OrthoPediatrics Corp. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Unless otherwise noted, dollar amounts below are in millions. The company designs and markets orthopedic implants and instruments for children.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $22.2 | $20.7 | $52.2 | $53.6 |
| Gross profit | $17.6 | $15.9 | $39.9 | $40.2 |
| Gross margin | 79% | 77% | 77% | 75% |
| Operating loss | $(2.5) | $(1.5) | $(14.0) | $(6.0) |
| Net loss | $(4.5) | $(2.7) | $(18.9) | $(8.3) |
| Net loss per share | $(0.24) | $(0.18) | $(1.07) | $(0.57) |
- Revenue mix: Q3 U.S. revenue rose to $19.6 million from $16.8 million; international revenue fell to $2.6 million from $4.0 million. For the nine months, U.S. revenue grew to $45.1 million from $40.9 million, while international revenue declined to $7.0 million from $12.7 million.
- Cash flow: Nine-month operating cash use was $18.4 million, versus $11.4 million in 2019. Investing cash use was $10.6 million, compared with $60.4 million, largely reflecting the prior-year Vilex and Orthex acquisition. Financing provided $46.7 million; cash and restricted cash increased $17.7 million to $89.7 million.
- Liquidity and debt: At September 30, cash was $88.4 million, restricted cash $1.4 million, current assets $161.4 million and current liabilities $25.7 million. Total debt was $1.2 million, comprising the affiliate mortgage; the $20 million Squadron term note was repaid in July. The company had a $25 million Squadron revolving commitment, with no revolving balance reported at quarter end.
Material changes and notable items
- Q3 revenue increased 7% year over year as U.S. activity recovered from COVID-related elective-surgery delays; nine-month revenue declined 3%. Management attributed the continued international weakness to slower recovery of elective procedures.
- Nine-month net loss more than doubled. General and administrative expense increased $8.8 million to $28.3 million, including higher stock-based compensation, litigation and acquisition-related costs. The nine-month period also included $1.8 million of fair-value expense on ApiFix contingent consideration.
- Inventory rose to $52.0 million from $38.0 million at year-end; the increase used $12.3 million of cash in the nine-month period. Management said inventory was built to support anticipated growth, acquisitions and new sales agencies, and partly to mitigate potential supply disruptions.
- The June follow-on offering raised $70.2 million net. The April ApiFix acquisition included cash, shares and contingent future consideration; at September 30, recorded acquisition installment payable was $24.3 million and contingent system-sales consideration was $29.0 million.
Outlook, risks and contingencies
- No specific revenue or earnings guidance is provided. Management expects near-term losses to continue while it expands its product portfolio and invests in consigned sets and markets. It believes available cash and anticipated operating cash flows are sufficient for ordinary-course needs for at least the next 12 months.
- COVID-19 creates substantial uncertainty: postponed elective procedures have reduced demand, and further restrictions could affect sales, supply, costs and forecasting. The company reported no significant supply-chain interruption to date, but noted higher transportation costs and delays.
- Litigation includes a K2M patent-infringement case, for which a trial was scheduled for April 2021; the company denies the claims and intends to defend itself. An October 2020 IMED Surgical lawsuit alleges ownership rights in point-and-click planning software; the company said it lacked sufficient information to assess the outcome.
- The ApiFix anniversary payments include approximately $13 million due on the second anniversary, potentially earlier if 150 U.S. procedures are completed, followed by $8 million and $9 million payments in years three and four, subject to terms. Additional system-sales consideration may also be payable.
- The company reports recurring operating losses and an accumulated deficit of $147.8 million. Its credit facility is secured by substantially all company assets, bears interest at the greater of LIBOR plus 8.61% or 10%, and includes restrictive covenants and default provisions.
Key facts for investors to verify
- Whether U.S. elective-surgery recovery continues and international revenue rebounds, particularly in scoliosis products.
- Whether cash burn and inventory investment remain manageable relative to the $89.7 million cash and restricted-cash balance and available revolving credit.
- Expected cash or stock funding, timing and valuation sensitivity for ApiFix installment and contingent payments.
- Potential costs or operating effects from the K2M and IMED disputes, and any changes in their status.
- How acquisition-related spending, stock compensation and recurring losses affect progress toward profitability; the filing provides no formal profitability timetable.