ORTHOPEDIATRICS CORP 10-Q

ITEM 1. FINANCIAL STATEMENTS ORTHOPEDIATRICS CORP. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (In Thousands, Except Share Data) September 30, 2021 December 31, 2020 ASSETS Current assets: Cash and cash equivalents $ 6,334 $ 28,758 Restricted cash 1,368 1,374 Short term investments 51,349 55,141 Accounts receivable - trade, less allowance for doubtful accounts of $ 373 and $ 433 , respectively 18,146 17,212 Inventories, net 55,458 52,989 Notes receivable 59 337 Prepaid expenses and other current assets 2,745 2,618 Total current assets 135,459 158,429 Property and equipment, net 28,783 27,227 Other assets: Amortizable intangible assets, net 54,904 50,284 Goodwill 70,490 70,511 Other intangible assets 13,957 13,961 Total other assets 139,351 134,756 Total assets $ 303,593 $ 320,412 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable - trade $ 8,972 $ 10,038 Accrued compensation and benefits 4,655 4,540 Accrued legal settlements — 6,342 Current portion of long-term debt with affiliate 136 131 Current portion of acquisition installment payable 12,791 12,233 Other current liabilities 1,464 1,744 Total current liabilities 28,018 35,028 Long-term liabilities: Long-term debt with affiliate, net of current portion 942 1,044 Acquisition installment payable, net of current portion 13,927 12,784 Contingent consideration 34,420 30,710 Deferred income taxes 4,848 5,755 Other long-term liabilities 320 323 Total long-term liabilities 54,457 50,616 Total liabilities 82,475 85,644 Stockholders' equity: Common stock, $ 0.00025 par value; 50,000,000 shares authorized; 19,672,162 shares and 19,560,291 shares issued as of September 30, 2021 (unaudited) and December 31, 2020, respectively 5 5 Additional paid-in capital 392,929 388,622 Accumulated deficit ( 178,098 ) ( 161,766 ) Accumulated other comprehensive income 6,282 7,907 Total stockholders' equity 221,118 234,768 Total liabilities and stockholders' equity $ 303,593 $ 320,412 See notes to condensed consolidated financial statements. 4 ORTHOPEDIATRICS CORP. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In Thousands, Except Share and Per Share Data) Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Net revenue $ 25,079 $ 22,205 $ 73,236 $ 52,154 Cost of revenue 6,525 4,566 17,914 12,241 Gross profit 18,554 17,639 55,322 39,913 Operating expenses: Sales and marketing 9,862 9,237 29,687 22,421 General and administrative 11,034 9,823 34,163 28,281 Research and development 1,302 1,077 3,935 3,223 Total operating expenses 22,198 20,137 67,785 53,925 Operating loss ( 3,644 ) ( 2,498 ) ( 12,463 ) ( 14,012 ) Other expenses: Interest expense, net 542 1,010 1,851 2,788 Fair value adjustment of contingent consideration ( 1,430 ) 909 3,710 1,819 Other (income) expense ( 267 ) 122 ( 802 ) 312 Total other expenses ( 1,155 ) 2,041 4,759 4,919 Loss before income taxes $ ( 2,489 ) $ ( 4,539 ) $ ( 17,222 ) $ ( 18,931 ) Provision for income taxes (benefit) ( 292 ) — ( 890 ) — Net loss $ ( 2,197 ) $ ( 4,539 ) $ ( 16,332 ) $ ( 18,931 ) Weighted average common stock - basic and diluted 19,291,374 19,112,797 19,256,128 17,700,429 Net loss per share - basic and diluted $ ( 0.11 ) $ ( 0.24 ) $ ( 0.85 ) $ ( 1.07 ) See notes to condensed consolidated financial statements. 5 ORTHOPEDIATRICS CORP. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Unaudited) (In Thousands) Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Net loss $ ( 2,197 ) $ ( 4,539 ) $ ( 16,332 ) $ ( 18,931 ) Other comprehensive loss: Foreign currency translation adjustment 288 ( 94 ) ( 1,343 ) 70 Unrealized loss on short-term investments ( 88 ) — ( 282 ) — Other comprehensive loss 200 ( 94 ) ( 1,625 ) 70 Comprehensive loss $ ( 1,997 ) $ ( 4,633 ) $ ( 17,957 ) $ ( 18,861 ) See notes to condensed consolidated financial statements. 6 ORTHOPEDIATRICS CORP. CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (Unaudited) (In Thousands, Except Share Data) Three and Nine Months Ended September 30, 2021 Accumulated Additional Other Total 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 Net loss — — — ( 10,379 ) — ( 10,379 ) Other comprehensive income — — — — ( 3,622 ) ( 3,622 ) Stock option exercise 2,010 — 62 — — 62 Restricted stock 97,111 — 1,316 — — 1,316 Balance at March 31, 2021 19,659,412 $ 5 $ 390,000 $ ( 172,145 ) $ 4,285 $ 222,145 Net loss — — — ( 3,756 ) — ( 3,756 ) Other comprehensive loss — — — — 1,797 1,797 Restricted stock 10,632 — 1,415 — — 1,415 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 7 ORTHOPEDIATRICS CORP. CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (Unaudited) (In Thousands, Except Share Data) Three and Nine Months Ended September 30, 2020 Accumulated Additional Other Total 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 Net loss — — — — — ( 4,945 ) — ( 4,945 ) Other comprehensive income — — — — — — ( 1,358 ) ( 1,358 ) Stock option exercise 22,208 — — — 688 — — 688 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 — — — — — ( 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 See notes to condensed consolidated financial statements. 8 ORTHOPEDIATRICS CORP. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In Thousands) Nine Months Ended September 30, 2021 2020 OPERATING ACTIVITIES Net loss $ ( 16,332 ) $ ( 18,931 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 7,870 5,696 Stock-based compensation 4,170 4,712 Fair value adjustment of contingent consideration 3,710 1,819 Acquisition installment payable 1,701 1,702 Deferred income taxes ( 890 ) — Changes in certain current assets and liabilities: Accounts receivable - trade ( 716 ) ( 389 ) Inventories ( 3,244 ) ( 12,340 ) Prepaid expenses and other current assets ( 138 ) ( 215 ) Accounts payable - trade ( 956 ) 155 Accrued legal settlements ( 6,342 ) — Accrued expenses and other liabilities ( 168 ) ( 558 ) Other ( 493 ) ( 24 ) Net cash used in operating activities ( 11,828 ) ( 18,373 ) INVESTING ACTIVITIES 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 ) Sale of short-term marketable securities 4,000 — Purchases of licenses ( 7,908 ) — Purchases of property and equipment ( 6,468 ) ( 6,448 ) Net cash used in investing activities ( 10,376 ) ( 10,637 ) FINANCING ACTIVITIES Payments on debt with affiliate — ( 25,000 ) Proceeds from issuance of common stock, net of issuance costs — 70,207 Proceeds from exercise of stock options 137 1,629 Payments on mortgage notes ( 97 ) ( 88 ) Net cash (used in) provided by financing activities 40 46,748 Effect of exchange rate changes on cash ( 266 ) ( 24 ) NET (DECREASE) INCREASE IN CASH ( 22,430 ) 17,714 Cash and restricted cash, beginning of year $ 30,132 $ 72,027 Cash and restricted cash, end of period $ 7,702 $ 89,741 9 SUPPLEMENTAL DISCLOSURES Cash paid for interest $ 43 $ 1,218 Transfer of instruments from property and equipment to inventory $ 80 $ 645 Issuance of common shares to acquire Telos $ — $ 1,568 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. 10 ORTHOPEDIATRICS CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Dollars In Thousands, Except Share and Per Share data) NOTE 1 – BUSINESS 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 TM Spine, BandLoc TM , Pediguard, Pediatric Nailing Platform | Femur, Orthex ® , QuickPack ® 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. The Company began selling its products in the United States in 2008 and internationally in 2011. 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. 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 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 pediatric congenital deformities and limb length discrepancies. 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. As part of the sale, we also executed an exclusive license arrangement with Squadron providing for perpetual access to certain intellectual property and a mutual distribution agreement. 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. On April 1, 2020, we purchased all the issued and outstanding membership interest of ApiFix, Ltd. ("ApiFix") for (a) $ 2,000 in cash, and (b) 934,783 shares of the Company's common stock, $ 0.00025 par value per share, representing approximately $ 35,000 (based on a closing share price of $ 37.63 on April 1, 2020. 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"). In addition, we have also agreed to pay as part of the purchase price the following anniversary payments, subject to certain limitations and adjustments: (i) approximately $ 13,000 on the second anniversary of the closing date, provided that such payment will be paid earlier if 150 clinical procedures using the ApiFix System are completed in the United States before such anniversary date, (ii) $ 8,000 on the third anniversary of the closing date; 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 11 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. We use the Tether Clamp System in connection with our Bandloc 5.5/6.0 System. We were previously the sole licensee of the purchased assets under a license agreement with Band-Lok. Our largest investor is Squadron, a private investment firm based in Granby, Connecticut. The global COVID-19 pandemic (“COVID-19” or the “pandemic”), together with the preventative and precautionary measures taken by governments, governmental agencies, communities, businesses and hospital administrators, has impacted, and may continue to impact significant aspects of our business, including demand for our products, supply chain and distribution systems, our operations generally, and the timing for bringing new products to market. 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 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. NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation 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., Orthex, LLC, Telos Partners, LLC and ApiFix, Ltd. (collectively, the “Company,” “we,” “our” or “us”). All intercompany balances and transactions have been eliminated. Unaudited Interim Condensed Consolidated Financial Statements 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, 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. 12 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, 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 $ 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 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 Preparation of the condensed consolidated financial statements requires the use of estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as of the date of the condensed consolidated financial statements. By their nature, these judgments are subject to an inherent degree of uncertainty. The impact of the coronavirus disease ("COVID-19") has significantly increased economic and demand uncertainty. We use historical experience and other assumptions as the basis for our judgments and estimates. Because future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Any changes in these estimates will be reflected in the condensed consolidated financial statements. Foreign Currency Transactions 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. 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. Revenue from Contracts with Customers In accordance with ASC 606, " Revenue From Contracts With Customers (ASC 606)", revenue is recognized when a customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these goods or services, and excludes any sales incentives or taxes collected from a customer which are subsequently remitted to government authorities. Revenue Recognition – United States 13 Revenue in the United States is generated primarily from the sale of our implants and, to a much lesser extent, from the sale of our instruments. Sales in the United States are primarily to hospital accounts through independent sales agencies. We recognize revenue when our performance obligations under the terms of a contract with our customer are satisfied. This typically occurs when we transfer control of our products to the customers, generally upon implantation or when title passes upon shipment. 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. Revenue Recognition – International 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; 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. To date, we have not experienced any loss in such accounts. 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 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 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 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). The Company also maintains restricted cash of 100 Euro at its Netherlands entity for potential Italian tenders. Accounts Receivable and Allowance for Doubtful Accounts 14 Accounts receivable are uncollateralized customer obligations due under normal trade terms, generally requiring payment within 30 days from the invoice date. Account balances with invoices over 30 days past due are considered delinquent. No interest is charged on past due accounts. Payments of accounts receivable are applied to the specific invoices identified on the customer's remittance advice or, if unspecified, to the customer's account as an unapplied credit. The carrying amount of accounts receivable is reduced by an allowance that reflects management's best estimate of the amounts that will not be collected, determined principally on the basis of historical experience, management's assessment of the collectability of specific customer accounts and the aging of the accounts receivable. 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; and 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 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. 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. 15 The need to maintain substantial levels of inventory impacts our estimates for excess and obsolete inventory. Each of our implant systems are designed to include implantable products that come in different sizes and shapes to accommodate the surgeon’s needs. Typically, a small number of the set components are used in each surgical procedure. Certain components within each set may become obsolete before other components based on the usage patterns. We adjust inventory values, as needed, to reflect these usage patterns and life cycle. In addition, we continue to introduce new products, which may require us to take additional charges for excess and obsolete inventory in the future. Property and Equipment, net Property and equipment are carried at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful life of the assets. When assets are retired or otherwise disposed of, costs and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is recognized in operations for the period. Maintenance and repairs that prolong or extend the useful life are capitalized, whereas standard maintenance, replacements, and repair costs are expensed as incurred. 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, 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. Sample inventory is carried at cost less accumulated depreciation. Depreciable lives are generally as follows: Building and building improvements 25 to 30 years Furniture and fixtures 5 to 7 years Computer equipment 3 to 5 years Business software 3 years Office and other equipment 5 to 7 years Instruments 5 years Sample inventory 2 years Amortizable Intangible Assets, net Amortizable intangible assets include fees necessary to secure various patents and licenses, including Band-Lok, the value of internally developed software, customer relationships, and non-competition agreements related to the acquisition of Orthex, and customer relationships and non-competition agreements related to the acquisitions of Telos and ApiFix. Amortization is calculated on a straight-line basis over the estimated useful life of the asset. Amortization for patents and licenses commences at the time of patent approval and market launch, respectively. Amortization for assets acquired commences upon acquisition. Intangible assets are amortized over a 3 to 20 year period. 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 16 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. Goodwill and Other Intangible Assets Our goodwill represents the excess of the cost over the fair value of net assets acquired. The determination of the value of goodwill and intangible assets arising from acquisitions requires extensive use of accounting estimates and judgments to allocate the purchase price to the fair value of net tangible and intangible assets acquired. Goodwill is not amortized and is assessed for impairment using fair value measurement techniques on an annual basis or more frequently if facts and circumstances warrant such a review. 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 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. 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. Acquisition Payable and Contingent Consideration Upon the completion of an acquisition, the Company may record an acquisition installment payable, contingent consideration or both. Acquisition installment payables, which are fixed future payments, are recorded at their net present value, and contingent consideration is recorded at fair value as determined by management with the assistance of an independent valuation specialist at the original issuance date and is marked to fair value on a recurring basis. Accretion of interest expense attributable to the acquisition installment payable is 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 on the condensed consolidated statement of operations. 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 Cost of revenue consists primarily of products purchased from third-party suppliers, excess and obsolete inventory adjustments, inbound freight, and royalties. Our implants and instruments are manufactured to our specifications by third-party suppliers who meet our manufacturer qualifications standards. Our third-party manufacturers are required to meet the standards of the Food and Drug Administration (the “FDA”), and the International Organization for Standardization, as well as other country-specific quality standards. The majority of our implants and instruments are produced in the United States. Sales and Marketing Expenses Sales and marketing expenses primarily consist of commissions to our domestic and select international independent sales agencies and consignment distributors, as well as compensation, commissions, benefits and other related costs for personnel we employ. Commissions and bonuses are generally based on a percentage of sales. Our international independent stocking distributors purchase instrument sets 17 and replenishment stock for resale, and we do not pay commissions or any other sales related costs for international sales to distributors. Advertising Costs Advertising costs consist primarily of print advertising, trade shows, and other related expenses. Advertising costs are expensed as incurred and are recorded as a component of sales and marketing expense. Research and Development Costs Research and development costs are expensed as incurred. Our research and development expenses primarily consist of costs associated with engineering, product development, consulting services, outside prototyping services, outside research activities, materials, development and protection of our intellectual property portfolio, as well as other costs associated with development of our products. Research and development costs also include related personnel and consultants’ compensation expense. Stock-Based Compensation Prior to our Initial Public Offering ("IPO") in October 2017, we maintained an Amended and Restated 2007 Equity Incentive Plan (the “2007 Plan”) that provided for grants of options and restricted stock to employees, directors and associated third-party representatives of the Company as determined by the Board of Directors. The 2007 Plan had authorized 1,585,000 shares for award. Immediately prior to our IPO, we adopted our 2017 Incentive Award Plan (the "2017 Plan") which replaced the 2007 Plan. The 2017 Plan provides for grants of options and restricted stock to officers, employees, consultants or directors of our Company. The 2017 Plan has authorized 1,789,647 shares for award. Options holders, upon vesting, may purchase common stock at the exercise price, which is the estimated fair value of our common stock on the date of grant. Option grants generally vest immediately or over three years . No stock options were granted in any of the periods presented. Restricted stock may not be transferred prior to the expiration of the restricted period, which is typically three years . The restricted stock that had been granted under the 2007 Plan had restriction periods that generally lasted until the earlier of six years from the date of grant, or an IPO or change in control, as defined in the 2007 Plan. All restricted stock granted prior to May 2014 vested upon our IPO and the remaining grants under the 2007 Plan vested six months after the IPO. We recognize the reversal of stock compensation expense when a restricted stock forfeiture occurs as opposed to estimating future forfeitures. We record the fair value of restricted stock at the grant date. 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 18 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 and unrealized gain (loss) on our short term investments. Income Taxes 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. Under this method, we determine deferred tax assets and liabilities on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. We recognize deferred tax assets to the extent that we believe that these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence. If we determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make an adjustment to the valuation allowance. 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” and "Smaller Reporting Company" Reporting Requirements We qualify as an “emerging growth company” as defined in the JOBS Act. For as long as a company is deemed to be an emerging growth company, it may take advantage of specified reduced reporting and other regulatory requirements that are generally unavailable to other public companies. Among other things, we are not required to provide an auditor attestation report on the assessment of the internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act of 2002. We will be able to take advantage of these reduced requirements until December 31, 2022, the date on which we will no longer qualify as an emerging growth company. Section 107 of the JOBS Act also provides that an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we are subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. 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. 19 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. 2021-04 " Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity's Own Equity (Subtopic 815-40): Issuer's Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (a consensus of the FASB Emerging Issues Task Force)". This ASU is intended to clarify and reduce diversity in an issuer's accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. The guidance clarifies whether an issuer should account for a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange as (1) an adjustment to equity and, if so, the related earnings per share effects, if any, or (2) an expense and, if so, the manner and pattern of recognition. The amendments in this ASU affect all entities that issue freestanding written call options that are classified in equity. The amendments do not apply to modifications or exchanges of financial instruments that are within the scope of another Topic and do not affect a holder’s accounting for freestanding call options. The amendments in this ASU are effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. An entity should apply the amendments prospectively to modifications or exchanges occurring on or after the effective date of the amendments. Early adoption is permitted for all entities, including adoption in an interim period. The Company is currently evaluating the impact of adopting ASU 2021-04 on its consolidated financial statements. In June 2016, the FASB issued ASU No. 2016-13 " Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" . The ASU is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The ASU requires the measurement of all expected credit losses for financials assets including trade receivables held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Based on ASU 2019-10 and our status as a smaller reporting company, the Company will adopt ASU 2016-13 effective January 1, 2023. The adoption of this guidance is not expected to have a significant impact on the Company's consolidated financial statements and related disclosures. NOTE 3 – BUSINESS COMBINATION 20 ApiFix On April 1, 2020, the Company purchased all the issued and outstanding membership interest of ApiFix for $ 2,000 in cash, including $ 344 of cash acquired, 934,783 shares of the Company's common stock, $ 0.00025 par value per share, representing approximately $ 35,176 (based on a closing share price of $ 37.63 on April 1, 2020), approximately $ 30,000 in anniversary payments, and approximately $ 41,741 in a system sales payment. The total consideration transferred of $ 87,379 , as calculated after discounting future payments to present value, is final. 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: 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 final. The following table summarizes the total consideration paid for ApiFix 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 $ 87,379 Assets Cash 344 Accounts receivable-trade 245 Inventories 685 Prepaid expenses and other current assets 77 Property and equipment 153 Intangible assets 32,150 Other intangible assets 8,640 Operating lease right-of-use asset 104 Total assets 42,398 Liabilities Accounts payable and accrued liabilities 226 Operating lease liabilities 106 Other current liabilities 270 Deferred income taxes 6,487 Total liabilities 7,089 Less: total net assets 35,309 Goodwill $ 52,070 21 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 $ 8,640 Indefinite Patents 31,720 15 years Customer Relationships 230 10 years Non-competition Agreements 200 4 years $ 40,790 The Company is obligated to make anniversary payments of: (i) approximately $ 13,000 on the second anniversary of the closing date, provided that such payment will be paid earlier if 150 clinical procedures using the ApiFix System are completed in the United States before such anniversary date, (ii) $ 8,000 on the third anniversary of the closing date; 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 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. The anniversary payments and system sales payment may each be made in cash or cash and common stock, subject to certain limitations; 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. 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. 22 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 September 30, 2021 Anniversary Payments: Second Year Payment $ 10,980 $ 12,233 $ 12,791 Third Year Payment 5,780 6,335 6,890 Fourth Year Payment 5,860 6,449 7,037 Total acquisition installment payable 22,620 25,017 26,718 Less: current portion of acquisition installment payable 10,980 12,233 12,791 Acquisition installment payable, net of current portion 11,640 12,784 13,927 System sales payment 27,190 30,710 34,420 ApiFix future consideration, net of current portion $ 38,830 $ 43,494 $ 48,347 Pre-acquisition revenues and earnings for ApiFix were not material to the condensed consolidated operations. NOTE 4 - GOODWILL AND INTANGIBLE ASSETS Goodwill Changes in the carrying amount of goodwill for the nine months ended September 30, 2021 were as follows: Total Goodwill at January 1, 2021 $ 70,511 Foreign currency translation impact ( 21 ) Goodwill at September 30, 2021 $ 70,490 Intangible Assets 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 Patents 14.0 years $ 43,349 $ ( 4,807 ) $ 38,542 Intellectual Property 9.6 years 8,990 ( 1,232 ) 7,758 License Agreements 5.9 years 10,674 ( 2,070 ) 8,604 Total amortizable assets $ 63,013 $ ( 8,109 ) $ 54,904 As of December 31, 2020, the balances of amortizable intangible assets were as follows: 23 Weighted-Average Amortization Period Gross Intangible Assets Accumulated Amortization Net Intangible Assets Patents 14.7 years $ 43,363 $ ( 2,650 ) $ 40,713 Intellectual Property 10.3 years 8,990 ( 744 ) 8,246 License Agreements 2.7 years 2,765 ( 1,440 ) 1,325 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. We use the Tether Clamp System in connection with our Bandloc 5.5/6.0 System. We were previously the sole licensee of the purchased assets under a license agreement with Band-Lok. 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 $ 13,957 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 . Trademarks are recorded in Other Intangible assets on the condensed consolidated balance sheets. 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; and 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. 24 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 Short term investments Exchange Trade Mutual Funds $ 35,358 $ — $ — $ 35,358 Corporate Bonds $ 8,209 $ — $ — $ 8,209 Treasury Bonds $ 4,206 $ — $ — $ 4,206 Other $ 3,575 $ — $ — $ 3,575 Financial Liabilities Contingent Consideration $ — $ — $ 34,420 $ 34,420 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 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. 25 The following table summarizes the change in fair value of Level 3 instruments in 2021: Total Balance at January 1, 2021 $ 30,710 Change in fair value of contingent consideration 3,710 Balance at September 30, 2021 $ 34,420 The recurring Level 3 fair value measurements of contingent consideration liabilities associated with commercial sales milestones include the following significant unobservable inputs as of September 30, 2021 and December 31, 2020: September 30, 2021 December 31, 2020 Valuation techniques Discounted cash flow, Monte Carlo Present value discount rate (1) 25.5 % 25.8 % Volatility factor 51.0 % 51.8 % Expected years 2.6 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 September 30, 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, 2021 December 31, 2020 Mortgage payable to affiliate $ 1,078 $ 1,175 Less: current maturities 136 131 Long-term debt with affiliate, net of current maturities $ 942 $ 1,044 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, 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: (i) the date on which any person or persons acquire (x) capital stock of the Company possessing the voting power to elect a majority of the Company's Board of Directors (whether by merger, consolidation, reorganization, combination, sale or transfer), or (y) all or substantially all of the Company's assets, determined on a consolidated basis; and (ii) January 1, 2024. 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. 26 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 and is recorded in interest, net. 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. There are no traditional financial covenants associated with the Second 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. 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. Pursuant to the terms of the mortgage note, we pay Tawani Enterprises Inc. monthly principal and interest installments of $ 16 with interest compounded at 5 % until maturity in 2028, at which time a final payment of remaining principal and interest is due. The mortgage is secured by the related real estate and building. 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 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 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 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. 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"). 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. 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. 27 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. 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. An ownership change under Section 382 of the Internal Revenue Code was deemed to occur on May 30, 2014. Given the limitation calculation, we anticipate approximately $ 16,200 in losses generated prior to the ownership change date will be subject to potential limitation. The estimated annual limitation is $ 1,062 . A second ownership change under Section 382 was deemed to occur on December 11, 2018. The estimated annual limitation is $ 9,736 , which is increased by $ 22,430 annually over the first five years as a result of an unrealized built in gain. NOLs sustained prior to May 30, 2014 will still be constrained by the lower limitation. 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, 2021. Such objective evidence limits the ability to consider other subjective evidence, such as our projections for future growth. NOTE 8 - STOCKHOLDERS’ EQUITY Stock Options The fair value for options granted at the time of issuance were estimated at the date of grant using a Black-Scholes options pricing model. Significant assumptions included in the option value model include the fair value of our common stock at the grant date, weighted average volatility, risk-free interest rate, dividend yield and the forfeiture rate. There were no stock options granted in any of the periods presented. Our stock option activity and related information are summarized as follows: Weighted-Average Contractual Terms Options Exercise Price (in Years) Outstanding at January 1, 2021 12,802 $ 30.97 1.6 Exercised ( 4,422 ) 30.97 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 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. 28 Restricted Stock Our restricted stock activity and related information are summarized as follows: Weighted-Average Remaining Restricted Contractual Terms Stock (in Years) Outstanding at January 1, 2021 436,730 1.1 Granted 111,637 Forfeited ( 4,188 ) Vested ( 168,264 ) Outstanding at September 30, 2021 375,915 1.4 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 $ 1,440 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 Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Net loss $ ( 2,197 ) $ ( 4,539 ) $ ( 16,332 ) $ ( 18,931 ) Weighted average number of shares - basic and diluted 19,291,374 19,112,797 19,256,128 17,700,429 Net loss per share - basic and diluted $ ( 0.11 ) $ ( 0.24 ) $ ( 0.85 ) $ ( 1.07 ) Our basic and diluted net loss per share is computed using the two-class method. The two-class method is an earnings allocation that determines net income per share for each class of common stock and participating securities according to their participation rights in dividends and undistributed earnings or losses. Non-vested restricted stock that includes non-forfeitable rights to dividends are considered participating securities. Because we have incurred a net loss for all periods presented, diluted net loss per common share is the same as basic net loss per common share. The following contingently issuable and convertible equity shares were excluded from the calculation of diluted net loss per share because their effect would have 29 been anti-dilutive for all periods presented: Nine Months Ended September 30, 2021 2020 Restricted stock 375,915 436,730 Stock options 6,638 13,472 Warrants — 404 Total shares 382,553 450,606 NOTE 10 – BUSINESS SEGMENT Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. We have one operating and reporting segment, OrthoPediatrics Corp., which designs, develops and markets anatomically appropriate implants and devices for children with orthopedic problems. Our chief operating decision-maker, our Chief Executive Officer, reviews financial information presented on a consolidated basis for purposes of making operating decisions and assessing financial performance, accompanied by disaggregated revenue information by product category. We determined that disaggregating revenue into these categories achieves the disclosure objective of illustrating the differences in the nature, timing and uncertainty of our revenue streams. We do not assess the performance of our individual product categories on measures of profit or loss, or other asset-based metrics. Therefore, the information below is presented only for revenue by category and geography. 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, 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 September 30, Nine Months Ended September 30, Product sales by geographic location: 2021 2020 2021 2020 U.S. $ 19,354 $ 19,583 $ 57,930 $ 45,113 International 5,725 2,622 15,306 7,041 Total $ 25,079 $ 22,205 $ 73,236 $ 52,154 Three Months Ended September 30, Nine Months Ended September 30, Product sales by category: 2021 2020 2021 2020 Trauma and deformity $ 16,817 $ 14,969 $ 49,302 $ 36,399 Scoliosis 7,266 6,555 20,874 14,102 Sports medicine/other 996 681 3,060 1,653 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 nine months ended September 30, 2021 and 2020. 30 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 a supplier with which we maintain certain long-term agreements. 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 $ 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 We have a defined-contribution plan, OrthoPediatrics 401(k) Retirement Plan (the “401(k) Plan”), which includes a cash or deferral (Section 401(k)) arrangement. The 401(k) Plan covers those employees who meet certain eligibility requirements and elect to participate. Employee contributions are limited to the annual amounts permitted under the Internal Revenue Code. The 401(k) Plan allows us to make a discretionary matching contribution. Discretionary matching contributions are determined annually by management. We have elected to match our employees' 401(k) contributions up to 4 % of employees' salary. NOTE 13 – COMMITMENTS AND CONTINGENCIES Leases At the inception of a contractual arrangement, the Company determines whether the contract contains a lease by assessing whether there is an identified asset and whether the contract conveys the right to control the use of the identified asset in exchange for consideration over a period of time. If both criteria are met, the Company calculates the associated lease liability and corresponding right-of-use asset upon lease commencement using a discount rate based on a borrowing rate commensurate with the term of the lease. The Company records lease liabilities within current liabilities or long-term liabilities based upon the length of time associated with the lease payments. The Company records its operating lease right-of-use assets as long-term assets. 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 From time to time, we are involved in various legal proceedings arising in the ordinary course of our business. 31 K2M - Alleged Patent Infringement On January 20, 2017, K2M, Inc. filed suit against us in the United States District Court for the District of Delaware (K2M, Inc. v. OrthoPediatrics Corp. et al., Case No. 1:17-cv-0061) seeking unspecified damages for alleged infringement of U.S. Patent No. 9,532,816. The complaint was amended on August 21, 2017 to add, among other things, a claim of patent infringement regarding U.S. Patent No. 9,655,664. These patents relate to certain instruments used in our RESPONSE™ spine systems, which represent a portion of our total scoliosis portfolio. We denied these claims and responded with counterclaims seeking declaratory relief that the patents in question are both invalid and not infringed. On November 19, 2019, K2M amended its complaint to add two (2) additional issued patents, to add claims of patent infringement regarding U.S. Patent Nos. 10,285,735 and 10,292,736 (both issued in May 2019). Like before, these newly issued K2M patents relate to certain instruments used in our RESPONSE spine systems, and we denied these claims and responded with counterclaims seeking declaratory relief that the patents in question are both invalid and not infringed. On June 29, 2021, the parties settled the matter, and subsequently filed a Joint Stipulation of Dismissal With Prejudice concerning all claims and counterclaims, which the Court subsequently granted and ordered. The Company previously accrued for the related expense during the fourth quarter of 2020. 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 (specifically, U.S. Patent No. 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 $ 60,000 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, 32 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 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. Patent Nos. 7,670,358; 8,361,121; 9,339,301; 9,668,787; 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. Barry. 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. 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. and Nick A. 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. Royalties 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 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. 33 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 .