OrthoPediatrics Corp. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Unaudited results; dollar figures below are in millions unless otherwise noted. The company designs and sells orthopedic implants, instruments and braces for children.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $34.95 | $25.08 | $91.30 | $73.24 |
| Gross profit / margin | $25.89 / 74% | $18.55 / 74% | $69.44 / 76% | $55.32 / 76% |
| Operating loss | ($6.96) | ($3.64) | ($17.09) | ($12.46) |
| Net income (loss) | $18.54 | ($2.20) | $9.11 | ($16.33) |
| Diluted EPS | $0.87 | ($0.11) | $0.43 | ($0.85) |
- Revenue grew 39% in Q3 and 25% year to date. U.S. revenue was $26.54 million in Q3; international revenue was $8.41 million. Trauma and deformity and scoliosis led growth.
- Operating expenses rose, including higher sales commissions, personnel and professional costs, acquisition-related expenses, and a $3.61 million ApiFix trademark impairment.
- Reported net income was substantially affected by noncash fair-value income from contingent consideration: $23.01 million in Q3 and $25.45 million year to date. The adjustment reflected reduced forecast ApiFix sales and lower expected contingent payments; it is not operating profit.
- Nine-month cash used in operations was $18.43 million, versus $11.83 million in 2021. Working-capital use included $14.81 million of inventory and $5.57 million of receivables growth.
- At September 30, cash was $35.42 million, short-term investments $84.71 million, and restricted cash $1.45 million. Total liabilities were $46.72 million; stockholders’ equity was $383.33 million.
- Debt included a $0.94 million affiliate mortgage. The $31 million revolving-facility borrowing used to fund the Pega acquisition was repaid in August; the $50 million facility was undrawn at quarter-end. The facility’s stated minimum interest rate is 10%, is secured by substantially all company assets, and matures no later than January 1, 2024.
Material changes and notable items
- Completed acquisitions of MD Orthopaedics in April and Pega Medical in July. The filing attributes approximately $7.0 million of nine-month revenue to the acquired businesses from acquisition dates.
- Raised $139.3 million net through an August public offering, including pre-funded warrants issued to largest investor Squadron; the warrants were exercised in September. The share issuance increased the share count.
- Nine-month investing cash outflow was $90.14 million, including acquisitions, purchases of instruments and short-term investments. Financing provided $136.01 million, primarily from the offering.
- Foreign-currency translation reduced equity by $15.66 million year to date; comprehensive loss was $6.48 million despite reported net income.
- Management said elective procedures continued to face disruption from COVID-related hospital staffing shortages and a significant 2022 RSV surge that absorbed hospital capacity. The company also cites seasonality in pediatric procedures.
Outlook, risks and contingencies
No specific revenue, earnings or margin guidance is provided in the filing. Management expects losses to continue in the near term while investing in product development, sales infrastructure and consigned instrument and implant sets. It states that cash and short-term investments, together with expected operating cash flows, are expected to support current and essential planned operations for more than twelve months after issuance of the statements.
- Key risks include procedure deferrals and hospital capacity constraints, ability to commercialize products and reach sustained profitability, acquisition integration, regulatory requirements, reliance on independent sales agencies and distributors, and inventory demand or obsolescence.
- The ApiFix trademark impairment was based on lower forecast revenue; management notes further impairment could result if actual results fall short of estimates.
- IMED’s arbitration proceeding was terminated in October 2022 after the plaintiff failed to pay required fees. Related court restrictions concerning disposition of the patent remain in place. The company also describes ongoing patent litigation with Wishbone and warns that adverse outcomes could harm results.
- The company has royalty obligations of 0.5% to 20% of sales and recorded $0.44 million year-to-date expense for a FIREFLY license performance shortfall.
Important facts for investors to verify
- How much of revenue growth is organic versus acquisition-driven, and whether acquired businesses meet expectations.
- Whether operating losses and operating cash outflows improve, given higher expenses and inventory investment.
- The recurring versus nonrecurring components of net income, especially contingent-consideration revaluations and tax benefits.
- Liquidity and financing terms, including the related-party revolving facility, its collateral and 2024 maturity.
- ApiFix sales forecasts and impairment assumptions, hospital staffing/RSV effects, and developments in the patent disputes.