OrthoPediatrics Corp. (Nasdaq: KIDS) — FY2020 Form 10-K
Reporting period: Year ended December 31, 2020; the filing was signed March 11, 2021. This is an annual report, not a standalone quarterly filing. The company designs and sells orthopedic implants and instruments for children, with products in trauma and deformity correction, scoliosis, and sports medicine.
Financial performance and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $71.1 million | $72.6 million |
| Gross profit / margin | $55.0 million / 77% | $54.6 million / 75% |
| Operating loss | $26.8 million | $9.1 million |
| Net loss | $32.9 million | $13.7 million |
| Adjusted EBITDA (non-GAAP) | $(5.9) million | $(1.1) million |
| Operating cash flow | $(18.5) million | $(17.8) million |
Revenue declined 2% year over year. U.S. revenue rose to $63.0 million (89% of sales) from $55.1 million; international revenue fell to $8.1 million (11%) from $17.5 million. By category, trauma and deformity revenue was $47.7 million (down 3%), scoliosis $20.7 million (down 3%), and sports medicine/other $2.7 million (up 57%).
At year-end, cash and cash equivalents were $28.8 million, restricted cash $1.4 million, and short-term investments $55.1 million. Current assets were $158.4 million and current liabilities $35.0 million. Total assets were $320.4 million, total liabilities $85.6 million, and stockholders’ equity $234.8 million. Debt was $1.2 million, primarily the mortgage; there were no borrowings under the $25 million revolving facility. Inventory increased to $53.0 million from $38.0 million.
Fourth-quarter 2020 revenue was $18.9 million, gross profit $15.1 million, operating loss $12.7 million, and net loss $14.0 million. The quarter included a $2.7 million revenue reduction tied to repurchasing distributor inventory during conversion to a sales-agency model; the filing says this reduced quarterly and annual gross profit by $1.1 million.
Material changes and notable items
- COVID-19-related postponements of elective surgeries weighed on sales; international markets were more severely affected and remained below historical levels throughout the year. Management reported that domestic trends moved toward normalization after the second quarter.
- Gross margin improved to 77% from 75%, reflecting sales mix and conversion of certain international distributors to sales agencies. The distributor inventory repurchase also reduced revenue and gross profit.
- Operating expenses increased, led by general and administrative expense, which rose 44% to $38.3 million. Drivers included expanded personnel and resources, higher stock-based compensation, litigation and acquisition costs, and amortization of acquired intangibles.
- The company raised $70.2 million net in a June 2020 stock offering. It repaid $25.0 million of Squadron-related credit and term debt during 2020, while expanding the revolving facility commitment to $25.0 million.
- Acquisitions and purchases included Telos, ApiFix, and Band-Lok intellectual property. ApiFix consideration includes installment payments and sales-based contingent consideration; the balance-sheet carrying value of contingent consideration was $30.7 million and acquisition installments totaled $25.0 million at year-end.
Outlook, risks, and contingencies
Management said available cash, investments, expected operating receipts, and borrowing capacity were expected to fund anticipated needs for at least the next 12 months. It also anticipated continued losses in the near term while investing in product development, sales infrastructure, and consigned instrument and implant sets. No quantified revenue or earnings guidance was provided. Strategic targets include R&D investment of 7–9% of sales and at least one new surgical system plus multiple product extensions annually; timing for some development programs remains uncertain.
Key risks include continued pandemic disruption, persistent losses and operating cash outflows, execution and adoption of new products, reliance on independent sales agencies and third-party manufacturers, inventory obsolescence, reimbursement and regulatory requirements, and international expansion. The company reported an accrued $6.3 million for legal settlements. Patent litigation involving K2M and Dr. Barry and a software ownership dispute involving IMED were outstanding; the company reported settlement discussions or a verbal settlement in certain matters, but final written agreements were not complete as described in the filing. Squadron is both the largest investor and a lender/related-party counterparty; the company also uses Squadron-affiliated suppliers.
Important facts for investors to verify
- How elective procedure volumes and international sales recovered after year-end, and whether the 2020 distributor-to-agency transition continues to affect reported revenue.
- Whether operating expenses, losses, and cash use improve as revenue grows; reconcile cash-flow figures, which differ between the MD&A table and audited cash flow statement.
- Inventory growth, utilization, and obsolescence exposure, including the effects of expanded consigned sets and the distributor inventory repurchase.
- Cash funding and timing or settlement terms for ApiFix installments and contingent consideration, as well as outcomes and payments related to litigation.
- Related-party governance and terms of the Squadron credit facility and affiliate supplier arrangements; consider potential dilution from equity issuance and acquisition consideration.
The independent auditor issued an unmodified opinion on the financial statements. Management reported effective disclosure controls and internal control over financial reporting; the auditor was not required to attest to internal-control effectiveness while the company remained an emerging growth company.