Business context and reporting period
OrthoPediatrics Corp. designs and markets orthopedic implants and devices for children, including products for trauma and deformity, scoliosis, and sports medicine. This unaudited Form 10-Q covers the three months ended March 31, 2021; financial figures below are in U.S. dollars and millions unless otherwise noted.
Financial performance and liquidity
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Revenue | $21.5 | $16.4 |
| Gross profit / margin | $16.3 / 76% | $12.2 / 75% |
| Operating loss | ($6.0) | ($4.5) |
| Net loss | ($10.4) | ($4.9) |
| Net loss per share, basic and diluted | ($0.54) | ($0.30) |
| Cash used in operating activities | ($1.9) | ($7.0) |
- Revenue grew 31%; U.S. sales were $16.8 million and international sales were $4.6 million. Scoliosis revenue rose 60%, trauma and deformity 19%, and sports medicine/other 120%.
- Operating expenses rose to $22.3 million, including general and administrative costs of $12.0 million, up 53%, primarily due to acquired businesses, added personnel and resources, and legal and professional fees.
- Cash, cash equivalents, restricted cash, and short-term investments totaled $78.0 million at quarter-end. Cash and restricted cash declined $7.3 million during the quarter. Inventory was $55.3 million.
- Total liabilities were $91.2 million. Long-term debt with an affiliate was $1.1 million, principally a mortgage; the $25 million revolving credit facility had no borrowings outstanding. Acquisition installment payables were $25.7 million, and contingent consideration was $34.9 million.
Material changes versus the prior comparable period
- Revenue increased $5.1 million as activity continued to recover from pandemic-related disruption; management attributed nearly all category growth to higher unit volumes rather than pricing.
- Gross margin improved by one percentage point. Operating loss widened by $1.5 million, while net loss more than doubled.
- Other expenses increased to $4.7 million, primarily due to a $4.2 million fair-value increase in ApiFix contingent consideration and $0.6 million of accretion on acquisition installment payments.
- Operating cash use improved by $5.0 million year over year. Investing cash use was $5.6 million, including a $2.9 million license purchase connected with the Barry settlement and $2.7 million of instrument-set purchases.
Outlook, risks, contingencies, and unusual items
- No formal revenue or earnings guidance is provided. Management expects losses to continue in the near term as it expands its product portfolio and invests in consigned inventory and market expansion. It believes cash, short-term investments, and expected operating cash flows will fund current and essential planned operations for more than the next 12 months.
- COVID-19-related postponements of elective procedures have affected demand; the duration and financial impact remain uncertain. The company reported no significant supply-chain interruption to date, but noted higher transportation costs and delays and increased inventory to mitigate potential disruptions.
- The ApiFix acquisition includes anniversary payments and a revenue-based system sales payment. The company anticipated a $13 million second-anniversary payment in the first half of 2021; the timing may accelerate if a specified procedure threshold is met. The recorded contingent consideration is a Level 3 estimate and actual payments may differ.
- The Barry patent dispute settled in March 2021 through a license agreement recorded at $2.9 million and amortized based on use. The company had $5.3 million accrued for legal settlements. K2M litigation remained subject to settlement discussions, which management considered probable but not assured. An IMED Surgical software-ownership lawsuit was being vigorously defended; an adverse outcome could materially affect the business.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether revenue growth and elective-procedure recovery continue, including trends by geography and product category.
- Cash burn, inventory investment, and the adequacy of available liquidity as expansion and near-term ApiFix payments proceed.
- The eventual amount and timing of ApiFix anniversary and sales-based payments, and the assumptions underlying the contingent-consideration valuation.
- Resolution, cost, and potential business impact of the K2M and IMED proceedings, and use of the recorded legal-settlement accrual.
- Whether the company can reduce losses while funding growth, given higher operating expenses and its history of recurring losses.