OrthoPediatrics Corp. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Financial statements are unaudited. Amounts below are in millions unless otherwise noted.
Business context
OrthoPediatrics designs and sells orthopedic implants and instruments for children, primarily through independent sales agencies in the U.S. and distributors internationally. It reported one operating segment. During the quarter it acquired Telos, a regulatory consulting firm; on April 1, 2020, it acquired ApiFix, which develops a less-invasive scoliosis treatment system.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $16.36 | $14.66 |
| Gross profit / gross margin | $12.21 / 74.7% | $10.66 / 72.7% |
| Operating loss | $(4.50) | $(2.72) |
| Net loss | $(4.95) | $(3.02) |
| Net loss per share | $(0.30) | $(0.21) |
| Cash used in operating activities | $(6.96) | $(3.47) |
Revenue rose 12% year over year; gross margin improved by about 2 percentage points, but higher operating expenses contributed to a wider operating and net loss. U.S. revenue increased to $13.38 million from $10.27 million, while international revenue fell to $2.97 million from $4.39 million. Trauma and deformity revenue grew 22% to $12.21 million; scoliosis revenue declined 13% to $3.71 million. The company attributed the category changes primarily to sales volume.
Reported growth is not a like-for-like comparison: the 2019 quarter preceded the Vilex/Orthex acquisition. The company disclosed pro forma Q1 2019 revenue of $15.83 million assuming that acquisition occurred at the start of 2019.
At March 31, cash was $53.58 million and restricted cash was $1.36 million. Current assets were $115.12 million and current liabilities $13.83 million. Total debt was $21.17 million, including $19.90 million owed under Squadron notes and a $1.27 million mortgage. Operating cash use increased, with inventory growth using $5.10 million. Investing cash use was $5.62 million, including Telos and instrument purchases; financing cash use was $4.53 million, principally the $5.00 million repayment of Squadron revolving debt. Management said available cash and anticipated operating cash flows were expected to fund current and essential planned operations for more than 12 months.
Material changes, outlook and risks
- Sales and marketing expense increased 16% to $7.56 million; general and administrative expense increased 40% to $7.88 million, reflecting business-support costs including regulatory, stock compensation and legal expenses. R&D rose 4% to $1.27 million.
- Debt with Squadron bears interest at the greater of three-month LIBOR plus 8.61% or 10%, is secured by substantially all company assets, and matures January 31, 2023. The agreement has negative covenants but no traditional financial covenants. The company is affiliated with its largest investor, Squadron.
- COVID-19 had already reduced revenue through delays in elective surgeries. Management cited uncertainty around demand, sales access, transport costs and potential future supply disruption; it could not reasonably estimate the future financial impact. No specific revenue or earnings guidance is provided.
- The April 1 ApiFix acquisition involved $2 million cash and approximately $37 million in stock, plus scheduled future payments of $13 million, $8 million and $9 million and a potentially additional revenue-based payment. The filing says the purchase accounting and pro forma financial information were incomplete.
- The company disclosed an immaterial correction to the December 31, 2019 balance sheet and related notes, reducing deferred revenue and goodwill by $12.41 million. It also faces a pending K2M patent-infringement suit involving certain spine instruments; the company disputes the claims and says an adverse outcome could materially affect results.
- The company has recurring losses and a $133.77 million accumulated deficit. It reported no income-tax benefit because deferred tax assets were fully offset by a valuation allowance.
Important facts for investors to verify
- How elective-surgery delays and the pandemic affected subsequent-quarter sales, collections, inventory and liquidity.
- Funding and dilution implications of ApiFix’s stock consideration and future milestone and revenue-based payments; the filing gives two share counts for the acquisition (934,768 in the note and 934,783 in MD&A).
- The reported statement of operations lists Q1 2020 net interest expense of $0.379 million, while a debt note states interest expense relating to Squadron and mortgage debt of $0.551 million; clarify the difference.
- Progress and potential financial exposure in the K2M litigation, and the final purchase accounting for Telos and ApiFix.