Business context and reporting period
OrthoPediatrics Corp. designs and sells orthopedic implants and instruments specifically for children, primarily for trauma and deformity, scoliosis, and sports medicine procedures. This is its audited Form 10-K for the fiscal year ended December 31, 2018; quarterly figures below identify the three months ended December 31, 2018. The company reported one operating segment and 80 full-time-equivalent employees.
Financial performance and position
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $57.6 million | $45.6 million |
| Gross profit / margin | $42.7 million / 74% | $34.5 million / 76% |
| Operating loss | $9.6 million | $6.5 million |
| Net loss | $12.0 million | $8.9 million |
| Operating cash flow | $(15.6) million | $(7.2) million |
| Investing cash flow | $(6.0) million | $(6.5) million |
| Financing cash flow | $39.7 million | $54.7 million |
| Cash and cash equivalents at year-end | $60.7 million | $42.6 million |
| Total assets / liabilities | $112.1 million / $30.4 million | $82.3 million / $34.8 million |
Revenue grew 26%, primarily from trauma and deformity sales (+21%) and scoliosis sales (+44%); sports medicine/other declined 3%. U.S. revenue was $43.5 million (76% of total) and international revenue was $14.1 million (24%). Gross margin fell from 76% to 74%, mainly due to higher international and distributor sales costs. Operating expenses rose 28% to $52.2 million, outpacing revenue growth. The company remained unprofitable and reported an accumulated deficit of $115.1 million.
Fourth-quarter 2018 revenue was $14.6 million, gross profit $10.5 million, operating loss $1.9 million, and net loss $2.5 million. Compared with fourth-quarter 2017, revenue rose from $11.7 million, while operating loss narrowed from $4.2 million and net loss from $4.8 million. Q4 2018 gross margin was approximately 72% versus 76% a year earlier.
Year-end debt totaled $21.3 million, comprising approximately $19.9 million owed under the Squadron term loan and $1.4 million on a mortgage; the revolving facility had no year-end balance. The Squadron agreement provides a $15 million revolving facility and matures in January 2023. Management said cash, expected receipts, and available borrowing capacity were sufficient for anticipated needs for at least 12 months after the financial statements were issued. The company used $5.7 million of operating cash to increase inventory and $3.8 million as accounts receivable grew. It invested $5.3 million in property and equipment, primarily instrument sets.
Changes, outlook, risks, and unusual items
- In December 2018, the company sold 1.725 million shares at $27 per share and received approximately $43.4 million net proceeds. The offering increased cash and stockholders’ equity; a Section 382 ownership change followed.
- Net loss widened by $3.1 million year over year. Results included $2.0 million of noncash accelerated restricted-stock expense related to the 2017 IPO; 2018 also included $2.6 million of non-recurring professional-services fees in the Adjusted EBITDA reconciliation. Adjusted EBITDA was $0.5 million, a non-GAAP measure.
- Management plans continued investment in consigned instrument sets, product development, sales infrastructure, and surgeon education. It targeted R&D spending of 10% of sales and described planned product launches for 2019; these are plans, not financial guidance. No quantified revenue or earnings outlook is provided.
- Major risks include continued losses and cash burn, reliance on third-party manufacturers and sales agencies, inventory obsolescence, regulatory clearances and compliance, reimbursement pressures, competition, and international expansion. Two sales agencies each represented more than 10% of 2018 revenue. The company also disclosed related-party supplier purchases and debt involving Squadron affiliates.
- K2M patent litigation concerning instruments used with the RESPONSE spine system remained unresolved. The district-court case was stayed pending patent-review proceedings; PTAB instituted reviews concerning one patent but declined to institute two petitions concerning another. The filing warns an adverse outcome could materially harm the business.
- Management reported effective disclosure controls and internal control over financial reporting; the auditor gave an unmodified opinion on the financial statements but did not attest to internal-control effectiveness. The filing describes several prior voluntary, lot-specific product recalls, without providing a material financial impact in this text.
Important facts for investors to verify
- Whether revenue growth and gross-margin trends persist, particularly as international sales and direct-market operations expand.
- Cash burn, inventory deployment and turnover, receivables collection, and the adequacy of liquidity beyond management’s stated 12-month horizon.
- Debt terms and related-party exposure: the MD&A describes interest at the lesser of LIBOR plus 8.61% and 10%, while the debt note describes the greater of those rates; verify the governing agreement and applicable rate.
- Progress and regulatory status of the planned product launches, and whether R&D investment and new instrument sets generate expected commercial returns.
- Developments in the K2M litigation and any resulting product, financial, or operating consequences.
- Potential limitations on the use of the $87.3 million of federal and state tax-loss carryforwards following ownership changes.