OrthoPediatrics Corp. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; the filing was signed March 5, 2020. This is an annual report, with unaudited quarterly results also provided. OrthoPediatrics designs and sells orthopedic implants and instruments specifically for children.
Financial performance and position
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Revenue | $72.6 million | $57.6 million |
| Gross profit / margin | $54.6 million / 75% | $42.7 million / 74% |
| Operating loss | $9.1 million | $9.6 million |
| Net loss | $13.7 million | $12.0 million |
| Adjusted EBITDA (non-GAAP) | $(1.1) million | $(3.5) million |
| Cash used in operating activities | $17.8 million | $15.6 million |
| Cash and restricted cash at year-end | $72.0 million | $60.7 million |
| Total assets / liabilities | $194.6 million / $52.2 million | $112.1 million / $30.4 million |
Revenue grew 26%, driven mainly by higher unit volumes rather than pricing. U.S. revenue was $55.1 million (76%); international revenue was $17.5 million (24%). Trauma and deformity generated $49.4 million, scoliosis $21.5 million, and sports medicine/other $1.7 million. Gross margin increased one percentage point. Operating loss narrowed modestly, but net loss increased, including a $1.0 million net loss from discontinued operations.
Fourth-quarter revenue was $19.0 million, with gross profit of $14.5 million, operating loss of $3.0 million, and net loss of $5.4 million.
Year-end inventory was $38.0 million, up from $25.7 million, and trade receivables were $16.0 million, up from $9.0 million. Operating cash use reflected business losses and working-capital investment, including inventory growth of $9.8 million and receivables growth of $5.8 million. Investing cash use was $61.9 million, including $49.8 million for the Vilex Companies acquisition and $11.6 million for instrument sets. Financing provided $91.0 million, including $60.0 million net proceeds from a follow-on stock offering and $30.0 million in new term borrowing.
Total debt on the balance sheet was $26.2 million, including $19.9 million owed under the Squadron term note, $5.0 million drawn on its revolving facility, and a $1.3 million mortgage. Squadron debt bears interest at the greater of three-month LIBOR plus 8.61% or 10%, and the remaining facilities mature in January 2023. The debt is secured by substantially all company assets and includes restrictive covenants.
Material changes and unusual items
- On June 4, 2019, the Company acquired Vilex and Orthex for approximately $60.2 million in total consideration, including $50.0 million cash and $10.0 million in stock. The acquisition added foot-and-ankle products and Orthex technology; acquisition-related costs were $0.7 million.
- On December 31, 2019, the Company sold substantially all Vilex adult-product assets to Squadron Capital LLC, its largest investor, in exchange for a $25.0 million reduction in acquisition-related debt. The consideration included a $12.4 million perpetual license arrangement and $12.6 million allocated to the divested assets. The Company reported a $1.0 million net loss from discontinued operations.
- The 2019 follow-on offering raised $60.0 million net; 1,755,500 shares were issued at $36.50 per share. Outstanding shares at year-end were 16.7 million.
- Effective January 1, 2019, the Company concluded that collection was probable for all international stocking distributors and changed the timing of revenue recognition for those customers to when control transfers. The filing says this followed a review of collection history.
Outlook, commentary, and risks
Management stated that cash, borrowing availability, product-sale receipts, and offering proceeds were expected to fund anticipated requirements for at least the next 12 months. The Company expected continued losses in the near term while investing in product development, sales infrastructure, and consigned inventory. It did not provide numerical revenue or earnings guidance. Its stated plans included targeting R&D spending of 7%–9% of sales and aspiring to launch at least one new surgical system and multiple product extensions annually.
- Planned or developing products included systems for slipped capital femoral epiphysis and neuromuscular scoliosis in 2020, a tibia nailing platform in late 2020, and active growing implants and spine tethering; timing and regulatory requirements for some programs remained uncertain.
- Key operating risks include sustained losses and cash burn; dependence on independent sales agencies and distributors; high inventory and instrument-set requirements; reliance on third-party manufacturers and suppliers; competition and surgeon adoption; product quality and liability; reimbursement and regulatory requirements, including the EU Medical Devices Regulation; and foreign-exchange exposure.
- Two U.S. sales agencies each accounted for approximately 12% of 2019 revenue. The filing also notes that the Company uses Structure Medical, a Squadron-affiliated supplier, and paid it $3.9 million in 2019.
- K2M, Inc. alleges patent infringement relating to instruments used in the RESPONSE spine systems and seeks unspecified damages. OrthoPediatrics disputes the claims; trial was scheduled for April 2021, and mediation in February 2020 did not resolve the matter. The Company cautioned an adverse outcome could materially affect its business and financial condition.
- The auditor issued an unmodified opinion on the financial statements. Management reported effective disclosure controls and internal control over financial reporting; the auditor was not required to attest to internal-control effectiveness.
Important facts for investors to verify
- Whether revenue growth and gross-margin improvement can continue while the Company remains loss-making and cash-flow negative.
- How inventory deployment, collections, and operating cash use evolve, particularly given the year-over-year increases in inventory and receivables.
- The final economics and ongoing revenue recognition of the Vilex divestiture, Orthex license, and mutual distribution arrangements with Squadron.
- Debt balances, interest expense, covenant compliance, maturity and repayment capacity, and the terms of related-party transactions.
- Progress, launch timing, regulatory clearance, and commercial uptake of pipeline products, alongside the outcome and potential exposure from the K2M litigation.