What changed in this filing

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Item 1. Financial Statements

2021-11-04 compared with 2021-08-05 · 132 added, 84 removed, 682 unchanged (24% of the section changed)

3 unchanged sentences

(In Thousands, Except Share Data)

June 30, 2021 December 31, 2020

September 30, 2021 December 31, 2020

Current assets:

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50,000,000 shares authorized;

19,670,044 shares and 19,560,291 shares issued as of June 30, 2021 (unaudited) and December 31, 2020, respectively

19,672,162 shares and 19,560,291 shares issued as of September 30, 2021 (unaudited) and December 31, 2020, respectively

Additional paid-in capital 392,929 388,622

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(In Thousands, Except Share and Per Share Data)

Three Months Ended June 30, Six Months Ended June 30,

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

2021 2020 2021 2020

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(In Thousands)

Three Months Ended June 30, Six Months Ended June 30,

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

2021 2020 2021 2020

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(In Thousands, Except Share Data)

Three and Six Months Ended June 30, 2021

Three and Nine Months Ended September 30, 2021

Additional Other Total

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Balance at June 30, 2021 19,670,044 $ 5 $ 391,415 $ ( 175,901 ) $ 6,082 $ 221,601

Net Loss — — — ( 2,197 ) — ( 2,197 )

Other comprehensive loss — — — — 200 200

Stock option exercise 2,412 — 75 — — 75

Restricted stock ( 294 ) — 1,439 — — 1,439

Balance at September 30, 2021 19,672,162 $ 5 $ 392,929 $ ( 178,098 ) $ 6,282 $ 221,118

ORTHOPEDIATRICS CORP.

1 unchanged sentence

(In Thousands, Except Share Data)

Three and Six Months Ended June 30, 2020

Three and Nine Months Ended September 30, 2020

Additional Other Total

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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

See notes to condensed consolidated financial statements.

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(In Thousands)

Six Months Ended

Nine Months Ended

September 30,

OPERATING ACTIVITIES

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Acquisition of Band-Lok intangible assets — ( 796 )

Sale of short-term marketable securities 4,000 —

Purchases of licenses ( 7,908 ) —

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We also expect medical procedure rates to continue to vary by type and country, and could be impacted by regional COVID-19 case volumes, hospital and clinical occupancy and staffing levels, the willingness of patients to schedule elective procedures, travel and quarantine restrictions, vaccine immunization rates, and new COVID-19 variants.

While COVID-19 case volumes appear to be decreasing in the U.S.

and certain other countries as a result of higher vaccination rates, the global COVID-19 outlook remains uncertain as vaccination rates have slowed and the spread of new variants has accelerated.

While we have seen the positive impact that higher vaccination rates have had on curbing the spread of the virus in the U.S.

and certain other countries, the global COVID-19 outlook remains uncertain as vaccination rates have slowed and the spread of new variants has accelerated.

While the impact of COVID-19 has had, and may continue to have, an adverse effect on our business, results of operations, financial condition and cash flows, the nature and extent of such impact is unknown, as we cannot predict with confidence the ultimate duration or further severity of the pandemic.

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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 June 30, 2021 and December 31, 2020, the condensed consolidated statements of operations for the three and six months ended June 30, 2021 and 2020, the condensed consolidated statements of comprehensive loss for the three and six months ended June 30, 2021 and 2020, the condensed consolidated statements of stockholders’ equity for the three and six months ended June 30, 2021 and 2020 and the condensed consolidated statements of cash flows for the six months ended June 30, 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 accompanying condensed consolidated balance sheets as of September 30, 2021 and December 31, 2020, the condensed consolidated statements of operations for the three and nine months ended September 30, 2021 and 2020, the condensed consolidated statements of comprehensive loss for the three and nine months ended September 30, 2021 and 2020, the condensed consolidated statements of stockholders’ equity for the three and nine months ended September 30, 2021 and 2020 and the condensed consolidated statements of cash flows for the nine months ended September 30, 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.

As such, certain information and footnote disclosures normally included in financial statements prepared in

accordance with GAAP have been condensed or omitted pursuant to applicable rules and regulations thereunder.

As such, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to applicable rules and regulations thereunder.

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 six months ended June 30, 2021 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 and nine months ended September 30, 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 $ 175,901 and $ 161,766 as of June 30, 2021 and December 31, 2020, respectively.

We have experienced recurring losses from operations since our inception and had an accumulated deficit of $ 178,098 and $ 161,766 as of September 30, 2021 and December 31, 2020, respectively.

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

We believe that our cash balance, including short term investments, at June 30, 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.

We believe that our cash balance, including short term investments, at September 30, 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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In conjunction with the sale of the assets relating to Vilex's adult product offering to a wholly-owned subsidiary of Squadron in 2019, $ 1,250 was placed into a separate escrow account to cover certain indemnification obligations.

This cash is reported as restricted cash on the June 30, 2021 and December 31, 2020 condensed consolidated balance sheets.

This cash is reported as restricted cash on the September 30, 2021 and December 31, 2020 condensed consolidated balance sheets.

These funds will remain restricted until such time as the software ownership dispute involving IMED Surgical, LLC is resolved (see “Legal Proceedings” under Note 13 – Commitments and Contingencies for additional information).

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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.

A significant decrease in demand could result

in an increase in the amount of excess inventory on hand, which could lead to additional charges for excess and obsolete inventory.

A significant decrease in demand could result in an increase in the amount of excess inventory on hand, which could lead to additional charges for excess and obsolete inventory.

The need to maintain substantial levels of inventory impacts our estimates for excess and obsolete inventory.

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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.

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.

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.

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

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Changes in the fair value of the contingent consideration are included in fair value adjustments of contingent consideration on the condensed consolidated statement of operations.

The amount of expense recorded in interest expense, net for the three and six months ended June 30, 2021 were $ 569 and $ 1,212 , respectively, and $ 886 for each of the three and six months ended June 30, 2020.

The fair value adjustments of contingent consideration for the three and six months ended June 30, 2021 were $ 990 and $ 5,140 , respectively, and $ 910 for each of the three and six months ended June 30, 2020.

The amount of expense related to acquisition installment payables recorded in interest expense, net for the three and nine months ended September 30, 2021 were $ 489 and $ 1,701 , respectively, and $ 816 and $ 1,702 for the three and nine months ended September 30, 2020, respectively.

The fair value adjustments of contingent consideration for the three and nine months ended September 30, 2021 were income of $ 1,430 and expense of $ 3,710 , respectively, and expense of $ 909 and $ 1,819 for the three and nine months ended September 30, 2020, respectively.

Cost of Revenue

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Recent Accounting Pronouncements

In October 2021, the FASB issued ASU No.

2021-08 "Business Combinations (Topic 805)-Accounting for Contract Assets and Contract Liabilities from Contracts with Customers".

The amendments in this Update address diversity and inconsistency related to the recognition and measurement of contract assets and contract liabilities acquired in a business combination.

The amendments in this Update require that an acquirer recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606, Revenue from Contracts with Customers.

The amendments in this Update require that an entity (acquirer) recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606.

For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.

For all other entities, the amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years.

The amendments in this Update should be applied prospectively to business combinations occurring on or after the effective date of the amendments.

Early adoption of the amendments is permitted, including adoption in an interim period.

An entity that early adopts in an interim period should apply the amendments (1) retrospectively to all business combinations for which the acquisition date occurs on or after the beginning of the fiscal year that includes the interim period of early application and (2) prospectively to all business combinations that occur on or after the date of initial application.

The Company is currently evaluating the impact of adopting ASU 2021-08 on its consolidated financial statements.

In May 2021, the FASB issued ASU No.

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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 following table reconciles the total consideration transferred after

discounting the future payments:

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

Consideration Present Value

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

The Company anticipates making the second anniversary payment of $ 13,000 during the second half of 2021.

The Company anticipates making the second anniversary payment of $ 13,000 between January 1 and April 1, 2022.

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.

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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 December 31, 2020 June 30, 2021

April 1, 2020 December 31, 2020 September 30, 2021

Anniversary Payments:

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NOTE 4 - GOODWILL AND INTANGIBLE ASSETS

Changes in the carrying amount of goodwill for the six months ended June 30, 2021 were as follows:

Changes in the carrying amount of goodwill for the nine months ended September 30, 2021 were as follows:

Goodwill at January 1, 2021 $ 70,511

Foreign currency translation impact ( 21 )

Goodwill at June 30, 2021

Goodwill at September 30, 2021

Intangible Assets

As of June 30, 2021, the balances of amortizable intangible assets were as follows:

As of September 30, 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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Total amortizable assets $ 55,118 $ ( 4,834 ) $ 50,284

On September 3, 2021, we entered into a five-year license agreement, resulting in exclusive distribution rights of the 7D Surgical FLASH TM Navigation platform for pediatric applications.

We paid $ 750 which will be amortized over the initial three years of the agreement.

On July 20, 2021, we entered into an amended license agreement, resulting in a five-year extension of our exclusive distribution rights of the FIREFLY Technology in children's hospitals across the United States.

We paid $ 4,300 for the amended agreement and the amount will be amortized over the life of the agreement.

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

Amortization is recorded based on the cases completed in the given period.

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 $ 3,394 in total consideration.

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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 $ 13,817 and $ 13,961 as of June 30, 2021 and December 31, 2020, respectively.

Trademarks are non-amortizing intangible assets which were $ 13,957 and $ 13,961 as of September 30, 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 .

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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 June 30, 2021 and December 31, 2020.

June 30, 2021

The following table summarize the assets and liabilities measured at fair value on a recurring basis as of September 30, 2021 and December 31, 2020.

September 30, 2021

Level 1 Level 2 Level 3 Total

Financial Assets

Cash Equivalents $ 2,007 $ — $ — $ 2,007

Short term investments

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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 adjustments in the fair value of the contingent consideration payments of $ 990 and $ 5,140 were recognized as expense for the three and six month periods ended June 30, 2021, respectively, in other expenses on the condensed consolidated statements of operations.

Additionally, $ 569 and $ 1,212 was recognized as interest expense for the three and six month periods ended June 30, 2021, respectively, on the condensed consolidated statements of operations for the accretion of the acquisition installment payable.

The adjustments in the fair value of the contingent consideration payments included an income adjustment of $ 1,430 and an expense adjustment of $ 3,710 for the three and nine month periods ended September 30, 2021, respectively, in other expenses on the condensed consolidated statements of operations.

Additionally, $ 489 and $ 1,701 was recognized as interest expense for the three and nine month periods ended September 30, 2021, respectively, 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:

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Change in fair value of contingent consideration 3,710

Balance at June 30, 2021

The recurring Level 3 fair value measurements of contingent consideration liabilities associated with commercial sales milestones include the following significant unobservable inputs as of June 30, 2021 and December 31, 2020:

June 30, 2021 December 31, 2020

Balance at September 30, 2021

September 30, 2021 December 31, 2020

Valuation techniques Discounted cash flow, Monte Carlo

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

The estimated fair value reflects assumptions made by management as of June 30, 2021;

The estimated fair value reflects assumptions made by management as of September 30, 2021;

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

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Long-term debt consisted of the following:

June 30, 2021 December 31, 2020

September 30, 2021 December 31, 2020

Mortgage payable to affiliate $ 1,078 $ 1,175

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

For the three and six months ended June 30, 2021 the unused commitment fee paid to Squadron was $ 32 and $ 63 , respectively.

For the three and nine months ended September 30, 2021 the unused commitment fee paid to Squadron was $ 32 and $ 95 , respectively.

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.

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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 June 30, 2021 the mortgage balance was $ 1,111 of which current principal of $ 134 was included in the current portion of long-term debt.

The aggregate interest expense relating to the notes payable to Squadron and the mortgage note payable to Tawani was $ 14 and $ 513 for the three months ended June 30, 2021 and 2020, respectively, and $ 29 and $ 892 for the six months ended June 30, 2021 and 2020, respectively.

At September 30, 2021 the mortgage balance was $ 1,078 of which current principal of $ 136 was included in the current portion of long-term debt.

The aggregate interest expense relating to the notes payable to Squadron and the mortgage note payable to Tawani was $ 14 and $ 109 for the three months ended September 30, 2021 and 2020, respectively, and $ 42 and $ 1,218 for the nine months ended September 30, 2021 and 2020, respectively.

NOTE 7 - INCOME TAXES

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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 six months ended June 30, 2021, the income tax benefit was $ 598 compared to $ 0 for the six months ended June 30, 2020.

Our effective income tax rate was 4.0 % and 0 % for the three months ended June 30, 2021 and 2020, respectively.

For the nine months ended September 30, 2021, the income tax benefit was $ 890 compared to $ 0 for the nine months ended September 30, 2020.

Our effective income tax rate was 5.2 % and 0 % for the three months ended September 30, 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.

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

The enactment of the CARES Act did not result in any material adjustments to our income tax provision for the three or six months ended June 30, 2021.

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, 2021.

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

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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 June 30, 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 June 30, 2021 for losses generated in the foreign jurisdiction.

The deferred tax assets were fully offset by a valuation allowance at September 30, 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 September 30, 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.

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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 June 30, 2021.

A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year period ended September 30, 2021.

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

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Exercised ( 4,422 ) 30.97

Outstanding at June 30, 2021

Forfeited or expired ( 1,742 ) 30.97

Outstanding at September 30, 2021

6,638 $ 30.97 1.6

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

At June 30, 2021 and December 31, 2020, all options were fully vested.

There was no stock-based compensation expense on stock options for the three and six months ended June 30, 2021 and 2020, respectively.

At September 30, 2021 and December 31, 2020, all options were fully vested.

There was no stock-based compensation expense on stock options for the three and nine months ended September 30, 2021 and 2020, respectively.

Restricted Stock

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Vested ( 168,264 )

Outstanding at June 30, 2021

Restricted stock exercisable at June 30, 2021

At June 30, 2021, there was $ 9,974 of unrecognized compensation expense remaining related to our service-based restricted stock awards.

Outstanding at September 30, 2021

Restricted stock exercisable at September 30, 2021

At September 30, 2021, there was $ 8,694 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 1.4 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 $ 1,415 and $ 2,495 for the three months ended June 30, 2021 and 2020, respectively, and $ 2,731 and $ 3,453 for the six months ended June 30, 2021 and 2020, respectively.

The decrease in the stock compensation expense for the three and six months ended June 30, 2021 was due primarily to one-time grants related to management transition plans that did not repeat in the current year.

Stock-based compensation expense on restricted stock amounted to $ 1,440 and $ 1,259 for the three months ended September 30, 2021 and 2020, respectively, and $ 4,170 and $ 4,712 for the nine months ended September 30, 2021 and 2020, respectively.

The increase in the stock compensation for the three months ended September 30, 2021 is primarily due to increase in plan participants as we continue to hire employees to support the continued expansion of our business.

The decrease in the stock compensation expense for the nine months ended September 30, 2021 was due primarily to one-time grants related to management transition plans that did not repeat in the current year.

NOTE 9 – NET LOSS PER SHARE

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

Three Months Ended Six Months Ended

June 30, June 30,

Three Months Ended Nine Months Ended

September 30, September 30,

2021 2020 2021 2020

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been anti-dilutive for all periods presented:

Six Months Ended June 30,

Nine Months Ended September 30,

Restricted stock 375,915 436,730

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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 six months ended June 30, 2021 or 2020.

No customer accounted for more than 10% of consolidated accounts receivable as of June 30, 2021 and December 31, 2020.

No customers accounted for more than 10% of total product sales for the three and nine months ended September 30, 2021 or 2020.

No customer accounted for more than 10% of consolidated accounts receivable as of September 30, 2021 and December 31, 2020.

Product sales by source were as follows:

Three Months Ended June 30, Six Months Ended June 30,

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

Product sales by geographic location:

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Total $ 25,079 $ 22,205 $ 73,236 $ 52,154

Three Months Ended June 30, Six Months Ended June 30,

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

Product sales by category:

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Total $ 25,079 $ 22,205 $ 73,236 $ 52,154

No individual country with sales originating outside of the United States accounted for more than 10% of consolidated revenue for the three and six months ended June 30, 2021 and 2020.

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, 2021 and 2020.

NOTE 11 - RELATED PARTY TRANSACTIONS

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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 $ 197 and $ 934 for the three months ended June 30, 2021 and 2020, respectively and $ 269 and $ 2,135 for the six months ended June 30, 2021 and 2020, respectively.

We made aggregate payments to Structure Medical for inventory purchases of $ 173 and $ 154 for the three months ended September 30, 2021 and 2020, respectively and $ 441 and $ 2,290 for the nine months ended September 30, 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.

We had sales and payments related to inventory purchases to Squadron's affiliate, now known as Vilex, LLC, of $ 68 and $ 336 , respectively, for the three months ended June 30, 2021, and $ 155 and $ 525 , respectively, for the six months ended June 30, 2021, respectively.

We had sales and payments related to inventory purchases to Vilex, LLC of $ 138 and $ 899 , respectively, for the three months ended June 30, 2020, and $ 524 and $ 1,539 , respectively, for the six months ended June 30, 2020.

We had sales and payments related to inventory purchases to Squadron's affiliate, now known as Vilex, LLC, of $ 45 and $ 150 , respectively, for the three months ended September 30, 2021, and $ 200 and $ 675 , respectively, for the nine months ended September 30, 2021, respectively.

We had sales and payments related to inventory purchases to Vilex, LLC of $ 28 and $ 641 , respectively, for the three months ended September 30, 2020, and $ 552 and $ 2,180 , respectively, for the nine months ended September 30, 2020.

NOTE 12 - EMPLOYEE BENEFIT PLAN

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

As of June 30, 2021, the Company has recorded a lease liability of $ 292 and corresponding right-of-use-asset of $ 295 on its condensed consolidated balance sheet.

As of September 30, 2021, the Company has recorded a lease liability of $ 320 and corresponding right-of-use-asset of $ 324 on its condensed consolidated balance sheet.

Legal Proceedings

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The Company previously accrued for the related expense during the fourth quarter of 2020.

No material modifications were made to the accrual during the three or six months ended June 30, 2021, and the payment made during the second quarter satisfies all liabilities associated with this matter.

No material modifications were made to the accrual during 2021, and the payment made during the second quarter 2021 satisfies all liabilities associated with this matter.

IMED Surgical - Software Ownership Dispute

On October 16, 2020, the Company, its wholly-owned subsidiary, Orthex, LLC (“Orthex”), the Company’s largest investor, Squadron Capital, LLC (“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”).

10,258,377 (titled “Point and click alignment method for orthopedic surgeons, and surgical and clinical accessories and devices,” issued on April 16, 2019) (hereinafter, the “’377 Patent”).

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 in Tennessee, Inc.

(“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.

Although we believe the IMED lawsuit is without merit and will vigorously defend the claims asserted us, 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.

(“Vilex”) for $ 60,000 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 $ 25,000 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 ‘377 Patent.

According to the lawsuit, the other defendants, who are unrelated to the Company, assigned the ‘377 Patent 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 ’377 Patent and seeks certain compensatory, consequential and unjust enrichment damages from Orthex and the unrelated defendants.

On May 13, 2021, the Court ordered the lawsuit stayed pending arbitration.

To the extent the Plaintiff desires to further pursue the matter, it must first do so through a separate arbitration proceeding.

The Plaintiff has not yet initiated an arbitration proceeding.

In connection with the stay order, the Court also ordered the Company, Orthex and Squadron to give notice to the Plaintiff before any attempt to dispose,

assign, sell or otherwise encumber the ‘377 Patent.

The Company, Orthex and Squadron have filed an appeal of this component of the order and are awaiting a ruling.

Although we believe the IMED lawsuit is without merit and will vigorously defend the claims asserted against us, if pursued by the Plaintiff, arbitration and litigation can involve complex factual and legal questions, and an adverse resolution of such proceedings could have a material adverse effect on our business, operating results and financial condition.

Barry - Alleged Patent Infringement

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

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

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.

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

As of June 30, 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.

Wishbone Medical, Inc.

– Patent Infringement Litigation

On October 30, 2020, OrthoPediatrics, along with its wholly-owned subsidiary, Orthex, LLC, filed a lawsuit in federal district court (N.D.

Indiana, South Bend Division, Case No.

3:20-cv-00929) against Wishbone Medical, Inc.

Deeter (collectively “Wishbone”), claiming infringement of ’377 Patent, unfair competition, false advertising, breach of contract, defamation per se, tortious interference with contractual relationships, and tortious interference with prospective contractual relationships.

In early January 2021, OrthoPediatrics amended its lawsuit by adding a declaratory judgment claim of infringement of the ‘377 Patent against Wishbone.

Thereafter, in January 2021, Wishbone filed a motion to dismiss all OrthoPediatrics’ causes of action.

In late August 2021, the Court denied Wishbone's motion to dismiss with respect to OrthoPediatrics’ infringement and breach of contract claims and dismissed OrthoPediatrics remaining causes of action.

In late September 2021, Wishbone filed its answer and counterclaims, in part, seeking declaratory judgment of non-infringement and invalidity of the ‘377 Patent, and alleging OrthoPediatrics patent infringement claim(s) against Wishbone was made in bad faith.

In mid-October 2021, OrthoPediatrics filed its answer to Wishbone’s counterclaims, denying all of them.

Although we believe Wishbone’s counterclaims are without merit and will vigorously defend the claims asserted against us, litigation can involve complex factual and legal questions, and an adverse resolution of this proceeding could have an adverse effect on our business, operating results and financial condition.

As of September 30, 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 June 30, 2021, 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 September 30, 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.

Purchase Obligations

As a result of entering into a license agreement for the exclusive distribution of the 7D Surgical FLASH TM Navigation platform, the Company has agreed to a minimum purchase commitment for the first twelve months of that agreement.

As of September 30, 2021, the remaining purchase commitment under the agreement was $ 3,800 .

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