OrthoPediatrics Corp. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Financial amounts below are in U.S. dollars; figures are rounded to millions unless noted. The company designs and markets orthopedic implants and devices for pediatric patients.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $26.7m | $13.6m | $48.2m | $29.9m |
| Gross profit | $20.4m | $10.1m | $36.8m | $22.3m |
| Gross margin | 77% | 74% | 76% | 74% |
| Operating loss | $(2.8)m | $(7.0)m | $(8.8)m | $(11.5)m |
| Net loss | $(3.8)m | $(9.4)m | $(14.1)m | $(14.4)m |
| Basic and diluted loss per share | $(0.19) | $(0.54) | $(0.73) | $(0.85) |
Q2 revenue increased 96% year over year; first-half revenue increased 61%. Growth reflected recovery from the pandemic-related procedure slowdown in the 2020 comparison period, the direct-sales transition in Germany, Austria and Switzerland, and higher unit volumes. Q2 U.S. revenue was $21.7m and international revenue $5.0m. First-half sales were led by trauma and deformity ($32.5m) and scoliosis ($13.6m). Management attributed category growth primarily to volume rather than pricing.
First-half operating expenses were $45.6m, up 35%, including sales and marketing of $19.8m, general and administrative expense of $23.1m, and research and development of $2.6m. Higher sales commissions, business expansion and acquired businesses contributed to expense growth. First-half other expense rose to $5.9m, including a $5.1m noncash fair-value increase in ApiFix contingent consideration and $1.2m of accretion expense on acquisition installment payments.
Cash, liquidity and debt
- At June 30, cash and cash equivalents were $10.6m, restricted cash $1.4m, and short-term investments $55.3m: $67.2m combined. Combined cash, restricted cash and investments were $85.3m at December 31, 2020.
- First-half operating cash use was $10.9m, investing cash use $7.3m, and financing cash use was immaterial. Cash and restricted cash declined $18.2m to $11.9m. Working-capital uses included $3.3m for inventory growth and $6.3m for legal settlements.
- Total liabilities were $86.1m and stockholders’ equity $221.6m. The company had $1.1m of mortgage debt to an affiliate; it reported no borrowings under its $25m Squadron revolving facility. The facility carries a 0.50% unused commitment fee, is secured by substantially all company assets, and matures no later than January 1, 2024.
- ApiFix future consideration included $26.2m of installment payables and $35.9m of contingent consideration at quarter-end. The company expected to make the approximately $13m second-anniversary ApiFix payment in the second half of 2021.
Outlook, risks and unusual items
No specific revenue, earnings or margin guidance is provided. Management expects losses to continue in the near term while it expands its product portfolio, sales infrastructure and consigned instrument sets. Management stated that available 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.
COVID-19 continues to create uncertainty around elective procedures, hospital capacity, staffing, travel and supply chains; the company said the duration and financial impact were not reasonably estimable. It reported no significant pandemic-related supply interruptions to date, while noting that it increased certain inventory levels. The business requires substantial consigned inventory and has seasonal procedure patterns.
Legal matters include an unresolved IMED Surgical dispute over ownership of planning software; the company disputes the claims but says an adverse outcome could materially affect its business, results and financial condition. The K2M patent case was settled and dismissed in June 2021, with the previously accrued liability paid in Q2. A separate Barry patent matter was settled in March 2021 through a license recorded at $2.9m. Other notable exposures include variable ApiFix contingent payments, foreign-currency translation, inventory obsolescence, and reliance on third-party manufacturers and independent sales agencies.
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 2020 Form 10-K.
Investor verification priorities
- Track whether revenue growth persists beyond the pandemic recovery comparison and whether international direct-sales expansion delivers the expected returns.
- Monitor cash consumption, inventory build, and management’s stated liquidity runway against continued operating losses.
- Verify the timing and form of ApiFix anniversary payments and changes in contingent consideration fair value.
- Follow developments in the IMED software dispute and any resulting operational, licensing or financial consequences.
- Assess whether rising selling and administrative costs remain proportionate to revenue growth and whether gross-margin gains continue.