OrthoPediatrics Corporation
03/04/2026 | Press release | Distributed by Public on 03/04/2026 15:51
Annual Report for Fiscal Year Ending December 31, 2025 (Form 10-K)
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, 2025 as compared to the year ended December 31, 2024. For a discussion and analysis of the year ended December 31, 2024 compared to December 31, 2023, 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, 2024, filed with the SEC on March 5, 2025.
Overview
We are the only global medical device company focused exclusively on providing a comprehensive trauma and deformity correction, scoliosis and sports medicine/other 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 $6.2 billion opportunity globally, including over $2.8 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. We operate over 45 orthotic and prosthetic ("O&P") clinics in the United States serving children's hospitals in numerous states. 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 87 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/other. 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 several direct sales representatives as well as over 30 independent sales agencies employing approximately 232 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 75 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 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 and 2024, we hired operating and sales representatives in Germany as salaried employees to better serve our customers, and in 2024 we opened warehouses in Germany and Australia. In 2025, we opened a warehouse in the Netherlands. In November 2025, we established a legal entity in Brazil to sell and distribute directly to the local market. These arrangements have generated an increase in revenue and gross margin. For the years ended December 31, 2025, 2024 and 2023, international sales accounted for approximately 21%, 21% and 25% 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 as well as our O&P clinic network.
Social Impact
OrthoPediatrics was founded on the cause of impacting the lives of children with orthopedic conditions. Since inception we have impacted the lives of over 1,291,000 children, when including those served by our acquired companies. We believe we should continue to expand our social impact, create an inclusive culture, and ensure good corporate governance practices.
•The Company and its associates regularly participate in philanthropic causes important to our local communities. We also partner with over 40 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 nine years we have been recognized by the Indiana Chamber of Commerce - Best Companies to Work in Indiana.
We believe effectively managing our priorities, as well as increasing our transparency related to social impact programs, will help create long-term value for our stakeholders. We expect to continue to increase our disclosures and communicate our social impact efforts in future SEC filings.
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 2025, 2024, 2023, and 2022, we determined that a triggering event had occurred indicating it was more likely than not the fair value of certain trademark assets were 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 $4.2 million, $1.8 million, $1.0 million and $3.6 million were recorded in 2025, 2024, 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, O&P clinic services 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. For our implants and instruments, 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. Sales of our bracing products are sold to stocking distributors, hospitals, orthotist and other medical professionals or directly to end customers. For such sales, we consider our performance obligation of our braces to be settled upon shipment, and revenue is therefore recognized at that time. For our O&P clinics, we recognize revenue when our custom manufactured braces or other products are fitted to and accepted by patients. Revenue from these O&P clinics is primarily derived from contracts with third party payors. At, or subsequent to delivery, an invoice is issued to the third-party payor, which primarily consists of commercial insurance companies, Medicare, Medicaid, and private or patient pay individuals. Revenue is recognized for the amounts expected to be received from payors based on contractual reimbursement rates, which are net of estimated contractual discounts and other implicit price concessions. These revenue amounts are further revised as claims are adjudicated, which may result in additional disallowances, which are considered as part of the transaction price and recorded as a reduction of revenues.
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, royalties, material, labor and overhead related to the manufacturing of our braces. 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 facilities in Iowa, the UK, and Boston. 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 recognize the cost of revenue on our braces sold to other O&P clinics not owned by us when they are shipped and the cost of our O&P clinic services when the customized brace has been fitted and accepted by the patient. 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 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, including stock-based compensation associated with these personnel. 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 these personnel, as well as facility costs and clinic operating 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 $9.3 million, $8.4 million and $7.9 million for the years ended December 31, 2025, 2024 and 2023, 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, increased set deployment, and additional O&P clinics. We expect the growth rate of our general and administrative expenses will be lower than the growth rate of our revenue.
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, including stock-based compensation for these personnel. 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 (i) fair value adjustments of contingent consideration associated with our ApiFix acquisition, (ii) accreted interest expense related to the acquisition installment payables, (iii) interest costs associated with our debt obligations, and (iv) loss on early debt extinguishment.
Results of Operations
Comparison of the Years Ended December 31, 2025 and 2024
The following table sets forth our results of operations for the years ended December 31, 2025 and 2024:
| (in thousands, except percentages) | 2025 | 2024 |
Increase
(Decrease)
|
% Increase
(Decrease)
|
|||||||||||||||||||
| Net revenue | $ | 236,348 | $ | 204,727 | $ | 31,621 | 15 | % | |||||||||||||||
| Cost of revenue | 63,687 | 56,129 | 7,558 | 13 | % | ||||||||||||||||||
| Sales and marketing expenses | 72,726 | 64,296 | 8,430 | 13 | % | ||||||||||||||||||
| General and administrative expenses | 119,832 | 102,789 | 17,043 | 17 | % | ||||||||||||||||||
| Intangible asset impairment | 4,638 | 1,836 | 2,802 | 153 | % | ||||||||||||||||||
| Restructuring expense | 5,601 | 3,653 | 1,948 | 53 | % | ||||||||||||||||||
| Research and development expenses | 9,102 | 11,034 | (1,932) | (18) | % | ||||||||||||||||||
| Other expenses (income), net | (50) | 6,919 | (6,969) | 101 | % | ||||||||||||||||||
| Provision for income taxes (benefit) | 460 | (4,107) | (4,567) | (111) | % | ||||||||||||||||||
| Net loss | $ | (39,648) | $ | (37,822) | $ | 1,826 | 5 | % | |||||||||||||||
Revenue
The following tables set forth our revenue by geography and product category for the years ended December 31, 2025 and 2024:
| Revenue by Geography | |||||||||||||||||||||||
| Year Ended December 31, | |||||||||||||||||||||||
| (in thousands, except percentages) | 2025 | % of revenue | 2024 | % of revenue | |||||||||||||||||||
| U.S. | $ | 186,403 | 79% | $ | 161,163 | 79% | |||||||||||||||||
| International | 49,945 | 21% | 43,564 | 21% | |||||||||||||||||||
| Total | $ | 236,348 | 100% | $ | 204,727 | 100% | |||||||||||||||||
| Revenue by Product Category | |||||||||||||||||||||||
| Year Ended December 31, | |||||||||||||||||||||||
| (in thousands, except percentages) | 2025 | % of revenue | 2024 | % of revenue | |||||||||||||||||||
| Trauma and deformity | $ | 166,301 | 70% | $ | 145,126 | 71% | |||||||||||||||||
| Scoliosis | 66,047 | 28% | 55,153 | 27% | |||||||||||||||||||
| Sports medicine/other | 4,000 | 2% | 4,448 | 2% | |||||||||||||||||||
| Total | $ | 236,348 | 100% | $ | 204,727 | 100% | |||||||||||||||||
Net revenue increased $31.6 million, or 15%, from $204.7 million for the year ended December 31, 2024 to $236.3 million for the year ended December 31, 2025. The increase was primarily driven by strong performance across global Trauma and Deformity, Scoliosis and OP Specialty Bracing, as well as recent acquisitions.
Trauma and deformity revenue, which includes the impact from acquired businesses, increased $21.2 million, or 15%, primarily driven by strong growth across numerous product lines, specifically our Cannulated Screws, PNP Femur, PediPlate, external fixation and Pega systems. Scoliosis revenue increased $10.9 million, or 20%, primarily driven by increased sales of our RESPONSE 5.5/6.0 and 7D Technology. Sports medicine / other decreased $0.4 million, or 10%. 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 $63.7 million and $56.1 million for the years ended December 31, 2025 and 2024, respectively. Gross margin was 73% for the year ended December 31, 2025 and 73% for the year ended December 31, 2024.
Sales and Marketing Expenses
Sales and marketing expenses increased $8.4 million, or 13%, from $64.3 million for the year ended December 31, 2024 to $72.7 million for the year ended December 31, 2025. The increase was due primarily to increased sales commission expenses due to an overall increase in volume of units sold. Sales and marketing expenses for the year ended December 31, 2025 were approximately 31% of revenue compared to 31% for 2024.
General and Administrative Expenses
General and administrative expenses increased $17.0 million, or 17%, from $102.8 million for the year ended December 31, 2024 to $119.8 million for the year ended December 31, 2025. The increase was due primarily to acquisitions. Stock-based compensation increased$2.1 million due to an increase in personnel. Depreciation and amortization expenses increased $1.4 million, or 7%, from $18.5 million for the year ended December 31, 2024 to $19.9 million for the year ended December 31, 2025. The increase was primarily due to higher set deployments and increased amortization associated with acquisitions.
Intangible Asset Impairment
During 2025, management completed a quantitative analysis as part of our annual impairment test, and determined the fair value of our ApiFix, MedTech, Orthex and Telos trademark assets were below their respective carrying values. Additionally, in connection with our decision to exit our Telos regulatory consulting business, we wrote off the remaining carrying value of its customer relationship intangible asset. We recorded an impairment charge of $4.6 million and $1.8 million during the years ended December 31, 2025 and 2024, respectively. See Note 5 - Goodwill and Intangible Assets for further details.
Research and Development Expenses
Research and development expenses decreased $1.9 million, or 18%, from $11.0 million for the year ended December 31, 2024 to $9.1 million for the year ended December 31, 2025. The decrease was primarily due to the timing of product development.
Restructuring Expense
The 2024 Restructuring Plan aims to improve operational efficiency, reduce costs by integrating the ApiFix product into the broader OP Scoliosis portfolio, and additional staff reduction across all of OrthoPediatrics Corp. In 2025, the Company made the decision to restructure Telos by dissolving the local operation and continuing staff reductions across the Company. The Company recorded restructuring expenses of $5.6 million for the year ended December 31, 2025, which included the write-off of goodwill associated with the Telos business of $1.9 million, compared to $3.7 million for the year ended December 31, 2024. The expense for the year ended December 31, 2024 comprised of the reduction of our Israeli physical site, reducing the ApiFix portfolio inventory, reserving for excess inventory, and certain employee termination benefits. The increase in expense for the year ended December 31, 2025, was primarily due to the restructuring of Telos.
Total Other Expenses (Income)
Total other expense decreased $7.0 million year over year, with other income of $0.1 million for the year ended December 31, 2025 compared to other expense of $6.9 million for the year ended December 31, 2024. This change was primarily due to large swings in monthly currency rates compared to prior years, resulting in a large foreign currency gain in 2025. Additional interest expense of $3.4 million, net related to our indebtedness was offset by the fact that the Company recorded a loss on theearly extinguishment of the MidCap Credit Agreement in the third quarter 2024 of $3.2 million, and additional interest expense of $6.0 million,net related to our indebtedness.
Income Tax Expense (Benefit)
Income tax expense (benefit) had a change of $4.6 million, with income tax expense of $0.5 million for the year ended December 31, 2025, compared to income tax benefit of $4.1 million for the year ended December 31, 2024. The year-over-year change was largely driven by the remeasurement of the valuation allowance in 2024
subsequent to recording the deferred tax liability as a result of the purchase accounting from the Boston O&P acquisition, resulting in a large income tax benefit.
Liquidity and Capital Resources
We have incurred operating losses since inception and negative cash flows from operating activities of $4.9 million, $27.0 million and $27.0 million for the years ended December 31, 2025, 2024 and 2023, respectively. As of December 31, 2025, we had an accumulated deficit of $275.2 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, 2025, we had cash, cash equivalents and restricted cash of $21.6 million and short-term investments of $41.3 million for a total of $62.9 million.
Cash Flows
The following table sets forth our cash flows from operating, investing and financing activities for the periods indicated:
| Year Ended December 31, | |||||||||||
| (in thousands) | 2025 | 2024 | |||||||||
| Net cash used in operating activities | $ | (4,851) | $ | (27,048) | |||||||
| Net cash used in investing activities | (43,629) | (13,162) | |||||||||
| Net cash provided by financing activities | 23,975 | 53,135 | |||||||||
| Effect of exchange rate changes on cash | 348 | (175) | |||||||||
| Net (decrease) increase in cash and restricted cash | $ | (24,157) | $ | 12,750 | |||||||
Cash Used in Operating Activities
Net cash used in operating activities was $4.9 million and $27.0 million for the years ended December 31, 2025 and 2024, respectively. The primary use of this cash was to fund our operations related to the development and commercialization of our products in each of these periods. Net cash used for working capital and changes in other operating assets and liabilities was $10.8 million and $22.9 million for the years ended December 31, 2025 and 2024, respectively. During 2025, the primary uses of cash used in operating activities was driven by inventory purchases of $8.5 million to support sales growth as well as an increase in accounts receivable of $9.4 million. These uses of cash were partially offset by cash inflows from accounts payable of $8.2 million. During 2024, we increased inventory by $13.2 million as we deployed additional inventory and accounts receivable increased by $4.7 million. We had a net loss of $39.6 million for the year ended December 31, 2025, compared to a net loss of $37.8 million for the year ended December 31, 2024.
Cash Used in Investing Activities
Net cash used in investing activities was $43.6 million and $13.2 million for the years ended December 31, 2025 and 2024, respectively. Net cash used in investing activities in 2025 was primarily related to the purchase of short-term investments of $15.0 million and cash paid for acquisitions of $15.5 million. We also invested $11.1 million in property and equipment, primarily instrument sets which were consigned in the United States and select international markets.
Net cash used in 2024 was primarily related to the purchase of short-term marketable securities of $25.0 million and the acquisition of Boston O&P of $20.2 million, which was partially offset by the sale of short-term marketable securities of $49.9 million. We also invested $14.3 million in property 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 $24.0 million and $53.1 million for the years ended December 31, 2025 and 2024, respectively. Net cash provided by financing activities in 2025 consisted of $25.0 million from the proceeds of the Credit Agreement with Braidwell. Net cash provided by financing activities for 2024 consisted of $73.5 million from the proceeds of the Credit Agreement with Braidwell and sale of our Convertible
Notes, offset by $12.2 million of cash used to repay our term loan and revolving facility with MidCap, $3.4 million of debt issuance costs, $2.3 million related to the ApiFix fourth and final anniversary payment, and $1.3 million related to the MedTech first year anniversary payment.
Indebtedness
Term Loan Agreement and Convertible Notes
On August 5, 2024, the Company signed an $100 million term loan and private placement arrangement with Braidwell LP by and among (i) the Company and other borrowers party to the Credit Agreement, (ii) Braidwell LP, and (iii) the financial institutions or other entities from time to time party thereto as Lenders. Terms of the financing include a $50 million term loan and $50 million of convertible notes. The term loan consists of an initial term loan of $25 million and access to a delayed draw term loan facility for an additional $25 million, subject to certain terms and conditions. The interest rate on the term loan is SOFR + 6.50% with the Company having the option to make a payment-in-kind interest payment equal to 1.00% per annum of the rate. Payments are interest only until the maturity date in August 2029. Included in the term loan are financial covenants to maintain cash in certain pledged accounts of at least 25% of the outstanding principal amount of the loan and to maintain certain minimum net product sales during the loan period.
The $50 million of convertible notes accrue interest at a rate of 4.75% per annum. Payments will consist of interest only until the maturity date in February 2030. The notes are convertible into common stock of the Company at an initial conversion price of $40.98, which represented a 30% premium to the Company's volume weighted average common stock price for the thirty trading days ended August 2, 2024.
In connection with its approval of the financing, the Company's Board approved a stock repurchase program of up to $5 million in value of the Company's outstanding common stock. Using the closing price on August 2, 2024, of $29.56, the amount of common stock subject to the repurchase program represents approximately 169,000 shares or 0.7% of the Company's outstanding common stock. No shares were repurchased under the program which reduced to $0.25 million on December 31, 2024.
The proceeds from the financing were used to repay the Company's outstanding debt of approximately $10 million with MidCap, transaction fees incurred in connection with the financing, potential stock repurchases under the program described above, and for general corporate purposes and working capital needs.
The debt facilities replace the $80 million Credit, Security, and Guaranty Agreement with MidCap Funding IV Trust and MidCap Financial Trust and other parties named therein. There was approximately $10 million outstanding under the MidCap Credit Agreement and it was terminated in connection with the Credit Agreement.
Tawani Mortgage
In August 2013, pursuant to the purchase of our office and warehouse space, we entered into a mortgage note payable to Tawani Enterprises Inc., the owner of which is a member of Squadron's management committee. Pursuant to the terms of the mortgage note, we pay Tawani Enterprises Inc. monthly principal and interest installments of $15,543, with interest compounded at 5% until maturity in August 2028, at which time a final payment of remaining principal and interest will become due.
See Note 9 - Debt and Credit Arrangements in Item 8 for further detail regarding our debt.
Contractual Obligations and Commitments
The Company's cash requirements within the next twelve months include accounts payable, accrued compensation and benefits, interest payments on our long-term debt, current portion of acquisition installment payable and other current liabilities. 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 9 - Debt and Credit Arrangements in Item 8 for further detail regarding our debt and the timing of expected future principal and interest payments.
•Acquisition installment payables, net of current portion- 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 17 - Commitments and Contingencies in Item 8 for further detail regarding these requirements.
•Lease Obligations- See Note 16 - Leases in Item 8 for further detail regarding our lease obligations.
•Royalties- See Note 17 - 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 sixteen 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 control of the product transfers to the customer, typically upon shipment. Approximately 68% and 70% of our global revenues in 2025 and 2024, respectively, is from the usage and sale of consigned inventory. Sales of our bracing products are sold to stocking distributors, hospitals, orthotists and other medical professionals or directly to end customers. Revenue is recognized for braces generally when title passes upon shipment. Our O&P clinics recognize revenue when our custom manufactured braces or other products are fitted to and accepted by patients. Revenue from these O&P clinics is primarily derived from contracts with third party payors. At, or subsequent to delivery, an invoice is issued to the third-party payor, which primarily consists of commercial insurance companies, Medicare, Medicaid, and private or patient pay individuals. Revenue is recognized for the amounts expected to be received from payors based on contractual reimbursement rates, which are net of estimated contractual discounts and other implicit price concessions. These revenue amounts are further revised as claims are adjudicated, which may result in additional disallowances, which are considered as part of the transaction price and recorded as a reduction of revenues.
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. 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.
Inventory Valuation
Our global inventory, which primarily consists of implants and instruments held in our warehouses, with third-party independent sales agencies or distributors, or consigned directly with hospitals, are considered finished goods and are purchased from third parties. Inventory is stated at the lower of cost or net realizable value, with cost determined using the first-in-first-out method. As of December 31, 2025 and 2024, inventory held on consignment at sales agencies, distributors, or other customers was $96.8 million and $95.4 million, or approximately 65% and 75% of gross inventory, respectively.
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. Most of our inventory is non-sterile, metallic implants and instruments that do not have an expiration date or shelf life.
We classify our implant and bracing inventory as a current asset and the related deployed instrument inventory is classified within Property and Equipment, Net. Instruments are reusable hand-held devices, specifically designed for use with our implants, and are used by surgeons during surgery. Instruments are typically not sold and are routinely used longer than one year. The implant and bracing inventory is classified as a current asset because it is expected to be sold, consumed, or converted into cash within a year or within the normal operating cycle of the business. Each inventory set contains multiple sizes of implants, most of which do not expire. The usage of the majority of the surgical implants falls within a normal standard deviation, however to meet patient needs, the surgeon requires access to all implant sizes within each set because they may not know what implant sizes are needed until in surgery. The need to stock sufficient amounts of inventory in various sizes results in higher inventory levels which can and does lead to longer inventory turns. The outlier implant sizes not routinely used in surgery will remain in the set until required for a surgery which could be several months after consignment, extending inventory turns. Before inventory sets are consigned and used in surgery, the Company acquires the necessary set components which are initially recorded as inventory. When all implants are received and the entire set is complete, the set is deployed into the distribution channel as consigned inventory for surgical use in new or existing children's hospitals within a distributor's geographical territory. Since all implants are necessary before a set can be placed on consignment, there is additional lead time required between product procurement, receipt, and deployment into the channel, which typically takes several months. In addition, the Company's surgical implant business has historically experienced aggressive growth, typically in excess of 20% annually, which has also contributed to increased inventory levels to meet current and future customer demand.
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 excess before other components based on the usage patterns. We adjust inventory values to reflect these usage patterns and life cycle. We continuously monitor our global inventory for excess or obsolete items in relation to estimated forecasted product demand and the product life cycle. 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. As of December 31, 2025 and 2024, our excess and obsolete inventory reserve was $7.7 million and $9.6 million, respectively.
In addition, we continue to introduce new products and acquire new companies or technologies, which we believe will increase our revenue and also increases our on-hand inventory. 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. In 2025, we performed a quantitative analysis of our two reporting units. Fair value was determined using a combination of the income approach (discounted cash flows) and the market approach, which are weighted based on the relevance and availability of observable inputs for each of the reporting units. The income approach uses a reporting unit's projection of estimated operating results and cash flows that is discounted using a weighted-average cost of capital that reflects current market conditions appropriate to the Company's reporting unit. The discounted cash flow model uses projections based on management's best estimates of economic and market conditions over the projected period using the best information available, including growth rates in revenues, costs and estimates of future expected changes in operating margins and cash expenditures. Other significant estimates and assumptions include terminal value growth rates, weighted average cost of capital and changes in future working capital requirements.
The market approach considered valuation multiples of comparable publicly traded companies and recent market transactions.
For all reporting units tested, the estimated fair value exceeded the carrying value, and no impairment was recorded.
We have indefinite lived trademark assets that are reviewed annually for impairment by performing a quantitative analysis, 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 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 2025, 2024, 2023 and 2022, we completed a quantitative analysis whereby we determined the fair value of certain trademark assets were below the carrying value. The primary reason for the impairment is the lower forecasted revenue of our ApiFix product than previously expected, and the decision by management to exit our Telos regulatory consulting business. We recorded impairment charges of $4.2 million, $1.8 million, $1.0 million, and $3.6 million for the years ended December 31, 2025, 2024, 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 August 1, 2025, the date of our last impairment review, the fair value of two of our trademarks exceeded their respective carrying values by less than 10%, excluding those trademarks that were partially or fully impaired that are described above. As of December 31, 2025, the carrying value of these two trademarks was $6.0 million.
Net Operating Losses
As of December 31, 2025, we had federal, state and foreign tax net operating loss carryforwards, or NOLs, of approximately $172.2 million, $103.7 million and $37.8 million, respectively, which begin to expire, if not utilized, beginning in 2028. All deferred tax assets were fully offset by a valuation allowance, with the exception of certain deferred tax liabilities in Canada in 2024 and 2025, and Canada and Israel in 2023, 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.
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