OrthoPediatrics Corp. — Q3 2021 Form 10-Q
Business context and period. The company designs and sells pediatric orthopedic implants and instruments. This unaudited report covers the three and nine months ended September 30, 2021; comparisons are with the corresponding 2020 periods. Unless otherwise stated, amounts below are in millions of dollars.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $25.1 | $22.2 | $73.2 | $52.2 |
| Gross profit | $18.6 | $17.6 | $55.3 | $39.9 |
| Gross margin | 74% | 79% | 76% | 77% |
| Operating loss | $(3.6) | $(2.5) | $(12.5) | $(14.0) |
| Net loss | $(2.2) | $(4.5) | $(16.3) | $(18.9) |
| Net loss per share | $(0.11) | $(0.24) | $(0.85) | $(1.07) |
- Q3 revenue grew 13%; nine-month revenue grew 40%. International revenue rose to $5.7 million from $2.6 million in Q3 and to $15.3 million from $7.0 million for nine months. U.S. revenue was slightly lower in Q3 ($19.4 million versus $19.6 million), but higher for nine months ($57.9 million versus $45.1 million).
- Revenue growth reflected recovery in international markets and a return toward normalized procedure levels, including benefits from direct-agency selling in Germany, Austria and Switzerland. Management attributed category growth mainly to higher unit volumes, including trauma and deformity, scoliosis and acquired product sales.
- Gross margin contracted, which management attributed primarily to international sales mix. Operating expenses increased, notably sales and marketing and G&A, reflecting higher commissions, acquired-business costs, expanded staffing and legal/professional fees.
- Q3 other income included a $1.4 million favorable contingent-consideration fair-value adjustment; the nine-month period included a $3.7 million expense from that adjustment. The nine-month tax benefit was $0.9 million. These items helped net loss improve despite a larger Q3 operating loss.
Cash, liquidity and obligations
- At September 30, cash and cash equivalents were $6.3 million, short-term investments $51.3 million and restricted cash $1.4 million; together these totaled approximately $59.1 million. Management said available cash, short-term investments and expected operating cash flows should support current and essential planned operations for more than 12 months.
- Nine-month operating cash use was $11.8 million, versus $18.4 million in 2020. Investing cash use was $10.4 million; financing provided $0.04 million, compared with $46.7 million provided in 2020, largely from the prior-year stock issuance. Cash and restricted cash declined $22.4 million during the 2021 period.
- Total liabilities were $82.5 million. Debt consisted primarily of a $1.1 million mortgage payable to an affiliate; there were no borrowings outstanding under the $25 million revolving facility with the company’s largest investor. The facility is secured by substantially all company assets, has a stated minimum interest rate of 10% when drawn, and includes restrictive covenants.
- ApiFix-related acquisition installments totaled $26.7 million at present value, including $12.8 million current; contingent consideration was $34.4 million. The company anticipated a second-anniversary payment of approximately $13 million between January 1 and April 1, 2022. It also had a remaining $3.8 million minimum purchase commitment under its 7D Surgical license.
- Inventory was $55.5 million, up from $53.0 million at year-end. The company reported an accumulated deficit of $178.1 million and said it expects losses to continue in the near term as it expands its products, markets and consigned instrument sets.
Outlook, risks and notable matters
- No quantified revenue, earnings or margin guidance is provided. Management described continued investment in product development, personnel, sales infrastructure and inventory, while stating that COVID-19’s future effects cannot be reliably estimated.
- COVID-19 may affect elective procedures, hospital staffing and capacity, demand, supply chains, distribution and product-launch timing. The company said it had not experienced significant pandemic-related supply interruptions to date, but increased certain inventory levels as a precaution.
- Legal matters include an IMED software-ownership dispute stayed pending arbitration, with no arbitration initiated as of the filing; a patent and related claims dispute with Wishbone, including counterclaims; and other intellectual-property matters. The K2M case was settled and dismissed, and the Barry matter was settled through a license agreement. Management cautioned that an adverse outcome in the IMED or Wishbone matters could affect results or financial condition.
- Other risks include recurring losses, substantial inventory requirements, contingent acquisition payments based on estimates and forecasts, reliance on third-party manufacturers and sales agencies, and evolving ESG expectations. Management reported disclosure controls as effective and no material changes to internal control over financial reporting during the quarter.
Investor verification points
- Assess whether revenue growth—especially international growth—can continue and whether procedure recovery is durable amid COVID-19 uncertainty.
- Track gross margin, operating expenses and cash burn; reconcile improving net loss with continuing operating losses and noncash fair-value movements.
- Verify liquidity against planned investment, the ApiFix payment schedule, the 7D purchase commitment and potential contingent consideration.
- Monitor the IMED arbitration and appeal, Wishbone counterclaims, and any changes to legal accruals or related costs.
- Review inventory growth and utilization, and the company’s progress toward sustained profitability.