OrthoPediatrics Corp. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. OrthoPediatrics designs and sells orthopedic implants and instruments for children. Unless indicated otherwise, financial amounts below are in millions of dollars.
Financial results
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $12.094 | $9.762 |
| Gross profit / margin | $8.919 / 73.7% | $7.415 / 76.0% |
| Operating expenses | $13.314 | $8.252 |
| Operating loss | $(4.395) | $(0.837) |
| Net loss | $(5.000) | $(1.285) |
| Net loss attributable to common stockholders | $(5.000) | $(2.711) |
| Basic and diluted loss per share | $(0.41) | $(1.55) |
| Cash used in operating activities | $(5.033) | $(0.005) |
| Cash used in investing activities | $(2.930) | $(1.632) |
Revenue increased 24%. U.S. revenue was $8.653 million, up from $7.336 million; international revenue was $3.441 million, up from $2.426 million. By product category, trauma and deformity generated $9.123 million, scoliosis $2.685 million, and sports medicine/other $0.286 million. Management attributed growth primarily to increased unit volumes and cited PediPlate, RESPONSE, FIREFLY and BandLoc among growth drivers.
Gross margin declined to 73.7% from 76.0%, mainly due to a higher share of international sales, including instrument-set sales. Operating expenses rose 61%, with sales and marketing up 45%, general and administrative up 78%, and R&D up 77%. The larger net loss reflects increased operating expenses and interest costs. Q1 2017 common-stockholder loss included $1.426 million of preferred-stock dividend accretion; there were no preferred shares outstanding in Q1 2018.
Financial position and liquidity
At March 31, 2018, cash was $34.591 million, compared with $42.582 million at year-end 2017. Current assets were $65.949 million and current liabilities $10.570 million. Total debt was $25.433 million, including $20.000 million under the Squadron term note, $3.930 million drawn on its revolving facility, and a $1.503 million mortgage payable to an affiliate. The Squadron facility has a $15 million revolving commitment, bears interest at the greater of three-month LIBOR plus 8.61% or 10%, and matures January 31, 2023. Debt is secured by substantially all company assets; the lender is a related party.
Cash declined $7.991 million during the quarter. Operating cash use included working-capital investment, particularly increased inventory and receivables, partly offset by higher payables. Investing outflows were principally $2.771 million for property and equipment, largely consigned instrument sets. Management said available cash, expected operating cash flows, product receipts and revolver availability were sufficient for anticipated needs for at least 12 months; funding beyond that period may depend substantially on obtaining additional financing on acceptable terms. The company reported recurring operating losses and an accumulated deficit of $108.066 million.
Changes, outlook and material considerations
- Operating loss widened to $4.395 million from $0.837 million, and operating cash flow shifted to a $5.033 million use from near break-even.
- G&A included $2.177 million of stock-based compensation, versus $0.339 million in Q1 2017, largely associated with restricted-stock vesting after the IPO. Management also cited higher legal expense and staffing.
- Management expects near-term losses to continue while investing in product development, inventory sets, and expansion in existing and new markets. No numerical revenue or earnings guidance was provided.
- Revenue is typically higher during summer and holiday periods because of pediatric surgery scheduling; quarterly results may therefore be seasonal.
- The company adopted ASC 606 on January 1, 2018 using the modified retrospective method and reported no impact on historical statements or opening balances.
- A K2M patent-infringement lawsuit concerns instruments used in the RESPONSE spine systems. The company denies infringement, challenges patent validity, and warns an adverse outcome could materially affect its business, results or financial condition; damages sought are unspecified.
- Other risks include reliance on third-party manufacturers and independent sales agencies, inventory obsolescence, regulatory requirements, recurring losses, funding needs, and unhedged foreign-currency exposure. The filing reported no material changes to previously disclosed risk factors.
- Minimum royalty commitments are $0.5 million annually through 2026; additional product-development milestone and royalty payment amounts and timing were not determinable.
Investor verification points
- Track whether revenue growth translates into improved gross margin and lower operating losses as international sales and related costs expand.
- Monitor cash burn, inventory and receivables, revolver availability, and the company’s ability to fund operations beyond the stated 12-month outlook.
- Review the related-party debt terms, interest burden, collateral, and transactions with Squadron-affiliated suppliers.
- Follow developments in the K2M litigation and potential effects on the RESPONSE portfolio.
- Assess the sustainability of growth by product and geography, seasonality, and the impact of restricted-stock compensation on expenses and dilution.