OrthoPediatrics Corp. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; unaudited. Dollar amounts below are in millions unless otherwise noted. OrthoPediatrics designs and sells pediatric orthopedic implants, instruments and braces.
Financial performance
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Net revenue | $44.7 | $31.6 | +41% |
| Gross profit | $32.2 | $23.6 | +37% |
| Gross margin | 72% | 75% | Down 3 percentage points |
| Operating loss | $(9.7) | $(8.6) | Loss widened |
| Net loss | $(7.8) | $(6.8) | Loss widened 15% |
| Net loss per share | $(0.34) | $(0.30) | |
| Net cash used in operating activities | $(6.7) | $(6.5) |
- Revenue growth reflected the Boston O&P acquisition and stronger performance across trauma and deformity, international scoliosis and specialty bracing. U.S. revenue was $34.3 million; international revenue was $10.4 million.
- Trauma and deformity revenue rose 42% to $33.3 million; scoliosis rose 44% to $10.2 million; sports medicine/other increased 5% to $1.2 million.
- Cost of revenue increased 56%, faster than sales, driven by volume, acquisition-related costs and mix, including additional international sales. Operating expenses increased 30% to $41.9 million; G&A rose 44% to $24.7 million, primarily reflecting Boston O&P.
- Other expense was $0.6 million, versus $1.2 million of other income in Q1 2023, principally reflecting higher net interest expense and the absence of the prior-year contingent-consideration fair-value gain. The income-tax benefit was $2.5 million, partly related to tax accounting from the Boston O&P acquisition.
Liquidity, cash flow and debt
- At March 31, cash and cash equivalents were $21.6 million, restricted cash $2.0 million and short-term investments $26.1 million, totaling $49.7 million. This compares with $82.3 million at December 31, 2023; the decline included the Boston O&P acquisition and operating and capital spending.
- Operating cash use was $6.7 million. Investing cash use was $3.7 million, including $6.5 million of property and equipment purchases, primarily instrument sets, and $20.7 million paid for Boston O&P, partly offset by sales of investments. Financing cash use was $0.6 million.
- Gross debt was approximately $11.3 million, including the $10.3 million MidCap term loan and mortgage and acquisition-note balances. The company also reported $14.0 million of acquisition installment payables, current and long-term. The $80 million MidCap agreement provides for up to $30 million in term loans, subject to draw conditions, and a $50 million revolving facility; the filing does not report revolver borrowings at quarter-end.
- The MidCap facility carries floating-rate interest and includes minimum trailing-12-month revenue covenants. The company reported compliance as of March 31, 2024. Management stated that cash, investments and expected operating cash flows should fund current and essential planned operations for more than 12 months, while noting recurring losses and continued near-term losses.
Material changes, outlook and risks
- On January 5, 2024, the company acquired Boston O&P for $22.0 million in cash consideration. The acquisition added pediatric orthotic and prosthetic products and clinical services; purchase-price allocation included $9.0 million of goodwill. Management attributed part of revenue and expense growth to the acquisition.
- No specific revenue, earnings or cash-flow guidance is provided in this filing. Management expects continued investment in products, sales infrastructure and consigned instrument and implant sets. Revenue is typically higher during summer and holiday periods, making quarterly comparisons seasonal.
- Inventory rose to $112.7 million from $105.9 million, reflecting the company’s need to place consigned sets at hospitals ahead of use. Management identifies hospital capacity, elective-procedure deferrals, respiratory illness and lingering pandemic effects as potential demand risks.
- Contingencies include an IMED dispute over ownership of patented planning software; IMED reported in April 2024 that it had arranged litigation funding to pursue arbitration. The company also assumed Boston O&P litigation alleging wrongful death; trial is scheduled for December 2025. Management says it intends to defend both matters but warns adverse outcomes could materially affect results.
- The company recorded $0.5 million of Q1 expense for estimated shortfalls against FIREFLY procedure-performance requirements. Remaining 7D FLASH purchase commitments were $1.8 million for 2024 and $1.5 million for 2025.
- Subsequent to quarter-end, the company paid the final ApiFix installment on April 1 using $2.3 million in cash and 245,812 shares. On May 1, it paid the first MedTech installment using $1.3 million in cash and 42,882 shares.
Important facts for investors to verify
- How much of the 41% revenue increase reflects ongoing organic growth versus Boston O&P and other acquired operations.
- Whether gross margin can recover from 72% as acquisition and international sales mix evolve.
- Inventory growth, operating cash use and capital spending relative to sales growth and available liquidity.
- MidCap facility availability, borrowing costs, covenant headroom and future acquisition-related cash and share payments.
- Developments in the IMED arbitration and Boston O&P litigation, including potential financial exposure.
- Progress integrating Boston O&P’s systems and controls; management reported disclosure controls were effective and said integration work was ongoing.