Borrowings under the Squadron Loan Agreement were made under a Second Amended and Restated Revolving
Note, dated June 13, 2022 (the “Amended Revolving Note”), payable, jointly and severally, by the Company and
each of its subsidiaries party thereto. The Amended Revolving Note matured at the earlier of: (i) the date on which
any person or persons acquire (x) capital stock of the Company possessing the voting power to elect a majority of
the Company’s Board of Directors (whether by merger, consolidation, reorganization, combination, sale or
transfer), or (y) all or substantially all of the Company’s assets, determined on a consolidated basis; and (ii)
January 1, 2024.
Borrowings under the Squadron Loan Agreement were secured by substantially all of the Company's assets and
were unconditionally guaranteed by each of its subsidiaries with the exception of Vilex. There were no traditional
financial covenants associated with the Squadron Loan Agreement. However, there were negative covenants
that prohibited us from, among other things, transferring any of our material assets, merging with or acquiring
another entity, entering into a transaction that would result in a change of control, incurring additional
indebtedness, creating any lien on our property, making investments in third parties and redeeming stock or
paying dividends, in each case subject to certain exceptions.
In connection with the purchase of our office and warehouse space in Warsaw, Indiana in August 2013, we
entered into a mortgage note payable to Tawani Enterprises Inc., an affiliate of Squadron. Pursuant to the terms of
the mortgage note, we pay Tawani Enterprises Inc. monthly principal and interest installments of $16 with interest
compounded at 5% until maturity in 2028, at which time a final payment of remaining principal and interest is due.
The mortgage is secured by the related real estate and building. As of December 31, 2023 and 2022, the
mortgage balance was $763 and $907, respectively, of which current principal due of $152 and $144,
respectively, was included in current portion of long-term debt.
At December 31, 2023, the aggregate future principal payments on our debt arrangements, including the Final
Payment, are as follows:
2024
2025
2026
2027
2028
Thereafter
$
152
160
168
176
10,407
—
$
11,063
Interest expense relating to notes payable to Squadron and mortgage note payable with Tawani was $42, $525
and $56 for the years ended December 31, 2023, 2022 and 2021, respectively.
NOTE 9 - INCOME TAXES
Total income tax benefit for the years ended December 31, 2023, 2022 and 2021 was allocated as follows:
Total tax expense (benefit)
2023
2022
2021
$
(338) $
(4,947) $
(1,128)
For the years ended December 31, 2023, 2022 and 2021 loss before taxes of the Company consists of the
following:
Domestic
Foreign
Total
2023
2022
2021
$
(12,582) $
6,451 $
(9,232)
(8,730)
(10,140)
(8,156)
$
(21,312) $
(3,689) $
(17,388)
114 | OrthoPediatrics Annual Report 2023
110
The components of income tax benefit for the years ended December 31, 2023, 2022 and 2021 are as follows:
2021
2023
2022
Current:
Federal
State
Foreign
Deferred:
Federal
State
Foreign
Decrease in valuation allowance
Total income tax expense (benefit)
$
— $
— $
85
740
825
68
17
85
$
— $
—
— $
—
—
—
—
—
—
—
(1,163)
—
(2,018)
(3,014)
(1,128)
—
$
(338) $
(4,947) $
(1,128)
The reconciliation between the effective tax rate and the statutory tax rate is as follows:
Federal statutory rate
State statutory rate, net of federal benefit
Effect of foreign rates different from statutory
Change in state rate
Excess tax benefits from stock plans
Nondeductible/nontaxable or other items
Unborn foreign tax deduction
US benefit of foreign branches
Nondeductible executive compensation
Change in valuation allowance
Income tax (expense) benefit
December 31,
2023
2022
2021
21.0 %
1.2 %
0.2 %
(0.3) %
(0.2) %
(3.3) %
(0.5) %
8.6 %
(1.0) %
(24.1) %
21.0 %
(6.3) %
6.4 %
0.9 %
9.6 %
(22.1) %
6.8 %
64.4 %
(4.4) %
57.8 %
1.6 %
134.1 %
21.0 %
2.0 %
(0.1) %
(1.3) %
7.5 %
11.9 %
(1.5) %
— %
— %
(33.1) %
6.3 %
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts used for income tax purposes. The primary
temporary differences that give rise to the deferred tax assets and liabilities are certain inventory adjustments,
depreciation and amortization, interest expense, stock based compensation and net operating loss carryforwards.
The deferred tax assets and liabilities consisted of the following at December 31, 2023 and 2022:
Deferred tax assets:
Inventories, net
Stock based compensation
Loss carryforwards
Credit carryforwards
Interest carryforward
Other
Total deferred tax assets
Valuation allowance
Net deferred tax assets
Deferred tax liabilities:
Intangibles
Property, plant and equipment
Total deferred tax liabilities
Foreign currency translation impact
Deferred tax liabilities, net
2023
2022
$
5,979 $
3,158
42,199
176
134
1,122
52,768
5,804
2,534
38,443
176
520
787
48,264
(41,927)
(36,778)
10,841
11,486
(14,426)
(15,737)
(1,898)
(1,703)
(16,324)
(17,440)
—
—
$
(5,483) $
(5,954)
111
OrthoPediatrics Annual Report 2023 | 115
The deferred tax assets were fully offset by a valuation allowance at December 31, 2023 and 2022, with the
exception of certain deferred tax liabilities in Canada and Israel. The Company has recorded a tax benefit during
the years ended December 31, 2023 and 2022, for losses generated in certain foreign jurisdictions.
As of December 31, 2023, we had available federal, state and foreign tax loss carryforwards of $118,930, $76,944
and $26,260, respectively. We had available federal tax credits of $176. Net operating losses ("NOLs") generated
prior to December 31, 2017 will begin to expire in 2028. Federal net operating losses generated after January 1,
2018 will have an indefinite carryforward period. An ownership change under Section 382 of the Internal Revenue
Code was deemed to occur on May 30, 2014. Given the limitation calculation, we anticipate approximately
$23,920 in losses generated prior to the ownership change date will be subject to potential limitation. The
estimated annual limitation is $1,062. A second ownership change under Section 382 was deemed to occur on
December 11, 2018. The estimated annual limitation is $9,736, which is increased by $22,430 over the first five
years as a result of an unrealized built in gain. NOLs sustained prior to May 30, 2014 will still be constricted by the
lower limitation.
Management assesses the available positive and negative evidence to estimate whether sufficient future taxable
income will be generated to permit use of the existing deferred tax assets. A significant piece of objective negative
evidence evaluated was the cumulative loss incurred over the three-year period ended December 31, 2023. Such
objective evidence limits the ability to consider other subjective evidence, such as our projections for future
growth. As a result, a full valuation continues to be recorded against the Company's net deferred tax assets, with
the exception of Canada and Israel.
We are subject to taxation in the United States, Indiana and various other state and international jurisdictions. As
of December 31, 2023, all tax years from 2008 remain open to examination by the major taxing jurisdictions to
which we are subject due to our net operating loss and credit carryforwards from those years. We believe that the
income tax filing positions will be sustained on audit and do not anticipate any adjustments that will result in a
material change. Therefore, no reserve for uncertain income tax positions has been recorded. Interest and
penalties, if any, associated with income tax examinations will be recorded as a component of income taxes.
At December 31, 2023, our foreign operations held cash totaling $3,230. We have not provided for foreign
withholding tax on the undistributed earnings from our non-U.S. subsidiaries that are considered to be indefinitely
reinvested. If such earnings were to be distributed, any foreign withholding tax would not be significant.
NOTE 10 - STOCKHOLDERS’ EQUITY
Prior to our IPO, we maintained the 2007 Plan that provides for grants of options and restricted stock to
employees, directors and associated third-party representatives of our company as determined by the Board of
Directors. The 2007 Plan had authorized 1,585,000 shares for award.
Immediately prior to our IPO, we adopted the 2017 Plan which replaced the 2007 Plan. The 2017 Plan provides
for grants of options and restricted stock to officers, employees, consultants or directors of our Company. The
2017 Plan has authorized 1,832,460 shares for award. As of December 31, 2023, the 2017 Plan had 186,909
shares available for issuance.
Stock Options
The fair value for options granted at the time of issuance were estimated at the date of grant using a Black-
Scholes options pricing model. Significant assumptions included in the option value model include the fair value of
our common stock at the grant date, weighted average volatility, risk-free interest rate, dividend yield and the
forfeiture rate. There were no stock options granted in any of the periods presented.
116 | OrthoPediatrics Annual Report 2023
112
Our stock option activity and related information are summarized as follows:
Outstanding at January 1, 2021
Forfeited or expired
Exercised
Outstanding at December 31, 2021
Forfeited or expired
Exercised
Outstanding at December 31, 2022
Forfeited or expired
Exercised
Outstanding at December 31, 2023
Options
Weighted-Average
Exercise Price
Weighted-Average
Remaining
Contractual Terms
(in Years)
12,802 $
(1,742) $
(4,422) $
6,638 $
(1,072) $
(2,010) $
3,556 $
(2,886) $
(670) $
— $
30.97
30.97
30.97
30.97
30.97
30.97
30.97
30.97
30.97
—
1.6
1.3
0.7
—
Options generally include a time-based vesting schedule permitting the options to vest ratably over three years. At
December 31, 2023 and 2022, all options were fully vested.
There was no stock-based compensation expense on stock options for all periods presented.
Restricted Stock
Our restricted stock activity and related information are summarized as follows:
Outstanding at January 1, 2021
Granted
Forfeited
Outstanding at Vested
Outstanding at December 31, 2021
Granted
Forfeited
Outstanding at Vested
Outstanding at December 31, 2022
Granted
Forfeited
Vested
Outstanding at December 31, 2023
Restricted
Stock
Awards
Weighted-Average
Remaining
Contractual Terms
(in Years)
Restricted
Stock Units
Weighted-Average
Remaining
Contractual Terms
(in Years)
436,730
114,256
(6,354)
(176,186)
368,446
216,881
(28,344)
(153,659)
403,324
311,689
(6,800)
(115,760)
592,453
1.1
1.1
1.4
—
—
2.5
—
—
—
—
—
11,634
(1,554)
—
10,080
4,005
(234)
—
1.6
13,851
1.7
At December 31, 2023, there was $14,150 of unrecognized compensation expense remaining related to our
service-based restricted stock awards. The unrecognized compensation cost is expected to be recognized over a
weighted average period of 1.6 years.
Stock-based compensation expense on restricted stock amounted to $10,526, $6,679 and $5,842 for the years
ended December 31, 2023, 2022 and 2021, respectively, all of which is recorded within general and administrative
expenses in the consolidated statements of operations.
Warrants
On August 15, 2022, the Company completed a public offering of securities that included the issuance and sale to
Squadron of pre-funded warrants to purchase up to 1,525,000 shares of the Company’s common stock. The price
per warrant was equal to the price per share at which common shares were concurrently sold to the public, minus
$0.00025, which nominal amount was the exercise price of each warrant. The warrants issued to Squadron were
exercised on September 20, 2022, following the expiration of all waiting periods under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the “HSR Act”), that were applicable to Squadron as a result of
113
OrthoPediatrics Annual Report 2023 | 117
it beneficially owning shares of the Company’s common stock with a value in excess of the HSR Act notification
threshold.
NOTE 11 – NET (LOSS) EARNINGS PER SHARE
The following is a reconciliation of basic and diluted net (loss) earnings per share attributable to common
stockholders:
Net (loss) income
Less: Earnings allocated to participating securities
Net (loss) income available to common shareholders
Denominator for basic and diluted net (loss) income per share
Weighted average shares outstanding for basic
Weighted average shares outstanding for diluted
(Loss) earnings per share:
Basic
Diluted
Year Ended December 31,
2023
2022
2021
(20,974) $
1,258 $
(16,260)
—
23
—
(20,974) $
1,235 $
(16,260)
22,675,477
20,704,556
19,268,255
22,675,477
20,947,727
19,268,255
(0.92) $
(0.92) $
0.06 $
0.06 $
(0.84)
(0.84)
$
$
$
$
Our basic and diluted net income (loss) per share is computed using the two-class method. The two-class
method is an earnings allocation that determines net income per share for each class of common stock and
participating securities according to their participation rights in dividends and undistributed earnings or losses.
Non-vested restricted stock that includes non-forfeitable rights to dividends are considered participating
securities.
For the periods presented with a net loss the weighted average shares outstanding remains consistent between
basic and diluted as the effect would have been anti-dilutive.
The following table shows the contingently issuable and convertible equity shares that were excluded from the
calculation of diluted net earnings (loss) per share because their effect would have been anti-dilutive:
Restricted stock
Stock options
Year Ended December 31,
2023
2022
2021
606,304
—
606,304
413,404
3,556
416,960
368,446
6,638
375,084
The contingently issuable shares in the table above do not include shares of our common stock associated with
our obligation to issue a variable number of our common shares as a result of our recent acquisitions of Pega
Medical, ApiFix or MedTech. See Note 3 for additional information regarding our commitment to issue future
equity under each of these acquisitions.
NOTE 12 – BUSINESS SEGMENT
Operating segments are defined as components of an enterprise for which separate financial information is
available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding
how to allocate resources and in assessing performance. We have one operating and reportable segment,
OrthoPediatrics, which designs, develops and markets anatomically appropriate specialized braces, implants and
devices for children with orthopedic problems. Our chief operating decision-maker, our Chief Executive Officer,
reviews financial information presented on a consolidated basis for purposes of making operating decisions and
assessing financial performance, accompanied by disaggregated revenue information by product category. We
do not assess the performance of our individual product categories on measures of profit or loss, or other asset-
based metrics. Therefore, the information below is presented only for revenue by category and geography.
Product sales attributed to a country or region includes product sales to hospitals, physicians and distributors and
is based on the final destination where the products are sold. No individual customer accounted for more than
118 | OrthoPediatrics Annual Report 2023
114
10% of total product sales for any of the periods presented. No customer accounted for more than 10% of
consolidated accounts receivable as of December 31, 2023 or 2022.
Disaggregated revenue - product sales by source were as follows:
Product sales by geographic location:
U.S.
International
Total
Product sales by category:
Trauma and deformity
Scoliosis
Sports medicine/other
Total
Year Ended December 31,
2023
2022
2021
$
$
111,010 $
92,419 $
37,722
29,870
148,732 $
122,289 $
77,781
20,268
98,049
Year Ended December 31,
2023
2022
2021
$
106,781 $
85,055 $
37,933
4,018
33,428
3,806
$
148,732 $
122,289 $
65,829
28,046
4,174
98,049
No individual country with sales originating outside of the United States accounted for more than 10% of
consolidated revenue for the years ended December 31, 2023, 2022 and 2021.
No individual country held long-lived assets in excess of 10% of consolidated long-lived assets as of
December 31, 2023 or 2022.
NOTE 13 - RELATED PARTY TRANSACTIONS
In addition to the expired debt and credit agreements and mortgage with Squadron and its affiliate (refer to Note
8), we currently use Structure Medical, LLC (“Structure Medical”) as one of our suppliers. Structure Medical is
affiliated with Squadron and a supplier with which we maintain certain long-term agreements. Our aggregate
payments to Structure Medical for inventory purchases were $1,060, $956 and $750 for the years ended
December 31, 2023, 2022 and 2021, respectively.
NOTE 14 - EMPLOYEE BENEFIT PLAN
We have a defined-contribution plan, OrthoPediatrics 401(k) Retirement Plan (the “401(k) Plan”), which includes a
cash or deferral (Section 401(k)) arrangement. The 401(k) Plan covers those employees who meet certain
eligibility requirements and elect to participate. Employee contributions are limited to the annual amounts
permitted under the Internal Revenue Code. The 401(k) Plan allows us to make a discretionary matching
contribution. Discretionary matching contributions are determined annually by management. OrthoPediatrics
Corp. matches our employees' 401(k) contributions up to 4%. Employees of MD Ortho receive contribution
matches up to 3% of their salary. For the years ended December 31, 2023, 2022 and 2021, the total 401(k) match
resulted in expense of $900, $718 and $510, respectively.
NOTE 15 – COMMITMENTS AND CONTINGENCIES
Leases
As of December 31, 2023, the Company has recorded a lease liability of $1,000 and corresponding right-of-use
asset of $1,084 on its consolidated balance sheet.
Legal Proceedings
From time to time, we are involved in various legal proceedings arising in the ordinary course of our business.
IMED Surgical - Software Ownership Dispute
On October 16, 2020, the Company, its wholly-owned subsidiary, Orthex, LLC (“Orthex”), the Company’s largest
investor, Squadron, and certain other defendants, were named in a lawsuit filed by IMED Surgical, LLC, a New
Jersey company (the “Plaintiff”), in Broward County, Florida Circuit Court. In the lawsuit, the Plaintiff claims,
among other things, that it is the rightful owner of certain patented point-and-click planning software being used
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OrthoPediatrics Annual Report 2023 | 119
by the Company, Orthex and Squadron (specifically, U.S. Patent No. 10,258,377 (titled “Point and click alignment
method for orthopedic surgeons, and surgical and clinical accessories and devices,” issued on April 16, 2019)
(hereinafter, the “‘377 Patent”).
In June 2019, the Company purchased all the issued and outstanding units of membership interests in Orthex,
and all the issued and outstanding shares of stock of Vilex in Tennessee, Inc. for $60,000 in total consideration.
Vilex and Orthex are primarily manufacturers of foot and ankle surgical implants, including cannulated screws,
fusion devices, surgical staples and bone plates, as well as the Orthex Hexapod technology, a system of rings,
struts, implants, hardware accessories, and the Point & Click Software used to treat congenital deformities and
limb length discrepancies. On December 31, 2019, the Company divested substantially all of the assets relating
to Vilex's adult product offerings to a wholly-owned subsidiary of Squadron, in exchange for a $25,000 reduction
in a term note owed to Squadron in connection with the initial acquisition. As part of the sale, the Company also
executed an exclusive license arrangement with Squadron providing for perpetual access to certain intellectual
property, including the ‘377 Patent. According to the lawsuit, the other defendants, who are unrelated to the
Company, assigned the ‘377 Patent to Orthex in violation of certain agreements with the Plaintiff. The Plaintiff,
among other things, requests that the defendants be ordered to convey and assign to Plaintiff all of their rights,
title and interests in and to the ‘377 Patent and seeks certain compensatory, consequential and unjust enrichment
damages from Orthex and the unrelated defendants.
On May 13, 2021, the Court ordered the lawsuit stayed pending arbitration. To the extent the Plaintiff desires to
further pursue the matter, it must first do so through a separate arbitration proceeding. In mid-November 2021,
the Plaintiff initiated an arbitration proceeding; however, the Plaintiff failed to pay the fees it was required to pay
for the arbitration to continue, resulting in the arbitration panel terminating the arbitration proceedings in mid-
October 2022. In connection with the stay order, the Court also ordered the Company, Orthex and Squadron to
give notice to the Plaintiff before any attempt to dispose, assign, sell or otherwise encumber the ‘377 Patent. The
Company, Orthex and Squadron filed an appeal of this component of the order, but the appellate court affirmed
the lower court’s decision. The Company, Orthex and Squadron have not sought to further pursue an appeal of
the subject order.
On February 3, 2023, the Court partially lifted the stay in this case for the sole purpose of, as clarified by the
Court's order on March 7, 2023, "permitting any party to argue any motion challenging the events that occurred
which led to the arbitration panel's termination order." No filing was made in response to that order. No further
filings were made in this case until October 30, 2023, when defendants filed a motion to dismiss.
On December 12, 2023, the Court ordered the Plaintiff has until March 13, 2024, to appear before the Court and
show cause why this case should not be dismissed for failure to pursue arbitration consistent with the Court’s
orders. If Plaintiff has not resumed arbitration by the March 13 hearing, the parties should brief the issue of
whether, if the case is dismissed, it should be dismissed with or without prejudice and set the matter for a hearing.
Although we believe the Company has strong defenses to the IMED lawsuit and we intend to vigorously defend
the claims asserted against us, arbitration and litigation can involve complex factual and legal questions, and an
adverse resolution of such proceedings could have a material adverse effect on our business, operating results
and financial condition.
Wishbone Medical, Inc. – Patent Infringement Litigation
On October 30, 2020, OrthoPediatrics, along with its wholly-owned subsidiary, Orthex, LLC, filed a lawsuit in
federal district court (N.D. Indiana, South Bend Division, Case No. 3:20-cv-00929) against Wishbone Medical, Inc.
and Nick A. Deeter (collectively “Wishbone”), claiming infringement of ’377 Patent, unfair competition, false
advertising, breach of contract, defamation per se, tortious interference with contractual relationships, and tortious
interference with prospective contractual relationships. In early January 2021, OrthoPediatrics amended its
lawsuit by adding a declaratory judgment claim of infringement of the ‘377 Patent against Wishbone.
Thereafter, in January 2021, Wishbone filed a motion to dismiss all OrthoPediatrics’ causes of action. In late
August 2021, the Court denied Wishbone's motion to dismiss with respect to OrthoPediatrics’ infringement and
breach of contract claims and dismissed OrthoPediatrics' remaining causes of action. In late September 2021,
Wishbone filed its answer and counterclaims, in part, seeking declaratory judgment of non-infringement and
invalidity of the ‘377 Patent, and alleging OrthoPediatrics patent infringement claim(s) against Wishbone was
120 | OrthoPediatrics Annual Report 2023
116
made in bad faith. In mid-October 2021, OrthoPediatrics filed its answer to Wishbone’s counterclaims, denying all
of them. In late January 2023, Wishbone amended its counterclaims to add a breach of contract claim against
OrthoPediatrics. In early February 2023, OrthoPediatrics filed its answer to Wishbone's amended counterclaims,
denying all of them. Additionally, in late March 2023, Wishbone filed a motion for judgment on the pleadings
regarding the patent eligibility of the '377 patent. In mid-April 2023, OrthoPediatrics filed its response to
Wishbone's late March 2023 motion. In mid-June 2023, the Court denied Wishbone's motion for judgment on the
pleadings.
In September 2023, the Company and Wishbone Medical, Inc. reached a settlement of all claims against one
another, resulting in a payment to the Company that was not material. In December 2023, the Company and Mr.
Deeter reached a settlement of all remaining claims against one another. Subsequently, the Court dismissed the
lawsuit with prejudice concerning all parties.
Boston Brace Litigation
This lawsuit arises from the alleged wrongful death of a patient following his January 2016, tracheal and laryngeal
resection procedure at Boston Children’s Hospital, which was performed by two physicians named as defendants
in the suit. The Plaintiffs allege that as a result of the patient’s post-operative care, which included placing his
neck in a position of flexion in a modified brace provided by Boston Brace International, Inc. (“Boston Brace”), the
patient was paralyzed, and years later, he died due to complications caused by his paralysis. The Company
acquired all of the outstanding shares of Boston Brace on January 5, 2024 as described more fully under Note 16
– Subsequent Events.
The lawsuit commenced in December 2018, in Suffolk Superior Court in Boston, Massachusetts. The Plaintiffs
assert counts of negligence against each individual defendant, lack of informed consent against the physician
defendants, failure to warn, breach of warranty and alleged improper use against Boston Brace, and loss of
consortium against all defendants. Trial is currently scheduled to begin in December 2025.
Although we believe Boston Brace has strong defenses to this lawsuit and we intend to vigorously defend the
claims asserted against us, litigation can involve complex factual and legal questions, and an adverse resolution
of such proceedings could have a material adverse effect on our business, operating results and financial
condition.
We are not presently a party to any other legal proceedings the outcome of which, if determined adversely to us,
would individually or in the aggregate materially affect our financial position or results of operations or cash flows.
Purchase Obligations and Performance Requirements
As a result of entering into a license agreement for the exclusive distribution of the 7D Surgical FLASHTM
Navigation platform during 2021, the Company agreed to a minimum purchase commitment for the first twelve
months of that agreement. As of December 31, 2021 the remaining balance of the commitment was $1,900.
During the year ended December 31, 2022 and 2023, the Company met the minimum purchase commitment as
required for the first twelve months of the agreement. Additionally, the contract requires future purchase
commitments based upon a percentage of historical purchases. As a result and as of December 31, 2023, the
Company has a minimum purchase commitment for approximately $1,820 and $1,456 for the years ending
December 31, 2024 and 2025, respectively.
On July 20, 2021, we entered into an amended license agreement, resulting in a five-year extension of our
exclusive distribution rights of the FIREFLY Technology. As a component of the agreement the Company is
required to meet minimum performance metrics, measured by the number of spine procedures in the fiscal year
which used the FIREFLY products against the annual requirement in the agreement. This includes any scheduled
surgeries whereby the Company has committed to payment of the product. The number of required surgeries
varies each year of the agreement. During the years ended December 31, 2023, 2022 and 2021, the Company
did not reach the minimum performance metrics. As such, the Company recorded $2,000, $1,104 and $512 as a
component of cost of revenue for the shortfall which occurred during 2023, 2022 and 2021, respectively.
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OrthoPediatrics Annual Report 2023 | 121
Royalties
As of December 31, 2023, we are contracted to pay royalties to individuals and entities that provide research and
development services, which range from 0.5% to 20% of sales. Additionally, we have minimum royalty
commitments of $10 annually through 2026.
We have products in development that have royalty commitments. In any development project, there are
significant variables that will affect the amount and timing of these payments and as of December 31, 2023, we
have not been able to determine the amount and timing of payments. We do not anticipate these future payments
will have a material impact on our financial results.
NOTE 16 – SUBSEQUENT EVENTS
On January 5, 2024, the Company entered into a stock purchase agreement with Boston Brace International, Inc.,
a Massachusetts corporation, the shareholders of Boston Brace (collectively, the “Sellers”), and the Sellers’
representative named therein, pursuant to which the Company acquired all of the issued and outstanding shares
of capital stock of Boston Brace from the Sellers. Boston Brace has developed and manufactures pediatric
orthotic and prosthetic devices, including non-surgical scoliosis treatment options, and provides related clinical
services.
Under the terms of the Purchase Agreement, the Company paid to the Sellers consideration of $22 million in
cash, subject to customary adjustments related to net working capital, transaction expenses, and funded
indebtedness.
Certain employees and executives of Boston Brace also received awards of restricted stock of the Company
which will vest in three years. The Restricted Stock Award Agreements were to approximately 170 individuals for
an aggregate of approximately 83,000 shares representing approximately $2.5 million (based on a share price of
$30.12, which was the average closing price during the four-month period ending on January 4, 2024) and were
granted pursuant to the Company’s 2017 Plan.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
At the end of the period covered by this report (the “Evaluation Date”), the Company carried out an evaluation,
under the supervision and with the participation of the Company’s management, including the Company’s Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure
controls and procedures pursuant to Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934
(“Exchange Act”). Disclosure controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by a company in the reports that it files or submits
under the Exchange Act is accumulated and communicated to the company’s management, including its
principal executive and principal financial officers, as appropriate to allow timely decisions regarding required
disclosure. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer
concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures are effective.
Disclosure controls and procedures are controls and procedures that are designed to ensure that information
required to be disclosed in Company reports filed or submitted under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules
and forms.
Management's Report on Internal Control over Financial Reporting
Internal control over financial reporting refers to the process designed by, or under the supervision of, our Chief
Executive Officer and Chief Financial Officer, and effected by our board of directors, management and other
personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles, and
includes those policies and procedures that:
122 | OrthoPediatrics Annual Report 2023
118
•
•
•
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the
transactions and dispositions of our assets;
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that our receipts
and expenditures are being made only in accordance with authorization of our management and
directors; and
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use
or disposition of our assets that could have a material effect on the financial statements.
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting
objectives because of its inherent limitations. Internal control over financial reporting is a process that involves
human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human
failures. Internal control over financial reporting also can be circumvented by collusion or improper management
override. Because of such limitations, there is a risk that material misstatements may not be prevented or
detected on a timely basis by internal control over financial reporting. However, these inherent limitations are
known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to
reduce, though not eliminate, this risk. Management is responsible for establishing and maintaining adequate
internal control over financial reporting for the company.
Management has used the framework set forth in the report entitled Internal Control-Integrated Framework (2013
framework) published by the Committee of Sponsoring Organizations of the Treadway Commission (2013
framework), known as COSO, to evaluate the effectiveness of our internal control over financial reporting. Based
on this assessment, management has concluded that our internal control over financial reporting was effective as
of December 31, 2023.
There has been no other changes in our internal control over financial reporting during our most recent fiscal
quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial
reporting.
Deloitte & Touche LLP, an independent registered public accounting firm, has audited the Consolidated Financial
Statements included in this Annual Report on Form 10-K and, as part of its audit, has issued an attestation report,
included herein, on the effectiveness of our internal control over financial reporting at December 31, 2023.
ITEM 9B. OTHER INFORMATION
None
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTION
Not Applicable.
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OrthoPediatrics Annual Report 2023 | 123
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
We will provide information that is responsive to this Item 10 regarding executive compensation in our definitive
proxy statement or in an amendment to this Annual Report not later than 120 days after the end of the fiscal year
covered by this Annual Report, in either case under the caption “Information About Directors,” “Section 16
(a) Beneficial Ownership Reporting Compliance” and possibly elsewhere therein. That information is incorporated
in this Item 10 by reference.
ITEM 11. EXECUTIVE COMPENSATION
We will provide information that is responsive to this Item 11 regarding executive compensation in our
definitive proxy statement or in an amendment to this Annual Report not later than 120 days after the end of
the fiscal year covered by this Annual Report, in either case under the caption “Executive Compensation,”
and possibly elsewhere therein. That information is incorporated in this Item 11 by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information about the Company’s common stock that may be issued under equity
compensation plans as of December 31, 2023.
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 under equity
compensations plans
(excluding securities reflected
in first column)
Equity compensation plans approved by stockholders
Total
606,304 $
606,304 $
—
—
186,909
186,909
We will provide additional information that is responsive to this Item 12 regarding ownership of securities by
certain beneficial owners in our definitive proxy statement or in an amendment to this Annual Report not later than
120 days after the end of the fiscal year covered by this Annual Report, in either case under the caption “Security
Ownership of Certain Beneficial Owners and Management and Related Stockholders,” and possibly elsewhere
therein. That information is incorporated in this Item 12 by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
We will provide information that is responsive to this Item 13 regarding transactions with related parties and
director independence in our definitive proxy statement or in an amendment to this Annual Report not later than
120 days after the end of the fiscal year covered by this annual report, in either case under the caption “Certain
Relationships and Related Transactions,” and possibly elsewhere therein. That information is incorporated in this
Item 13 by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
We will provide information that is responsive to this Item 14 regarding principal accounting fees and services in
our definitive proxy statement or in an amendment to this Annual Report not later than 120 days after the end of
the fiscal year covered by this annual report, in either case under the caption “Principal Accountant Fees and
Services,” and possibly elsewhere therein. That information is incorporated in this Item 14 by reference.
124 | OrthoPediatrics Annual Report 2023
120
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
FINANCIAL INFORMATION
(a) 1. The following financial statements of OrthoPediatrics Corp. are filed as part of this document under Item 8
hereof:
Report of Independent Registered Public Accounting Firm
(PCAOB ID: 34)
Consolidated balance sheets at December 31, 2023 and 2022
Consolidated statements of operations, years ended December 31, 2023, 2022 and 2021
Consolidated statements of comprehensive loss, years ended December 31, 2023, 2022 and
2021
Consolidated statements of stockholders' equity, years ended December 31, 2023, 2022 and
2021
Consolidated statements of cash flows, years ended December 31, 2023, 2022 and 2021
Notes to consolidated financial statements
(a) 2. Financial statement schedules:
All schedules are omitted because they are not applicable or not required, or because the required information is
included in the consolidated financial statements or related notes.
(a) 3. Exhibits:
Exhibit No: Ref Description of Exhibits:
Share Purchase Agreement, dated April 1, 2020, by and among OrthoPediatrics Corp., ApiFix Ltd. (“ApiFix”), certain controlling
shareholders of ApiFix, and the sellers’ representative named therein (Incorporated by reference to Exhibit 2.1 of registrant's
Form 8-K filed on April 1, 2020) (SEC File No. 001-38242) W
Agreement and Plan of Merger, dated April 1, 2022, by and among OrthoPediatrics Corp., OrthoPediatrics Iowa Holdco, Inc.,
Mitchell Designs, Inc. (“Designs”), and John Mitchell, the sole shareholder of Designs (Incorporated by reference to Exhibit 10.1
of registrant's Form 8-K filed on April 4, 2022) (SEC File No. 001-38242) W
Sale and Purchase Agreement, dated June 13, 2022, among OrthoPediatrics Corp., OrthoPediatrics Canada ULC, and the
shareholders of Pega Medical Inc. (Incorporated by reference to Exhibit 2.1 of registrant's Form 8-K filed on June 14, 2022)
(SEC File No. 001-38242) W
Amended and Restated Certificate of Incorporation of OrthoPediatrics Corp. (Incorporated by reference to Exhibit 3.1 of
registrant's Form 8-K filed on October 16, 2017) (SEC File No. 001-38242)
Amended and Restated Bylaws of OrthoPediatrics Corp. (Incorporated by reference to Exhibit 3.2 of registrant's Form 8-K filed
on October 16, 2017) (SEC File No. 001-38242)
Specimen stock certificate evidencing the shares of common stock (Incorporated by reference to Exhibit 4.1 of registrant's
Amendment No. 3 to Form S-1 filed on October 2, 2017) (SEC File No. 333-212076)
Registration Rights Agreement, by and between the registrant and Squadron, dated as of May 30, 2014 (Incorporated by
reference to Exhibit 4.2 of registrant's Form S-1 filed on June 16, 2016) (SEC File No. 333-212076)
First Amendment to Registration Rights Agreement, by and between the registrant and Squadron, dated October 16, 2017
(Incorporated by reference to Exhibit 10.2 of registrant's Form 8-K filed on October 16, 2017) (SEC File No. 001-38242)
Stockholders Agreement, by and between the registrant and Squadron, dated October 16, 2017 (Incorporated by reference to
Exhibit 10.1 of registrant's Form 8-K filed on October 16, 2017) (SEC File No. 001-38242)
+ Description of the securities of OrthoPediatrics Corp. registered pursuant to Section 12 of the Exchange Act
Form of Director and Executive Officer Indemnification and Advancement Agreement (Incorporated by reference to Exhibit 10.1
of registrant's Amendment No. 3 to Form S-1 filed on October 2, 2017) (SEC File No. 333-212076)
OrthoPediatrics Corp. Amended and Restated 2007 Equity Incentive Plan (Incorporated by reference to Exhibit 10.2 of
registrant's Form S-1 filed on June 16, 2016) (SEC File No. 333-212076)
OrthoPediatrics Corp. 2017 Incentive Award Plan (Incorporated by reference to Exhibit 10.3 of registrant's Amendment No. 3 to
Form S-1 filed on October 2, 2017) (SEC File No. 333-212076)
OrthoPediatrics Corp. Non-Employee Director Compensation Policy, effective January 1, 2022 (Incorporated by reference to
Exhibit 10.1 of registrant's Form 8-K filed on November 4, 2021) (SEC File No. 001-38242)
Employment Agreement, by and between the registrant and Fred L. Hite, dated as of February 1, 2015 (Incorporated by
reference to Exhibit 10.6 of registrant's Form S-1 filed on June 16, 2016) (SEC File No. 333-212076)
Employment Agreement, by and between the registrant and David R. Bailey, dated as of July 31, 2014 (Incorporated by
reference to Exhibit 10.7 of registrant's Form S-1 filed on June 16, 2016) (SEC File No. 333-212076)
Employment Agreement, by and between the registrant and Gregory A. Odle, dated as of July 31, 2014 (Incorporated by
reference to Exhibit 10.8 of registrant's Form S-1 filed on June 16, 2016) (SEC File No. 333-212076)
*
*
*
*
*
*
2.1
2.2
2.3
3.1
3.2
4.1
4.2
4.3
4.4
4.5
10.1
10.2
10.3
10.4
10.5
10.6
10.7
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OrthoPediatrics Annual Report 2023 | 125
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
21.1
23.1
24.1
31.1
31.2
32.1
32.2
97
*
*
*
Employment Agreement, by and between the registrant and Daniel J. Gerritzen, dated as of July 31, 2014 (Incorporated by
reference to Exhibit 10.9 of registrant's Form S-1 filed on June 16, 2016) (SEC File No. 333-212076)
Employment Agreement, by and between the registrant and Joseph W. Hauser, dated as of March 1, 2022 (Incorporated by
reference to Exhibit 10.5 of registrant's Form 10-Q filed on May 5, 2022) (SEC File No. 001-38242)
Form of OrthoPediatrics Corp. Restricted Stock Award Agreement (Incorporated by reference to Exhibit 10.3 of registrant's Form
8-K filed on October 16, 2017) (SEC File No. 001-38242)
Fourth Amended and Restated Loan Agreement, by and among the registrant, its subsidiaries and Squadron, dated as of
December 31, 2017 (Incorporated by reference to Exhibit 10.1 of registrant's Form 8-K filed on January 8, 2018) (SEC File No.
001-38242)
First Amendment to the Fourth Amended and Restated Loan Agreement, dated as of June 4, 2019, by and among
OrthoPediatrics Corp., its subsidiaries named therein and Squadron Capital LLC (Incorporated by reference to Exhibit 10.2 of
registrant's Form 8-K filed on June 5, 2019) (SEC File No. 001-38242)
Second Amendment to the Fourth Amended and Restated Loan Agreement, dated as of August 4, 2020, by and among
OrthoPediatrics Corp., its subsidiaries named therein and Squadron Capital LLC (Incorporated by reference to Exhibit 10.3 of
registrant's Form 10-Q filed on August 6, 2020) (SEC File No. 001-38242)
Third Amendment to the Fourth Amended and Restated Loan Agreement, date as of December 31, 2021, by and among
OrthoPediatrics Corp., its subsidiaries named therein and Squadron Capital LLC (Incorporated by reference to Exhibit 10.1 of
registrant's Form 8-K filed on January 6, 2022) (SEC File No. 001-38242)
Fourth Amendment to the Fourth Amended and Restated Loan Agreement, dated as of June 13, 2022, by and among
OrthoPediatrics Corp., its subsidiaries named therein and Squadron Capital LLC (Incorporated by reference to Exhibit 10.1 of
registrant's Form 8-K filed on June 15, 2022) (SEC File No. 001-38242)
Fifth Amendment to the Fourth Amended and Restated Loan Agreement, dated as of November 15, 2022, by and among
OrthoPediatrics Corp., its subsidiaries named therein and Squadron Capital LLC (Incorporated by reference to Exhibit 10.16 of
registrant's Form 10-K filed on March 1, 2023) (SEC File No. 000-38242)
Second Amended and Restated Revolving Note, dated June 13, 2022, made payable, jointly and severally, by OrthoPediatrics
Corp. and each of its subsidiaries party thereto (Incorporated by reference to Exhibit 10.2 of registrant's Form 8-K filed on June
15, 2022) (SEC File No. 001-38242)
Credit, Security and Guaranty Agreement, dated December 29, 2023, by and among OrthoPediatrics Corp., MidCap Financial
Trust, and other parties named therein (Incorporated by reference to Exhibit 10.1 of registrant's Form 8-K filed on December 2,
2024) (SEC File No. 001-38242)
+
Subsidiaries of the registrant
+ Consent of Deloitte & Touche LLP, independent registered public accounting firm
+
+
+
++
++
Limited Power of Attorney
Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
Certifications of Chief Executive Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Certifications of Chief Financial Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002
+ OrthoPediatrics Clawback Policy
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
104
+
+
+
+
+
+
Inline XBRL Instance Document (The instance document does not appear in the Interactive Data File because its XBRL tags are
embedded within the Inline XBRL document.)
Inline XBRL Taxonomy Extension Schema Document
Inline XBRL Taxonomy Extension Calculation Linkbase Document
Inline XBRL Taxonomy Extension Definition Linkbase Document
Inline XBRL Taxonomy Extension Label Linkbase Document
Inline XBRL Taxonomy Extension Presentation Linkbase Document
Cover Page Interactive Data File (formatted as Inline XBRL and included in Exhibit 101)
* Exhibits that describe or evidence management contracts or compensatory plans or arrangements required to
be filed as Exhibits to this Report.
+ Exhibits that are filed with this Report (other than through incorporation by reference to other disclosures or
exhibits).
++ Furnished and not filed herewith.
w Schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company agrees
to furnish a copy of any omitted schedules or exhibits to the SEC upon request.
126 | OrthoPediatrics Annual Report 2023
122
ITEM 16. FORM 10-K SUMMARY
None.
123
OrthoPediatrics Annual Report 2023 | 127
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 8th day
of March, 2024.
SIGNATURES
OrthoPediatrics Corp.
By:
/s/ David R. Bailey
David R. Bailey
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report on Form 10-K has been signed
by the following persons on behalf of the registrant and in the capacities indicated, on this 8th day of March,
2024.
/s/ David R. Bailey
David R. Bailey
Director, President and Chief Executive Officer
(Principal Executive Officer)
/s/ Fred L. Hite
Fred L. Hite
Director, Chief Financial Officer and Chief Operating
Officer
(Principal Financial and Accounting Officer)
*
Mark C. Throdahl
Director
*
Terry D. Schlotterback
Director
*
Jimmy McDonald
Director
*
Marie C. Infante
Director
*
Harold Ruf
Director
*
Bryan W. Hughes
Director
*
David R. Pelizzon
Director
*
Dr. George Dyer
Director
*
Samuel D. Riccitelli
Director
* By Daniel J. Gerritzen as Attorney-in Fact pursuant to a Limited Power of Attorney executed by the directors
identified above, which Power of Attorney is being filed with the Securities and Exchange Commission as an
exhibit hereto.
/s/ Daniel J. Gerritzen
Daniel J. Gerritzen
As Attorney-in-Fact
March 8, 2024
128 | OrthoPediatrics Annual Report 2023
124
THIS PAGE LEFT INTENTIONALLY BLANK
ABOUT US
Founded in 2006, OrthoPediatrics is an orthopedic company focused exclusively on advancing the field of pediatric orthopedics.
As such it has developed the most comprehensive product offering to the pediatric orthopedic market to improve the lives of
children with orthopedic conditions. OrthoPediatrics currently markets 70 surgical systems that serve three of the largest
categories within the pediatric orthopedic market. This offering spans trauma and deformity, scoliosis, and sports medicine/other
procedures. OrthoPediatrics’ global sales organization is focused exclusively on pediatric orthopedics and distributes its products
in the United States and over 70 countries outside the United States. For more information, please visit www.orthopediatrics.com
BOARD OF DIRECTORS
THIS PAGE LEFT INTENTIONALLY BLANK
Bryan Hughes
Director
Marie Infante
Director
Jimmy McDonald
Director
David Pelizzon
Director
Samuel Riccitelli
Director
Harald Ruf
Director
Terry Schlotterback
Director
EXECUTIVE OFFICERS
David Bailey
Fred Hite
Daniel Gerritzen
Joseph Hauser
Gregory Odle
President & CEO
Chief Financial Officer &
Executive Vice President &
President of Trauma &
President of Scoliosis
Chief Operating Officer
General Counsel
Deformity Correction
Executive Chairmanof the BoardMark Throdahl,President & CEODavid BaileyChief Financial Officer &Chief Operating OfficerFred HiteDirectorDr. George DyerINVESTOR INFORMATION111 Monument CircleSuite 4200Indianapolis, IN 46204317-464-8600www.deloitte.comIndependent AuditorDELOITTE & TOUCHE LLP2700 Market Tower10 West Market StreetIndianapolis, IN 46204317-635-8900www.dentons.comDENTONS BINGHAMGREENEBAUM LLP462 South 4th St, Suite 1600Louisville, KY 40202877-373-6374www.computershare.com/InvestorCOMPUTERSHARE, INC. ABOUT US
Founded in 2006, OrthoPediatrics is an orthopedic company focused exclusively on advancing the field of pediatric orthopedics.
As such it has developed the most comprehensive product offering to the pediatric orthopedic market to improve the lives of
children with orthopedic conditions. OrthoPediatrics currently markets 70 surgical systems that serve three of the largest
categories within the pediatric orthopedic market. This offering spans trauma and deformity, scoliosis, and sports medicine/other
procedures. OrthoPediatrics’ global sales organization is focused exclusively on pediatric orthopedics and distributes its products
in the United States and over 70 countries outside the United States. For more information, please visit www.orthopediatrics.com
BOARD OF DIRECTORS
Bryan Hughes
Director
Marie Infante
Director
Jimmy McDonald
Director
David Pelizzon
Director
Samuel Riccitelli
Director
Harald Ruf
Director
Terry Schlotterback
Director
EXECUTIVE OFFICERS
David Bailey
President & CEO
Fred Hite
Chief Financial Officer &
Chief Operating Officer
Daniel Gerritzen
Executive Vice President &
General Counsel
Joseph Hauser
President of Trauma &
Deformity Correction
Gregory Odle
President of Scoliosis
OrthoPediatrics Annual Report 2023 | 131
Executive Chairmanof the BoardMark Throdahl,President & CEODavid BaileyChief Financial Officer &Chief Operating OfficerFred HiteDirectorDr. George DyerINVESTOR INFORMATION111 Monument CircleSuite 4200Indianapolis, IN 46204317-464-8600www.deloitte.comIndependent AuditorDELOITTE & TOUCHE LLP2700 Market Tower10 West Market StreetIndianapolis, IN 46204317-635-8900www.dentons.comDENTONS BINGHAMGREENEBAUM LLP462 South 4th St, Suite 1600Louisville, KY 40202877-373-6374www.computershare.com/InvestorCOMPUTERSHARE, INC. ANNUAL
REPORT
2023
FOCUSED EXCLUSIVELY
ON IMPROVING THE LIVES OF CHILDREN
www.orthopediatrics.com