OrthoPediatrics Corp.

Welcome to the Q2 2020 Orthopediatrics Corp. earnings conference call. My name is Vanessa and I'll be your auditor for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. During the question and answer session, if you have a question, please press star then 1 on your touchtone phone. Please note that this conference is being recorded. I will now turn the call over to Emma Polillo. Emma, you may begin.

Thanks, operator, and thanks everyone for participating in today's call. Joining me from the company are Mark Throdahl, Chief Executive Officer, Fred Hite, Chief Operating Officer and Chief Financial Officer, and David Bailey, President. Before we begin, I would like to caution listeners that comments made by management during this conference call will include forward-looking statements within the meaning of federal securities law, including the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve material risks and uncertainties and the company's actual results may differ materially. For our discussion of risk factors, including, among others, the risks related to COVID-19, the impact such pandemic may have on the demand for the company's products, and the company's ability to respond to the related challenges, I encourage you to review the company's most recent quarterly report on Form 10-2, which will be filed with the Securities and Exchange Commission soon. During the fall today, management will also discuss certain non-GAAP financial measures, which are used as supplemental measures of performance. The company believes these measures provide useful information for investors in evaluating its operations period over period. For each non-GAAP financial measure referenced on this call, the company has included a reconciliation of the non-GAAP financial measures for the most directly comparable GAAP financial measure in its earnings release. Please note that the non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for orthopediatric financial results prepared in accordance with GAAP. In addition, the content of this conference call contains consistent information that is accurate only as of the date of the live broadcast, August 6, 2020. Except as required by law, the company undertakes no obligation to revise or update any statement to reflect events or circumstances that take place after the date of this call. With that said, I'd like to turn the call over to Mark.

Good morning, everyone, and thank you for joining us today on our second quarter 2020 earnings conference call. I'd like to start by thanking our associates for the impressive progress we've made during the second quarter, advancing our corporate initiatives despite the dislocations of the COVID-19 pandemic. Despite a year-over-year sales decline in the second quarter, we've been encouraged by significant and consistent monthly improvements in sales growth throughout the period. This morning, I will provide an update on how we are managing through the pandemic. and then focus on our progress executing on key initiatives, including new product development and the integration of novel acquired technologies, regulatory and operational advancements, set consignments and clinical education. I'll then turn the call over to Fred for a financial review before we open up the call to questions. After sales growth in January and February exceeded 30%, March sales dropped dramatically as elective surgeries throughout the world were postponed. This decline deepened in April, before turning around significantly in May and June. Our revenue for the second quarter of 2020 was down 25% from last year, reflecting the global impact of COVID-19. This was significantly better than our worst case scenario in March, which did not anticipate such notable monthly improvements. From a geographical perspective, the U.S. is bouncing back quicker than international markets, evidenced by a 12% U.S. decline versus a 67% international decline for the second quarter. More specifically, revenue in April was down 60% from prior year with international sales slightly worse than domestic sales. may improve with sales down only 15% versus the prior year, with domestic sales equaling their level last year. This encouraging trend continued in June when sales were down 17% from prior year, but domestic sales were up 5%, indicating further stabilization of the domestic business. We provide these numbers in an effort to maximize transparency to investors during this unprecedented time. Moving on to revenue contribution by product line, trauma and deformity sales declined 22% for the second quarter, despite strong sales of the Orthex Hexapod system, our new PNP femur system, and two new cannulated screw systems. Scoliosis sales declined 35%, but June sales approached the levels seen in the same period last year. Sports medicine and other grew 20%, reflecting contributions from the Telos Partners acquisition. The improving domestic trend in elective deformity correction and scoliosis surgeries was further seen in July, leading us to anticipate that third quarter domestic sales could generate single digit growth over the third quarter 2019. This is further supported by significant contract activity at a number of large domestic accounts. indicating that stabilization is in progress, particularly here in the United States. Beyond these encouraging sales trends, we continue to be impressed by our associates' focus and productivity during the period, allowing us to advance virtually all our 2020 strategic priorities at the pace anticipated when they were established last December. Before I turn to a more detailed update on these strategic initiatives, however, let me address how we are leading the company through the global COVID-19 pandemic. We view COVID-19 as an opportunity to strengthen our industry leading position and enhance competitive advantage at a time when large competitors, which have nominally focused on pediatric orthopedics in the past, must instead focus on repairing their large adult businesses and dealing with the employee morale impact of job cuts and salary reductions. We recognized in mid-March that the company had sufficient cash resources to weather the COVID-19 impact in 2020 and fund anticipated set investments both this year and in 2021. This supported the decision to make no draconian expense reductions and to continue aggressive initiatives in product development, European regulatory compliance, sales training, acquisitions, and management succession. We made no cuts or base salary reductions for OP employees. We stabilized the domestic sales force by establishing a distributor relief fund that enables distributors to borrow low-cost loans from the company which do not need to be repaid until December 2021 Furthermore, in the second quarter, every orthopediatrics associate was contacted personally by a senior executive every week. We also held weekly town hall meetings to maximize communication and maintain positive morale. In tandem with stabilizing our employees, we maintained instrument implant set deployments with $9.1 million of investments in the first half of 2020 versus $10.6 million in the same period last year. New product development has tracked plan, and we have received a significant number of regulatory approvals in jurisdictions outside the United States. In addition, we used our DocMatter surgeon community to host webinars led by leading pediatric orthopedic surgeons, including the president of POSNA, who described how they were treating patients in the COVID environment. Furthermore, we remained the only double diamond sponsor of PASNA and EPOS in 2020. Our decision not to reduce our financial commitment to surgical societies was in stark contrast to others who either reduced or eliminated their contributions entirely, and this has received considerable notice. by surgical societies and the global surgeon community alike. We also completed phase one of a CEO transition begun in 2018 whose second phase will end next year when I step down as CEO becoming executive chairman. David Bailey will then become president and CEO. This follows our announcement in May when Bailey was appointed president. and Fred Hite was appointed Chief Operating Officer and Chief Financial Officer. In summary, virtually all our 2020 corporate objectives have tracked plan through the first half of the year, despite our associates working remotely since March 16. Over the past months, we have learned new ways to work that will be implemented permanently in future. We have proven that we can work effectively with less travel and fewer face-to-face meetings We can effectively conduct virtual surgeon design meetings that can speed product development and utilize a telemedicine system developed by Apifix that can allow surgeons to be supported in the operating room by clinical experts located anywhere in the world. Finally, I'd like to thank our existing and new shareholders for their support that helped us raise an additional 70 million net dollars in a follow-on offering in June that provides financial flexibility for acquisitions and future opportunities, as well as meeting the cash obligations associated with APIFIX milestone payments, set deployment initiatives, and general working capital needs that Fred will describe. Let me now turn to more specific accomplishments in the quarter, starting with new products. We continue to make substantive quality improvements on certain trauma and deformity correction products Keeping these systems evergreen, we also continue advancing the development of a novel early-onset scoliosis system and are optimistic about the additional market opportunities it will create as we near design completion. In addition to our pipeline development, our recently launched PNP femur and next-generation cannulated screw systems contributed materially to sales growth in the second quarter 2020 and represent significant near-term growth drivers. Orthex substantially exceeded our expectations for the quarter with very strong growth over 2019 driven by new user adoptions and supported by successful domestic sales integration and extensive training programs. Other new systems such as Pedifoot are also demonstrating success with the surgeries performed to date. But they do remain in beta launch with limited sets in the field. While it is a small percentage of our sales, it is worth mentioning that we are pleased with the impact of Telos Partners' consulting revenue, which is reflected in our sports medicine other sales. As a reminder, we acquired Telos in March of this year to access state-of-the-art expertise on regulatory trends and clinical trial management. But we're finding that this business has thrived in the COVID-19 environment. In June, we purchased the patents associated with our Bandlock systems for a total consideration of $3.4 million, consisting of $750,000 in cash and $2.6 million in stock, thus allowing us to avoid licensing fees of $500,000 annually. In April, we acquired Apifix for non-infusion treatment of progressive adolescent adipathic scoliosis, or AIS, and recently commenced its domestic launch. Based on early surgeon feedback, we're confident in the system's potential to transform scoliosis surgery and patient treatment. We are already seeing initial sales contributions and impressive surgeon demand. As a reminder, Apifix is one of two recently approved non-fusion technologies and represents a paradigm shift in how scoliosis is treated. It addresses patients with curves between 35 and 60 degrees where bracing is failing. Apifix is a much simpler surgery than spinal tethering, the other non-fusion product on the market, which comes with a big learning curve, as one user put it. Importantly, we anticipate benefiting from extremely high sales to dollar of set inventory, which can improve our overall revenue per dollar of consigned set investment in the future. Apifix reached critical second quarter milestones on schedule, including establishing 18 post-approval study registry sites year-to-date against a total of 20 sites this year. All 20 sites are anticipated to achieve IRB approval by year end. Furthermore, we are delighted the first surgery was successfully performed at Mayo Clinic at the end of June. Surgeons there were pleased with how easy it was to place the implant. Subsequent surgeries have taken place at Atlanta Children's Hospital and Mercy Children's in Kansas City. Early surgeon feedback has been very positive regarding the simplicity and speed of the procedure. The degree of correction, limited blood loss, post-surgical hospital stays of only one or two days, and rapid patient recovery. We look forward to an increasing number of cases as the 20 sites adopt ApiFix in the second half year. Also of note, we recently received FDA approval to expand the label to 35 to 60 degrees for progressive curve from 40 to 60 degrees previously. thus allowing the Apifex system to compete head-to-head with Tethering's indication for its skeletally immature patients. Turning to international and domestic sales organizations, we are currently working on the conversion to sales agencies of two EMEA stocking distributors, one of which is in a very large European market. We anticipate that both conversions will take place by the first quarter 2021. On the domestic side, we added one sales agency during the quarter, bringing the number to 37. We also restructured Orthex sales representatives and added several representatives in underserved cities for a total of 164 consultants in the second quarter, representing an 8% increase from 152 consultants in the second quarter 2019. Additionally, we will soon break ground on a 20,000 square foot warehouse expansion here in Warsaw, nearly three times the size of the warehouse expansion completed only 18 months ago. We anticipate the new warehouse will be completed in the first half of 2021. The current warehouse space will then be used for enhanced social distancing in the short term and new personnel in the long term. Moving to clinical education, We led 23 sales training sessions and sponsored 4 COVID-19 sessions on DocMatter. In Latin America, we sponsored 14 small group surgeon training sessions, 20 large group training programs with more than 120 surgeons per session, and 11 company-led training programs. We are excited to be working with PASNA on the development of the Resident Master series. These courses will be released through the Orthopediatrics Foundation and will be taught by eminent pediatric orthopedic surgeons. We also expect a full beta launch this year of a new OP mobile app that is now well along in development. This app will allow surgeons and sales consultants to access all OP's training videos, surgeon technique guides, and other information on the company's 35 surgical systems, Both before and during surgery. This is a time that tests the company's leadership and its culture. We have been delighted by the spontaneous demonstrations of initiative and leadership at all levels of the company, despite working from home. While sales declined in the period, our company has remained cohesive and productive, executing on our 2020 objectives as if COVID-19 had not occurred. With that, let me now turn the call over to Fred to review our financial results. Fred.