Business context and reporting period
OrthoPediatrics Corp. designs and markets orthopedic implants, instruments and braces focused on pediatric patients. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2023; comparisons are with the corresponding 2022 periods. The company sells principally in the U.S. and internationally, and relies on third-party manufacturers and independent sales agencies.
Financial performance and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $39.6 million | $32.9 million | $71.1 million | $56.3 million |
| Gross profit | $30.0 million | $25.0 million | $53.6 million | $43.5 million |
| Gross margin | 76% | 76% | 75% | 77% |
| Operating loss | $5.6 million | $3.7 million | $14.2 million | $10.1 million |
| Net loss | $2.9 million | $0.3 million | $9.7 million | $9.4 million |
| Net loss per share, diluted | $0.13 | $0.02 | $0.43 | $0.48 |
At June 30, cash and cash equivalents were $9.7 million, restricted cash $1.6 million and short-term investments $83.5 million, totaling $94.8 million in cash, restricted cash and investments. Operating cash outflow was $10.8 million for the first half, versus $12.4 million a year earlier. Investing activities provided $14.1 million, including net proceeds from short-term investments, while property and equipment purchases were $10.6 million, primarily for instrument sets.
Total liabilities were $54.6 million and stockholders’ equity was $380.3 million. The company had no borrowings on its $50.0 million revolving credit facility; its mortgage payable to an affiliate was $0.8 million. The revolver matures at the earlier of a change of control or January 1, 2024. Management stated that cash and short-term investments, together with expected operating cash flows, should fund current and essential planned operations for more than 12 months after issuance of the statements.
Material changes versus the prior comparable period
- Q2 revenue grew 20%; first-half revenue grew 26%. Management attributed growth mainly to trauma and deformity products, acquisitions, and a 35% increase in international revenue.
- First-half trauma and deformity revenue increased 30% to $50.9 million; scoliosis revenue increased 17% to $18.0 million. U.S. revenue was $53.4 million and international revenue $17.8 million for the first half.
- First-half gross margin declined to 75% from 77%, while operating loss widened to $14.2 million from $10.1 million. Higher general and administrative costs, sales commissions, research and development, and acquisition-related costs contributed to increased expenses.
- Q2 net loss widened to $2.9 million from $0.3 million, despite favorable other income, principally from a fair-value reduction in contingent consideration. The reported Q2 fair-value adjustment contributed $2.3 million of income.
- In May 2023, the company acquired MedTech Concepts in an asset acquisition. Consideration transferred was $10.0 million on a present-value basis; the company does not expect material 2023 revenue from the platform. The acquisition added software intellectual property and a trademark, and includes future payments and service-based stock compensation.
- Shares issued rose to 23.34 million at June 30, 2023 from 22.88 million at December 31, 2022. First-half stock-based compensation was $5.4 million, up from $3.3 million.
Outlook, risks and unusual items
The filing provides no specific revenue, earnings or margin guidance. Management expects near-term losses to continue as it expands its product portfolio and invests in consigned implant and instrument sets. Revenue is typically higher in summer and holiday periods because of pediatric surgery schedules.
Key risks include continued operating losses and cash use; dependence on elective procedures and hospital capacity, including effects from staffing constraints and respiratory illnesses; the working-capital demands of consigned inventory; and the need to maintain sales-agency and distributor networks. The company also cites regulatory, intellectual-property and product-development risks. Management warns that changes in forecasts could lead to additional impairment of intangible assets; an ApiFix trademark impairment of $3.6 million was recorded in 2022.
Contingencies include an ongoing patent infringement dispute with Wishbone and an IMED software-ownership dispute. The IMED arbitration was terminated in 2022 after the plaintiff failed to pay required fees, although court restrictions concerning disposition of the patent remain. The company says it believes the claims are without merit but acknowledges adverse outcomes could harm its business or financial condition. The company also recorded $0.6 million of first-half expense for estimated shortfalls against FIREFLY performance requirements and had $3.9 million of remaining 7D Surgical purchase commitments for 2023 and 2024.
The company reported effective disclosure controls and no material changes in internal control over financial reporting. It stated there were no material changes to the risk factors in its 2022 Form 10-K.
Important facts for investors to verify
- Whether revenue growth continues across product categories and international markets, and how much reflects acquisitions versus underlying growth.
- Whether expense growth and stock-based compensation moderate sufficiently to improve operating performance and the path to profitability.
- Cash burn, inventory and receivables growth, and the company’s ability to maintain liquidity as it funds instrument-set expansion.
- How the January 2024 revolver maturity is addressed, including any extension, refinancing or other financing needs.
- Progress and costs related to MedTech, acquisition-related obligations, FIREFLY performance requirements and 7D purchase commitments.
- Developments in the Wishbone and IMED disputes, and any changes in impairment assumptions or other contingencies.