OrthoPediatrics Corp. — Q3 2023 Form 10-Q
Business context and reporting period. The company designs and markets orthopedic implants, instruments and braces for children, across trauma and deformity, scoliosis, and sports medicine/other. This unaudited report covers the three and nine months ended September 30, 2023; dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $40.0 | $35.0 | $111.1 | $91.3 |
| Gross profit / margin | $31.0 / 77% | $25.9 / 74% | $84.5 / 76% | $69.4 / 76% |
| Operating loss | $(4.5) | $(7.0) | $(18.7) | $(17.1) |
| Net income (loss) | $(4.6) | $18.5 | $(14.3) | $9.1 |
| Diluted EPS | $(0.20) | $0.87 | $(0.63) | $0.43 |
| Cash used in operating activities | Not reported quarterly | $(19.5) | $(18.4) |
Revenue grew 14% in Q3 and 22% year to date. Trauma and deformity was the largest category and grew 21% in Q3 and 27% year to date; scoliosis grew 3% and 11%, respectively. U.S. revenue was $29.4 million in Q3 and international revenue was $10.6 million.
At September 30, cash and cash equivalents, restricted cash and short-term investments totaled $84.0 million, versus $119.8 million at December 31, 2022. Cash, cash equivalents and restricted cash alone were $12.2 million. The company used $19.5 million in operating cash flow and spent $13.0 million on property and equipment, primarily instrument sets, during the first nine months. Inventory increased to $100.5 million from $78.2 million, and trade receivables rose to $37.6 million from $24.8 million.
Total liabilities were $58.1 million. Debt included an $0.8 million mortgage; there were no borrowings on the $50 million revolving facility. The facility’s stated maturity was January 1, 2024, and borrowings bear interest at the greater of six-month SOFR plus 8.69% or 10%. Current and long-term acquisition installment payables totaled $13.4 million.
Changes versus prior comparable periods
- Q3 operating loss narrowed to $4.5 million from $7.0 million, while the nine-month operating loss widened to $18.7 million from $17.1 million.
- Net results shifted from income to loss in both comparisons. Prior-year results included substantial gains from fair-value reductions in contingent consideration: $23.0 million in Q3 2022 and $25.5 million in the first nine months of 2022. The corresponding 2023 nine-month gain was $3.0 million; the filing reports no Q3 2023 adjustment.
- General and administrative expense increased 22% in Q3 and 30% year to date, mainly from added personnel, expansion resources and stock compensation. Sales and marketing expense rose 14% in both periods, primarily with higher commissions.
- Operating cash use increased by $1.1 million year to date. Management attributed working-capital use largely to inventory purchases supporting growth and higher receivables, partly offset by accounts payable.
Outlook, risks and unusual items
- No specific revenue, earnings or margin guidance is provided. Management expects near-term losses while investing in product expansion and consigned implant and instrument sets. It says cash, short-term investments and expected operating cash flows are sufficient for current and essential planned operations for more than 12 months after issuance.
- The company recorded a $1.0 million Q3 ApiFix trademark impairment, following a $3.6 million impairment in 2022, citing lower forecast revenue. Further impairment could be material if actual results differ from estimates.
- Management cites possible effects from hospital staffing constraints, delayed elective procedures, and respiratory illnesses including RSV; the future impact is uncertain. The business is seasonal, with revenue typically higher in summer and holiday periods.
- The 7D Surgical FLASH distribution agreement carries remaining purchase commitments of $1.3 million for 2023 and $2.3 million for 2024. The company also recorded $1.1 million of expense in the first nine months for estimated shortfalls against FIREFLY performance requirements. Product royalties range from 0.5% to 20% of sales.
- In September, the company settled claims with Wishbone Medical for an immaterial payment to OrthoPediatrics; claims involving an individual defendant remain. A separate software patent ownership dispute had its arbitration terminated after the plaintiff did not pay required fees; the company says an adverse resolution could materially affect its business or financial results.
- MedTech was acquired in May 2023 and Rhino assets in July 2023. MedTech is a pre-commercial technology platform, with no material 2023 revenue contribution anticipated. The company also reported that its ERP upgrade was substantially completed during the period and that implementation may affect certain financial-reporting processes.
Important facts for investors to verify
- Whether revenue growth converts into lower operating losses and improved operating cash flow, given rising inventory and receivables.
- The status and terms of the revolving facility after its stated January 1, 2024 maturity, and the company’s future liquidity and financing needs.
- Assumptions behind the ApiFix trademark valuation and any further impairment risk.
- Execution, costs and potential returns from the MedTech platform and other acquisitions, including remaining installment and equity obligations.
- Progress on FIREFLY performance requirements, FLASH purchase commitments, and the remaining litigation matters.