OrthoPediatrics Corp. (KIDS) Q1 2021 Earnings Report, Transcript and Summary

Welcome to the Q1 2021 OrthoPediatrics Corp Earnings Conference Call. My name is John. I'll be your operator for today's call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] Please note the conference is being recorded. And I will now turn the call over to Christine Petraglia.

Thank you, John, and thank you everyone for joining today's call. With 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, 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-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 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 the live broadcast today, May 6, 2021. Except as required by law, the company undertakes no obligation to review or update any statements to reflect events or circumstances that take place after the date of this call. With that said, I like to turn the call over to Mark.

Good morning everyone and thank you for joining us today on our first quarter 2021 earnings conference call. I'd like to begin by recognizing my fellow OrthoPediatrics associates for their tenacity and hard work. Our strong performance in the quarter is a testament to our committed team and the resilient business we built together and I couldn't be prouder of where OrthoPediatrics is today. We're starting out fiscal 2021 on an excellent note with our quarterly revenue growth exceeding 30%, which is back up to pre-pandemic levels and with adjusted EBITDA and gross margins continuing to improve steadily. Of course, we didn't achieve this overnight. We'd been building momentum for more than a year. As we reflect on our progress to date, we are very pleased to report that the initiatives we put in place last year beginning at the start of elective surgery deferrals in mid-March have positioned OP stronger today than it was at the outset of COVID-19. We said that we would emerge stronger from the pandemic than when we entered it and we have done so. Before I walk through our results this quarter, I'd like to comment on our succession plan. As you'll recall, last May we announced the appointment of Dave Bailey as President and following our upcoming June 2nd Annual Meeting, Dave will formally be appointed CEO and I will become executive chairman of the board. As we continue to advance toward recovery from the pandemic and build on the strong foundation we've established as a team. I believe this transition is well timed. In addition to this being a meaningful moment for our company, this change in leadership is an important personal milestone. When I was named CEO in 2011, our annual sales were only $7 million. We had just restructured the company and our financial condition was tenuous. The one thing we had going for us was opportunity and abundance of opportunity. Despite the very different company that OrthoPediatrics is today, we still have an abundance of opportunity and I look forward to remaining actively involved as executive chairman and seeing all that this team will accomplish in the years to come. So with that said, let's begin today's call with an overview of our financial results and then discuss results by product line, including our thoughts on procedure recovery rates in the United States and abroad. I will also comment on additional progress that is setting us up for success during the balance of 2021. Fred will then lead us in a detailed financial review following which we'll open up the call to your questions. Overall, the success we achieved in the first quarter was driven by strong core business growth, both domestic and international. Our acquisitions of Orthex, ApiFix and Telos partners as well as our continued investment in sets served as additional catalyst to our growth. As we look ahead and continue down the path to recovery from the pandemic, I'm confident that OP is well positioned to drive sustainable long-term value creation. First quarter 2021 sales grew 31% to $21.5 million compared to $16.4 million in Q1 2020. All three businesses across domestic and international markets showed a marked improvement over the same period last year. Our sales growth in Q1 2021 returned to pre-pandemic levels with sales growing 30% or more, levels we had previously seen in Q3 and Q4 2019 and continuing into January and February 2020. I'd like to point out that there were two fewer billing days in Q1 2021 versus Q1 2020, which impacted our growth rate that otherwise would have been 35% for the first quarter of 2021. This represents a significant turnaround following the sharp decline in sales that we experienced in Q2 2020 and the slow but accelerating growth in Q3 and Q4 as a result of the impact of COVID-19. Despite a slow start to the quarter and continued regional spikes in COVID throughout the United States, we again delivered strong domestic growth. However, the decisive factor in the quarter was our impressive international performance where sales grew dramatically as a result of continued strong agency growth and a return to double-digit growth by stocking distributors. All segments of our business performed well in Q1 2021. Domestic sales of $16.8 million grew 26% maintaining the strong growth rate we achieved in Q3 and Q4 2020. International sales of $4.6 million grew 56% demonstrating an extraordinary recovery from the 21% decline we experienced in Q4 2020. We were pleased to see that international stocking distributors began purchasing again in Q1 2021 and generated 15% revenue growth. This is an indication both of their depleted inventories as well as surgical procedure backlogs in many countries. International sales agency revenues grew 122% with the addition of Germany, Austria, and Switzerland, or dock conversions in January 2021 versus 26% growth in Q3 and 51% in Q4 2020. Agency growth was stimulated by the dock conversions, which positions us for continued agency growth in 2021 and beyond. We're pleased to have expanded the sales agency model to 14 agencies in 13 countries. We plan to continue agency conversions and broadening our product portfolio in these markets to include new technologies such as Orthex and ApiFix. As we build out our product offering, we are expanding our ability to improve the lives of children in those markets. We're particularly encouraged by the strong growth of our worldwide trauma and deformity business, which grew 19.2% to $14.6 million. In 2020, the deformity segment of this business was negatively impacted by the deferral of elective surgeries. Trauma and deformity revenue continues to be bolstered by strong contributions from new product launches, such as PNP|FEMUR, cannulated screws, and Orthex as well as the consignment of inventory to new and existing accounts. Additionally, the first Orthex surgical cases in Europe were performed at the Paley European Institute and Medicover Hospital in January and February 2021. We expect that the Orthex EMEA launch will have a positive impact on 2021 as well as future years and anticipate further Orthex launches across additional international markets. Worldwide scoliosis, which had also been impacted by deferred surgeries last year grew 60.4% to $6.0 million. We had strong growth across all product lines and continued to gain market share in our fusion business. 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. And in addition to the positive clinical results, we anticipate benefiting from an extremely high sales to dollar of set inventory that can improve our overall revenue per dollar of consigned set investment in the future. Worldwide sports medicine, other grew 120.5% to $1.0 million driven by Telos partners, consulting contracts and repeat advisory business. To that end, we are seeing very positive results of our Telos partners acquisition. We acquired Telos in March of 2020 to access state-of-the-art expertise on regulatory trends and clinical trial management, but we're pleased to report that their expertise is in demand by med tech companies, particularly in light of the complex and dynamic regulatory environment. And Telos continues to add incremental revenue and customers to their portfolio. While we're proud of our performance in Q1 2021, we must note that we are seeing continued shut down of elective surgeries and important Latin American markets like Brazil and Colombia due to the pandemic and while the UK is returning to normal elective surgery schedules, we continue to see the negative impact of spiking COVID cases in some other European markets. We are confident that continued vaccination programs will further stabilize elective surgery rates in this country and abroad, but we'd caution that regional performance will remain lumpy for some time. Therefore, we will continue to focus on our strategy of surgeon conversions, new product development, sales training, clinical education, and the continued deployment of set inventory in this country and abroad. In addition, we have reached agreements on both alleged intellectual property infringement cases in which the company had financial exposure, the coupled derotation procedure patented by a surgeon inventor and the 4-year-old proceeding with K2M Stryker. These settlements preserve us from incurring considerable legal expense this year and beyond and we have stopped all trial preparation spending as of the 1st of April 2021. Turning now to new products and surgeon conversions, OP is building a scoliosis portfolio to create children across the spectrum of this condition, from early onset scoliosis or EOS to fusion. These products include SHILLA II for EOS, a manual growing rod now in development. ApiFix for failed bracing cases, RESPONSE for fusion, RESPONSE Neuromuscular for complex cases in children with conditions such as cerebral palsy, and FIREFLY patient-specific guides for accurately placing pedicle screws. We believe this portfolio gives OP the broadest offering focused on the pediatric market and physicians that accompany for significant long-term share gains. To walk through some highlights, 14 of the 21 ApiFix IRB sites have now been fully approved with four to five more on the verge of approval. Through April, there had been 50 surgeries in the United States, including 20 in 2020 with 32 more patients scheduled or approved for surgery. This means that we are on track to complete the registry of 200 cases during Q4 2021. The registry requires two IRB approvals, one for the site as required by the Humanitarian Device Exemption and the second for the registry itself. This second approval process has been impacted by COVID related delays. We continue to convert surgeons to our Orthex system, which we acquired in 2019. We converted 10 new domestic users and six international surgeons in Q1 2021. Additionally, we're now beginning to see the results of conversions made in 2020 as elective surgeries resume a more normal level. In 2020, we introduced Orthex in Australia and Canada. And in both markets, we are seeing a rapid adoption of this technology. More recently, we announced the long awaited launch of Orthex in Europe and expected to further impact our international recovery, especially in large agency markets like the United Kingdom and Germany. Moving on to sales training and clinical education, in February, we launched a dedicated website for ApiFix, apifix.com to support this game changing spinal deformity, correction technology. This new online resource focuses on educating patients, families, and healthcare providers about the viable alternative we offer for the treatment of progressive adolescent idiopathic scoliosis. Through this site, we also enable patients to identify surgeons who are approved to perform the surgery. In one case, a patient and their family flew from Hawaii to Dayton, Ohio to have the ApiFix procedure completed. We also launched an ApiFix sub-site on the OrthoPediatrics stock matter platform. This allows clinicians to share patient data, surgical techniques and experience as well as outcomes. The ApiFix.com website and dock matter subside are part of our commitment to smart and steady success introducing ApiFix to the U.S. market. We also launched the OrthoPediatrics app called PD Portal, which provides instant access to technical data, technique guides and case planning for OP sales reps, and in the future for surgeons. PD Portal allows our sales reps to be an even more valuable consultative resource for their surgeons. This quarter, we continue to execute our strategy of aggressively deploying sets. $5.3 million of sets were consigned in Q1 2021, compared to $3.3 million in the first quarter of 2020. We anticipate $13 million to $15 million of set deployments in 2021, a somewhat lower number from recent years because of the significantly greater ROI of ApiFix and Orthex instrument sets. We also grew domestic sales organization head count to 177 sales reps compared to 167 as of the first quarter 2020 with six new reps hired during the first quarter of 2021. Further recruitment efforts are now underway by many of our domestic sales partners, underscoring their confidence in the recovery of our business. As the U.S. market continues to normalize, we expect that an increased number of sales associates will be added over the coming year. Switching gears to factors enhancing our competitive advantage, while the pandemic temporarily reduced our sales growth in 2020, it proved to be an excellent opportunity to strengthen our industry leading position in pediatric orthopedics. At every step, the company has remained committed to supporting our patients and surgeons. Despite the challenges we did not cut our financial support to important surgical societies in stark contrast to other industry sponsors. Being the market leader requires a long-term multidimensional commitment to innovative product development, selected acquisition of complementary technologies, investment in non-commercial clinical education and leading the financial support of pediatric orthopedic surgical societies. Moreover, it is rooted in a built to last strategy of consistent execution that balances aggressive growth with steady improvements in profitability. At OP, we take this role as the market leader very seriously. We believe it is our responsibility, not only to deliver value to our stakeholders, but to contribute to advancing the field of pediatric orthopedic surgery as a whole. Our corporate objectives have tracked to plan thus far, and we don't intend to slow down anytime soon. Before I turn things over to Fred, let me conclude by saying that the COVID pandemic required us to take a fresh look at how we operate. It put every aspect of our business to the test, including our company's leadership and culture. Among the many lessons learned from the pandemic, is that culture more than anything else carries a company forward. And our accomplishments in the face of uncertainty reaffirmed this belief. Not only are we stronger today from a financial perspective, but we are also a more resilient, more agile team. We continue to see many demonstrations of leadership initiative and selflessness at all levels of the company. And although we've worked remotely since March 2020, we have remained closely coordinated with a high degree of morale and productivity. A great validation of our ability to come together over the past year, despite working virtually is the recognition we continue to receive as the employer of choice in the industry. In Q1 2021, we were again named one of the best places to work in Indiana for the fifth time. This recognition is accorded only to a few companies out of thousands surveyed by the Indiana chamber of commerce. And we are honored to have been selected again. Finally, and most importantly, during Q1 2021, we surpassed the estimated milestone of treating 200,000 children with orthopedic conditions. This is an exceptional number of surgeries for a medical technology company of our size and highlights our role as a trusted partner within the pediatric orthopedic surgical community. With that, let me now turn the call over to Fred to review our financial results and outlook. Fred?

Thanks Mark. Total revenue for the first quarter of 2021 was $21.5 million, a 31.2% increase compared to $16.4 million for the same period last year. U.S. revenue for the first quarter of 2021 was $16.8 million, a 25.8% increase compared to $13.4 million for the same period last year, representing 78.5% of total revenue. International revenue for the first quarter of 2021 was $4.6 million, a 55.6% increase compared to $3.0 million for the same period last year, representing 21.5% of total revenue. The increase during the three-month ended March 31, 2021 reflects the normalization in both U.S. and international markets, which during the three months ended March 31, 2020 had begun experiencing the impacts of COVID-19. With domestic sales growth accelerating during the first quarter we're very encouraged that we can continue to build on this momentum. Outside of the U.S. as Mark mentioned, has shown marked improvements. On first quarter revenue breakdown by category was as follows: trauma and deformity revenue was $14.6 million, a 19.2% increase compared to $12.2 million in the same period last year. Strong growth in trauma continue to drive domestic sales with encouraging signs of recovery seen in elective deformity surgeries. Scoliosis revenue in the first quarter of 021was $6.0 million, a 60.4% increase compared to $3.7 million in the same period last year. Our scoliosis business as shown signs of improvement, given the backlog of elective surgeries, plus the addition of ApiFix revenue. Finally, sports medicine other revenue in the first quarter of 2021 was $1.0 million, representing 121% increase over the $0.4 million in the same period last year. As Mark mentioned, Telos continued to excel, although represents a small percentage of our business, the strong performance reflected the impact of new Telos partners consulting contracts and repeat advisory business. Moving down the income statement, gross profit for the first quarter of 2021 with $16.3 million, a 33.7% increase compared to $12.2 million from the same period last year. Gross profit margin for the first quarter of 2021 was 76.1% compared to 74.7% for the same period last year. The strength in gross margin was driven by a larger percentage of domestic and OUS agency sales. Sales and marketing expenses in the first quarter of 2021 increased 18% year-over-year to $8.9 million. This was driven by an increase in unit volumes sold and associated commissions in the U.S. and international markets where we have agencies. General and administrative expenses in the first quarter of 2021 were $12.0 million, an increase of 53% over the $7.9 million for the first quarter of 2020. The increase in expense was primarily due to the additional expenses associated with ApiFix and Telos acquisitions, personnel and resources to support the expansion of our business as well as an increase in legal and other professional services expenses associated with our ongoing litigation and acquisitions. Depreciation and amortization expense increased $1.2 million or 85% from the $1.4 million in the first quarter of 2020. The increase was primarily due to the amortization of intangible assets acquired through ApiFix, Orthex and Telos acquisitions and the purchase of the Band-Lok intellectual property. Research and development expense of $1.3 million in the first quarter of 2021 remained flat as compared to the first quarter of 2020. Total operating expense in the first quarter of 2021 were $22.3 million compared to $16.7 million for the same period last year, primarily due to the increase in G&A. Operating loss in the first quarter of 2021 was $6.0 million compared to a loss of $4.5 million in the first quarter of 2020 and adjusted EBITDA for the first quarter of 2021 was negative $1.4 million compared to negative $2.1 million for the first quarter of 2020. This improvement over prior year was achieved from revenue growth combined with effective cost containment, despite continued strategic investments, which will drive future growth. Interest expense in the first quarter of 2021 was $0.7 million, of which $0.6 million was from the imputed interest on the ApiFix acquisition fixed payments. The $0.7 million compared to $0.4 million in the same period last year. Other expense was negatively impacted by $4.2 million of fair value adjustment of contingent considerations. This is a non-cash expense resulting from accretion associated with the ApiFix acquisition and is expected to continue each quarter in 2021. Net loss from continuing operations for the first quarter of 2021 was $10.4 million compared to a net loss of $4.9 million in the same period last year. Net loss per share in the first quarter of 2021 was 0.54 per basic and diluted share compared to 0.3 per basic and diluted share in the same period last year. First quarter 2021 adjusted non-GAAP earnings loss per share is a negative 0.25 per diluted share compared to a negative 0.30 per diluted share the same period last year. Free cash flow of negative $7.5 million versus negative $12.5 million in quarter one 2020 and shows a $5 million improvements. We're very pleased by the continued progress bringing the company to a positive adjusted EBITDA, thus lessening our dependency on capital markets to raise capital to fund future set consignments. As Mark mentioned, we have reached agreement on both alleged IP infringement cases in which the company had financial exposure. The couple de-rotation procedure patented by a surgeon inventor and the four-year old proceeding with K2M Stryker. A provision of $6.3 million was accrued in the fourth quarter of 2020 for these cases with an additional $150,000 added in quarter one of 2021. These settlements preserve us from incurring considerable legal expenses this year and beyond, and we have stopped all trial prep spending as of the 1st of April 2021. Turning to our balance sheet as of March 31, 2021 our cash and restricted cash, $78.0 million compared to $85.3 million as of December 31, 2020. Currently we have no outstanding term-loan obligations. As previously disclosed we have a $25 million revolving credit facility, which expires in January of 2024 with the full $25 million available to us at this time. The change in property and equipment during the first quarter of 2021 was $2.7 million compared to $4.0 million from the same period last year. This investment reflects the deployment of consigned sets, which includes specific instruments and cases and trays. Including the implants, $5.3 million of consigned sets were deployed during the first quarter of 2021, compared to $3.3 million during the first quarter of 2020. During the first quarter of 2021, we purchased a license worth $2.9 million as compared to zero in the first quarter of 2020. Given the strong start to the year, we are increasing the low end of our guidance, the 32% to 38% growth or $94 million to $98 million versus the $71.1 million in 2020. In addition, our confidence of achieving this guidance has grown because of the number of tailwinds, including our direct sales in Germany, Austria, and Switzerland. The ApiFix procedures, the Orthex conversions that will continue to accelerate both here and in Europe and the backlog of surgical procedures in many international markets. While the COVID pandemic environment will continue to evolve potentially in unexpected ways, our proven business model consistent and strong execution, continued focused on cost containment and our strong balance sheet, all combined to give us confidence in the future of the business. Now, let me turn the call back over to Mark for some closing comments.

Excellent Fred thanks. This past year has reminded us how fortunate we are to serve the surgeons and healthcare providers we're proud to call our customers. We have unbounded admiration for their sacrifices as they put their lives on the line to improve the lives of children. As I shared at the start, this is my last earnings call as CEO, and before I hand the call over to the operator for Q&A, I would like to sincerely thank everyone on the line: our investors, our associates, and our other stakeholders for their support. I am particularly grateful to our associates throughout the world for their personal leadership that has allowed us to treat more than 200,000 children since 2008. I am confident that with the team's continued execution under a new generation of management, OrthoPediatrics will build on its leading market position and advance its corporate purpose to transform the lives of children throughout the world. Let's now turn the call over to your questions, please.

Thank you. [Operator Instructions] Our first question is from Matthew O'Brien from Piper Sandler.

Good morning. Thanks for taking the question and Mark really best wishes as you transition into the Chairman role. And thanks for all your stewardship over the last several, or many years for the company and Dave, really excited for you as you step into the CEO role.

Thanks Matt.

Yes, of course. So I guess, Fred to start with, I know OP is typically pretty conservative with guidance. I think there's some of that in here, you beat our model by a couple of million bucks but you've raised the midpoint. You basically took up the low end by about $1 million and then you raised the midpoint of the range now by about $0.5 million. So the beat doesn't equate to the tick up in the midpoint of the range. And I just wanted to hear if there's something specifically that you wanted to call out that you're a little bit more incrementally worried about. I don't know if it's COVID I don't know if it's, again, your typical conservativism, but just anything to talk about kind of that Delta and how come the midpoint of the range to be come up a little bit more.

Yes, I think the biggest thing is the COVID environment outside of the U.S. So when we issued that guidance earlier, Brazil was starting to open up and we started to see some procedures taking place. Since that time they've gone into complete lockdown and we are hoping that they're going to open up here sometime soon, but that's just one example, obviously many other countries, since that time we issued that guidance have now had spiking COVID cases that are shutting down. And it's just the unknown of the international market that causes us to be a bit more conservative, I think, than we would otherwise.

Okay. So is it fair to say then the OUS outlook is maybe a little diminished, but the domestic outlook just given the increase in the guidance overall is probably stronger than we had anticipated?

Yes, I think that's a good summary. We feel more confident today than we did three months ago or several months ago in the domestic recovery, but the international has deteriorated a bit.

Understood. Okay. And then as the follow-up, complex buying again was just an eye-popping number. I know there's unique comps and all that but talk a little bit more about physician interest conversion. I don't know if it's ApiFix specifically, or the rest of the portfolio, that's really driving the interest level, but just talk about just kind of the groundswell of interest that you're seeing on the complex side. I know we're, we're seeing some of it come through here in Q1, but as we looked into the remainder of the postseason and even into 2022, if you can just help us understand again, what you're seeing from a physician interest perspective.

Sure. Matt, its Dave. So no question customers, and we're very excited about Apixaban and I think there is a bit of a halo effect we're getting with Apixaban and some of the IRB sites. And we're seeing surgeons who hadn't previously used our screws for fusion; start to use our screws for fusion from the IRB sites. But overall, I think we're executing the strategy of consistent account conversion and our fusion business continues to grow. The response business was up again this quarter. And when we look at the calendar of names, the names on our calendar, we continue to see newer and new faces and new names on our calendar month over month. And so I think it's just a function of us being able to successfully execute a strategy of an account conversion related to fusion procedures at this point.

Got it. Thanks so much.

Our next question is from Rick Wise from Stifel.

Good morning, gentlemen. And of course my congratulations on all sides, it's not so eloquently said. Maybe let's start with gross margin. Gross margin far exceeded my expectations. I'm guessing its volume mix and the conversions. Maybe you could elaborate on that a little bit. And how do we think about, if that's correct, the implications for gross margins for the year? I mean, I look at 2020, obviously many moving pieces so far since we're lower in first half, much stronger than the second half for many reasons, but can we get back or to that second half 2020 level or given the stronger start, gosh, do we use, should we start thinking about eight as the first number for the second half?

Nice try, Rick. So, the answer is in the second half of last year we had very little stocking orders or set sales, which is go through at zero margin. In the first quarter of 2021 our stocking sales were up 15% year-over-year, which is encouraging, but it was primarily replenishment and a very little amount of sets that were included in there. We still anticipate yet this year that our stocking distributors are going to start buying some additional sets. And when those go through at no margin, it will drag down the margin a little bit. With that being said the positive that we're seeing right now is definitely from the agency conversions, primarily DACA, adding to the business and the strong revenue growth domestically, which we do anticipate to continue. So I think overall, we would expect that this year will be a little better than last year in total, but it'll be a little lumpy depending on when those sets sales come in.

Okay. And just any color as a follow up on that, Fred, I mean, do we imagine, as we model this out, sort of have it steadily sequentially better, or how do we think about that flow through the, such an important number?

Yes. Sure. It typically is better in the second and third quarter when our volume is higher and the first and the fourth quarter, weaker volume brings lower gross margins traditionally. And so I would think the second and third quarter would be higher year-over-year, and then the fourth quarter could potentially be lower on a percentage basis, if we start to see some more set sales in the fourth quarter of this year.

Alright. Just two others from me and I'll ask them both. On the IP [indiscernible] front. It is great to see that resolved. Just out of curiosity, what kind of litigation expense saving on a quarterly basis will you garner from that as we think about the miles for this year? And maybe at a higher level, maybe talk us through some of the key beyond the wonderful, exciting Apixaban and Orthex. What are the key product launches this year, or the most important that we should be sensitive to and how are you thinking about M&A now, are you taking a pause as you digest and invest in Apixaban and Orthex or no, there are other opportunities and we should be open to the idea that something might happen on that front? Thank you so much

Thanks, Rick. I’ll take the first one, then maybe Dave can talk about the second one. In the first quarter of 2021. We did have quite a few unusual, call it "onetime expenses". There was about $600,000 of professional services in the G&A bucket that we don't anticipate repeating. There was an additional $700,000 of legal and settlement expenses in the first quarter that will go away going forward, and then probably another $300,000. So in total of other expenses that were one time. So in total, there was about 1.6 million of expenses in the first quarter G&A that we would expect would not repeat going forward. So we should start to see some savings in that area related to legal and other topics that should help the adjusted EBIT for the rest of the year.

Yes, Rick, from a growth standpoint, we're really encouraged to see once again, almost all of our products, some of whom that are more than 10 years old growing by double digits. So a pretty good indication that we're taking share, even with a number of the products that we've had for a long time. That said, we're particularly excited about the launch of Orthex internationally in the EMEA markets that has just started recently. And so as you can imagine, that's a big endeavor for us. That'll take the balance of the year to get sets there and to get people trained internationally, but we expect it to be our largest launch internationally in the company's history. And so that's where our focus is. We also will be launching their response neuromuscular system and we've talked and we've issued some press about having some 510(k) approvals there, but we've never launched the system. And we believe that's a first of its kind in the marketplace. No one has ever developed a system specifically for that indication. And we're excited about that. The trauma and limb deformity side expect to do a full launch of the Skippy product. And that's the product again; we have 510(k) approval for building inventory training new sales force and planning to launch that this year. And then last but not least, we have been working on a companion product to Orthex, a slightly different version of an external fixation device that would round out that portfolio a bit. And we expect that to launch this year. So good to see the kind of organic growth that we're generating with the products we have in the pipeline or in the portfolio. Certainly excited about Apixaban and what's going on there, Orthex what's going on there. But then we have a bunch of new products that are going to follow all of that up and being launched this year.

And the last question was around M&A if you want to talk about that.

Yes. So from an M&A perspective, we certainly don't have anything let's say to the scale of Apixaban. We've told you in the past that we are looking at a number of smaller transactions potentially to add some technology to the portfolio, maybe some partnerships or licensing. We're always interested in the biologic segment of this, may be some things that we could do there. We remain quite keen to continue to support our scoliosis business and potentially the trauma and limb deformity business with certain navigation solutions. And so we've kind of, we've always been looking at potential partnerships in the interoperative navigation side and we will continue, but at this stage, I don't think we could point to anything imminent.

Thank you so much.

Thanks, Rick.

Thanks, Rick.

Our next question is from Kaila Krum from Truist Securities.

Great. Hi, guys. Thanks for taking our questions and Mark, I'll echo at the sentiments from others. But we're going to miss your insights and also your voice on the call, but the best wishes in the new role.

Thank you, Kaila.

Of course, I know things will be in good hands though with Dave and Fred.

They sure well.

So I just wanted to just start off on the trauma and deformity of business, which it looks like actually grew by about 30% sequentially. I want to fully understand the drivers there. You mentioned stocking distributors posted 15% year-over-year growth in the quarter. Can you just parse out, I guess, how, how big that was on a dollar basis in the quarter? And then I want to understand if you can continue at this sort of 14 million to 15 million quarterly run rate in T&D or will it take some time to work down that inventory?

No, I think we were obviously very pleased with the performance. As mentioned the trauma business had continued to perform throughout COVID and really what was different this time is the deformity correction. Those serve both surgeries, but also were encouraged by the activity in the clinics increased dramatically here in the first quarter. And as many, I think, other companies have mentioned slower in January and February dramatically improved in March. And that has continued into April with really the deformity correction piece of that business, which does include Orthex as the differentiator from what it was earlier several quarters ago.

I think what's important to know is that that deformity correction component of our business for limb deformity is probably the most elective in terms of all of our procedures that can be delayed maybe more than a scoliosis procedure and certainly, emergent trauma. So it was really, as Fred mentioned, really gratifying to see that business come back here in the first quarter, pretty aggressively. And hopefully that continues, obviously Orthex is a big part of limb deformity correction, and to see continued surgeon conversions there. But also to start to see the usage rates of surgeons that we converted last year, and I think we sided some 38 surgeons that we converted last year. So to see the usage rates of those surgeons go up, those surgeons get into a more normal volume, is really encouraging. The last thing I would point to is that we continue to have really strong success with the most recently launched products. The PMP femur continues to take share, cannulated screws continue to take share. So overall, I think we're very encouraged with what we're seeing on the trauma deformity business and hope that continues.

Great, okay. That make sense. It sounds like it's really the core business continuing to hum versus anything sort of one time in nature there.

Yes, that's right.

Perfect, great. And then just on ApiFix, I mean, is it possible to break out how much that product contributed in the first quarter and how do you think that this product can ramp over the next 12 to 24 months? At this point, we're modeling a little over $5 million in 2021. But would you be disappointed if ApiFix wasn't at least double that size in 2022? Thanks for the questions.

Yes, I think your assumption of $5 million in 2021 is a very good assumption. We absolutely plan on executing on the 200 person registry during the fourth quarter of this year, which would equate to that number. As far as next year, we'll see as we go throughout this year and how aggressive the uptick is. Now what we're really encouraged by is the significant demand from patients and from other surgeons that are not within the registry sites. And we're already starting to think about how do we get them started as soon as the 200 registries are completed. So couldn't be happier with the progress of that product and the demand that we're getting from all avenues of the business.

Great, thank you.

Thank you.

Our next question is from Ryan Zimmerman from BTIG.

Great. Thank you for taking the questions and echo everyone's sentiment, Dave, you mentioned Shilla 2 for in scoliosis, and I know you've been working on a growing rod solution for some time, but I think that is the first time I've heard it maybe you've said of a before, but could you just elaborate a little bit on that technology? The timelines for that potentially coming to market, and anything else you would want to share with us at this time on it?

Yes, so a good question, Ryan. So, I think, the way to think about this is that we have a strategy around EOS that's not singular in nature. We don't believe that there's a single product that's going to solve all the EOS related indication. And so for years, we have worked on a growing distraction device that's mechanical in nature. We've also worked on a Shilla-like product, that's more of a trolley. This is a open screws that allow the spine to grow, but keep the scoliosis procedures, keep the scoliosis aligned straight. And so it's not mechanized, but it's more of a passive device that allows the body to continue to hold the spine straight and the child to continue to grow. We believe that's another product in what needs to be a series of products to support EOS. We're also internally working on a system for pelvic fixation as well as rib-based fixation for early-onset scoliosis. That would be more of a manual distraction technique, which is still reasonably popular in pediatric orthopedics. And that would be a companion product to our small stature response system. And we think that over the next few years, we will be able to bring all three of those types of products to market, or at least a few of those solutions to market, which when we fast forward two, three years, we believe we'll have the most solutions of any company to address extremely difficult pathology in early-onset scoliosis.

Thank you for that. And then the follow up to Kaila's question. You might have mentioned this. The 32 surgeries for ApiFix that scheduled, are those over the course of the next quarter, over the course of 2021? Just some sense there in terms of the timing of what you'd say for that or are those scheduled already and that's kind of the bolus we expect in the second quarter?

We’re scheduling surgeries kind of ongoing scheduled. So yes, we have 32 patients approved that are either scheduled or, and I would say that's for the next few months, and then we're continuing to add patients weekly to that 32 number. So I don't know if I would call it a bolus. I can't off the top of my head, remember exactly where the last one of those schedules come out, but certainly an indication, Ryan, that we are accelerating in terms of the volume of patients that are in queue to have the ApiFix surgery done.

Understood, understood. And just lastly from me, you converted obviously Germany, Switzerland, Austria, what other major international distributors could we see converted this year from the stock and distributor pool?

There's some other, I would say, smaller markets that we are working on. I would say nothing probably in the first half of the year, but potentially later in the year, there could be some much, much smaller, less impactful markets that we are working to convert. But DACA is by far the largest region for us at any other location outside of the U.S. And so this is the big accomplishment to get this done. We're very pleased with the start that we've seen there and the expected growth that that'll drive both this year, but more importantly, I think it's for years to come, as we continue to deploy more consigned inventory in the location, introduce new products in that location and really accelerate the pace in the DACA region as the other countries.

Got it. All right, thanks for taking my questions guys.

Thank you, Ryan.

Our next question is from Mike Matson from Needham & Company.

Hi, thanks for taking my questions. I wanted to ask about the international agency growth and the gross margin improvement. Is it possible Fred to quantify how much of those things came from the DACA conversion that you guys did?

No, we’re not going to break out individually how much each country is contributing, but clearly, that 122% growth, a nice portion of it came from DACA. But a lot of our other agencies, I would say, aside from the UK delivered growth year-over-year and sequential Australia, is almost back to normal, if you would. And as Mark mentioned, we've launched some new products there recently and that's driving tremendous growth and it's so encouraging to see almost how normalized the country is in operating right now, long may that last. And many of our other countries are the same, except for, I think the U.K., which is just now starting to free up a bit and we would expect them to start working through an enormous backlog that has been built-up in that country.

Okay, thanks. Well, that's a good lead into my next question. Just you've mentioned the backlog several times on the call. So how should we think about that? Is it possible to quantify the backlog at all and your sales last year were almost flat over 2019 versus 20% to 30% kind of normalized growth in a typical year. So I mean, is that a reasonable way to quantify it or is that not reasonable?

Yes, I think that is one way to quantify it. The question in our minds, I believe, is how long is it going to take to release? So in many countries where government healthcare pays for this, they’re not working overtime. They’re not working weekends like they did in the U.S. to catch up on backlog and it could be 18, 24 months in many of these countries for that backlog to get cleared. And so, we’re – it’s a question market in our minds right now on how long it is going to take to clear the backlog OUS, particularly I in the UK that has not shown an ability to add additional resources or work over time. So it could be there for a long time, unfortunately.

Okay, thanks. That’s helpful. I appreciate it.

Our next question is from Dave Turkaly from JMP Securities.

Great, good morning guys. Fred, maybe one for you, just to start with given what we’re seeing in the revenue side, the margin side, knowing that we're losing some expenses in G&A from legal. I was wondering if you might comment at all directionally about what we're thinking about adjusted EBITDA or net loss this year. I imagine you could be break even very soon, but just any thoughts you have on sort of the bottom line given where you stand today, as we look at this year.

Yes, as we have said, I think from the last call, we're absolutely committed to getting to positive adjusted EBITDA for the full year of 2021. The first quarter, and the fourth quarter are always are softer sales and having the same cause with softer sales is going to generate negative EBITDA but we're very excited about some strong EBITDA in the second and third quarter. As a reminder, in the third quarter of last year despite COVID, we generated $1.3 million of positive adjusted EBITDA and we would obviously be expecting to improve on that this year, given the increase in volume that we're looking at. On the net income line, it's still going to continue to be noisy, if you will, because of this accretion from the ApiFix acquisition on those payments that are coming up over the next many years. So that will continue to drag down the net income line, but really the main focus for the business is getting adjusted EBITDA positive which is as you know the cash that the business is using or generating from true operations.

Got it, thanks for that. And I think you have mentioned the $4 million contingent fair value adjustment was for ApiFix, but I think you said you're going to see that for the rest of the year. So I think that that would bring the total to north of $40 million, which I imagine is a good thing probably means you're hitting milestones, but can you just remind us like what those milestones are and when the actual payment might be triggered?

Yes, that particular line is tied to our year four payments for this acquisition, which is a multiple of the LTM revenue. And so it takes the calculation of LTM revenue times a multiplier, less the payments that we've already made, and we true up the acquisition payments at that time. You are absolutely correct, that number is impacted by the time value of money. So as we get closer, it has to be accreted, but as we gain confidence in our forecast, that number also increases, which is some of what you're seeing right now.

Okay, got it. And then I'd be remiss if I didn't went in for Mark, if I could. Obviously I know language is important to him and it's out in the press release this morning was the most critically when it was referring to the stocking distributors and knowing that OUS is a small percentage mix. I just wanted to hear him explain exactly why that was most critical. Thank you.

15% growth…

Well, it strikes me Dave is that that was the Achilles heel of the business last year, because we reported 51% agency growth in Q4 and 26% agency growth in Q3, but gosh, the stocking distributor thing was way, way down. So the fact that it's back growing at mid-teens levels, I think is a vote for freedom.

With COVID still impacting the international businesses.

Yes, yes.

Got it, thank you.

Thanks, Dave.

Thanks, Dave.

And no further questions at this time.

So let me just conclude the meeting by thanking everyone for their interest in the company and for your support in our cause of helping children throughout the world. We're very much forward-looking to updating you on our future progress. So everyone have a good day.

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