OrthoPediatrics Corp.

Good morning and welcome to the Orthopediatrics Corporation third quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. We'll be facilitating a question and answer session towards the end of today's call. As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Emma Palolillo from the Gilmartin Group for a few introductory comments.

Thank you for joining today's call. With me from the company are David Bailey, President and Chief Executive Officer, and Fred Height, Chief Operating and Financial Officer. Before we begin today, let me remind you that the company's remarks include forward-looking statements within the meaning of federal securities laws, including the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to numerous risks and uncertainties, and the company's actual results may differ materially. For discussion of risk factors, including among others, the risks related to COVID-19, the impact this 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 annual report on Form 10-K, which was filed with the Securities and Exchange Commission on March 3rd, 2022. During the call today, management will also discuss certain non-GAAP financial measures, which are 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 non-GAAP financial measures to the most directly comparable GAAP financial measures 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 orthopediatrics financial results prepared in accordance with GAAP. In addition, the content of this conference call contains time-sensitive information that is accurate only as of the date of this live broadcast today, November 1st, 2022. Except as required by law, the company undertakes no obligation to revise or update any statements to reflect events or circumstances taking place after the date of this call. With that, I would like to turn the call over to David Bailey, President and Chief Executive Officer.

Thanks, Emma. Good morning, everyone, and thank you for joining us on our third quarter conference call. As we start all earnings calls, I'd like to highlight, after refining the calculation of our acquisitions, we helped over 17,000 children in the third quarter of 2022. Since inception, Orthopediatrics combined with MD Orthopedics and Pega Medical has now helped more than 610,000 children. Doing the right thing for children is and will always remain our top priority. In the third quarter of 2022, we generated record total revenue of $35 million, which includes stronger than expected revenue from our two acquisitions, MD Ortho and Pega Medical, and in total represents growth of 39% compared to the third quarter of 2021. We generated domestic organic sales growth of 25% and overall global organic growth of 22% compared to the prior year period. Organic international sales growth compared to the prior year period was 10% and was negatively impacted by unfavorable foreign exchange conversion, volume disruptions in Australia and the EU due to staffing shortages, and lower than expected set purchases from stocking partners due to the stronger dollar. Although we generated 39% revenue growth in the third quarter of 2022, this was below our expectations. While the acquisition revenue outperformed our estimates, organic growth was below our forecast. Despite strong commercial and operational execution, surge in conversions, and market share gains, we experienced extreme swings in case volumes in numerous locations late in the quarter. hospital staffing and capacity constraint, and a high rate of respiratory illness, or RSV, negatively impacted case volumes. As it has been published in multiple national publications, which reference many of our largest customers, RSV is filling beds and significantly reducing the capacity for surgery. This started showing up in September and has continued through October. All of these factors may continue for the remainder of the year and are now reflected in our reduced full-year revenue guidance. We have observed that unlike adult hospitals, pediatric cases are not being moved to ambulatory surgery centers or ASCs, where case capacity and efficiency seems to be much higher than in the hospital setting. Obviously, we cannot control these unexpected environmental factors, but we can control our commercial and operational execution, which are producing strong growth in new users and increasing technology adoption across our expanding portfolio. Looking at the business overall in the quarter, through strong operational efficiency, we generated over $1.9 million of adjusted EBITDA. The last two quarters of positive adjusted EBITDA began a positive trend, forming the foundation to deliver on our goal of producing several million dollars in adjusted EBITDA in 2022 and sets us up to further improvement in 2023. Additionally, we took steps to strengthen the balance sheet. which will provide further flexibility to invest in sustainable growth initiatives. We believe our current position and continuing efficiency initiatives can enable sustained 20-plus percent sales growth, profitability, and cash flow break-even in the next three to five years. Moving to our revenue segments. Overall, on the surge in adoption front, we drove major new users with our Response, Apifix, 7D, and Orthex products. Orthex, Response, Apifix, PNP Femur, and cannulated screws all drove significant growth, with Apifix more than doubling over prior quarter and prior year quarter. In the third quarter of 2022, we generated total trauma and deformity revenue of $23.9 million, representing growth of 42% compared to the prior year period. This included combined global revenue of approximately $4.4 million for MD Orthopedics and Pega Medical. Organic T&D was $19.5 million, representing growth of 16% compared to the same period prior year. Revenue growth in the quarter was driven by market share gains within our external fixation franchise and ongoing search and adoption of the PNP femur and cannulated screw system. In the third quarter of 2022, we generated total scoliosis revenue of $10 million, representing organic growth of 37% compared to the prior year period. Despite key account disruptions, we added several new response and Apifix users and deployed multiple demo units to 7D. Apifix saw continued improvement in the quarter, more than doubling over prior quarter and prior year quarter. The combination of response, Apifix, and 7D continue our progress of taking market share from key competitors. I'll now provide an update on the integration progress with our recent acquisitions, starting with Pega Medicals. We are one quarter into the integration and are pleased with the initial progress. As expected, following the post-acquisition announcement of the termination of nearly all legacy US PEGA distributors, we experienced some revenue disruption as the distributors worked through their 60-day notice period. This was immediately followed by record monthly revenue in September after the OP US sales organization officially took control. Looking forward, we are eager to get more PEGA instrument sets in the hands of our customers so that we can meet the increasing demand for these innovative technologies. Our surge in customers' feedback is extremely positive. The product synergies are obvious, and the cultural integration of this business is exactly what we had hoped for. As we increase that allocation and train our global sales representatives, we fully expect this business to grow revenue at greater than 20%. Turning to the integration of MD Orthopedics, or MDO, During the quarter, we continued seeing favorable acquisition synergies. Strong sales resulting from new distributor reorders, increased volumes, and the opening of Brazil, our first new market post-acquisition. Continuing to build on these synergies, along with new product launches, makes us confident that our non-surgical franchise is going to be a great success and will also produce revenue growth of greater than 20% while delivering profit and positive cash flow. Overall, it is very early. but we are excited by what we are seeing with the integration synergies in the initial stages of both of these acquisitions. Feedback from our customers has been very positive, and it is translating into increasing revenue already. We view both of these acquisitions as new sources of growth and key pieces in strengthening our competitive position. Turning to new product development. During the quarter, we commenced consignment placements of our recently launched drive rail external fixation system, which complements the Orthex external fixation product and is leading to continued market share gains and new user acquisition. We also progress with R&D projects across each segment of our business. In Scoliosis, we are preparing to launch a number of response instrument set upgrades, including our new response derotation instrument and response cannulated screws. We also furthered our early-onset scoliosis system development and expect to launch our first-ever power system during the first quarter of 2023, which will allow surgeons to place both pedicle screws and set screws under power with ease. In trauma and deformity, we continued advancing our Orthex pre-planning software, along with PNP Tibia and several PEGA deformity correction products. We're also nearing completion of our OP non-surgical DF2 product, for the non-surgical treatment of pediatric femur fractures. Lastly, we are preparing for the upcoming MDO line extension and the MDO spring assist clubfoot brace to be available in the near future. Transitioning to strategic partnerships. As a reminder, during the quarter, we placed our first 7D surgical interoperative navigation system at St. Mary's Palm Beach and continue to have several evaluation units currently working their way through the value analysis committee. Based on our early experience, we are pleased with the initial pull-through, particularly of our response spine system, with increasing utilization in accounts that have historically demonstrated low penetration. We are increasingly confident several units will be converted into sales as we look into 2023. As a reminder, Orthopediatrics owns exclusive access to the 7D technology within the fields of pediatric orthopedics and pediatric spine surgery within children's hospitals in the United States. Lastly, we remain at the forefront of helping train the next generation of pediatric orthopedic surgeons and are particularly proud of our continued contributions across the community. So far in 2022, we have conducted nearly 200 training events for healthcare professionals. In September, we served as a gold-level sponsor of the Scoliosis Research Society in Stockholm, Sweden, where we conducted Apathix user meetings and hosted surgeons in our technology suite featuring 7D. Additionally, we continued as the only orthopedic OEM and leading sponsor of the American Academy for Cerebral Palsy and Developmental Medicine annual meeting. Finally, we were the premier sponsor of the Pediatric Orthopedic Surgical Techniques course offered to all pediatric orthopedic surgeon fellows in North America. With that, I'll turn the call over to Fred to provide more detail on our financial results. Fred?

Thanks, Dave. Our third quarter 2022 worldwide revenue of $35.0 million increased 39% when compared to the third quarter of 2021. Growth in the quarter was driven primarily by continued surge in adoption, resulting in 22% organic growth. In addition, we added $4.4 million of combined revenue from MDO and Pega Medical. In the third quarter of 2022, US revenue was $26.5 million, a 37% increase from the third quarter of 2021. The growth in the quarter was primarily driven by organic growth across scoliosis and trauma and deformity, as well as the addition of MDO and Pega Medical. In the third quarter of 2022, we generated total international revenue of $8.4 million, representing growth of 47% compared to the prior year period. Growth in the quarter was driven primarily by increased procedure volumes, increased set sales to our international stocking distributors, as well as the addition of MDO and Pega Medical. In the third quarter, trauma and deformity revenue of $23.9 million increased 42% compared to the prior year period. Growth was driven primarily by organic growth from cannulated screws and the PMP femur system, as well as non-organic growth from MD Ortho and Pega Medical of $4.4 million. In the third quarter of 2022, scoliosis organic revenue of $10.0 million increased 37% compared to the prior year period. Growth was primarily driven by increased sales of our response fusion system and ApiFix non-fusion system, as well as increased set sales to our international stocking distributors as they look to respond to increased backlog. Finally, sports medicine other revenue in the third quarter of 2022 was $1.1 million, which grew 8% compared to the prior year period. Turning to set deployment, $6.4 million of sets were consigned in the third quarter of 2022. compared to $1.7 million in the third quarter of 2021. Year to date, we have now deployed $13.8 million, up 24% compared to the first three quarters of 2021. We expect another significant deployment in the fourth quarter of 2022. Touching briefly on a few key metrics. For the third quarter of 2022, gross profit margin was 74.1% compared to 74.0% in the third quarter of 2021. Total operating expenses increased $10.7 million, or 48%, from $22.2 million in the third quarter of 2021 to $32.9 million in the third quarter of 2022. Sales and marketing expenses increased $2.1 million, or 21%, to $11.9 million in the third quarter of 2022. The increase was driven primarily by increased sales commission expense, as well as the addition of our recent acquisitions. General and administrative expenses increased $4.1 million or 37% to $15.1 million in the third quarter of 2022. The increase was driven primarily by the addition of personnel and resources to support the continued expansion of our business, as well as the addition of our recent acquisitions. In the third quarter of 2022, we recorded a $3.6 million charge to operations related to trade name impairment, which was primarily driven by the decrease in forecasted revenue that was lower in comparison to the same period last year. Research and development expenses increased $0.9 million, or 69%, to $2.2 million in the third quarter of 2022. The increase was driven by additional resources as well as the addition of our recent acquisitions. Interest and other expenses were $1.7 million in the third quarter of 2022, compared to $0.3 million in the same period last year. In the third quarter of 2022, we realized a $23.0 million fair value adjustment benefit, which was driven by the decrease in forecasted revenue that was lower in comparison to the same period last year. This compared to a $1.4 million benefit in the third quarter of 2021. We reported an adjusted EBITDA profit of $1.9 million in the third quarter of 2022 compared to a profit of $0.5 million for the third quarter of 2021. For the first nine months of 2022, we generated $2.5 million of positive adjusted EBITDA compared to $0.4 million in 2021. We ended the third quarter with $121.6 million in cash, short-term investments, and restricted cash. This includes approximately $144 million in gross proceeds from our recent capital raise in August, less $31 million repayment of our line of credit. We have material increased our cash on hand, paid down our debt, and we have $50 million available to us on our line of credit. Given the current economic environment, our strong balance sheet, positive adjusted EBITDA, and line of sight to cash flow breakeven places us in a position of tremendous strength. Turning to our outlook for the remainder of 2022, we expected the elective surgical backlog would be extinguished in the second half of this year. However, based on what we saw in September, we believe children's hospitals will continue to operate at approximately 80 to 90% of their 2019 capacity. Additionally, we continue to see high rates of RSV impacting children to be a headwind throughout the fourth quarter. We anticipate these headwinds will be offset by continued fundamental tailwinds based on our leading competitive position, including an increased active surgeon base, growing backlog of deferred procedures, expanding product portfolio, the addition of key strategic partnerships, and pending international approvals, all which will enable further share-taking. For 2022, we now expect annual revenue to be in the range of $124 million to $125 million, representing year-over-year annual growth between 26% and 27%. This guidance assumes roughly $11 million of revenue contribution from MD Ortho and Pega Medical. We now expect organic growth of 15% to 16%. Lastly, we plan to deploy between $20 and $24 million of new sets in 2022, representing year-over-year annual growth between 47% and 77%. In addition, we continue to fully expect to generate several million dollars of adjusted EBITDA for the full year of 2022, crossing a major milestone for our business. Finally, we wanted to provide an update regarding the SEC fact-finding inquiry that was previously disclosed by the company via an 8K in late December 2020. Earlier this year, the SEC notified us that it had concluded its inquiry. and did not recommend any enforcement actions from the SEC against the company. At this point, I'll now turn the call back over to Dave for some closing comments.

Thanks, Fred. Overall, it may sound strange to express disappointment with 39% revenue growth, but there's no getting around the fact that our third quarter performance reflected continued disruptions in the operating environment. We may see continued staff shortages and RSV impact Q4, but it is significant to note our competitive position is as strong as ever, and there is no change in our posture of aggressive continued growth. In fact, our competitive position continues to be enhanced by the prospect of improved profitability, set deployments, increasing surge in adoption of key new products, 7D placements, and sales synergies produced from our two successful acquisitions, These catalysts will all drive near-term value and strengthen our market-leading position. We remain on track to continue expanding our profitability. Our bolstered balance sheet will support future growth and, combined with disciplined investment, will drive the company to cash flow breakeven. Finally, our success remains grounded in a corporate culture that places helping children first and at the center of everything we do. All of these factors give us confidence in our ability to continue to successfully execute our long-term strategy. With that, I'd like to turn the call back over to the operator to open the line for any questions.

If you'd like to ask a question, please press star 1-1. Our first question comes from Matt O'Brien with Piper Sandler. Your line is open.

Oh, morning. Thanks for taking the questions and congrats on the successful SEC conclusion you announced this morning. Wanted to start with the guide for the year, because when I look at the increase in the MDO slash Pega guidance, you know, that's up a couple of million. So the organic business is actually down about six. Would love if you could maybe parse out a little bit just the impact you're seeing from the pandemic versus any other factors that are potentially impacting you. And then I guess the next logical question is how that leads into 2023 and what you're thinking as far as the business goes as we head into next year.

Yeah, I'll talk about the environment here and then have Fred maybe take on some of the guide in the future. You know, Matt, I think what we've been seeing here, particularly in September, as we noted in the script, is just a really wild swings in terms of volume of our key customers. And so you've got these accounts that I think we're starting to really improve throughout the early part of the summer. Still having staffing shortages, but certainly starting to improve. And then you get hit with RSV and, you know, you have the combination of COVID staffing, RSV, And, you know, from account to account, region to region, we saw, particularly in September and moving into October, some wild swings. Obviously, that's impacting, negatively impacting revenue growth, particularly on the organic side. And I think going forward, we, you know, what we have seen this in the past, you typically see these very rapid spikes and then a pretty rapid decline. And, you know, certainly this has been noted in a number of publications around, you know, these hospitals that have been really tapped out with these RSV patients. But it is our hope. I don't know that we can build it into a guide, but it's certainly our hope that we would see, you know, a month, month and a half of this, and this would improve. But it's certainly very difficult for us to speculate as to how fast this, the RSV, kind of new RSV pandemic would improve. That said, I think as we think about 2023, it would be our expectation that this wouldn't last deep into Q1 and that hopefully, I know all of the marketplaces have been saying this for a long time, but hopefully we can get back to some type of normal operating environment as we look into 2023. Yeah, I would just add to that.

The one other variable in there is FX. So when you look at the organic business in the third quarter, We were unfavorably impacted by about $700,000. And, you know, the real change came in the month of September in Europe, and we anticipate those rates continuing into the fourth quarter. So we'll have another negative impact in the fourth quarter that will definitely, combined with the third quarter, impact the overall guidance that was provided on the organic side of the business. I think the positive is that the two acquisitions are doing much better than actually we thought they would be doing at this point, and we see that continuing into the fourth quarter and into next year, particularly as we can get some sets and some inventory deployed domestically on the Pega side of the business. So very excited about the growth drivers for next year related to Pega.

Got it. That's really helpful. And then just on Appifix, can you level set us on – how the registry slash commercial rollout is going. And I know a lot of people are really excited about that. Is it going to inflect a little bit more or meaningfully maybe in 23? And then, Dave, you mentioned some of these new products you're introducing. It seems like there's a lot of them. Can you just maybe tease out some of the bigger contributors that we should see from a new product perspective next year? Thanks.

Sure. Sure. Yeah, I think that you could expect to see Appifix contributing more next year in terms of growth. We've always said that we would expect a doubling of revenue from 2022 to 2023. Certainly, this has been kind of fits and starts with Appifix, particularly early on with respect to COVID and certainly now with RSV, but it's really good to see I would say at this stage the volume of commercial cases is probably very similar to the volume of registry cases. We still expect that registry to be closed at some point in time here in the early part of next year. We've had a fair volume of surge in movement from registry sites into commercial sites, so a number of the cases that we're in fact doing are not going into registry because they're in commercial sites. So that slowed that down a little bit. But overall, we're very pleased with the way we're seeing Apifix grow, expected to grow next year, and we're extremely pleased with the results we're seeing. And so hopefully we'll be able to publish two-year results next year, and I think that will also be another inflection point for the product. You know, as far as new products launches, really pleased to see the organic growth of the scoliosis business at 37%. Not too many companies growing 37% organic in the spine world at this stage. And we think that's on the backs of certainly Apifix, 7D, but also some of the work we're doing in R&D, getting some of these derotation instrumentation out. So we would expect next year to see the derotation, cannulated screws, the constant work that we're doing on the complex scoliosis side, combined with 7D and Apifix to be real growth drivers. Obviously, next year, we expect to see both MDO and Pega be growth drivers. Pega, particularly when we get inventory, which we expect to get into the first quarter of next year, expect that to be a driver. And then we continue to take share with the P&P FEMER. We believe that is a market-leading technology. We think we're going to be able to take a lot more share next year. And then PMP Tibia comes right behind it. So there's a lot to talk about there. And we just continue to give our Salesforce and our customers new technologies that I think are going to continue to impact the business positively.

Great. Thanks so much. Thanks, Matt.

Our next question comes from Rick Wise with Stiefel. Your line is open.

Hey, Fred and Dave. It's Anton on for Rick. Thanks for taking the questions. Hey. So, I mean, maybe first, last quarter you talked about 2.5 million U.S. deferred procedure backlog kind of expect to be scheduled throughout 2022. Can you talk to us a bit about how the 3Q, like RSC headwinds, impacted the U.S. backlog? Has it become kind of larger now? that elevated RSV volumes have kind of weighed on pediatric hospitals' ability to perform procedures? And when do you think the backlog could be fully worked through? Is it like a positive tail end for 2023 sales performance?

Yeah, I'd say at this stage, it is very difficult to determine the magnitude of that backlog. Harder outside of the U.S. We know it's there, And certainly we expected and was built into our guide in the second half that we would have extinguished that. And based again on what we saw throughout the summer, felt like we were starting to really pick up some steam there. I mean, there's no doubt that our children's hospitals are not operating at full tilt right now. We have surgeons that are anecdotally telling us they're scheduled out right now through the early part of summer next year with major elective procedures. And so while on one stage that is really good, on another side of that, that was fairly uncommon and is indicative of just the capacity right now within these children's hospitals. So the backlog is probably growing. I think Fred and I at this stage are having a hard time trying to quantify what that backlog is, particularly when we see hospitals operating in 80%, 90% capacity, particularly for these really complicated surgeries. I would have to guess this is a tailwind for us when we can get back to a more normal operating environment. And, you know, hopefully we see that in the start of 2023, but it's very difficult to quantify at this point.

Okay, got it. And then on 7D, I mean, your prepared remarks about the St. Mary's placement driving response pull-through was very encouraging. I think you mentioned last call that your strategy for 7D placement was to target accounts with low OP penetration. Can you give us, like, any additional color into the pull-through you're seeing there? How much further could it go? And on... additional hospitals kind of currently demoing systems? I guess what's left to be done there for them to convert, and how many systems could we see come through next year?

Yeah, that's a great question. So I would say, to use the cliche, we are literally on the one-yard line, on the goal line here with a number of key accounts, and a number of those key accounts are relatively new users of response. And so we're a signature or so away from placing some of these units on contract. It's taken longer than we would have expected. I suspect we're in the same boat with a lot of people at this stage. But we expect that this will have an impact. Certainly, it's 2023. We expect to be able to place the units that we acquired this year and then acquire more units and place more units in 2023. And you're exactly right. I mean, we have four or five accounts right now that literally had no exposure to the response system in our scoliosis products. They were customers of ours on the T&D side, but now they're using response. And they're using response even before they're contractually obligated to do that through a unit placement. So, we really like what we're seeing there. And I think that, you know, 7D, again, 7D Apifix, these types of things are certainly driving the 37% organic growth we saw in Q3. you know, even in a really choppy environment. And we would expect to see that positive uplift due to 7D continue throughout the balance of the year as well as the balance of next year.

That's great, Keller. Thanks again for taking the question. Sure.

Our next question comes from Ryan Zimmerman with BTIG. Your line is open.

Hey, thanks for taking the questions and good morning, guys. I want to follow up on Matt's question on RSV and just Just ask a little bit, you know, Dave, do you feel like you've sufficiently accounted for the full impact of RSV in the fourth quarter? Given how volatile it is, I just want to make sure that, you know, you guys feel confident with the guidance that's set for fourth quarter and 22.

Yes, great question. The RSV, as Dave mentioned, spikes really, really fast. If you look at the trend charts on the CDC website, And then it comes down really fast as well. It seems to have started about two months earlier this year than years past. And so we anticipate that will come back down in the fourth quarter, sometime in the fourth quarter. And we feel pretty confident in the guidance that we have fully reflected that as well as the unfavorable effects that's going to be impacting the business. We would anticipate, hopefully, that we can get this behind us and start recovering a bit before the end of the fourth quarter and then starting into the first quarter. So, good question. We think we've got it adequately, you know, bracketed, if you will, and included in the guidance.

I think Fred and I are becoming honorary virologists here. And so, we have... I've certainly been involved in a lot of conversations with our accounts to try to gauge exactly how it's impacted them.

Yeah, no, that's helpful because clearly I couldn't call it even though I thought I tried. But, you know, I want to ask about – I appreciate the disclosures on organic growth. I think it's a question investors have been asking for on orthopediatrics for a while. And so, you know, maybe you could just talk a little bit, Fred – The M&A contribution was up about $2 million, you know, better than we expected from the prior guidance. One, what can that run rate next year in terms of kind of your expectations? Then two, I did notice that, you know, you did a little bit over $4 million this quarter, but you're implying $4 million in December. Is there a reason why that slows down? Is that seasonality? Just kind of take me through your thinking around M&A. and the contribution from the businesses.

Yeah, absolutely. As we mentioned, both businesses are doing better than expected, particularly Pega in the month of September once it got into the hands of our domestic sales agents. And so very pleased with the third quarter performance. Both of those businesses follow the same trend as our seasonality and our legacy business. And so, as you know, in the fourth quarter, typically the sales are softer than they are in the third quarter because the kids have obviously gone back to school. And so that reduction that is included, the $4 million versus the $4.4 million, which you are correct, is really just driven by the seasonality of the overall pediatric business. That's included in there. Listen, both of these businesses are very exciting and we anticipate that the growth of both of these businesses will be faster than the overall revenue growth for our business in all of 2023 and probably beyond for a few more years. So as Dave mentioned, really on the Pega side, it's a matter of getting sets deployed. That will start in the first quarter and tail out into the second quarter and probably continue into the second half of next year as we continue to deploy sets in that business. And on the MDO side, the product launches, we opened Brazil for the first time with them. We have a lot of distributor relationships in Brazil. They were not selling there historically. And so encouraged to have that country open to clubfoot correction and more to come.

Appreciate the call. Thanks for taking the questions, guys.

Good try.

Our next question comes from Sam Brodowski with Truist. Your line is open.

Hi, good morning. Thanks for taking the question. Just one more on the acquisitions. Good morning. So can you parse out at all a little bit maybe the mix in that $4.4 million between the two? Is it reasonable to think sort of a flat sequential for MDO or is there an increase there from 2Q?

Yeah, so the businesses combined, I think about half that was domestic, half of it was OUS. So both of those businesses are more international than our legacy business, which is about 25% outside of the US. And again, we saw nice growth from both MDO as well as Pega within the quarter, and we anticipate that continuing.

Okay. And maybe just on MDO, it's we think about that 2Q with a continued success, is that 2.6-ish million revenue? Is that like a reasonable run rate to think for next year?

I think that's reasonable for this year. It should grow on that for next year.

Great. That's helpful. And then just at a higher level, when we think about the algorithm to get to 20% organic growth, you know, I mean, Scoliosis has been performing really well the past two quarters on an organic basis, and mid-teens growth, call it, for the trauma and deformity business. Is that how we should be thinking about the businesses in 23 and beyond, or is there maybe going to be some acceleration in the trauma and deformity business? Thanks for taking the question.

Yeah, I would expect the trauma and deformity business to continue to accelerate again when we get back to a more normal environment, particularly on the elective deformity correction side. we had a fantastic quarter of taking share in the external fixation franchise. The devised rail combined with Orthex has had a big impact, and we expect that combined with DMP and cannulated screws to continue to drive growth throughout the balance of 2023. Obviously, the Scully business is growing faster. It has historically grown faster. And again, with Apipix and 7D, we would expect that business to continue to grow. But I think When you combine PEGA, MDO, and all that we've got going on on the T&D business now in a normalized environment, as well as everything we've got going on on the SCOLE business, we are very bullish about our capacity to grow organic sales growth by north of 20%.

Thank you. Thanks, Sam.

Our next question comes from Mike Mattson with Needham & Company. Your line is open.

Good morning. I wanted to ask about the trademark impairment. I didn't completely understand what that was related to.

Yeah, both the trademark impairment and the $23 million on the accretion, both of those are related to AppyFix.

Okay. Does that imply that the sales have been lower than you expected or planned for?

Yeah. So, the way that works is we provide a forecast, 10-year forecast, actually, to a third party who goes through a valuation analysis. And that was completed and updated here in September. And that... forecast, which it is lower than we had anticipated, impacted the impairment. And then that flows through to the accretion analysis as well. As a reminder, the accretion is related to a four-year system sales payment. So it's an earn out in April of 2024.

Okay. And to what degree, I mean, obviously you were launching this thing during a pandemic. So, I mean, is it mainly related to COVID or were there any other issues there that, you know, caused it to maybe not do as well as you thought or be slower in terms of the ramp?

I would just say that we were obviously much more bullish when we didn't know we were going to be facing, you know, three years of a COVID environment. So, when we acquired this business, during the first month of the pandemic. I think, you know, we expected the rollout and the registry and everything, obviously, to be filled much quicker. And, you know, that, I think from our standpoint long-term, we have really no change in our view of what this technology is doing. And obviously, it's growing our scoliosis business in a substantial way, even though it's still relatively small. I think that, you know, the expectations for this business, given the impact of pandemic and everything else, have probably pushed out a few years, and that certainly impacts the valuation. Absolutely. Okay.

Thanks. And then just we're seeing this merger with OrthoFix and C-Spine. And I know OrthoFix is probably one of the few companies out there that had some sort of pediatric business, probably more in the trauma and deformity area than in spine, admittedly. But, you know, I'm just wondering what your views are on the deal in terms of what it means for orthopediatrics. I mean, I'd imagine there's probably going to be some disruption as the combine the companies, but longer term, you know, is there a risk that they could become more of a, you know, larger player in the pediatric market maybe?

Yeah, our biggest concern up front was just how, you know, we ensured that we had this very strong partnership with C-Spine and know the management quite well there. And the biggest concern was just to make sure that we were all still full go in terms of the 7D arrangement. Not just on the scoliosis side, but work that we're doing in partnership to develop technologies on the trauma and limb deformity side. And we're very confident that that's a full go. So, I guess I can't comment for sure on what's going to happen there, but OrthoFix didn't particularly impact our revenue growth as a standalone company. My suspicion is that this won't have a big impact or any impact on us as they try to integrate into an adult spine company. And, you know, I think that probably provides us with some real opportunity if there are some places, particularly outside of the United States, where they may see disruption, you know, be some nice opportunities, particularly with our expanded international footprint post-SEG acquisition.

Okay, thanks. And then finally, just given where the gross margin was, it doesn't look like you're really feeling any major kind of inflationary pressures, but just wanted to check in on kind of what you're seeing with regard to inflation and your supply chains.

Yeah, that's absolutely correct. I mean, there's a little inflation, obviously, in transportation and a few pockets here or there, but nothing that's impacting the margin of the business today or that we would anticipate in the future. The lowering of the set deployment numbers by a few million dollars is some leftover legacy problems from suppliers again. trying to get that one last instrument into the set before we can deploy it. And some dates are moving out for deliveries from some of our suppliers. So that'll push some of the deployment into next year. But inflation-wise, we're in good shape.

Okay, got it. Thank you.

Thanks, Mike.

There are no further questions at this time. I'd like to turn the call back over to Dave and Fred for any closing remarks.

Great. Well, all of you, it's something And we look forward to talking to several of you at some upcoming investor conferences. Thank you.

This concludes the program. You may now disconnect. Everyone, have a great day.