OrthoPediatrics Corp. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Unaudited figures below are in millions of U.S. dollars unless stated otherwise. The company develops and sells pediatric orthopedic implants, instruments and braces.
Financial performance and liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $32.9 | $26.7 | $56.3 | $48.2 |
| Gross profit | $25.0 | $20.4 | $43.5 | $36.8 |
| Gross margin | 75.9% | 76.6% | 77.3% | 76.4% |
| Operating loss | $(3.7) | $(2.8) | $(10.1) | $(8.8) |
| Net loss | $(0.3) | $(3.8) | $(9.4) | $(14.1) |
| Net loss per share | $(0.02) | $(0.19) | $(0.48) | $(0.73) |
For the six months, operating cash flow was negative $12.4 million, versus negative $10.9 million a year earlier. Cash and cash equivalents were $37.2 million, short-term investments $14.0 million and restricted cash $1.4 million at June 30. Inventory was $67.5 million, up from $57.6 million at year-end; accounts receivable rose to $25.4 million from $17.9 million.
Debt included $31.0 million drawn on the revolving facility and a $1.0 million mortgage. The facility had $19 million available of a $50 million commitment. The company also reported $15.1 million in acquisition installment payables and $26.5 million in contingent consideration. The revolving debt bears interest at the greater of six-month SOFR plus 8.69% or 10%, is secured by substantially all company assets, and matures no later than January 1, 2024, subject to earlier change-of-control maturity.
Changes versus prior comparable periods
- Revenue increased 23% in Q2 and 17% for the first half. Management attributed growth primarily to non-elective trauma sales and reported approximately $2.6 million of MD Orthopaedics revenue in the periods.
- By category, Q2 trauma and deformity revenue grew 26% and scoliosis grew 23%; sports medicine/other declined 15%. International revenue grew to $8.0 million from $5.0 million in Q2.
- Gross margin was lower by approximately 0.7 percentage points in Q2, while first-half gross margin improved by approximately 0.9 points.
- Operating losses widened, despite narrower net losses. Net results benefited from a $5.0 million Q2 gain on remeasurement of contingent consideration; the first-half gain was $2.4 million, compared with a $5.1 million expense in the prior-year period. These valuation adjustments are a significant factor in interpreting net loss.
- General and administrative expenses rose 31% in Q2, which the company attributed to expansion-related personnel, legal and professional fees, and MD Ortho costs. Research and development expenses also increased.
- Foreign-currency translation produced a $12.2 million comprehensive loss for the first half, reducing accumulated other comprehensive income to a $3.7 million loss.
Outlook, risks and unusual items
- No specific revenue, earnings or margin guidance is provided. Management expects losses to continue in the near term as it invests in product development, sales expansion and consigned instrument and implant sets.
- Management stated that cash, short-term investments and anticipated operating cash flows should support current and essential planned operations for more than 12 months. The company nevertheless had recurring losses and negative operating cash flow.
- COVID-19-related hospital staffing constraints and postponements of elective procedures remain risks to demand. The company reported no significant pandemic-related supply interruptions to date, but increased certain inventory levels as a precaution.
- On April 1, 2022, the company acquired MD Orthopaedics for approximately $8.8 million cash and 173,241 shares, with purchase-price allocation still preliminary.
- After quarter-end, on July 1, the company acquired Pega Medical for approximately $32.0 million cash and issued 34,899 shares to the sellers under separate terms. The June 2022 credit-facility amendment increased capacity to $50 million in anticipation of this acquisition.
- Pending matters include an arbitration concerning ownership of the ’377 patent and patent litigation involving Wishbone Medical. Management says it will defend the claims; an adverse outcome could materially affect the business. The company also had a $1.1 million remaining minimum purchase commitment for a surgical navigation platform and recorded $0.3 million of first-half expense related to FIREFLY performance requirements.
- Management noted a narrowed impairment cushion for certain intangible assets; a material impairment charge could result if actual results fall short of estimates. Acquisition-related fair values and contingent consideration depend on significant estimates.
Key facts investors should verify
- Whether revenue growth and procedure volumes persist, and how much growth is attributable to acquisitions versus existing operations.
- Whether operating cash burn, rising receivables and inventory, and capital spending improve as sales expand.
- The financing and ongoing cash impact of the Pega Medical acquisition, including use of the affiliate revolving facility and resulting interest expense.
- The assumptions behind contingent-consideration remeasurement and the effect of excluding its gains or losses when assessing operating performance.
- Developments in the patent disputes, the restricted escrow cash, and potential impairment of goodwill or intangible assets.