Ladies and gentlemen, thank you for standing by, and welcome to the Q1 2020 OrthoPediatrics Corp Earnings Conference Call. At this time all participant lines are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded.

[Operator Instructions] I would now like to hand the conference over to your speaker today, Tram Bui from Ruth Group. Thank you. Please go ahead..

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 Financial Officer; and David Bailey, Executive Vice President.

Before we begin, I’d 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 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, May 6, 2020. 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 would like to turn the call over to Mark..

Good morning, everyone and thank you for joining us today on our first quarter 2020 earnings conference call. We hope that everyone is healthy and staying safe. We would like to begin by thanking the entire healthcare community for its skill, empathy, and resilience addressing the global COVID-19 pandemic.

I have also been impressed although I’m not surprised by the way our organization has stepped up during this crisis. While we saw a strong start to the year before the pandemic hit, we have sustained our momentum on corporate initiatives that will allow us to emerge from the COVID crisis stronger than when we entered it.

With the pandemic foremost in everyone’s mind, we thought it would be appropriate to give you an assessment of how we are leading OrthoPediatrics through this crisis, as we begin to see elective surgeries rescheduled this month and anticipate approaching normal levels by year-end.

Fred will then provide a financial review before we open the call to questions. For the first quarter of 2020, we generated 12% revenue growth despite the impact of COVID-19. We had a very strong start to the year with 31% sales growth in January and February, continuing the trajectory achieved in Q3 and Q4 of 2019.

This strong start was also reflected in 30% domestic sales growth for the first quarter 2020, supported by all product lines, despite the deferral of elective surgeries beginning in March.

Internationally however sales decreased 32% for the quarter, reflecting the earlier impact of the crisis in Europe, South America and Asia as stocking distributor orders, set purchases, and set delivery came to a near halt in the month of March.

Given the higher mix of domestic revenues, gross margin increased to 75% in the first quarter 2020 compared to 73% in the first quarter of 2019. Trauma and Deformity Correction sales in the first quarter of 2020 grew 22%.

Our Scoliosis business declined by 13% in the quarter and was impacted by a complete deferral of surgeries in the last few weeks of March. Sports medicine/other grew 14% in the quarter. Our Trauma and Deformity Correction growth was in part driven by the continued roll out of the Orthex Hexapod External Fixation System that we acquired last June.

In addition to Orthex, for the balance of 2020, we anticipate expanded rollouts of all our recently launched products.

This includes ApiFix and its Minimally Invasive Deformity Correction, or MID-C system, which we acquired in early April and is one of only two FDA approved technologies that potentially allows patients to avoid fusion surgery altogether.

In combination with the launch of our large fragment cannulated screw system and the recent FDA approval of broadened indications for our RESPONSE Scoliosis System and other important new products, we look forward to offering a significantly expanded portfolio, when elective surgeries resume.

As we look forward to the remainder of the year and surgeries approaching normal levels, we believe that OrthoPediatrics can leverage the impact of the strongest pediatric orthopedic product portfolio on the market, supported by our sales force of 167 domestic consultants.

Before I turn to a more detailed update on execution against growth objectives, I’d like to discuss how we are leading the company through the global COVID-19 pandemic, as elective surgeries resume this month and grow steadily throughout the year.

Although we were on track to deliver our previous annual revenue growth guidance and the third consecutive quarter of 30% plus growth, in late March, we withdrew our previously announced 2020 revenue guidance of growth in the range of 22% to 24% and investment in consigned sets in a range of $19 million to $21 million.

We took this step because of rapidly evolving uncertainties on the duration and impact of COVID-19, and in particular, its impact on elective surgeries.

We are maintaining suspension of our guidance for the full year 2020 and expect that our near-term Deformity Correction and Scoliosis businesses will be significantly impacted following the strong start to the year. We do not expect the pandemic to impact the Trauma business to the same degree.

Furthermore, so-called elective deformity correction and scoliosis surgeries are critical procedures that cannot be postponed long and many of our surgeon customers describe a considerable backlog of surgeries. This supports our confidence that surgeries will normalize and perhaps even rebound this year, particularly in the United States.

At this time, we cannot estimate the timing or magnitude of the near-term sales recovery or the possible rebound, but we will note that we saw slightly better sales in April than our worst-case financial model suggested and May sales are showing considerable improvement.

We are in close communication with our worldwide selling organization and are tracking the outlook at each of our top 100 accounts. Some institutions have announced that their ORs will run 7 days a week with extended hours some surgeons have been told to cancel their summer holidays.

We expect that elective surgeries will accelerate in June and July, returning to normal levels by Q4 2020 in the United States. It is too soon to comment on the international outlook. We anticipate that freestanding pediatric hospitals unaffected by COVID, particularly those in the U.S., will be the first to return to normal levels of surgery.

At this point, however, uncertainties remain, including OR support staff availability, the impact of few patients seen in clinics since mid-March and parental concerns about bringing their children to hospitals. A key fact to keep in mind is that OrthoPediatrics ended 2019 with $72 million of cash.

On March 16, the first day we began to work remotely, my colleagues and I reviewed a cash flow stressed test model prepared by Fred. This model has served as the basis for the decisions we have made subsequently.

It enabled us to assure our employees that there will be no job reductions or base pay cuts and that assurance has stabilized and motivated our direct workforce. It allowed us to establish a distributor relief fund, so that our U.S. sales agencies could draw down very low interest loans that do not need to be repaid fully until year end 2021.

While this fund may be superseded by the Federal Paycheck Protection Program, we believe that it has stabilized our sales force of independent consultants, most of whom sell nothing, but OrthoPediatrics products.

These actions together with weekly webcast global town hall meetings and a personal telephone call by an executive officer to every employee in the company, every week have maintained a high level of cohesion and morale.

These steps have allowed us to continue advancing corporate initiatives such as intensified Orthex sales training, EU MDR compliance, developing sterile individually packaged products for Europe and working with key suppliers to build inventories of critical products.

We have used our industry leading position and resources to conduct training seminars for young surgeons. We have been utilizing the dark matter website to host worldwide surgeon discussion groups on treating children during the COVID pandemic, and now anticipating the scope of the recovery.

More recently, we have worked on establishing investigational review board sites and targeting U.S. surgeries for the ApiFix MID-C System. And finally, we have commenced an orderly senior executive succession process.

Once the global situation begins to normalize, we will be in a better position to estimate the impact on revenue growth and set deployments. In the meantime, the company continues systematic execution of our 2020 growth initiatives with focus and a spree decor, which is a testament to our corporate culture that is the foundation for all our success.

Let’s now turn to these initiatives, starting with new products. In March, we announced the limited launch of a Large Fragment Cannulated Screw System, which represents the company’s 34th surgical system. The system is designed to address slipped capital femoral epiphysis or SCFE cases and the trauma procedures of long bones and long bone fragments.

Indications for the system includes SCFE, femoral neck fractures, tibial plateau fractures, sacroiliac joint disruption, intercondylar femur fracture, subtalar arthrodesis, and fixation of the pelvis and iliosacral joint. The system features an innovative screw designed to facilitate implant insertion and removal.

More specifically, it includes patented thread cannulation to ease implants removal with screws in two millimeter increment for greater precision. In March, we also received FDA 510(k) clearance and expanded indications for our RESPONSE Scoliosis System to include neuromuscular surgery.

As further components are added, we look forward to this becoming the basis for our new RESPONSE Neuromuscular System, RESPONSE NM, which will feature a complete set of implants and instruments with unique attributes that address extreme hyperlordosis and simplify insertion. This system will be the first of its kind in the industry.

We also continued development of enhancements in some Trauma and Deformity Correction systems to further improve screw to driver and screw to plate interfaces in addition to progressing our Osteogenesis Imperfecta Nailing System.

In tandem, we advanced work on the second generation early onset scoliosis technology with IP license from an adult spine company that we’re developing with the inventor and a panel of surgeons, who use the system.

In addition to our product development pipeline, recent new systems such as PediFoot cannulated screws and the PNP FEMUR intramedullary nail systems all represent significant near-term growth vehicles.

While we announced their launch in 2018 and 2019, these were only initial launches and significant investments in sets have been made this year for these systems following strong demand.

Turning to product expansion through acquisitions, in January, we announced the divestiture of substantially all the assets related to the adult products of Vilex in Tennessee, as well as a license for Orthex in the adult space for $25 million.

This divestiture was conducted as a competitive bidding process by a board panel of our independent non-executive directors. Meanwhile, Orthex sales continued very strong through mid-March with evaluations and surgeon conversions.

Currently, our sales organization is being trained on the system with webinars conducted on an almost daily basis with attendance that is three-fold greater than before the COVID pandemic. Furthermore, Orthex sales calls and new surgeon commitments continue to take place through virtual meetings, where the software can easily be demonstrated.

In April, we announced the acquisition of ApiFix Limited and its MID-C System for non-fusion treatment of progressive adolescent idiopathic scoliosis or AIS. This has become the company’s 35th surgical system.

As a reminder, we acquired ApiFix for 934,768 shares of OP common stock and $2 million in cash at closing, plus milestone payments and an earn-out over a period of four years. We believe the MID-C System is a game changer. It fills a major treatment gap that potentially allows patients to avoid fusion surgery altogether.

The system is implanted unilaterally on the concave aspect of the curvature and acts like an internal brace for patients with Lenke type 1 and Lenke type 5 curves of 40 degrees to 60 degrees. Importantly, this solution avoids permanently limiting range of motion and is easily removable.

It is one of only two FDA approved non-fusion technologies and expands the market for surgical intervention in AIS patients. We know of no other competitive products on the horizon. The MID-C System is backed by eight years of clinical history with more than 370 patients outside the U.S.

Importantly this acquisition opens a new segment in the continuum of scoliosis care and offers the option to treat patients who are not being successfully treated with bracing. Before these patients can move to fusion surgery, they are often in limbo, until their curves progress to 50 degrees or more.

The MID-C solution provides a shorter, less complex and far less risky surgery than tethering, the other non-fusion technology available. We’re pleased to stand tall and advance our strategic initiatives with this major acquisition, even in the midst of the COVID crisis.

Turning to operations to support our new product launches, we continue to consolidate the great majority of our implant supply into the hands of our highest quality and most responsive supplier, which has maintained full employment based on our orders to build sets, inventories of critical products, and vendor-managed inventories.

OP orders represent the vast majority of the volume of this contract manufacturer, which is located 45 minutes from our Warsaw headquarters and where we also established a quick turnaround prototype cell that significantly reduces lead times in product development.

Q2 is typically when we prepare for the summer surgery season and this quarter, we anticipate consigning some $7 million of new instrument implant sets after consigning $3.3 million from Q1.

Despite the postponement by the European Union of its medical device directive until 2022, we continue to address this major regulatory affairs challenge to ensure that we are fully compliant with these regulations as quickly as possible.

Turning to our international and domestic sales organizations, in March, we implemented our sales agency model in Italy by converting our stocking distributor in that country, thus, bringing us to a total of 38 stocking distributors and eight sales agencies internationally.

In the U.S., the size of the selling organization is currently 167 sales consultants, which is up 21% from the same period last year. While our discussions with major U.S.

pediatric centers about becoming their primary source of Trauma and Deformity products have temporarily been put on hold, they represent significant future potential and are further supported by the recent addition of ApiFix, Orthex, and new surgical systems introduced since our IPO in 2017.

This is a time that tests a company’s leadership and its culture. We are delighted to see spontaneous demonstrations of leadership, initiatives, and selflessness at all levels of the company. Although we have worked remotely since March 16, we remain cohesive with a high-degree of morale and productivity.

We are proud of our tangible progress toward becoming the employer of choice in the orthopedic industry with recognition in February for the fourth year as one of the best places to work in Indiana. Employees at thousands of companies are pulled by the Indiana Chamber of Commerce and fewer than 100 are selected for this honor.

Therefore, we are confident that we will retain our employees, our sales personnel, and our momentum as we continue to drive competitive advantage even during the COVID crisis. With that, let me now turn the call over to Fred to review our financial results.

Fred?.

Trauma and Deformity revenue in the first quarter of 2020 was $12.2 million, a 22% increase compared to $10.0 million in the same period last year, which included contributions from Orthex Hexapod Deformity Correction System and new product introductions, offset by the slowdown in elective deformity correction surgeries.

Scoliosis revenue in the first quarter of 2020 was $3.7 million, a 13% decrease compared to $4.3 million in the same period last year. Our scoliosis business was impacted by COVID-19 more quickly as elective surgeries were deferred.

Lastly, sports medicine/other revenue in the first quarter of 2020, was $435,000, representing a 14% increase compared to $381,000 in the same period last year. Moving down the income statement, gross profit in the first quarter of 2020 was $12.2 million, a 15% increase compared to $10.7 million in the same period last year.

Gross margin in the first quarter of 2020 was 74.7% compared to 72.7% in the first quarter of 2019. The increase was attributable to a higher mix of domestic sales at higher gross margin, as Mark previously mentioned.

Sales and marketing expenses in the first quarter of 2020 increased 16% to $7.6 million when compared to $6.5 million in the same period last year. This was driven by an increase in unit volumes sold and associated commissions in the U.S. and ongoing marketing expenses.

General and administrative expenses in the first quarter of 2020 were $7.9 million, an increase of 40% when compared to $5.6 million in the first quarter of 2019.

The increase in expenses was primarily driven by increased quality and regulatory expenses, increased depreciation from significantly increased set deployment in prior years, as well as increased non-cash stock compensation.

Research and development expenses were $1.3 million in the first quarter of 2020, an increase of 4% when compared to $1.2 million in the first quarter of 2019.

Total operating expenses in the first quarter of 2020 were $16.7 million compared to $13.4 million for the same period last year and operating loss in the first quarter of 2020 was $4.5 million compared to a loss of $2.7 million in the first quarter of 2019, driven by the higher non-cash stock compensation, higher quality and regulatory, and higher depreciation as a result of the increased set deployments in prior years.

Adjusted EBITDA for the first quarter of 2020 was a negative $2.1 million compared to a negative $1.4 million for the first quarter of 2019. Interest expense in the first quarter of 2020 was $0.4 million, a 25% increase compared to $0.3 million in the same period last year.

Net loss in the first quarter of 2020 was $4.9 million compared to a net loss of $3.0 million in the same period last year. And net loss per share attributable to common stockholders in the first quarter of 2020 was $0.30 per basic and diluted share compared to $0.21 per basic and diluted share in the same period last year.

Turning to our balance sheet, as of March, 31, 2020 after paying off $5 million on our credit facility, our cash and restricted cash was $54.9 million compared to $72.0 million as of December 31, 2019 and the company had approximately $21.2 million in total outstanding indebtedness with the full amount of its $15 million revolver credit facility currently available.

Purchases of property and equipment during the first quarter of 2020 were $4.0 million, a 20% decrease compared to $5.0 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 $3.3 million of consigned sets were deployed during the quarter compared to $2.7 million during the first quarter of 2019.

As Mark mentioned, this is the first stage of a significant deployment of new sets and we look forward to our anticipated the deployment of additional sets to meet those demands in the second quarter and beyond. I also wanted to mention adjustment to our year-end 2019 balance sheet.

When we file our 10-Q soon, it will reflect updated purchase accounting related to Orthex-Vilex transaction, which resulted in the elimination of $12.4 million of deferred revenue and offset it with an increase in IP value, which was then sold at year-end in conjunction with the sale of the Vilex.

The 10-Q also makes reference to a small acquisition we made in March of 2020 of Telos Partners LLC, a specialty regulatory affairs consulting practice.

The purpose of this transaction was access the most sophisticated technical expertise available in this challenging field, enabling OrthoPediatrics to anticipate and comply with future regulations around the world.

The size and P&L impact of this acquisition were not material and any external sales that they generate will be reported in the sales sports medicine/other category.

In terms of guidance, as you know, we withdrew our prior annual 2020 revenue growth in the range of 22% to 24% and investment in consigned sets in the range of $19 million to $21 million due to the rapidly evolving environmental and continued uncertainties surrounding the duration and impact of COVID-19.

Let me now turn the call back to Mark for some closing remarks..

Thanks, Fred. As we have all been reminded throughout this pandemic, unforeseen events can upend the environment in which we operate.

I’d like to thank all our associates for their extraordinary leadership and personal accountability that has enabled us to help 172,000 children from the time we entered the market in 2008 through the first quarter of 2020.

I am confident that our focus and consistent execution will continue to drive OrthoPediatrics’ leading position in the pediatric orthopedic industry.

Before we open the call to questions, in our press release yesterday, we announced the promotion of Dave Bailey to President and Fred Hite to Chief Operating Officer and Chief Financial Officer effective as of June 3, 2020.

These promotions commence an orderly process of senior executive succession in anticipation of Dave being named Chief Executive Officer, when I transition to Executive Chairman at some point in 2021 following my 70th birthday.

When that occurs, I will continue to work from our Warsaw headquarters and maintain direct involvement in investor relations, strategy development, and operational travel in the field.

This transition stems from discussions began in 2018, when I informed the Board that I believed it was appropriate to step aside as CEO sometime following my 70th birthday in 2021. This triggered an orderly process of succession planning from which emerged two outstanding candidates with complementary skills.

Fred Hite is a rare financial executive, who brings strong operational insight and corporate development expertise. And Dave Bailey, who has been with OP since its founding, has deep knowledge of our technologies, our customers, and surgical procedures as well as our selling organizations, both in the U.S. and internationally.

Dave and Fred already constitute a powerful duumvirate. Therefore, I expect seamless continuity when I ultimately step into the Executive Chairman’s role. The three of us have long worked as a team that is unconcerned with titles and hierarchy and I have no doubt in their abilities to continue driving the company forward to the next level of success.

And with that, let’s open the call up to your questions..

And thank you. [Operator Instructions] And our first question comes from Rick Wise from Stifel. Your line is now open..

Good morning to you all. Congratulations to Dave and Fred, well deserved. And Mark, I don’t want to gust, but congratulations to you and the team for everything you’ve achieved.

And personally, I am thrilled that you are still going to be around to pick on in communications perspective?.

Well, thank you, Rick. Those are kind words..

Now, just turning to some of your comments today, thank you for all the color, it’s hard not to start with your comments about April and May.

Can you give us a little more detail about what you are seeing? When you say April slightly better than worst case, do you feel like volume has stabilized and I appreciate there might be different comments for each procedure and each geography and when you talk about May’s considerable improvement, just again I want to make sure my understanding, is that considerable improvement relative to expectations, relative to the last week or again just help us ground ourselves there? Thank you..

Yes. In summary, April was down approximately 60% from normal. Trauma was less than that and Scoliosis and Deformity correction were more than that, but that 60% decline was less than we had anticipated in our cash flow stress test model. It was noteworthy that international was slightly worse than domestic in the month of April.

Now in May, while we are only a few days into the month, we have seen a substantial increase, but we are still below normal by a considerable amount and we are probably a little better than our stress test model, but are actually reasonably much in line with the improvement that we anticipated would take place in Q2.

But I would stress, Rick that this is one data point called April and a few days into a second data point called May, but I think that’s about as much as we can tell you about where we are..

Thank you. And our next question comes from Matthew O’Brien from Piper Sandler. Your line is now open..

Good morning. Let me echo Rick’s comments on the C-suite there. Congratulations to everybody.

I guess, Mark, for starters on the scoli season as we’re – as it’s coming up here, it’s obviously the summer months are critical for that business, can you reconcile some of your comments about the interest or some of these new cases that are being scheduled with parents’ willingness to bring their kids in for these long procedures and how we should think about that about the season this time around, given the COVID overhang..

Dave, would you want to comment on that?.

Yes, Matt. Hi, good to talk to you. Yes, I think it is very encouraging to see at least in the month of May so far that we are starting to see a number of the cases that were booked or we felt like we lost in the last three weeks of March start to be booked back in May.

And that said, we are only looking at the bookings, we haven’t done a number of those procedures. And so, in the first few weeks, we’ve seen a number of cases get scheduled, as well as a number of those cases get canceled. And so, as Mark suggested, it’s very early days.

But at this stage, we are seeing returns to bookings, which is not something that we witnessed at all in April. We can’t speculate at this moment what is necessarily driving some of those cancellations, but it is encouraging to see the bookings. Now, for June, I think that’s anybody’s guess, we already have a number of cases scheduled in June.

But I think it’s going to take us for the month of May to determine parents’ and patients’ willingness to ultimately go back into the operating room back into the hospital and ultimately to see how hospitals kind of ease back into things as some of the pandemic passes..

That’s really helpful, Dave.

Just along those lines to just follow up a little bit more, what kind of visibility do you have in a normal year to those volumes in June and July? And then how does that kind of – how does that look at this point? Again, I know it’s early and there’s a lot of confounding factors right now, but how does that look at this point versus maybe more traditional type year?.

Yes, that’s a great question. So normally we have visibility I would say at least a month if not 6 weeks in advance for about 75% of the surgeries scheduled on any given month and I’m speaking specifically to Scoliosis.

I would say, at this point, we have been very aggressive with our sales force to try to get them to ensure that they post those cases with us and connect with their physicians and their accounts, so that we understand obviously where we need inventory, particularly in instances, where it’s possible that some of these cases could be done over a weekend or after hours or back to back to back when a physician gets OR time.

So we are being very aggressive right now on making sure that we have clarity. That said, I do think it’s encouraging that we have the volume of cases that we have on in May as well as the volume of cases we have on in June.

And I would say that our clarity into the month of June is pretty similar to where our clarity is normally at this time in the summer and it is clear that even in the month of June as well as the month of May that we are substantially off where we would expect to be at this time in a normal summer, albeit we are better off than we expected to be a few weeks earlier.

Does that make sense, Matt?.

Got it. It makes total sense. And just as a quick follow-up, the commentary about January and February was obviously real favorable.

I would love to just see if you could tease out a little bit where some of that strength was coming from the 30% growth in January and February, Trauma and Deformity, Scoli, domestic, international, just anything you can kind of tease out as far as some highlights or some stronger points that you saw there..

Fred, would you want to comment on that?.

Yes, absolutely. So we had a very strong start to the year. I would say that domestic was stronger than our international business, growing stronger than our international business. The T&D, even if you back out the Orthex, was very, very strong. So we’re very pleased with the organic growth of our T&D business.

And then when you add on Orthex on top of that, the domestic performance was just outstanding. So we are off to a great start.

The first week of March actually continued that trend and it was really that second, third, and fourth week of March when things started to slow down dramatically on the domestic side and went to very, very little sales on the international side as they saw stuff obviously start much sooner..

Very helpful. Thank you so much..

And thank you. And our next question comes from Ryan Zimmerman from BTIG. Your line is now open..

Great. Thank you and let me echo everyone’s sentiments. Congrats everyone on the roles. I want to talk about T&D, particularly on the trauma side. We’ve heard from some of the large ortho players that the stay-at-home orders are having some impact on trauma around the country.

And so, I’d just love to get your thoughts around that relative to your confidence in the Trauma business. Are kids still playing side and are you seeing trauma cases still as a result of that? Just some color there I think would be helpful..

Even in the dark days of April, we were seeing trauma cases, albeit trauma was off from what it would normally be and I think that, that confirms the assumption we made on March 16, when we evaluated Fred’s stress test model, that the Trauma business will be less seriously impacted because these were not elective surgeries, which is the case with Scoliosis and the Deformity Correction..

Thank you, Mark. I appreciate that. And then if you could talk about ApiFix for a minute, I just would love to understand kind of how you’re thinking about the roll out there.

Is this something that you’re going to do in a phased manner? Are you unleashing into the full power of 167 sales consultants at a specific time? So just some color on the commercialization there?.

Yes. The focus is on comparatively few, some 20 IRB sites, Investigational Review Board sites. 11 of them are in hand now and we are working on getting another 10. There has been very robust demand by surgeons both at those accounts and in many others around the world to get their hands on ApiFix. But we must remember that this is an HDE product.

We want to make certain there is a very good track record due to a good surgeon training before they commence surgery, good support of those cases from our side, and finally, good outcomes for the patient, because the first 200 of these cases will be – will go into a registry, which will be followed for some years.

And, of course, we want that registry to confirm the innate potential of this extraordinary technology. So, we are not going to be unleashing 167 sales reps with this thing, we’re going to be doing this in a more controlled manner..

Okay..

Dave, would you want to add any additional color? I’m sorry Ryan, if that answers your question, that’s fine..

No, no please, Dave – some colors from Dave would be great and then I have one more to sneak in..

Alright.

Ryan, one of the things that we are doing right now is starting to – we have commenced the process of very high level training with several of our managing directors in the field, as well as even potentially some engineers that we have in OrthoPediatrics to be able to cover these cases, counsel physicians very specifically on how to use the instrumentation and how to use the implants.

While we’ve articulated that this is a fairly simple procedure, particularly compared to vertebral body tethering, we are extremely focused on ensuring that these cases go extremely well, particularly early on. I think it’s very critical that our surgeons have a great experience with this product.

We would likely have each one of the first couple of hundred of these surgeries covered by a specific expert either from ApiFix directly coming over from Israel or members of our staff, who have been a part of several hundred, if not several thousand scoliosis cases and have a very commanding presence in the operating room such that we can ensure that these procedures go extremely well.

So we spent – like Mark talked about, we spent an enormous amount of time training our sales force on Orthex, we are also spending a fair amount of time at this stage training our internal people who will be in the OR about ApiFix..

Got it. I appreciate the color there, Dave.

And just to sneak one in, on the international orders, noting that these are stocking distributors, what’s your estimation Fred for a recruitment of those potential orders that were maybe lost at the tail-end of this quarter? Is this just a timing dynamic and you pick those up? Or how do we think about just some of the stocking order timing that you lost in the tail-end of the quarter? Thanks..

Yes, that’s a great question. Those orders will come back. They wanted those sets. Obviously, the timing of that I think is the big question.

They are all, as you can imagine, managing through their own cash situation and understanding the impact to their business and they have to, I think, gain some confidence in the surgeries returning and then building back up their cash position before they would be ready to repurchase and be aggressive in investing more in their business.

So, they haven’t gone away, I think it’s just a timing question on when they would return..

Okay. Thank you. Thanks for taking the questions..

Thanks, Ryan..

And our next question comes from Kaila Krum from SunTrust. Your line is now open..

Great. Thanks. Hi guys, thanks for taking our questions and congrats to Dave and Fred on your promotions and to Mark on the planned transition in a new role. So, you guys mentioned the 60% decline in April and that’s not too surprising, but you’ve mentioned also a return to bookings in May.

And I’m curious if you could give us any sense for how many of those deferred procedures in April are being rescheduled or in processing of being rescheduled at this point..

I think Kaila other than the scoliosis cases that Dave referred to, at this very early stage in the month, we don’t have a good feel for anything other than to say sales historically, i.e., in the last six, seven days have been much stronger than they were in April and clearly reflect the return of elective surgeries in what roughly half of the states in the United States, albeit at very different levels of operations.

So Dave, unless you or you, Fred, would have more color there, I’m not sure I know of any other detail with regard to Deformity Correction and things other than scoliosis..

Yes. I don’t know.

Kaila, I think one of the nuances we’re noticing, but we – this is anecdotal at this point is that obviously surgery for elective procedures isn’t opening up in every account geographically the same way and so we have noticed that certain of our key accounts, particularly on the Scoliosis side may have scheduled a number of procedures kind of back to back to back in particular in May, but we’re not seeing consistent bookings across kind of the entire footprint of our customer base and so it leads us to speculate.

And again, I would say, a pure speculation at this point. But what we’re speculating is that a number of the accounts that are coming back online are trying to catch up from cases that we know we already had booked in the last three weeks of March that went away and that we would have inevitably had booked in the month of April.

And so it’s possible that in those accounts we’re seeing kind of higher volumes in a particular account as a result of the fact that they’re trying to get ahead of getting some of these procedures done before they go into the summer, but what we’re not seeing is the uniform return to elective scoliosis or any elective procedures in other pockets of the United States..

Got it. Okay. That makes a ton of sense. Thank you.

And then – does this Telos Partners LLC deal, I realize it’s small for you guys, but what prompted that deal at this time? Just to be curious for more background there?.

Well, I think we went through this experience last year, where we recognized there was a sea change that was happening in Europe with regard to this new Medical Device Regulation.

And so, we had gotten to know that the lead partner at Telos, which is just a handful of very high level regulatory affairs professionals, and we were very impressed with that guy’s grasp, not only on what was going on in Europe, but how to comply with it in an efficient way and secondly, what to anticipate in the future.

So I think this was – the goal here was to be able to access on a permanent basis the most sophisticated technical expertise we had encountered in this whole regulatory affairs world and that would enable us not to be at play catch-up, but to anticipate the thrust of future regulations and then to learn how to comply with those in the best possible manner.

And one final comment and that is because Telos is still out with many clients which span far greater area than just orthopedics, we like the fact that they are out talking to other companies and therefore are at the cutting edge of the thinking in this area.

And this was not intended to become a huge profit center for the company, although I have to say the better they do, the better we will do, it was really to be able to have immediate access to that expertise on an ongoing basis..

Got it. Thank you..

Thank you. And our next question comes from Mike Matson from Needham & Company. Your line is open..

Hi, thanks for taking my questions. Just have a few on the P&L.

So just curious what the outlook is for gross margins, I know that your manufacturing is outsourced, but if you see this big decline in the – or sizable decline in the second quarter is that going to have any repercussions to gross margin either in the quarter or looking out over the next few quarters?.

Yes. Mike, it’s a great question and actually this is a period of time when we’re glad we don’t have all of the fixed costs of manufacturing facilities that will be really negatively impacting our gross margin rate because it is a 100% variable because it’s all outsourced.

We’re very pleased that the gross margin was very strong in the first quarter and I think it will be continued very strong in the second quarter and third quarter, particularly as the domestic business may return sooner than the international business and we have favorable mix leveraging that 85% gross margin in the U.S.

There is really no other fixed cost that we have that will be weighting that down and so we expect that gross margin strengths to continue throughout the rest of the year..

Okay. And then similarly with regard to your OpEx, it sounds like you are not being real aggressive with cost-cutting or anything like that. And it looks like you were kind of around $17 million in the first quarter.

So should we expect it to continue to be kind of in that range? Maybe there is some decreased travel and things like that, some discretionary spending, but I don’t know just your thought there on OpEx over the next couple of quarters?.

Yes, sure. Again on the commissions, which is almost 30%, 32% of sales, that’s a 100% variable. And so, as revenue comes down, that comes down with it in the exact ratio. The things that are not variable are obviously compensation as we’ve committed to keep all of our employees.

The stock compensation doesn’t change obviously and depreciation doesn’t change. So those things are all fixed.

Where we see some savings that are in the semi-fixed area are things like travel, obviously that’s gone down dramatically and we expect that to be down for the rest of the year as well as meeting expenses, advertising, and some of those other controllable expenses, which I view as semi-fixed.

We are definitely seeing those savings in the second quarter and we expect that to continue throughout the rest of the year..

Okay, thanks. That was helpful. And then just wanted to ask on your set placements, so I know you’ve suspended the guidance there, but when you look at the original plan, if we kind of fast forward to the end of next year, I’d imagine you will be placed in considerable amount next year as well.

So, do you think you can kind of catch-up on that assuming it’s slower in the second or maybe even in the third quarter that you can get by the end of next year that you’ll be at where you otherwise would have been with regard to set placements, assuming that this kind of recovers and it doesn’t get worse in the fall, I guess, the pandemic?.

Yes. That’s a great question. So we had a lot of our sets for this year early on order. And so with the replenishment orders being down, many of our suppliers are focusing on completing those set orders and getting those to us here in 2020.

And so we would expect to deploy a considerable amount of inventory into the field to meet what we see as a demand that’s not going away, it’s just been deferred.

And so our goal is to get those sets out there into the field, so we would see an increase in deployment in the second quarter and then continue deployment in the third and fourth quarter, albeit slightly lower than maybe our overall forecast. We are very fortunate in the fact that we did raise $60 million in December of last year.

And so while we have the cash to be able to deploy those sets both this year and the cash to deploy those sets next year and still have enough cash to take us all the way through the end of next year in a strong position.

So I guess my long answer to your question, but the answer is yes, we would fully expect that we would have deployed our expected ‘20 and our 2021 sets by the end of next year..

Okay, great. Thanks a lot..

Thanks Mike..

Thank you. And our next question comes from Dave Turkaly from JMP Securities. Your line is now open..

Thanks.

It’s way too early in the morning for Latin, but congrats to Mark and the duumvirate ahead?.

Well done, Dave. Well done..

You mentioned it seems like you are continuing to expand the consultants. I think you said 167.

So you mentioned, no job reductions, but I’m curious as to plans in terms of where you started the year and what you might be doing on the hiring front either here and internationally?.

Well, things certainly are ground to a halt on that hiring front over the last couple of months and we’ll just have to see how this progresses.

But we have felt that we’ve got to be committed to our current headcount both the selling organization as well as our direct employees and to maintain a high degree of motivation rather than to be adding to the headcount.

I think, Dave, the most fundamental thing in this whole COVID exercise is that there was very little focus by orthopedic companies on pediatrics before COVID, and there will be even less focus now and the market will become even less competitive.

So our whole orientation has been to capitalize on that future state of it being less competitive and hit the decks running very hard as surgeries are put back on the book. So maintaining this high degree of motivation with our staff was really a paramount concern to us..

And maybe just to follow-up on that, you said something in the prepared remarks about senior management talking to consultants I think you said it live every week, but I just want to confirm that?.

Yes. We – our HR VP actually puts out a little telephone chain to the entire senior management team, so that one of us touches base with one of our associates every week.

And these are non-business calls, it’s just to call and ask how is the weather in Des Moines, Iowa and how is your family keeping, but as you can imagine that has a very powerful impact on people who are working remotely, so they don’t feel dissociated..

Got it. Last one, you mentioned the Large Fragment Cannulated Screw, I just was curious, is that an upgrade of an older product or is that an entirely new area for you guys? Thanks a lot..

Dave, you want to comment on that?.

Dave, that’s a great question. So we had a cannulated – a large cannulated screw in a single size. It was a 7.0 cannulated screw and it didn’t have a lot of instrumentation specific to the slip capital femoral epiphysis procedure that we are promoting aggressively, the new Large Fragment System.

So, I wouldn’t expect a lot of cannibalization of our existing screw business, because that gets used in a number of different indication, but we would expect to see the new SCFE system, the Large Frag Cannulated Screw System kind of becoming the premier system for the SCFE procedure in children’s hospitals..

Thank you..

And thank you. And I am showing no further questions. I would now like to turn the call back over to Mark Throdahl, CEO for further remarks..

Well, we just like to thank all of you for your interest in the company and our progress and we hope everyone will stay safe and healthy. And then we look forward to being able to provide you with timely updates as this situation clarifies itself. So, thanks so much and have a great day..

Ladies and gentleman, this concludes today’s conference call. Thank you for participating. You may now disconnect..