OrthoPediatrics Corp. — Q1 2022 Form 10-Q
Business and period: The company designs and markets orthopedic implants and instruments for children, focused on trauma and deformity, scoliosis, and sports medicine. This unaudited report covers the three months ended March 31, 2022, compared with Q1 2021. Figures below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless stated otherwise.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $23.4 million | $21.5 million | +9% |
| Gross profit / margin | $18.6 million / 79% | $16.3 million / 76% | Margin +3 percentage points |
| Operating loss | $(6.4) million | $(6.0) million | Loss widened $0.4 million |
| Net loss | $(9.1) million | $(10.4) million | Loss narrowed $1.3 million |
| Net loss per share, diluted | $(0.47) | $(0.54) | Improved $0.07 |
| Cash used in operating activities | $(4.2) million | $(1.9) million | Use increased $2.3 million |
Revenue growth was primarily driven by non-elective trauma sales and stronger sales in Germany, Austria, and Switzerland following conversion to a direct agency model. U.S. revenue was $18.2 million, up from $16.8 million; international revenue was $5.2 million, up from $4.6 million. Trauma and deformity sales rose 13% to $16.5 million; scoliosis was nearly flat at $6.0 million; sports medicine/other declined 4% to $0.9 million.
Cost of revenue fell 6% despite higher sales, supporting the gross-margin increase. Management cited direct-agency sales, favorable purchase-price variances, and fewer scoliosis set sales to international stocking distributors. Operating expenses increased: sales and marketing by 9% to $9.8 million, general and administrative by 9% to $13.2 million, and research and development by 55% to $2.0 million. The R&D increase reflected product development and added personnel. Lower contingent-consideration fair-value expense helped narrow the net loss; the expense was $2.6 million versus $4.2 million a year earlier.
Cash, liquidity, and obligations
At March 31, 2022, cash and cash equivalents were $18.0 million, restricted cash $1.4 million, and short-term investments $27.1 million, totaling $46.4 million in cash and short-term investments including restricted cash. Total current assets were $131.4 million and current liabilities $34.3 million. Inventories increased to $64.1 million from $57.6 million. The company attributed higher operating cash use primarily to inventory investment, partly offset by increased trade payables.
Investing activities provided $14.3 million, primarily from $18.5 million of short-term investment sales, offset by $4.2 million of property and equipment purchases. Financing activities used $0.03 million. Cash and restricted cash ended the quarter at $19.3 million.
Balance-sheet long-term debt with the affiliate was $1.0 million, consisting of a mortgage payable; no term-loan obligations remained. The company also has a $25 million revolving credit facility with Squadron Capital, bearing interest at the greater of six-month SOFR plus 8.69% or 10%, and maturing no later than January 1, 2024. The filing does not clearly state the amount drawn or available under the revolver. Acquisition installment payable totaled $27.6 million, and contingent consideration was $31.5 million.
Management stated that cash, short-term investments, and expected operating cash flows were sufficient for current and essential planned operations for more than the next twelve months. The company reported recurring operating losses and an accumulated deficit of $187.1 million.
Material changes, outlook, and risks
- There was no numerical revenue or earnings guidance in the filing. Management expects near-term losses to continue while expanding its product portfolio and investing in consigned implant and instrument sets.
- COVID-19-related postponements of elective procedures may continue to reduce demand. The company said it had not yet experienced significant COVID-related supply interruptions but increased certain inventory levels; transport disruptions could raise costs or cause delays.
- Revenue is typically higher in summer and holiday periods due to pediatric surgery scheduling, creating seasonality.
- Management said impairment headroom had narrowed for certain intangible assets; materially weaker actual results could lead to a potentially material impairment charge.
- IMED Surgical’s patent-ownership dispute is in arbitration after the court stayed the lawsuit pending arbitration. The company disputes the claims; an adverse outcome could materially affect its business, results, or financial condition. A separate patent infringement case involving Wishbone Medical includes counterclaims; the company also disputes those claims.
- The company had a $1.9 million remaining minimum purchase commitment for the 7D Surgical FLASH platform and recorded $0.1 million of expense for estimated shortfall under FIREFLY performance requirements.
- On April 1, 2022, after quarter-end, the company acquired MD Orthopaedics for $8.2 million cash and 173,241 shares valued at approximately $9.7 million. It also paid the first ApiFix installment with $3.2 million cash and 185,811 shares valued at approximately $10.4 million.
- The revolving facility is secured by substantially all company assets and includes restrictive covenants and events of default. The lender is an affiliate of the company’s largest investor; related-party supplier Structure Medical received $0.3 million for inventory purchases during the quarter.
Important facts for investors to verify
- Whether procedure volumes and direct-agency growth can sustain revenue gains and the improved gross margin, particularly as COVID-related disruptions evolve.
- Revolver borrowings and availability, the timing and funding of acquisition installments, and the cash impact of the April 2022 acquisition and ApiFix payment.
- Inventory growth, future operating cash use, and management’s liquidity assumptions supporting its more-than-twelve-month assessment.
- Progress and potential exposure in the IMED arbitration and Wishbone litigation, as well as any changes in the restricted escrow cash.
- Whether operating-expense growth and contingent-consideration remeasurement affect the path toward profitability, and whether impairment indicators worsen.