OrthoPediatrics Corp. — Q2 2020 Form 10-Q
Business context and reporting period. The company designs and markets orthopedic implants and devices for children. This unaudited quarterly report covers the three and six months ended June 30, 2020; financial amounts below are in U.S. dollars unless stated otherwise. Management attributed the period’s revenue decline primarily to COVID-19-related delays in elective surgeries.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Net revenue | $13.6m | $18.2m | $29.9m | $32.9m |
| Gross profit / margin | $10.1m / 74% | $13.6m / 75% | $22.3m / 74% | $24.3m / 74% |
| Operating loss | $(7.0)m | $(1.8)m | $(11.5)m | $(4.5)m |
| Net loss | $(9.4)m | $(2.6)m | $(14.4)m | $(5.6)m |
| Basic and diluted loss per share | $(0.54) | $(0.18) | $(0.85) | $(0.39) |
| Cash used in operating activities | — | $(14.7)m | $(10.4)m, including discontinued operations |
- At June 30, cash and restricted cash totaled $114.4m; current assets were $180.4m and current liabilities $24.8m. Inventory was $48.9m, up from $38.0m at year-end.
- Debt was $21.1m at June 30, including $19.9m payable to Squadron and a $1.2m mortgage. On July 15, the company repaid the $20m Term Note A; an August 4 amendment increased the Squadron revolving commitment from $15m to $25m.
- First-half investing cash use was $9.3m. Financing provided $66.4m, primarily from the June stock offering, which generated $70.2m net proceeds. Shares outstanding increased to 19.5m at June 30 from 16.7m at December 31, 2019.
- Management said cash and expected operating cash flows were sufficient for current and essential planned operations for more than the next 12 months, while noting ongoing operating losses and accumulated deficit of $143.2m.
Material changes and notable items
- Q2 revenue fell 25%; first-half revenue fell 9%. International sales declined to $1.4m from $4.4m in Q2, while U.S. sales declined to $12.1m from $13.8m. Management cited postponed elective procedures and a slower recovery in international markets. Scoliosis and trauma/deformity sales fell; sports medicine/other increased modestly.
- First-half general and administrative expense rose 52% to $18.5m, reflecting higher stock compensation, legal and acquisition costs. Q2 included a $1.3m immediately vested CEO stock grant. Sales and marketing expense declined with lower sales commissions; gross margin was broadly stable.
- Acquisitions and purchases included Telos (March), ApiFix (April) and Band-Lok intellectual property (June). ApiFix consideration was preliminarily valued at $87.4m, including stock, cash and future anniversary and sales-based payments; its preliminary allocation included $53.4m goodwill. The company recorded a $0.9m first-half fair-value expense for ApiFix contingent consideration.
- COVID-19 had reduced revenue through delayed elective surgeries. Management had not yet experienced significant supply-chain interruption but increased inventory to mitigate potential disruption; transportation constraints were causing higher costs and delays. The company said future effects could not be reasonably estimated and could be material.
- No specific revenue, earnings or margin guidance was provided. Management expected near-term losses while investing in products, inventory sets and market expansion.
- A patent infringement case brought by K2M concerning instruments used in the RESPONSE spine systems remained pending. The company denied the claims; trial was scheduled for April 12, 2021. An adverse outcome could materially affect the business, results or financial condition.
Important facts for investors to verify
- Whether elective surgery volumes and international demand recover, and how that affects revenue, margins and cash burn.
- Inventory growth, turnover and potential excess or obsolete inventory charges.
- ApiFix adoption, clinical procedure milestones, future anniversary payments and the sales-based contingent payment; acquisition valuations were preliminary.
- Post-quarter debt repayment and the amended revolving facility’s availability, high minimum interest rate and terms with related-party lender Squadron.
- Outcome and potential exposure from the K2M litigation, alongside the company’s continued operating losses and reliance on financing.