What changed in this filing

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Item 1. Financial Statements

2021-05-06 compared with 2020-11-05 · 257 added, 289 removed, 494 unchanged (53% of the section changed)

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(In Thousands, Except Share Data)

September 30, 2020 December 31, 2019

March 31, 2021 December 31, 2020

Current assets:

Cash $ 88,372 $ 70,777

Cash and cash equivalents $ 21,426 $ 28,758

Restricted cash 1,369 1,374

Short term investments 55,209 55,141

Accounts receivable - trade, less allowance for doubtful accounts of $ 361 and $ 433 , respectively

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Accrued compensation and benefits 4,850 4,540

Accrued legal settlements 5,250 6,342

Current portion of long-term debt with affiliate 132 131

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Contingent consideration 34,860 30,710

Deferred income taxes 5,233 5,755

Other long-term liabilities 315 323

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50,000,000 shares authorized;

19,554,621 shares and 16,723,128 shares issued as of September 30, 2020 (unaudited) and December 31, 2019, respectively

19,659,412 shares and 19,560,291 shares issued as of March 31, 2021 (unaudited) and December 31, 2020, respectively

Additional paid-in capital 390,000 388,622

Accumulated deficit ( 172,145 ) ( 161,766 )

Accumulated other comprehensive income (loss) 67 ( 3 )

Accumulated other comprehensive income 4,285 7,907

Total stockholders' equity 222,145 234,768

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(In Thousands, Except Share and Per Share Data)

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

Three Months Ended March 31,

Net revenue $ 21,462 $ 16,356

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Fair value adjustment of contingent consideration 4,150 —

Other expense 122 41 312 78

Other (income) expense ( 160 ) 69

Total other expenses 4,718 448

Net loss from continuing operations $ ( 4,539 ) $ ( 2,877 ) $ ( 18,931 ) $ ( 8,356 )

Net income from discontinued operations — 213 — 54

Loss before income taxes $ ( 10,691 ) $ ( 4,945 )

Provision for income taxes (benefit) ( 312 ) —

Net loss $ ( 10,379 ) $ ( 4,945 )

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(In Thousands)

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

Three Months Ended March 31,

Net loss $ ( 10,379 ) $ ( 4,945 )

Other comprehensive (loss) income:

Other comprehensive loss:

Foreign currency translation adjustment ( 3,499 ) ( 1,358 )

Other comprehensive (loss) income ( 94 ) ( 530 ) 70 ( 362 )

Unrealized loss on short-term investments ( 123 ) —

Other comprehensive loss ( 3,622 ) ( 1,358 )

Comprehensive loss $ ( 14,001 ) $ ( 6,303 )

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(In Thousands, Except Share Data)

Three and Nine Months Ended September 30, 2020

Three Months Ended March 31, 2021

Additional Other Total

Common Stock Treasury Stock Paid-in Accumulated Comprehensive Stockholders'

Shares Value Shares Value Capital Deficit Income (Loss) Equity

Common Stock Paid-in Accumulated Comprehensive Stockholders'

Shares Value Capital Deficit Income (Loss) Equity

Balance at January 1, 2021 19,560,291 $ 5 $ 388,622 $ ( 161,766 ) $ 7,907 $ 234,768

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Restricted stock 97,111 — 1,316 — — 1,316

Consideration for Telos Acquisition 36,628 — — — 1,750 — — 1,750

Repurchase of common stock — — ( 4,014 ) ( 187 ) — — — ( 187 )

Balance at March 31, 2021 19,659,412 $ 5 $ 390,000 $ ( 172,145 ) $ 4,285 $ 222,145

Net Loss — — — — — ( 9,447 ) — ( 9,447 )

Other comprehensive loss — — — — — — 1,522 1,522

Stock option exercise 19,162 — — — 593 — — 593

Restricted stock 52,032 — — — 2,495 — — 2,495

Consideration for ApiFix acquisition and Band-Lok intellectual property purchase 989,154 — — — 37,638 — — 37,638

Issuance of common stock, net of issuance cost 1,595,986 1 4,014 187 70,206 — — 70,394

Balance at June 30, 2020 19,544,008 $ 5 — $ — $ 385,510 $ ( 143,214 ) $ 161 $ 242,462

Net Loss — — — — — ( 4,539 ) — ( 4,539 )

Other comprehensive loss — — — — — — ( 94 ) ( 94 )

Stock option exercise 11,230 — — — 348 — — 348

Restricted stock ( 617 ) — — — 1,259 — — 1,259

Balance at September 30, 2020 19,554,621 $ 5 — — $ 387,117 $ ( 147,753 ) $ 67 $ 239,436

ORTHOPEDIATRICS CORP.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(In Thousands, Except Share Data)

Three and Nine Months Ended September 30, 2019

Three Months Ended March 31, 2020

Additional Other Total

Common Stock Paid-in Accumulated Comprehensive Stockholders'

Shares Value Capital Deficit Income (Loss) Equity

Common Stock Treasury Stock Paid-in Accumulated Comprehensive Stockholders'

Shares Value Shares Value Capital Deficit Income (Loss) Equity

Balance at January 1, 2020 16,723,128 $ 4 — — 271,182 ( 128,822 ) ( 3 ) 142,361

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Restricted stock 105,710 — — — 958 — — 958

Consideration for Telos acquisition 36,628 — — — 1,750 — — 1,750

Repurchase of common stock — — ( 4,014 ) ( 187 ) — — — ( 187 )

Balance at March 31, 2020 16,887,674 $ 4 ( 4,014 ) $ ( 187 ) $ 274,578 $ ( 133,767 ) $ ( 1,361 ) $ 139,267

Net Loss — — — ( 2,618 ) — ( 2,618 )

Other comprehensive loss — — — — ( 133 ) ( 133 )

Acquisition consideration 245,352 — 10,000 — — 10,000

Stock option exercise 2,983 — 92 — — 92

Restricted stock 8,729 — 692 — — 692

Balance at June 30, 2019 14,939,462 $ 4 $ 209,262 $ ( 120,729 ) $ ( 455 ) $ 88,082

Net Loss — — — ( 2,664 ) — ( 2,664 )

Other comprehensive loss — — — — ( 530 ) ( 530 )

Stock option exercise 17,511 — 484 — — 484

Restricted stock 10,155 — 733 — — 733

Balance at September 30, 2019 14,967,128 $ 4 $ 210,479 $ ( 123,393 ) $ ( 985 ) $ 86,105

See notes to condensed consolidated financial statements.

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(In Thousands)

Nine Months Ended

September 30,

Three Months Ended

OPERATING ACTIVITIES

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Acquisition installment payable 644 —

Deferred income taxes ( 312 ) —

Changes in certain current assets and liabilities:

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Accounts payable - trade 2,058 1,739

Accrued legal settlements ( 1,092 ) —

Accrued expenses and other liabilities 446 ( 1,694 )

Other ( 138 ) 3

Net cash used in operating activities - continuing operations ( 18,373 ) ( 11,433 )

Net cash provided by operating activities - discontinued operations — 590

Net cash used in operating activities ( 1,915 ) ( 6,956 )

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Acquisition of Telos, net of cash acquired — ( 1,670 )

Acquisition of ApiFix, net of cash acquired ( 1,723 ) —

Acquisition of Band-Lok intangible assets ( 796 ) —

Acquisition of Vilex and Orthex, net of cash acquired — ( 49,687 )

Purchases of licenses ( 2,858 ) —

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FINANCING ACTIVITIES

Proceeds from issuance of debt with affiliate — 30,000

Payments on debt with affiliate — ( 5,000 )

Proceeds from issuance of common stock, net of issuance costs 70,207 —

Repurchases of common shares — ( 187 )

Proceeds from exercise of stock options 62 688

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Effect of exchange rate changes on cash 155 23

NET INCREASE (DECREASE) IN CASH 17,714 ( 40,183 )

NET DECREASE IN CASH ( 7,337 ) ( 17,086 )

Cash and restricted cash, beginning of year $ 30,132 $ 72,027

Cash and restricted cash, end of period $ 22,795 $ 54,941

Less cash of discontinued operations, end of period $ — $ 839

Cash of continuing operations, end of period $ 89,741 $ 19,669

SUPPLEMENTAL DISCLOSURES

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Transfer of instruments from property and equipment to inventory $ 57 $ 182

Issuance of common shares to acquire Vilex and Orthex $ — 10,000

Issuance of common shares to acquire Telos $ — $ 1,750

Issuance of common shares to acquire ApiFix $ 35,176 $ —

Issuance of common shares to acquire Band-Lok intellectual property $ 2,644 $ —

See notes to condensed consolidated financial statements.

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OrthoPediatrics Corp., a Delaware corporation, is a medical device company committed to designing, developing and marketing anatomically appropriate implants and devices for children with orthopedic conditions, giving pediatric orthopedic surgeons and caregivers the ability to treat children with technologies specifically designed to meet their needs.

We sell our specialized products, including PediLoc ® , PediPlates ® , Cannulated Screws, PediFlex TM nail, PediNail TM , PediLoc ® Tibia, ACL Reconstruction System, Locking Cannulated Blade, Locking Proximal Femur, Spica Tables, RESPONSE Spine, Bandloc, Pediguard, Pediatric Nailing Platform | Femur, Orthex, QuickPack TM and ApiFix to various hospitals and medical facilities throughout the United States and various international markets.

We sell our specialized products, including PediLoc ® , PediPlates ® , Cannulated Screws, PediFlex TM nail, PediNail TM , PediLoc ® Tibia, ACL Reconstruction System, Locking Cannulated Blade, Locking Proximal Femur, Spica Tables, RESPONSE TM Spine, BandLoc TM , Pediguard, Pediatric Nailing Platform | Femur, Orthex, QuickPack TM and ApiFix ® Mid-C System, to various hospitals and medical facilities throughout the United States and various international markets.

We currently use a contract manufacturing model for the manufacturing of implants and related surgical instrumentation.

In 2017, we expanded operations and established legal entities in the United Kingdom, Australia and New Zealand, permitting us to sell under an agency model direct to local hospitals in these countries.

In September 2018, we further expanded operations in Canada selling direct to local hospitals, and in January 2019 we expanded to Belgium and the Netherlands.

Additionally, in March 2019 we established a holding company and an operating company in the Netherlands and began selling direct to Italy in March 2020 enhancing our operations in Europe.

We began selling direct to Canada in September 2018, Belgium and the Netherlands in January 2019, Italy in March 2020 and Germany, Switzerland and Austria in January 2021.

Additionally, in March 2019, we established an operating company in the Netherlands in order to enhance our operations in Europe.

On June 4, 2019, we purchased all the issued and outstanding shares of stock of Vilex in Tennessee, Inc.

("Vilex") and all the issued and outstanding units of membership interests in Orthex, LLC ("Orthex") for $ 60,000 in total consideration.

Vilex and Orthex (the "Vilex Companies") are primarily manufacturers of foot and ankle surgical implants, including cannulated screws, fusion devices, surgical staples and bone plates, as well as Orthex Hexapod technology which is used to treat pediatrics congenital deformities and limb length discrepancies.

Vilex and Orthex are primarily manufacturers of foot and ankle surgical implants, including cannulated screws, fusion devices, surgical staples and bone plates, as well as Orthex Hexapod technology which is used to treat pediatrics congenital deformities and limb length discrepancies (refer to Note 3).

On December 31, 2019, we divested substantially all of the assets relating to Vilex's adult product offerings to a wholly-owned subsidiary of Squadron Capital LLC ("Squadron") in exchange for a $ 25,000 reduction in a Term Note owed to Squadron in connection with the initial acquisition.

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On March 9, 2020, we purchased all the issued and outstanding membership interest of Telos Partners, LLC ("Telos") for $ 3,300 in total consideration.

Telos is a boutique regulatory consulting firm formed in Colorado.

Telos is a boutique regulatory consulting firm formed in Colorado (refer to Note 3).

On April 1, 2020, we purchased all the issued and outstanding membership interest of ApiFix, Ltd.

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and (iii) $ 9,000 on the fourth anniversary of the closing date.

In addition, to the extent that the product of our revenues from the ApiFix System for the twelve months ended June

30, 2024 multiplied by 2.25 exceeds the anniversary payments actually made for the third and fourth years, we have agreed to pay the selling shareholders a system sales payment in the amount of such excess.

The anniversary payments and system sales payment may each be made in cash or cash and common stock.

In addition, to the extent that the product of our revenues from the ApiFix System for the twelve months ended June 30, 2024 multiplied by 2.25 exceeds the anniversary payments actually made for the third and fourth

years, we have agreed to pay the selling shareholders a system sales payment in the amount of such excess.

The anniversary payments and system sales payment may each be made in cash or cash and common stock (refer to Note 3).

On June 10, 2020, we purchased certain intellectual property assets from Band-Lok, LLC, a North Carolina limited liability company ("Band-Lok"), related to its Tether Clamp and Implantation System ("Tether Clamp System") for approximately $ 3,400 in total consideration.

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Our largest investor is Squadron, a private investment firm based in Granby, Connecticut.

A novel strain of the coronavirus disease ("COVID-19") was first identified in Wuhan, China in December 2019, and the related outbreak was subsequently declared a pandemic by the World Health Organization and a national emergency by the President of the United States.

As a result of the pandemic, we have experienced significant business disruption.

For example, in preparation for COVID-19-related hospitalizations, various governments, governmental agencies and hospital administrators have instructed hospitals to postpone some elective procedures in both our domestic and international markets to various degrees.

As a majority of our products are utilized in elective surgeries or procedures, the deferrals of such surgeries and procedures have had, and may continue to have, a significant negative impact on our business and results of operations.

Despite the impact COVID-19 has had on our business, we continue to invest in research and development, invest in our people, and take steps to position ourselves for long-term success.

The extent to which COVID-19 may continue to negatively impact the Company's consolidated financial position, results of operations or cash flows is uncertain and will be closely monitored.

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES

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The accompanying condensed consolidated financial statements include the accounts of OrthoPediatrics Corp.

and its wholly-owned subsidiaries, OrthoPediatrics US Distribution Corp., OrthoPediatrics EU Limited, OrthoPediatrics AUS PTY LTD, OrthoPediatrics NZ Limited, OP EU B.V., OP Netherlands B.V., Vilex in Tennessee, Inc., Orthex, LLC, Telos Partners, LLC, ApiFix Ltd.

and ApiFix Inc.

(collectively, the “Company,” “we,” “our” or “us”).

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We have prepared the accompanying condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”).

The accompanying condensed consolidated balance sheets as of September 30, 2020 and December 31, 2019, the condensed consolidated statements of operations for the three and nine months ended September 30, 2020 and 2019, the condensed consolidated statements of comprehensive loss for the three and nine months ended September 30, 2020 and 2019, the condensed consolidated statements of stockholders’ equity for the three and nine months ended September 30, 2020 and 2019 and the condensed consolidated statements of cash flows for the nine months ended September 30, 2020 and 2019 are unaudited and should be read in conjunction with the annual consolidated financial statements as of and for the year ended December 31, 2019 and related notes thereto contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC") on March 5, 2020.

The accompanying condensed consolidated balance sheets as of March 31, 2021 and December 31, 2020, the condensed consolidated statements of operations for the three months ended March 31, 2021 and 2020, the condensed consolidated statements of comprehensive loss for the three months ended March 31, 2021 and 2020, the condensed consolidated statements of stockholders’ equity for the three months ended March 31, 2021 and 2020 and the condensed consolidated statements of cash flows for the three months ended March 31, 2021 and 2020 are unaudited and should be read in conjunction with the annual consolidated financial statements as of and for the year ended December 31, 2020 and related notes thereto contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC") on March 11, 2021.

The financial data and other financial information disclosed in the notes to the accompanying condensed consolidated financial statements are also unaudited.

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The unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements as of and for the year ended December 31, 2020 and, in management’s opinion, include all adjustments, consisting of only normal recurring adjustments, necessary for the fair presentation of the financial statements for the interim periods.

The results of operations for the three and nine months ended September 30, 2020 are not necessarily indicative of the results to be expected for the full fiscal year or for any other period.

The results of operations for the three months ended March 31, 2021 are not necessarily indicative of the results to be expected for the full fiscal year or for any other period.

The accompanying condensed consolidated financial statements have been prepared assuming our Company will continue as a going concern.

We have experienced recurring losses from operations since our inception and had an accumulated deficit of $ 147,753 and $ 128,822 as of September 30, 2020 and December 31, 2019, respectively.

We have experienced recurring losses from operations since our inception and had an accumulated deficit of $ 172,145 and $ 161,766 as of March 31, 2021 and December 31, 2020, respectively.

Management continues to monitor cash flows and liquidity on a regular basis.

We believe that our cash balance at September 30, 2020 and expected cash flows from operations

for the next twelve months subsequent to the issuance of the accompanying condensed consolidated financial statements, are sufficient to enable us to maintain current and essential planned operations for more than the next twelve months.

On June 22, 2020, we completed a follow-on offering of our common stock, in which we issued and sold 1.6 million shares of common stock at a public offering price of $ 47.00 per share for aggregate gross proceeds of $ 75,200 .

We received $ 70,207 in net proceeds after deducting $ 4,512 of underwriting discounts and commissions and paying $ 481 in offering costs.

We believe that our cash balance, including short term investments, at March 31, 2021 and expected cash flows from operations for the next twelve months subsequent to the issuance of the accompanying condensed consolidated financial statements, are sufficient to enable us to maintain current and essential planned operations for more than the next twelve months.

Use of Estimates

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Foreign Currency Transactions

We currently bill our international distributors in United States ("U.S.") dollars, resulting in minimal foreign exchange transaction expense.

We currently bill our international stocking distributors in U.S.

dollars, resulting in minimal foreign exchange transaction expense.

Beginning in the second quarter of 2017, we began selling direct within the United Kingdom, Ireland, Australia and New Zealand and billing using the local currency for each country.

In September 2018, we began selling direct in Canada, in January 2019 in Belgium and the Netherlands, in March 2020 in Italy and in April 2020 in Israel.

The financial statements of our foreign subsidiaries are accounted for and have been translated into U.S.

We began selling direct to Canada in September 2018, Belgium and the Netherlands in January 2019, Italy in March 2020 and Germany, Switzerland and Austria in January 2021.

Additionally, in March 2019, we established an operating company in the Netherlands in order to enhance our operations in Europe.

The financial statements of our foreign subsidiaries are accounted for in local functional currencies including and have been translated into U.S.

dollars using end-of-period exchange rates for assets and liabilities and average exchange rates during each reporting period for results of operations.

Local functional currencies include primarily the Pound Sterling, the Euro, Australian Dollar, Canadian Dollar and Israeli Shekel.

Foreign currency translation adjustments have been recorded as a separate component of the condensed consolidated statements of comprehensive loss.

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Revenue Recognition – International

Outside of the United States, we primarily sell our products through independent stocking distributors.

Outside of the United States, we sell our products directly to hospitals through independent sales agencies or to independent stocking distributors.

Generally, the distributors are allowed to return products, and some are thinly capitalized;

Based on our history of collections and returns from international customers, prior to 2019, we concluded that collectability was not reasonably assured at the time of delivery for certain customers who had not evidenced a consistent pattern of timely payment.

Accordingly, in the past we did not recognize international revenue and associated cost of revenue at the time title transfers for these customers for whom collectability had not been deemed probable based on the customer’s history and ability to pay, but rather when cash had been received.

Following a review of our collection history, we deemed collectability was probable for all international stocking distributors effective January 1, 2019.

Based on a history of reliable collections, we have concluded that a contract exists and revenue should be recognized when our performance obligations under the terms of the contract with our customer are satisfied.

This typically occurs when we transfer control of our products to the customer, generally upon implantation or when title passes upon shipment.

In the countries where we sell under an agency model direct to local hospitals, the products are generally consigned to our independent sales agencies, and revenue is recognized when the products are used by or shipped to the hospital for surgeries on a case by case basis.

On rare occasions, hospitals purchase products for their own inventory, and revenue is recognized when the products are shipped and the title and risk of loss passes to the customer.

Pricing for each customer is dictated by a unique pricing agreement, which does not generally include rebates or discounts.

Cash and Cash Equivalents

however, based on a history of reliable collections, we have concluded that a contract exists and revenue should be recognized when we transfer control of our products to the customer, generally when title passes upon shipment.

Additionally, based on our history of immaterial returns from international customers, we have historically estimated no reserve for returns.

The products are generally consigned to our independent sales agencies, and revenue is recognized when the products are used by or shipped to the hospital for surgeries on a case by case basis.

On rare occasions, hospitals purchase products for their own inventory, and revenue is recognized when title passes upon shipment.

Pricing for each customer is dictated by a unique pricing agreement.

Cash, Cash Equivalents and Short Term Investments

We maintain cash in bank deposit accounts which, at times, may exceed federally insured limits.

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We consider all highly liquid investments with original maturity of three months or less at inception to be cash equivalents.

The carrying amounts reported in the balance sheet for cash are valued at cost, which approximates fair value.

Accounts Receivable

The carrying amounts reported in the balance sheets for cash are valued at cost, which approximates fair value.

The Company invests in available-for-sale short term investments.

The Company has the ability, if necessary, to liquidate without penalty any of its short term investments to meet its liquidity needs in the next twelve months.

As such, those investments with contractual maturities greater than one year from the date of purchase are classified as short-term on the accompanying Consolidated Balance Sheets.

The company includes unrealized gains or losses in stockholders' equity.

If the adjustment to fair value reflects a decline in the value of the investment, the Company considers available information to determine whether the decline is "other than temporary" and, if so, reflects the change on the Consolidated Statements of Operations.

Restricted Cash

In conjunction with the sale of a business acquired in 2019, $ 1,250 was placed into a separate escrow account.

This cash is reported as restricted cash on the March 31, 2021 and 2020 consolidated balance sheet.

These funds will remain restricted until August 31, 2021 at which time, they will be released to the Company subject to no claims related to the purchase.

The Company also maintains restricted cash of 100 Euro at its Netherlands entity for potential Italian tenders.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are uncollateralized customer obligations due under normal trade terms, generally requiring payment within 30 days from the invoice date.

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All accounts or portions thereof deemed to be uncollectible or to require an excessive collection cost are written off to the allowance for doubtful accounts.

Fair Value of Financial Instruments

The accounting standards related to fair value measurements define fair value and provide a consistent framework for measuring fair value under the authoritative literature.

Valuation techniques are based on observable and unobservable inputs.

Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect market assumptions.

This guidance only applies when other standards require or permit the fair value measurement of assets and liabilities.

The guidance does not expand the use of fair value measurements.

A fair value hierarchy was established, which prioritizes the inputs used in measuring fair value into three broad levels.

Level 1 – Quoted prices in active markets for identical assets or liabilities;

Level 2 – Observable market-based inputs or unobservable inputs that are corroborated by market data;

Level 3 – Significant unobservable inputs that are not corroborated by market data.

Generally, these fair value measures are model-based valuation techniques such as discounted cash flows, and are based on the best information available, including our own data.

The Company's financial instruments include cash and cash equivalents, short-term investments, accounts receivable, accounts payable, acquisition installment payables, contingent consideration and long-term debt.

The carrying amounts of accounts receivable, accounts payable, acquisition installment payables and long-term debt approximate the fair value due to the short-term nature or market rates of these instruments.

The company bases the fair value of short-term investments on quoted market prices for identical or comparable assets.

Contingent consideration represents the system sales payment the Company is obligated to make.

The fair value of the contingent consideration payment is considered a level 3 fair value measurement and was determined with the assistance of an independent valuation specialist at the original issuance date and as of the balance sheet date.

See Note 5 for further discussion of financial instruments that carried a fair value on a recurring and nonrecurring basis.

Inventories, net

Inventories are stated at the lower of cost or net realizable value, with cost determined using the first-in-first-out method.

Inventories, which consist of implants and instruments held in our warehouse or with third-party independent sales agencies or distributors, are considered finished goods and are purchased from third parties.

Inventories purchased from third parties, which consist of implants and instruments held in our warehouse or with third-party independent sales agencies or distributors, are considered finished goods.

We evaluate the carrying value of our inventories in relation to the estimated forecast of product demand, which takes into consideration the life cycle of the product.

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Instruments are hand-held devices, specifically designed for use with our implants and are used by surgeons during surgery.

Instruments deployed within the United States, United Kingdom, Australia, New Zealand, Canada, Belgium, the Netherlands and Italy are carried at cost less accumulated depreciation and are recorded in property and equipment, net on the condensed consolidated balance sheets.

Instruments deployed within the United States, United Kingdom, Australia, New Zealand, Canada, Belgium, the Netherlands, Italy, Germany, Switzerland and Austria are carried at cost less accumulated depreciation and are recorded in property and equipment, net on the condensed consolidated balance sheets.

Sample inventory consists of our implants and instruments, and is maintained to market and promote our products.

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Amortizable intangible assets are assessed for impairment annually or whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable.

Recoverability is

measured by a comparison of the carrying amount to future net undiscounted cash flows expected to be generated by the associated asset.

Recoverability is measured by a comparison of the carrying amount to future net undiscounted cash flows expected to be generated by the associated asset.

If such assets are determined to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount exceeds the fair market value of the assets.

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The goodwill is considered to be impaired if we determine that the carrying value of the reporting unit exceeds its respective fair value.

We have indefinite lived tradename assets that are reviewed for impairment by performing a quantitative analysis, which occurs annually in the fourth quarter or whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable.

We have indefinite lived tradename assets that are reviewed for impairment annually in the fourth quarter or whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable.

Recoverability is measured by a comparison of the carrying amount to future net undiscounted cash flows expected to be generated by the associated asset.

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No impairment charges were recorded in any of the periods presented.

Acquisition Payable and Contingent Consideration

Upon the completion of an acquisition, the Company may record an acquisition installment payable, contingent consideration or both.

Both are recorded at their fair values as determined by management with the assistance of an independent valuation specialist at the original issuance date and are adjusted on a recurring basis.

Accretion of interest expense attributable to the acquisition installment payable are recorded as a component of interest expense, net.

Changes in the fair value of the contingent consideration are included in fair value adjustments of contingent consideration.

The amount of expense recorded in interest expense, net and fair value adjustments of contingent consideration for the three months ended March 31, 2021 were $ 644 and $ 4,150 , respectively.

We recorded no interest expense or fair value adjustments for the three months ended March 31, 2020.

Cost of Revenue

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Stock-based compensation is recognized ratably over the requisite service period, which is generally the restriction period for restricted stock.

Litigation and Contingencies

Accruals for litigation and contingencies are reflected in the condensed consolidated financial statements based on management’s assessment, including advice of legal counsel, of the expected outcome of litigation or other dispute resolution proceedings and/or the expected resolution of contingencies.

Liabilities for estimated losses are accrued if the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated.

Significant judgment is required in both the determination of probability of loss and the determination as to whether the amount is reasonably estimable.

Accruals are based only on information available at the time of the assessment due to the uncertain nature of such matters.

As additional information becomes available, management reassesses potential liabilities related to pending claims and litigation and may revise its previous estimates, which could materially affect the Company’s results of operations in a given period.

Comprehensive Income (Loss)

Comprehensive income (loss) is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources.

Comprehensive income (loss) includes foreign currency translation adjustments.

Comprehensive income (loss) includes foreign currency translation adjustments and unrealized gain (loss) on our short term investments.

We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the condensed consolidated financial statements.

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We record uncertain tax positions on the bases of a two-step process in which (i) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the positions and (ii) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50% likely to be realized upon ultimate settlement with the related tax authority.

“Emerging Growth Company” Reporting Requirements

“Emerging Growth Company” and "Smaller Reporting Company" Reporting Requirements

We qualify as an “emerging growth company” as defined in the JOBS Act.

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This is an increase of $70 million from the previous $1 billion threshold.

We also qualify as a "smaller reporting company," as such term is defined in Rule 12b-2 under the Exchange Act.

To the extent that we continue to qualify as a smaller reporting company, after we cease to qualify as an emerging growth company, certain of the exemptions available to us as an emerging growth company may continue to be available to us as a smaller reporting company.

Recent Accounting Pronouncements

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The adoption of this guidance is not expected to have a significant impact on the Company's consolidated financial statements and related disclosures.

In January 2017, the FASB issued ASU 2017-04, " Intangibles-Goodwill and Other (Topic 350):

Simplifying the Test for Goodwill Impairment" .

This pronouncement eliminates Step 2 from the goodwill impairment test and requires an entity to perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount.

Under this guidance, an entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value.

It is effective for reporting periods beginning after December 15, 2020, although earlier adoption is permitted.

The Company adopted this standard on January 1, 2020 and it did not have a significant impact on the Company's consolidated financial statements and related disclosures.

In December 2019, the FASB issued ASU No.

2019-12 " Income Taxes:

Simplifying the Accounting for Income Taxes" intended to simplify the accounting for income taxes by eliminating certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside cost basis differences.

The new guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill.

The standard is effective for annual periods beginning after December 15, 2020 and interim periods within, with early adoption permitted.

Adoption of the standard requires certain changes to be made prospectively, with some changes to be made retrospectively.

The Company adopted this standard on January 1, 2020 and it did not have a significant impact on the Company's consolidated financial statements and related disclosures.

NOTE 3 – BUSINESS COMBINATION

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ApiFix, a corporation organized under the laws of Israel, has developed a minimally invasive deformity correction system for patients with Adolescent Idiopathic Scoliosis ("ApiFix System").

The Company incurred $ 311 of acquisition-related costs that are included in general and administrative expenses on the consolidated statements of operations.

The following table reconciles the total consideration transferred after discounting the future payments:

Consideration Present Value

Cash consideration $ 2,000 $ 2,000

Payment of ApiFix transaction related costs 67 67

Issuance of common stock 35,176 35,176

Anniversary Payments 30,000 22,620

System sales payment 41,741 27,190

Total consideration transferred $ 108,984 $ 87,053

The purchase price allocation set forth herein is preliminary.

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Operating lease liabilities 106

Other long-term liabilities 270

Other current liabilities 270

Deferred income taxes 6,487

Total liabilities 7,089

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Non-competition Agreements 200 4 years

The Company recorded a measurement period adjustment of $ 7,930 during fiscal 2020 to increase patents and decrease goodwill related to the refinement of inputs of the acquisition valuation.

The Company is obligated to make anniversary payments of:

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provided that the Company makes the determination with respect to anniversary payments and a representative of the former ApiFix shareholders may make the determination with respect to the system sales payment, if any.

The fair value of the contingent consideration payments is considered a Level 3 investment and were determined by an independent valuation specialist at the original issuance date using an option pricing model and a Monte Carlo simulation based on forecast annual revenue, expected volatility and an implied probability of achieving revenue forecasts.

model and a Monte Carlo simulation based on forecast annual revenue, expected volatility and an implied probability of achieving revenue forecasts.

The fair value of the payment will continue to be adjusted as additional information becomes available regarding the progress toward achievement of the revenue forecast.

The adjustments in the fair value of the contingent consideration payments of $ 909 and $ 1,819 were recognized as an expense for the three and nine month periods ended September 30, 2020, respectively, in other expenses on the condensed consolidated statements of operations.

An additional $ 816 and $ 1,702 were recognized as interest expense for the three and nine month periods ended September 30, 2020, respectively, on the condensed consolidated statements of operations for the adjustment in the fair value of the acquisition installment payable.

Presented below is a summary of the present value of the anniversary payments and system sales payment related to the ApiFix acquisition:

April 1, 2020 September 30, 2020

April 1, 2020 March 31, 2021

Anniversary Payments:

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The Company incurred $ 25 of acquisition-related costs, that are included in general and administrative expenses on the consolidated statements of operations.

The purchase price allocation set forth herein is preliminary.

The purchase price allocation set forth herein is final.

The following table summarizes the total consideration paid for Telos and allocation of purchase price to the estimated fair value of the assets acquired and liabilities assumed at the acquisition date (in thousands):

Description Amount

Preliminary fair value of estimated total acquisition consideration $ 3,318

Fair fair value of total acquisition consideration $ 3,318

Accounts receivable-trade 215

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The fair value of identifiable intangible assets were based on valuations using a combination of the income and cost approach.

The estimated fair value and useful life of identifiable intangible assets are as follows:

Amount Remaining Economic Useful Life

Trademarks / Names $ 210 Indefinite

Customer Relationships 910 10 years

Non-competition Agreements 40 5 years

The Company recorded a measurement period adjustment during fiscal 2020 to increase prepaid expenses and decrease goodwill related to contractual terms.

Vilex and Orthex

On June 4, 2019, the Company purchased all the issued and outstanding shares of stock of Vilex and units of membership interests in Orthex for $ 50,000 in cash, adjusted for working capital, and 245,352 shares of common stock, $ 0.00025 par value per share, of the Company.

The shares of common stock

were valued at $ 40.76 per share, the volume weighted average trading price during the thirty day trading period ending on May 30, 2019.

In addition, $ 3,000 was placed in an escrow account for a period of up to twenty months to cover certain indemnification obligations and to secure certain closing adjustments.

The Company incurred $ 737 of acquisition-related costs, that are included in general and administrative expenses on the consolidated statements of operations.

The purchase price allocation set forth herein is final as to working capital amounts, intangible values and tax accounting matters.

The following table summarizes the total consideration paid for Vilex and Orthex and allocation of purchase price to the estimated fair value of the assets acquired and liabilities assumed at the acquisition date (in thousands):

Description Amount

Fair value of estimated total acquisition consideration $ 60,184

Accounts receivable-trade 2,088

Inventories 3,652

Prepaid expenses and other current assets 12

Property and equipment 7,540

Intangible assets 31,180

Operating lease right-of-use asset 323

Total assets 45,143

Accounts payable and accrued liabilities 563

Operating lease liabilities 323

Deferred tax liability 1,175

Other long-term liabilities 68

Total liabilities 2,129

total net assets 43,014

Goodwill $ 17,170

The fair value of identifiable intangible assets were based on valuations using a combination of the income and cost approach.

The estimated fair value and useful life of identifiable intangible assets are as follows:

The fair value and useful life of identifiable intangible assets are as follows:

Amount Remaining Economic Useful Life

Trademarks / Names $ 210 Indefinite

Patents 22,390 15 years

Internally Developed Software 1,550 10 years

Customer Relationships 910 10 years

Non-competition Agreements 40 5 years

The Company recorded a measurement period adjustment during fiscal 2020 to increase inventory and decrease goodwill related to working capital adjustments to allocate inventory between Orthex and Vilex.

Since the Vilex products include adult offerings that are not core to the Company's pediatric business, the Company received Board approval to take the steps necessary to divest the non-core Vilex assets.

On December 31, 2019, the Company divested substantially all of the assets relating to Vilex's adult product offering to a wholly-owned subsidiary of Squadron Capital, LLC in exchange for a $ 25,000 reduction in a term note owed to Squadron in connection with the initial acquisition along with certain ongoing intellectual property rights.

Of the $ 25,000 purchase price, $ 12,410 was attributable to the license of the Orthex intellectual property and the remaining $ 12,590 was applied to the Vilex assets and liabilities divested.

After the issuance of our December 31, 2019 annual consolidated financial statements, and in connection with the preparation of our condensed consolidated financial statements for the three months ended March 31, 2020, we identified and corrected an immaterial error related to the deferred revenue liability recognized from license of Orthex intellectual property as of December 31, 2019.

The immaterial correction of the error resulted in a reduction of the deferred revenue liability and goodwill on the consolidated balance sheet as of December 31, 2019 of $ 12,410 , based on the conclusion that the consideration transferred was allocable to a portion of certain Orthex patent assets sold concurrently with the sale of Vilex.

We have evaluated the adjustment and, based on an analysis of quantitative and qualitative factors, determined that the related impact was not material to our consolidated financial statements for any prior annual or interim period presented.

In order to accurately present the historical period, we have revised our December 31, 2019 balance sheet and related footnotes to reflect the immaterial correction of this error.

NOTE 4 - GOODWILL AND INTANGIBLE ASSETS

Changes in the carrying amount of goodwill for the nine months ended September 30, 2020 were as follows:

Goodwill at January 1, 2019 $ —

Vilex Companies acquisition 17,170

Divestiture of Vilex in Tennessee, Inc.

Changes in the carrying amount of goodwill for the three months ended March 31, 2021 were as follows:

Goodwill at January 1, 2021 $ 70,511

Telos acquisition 1,874

Orthex measurement period adjustment ( 688 )

ApiFix acquisition 45,583

Foreign currency translation impact ( 2,048 )

Goodwill at September 30, 2020 $ 60,148

Goodwill at March 31, 2021 $ 68,463

Intangible Assets

As of September 30, 2020, the balances of amortizable intangible assets were as follows:

As of March 31, 2021, the balances of amortizable intangible assets were as follows:

Weighted-Average Amortization Period Gross Intangible Assets Accumulated Amortization Net Intangible Assets

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We were previously the sole licensee of the purchased assets under a license agreement with Band-Lok.

On March 19, 2021, we recorded a license agreement in the amount of $ 2,858 in settlement of the Barry legal matter.

Additional information regarding this matter can be found in Note 13.

Licenses are tied to product launches and do not begin amortizing until the product is launched to the market.

Trademarks are non-amortizing intangible assets which were $ 13,305 and $ 4,490 as of September 30, 2020 and December 31, 2019, respectively.

Concurrently with our acquisition of each company, we acquired the trademark of Orthex on June 4, 2019 valued at $ 4,230 , the trademark of Telos on March 9, 2020 valued at $ 210 and the trademark of ApiFix on April 1, 2020 valued at $ 8,605 .

Trademarks are non-amortizing intangible assets which were $ 13,618 and $ 13,961 as of March 31, 2021 and December 31, 2020, respectively.

Concurrently with our acquisition of each company, we acquired the trademark of Telos on March 9, 2020 valued at $ 210 and the trademark of ApiFix on April 1, 2020 valued at $ 8,640 .

Trademarks are recorded in Other Intangible assets on the Condensed Consolidated Balance Sheets.

NOTE 5 - DISCONTINUED OPERATIONS

On June 4, 2019, the Company acquired Vilex, a manufacturer of foot and ankle surgical implants.

Since the Vilex products included adult offerings that were not core to the Company's pediatric business, the Company received Board approval to take the steps necessary to divest the non-core Vilex assets and those Vilex assets were sold on December 31, 2019.

The following summarized financial information has been segregated from continuing operations and reported as discontinued operations for the three and nine months ended September 30, 2019:

Three Months Ended Nine Months Ended

September 30, 2019 September 30, 2019

Revenue $ 1,285 $ 1,699

Operating expenses 707 1,213

Depreciation and amortization 365 432

Operating income 213 54

Income from discontinued operations $ 213 $ 54

NOTE 5 - FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company measures certain financial assets and liabilities at fair value.

The accounting standards related to fair value measurements define fair value and provide a consistent framework for measuring fair value under the authoritative literature.

A fair value hierarchy was established, which prioritizes the inputs used in measuring fair value into three broad levels.

Level 1 – Quoted prices in active markets for identical assets or liabilities;

Level 2 – Observable market-based inputs or unobservable inputs that are corroborated by market data;

Level 3 – Significant unobservable inputs that are not corroborated by market data.

Generally, these fair value measures are model-based valuation techniques such as discounted cash flows, and are based on the best information available, including our own data.

The following table summarize the assets and liabilities measured at fair value on a recurring basis as of March 31, 2021 and December 31, 2020.

March 31, 2021

Level 1 Level 2 Level 3 Total

Financial Assets

Cash Equivalents $ 11,005 $ — $ — $ 11,005

Short term investments

Exchange Trade Mutual Funds $ 35,257 $ — $ — $ 35,257

Corporate Bonds $ 10,318 $ — $ — $ 10,318

Treasury Bonds $ 5,265 $ — $ — $ 5,265

Other $ 4,369 $ — $ — 4,369

Financial Liabilities

Contingent Consideration $ — $ — $ 34,860 $ 34,860

December 31, 2020

Level 1 Level 2 Level 3 Total

Financial Assets

Cash Equivalents $ 15,002 $ — $ — $ 15,002

Short term investments

Exchange Trade Mutual Funds $ 35,208 $ — $ — $ 35,208

Corporate Bonds $ 9,616 $ — $ — $ 9,616

Treasury Bonds $ 6,520 $ — $ — $ 6,520

Other $ 3,797 $ — $ — $ 3,797

Financial Liabilities

Contingent Consideration $ — $ — $ 30,710 $ 30,710

The Company's level 1 assets consist of cash equivalents which are generally comprised of short-term, liquid investments with original maturity of three months or less at inception and other short term investments which are comprised of exchange traded mutual funds and marketable securities with a maturity date greater than 3 months.

The Company's Level 3 instruments consist of contingent consideration.

The fair value of contingent consideration liabilities assumed in business combinations is recorded as part of the purchase price consideration of the acquisition and is determined using a discounted cash flow model or probability simulation model.

The significant inputs of such models are not always observable in the market, such as certain financial metric growth rates, volatility rates, projections associated with the applicable milestone, the interest rate, and the related probabilities and payment structure in the contingent consideration arrangement.

The adjustment in the fair value of the contingent consideration payments of $ 4,150 was recognized as an expense for the three month period ended March 31, 2021, in other expenses on the condensed consolidated statements of operations.

An additional $ 644 was recognized as interest expense for the three month period ended March 31, 2021, on the condensed consolidated statements of operations for the accretion of the acquisition installment payable.

The following table summarizes the change in fair value of Level 3 instruments in 2021:

Balance at January 1, 2021 $ 30,710

Change in fair value of contingent consideration 4,150

Balance at March 31, 2021 $ 34,860

The recurring Level 3 fair value measurements of contingent consideration liabilities associated with commercial sales milestones include the following significant unobservable inputs as of March 31, 2021 and December 31, 2020:

March 31, 2021 December 31, 2020

Valuation techniques Discounted cash flow, Monte Carlo

Present value discount rate (1)

25.3 % 25.8 %

Volatility factor 52.6 % 51.8 %

Expected years 3.1 years 3.5 years

(1) The present value discount rate includes estimated risk premium.

The estimated fair value reflects assumptions made by management as of March 31, 2021;

however, the actual amount ultimately paid could be higher or lower than the fair value of the remaining contingent consideration.

NOTE 6 - DEBT AND CREDIT ARRANGEMENTS

Long-term debt consisted of the following:

September 30, 2020 December 31, 2019

Note payable to Squadron $ — $ 19,891

Revolving credit facility with Squadron — 5,000

March 31, 2021 December 31, 2020

Mortgage payable to affiliate 1,143 1,175

Total debt 1,207 26,191

current maturities 132 131

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On December 31, 2017, we entered into a Fourth Amended and Restated Loan and Security Agreement, or the Loan Agreement, with Squadron Capital LLC, or Squadron.

Pursuant to the Loan Agreement, a majority of the term loan amounts under the previous agreement with Squadron were consolidated into a $ 20,000 term note, or the Term Note A, and a $ 15,000 revolving credit facility was established.

Both facilities include interest only payments and provide for an interest rate equal to the greater of (a) three month LIBOR plus 8.61 % and (b) 10 %.

The Loan Agreement also extended the maturity date to January 31, 2023.

In order to finance a portion of the cash consideration for the acquisition of the Vilex Companies, the Company entered into a First Amendment, or the First Amendment, to the Loan Agreement (as so amended, the "First Amended Loan Agreement"), with Squadron.

The First Amended Loan Agreement provided for a new $ 30,000 term loan facility, represented by a Term Note B, in addition to the existing $ 20,000 Term Note A and $ 15,000 revolving credit facility.

Similar to the other facilities under the First Amended Loan Agreement, the Term Note B was subject to interest only payments at an interest rate equal to the greater of (a) three month LIBOR plus 8.61 %, and (b) 10.00 %.

The Term Note B, which would have matured no later than May 31, 2020, was paid in full on December 31, 2019 using $ 25,000 received in exchange for the divestiture of the adult product offerings of Vilex and the related Orthex license agreement, and $ 5,000 from the available Squadron revolving credit facility.

On January 4, 2020, the Company paid $ 5,000 on the revolving loan agreement with Squadron.

Borrowings under the First Amended Loan Agreement are secured by substantially all of the Company's assets and are unconditionally guaranteed by each of its subsidiaries with the exception of Vilex.

There are no traditional financial covenants associated with the First Amended Loan Agreement.

However, there are negative covenants that prohibit us from, among other things, transferring any of our material assets, merging with or acquiring another entity, entering into a transaction that would result in a change of control, incurring additional indebtedness, creating any lien on our property, making investments in third parties and redeeming stock or paying dividends.

On July 15, 2020, the Company repaid the $ 20,000 principal amount outstanding under the Loan Agreement’s Term Note A, together with all unpaid interest and other related amounts payable.

Following such repayment, there are no outstanding term loan obligations under the Second Amended Loan Agreement.

On August 4, 2020, the Company entered into a Second Amendment (the “Second Amendment”) to its First Amended Loan Agreement with Squadron (as so further amended, the “Second Amended Loan Agreement”).

Pursuant to the Second Amendment, the First Amended Loan Agreement’s revolving credit commitment was increased from the previously established $ 15,000 to $ 25,000 .

The Company has agreed to pay Squadron an unused commitment fee in an amount equal to the per annum rate of 0.50 % (computed on the basis of a year of 360 days and the actual number of days elapsed) times the daily unused portion of the revolving credit commitment.

The unused commitment fee is payable quarterly in arrears.

Borrowings under the revolving credit facility will be made under a First Amended and Restated Revolving Note, dated August 4, 2020 (the “Amended Revolving Note”), payable, jointly and severally, by the Company and each of its subsidiaries party thereto.

Pursuant to the Loan Agreement, which has been amended by a First Amendment dated as of June 4, 2019 and a Second Amendment date as of August 4, 2020 (as so amended, the "Second Amendment Loan Agreement"), Squadron is providing the Company a revolving credit facility in the amount of $ 25,000 .

Borrowings under the revolving credit facility are to be made under a First Amended and Restated Revolving Note, dated August 4, 2020 (the "Amended Revolving Note"), payable, jointly and severally, by the Company and each of its subsidiaries party thereto.

The Amended Revolving Note will mature at the earlier of:

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and (ii) January 1, 2024.

Prior to the Second Amendment, the revolving credit facility was to have matured on January 31, 2023.

The Second Amended Loan Agreement continues to provide for interest only payments, which are payable monthly, with interest rates equal to the greater of (a) three month LIBOR plus 8.61 %, and (b) 10.00 %

The Second Amended Loan Agreement provides for interest only payments, which are payable monthly, with an interest rate equal to the greater of (a) three month LIBOR plus 8.61 %, and (b) 10.00 %.

On January 4, 2020, the Company repaid Squadron $ 5,000 outstanding under the revolving credit facility in effect at that time and, on July 15, 2020 the Company repaid the $ 20,000 Term Note A outstanding under the Loan Agreement, together with all unpaid interest and other related amounts payable.

The Company does not currently have any borrowings outstanding under the Second Amended Loan Agreement.

The unused commitment fee is payable quarterly in arrears and is recorded in interest, net.

For the quarter ended March 31, 2021 the unused commitment fee paid to Squadron was $ 52 .

Borrowings under the Second Amended Loan Agreement are secured by substantially all of the Company's assets and are unconditionally guaranteed by each of its subsidiaries with the exception of Vilex.

There are no traditional financial covenants associated with the Second Amended Loan Agreement.

In connection with the purchase of our office and warehouse space in Warsaw, Indiana in August 2013, we entered into a mortgage note payable to Tawani Enterprises Inc., an affiliate of Squadron.

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The mortgage is secured by the related real estate and building.

At December 31, 2019, the mortgage balance was $ 1,300 of which current principal due of $ 124 was included in current portion of long-term debt.

At September 30, 2020 the mortgage balance was $ 1,207 of which current principal of $ 129 was included in current portion of long-term debt.

Interest expense relating to notes payable to Squadron and Tawani was $ 109 and $ 1,297 for the three months ended September 30, 2020 and 2019, respectively, and $ 1,218 and $ 2,232 for the nine months ended September 30, 2020 and 2019, respectively.

NOTE 7 - STRATEGIC ARRANGEMENTS

Effective December 1, 2007, we entered into a ten -year agreement with Case Western Reserve University (“CASE”) to assist in certain aspects of our research and development.

Effective August 2, 2017, we entered into an Amended and Restated License Agreement to account for additional licensed product and extend the agreement for another ten years .

The main focus of this research and development involves leveraging our exclusive rights to the Hamann-Todd Collection of the Cleveland National History Museum, the world's largest pediatric osteological collection, to assist in the design of implants which match pediatric bone curvature and structure.

In exchange for services, CASE receives certain royalties and up-front fees.

The royalties and certain fees are contingent upon our obtaining FDA approval and the launch of our products into the marketplace.

CASE receives a minimum annual royalty of $ 10 or a royalty of 3 % of net sales on products, whichever is greater.

Additionally, for each new product developed, CASE will receive milestone payments of $ 5 for FDA approval to sell our products within the United States and $ 10 for general product launch.

Additionally, CASE receives a royalty of 3 % of net sales on products fully developed and being sold in the marketplace.

The royalty expense recognized related to the CASE agreement is recorded as a component of cost of revenue and was $ 35 and $ 41 for the three months ended September 30, 2020 and 2019, respectively, and $ 90 and $ 115 for the nine months ended September 30, 2020 and 2019, respectively.

At September 30, 2020 and December 31, 2019, $ 35 and $ 41 , respectively, was due to CASE.

As of December 31, 2020, the mortgage balance was $ 1,175 of which current principal due of $ 131 was included in the current portion of long-term debt.

At March 31, 2021 the mortgage balance was $ 1,143 of which current principal of $ 132 was included in the current portion of long-term debt.

Interest expense relating to notes payable to Squadron and mortgage note payable with Tawani was $ 15 and $ 551 for the three months ended March 31, 2021 and 2020, respectively.

NOTE 7 - INCOME TAXES

The Company utilizes an estimated annual effective tax rate to determine its provision or benefit for income taxes for interim periods.

The income tax provision or benefit is computed by multiplying the estimated annual effective tax rate by the year-to-date pre-tax book income (loss).

For the three months ended March 31, 2021, the income tax benefit was $ 312 compared to $ 0 for the three months ended March 31, 2020.

Our effective income tax rate was 2.9 % and 0 % for the three months ended March 31, 2021 and 2020, respectively.

Our effective tax rate increased compared to the prior year primarily due to the acquisition of ApiFix in 2020 and the deferred tax liability recorded in the purchase accounting.

The deferred tax liability was set up as a result of the amortizing intangible assets recorded in the purchase accounting which generate nondeductible book amortization.

In response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") was signed into law in March 2020.

The CARES Act lifts certain deduction limitations originally imposed by the Tax Cuts and Jobs Act of 2017 ("2017 Tax Act").

Corporate taxpayers may carryback net

operating losses ("NOLs") originating during 2018 through 2020 for up to five years, which was not previously allowed under the 2017 Tax Act.

The CARES Act also eliminates the 80% of taxable income limitations by allowing corporate entities to fully utilize NOL carryforwards to offset taxable income in 2018, 2019 or 2020.

Taxpayers may generally deduct interest up to the sum of 50% of adjusted taxable income plus business interest income (30% limit under the 2017 Tax Act) for tax years beginning January 1, 2019 and 2020.

The CARES Act allows taxpayers with alternative minimum tax credits to claim a refund in 2020 for the entire amount of the credits instead of recovering the credits through refunds over a period of years, as originally enacted by the 2017 Tax Act.

In addition, the CARES Act raises the corporate charitable deduction limit to 25% of taxable income and makes qualified improvement property generally eligible for 15-year cost-recovery and 100% bonus depreciation.

The enactment of the CARES Act did not result in any material adjustments to our income tax provision for the three or nine months ended September 30, 2020.

For the three and nine months ended September 30, 2020 and 2019, we calculated the provision of income taxes by applying an estimate of the annual effective tax rate for the full fiscal year to the ordinary loss for the reporting period resulting in a zero tax provision consistent with prior periods.

The deferred tax assets were fully offset by a valuation allowance at September 30, 2020 and December 31, 2019, and no income tax benefit has been recognized in our condensed consolidated statements of operations for any of the periods presented.

At December 31, 2019, we had available federal and state tax loss carryforwards of $ 86,807 , state loss carryforwards of $ 64,026 and tax credits for federal and state tax purposes of $ 260 .

The enactment of the CARES Act did not result in any material adjustments to our income tax provision for the three or three months ended March 31, 2021.

On December 27, 2020 the Consolidated Appropriations Act, 2021 (“CAA”) was signed into law.

The CAA included the COVID-related Tax Relief Act of 2020 (“COVID TRA”), which expanded, extended, and clarified selected CARES Act provisions, specifically on Paycheck Protection Program (PPP) loan and Employee Retention Tax Credit, 100% deductibility of business meals purchased from restaurants as well as other tax extenders.

The Consolidated Appropriations Act did not have a material impact on the Company’s income tax provision.

The deferred tax assets were fully offset by a valuation allowance at March 31, 2021 and December 31, 2020, with the exception of certain deferred tax liabilities recognized in a foreign jurisdiction as a result of fair value adjustments recorded upon the acquisition of ApiFix.

The company has recorded a tax benefit during the period ended March 31, 2021 for losses generated in the foreign jurisdiction.

As of December 31, 2020, we had available federal, state and foreign tax loss carryforwards of $ 98,918 , $ 68,901 and $ 16,905 , respectively.

We had available federal tax credits of $ 176 .

Net operating losses generated prior to December 31, 2017 will begin to expire in 2028.

Federal net operating losses generated after January 1, 2018 will have an indefinite carryforward period.

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Management assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets.

A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year period ended September 30, 2020.

A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year period ended March 31, 2021.

Such objective evidence limits the ability to consider other subjective evidence, such as our projections for future growth.

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Exercised ( 2,010 ) 30.97

Forfeited or expired ( 4,556 ) 30.97

Outstanding at September 30, 2020 13,472 $ 30.97 1.8

Outstanding at March 31, 2021 10,792 $ 30.97 1.6

Options generally include a time-based vesting schedule permitting the options to vest ratably over three years .

At September 30, 2020 and December 31, 2019, all options were fully vested.

There was no stock-based compensation expense on stock options for the three and nine months ended September 30, 2020 and 2019, respectively.

At March 31, 2021 and December 31, 2020, all options were fully vested.

There was no stock-based compensation expense on stock options for the three months ended March 31, 2021 and 2020, respectively.

Restricted Stock

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Vested ( 144,743 )

Outstanding at September 30, 2020 436,730 1.4

Restricted stock exercisable at September 30, 2020 —

At September 30, 2020, there was $ 8,636 of unrecognized compensation expense remaining related to our service-based restricted stock awards.

Outstanding at March 31, 2021 389,098 1.7

Restricted stock exercisable at March 31, 2021 —

At March 31, 2021, there was $ 11,417 of unrecognized compensation expense remaining related to our service-based restricted stock awards.

The unrecognized compensation cost was expected to be recognized over a weighted-average period of 1.7 years or earlier upon an elimination of the restriction period as a result of a change in control event.

Stock-based compensation expense on restricted stock amounted to $ 1,259 and $ 733 for the three months ended September 30, 2020 and 2019, respectively, and $ 4,712 and $ 1,896 for the nine months ended September 30, 2020 and 2019, respectively.

The increase in the stock compensation expense for the nine months ended September 30, 2020 was due to a one-time stock grant to the Company's Chief Executive Officer that vested immediately resulting in an additional $ 1,322 of expense.

Our warrant activity and related information are summarized as follows:

Weighted-Average

Warrants Exercise Price

Outstanding at January 1, 2020 404 $ 30.97

Outstanding at September 30, 2020 404 $ 30.97

For all periods presented, the warrants were issued at an exercise prices of $ 30.97 per share.

The warrants have a ten -year term.

At September 30, 2020, no warrants had been exercised.

At inception, no fair value was assigned to the warrants.

Stock-based compensation expense on restricted stock amounted to $ 1,316 and $ 958 for the three months ended March 31, 2021 and 2020, respectively.

The increase in the stock compensation expense for the three months ended March 31, 2021 was due primarily to a third year of restricted stock grants in a three year vesting cycle.

NOTE 9 – NET LOSS PER SHARE

The following is a reconciliation of basic and diluted net loss per share:

Three Months Ended Nine Months Ended

September 30, September 30,

2020 2019 2020 2019

Three Months Ended

Net loss $ ( 10,379 ) $ ( 4,945 )

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The following contingently issuable and convertible equity shares were excluded from the calculation of diluted net loss per share because their effect would have been anti-dilutive for all periods presented:

Nine Months Ended September 30,

Three Months Ended March 31,

Restricted stock 389,098 423,712

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Product sales attributed to a country or region includes product sales to hospitals, physicians and distributors and is based on the final destination where the products are sold.

No customers accounted for more than 10% of total product sales for the three and nine months ended September 30, 2020 or 2019.

No customer accounted for more than 10% of consolidated accounts receivable as of September 30, 2020 and December 31, 2019.

No customers accounted for more than 10% of total product sales for the three months ended March 31, 2021 or 2020.

No customer accounted for more than 10% of consolidated accounts receivable as of March 31, 2021 and December 31, 2020.

Product sales by source were as follows:

Three Months Ended September 30, Nine Months Ended September 30,

Three Months Ended March 31,

Product sales by geographic location:

$ 16,839 $ 13,384

$ 19,583 $ 16,785 $ 45,113 $ 40,900

International 4,623 2,972

Total $ 21,462 $ 16,356

Three Months Ended September 30, Nine Months Ended September 30,

Three Months Ended March 31,

Product sales by category:

2020 2019 2020 2019

Trauma and deformity $ 14,552 $ 12,210

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Total $ 21,462 $ 16,356

No individual country with sales originating outside of the United States accounted for more than 10% of consolidated revenue for the three and nine months ended September 30, 2020 and 2019.

No individual country with sales originating outside of the United States accounted for more than 10% of consolidated revenue for the three months ended March 31, 2021 and 2020.

NOTE 11 - RELATED PARTY TRANSACTIONS

In addition to the debt and credit agreements and mortgage with Squadron and its affiliate (see Note 6), we currently use Structure Medical, LLC (“Structure Medical”) as one of our suppliers.

Structure Medical is affiliated with Squadron and we do not have a long-term contract with them.

We made aggregate payments to Structure Medical of $ 154 and $ 838 for the three months ended September 30, 2020 and 2019, respectively, and $ 2,290 and $ 3,331 for the nine months ended September 30, 2020 and 2019.

Structure Medical is affiliated with Squadron and a supplier with which we maintain certain long-term agreements.

We made aggregate payments to Structure Medical for inventory purchases of $ 72 and $ 1,201 for the three months ended March 31, 2021 and 2020, respectively.

On December 31, 2019, the Company divested Vilex for $ 25,000 to an affiliate of Squadron.

In conjunction with the divestiture, the Company also entered into an exclusive perpetual license agreement to permit the purchasers of Vilex the ability to access intellectual property and sell products using the external fixation technology of Orthex, LLC to non-pediatric accounts.

The Orthex license agreement was determined to have a value of $ 12,410 and is determined to be a sale of functional intellectual property, resulting in the derecognition or sale of certain patent intangibles acquired in the Vilex and Orthex acquisition.

We had sales and payments related to inventory purchases to Squadron's affiliate, now known as Vilex, LLC, of $ 87 and $ 189 , respectively, for the three months ended March 31, 2021.

We had sales and payments related to inventory purchases to Vilex, LLC of $ 386 and $ 640 , respectively, for the three months ended March 31, 2020.

NOTE 12 - EMPLOYEE BENEFIT PLAN

4 unchanged sentences

Discretionary matching contributions are determined annually by management.

Effective January 1, 2020, we have elected to match our employees' 401(k) contributions

up to 4 % of employees' salary.

Prior to January 1, 2020, we matched our employees' 401(k) contributions up to 3 % of employees' salary.

We have elected to match our employees' 401(k) contributions up to 4 % of employees' salary.

NOTE 13 – COMMITMENTS AND CONTINGENCIES

3 unchanged sentences

The Company records its operating lease right-of-use assets as long-term assets.

As of September 30, 2020, the Company has recorded a lease liability of $ 332 and corresponding right-of-use-asset of $ 335 on its condensed consolidated balance sheet.

As of March 31, 2021, the Company has recorded a lease liability of $ 315 and corresponding right-of-use-asset of $ 318 on its condensed consolidated balance sheet.

Legal Proceedings

19 unchanged sentences

Additionally, we have denied these most recent claims and responded with counterclaims seeking declaratory relief that the subject patents are both invalid and not infringed.

Moreover, on November 20, 2019, the Court issued a Scheduling Order, which in part, set a trial date for April 12, 2021.

Subsequently, the parties attended a second court-ordered mediation on February 25, 2020, which did not resolve the dispute, but we continue to welcome constructive discussions on a negotiated settlement.

Although we believe that the K2M lawsuit is without merit and will vigorously defend the claims asserted against us, intellectual property litigation can involve complex factual and legal questions, and an adverse resolution of this proceeding could have a material adverse effect on our business, operating results and financial condition.

IMED Surgical - Software Ownership Dispute

On October 16, 2020, the Company, Orthex, Squadron, and certain other defendants, were named in a lawsuit filed by IMED Surgical, LLC, a New Jersey company (the “Plaintiff”), in Broward County, Florida Circuit Court.

In the lawsuit, the Plaintiff claims, among other things, that it is the rightful owner of certain patented point-and-click planning software being used by the Company, Orthex and Squadron (the “Point & Click Software”).

In June 2019, the Company purchased all the issued and outstanding units of membership interests in Orthex, and all the issued and outstanding shares of stock of Vilex, for $ 60 million in total consideration.

Vilex and Orthex are primarily manufacturers of foot and ankle surgical implants, including cannulated screws, fusion devices, surgical staples and bone plates, as well as the Orthex Hexapod technology, a system of rings, struts, implants, hardware accessories, and the Point & Click Software used to treat congenital deformities and limb length discrepancies.

On December 31, 2019, the Company divested substantially all of the assets relating to Vilex's adult product offerings to a wholly-owned subsidiary of Squadron, in exchange for a $ 25 million reduction in a term note owed to Squadron in connection with the initial acquisition.

As part of the sale, the Company also executed an exclusive license arrangement with Squadron providing for perpetual access to certain intellectual property, including the Point & Click Software.

According to the lawsuit, the other defendants, who are unrelated to the Company, assigned the Point & Click Software to Orthex in violation of certain agreements with the Plaintiff.

The Plaintiff, among other things, requests that the defendants be ordered to convey and assign to Plaintiff all of their rights, title and interests in and to the Software and seeks certain compensatory, consequential and unjust enrichment damages from Orthex and the unrelated defendants.

The Company is currently considering this matter, but lacks sufficient information to assess the potential outcome at this time.

We are not presently a party to any other legal proceedings the outcome of which, if determined adversely to us, would individually or in the aggregate materially affect our financial position, results of operations or cash flows.

As of September 30, 2020, we are contracted to pay royalties to individuals and entities that provide research and development services, which range from 0.5 % to 20 % of sales.

Additionally, we had minimum royalty commitments of $ 500 annually through 2026 which ceased upon the purchase of the Band-Lok assets in June 2020.

Moreover, on November 20, 2019, the Court issued its Scheduling Order, which in part, set a trial date for April 12, 2021.

Subsequently, the parties attended a second court-ordered mediation on February 25, 2020, which did not resolve the dispute.

Throughout 2021, we have continued settlement negotiations regarding this matter and anticipate that it will be settled in the near term.

Because the Company considers a potential settlement to be probable, it previously accrued for the related expense during the fourth quarter of 2020.

No material modifications were made to the accrual during the quarter ended March 31, 2021.

While the Company considers it probable, no assurance can be given that a final settlement will be reached and, were negotiations to cease, we would vigorously defend the claims asserted against us.

Barry - Alleged Patent Infringement

On December 30, 2020, Dr.

Mark Barry filed suit against us in the United States District Court for the District of Delaware (Barry v.

OrthoPediatrics Corp.

et al., Case No.

1:20-cv-01786) seeking unspecified damages for alleged infringement of U.S.

and 9,668,788, which relate to systems and methods concerning derotation of spinal bodies to correct spinal deformities.

On March 19, 2021, the parties reached a final settlement, which included the Company entering into a license agreement with Dr.

The license agreement was recorded by the Company in the amount of $ 2,858 , which will be amortized over a period of up to 8 years based upon the number of cases utilizing the related spinal deformity system in a given period.

The balance of the amount otherwise paid to Dr.

Barry had been previously accrued for during the fourth quarter of 2020 in anticipation of this final settlement.

Accrued Legal Settlement Costs

As of March 31, 2021, we have an outstanding accrued legal settlement balance of $ 5,250 related to the potential outcome of outstanding legal matters.

As of March 31, 2021, we are contracted to pay royalties to individuals and entities that provide research and development services, which range from 0.5 % to 20 % of sales.

We have products in development that have milestone payments and royalty commitments.

In any development project, there are significant variables that will affect the amount and timing of these payments and as of September 30, 2020, we have not been able to determine the amount and timing of payments.

In any development project, there are significant variables that will affect the amount and timing of these payments and as of March 31, 2021, we have not been able to determine the amount and timing of payments.

We do not anticipate these future payments will have a material impact on our financial results.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements