OrthoPediatrics Corp. (KIDS) Q2 2020 Earnings Report, Transcript and Summary

Welcome to the Q2 2020 OrthoPediatrics Corp Earnings Conference Call. My name is Vanessa and I'll be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Emma Poalillo. 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 laws, 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 a discussion of risk factors, including among others, the risks related to COVID-19, 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-Q, which will be filed with the Securities and Exchange Commission soon. During the call 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 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 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 the live broadcast, August 6, 2020. Except as required by law, the company undertakes no obligation to revise or update any statements 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 improved 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 reduction. We've 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 POSNA 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 I 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 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 represents 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. And we're finding that these businesses thrive in the COVID-19 environment. In June, we purchased the patents associated with our BandLoc 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 idiopathic 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 ApiFix system to compete head-to-head with tethering indication for 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 four COVID-19 sessions on dark matter. 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 POSNA 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 a 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 remain 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?

Thanks, Mark. Total revenue in the second quarter 2020 was $13.6 million, down 25% compared to $18.2 million for the same period in 2019. U.S. revenue in the second quarter 2020 was $12.1 million, a 12% decrease compared to $13.8 million in the same period last year, representing 89% of total revenue. International revenue in the second quarter of 2020 was $1.4 million, a 67% decrease compared to $4.4 million in the same period last year, representing 11% of total revenue. As Mark mentioned, our global sales was clearly impacted by COVID-19. We are very encouraged by the consistent improvement we realized throughout the quarter, which also carried over into July. This strengthening trend was led by our domestic business, which reported year-over-year growth in both June and July. Our second quarter revenue breakdown by product category was as follows. Trauma and Deformity revenue in the second quarter 2020 was $9.2 million, a 22% decrease compared to $11.9 million in the same period last year. Favorable Trauma, Orthex Hexapod Deformity Correction System and new product introductions partially offset the COVID slowdown in elective deformity surgeries. Scoliosis revenue in the second quarter 2020 was $3.8 million, a 35% decrease compared to $5.9 million in the same period last year. Our scoliosis business continues to be more impacted by COVID as elective surgeries are deferred to a varying degree by geography. However, we also saw favorable trends in our scoliosis business across the quarter and into July. Lastly, Sports Medicine/Other revenue in the second quarter 2020 was $0.5 million, representing a 20% increase compared to $0.4 million in the same period last year. This favorable growth was primarily driven by the inclusion of Telos revenue in this category. Nearly all the changes in each category was due to a decrease in unit volumes sold and not a result of selling price changes. Moving down the income statement. Gross profit in the second quarter 2020 was $10.1 million compared to $13.6 million in the same period last year. Gross margin in the second quarter 2020 was 74.0% compared to 74.8% in the second quarter 2019. Sales and marketing expenses in the second quarter 2020 decreased 26% to $5.6 million compared to $7.6 million in the same period last year. This was driven by a decrease in unit volumes sold and associated commissions in the U.S. and international markets with sales agencies. General and administrative expenses in the second quarter 2020 was $10.6 million, an increase of 61% compared to $6.6 million in the second quarter of 2019. The increase in expense was primarily driven by the addition of ApiFix and Telos G&A, increased quality and regulatory expenses, acquisition-related costs as well as increased noncash stock compensation, depreciation and amortization expenses. The second quarter 2020 G&A expense also included a onetime grant and vesting of restricted stock of approximately $1.3 million of expense, which will not repeat going forward. Research and development expense were $0.9 million in the second quarter of 2020, a decrease of 29% compared to $1.2 million in the second quarter of 2019. The decrease includes the revision of $250,000 of accrued R&D expense in the quarter attributable to the BandLoc patent. Total operating expenses in the second quarter 2020 was $17.1 million compared to $15.4 million for the same period last year. Operating loss in the second quarter 2020 was $7.0 million compared to a loss of $1.8 million in the second quarter 2019. Adjusted EBITDA for the second quarter of 2020 was negative $2.3 million compared to $0.6 million for the second quarter of 2019. Interest expense in the second quarter of 2020 was $1.4 million compared to $0.6 million in the same period last year. The increase includes a noncash charge of $0.9 million for the accretion of the ApiFix acquisition installment payment. Effectively, this is a difference between the net present value of the liability and the total anticipated value expected to be paid in the future. Separately from interest expense, we also had a noncash charge in other expense for the fair value adjustments of contingent consideration of $0.9 million also associated with the ApiFix acquisition. In total, these two non-cash amount equaled $1.8 million for the second quarter of 2020 and will continue to impact the net income and EPS on a reduced rate until we complete our year-four anniversary instalment payment. Net loss in the second quarter 2020 was $9.4 million compared to a net loss of $2.6 million in the same period last year. Net loss per share in the second quarter of 2020 was $0.54 per basic and diluted share compared to $0.18 per basic and diluted share in the same period last year. Turning to our balance sheet. As of June 30, 2020, our cash and restricted cash was $114.4 million compared to $54.9 million as of March 31, 2020. This includes the $70 million in net proceeds from the follow-on public offering in June of 1.6 million shares at $47 per share. These funds will be used to strengthen the balance sheet in anticipation of possible adverse market conditions associated with COVID to meet cash obligations of the ApiFix milestone payment, fund new implant instrument sets, possible future acquisitions, and to meet corporate need. Related to our debt, on July 15, 2020, we repaid our $20 million principal amount outstanding under our term loan agreement, together with all unpaid interest and other related amounts payable. And currently, we have no outstanding term loan obligation. We also expanded our $15 million revolving credit facility to $25 million and extended the expiration date from January of 2023 to January of 2024 with the full $25 million currently available to us. The change in property and equipment during the second quarter 2020 was $1.2 million compared to $3.6 million during the same period last year, reflecting a decrease in construction and process, which includes partial sets waiting to be deployed. Including the implants, $5.8 million of consigned sets were deployed during the quarter compared to $9.3 million during the second quarter of 2019. Year-to-date, we have deployed $9.1 million of sets compared to $10.6 million in 2019. In terms of performance for the balance of the year, we anticipate sales in the second half of 2020 will continue to improve domestically as the elective surgeries resume. Although they will regionally -- vary regionally in the U.S. and country-by-country internationally. While we expect sales in the third quarter to continue the month-to-month recovery trend we have seen in the second quarter, it is important to keep in mind the pandemic is likely to continue to evolve. As such, we note that there is some level of uncertainty in the coming quarters, but our proven business model, our strong balance sheet and corporate objectives remains very strong. And we are confident in our ability to continue to lead the market. Let me now turn the call back over to Mark for some final comments.

Thanks, Fred. We'd like to conclude by thanking the entire healthcare community everywhere in the world for its skill, resilience and selflessness during the COVID-19 pandemic. They remind us how fortunate we are to serve customers with such a noble calling. I would also like to thank our associates for their personal leadership and accountability that has allowed us to treat 178,000 children from 2008 through the second quarter 2020. I'm confident that our focus and consistent execution will continue strengthening OrthoPediatrics' leading market position in pediatric orthopedics. And I'm confident that we will emerge from the COVID pandemic even stronger than when we entered it. With that, let's turn the call over to your questions, please.

Thank you. [Operator Instructions] Our first question comes from Matthew O'Brien from Piper Sandler. Your line is now open.

This is Patrick on for Matt. Congrats on the quarter, all things considered, given the COVID environment. I would like to just start with the early onset scoliosis opportunity. I know you mentioned you're nearing design completion with so many larger other spine companies not focusing on this market opportunity, I'd love to hear more color on the work you're doing there. Any idea of when you'll have the design completion? How should we think about the market opportunity, some of your efforts with the surgeon panels as you work through this opportunity? Any feedback you'd be willing to share would be greatly appreciated, and then I have a follow-up.

Let me start with a general comment and then turn that question over to Dave Bailey, who is very close to this situation. This was technology in fact that we licensed several years ago from a very large spine company that had basically given up on the product and the surgeons who had developed the product with that company was frustrated by that and came to us. And so, I think it is indicative of the fact that at least that company had very little interest in developing a specific product for early onset scoliosis, which is something we have seen mirrored by the behavior of so many other of the leading spine company. But that is a general comment, perhaps Dave though would comment more specifically about the potential of this and our expectations.

So, we view the early onset scoliosis market as an area of major unmet need in pediatric orthopedic. And as Mark alluded to, we recognize that the large orthopedic companies are not focused specifically in pediatric orthopedics, but much less focused on a smaller niche of pediatric spinal deformity correction. Further, there are a number of ways to treat early onset scoliosis and we believe the development that we're doing with our several key opinion leaders from major children's hospitals is a very unique and different way that will allow pediatric orthopedic surgeons around the world to treat a very-very difficult indication with substantial unmet need. So, I think we're very excited. It may be some time before we see the product hit the market, particularly in the United States, while we are nearing completion of the development cycle. We'll then move into a period of time where we'll be working with FDA to get product approved. And certainly, as you all know, we couldn't give any specifics with respect to how the FDA may react. Although, we do expect, given our long history of successful negotiations and discussions with FDA, that we would be successful overtime.

And I'd be curious to shift and look at the Orthex Hexapod. I know you had mentioned that the performance this quarter was much better than you expected. One really interesting component to the opportunity there was to expand the addressable market for the T&D business as a whole. So I know it's early, and we're working with the COVID-19 environment. But have you been able to increase surgeon reach? Have you been getting to those more limb reconstruction specialists or at least having the conversations there so you can get other product into those areas that you might not have been able to get to before? Just be curious on your efforts to date with the hexapod.

Again, in general terms, let me say something and then ask Dave for additional comment. When we acquired this business a year ago, there were 30 users. We've nearly tripled the number of users. And that is indicative, I think, of how the breadth of that product has expanded over the year that we have owned it. I think furthermore, it has closed a major gap in the Trauma and Deformity product line that has enabled us to -- or really the first time in our company's history, go after virtually all of the Trauma and Deformity business at a number of major accounts. And we've been delighted by the progress of putting some of those accounts under contract or seeing very significant expansion of our market position there. And we're talking about some of the largest pediatric centers in the country.

Yes, that's right, Mark. We're extremely pleased with the adoption of the Orthex product. Very specifically, 29 new customers, I believe, new accounts that are utilizing the Orthex system here within the last few months, a number of which we picked up during the COVID pandemic. I think we detailed some of our training and education efforts with our sales force. But also, we had a number of different training and education efforts with pediatric orthopedic surgeons around the world in training them on how to use the software and how to use the device remotely. And I think we're already starting to see that training pay off with these 29 new accounts. I think the first places obviously we've been able to go and get success with this product are places where we have a strong presence already, freestanding children's hospitals or children's hospitals where we have -- we're already the market incumbent. And so it's been -- I don't want to say easy, but certainly, it's been -- those are the places where we can attract the most interest most rapidly. We have started to expand into a few of the accounts where we weren't very present with limb deformity correction surgeon. although as you rightly point out, it's a little bit more difficult in the COVID environment because those accounts aren't typically accounts where we have historically had a substantial presence. So we are starting to see that, but we do expect to see that on an increasing basis as we move forward and come out of the COVID pandemic.

Our next question comes from Ryan Zimmerman from BTIG.

So I wanted to ask a few questions. Mark, you noted single-digit growth in July. And I was wondering if you can put maybe a little finer point on kind of your expectations there, low single digits, mid-single digits. Just any color, I think, would be appreciated in terms of how you're thinking about your recovery, particularly domestically, which does sound very strong. And then I have a couple of follow-ups.

With all due care, I think I should turn that question over to Fred.

Yes. So, as Mark mentioned, domestically, in May, we were equal to last year. In June, we did see a 5% growth year-over-year and July was slightly higher than that. So, I think, more importantly than the exact number to us, it's the trend, the favorable trend that we're seeing month-on-month. And we would fully expect that to continue throughout the third quarter. It's very encouraging to see, even with some soft spot regionally, how well the domestic business is performing.

So, couple of other questions. Given the amount of set investments, set investments you guys have done over the years. In our channel, I actually talk to a lot of distributors and they do have a lot of sets. So, I'm wondering, are we at a point where sets are not constraining growth? Is there still robust demand for set and how should investors think about your set allocation over the balance of this year and into next year?

Once again, let me make a general comment, and then ask Fred for more specific. We are still basically in a beta launch phase for a number of the new products that were developed even 18 months ago. I had mentioned PediFoot in this thing, but we could say the same thing about SCFE, which was a new system that was launched. Even the cannulated screw sets, there is tremendous demand for those. So I think that the answer with certain products is, yes, there is still tremendous demand. I think internationally, there will be ongoing significant demand, although given the international situation in so many markets, that has not been apparent in the last several months. But as to the specific outlook and what we make of that in terms of investment, Fred, would you have any thoughts?

Yes, I think, obviously, no sets were deployed in the month of April, given all the hospitals were shut down. But as we started to come out of this as a management group, we really took view on what we can do to strengthen the business. And deploying more set is one of those things. So, I would anticipate we would continue to deploy new set at almost a normal pace for the rest of this year and into 2021. I think the dollars will be more focused on new products. As Mark mentioned, PediFoot, PNP, Orthex, ApiFix, those are new requirements that we haven't had in the past, but it's also encouraging to see demand for the core legacy system. As we add new reps, we need more set. As we win some of these major account conversions that Mark mentioned, we're going to need new set in those hospitals to support that incremental demand. So, I would anticipate that we will continue to invest in the business at a similar level that we did pre-COVID.

And then last one from me, and I appreciate all color. Good to hear. You guys recently made a point to emphasize your growth in FIREFLY, and I thought it was interesting. I'm just wondering Mark, maybe Dave for you, what does it signal in terms of your view on potentially the role of robotics or lack thereof in pediatric spine and whether there may or may not be a place there?

Certainly, I think the verdict is still out in pediatric orthopedics. We don't encounter a number of competitive situations on the robotic side. Certainly, our success with the FIREFLY device is more predicated on the need for intra-operative surgical navigation when it is for robotics. And we do see that in the future, company's most likely with a suite of sort of intraoperative navigation product, a FIREFLY like device, 3D printed device like ours, as well as some type of intra-operative navigation, we see that as important and we are looking into the options that we may have to offer FIREFLY in addition to some other surgical navigation products. But at the moment, we don't see a large competitive pressure applied or within our accounts on surgical robotics in these open scoliosis procedures.

Our next question comes from Kaila Krum by Truist Securities.

So, I'd love to just hear a little bit more about how the ApiFix rollout is going. You mentioned you started doing cases. Can you just give us a little bit more anecdotal feedback what you're hearing from docs? And then we spoke the higher volume surgeon who were really excited about helping both existing surgical patients and non-surgical bracing patient. I mean, do you think that MID-C can ultimately grow the surgical market volume overall? Just would love to get a little bit more feedback there.

Well, let me comment and then ask Dave for his thoughts. I think the bottom line is that [indiscernible] and we could not be more delighted by how there has been such enormous surge demand for this thing. We have actually had difficulty deciding on what the 20 registry sites which is the number that we want to limit this to for the next 18 months or so until the first 200 cases are completed. But in the three institutions where the surgery has taken place, the feedback has all been very consistent. Our surgeons are frankly astonished at how simple it is to conduct a surgery, how quick the surgery goes in 90 minutes to two hours, and the very rapid recovery of patients who I think the last one, the patient went home the next day, and within several weeks are back to full mobility. Plus, they are getting superb correction. So, everything is going exactly as we had hoped. And if anything, I think our challenge in the future will be to constrain the tremendous demand that's being fueled by patients and families wanting this procedure as they hear more and more about it. Kaila, by the way, I thought that the call that you arranged with Baron Lonner was extremely interesting. Lonner is -- I think he mentioned he does 140 tethering cases a year and feels that anywhere from half to 60% of them would be candidates for ApiFix, and I believe it was he who said that there is a big learning curve associated with tethering that you don't have with the ApiFix product. But Dave, what more specific comment will you make?

Well, it's hard to amplify, Mark, your comments. But I think that we are holding back the tide a bit here, which is really encouraging this early. The inbound interest from surgeons has been really strong. In fact, we are now starting to deal with inbound interest from patients that are coming through the ApiFix site as well as coming even to some of our distributors or some of our managing directors, which is certainly a new phenomenon for the company. So we're very pleased, extremely pleased that the first three of these procedures went off so well. You can imagine in this -- in the COVID environment, ensuring that these cases were well covered by Paul and getting sales representatives into the operating room so that we could get our team more experienced, that was a real challenge, but we were able to navigate that. And we're extremely pleased with how the progression of the IRB approvals have gone. We have three now that are completely ready, and within a week of full approval, these accounts had scheduled surgery. And we have a number of additional sites that are ready to go. And we expect that the minute they get the IRB approval for the registry that we will start to see additional surgeries there. So couldn't be more pleased. I would also note that the expansion of the indications from a 40- to 60-degree curve to 35- to 60-degree curves is very important for the company. And it does exactly, as you suggest, in that it expands the indications into some of these very difficult bracing patients, patients who are noncompliant or who are not receiving the kind of improvement that they'd like to see with bracing. That 5-degree indication expansion, in fact, really moves into a segment of the marketplace right now that historically may not have been surgical candidates. And so you're very right to assume that we expect this will continue to expand the surgical market for patients, particularly young patients with AIS.

And great color just on the IRB progress you guys have made. So I mean I realize it's early, but in your initial target of 20 centers, I guess I was surprised by the potential volume that Dr. Lonner suggested he could do. I realize he's a high-volume guy, but I mean is it reasonable to assume each of these 20 centers can do 2 to 3 cases apiece per quarter? Could it be higher than that? I just would love to understand your thoughts around potential capacity for each of these centers.

There's no question.

Yes, that number you cite is -- yes, that's a good number. I think that there is no question that these sites, once we get moving these sites, we'll have the capacity not to do the kind of volume that Dr. Lonner does maybe, but certainly, the surgeons can do this kind of volume. And the patient demand for this will definitely be driven to those accounts that are offering this type of product.

We must remain conservative for several reasons. The first is that we got 3 cases under our belt. You just don't know. Even though the European data are extremely encouraging and are being confirmed by this, that's an issue. Secondly, there is the challenge that we only have a handful of people that can support the surgery so well to guarantee great results at the moment. And it's so important that these first 200 cases be as good as they can be because we're going to be living with those registry patients for a decade or more as they're followed. So the future reputation of the technology will rest on a foundation that we must carefully lay down over the next year to 18 months. But it could go a lot faster than we are anticipating, there's no doubt about it.

Our next question comes from Mike Matson from Needham and Company. Your line is open.

Yes, so I just wanted to ask about the international business, maybe why is it lagging the U.S.? Are they just -- those countries are just recovering more slowly from COVID or is there something else going on?

From my perspective, I think the cardinal difference Mike is that so many of our international hospitals treat adults as well as children. And so, they were right in the epicenter of the COVID-19 epidemic in their countries. But that is not the case here in the United States, nearly to that degree. Most of the pediatric centers here were unaffected by COVID, except of course the postponement of elective surgeries and the reticence of parents to bring in their children in the April/May time period, that's passing. So, I think that we continue to see very uneven recovery. Markets like Germany, Australia, New Zealand have certainly bounced back. Others, like the U.K., are just beginning elective surgeries now. In fact, I've not even heard confirmation that they've begun, but they were scheduled to begin by mid to late July. And Latin America is still being ravaged by this disease. And as you're aware, we have a significant business in Brazil. So, I think those are the factors I would point to. Fred, do you have some other thoughts?

Yes, just the one other impact I think is to our stocking distributors, historically we had sold them set and that's how they really grew their business. And as you can imagine, many of them are struggling with cash right now and they're just not buying set. And so, that is impacting our second quarter revenue growth for sure on the international side of the business. I do think it's encouraging as of late in the last couple of weeks that we're starting to see some green shoots in that area and while it's not clearly not recovered, we're starting to see some favorable items popping up and we would hope that trend would continue really throughout the second half of 2020.

We were surprised by how strong international sales were last month for example, but we've been warned by our international executives, "Look, that is not a trend." So, 'Green Shoot' is a great phrase.

And then my second question for Fred. Just the G&A was up quite a bit and I understand that there was, it sounds like there were some combination of some one-time things in there, as well some things that make -- tended to be in there. So, can you give us some idea of what the run rate you expect are going forward versus the $10.6 million this quarter?

Yes. So, let's just isolate some things in there. So, there is obviously higher depreciation in there, that's going to continue -- higher amortization, that's going to continue, associated with the prior acquisition. The one item that was in there, I would say, was the $1.3 million non-cash. Stock comp is not going to continue. There was about $300,000 of deal-related fees in there as well. But the rest of it is probably going to be there for next several quarters.

So, maybe kind of more in the $8 million to $9 million range more reasonable or --?

Yes.

And then we have our last question from Dave Turkaly. Your line is open.

I think you guys have talked about in the past, servicing top-300 pediatric institutions, maybe somewhere along the line of 500 or so customers domestically. I'm just curious what your thoughts are in terms of -- are all those places now back doing elective procedures? And as you look through the back half of this year, do you anticipate that they will remain doing so, that there won't be further shutdowns to those procedures?

So throughout the second quarter, I would say that not all of those accounts were back to doing elective procedures. Certainly, the second quarter was affected more harshly by the Northeast. Our distributor there, which is our largest distributor, saw nice progression from the end of March through April and then up in May and June. But we are only now in July, starting to see substantial starts in the Northeast, and we have some major accounts in the Northeast. So, I think we were particularly pleased with Q2 and June and July, because it was really unaffected at least from a positive standpoint from our major account we have in the Northeast. That said, there are some hotspots obviously that you described. And while we hear the elective procedures have been stopped in some of these places -- Arizona, Texas. We have not seen or have not been substantially affected by that within the children's hospitals. And so, we remain optimistic, but we are also cautious. But at the moment, we have not seen the kinds of reductions in elective procedures and some of the hotspots around the country that are kind of described in the news and we are starting to see places that haven't contributed to revenue, as significantly in the second quarter, start to do procedures.

Yes, I think it's interesting when Mark noted that you could come out of this stronger and that there are some aspects of COVID specifically that might be enhancing your competitive footprint. I was just wondering if you could give us any anecdotal evidence of sort of that actually happening where either the reps from other places may not be allowed in or where you might be getting stronger or you have higher penetration in some accounts given that may be the lack of focus from some of the bigger guys? But any color that you could add to that would be greatly appreciated. Thanks.

Well, I think, Dave, a specific example of that would be the many Orthex training sessions that were done online in the second quarter. Some of these had 100 to 150 sales reps dialing in. The Hexapod system is an extremely complex surgery. It's actually more complex and difficult than scoliosis in terms of how the product works. And I think that is directly correlated to the number of conversions that have taken place. And all those conversions, remember, are coming from well-established entities, Smith & Nephew and Orthofix, dominate this market historically. So, that would be an example. I think beyond that, the work that we're doing on regulatory compliance in general on sales training, the progress we're making with the development of an app, which we'll be rolling out in beta form by year-end and have a very significant impact on users, who can literally on their cellphone dial-up a training video as they're walking into the operating room. These things are what I was referring to as making the company much stronger, ironically, as a result of this pandemic and the lessons that it's teaching us.

Yes. Dave, I would say as well, from a very tangible perspective, we are seeing an increased number of accounts that are looking to reduce the number of vendors and are by default moving towards the incumbents. And we have -- Mark talked about the 5 different accounts that we're working on that we have either single-bid contracts or a few different vendors where we would get, let's say, 80% of the volume. We've talked about working on those things now for a long time. And we have seen a few of those things here within the last, let's say, six weeks go in our favor. And so our suspicion that accounts would want to see less representation at least from new company, I don't think I would want to be a company trying to launch new products into hospitals or children's hospitals right now. And so our incumbent position within these 300 accounts is already tangibly serving us well. And in addition to conversion of some of these accounts we've been working on, we're starting to see additional accounts come to us asking us to go on contract, to go on contracts that would inevitably drive sales up and drive some of our more -- some of the historical incumbent competitors out of the market or out of these hospitals. And so I think it's a very tangible thing we're seeing particularly as these hospitals have started to open up for both elective procedures as well as continue to do trauma procedures.

We have no further questions at this time.

So as always, we'd like to thank you very much for your interest in our company and your indirect support for the cause of helping children throughout the world. And we hope everyone stays safe and healthy, and we're looking very much forward to updating you on our future progress. So everyone, have a good day.

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.