OrthoPediatrics Corp. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Financial statements are unaudited; amounts below are in millions unless noted. OrthoPediatrics designs and markets orthopedic implants, instruments, and braces for children.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $31.6 | $23.4 | +35% |
| Gross profit / margin | $23.6 / 75% | $18.6 / 79% | Margin down 4 percentage points |
| Operating loss | $(8.6) | $(6.4) | Loss widened |
| Net loss | $(6.8) | $(9.1) | Loss narrowed 25% |
| Net loss per share, diluted | $(0.30) | $(0.47) | Improved |
| Cash used in operating activities | $(6.5) | $(4.2) | Cash use increased |
| Capital expenditures | $4.9 | $4.2 | — |
Revenue growth reflected recovery in domestic and international markets and $4.8 million of growth from the MD Orthopaedics and Pega Medical acquisitions, partly offset by foreign currency effects. U.S. revenue was $23.8 million and international revenue $7.8 million. Trauma and deformity revenue rose 42% to $23.4 million; scoliosis grew 18% to $7.1 million; sports medicine/other grew 22% to $1.1 million.
Cost of revenue rose 65%, faster than revenue, and gross margin declined from 79% to 75%. Management attributed the margin decline primarily to favorable purchase-price variances in the prior-year quarter that did not recur. Sales and marketing expense increased 25% to $12.2 million; general and administrative expense increased 34% to $17.7 million, including acquisition-related costs, added personnel, legal expense, and travel; research and development expense increased 12% to $2.3 million.
Net loss improved despite a higher operating loss, primarily because other items shifted from $3.0 million of expense to $1.2 million of income. This included a $0.7 million favorable fair-value adjustment to contingent consideration, versus $2.6 million of expense in Q1 2022, and a shift to net interest income.
Liquidity, cash flow, and debt
At March 31, 2023, cash and cash equivalents were $34.7 million, restricted cash $1.5 million, and short-term investments $73.1 million, totaling $109.2 million. Total current assets were $225.0 million and current liabilities $35.2 million. Inventory was $84.9 million, up from $78.2 million at year-end 2022.
Operating cash use was $6.5 million, including a $6.0 million inventory increase to support expected growth; trade payables provided $5.5 million of offsetting cash. Investing activities provided $32.3 million, mainly from selling short-term securities, and included $4.9 million of property and equipment purchases. Cash, cash equivalents, and restricted cash increased $25.7 million to $36.1 million; this increase partly reflects the conversion of short-term investments into cash.
The company reported $0.9 million of mortgage debt to an affiliate and no borrowings under its $50.0 million revolving credit facility. The facility bears interest at the greater of six-month SOFR plus 8.69% or 10.0%, and matures at the earlier of a change of control or January 1, 2024. Acquisition installment payables totaled $16.2 million at quarter-end. The company reported an accumulated deficit of $183.6 million and continuing operating losses, but management stated that cash, short-term investments, and expected operating cash flows were sufficient for current and essential planned operations for more than twelve months after issuance of the statements.
Outlook, risks, and notable items
- No specific revenue, earnings, or other quantified full-year guidance is provided. Management expects losses to continue in the near term as it expands its product portfolio and invests in consigned surgical sets.
- Management identifies elective-procedure deferrals, hospital staffing constraints, COVID-19 and RSV-related disruptions, foreign currency effects, and seasonality as factors that may affect demand. Revenue is typically higher in summer and holiday periods.
- The company recorded a $0.3 million expense for estimated shortfalls against FIREFLY performance requirements in Q1 2023, versus $0.1 million in Q1 2022. Remaining 7D Surgical FLASH purchase commitments were $2.8 million for 2023 and $2.3 million for 2024.
- Two patent-related disputes remain notable. In the IMED software ownership dispute, arbitration was terminated in October 2022 after the plaintiff did not pay required fees; the plaintiff may pursue further action subject to the court’s stay order. In the Wishbone litigation, the company is defending its patent and related claims; Wishbone filed a motion concerning patent eligibility in March 2023, and the company responded in April. Management says adverse outcomes could harm the business and financial results.
- After quarter-end, on April 3, the company paid $2.0 million in cash and issued 140,003 shares valued at $6.2 million to satisfy an ApiFix installment obligation. On May 1, it acquired Medtech Concepts for approximately $15.3 million, including $3.0 million cash, shares valued at $2.3 million, and additional anniversary payments. Management does not expect material Medtech revenue in 2023; a company director through April 28 was among the sellers, and an independent special committee and the full Board approved the transaction, with the director abstaining.
- The company recorded a $3.6 million ApiFix trademark impairment in 2022 because of lower expected product revenue; no impairment was recorded in Q1 2023. Future impairment remains possible if estimates or actual results change.
Key facts for investors to verify
- Whether revenue growth, particularly acquired growth, translates into improving gross margin and a narrowing operating loss.
- How inventory, operating cash use, and investment in consigned sets evolve as sales expand.
- The status and terms of the revolving facility approaching its January 2024 maturity, and the company’s liquidity after the April ApiFix payment and May Medtech acquisition.
- Potential cash, share-issuance, or operating impacts from acquisition installments, purchase commitments, FIREFLY performance requirements, and litigation.
- Whether procedure deferrals, foreign exchange, or seasonality materially affect future demand; management’s stated outlook is not quantified.