What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2022-03-03 compared with 2021-03-11 · 255 added, 255 removed, 894 unchanged (36% of the section changed)

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We have audited the accompanying consolidated balance sheets of OrthoPediatrics Corp.

and subsidiaries (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive loss, stockholders' equity (deficit) and cash flows, for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the "financial statements").

and subsidiaries (the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive loss, stockholders' equity and cash flows, for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the "financial statements").

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.

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We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement, whether due to error or fraud.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

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Accumulated deficit ( 178,026 ) ( 161,766 )

Accumulated other comprehensive income (loss) 7,907 ( 3 )

Accumulated other comprehensive income 8,491 7,907

Total stockholders' equity 225,369 234,768

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Net loss $ ( 16,260 ) $ ( 32,944 ) $ ( 13,731 )

Net loss attributable to common stockholders $ ( 32,944 ) $ ( 13,731 ) $ ( 12,025 )

Weighted average common shares - basic and diluted 19,268,255 18,056,828 14,624,194

Net loss from continuing operations per share attributable to common stockholders - basic and diluted $ ( 1.82 ) $ ( 0.87 ) $ ( 0.96 )

Net loss from discontinued operations per share attributable to common stockholders - basic and diluted $ — $ ( 0.07 ) $ —

Net loss per share attributable to common stockholders - basic and diluted $ ( 1.82 ) $ ( 0.94 ) $ ( 0.96 )

Net loss from continuing operations per share - basic and diluted $ ( 0.84 ) $ ( 1.82 ) $ ( 0.87 )

Net loss from discontinued operations per share - basic and diluted $ — $ — $ ( 0.07 )

Net loss per share - basic and diluted $ ( 0.84 ) $ ( 1.82 ) $ ( 0.94 )

See notes to consolidated financial statements.

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Unrealized gain (loss) on short-term investments ( 573 ) 53 —

Other comprehensive (loss) income, net of tax 7,910 620 ( 758 )

Other comprehensive income, net of tax 584 7,910 620

Comprehensive loss $ ( 15,676 ) $ ( 25,034 ) $ ( 13,111 )

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ORTHOPEDIATRICS CORP.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

( in thousands, except share information)

Common Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Total Stockholders' Equity (Deficit)

Common Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Total Stockholders' Equity

Balance at January 1, 2019 14,538,202 $ 4 $ 197,442 $ ( 115,091 ) $ ( 623 ) $ 81,732

Net loss — — — ( 13,731 ) — ( 13,731 )

Consideration for Vilex and Orthex Acquisition 245,352 — 10,000 — — 10,000

Restricted stock 145,153 — 2,603 — — 2,603

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Net loss — — — ( 32,944 ) — ( 32,944 )

Consideration for Vilex and Orthex Acquisition 245,352 — 10,000 — — 10,000

Restricted stock 162,125 — 6,196 — — 6,196

Stock option exercise 53,270 — 1,650 — — 1,650

Consideration for ApiFix and Telos acquisitions and Band-Lok intellectual property purchase 1,025,782 — 39,388 — — 39,388

Issuance of common stock, net of issuance cost 1,595,986 1 70,206 — — 70,207

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Net Loss — — — ( 16,260 ) — ( 16,260 )

Restricted stock 162,125 — 6,196 — — 6,196

Stock option exercise 4,422 — 137 — — 137

Consideration for ApiFix and Telos acquisitions and Band-Lok intellectual property purchase 1,025,782 — 39,388 — — 39,388

Issuance of common stock, net of issuance cost 1,595,986 1 70,206 — — 70,207

Restricted stock 107,902 — 5,842 — — 5,842

Consideration for Devise Ortho acquired assets 4,599 — 298 — — 298

Other comprehensive income — — — — 584 584

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INVESTING ACTIVITIES

Acquisition of Devise Ortho assets ( 650 ) — —

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

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Acquisition of Vilex and Orthex, net of cash acquired — — ( 49,836 )

Purchase of notes receivable — — ( 502 )

Purchases of licenses ( 7,908 ) — ( 270 )

Sale of short term investments 9,250 — —

Purchase of short term investments — ( 55,000 ) —

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Proceeds from issuance of debt with affiliate — — 30,000

Payment of revolving credit facility with affiliate — — ( 4,065 )

Proceeds from issuance of common stock, net of issuance costs — 70,207 59,996

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Transfer of instruments from property and equipment to inventory $ 453 $ 415 $ 1,037

Issuance of common share sto acquire Vilex and Orthex $ — $ 10,000 $ —

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

Issuance of common shares to acquire Telos $ — $ 1,568 $ —

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

Issuance of common shares to purchase Devise Ortho assets $ 298 $ — $ —

Divestiture consideration allocated to assets held for sale (See Note 4) $ — $ — $ 25,000

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

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

We 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 , Pediatric Nailing Platform | Femur, Orthex, QuickPack TM and ApiFix ® Mid-C System, to various hospitals and medical facilities throughout the United States and various international markets.

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

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

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 pediatrics congenital deformities and limb length discrepancies (refer to Note 3).

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

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 (refer to Note 4).

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 (refer to Note 3).

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 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 (refer to Note 3).

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

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

We are the only global medical device company focused exclusively on providing a comprehensive trauma and deformity correction, scoliosis and sports medicine product offering to the pediatric orthopedic market in order to improve the lives of children with orthopedic conditions.

Since inception we have impacted the lives of over 234,000 children.

We design, develop and commercialize innovative orthopedic implants and instruments to meet the specialized needs of pediatric surgeons and their patients, who we believe have been largely neglected by the orthopedic industry.

We currently serve three of the largest categories in this market.

We estimate that the portion of this market that we currently serve represents a $ 3,300 opportunity globally, including over $ 1,500 in the United States.

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

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

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We continued to train and educate our sales team and our surgeons on our products.

During 2020, we continued to focus on developing innovative solutions, acquired multiple enabling technologies and continued to deploy additional consigned instrument and implant sets in furtherance of our strategy.

During 2020 and 2021, we continued to focus on developing innovative solutions, acquired multiple enabling technologies, invested in both new and existing partnerships and continued to deploy additional consigned instrument and implant sets in furtherance of our strategy.

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

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The accompanying 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 $ 161,766 and $ 128,822 as of December 31, 2020 and 2019, respectively.

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

On August 4, 2020, the Company entered into a Second Amendment to its First Amended Loan Agreement with Squadron.

The Loan Agreement’s revolving credit commitment was increased from the previously established $ 15,000 to $ 25,000 .

The Company did no t have an outstanding balance as of December 31, 2020.

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

We believe that our cash balance at December 31, 2020 and expected cash flows from operations for the next twelve months subsequent to the issuance of the consolidated financial statements, are sufficient to enable us to maintain current and essential planned operations for more than the next twelve months.

On December 11, 2018, we completed a follow-on offering of our common stock, in which we issued and sold 1.725 million shares of common stock at a public offering price of $ 27.00 per share for aggregate gross proceeds of $ 46,575 .

We received $ 43,423 in net proceeds after deducting $ 2,800 of underwriting discounts and commissions and paying $ 352 in offering costs.

On December 13, 2019, we completed a follow-on offering of our common stock, in which we issued and sold 1.755 million shares at a public offering price of $ 36.50 per share for aggregate gross proceeds of $ 64,076 .

We received $ 59,996 in net proceeds after deducting $ 3,845 of underwriting discounts and commissions and paying $ 235 in underwriting commissions and offering costs.

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

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

We have experienced

recurring losses from operations since our inception and had an accumulated deficit of $ 178,026 and $ 161,766 as of December 31, 2021 and 2020, respectively.

Use of Estimates

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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.

In the year ended December 31, 2020, the Company recorded a $ 2,730 revenue reduction due to the repurchase of inventory from a stocking distributor in Germany, Austria and Switzerland that we converted to a sales agency.

Beginning in early 2017 and continuing through 2021, we expanded operations and established legal entities outside the United States, permitting us to sell under an agency model direct to local hospitals internationally.

The countries we serve under the agency model include the United Kingdom, Ireland, Australia, New Zealand, Canada, Belgium, the Netherlands, Poland, Italy, Israel, Germany, Switzerland, and Australia.

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

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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.

The company bases the fair value of short-term investments on quoted market prices for identical or comparable assets except for investments classified as asset backed securities which we identify as Level 2.

These securities are predominately priced by third parties, either a pricing vendor or dealer.

When a quoted price in an active market for an identical security is not available these third parties will utilize an alternative market approach, such as a recent trade or matrix pricing, or an income approach, such as a discounted cash flow pricing model that calculates values from observable inputs such as quoted interest rates, yield curves and other observable market information.

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.

balance sheet date.

See Note 6 for further discussion of financial instruments that carried a fair value on a recurring and nonrecurring basis.

Revenue from Contracts with Customers

The Company adopted ASC 606, " Revenue From Contracts with Customers (ASC 606)", on January 1, 2018 using the modified retrospective method for all contracts not completed as of the date of adoption.

The adoption of ASC 606 did not have any impact on the Company's consolidated historical financial statements.

results for 2019 and 2018 reflect the application of ASC 606 guidance.

In accordance with ASC 606, revenue is recognized when our performance obligations under the terms of a contract with our customer are satisfied.

In accordance with ASC 606, "Revenue from Contracts with Customers," revenue is recognized 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.

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

Sales through two of our independent sales agencies in the United States accounted for 14.2 % and 13.8 % of our global revenue in 2020.

Sales through two of our independent sales agencies in the United States accounted for 12.3 % and 12.2 % of our global revenue in 2019, respectively.

Sales through two of our independent sales agencies in the United States accounted for 12.1 % and 11.2 % of our global revenue in 2018, respectively.

Revenue Recognition – International

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

Prior to 2019, we concluded that collectibility was not reasonably assured at the time of delivery for certain customers who had not evidenced a consistent pattern of timely payment.

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

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

Based on a history of reliable collections, we have concluded that a contract exists and revenue should be recognized when 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.

In early 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.

Beginning in early 2017and continuing through 2021, we expanded operations and established legal entities outside the United States, permitting us to sell under an agency model direct to local hospitals internationally.

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

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.

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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.

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, as a component of other comprehensive income 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.

There were no such losses recognized in the accompanying Consolidated Statements of Operations.

Restricted Cash

In conjunction with the sale of Vilex, $ 1,250 was placed into a separate escrow account.

This cash is reported as restricted cash on the December 31, 2020 and 2019 consolidated balance sheet.

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

This cash is reported as restricted cash on the December 31, 2021 and 2020 Consolidated Balance Sheets.

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

however, due to the pending IMED Surgical litigation, the cash remains reported as restricted until the conclusion of the legal matter.

See Note 16 - Commitments and Contingencies for further detail.

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

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Balance at beginning of year $ 433 $ 506 $ 134

Additions charged to expense 274 424 3

Adjustments charged to expense (income) ( 5 ) 274 424

Write-offs 81 347 52

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Charges for excess and obsolete inventory are included in cost of revenue and were $ 1,100 , $ 1,269 and $ 604 for the years ended December 31, 2021, 2020 and 2019, respectively.

Costs Related to the Initial Public Offering

At the time of the IPO, $ 1,840 of additional costs, primarily consisting of legal, accounting and other direct fees and costs related to the IPO incurred during 2017 and were initially deferred and capitalized and then reclassified to stockholders’ equity at the conclusion of our IPO on October 12, 2017.

Additionally, $ 1,986 of additional non-cash expense related to the accelerated vesting of restricted stock was included in general and administrative expenses in 2018.

Costs Related to the Follow-on Offerings

On December 11, 2018, we completed a follow-on offering of our common stock.

Offering expenses of $ 352 , primarily consisting of legal, accounting and other direct fees and costs related to the offering, were initially deferred and capitalized and then reclassified to stockholders' equity at the conclusion of our follow-on offering on December 11, 2018.

On December 13, 2019, we completed another offering of our common stock.

Costs Related to Common Stock Offerings

On December 13, 2019, we completed a public offering of our common stock.

Offering expenses of $ 235 , primarily consisting of legal, accounting and other direct fees and costs related to the offering were recorded in stockholders' equity at the conclusion of our offering.

On June 22, 2020, we completed another offering of our common stock.

On June 22, 2020, we completed another public offering of our common stock.

Offering expenses of $ 481 , primarily consisting of legal, accounting and other direct fees and costs related to the offering were recorded in stockholders' equity at the conclusion of our offering.

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Amortizable Intangible Assets, net

acquisition of Orthex, and customer relationships and non-competition agreements related to the acquisitions of Telos and ApiFix.

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.

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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.

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 our one reporting unit exceeds its respective fair value.

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The quantitative assessment for goodwill requires us to estimate the fair value of our one reporting unit using either an income or market approach or a combination thereof.

We have indefinite lived tradename assets that are reviewed for impairment by performing a quantitative analysis, which occurs annually in the fourth quarter, utilizing balances as of October 1, or whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable.

We have indefinite lived trademark assets that are reviewed for impairment by performing a quantitative analysis, which occurs annually in the fourth quarter, utilizing balances as of October 1, 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 discounted cash flows expected to be generated by the associated asset.

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

The amount of expense recorded in interest expense, net and fair value adjustments of contingent consideration for the year ended December 31, 2020 were $ 2,397 and $ 3,520 , respectively.

Both are included as a component of other expenses on the consolidated statement of operations.

The amount of expense recorded in interest expense, net was $ 2,155 and $ 2,397 for the twelve month period ended December 31, 2021 and 2020, respectively.

Adjustments in the fair value of the contingent consideration payment were recognized as income of $ 1,800 and expense of $ 3,520 for the twelve month period ended December 31, 2021 and 2020, respectively.

Shipping and Handling Costs

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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 Food and Drug Administration (the “FDA”), International Organization for

Standardization and other country-specific quality standards.

Our third-party manufacturers are required to meet Food and Drug Administration (the “FDA”), International Organization for Standardization and other country-specific quality standards.

The majority of our implants and instruments are produced in the United States.

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the preferences and dividends of our redeemable convertible preferred stock relative to those of our common stock;

our operating results and financial conditions, including our level of available capital

our operating results and financial conditions, including our level of available capital resources;

equity market conditions affecting comparable public companies;

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

Comprehensive income (loss) includes foreign currency translation adjustments.

Comprehensive income (loss) includes foreign currency translation adjustments and unrealized gains (losses) on marketable securities.

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 financial statements.

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

No accrued legal fees outside the course of ordinary business were recorded for the year ended December 31, 2021.

The Company recorded an accrual of $ 6,342 for legal settlements for the year ended December 31, 2020.

During 2021, there were no material adjustments to the accrued legal settlements recorded in 2020 and the settlement amounts were paid, resolving the related legal proceedings.

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.

“Emerging Growth 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.

"Emerging growth companies" 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.

Our status as an emerging growth company will remain until December 31, 2022.

As such, our external auditors for the fiscal year ending December 31, 2022 will be required to provide an attestation on the status of our internal controls under Section 404(b) of the Sarbanes-Oxley Act.

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 will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

In April 2017, the SEC adopted new rules that included an inflation-adjusted threshold in the definition of an emerging growth company.

Under the new inflation-adjusted threshold, we would cease to be an emerging growth company on the last day of the fiscal year in which our annual gross revenues exceed $1.07 billion.

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

Recent Accounting Pronouncements

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

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

Simplifying the Test for Goodwill Impairment" .

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

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

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

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

In December 2019, the FASB issued ASU No.

2019-12 " Income Taxes:

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

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

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

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

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

NOTE 3 – BUSINESS COMBINATION

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 will adopt ASU 2021-04 effective January 1, 2022.

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

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.

NOTE 3 – BUSINESS COMBINATIONS

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.

consideration transferred of $ 87,379 , as calculated after discounting future payments to present value, is preliminary and subject to certain limitations and adjustments.

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, excluding the impact of foreign currency translation:

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

Consideration Present Value

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

The purchase price allocation set forth herein is preliminary.

The 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):

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 final fair value of the assets acquired and liabilities assumed at the acquisition date (in thousands):

Description Amount

Preliminary fair value of estimated total acquisition consideration $ 87,379

Fair value of total acquisition consideration $ 87,379

Accounts receivable-trade 245

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Goodwill $ 52,070

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

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

The fair value of identifiable intangible assets were based on valuations using a combination of the income and cost approach, inputs which would be considered Level 3 under the fair value hierarchy.

The estimated fair value

and useful life of identifiable intangible assets are as follows:

Amount Remaining Economic Useful Life

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Non-competition Agreements 200 4 years

The Company recorded a measurement period adjustment of $ 7,930 during fiscal 2020 to increase patents, increase deferred tax liabilities by $ 6,487 and decrease goodwill by $ 1,443 related to the refinement of inputs of the acquisition valuation.

The Company is obligated to make anniversary payments of:

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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 first half of 2021.

The Company anticipates making the second anniversary payment of $ 13,000 on the anniversary date.

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

The fair value of the contingent consideration 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 using an option pricing model and a Monte Carlo simulation based on forecasted annual revenue, expected volatility and an implied probability of achieving revenue forecasts.

Pursuant to the acquisition agreement, both the anniversary installments and the system sales payment require a minimum cash payment of 25 percent of the total amount due.

The remaining 75 percent may be paid with common stock.

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

The adjustment in the fair value of the contingent consideration payment of $ 3,520 was recognized as an expense for the twelve month period ended December 31, 2020, in other expenses on the consolidated statements of operations.

An additional $ 2,397 was recognized as interest expense for the twelve month period ended December 31, 2020, on the consolidated statements of operations for the accretion of the acquisition installment payable.

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

April 1, 2020 December 31, 2020

The adjustments in the fair value of the contingent consideration payment were recognized as income of $ 1,800 and expense of $ 3,520 for the twelve month period ended December 31, 2021 and 2020, respectively, in other expenses on the consolidated statements of operations.

An additional $ 2,155 and $ 2,397 was recognized as interest expense for the twelve month period ended December 31, 2021 and 2020, respectively, on the consolidated statements of operations for the accretion of the acquisition installment payable.

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

December 31, 2021 December 31, 2020 April 1, 2020

Anniversary Payments:

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The shares of common stock were valued at $ 42.81 per share, the Company's closing share price on March 9, 2020.

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

The purchase price allocation set forth herein is preliminary.

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

The Company incurred $ 25 of acquisition-related costs, that are included in general and

administrative expenses on the consolidated statements of operations.

The purchase price allocation set forth herein is final.

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

Description Amount

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

Fair value of total acquisition consideration $ 3,318

Accounts receivable-trade 215

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Goodwill $ 1,874

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

The fair value of identifiable intangible assets were based on valuations using a combination of the income and cost approach, inputs which would be considered Level 3 under the fair value hierarchy.

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

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Non-competition Agreements 40 5 years

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

Vilex and Orthex

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The purchase price allocation set forth herein is final.

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

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

Description Amount

Estimated fair value of total acquisition consideration $ 60,184

Fair value of total acquisition consideration $ 60,184

Accounts receivable-trade 2,088

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Goodwill $ 17,170

Measurement period adjustments during fiscal year 2019 included $ 239 to accounts receivable - trade, $ 253 to inventory, $ 92 to working capital, $ 1,400 to deferred tax liability and $ 510 to intangible assets as a result of information identified as of the date of acquisition.

These measurement period adjustments to the purchase price allocation increased goodwill by $ 586 .

The fair value of identifiable intangible assets were based on valuations using a combination of the income and cost approach, inputs which would be considered Level 3 under the fair value hierarchy.

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

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

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

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

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

NOTE 4 – DISCONTINUED OPERATIONS

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The Company determined, after performing the qualitative analysis that there was no evidence that it is more likely than not that the fair value of its reporting unit was less than the carrying amount, therefore, it was not necessary to perform a quantitative impairment test.

Changes in the carrying amount of goodwill in 2019 and 2020 were as follows:

Goodwill at January 1, 2019 $ —

Vilex Companies acquisition 17,170

Divestiture of Vilex in Tennessee, Inc.

Changes in the carrying amount of goodwill were as follows:

Goodwill at January 1, 2020

Telos acquisition 1,874

Orthex measurement period adjustment ( 688 )

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Foreign currency translation impact 3,482

Goodwill at January 1, 2021

Foreign currency translation impact 1,838

Goodwill at December 31, 2021

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

Anticipated market launch is in 2021 and 2022 for products for which we obtained licensing in 2020.

Trademarks are non-amortizing intangible assets which were $ 13,961 and $ 4,490 as of December 31, 2020 and 2019, respectively.

Concurrently with our acquisition of each company, we acquired the trademark of Orthex on June 4, 2019 valued at $ 4,230 , the trademark of Telos on March 9, 2020 valued at $ 210 and the trademark of ApiFix on April 1, 2020 valued at $ 8,640 .

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

Anticipated market launch is in 2022 through 2024 for products for which we previously obtained licensing.

On October 20, 2021, we purchased certain intellectual property assets from Devise Ortho, Inc.

related to its Drive Rail external fixation system.

We recorded $ 840 which will be amortized over the life of the patents, or approximately 16 years.

In addition to the intellectual property, the Company purchased $ 108 of inventory from Devise Ortho, Inc.

The total consideration of $ 948 was paid using $ 650 in cash and 4,599 shares of the Company's common stock, representing approximately $ 298 (based on the closing share price of $ 64.83 on October 20, 2021).

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.

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

Trademarks are recorded as indefinite-lived intangible assets in the amounts of $ 14,268 and $ 13,961 as of December 31, 2021 and 2020, respectively.

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

The change in balance during 2021 was the result of foreign currency translation of the ApiFix trademark.

The Company tests intangible assets with indefinite lives for impairment annually on October 1 st 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 discounted cash flows expected to be generated by the associated asset.

Recoverability is measured by a comparison of the carrying amount to the estimated fair value of the asset, as represented by the net discount future 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 intangible assets.

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

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

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

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

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

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

There were no assets or liabilities measured at fair value on a recurring basis as of the year ended December 31, 2019.

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

12/31/2020 Level 1 Level 2 Level 3

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

December 31, 2021

Level 1 Level 2 Level 3 Total

Financial Assets

Short term investments

Corporate Bonds $ 22,476 $ — $ — $ 22,476

Treasury Bonds $ 14,317 $ — $ — $ 14,317

Asset Backed Securities $ — $ 8,272 $ — $ 8,272

Other $ 837 $ — $ — $ 837

Financial Liabilities

Contingent Consideration $ — $ — $ 28,910 $ 28,910

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 $ — $ —

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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 following table summarizes the change in fair value of Level 3 instruments in 2020:

The Company's level 2 asset pertains to certain asset-backed securities, collateralized by non-mortgage-related consumer debt.

These securities are predominately priced by third parties, either by a pricing vendor or dealer.

The Company's Level 3 instrument consists of contingent consideration.

The fair value of the contingent consideration liability 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 forecasted annual revenues, expected volatility and discount rates.

The adjustments in the fair value of the contingent consideration payments resulted in income of $ 1,800 and expense of $ 3,520 for the year ended December 31, 2021 and 2020, respectively.

No expense was recorded in 2019.

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

Balance at January 1, 2020 $ —

Contingent consideration recorded as a result of the acquisition (Note 3) 27,190

Change in fair value of contingent consideration 3,520

Increase in fair value of contingent consideration 3,520

Balance at December 31, 2020

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.

Fair value adjustments to contingent consideration liabilities are recorded through operating expenses in the Consolidated Statement of Operations.

Contingent consideration arrangements assumed by an asset purchase will be measured and accrued when such contingency is resolved.

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

Decrease in fair value of contingent consideration ( 1,800 )

Balance at December 31, 2021

The recurring Level 3 fair value measurements of the contingent consideration liability associated with the ApiFix system sales milestone include the following significant unobservable inputs as of December 31, 2021, 2020 and the date of acquisition, respectively:

2021 December 31,

2020 April 1,

Valuation techniques Discounted cash flow, Monte Carlo

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Volatility factor 50.3 % 51.8 % 43.7 %

Expected Years 4.1 years 3.5 years

Expected Years 2.4 years 3.5 years 4.1 years

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

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Long-term debt consisted of the following:

Note payable to Squadron $ — $ 19,891

Revolving credit facility with Squadron — 5,000

Mortgage payable to affiliate $ 1,044 $ 1,175

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

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

The Company also 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 year ended December 31, 2020 the unused commitment fee paid to Squadron was $ 52 .

The unused commitment fee paid to Squadron for the years ended December 31, 2021 and 2020 was $ 127 and $ 52 , respectively.

Effective December 31, 2021, the Company entered into a Third Amendment (the "Third Amendment") to its Second Amended Loan Agreement with Squadron (as so further amended, the "Third Amended Loan Agreement").

The Third Amendment addresses the transition of the interest rate calculation from LIBOR to a SOFR (Secured Overnight Financing Rate) based rate.

The previous interest rate on the facilities was at the greater of (a) three month LIBOR plus 8.61 % and (b) 10.0 %.

Following the Third Amendment, the interest rate on the revolving credit facility is the greater of (a) six month SOFR plus 8.69 % and (b) 10.0 %.

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

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and (ii) January 1, 2024.

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

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

There are no outstanding term loan obligations under the Second Amended Loan Agreement.

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.

There are no outstanding term loan obligations under the Third Amended Loan Agreement.

Borrowings under the Third 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 Third 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.

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Interest expense relating to notes payable to Squadron and mortgage note payable with Tawani was $ 56 , $ 1,233 and $ 4,229 for the years ended December 31, 2021, 2020 and 2019, respectively.

NOTE 10 - STRATEGIC ARRANGEMENTS

Effective December 1, 2007, we entered into a 10 year agreement with Case Western Reserve University (“CASE”) to assist in certain aspects of our research and development.

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

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

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

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

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

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

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

The royalty expense recognized related to the CASE agreement is recorded as a component of cost of revenue and amounted to $ 125 , $ 153 and $ 145 for the years ended December 31, 2020, 2019 and 2018, respectively.

As of December 31, 2020 and 2019, $ 35 and $ 39 , respectively, was due to CASE.

NOTE 10 - INCOME TAXES

On December 22, 2017, the Tax Cuts and Jobs Act (the Tax Act) was signed into United States tax law.

The Tax Act made broad and complex changes to the U.S.

tax code, including, but not limited to, (1) reduction of the U.S.

federal corporate tax rate from 35 percent to 21 percent;

(2) elimination of the corporate alternative minimum tax (AMT);

(3) a general elimination of U.S.

federal income taxes on dividends from foreign subsidiaries;

(4) current inclusion in U.S.

federal taxable income of certain earnings of controlled foreign corporations;

(5) a new limitation on deductible interest expense;

(6) limitations on the deductibility of certain executive compensation;

(7) limitations on the use of FTCs to reduce the U.S.

income tax liability;

and (8) limitations on net operating losses (NOLs) generated after December 31, 2017, to 80 percent of taxable income.

The Tax Act reduced the US federal corporate tax rate from a graduated rate up to 35% to a flat rate of 21%, effective January 1, 2018.

The Company adjusted its deferred tax assets and liabilities at December 31, 2017 to reflect the Tax Act’s reduction of corporate income tax rates which are expected to be in effect in future years as the deferred tax assets and liabilities are realized.

The effect of this provisional adjustment in the deferred provision for income taxes is a discrete net expense of $ 11,095 , however this is offset with a reduction in the valuation allowance as of December 31, 2018.

In response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") was signed into law on March 27, 2020.

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Corporate taxpayers may carryback net operating losses originating during 2018 through 2020 for up to five years, which was not previously allowed under the Tax Act.

The CARES Act also eliminates the 80% of taxable income limitation allowing corporate entities to fully utilize net operating loss carryforwards to offset

taxable income in 2018, 2019 and 2020.

The CARES Act also eliminates the 80% of taxable income limitation allowing corporate entities to fully utilize net operating loss carryforwards to offset taxable income in 2018, 2019 and 2020.

The enactment of the CARES Act did not result in any material impact to the Company’s income tax provision.

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Federal $ — $ — $ 1,033

State — 37 564

Foreign ( 1,128 ) ( 723 ) —

(Decrease) Increase in valuation allowance — ( 1,070 ) 3,099

Decrease in valuation allowance — — ( 1,070 )

Total income tax expense (benefit) $ ( 1,128 ) $ ( 723 ) $ —

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Change in state rate ( 1.3 ) % ( 2.5 ) % ( 1.3 ) %

Excess tax benefits from stock plans 7.5 % 0.6 % 0.3 %

Nondeductible/nontaxable or other items 11.9 % 0.5 % — %

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Total deferred tax liabilities ( 8,756 ) ( 10,174 )

Foreign currency translation impact ( 143 ) —

Deferred tax assets (liabilities), net $ ( 4,771 ) $ ( 5,755 )

The deferred tax assets were fully offset by a valuation allowance at December 31, 2021 and 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 year ended December 31, 2020, for losses generated in Israel.

During 2019, the Company assumed certain deferred tax liabilities in connection with the acquisition of Vilex, which allowed for a release of $ 1,124 of the valuation allowance.

Such amount was recognized in discontinued operations.

The Company has recorded a tax benefit during the years ended December 31, 2021 and 2020, for losses generated in Israel.

As of December 31, 2021, we had available federal, state and foreign tax loss carryforwards of $ 114,008 , $ 73,997 and $ 22,671 , respectively.

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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.

Given the limitation calculation, we anticipate approximately $ 23,920 in losses generated prior to the ownership

change date will be subject to potential limitation.

The estimated annual limitation is $ 1,062 .

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NOTE 11 - STOCKHOLDERS’ EQUITY

Prior to our IPO, we maintained an Amended and Restated 2007 Equity Incentive Plan (the “2007 Plan”) that provides for grants of options and restricted stock to employees, directors and associated third-party

representatives of our company as determined by the Board of Directors.

The 2007 Plan had authorized 1,585,000 shares for award.

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The 2017 Plan has authorized 1,832,460 shares for award.

As of December 31, 2021, the Plan had 694,186 shares available for issuance.

Stock Options

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At December 31, 2021, there was $ 7,075 of unrecognized compensation expense remaining related to our service-based restricted stock awards.

The unrecognized compensation cost is expected to be recognized over a

weighted average period of 1.1 years.

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.

The unrecognized compensation cost is expected to be recognized over a weighted average period of 1.1 years.

Stock-based compensation expense on restricted stock amounted to $ 5,842 , $ 6,196 and $ 2,603 for the years ended December 31, 2021, 2020 and 2019, respectively.

The increase in the stock compensation expense for the twelve months ended December 31, 2020 was primarily driven by a third year of restricted stock grants in a three year vesting cycle and one-time stock grants related to executive management transitions that vested immediately resulting in an additional $ 1,542 of expense.

The decrease in the stock compensation expense for the twelve months ended December 31, 2021 was primarily driven by the lack of one-time stock grants related to executive management transitions that vested immediately resulting in an additional $ 1,542 of expense which did not repeat in 2021.

Our warrant activity and related information are summarized below:

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Weighted average number of shares - basic and diluted 19,268,255 18,056,828 14,624,194

Net loss from continuing operations per share attributable to common stockholders - basic and diluted

Net loss from continuing operations per share - basic and diluted

$ ( 0.84 ) $ ( 1.82 ) $ ( 0.87 )

Net loss from discontinued operations per share attributable to common stockholders - basic and diluted — ( 0.07 ) —

Net loss per share attributable to common stockholders - basic and diluted $ ( 1.82 ) $ ( 0.94 ) $ ( 0.96 )

Net loss from discontinued operations per share - basic and diluted — — ( 0.07 )

Net loss per share - basic and diluted $ ( 0.84 ) $ ( 1.82 ) $ ( 0.94 )

Our basic and diluted net loss per share is computed using the two-class method.

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For the year ended December 31, 2021, sales and payments related to inventory purchases to Squadron's affiliate, now known as Vilex, LLC, were $ 224 and $ 702 , respectively.

For the year ended December 31, 2020 sales and payments related to inventory purchases were $ 595 and $ 2,900 , respectively.

NOTE 15 - EMPLOYEE BENEFIT PLAN

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NOTE 16 – COMMITMENTS AND CONTINGENCIES

As of December 31, 2021, the Company has recorded a lease liability of $ 293 and corresponding right-of-use asset of $ 297 on its consolidated balance sheet .

Legal Proceedings

From time to time, we are involved in various legal proceedings arising in the ordinary course of our business.

K2M - Alleged Patent Infringement

On January 20, 2017, K2M, Inc.

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These patents relate to certain instruments used in our RESPONSE™ spine systems, which represent a portion of our total scoliosis portfolio.

We have denied these claims and responded with counterclaims seeking declaratory relief that the patents in question are both invalid and not infringed.

The parties attended a court-ordered mediation on October 24, 2017, which did not resolve the dispute, but as we move forward with this matter we welcome constructive discussions on a negotiated settlement.

Nevertheless, we view our case as particularly strong and will continue to vigorously defend this matter.

On June 28, 2018, the United States Patent and Trademark Office's Patent Trial and Appeal Board ("PTAB") instituted limited review concerning whether certain third parties had described the invention of certain of K2M's patent claims before allegedly invented by K2M.

On July 10, 2018, the Court stayed the litigation pending the outcome of PTAB's review.

On June 4, 2019, PTAB completed its review, finding, among other things, insufficient evidence of such description by the third parties.

In early October 2019, the Court orally lifted the stay in federal district court.

Thereafter, on November 19, 2019, K2M amended its complaint to add two (2) additional issued patents, to add claims of patent infringement regarding U.S.

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.

10,285,735 and 10,292,736 (both issued in May 2019).

Like before, these newly issued patents relate to certain instruments used in our RESPONSE spine systems.

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

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

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

Subsequent to year end, we entered into settlement negotiations regarding this matter and anticipate that it will be settled in the near term.

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

As intellectual property litigation can involve complex factual and legal questions, an adverse resolution of this proceeding could have a material adverse effect on our business, operating results and financial condition.

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 satisfied 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.

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.

In mid-November 2021, the Plaintiff 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 filed an appeal of this component of the order, but the appellate court affirmed the lower court’s decision.

The Company, Orthex and Squadron have not sought to further pursue an appeal of the subject order.

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

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

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

Intellectual property litigation can involve complex factual and legal questions, and an adverse resolution of this proceeding could have a material adverse effect on our business, operating results and financial condition.

The parties reached a verbal settlement in February 2021, but have not finalized the written settlement agreement, and do not expect to do so for several weeks.

As of December 31, 2020, we have accrued $ 6,342 related to the potential outcome of outstanding legal matters.

and 9,668,788, which relate

to systems and methods concerning derotation of spinal bodies to correct spinal deformities.

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

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

The balance of the amount otherwise paid to Dr.

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

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.

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

Purchase Obligations and Performance Requirements

As a result of entering into a license agreement for the exclusive distribution of the 7D Surgical FLASH TM Navigation platform during 2021, the Company has agreed to a minimum purchase commitment for the first twelve months of that agreement.

As of December 31, 2021, the remaining purchase commitment under the agreement was $ 1.9 million.

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.

As a component of the agreement the Company is required to meet minimum performance metrics, measured by the number of spine procedures in the fiscal year which used the FIREFLY products against the annual requirement in the agreement.

This includes any scheduled surgeries whereby the Company has committed to payment of the product.

The number of required surgeries varies each year of the agreement.

During the year ended December 31, 2021, the Company did not reach the minimum performance metrics.

As such, the Company recorded $ 0.5 million as a component of cost of revenue for the shortfall which occurred during the year.

no expense was recorded for the years ended December 31, 2020 or 2019.

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

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Net loss ( 10,379 ) ( 3,756 ) ( 2,197 ) 72

Net loss attributable to common stockholders ( 4,945 ) ( 9,447 ) ( 4,539 ) ( 14,013 )

Net loss per share attributable to common stockholders - basic and diluted $ ( 0.30 ) $ ( 0.54 ) $ ( 0.24 ) $ ( 0.73 )

Net loss per share - basic and diluted $ ( 0.54 ) $ ( 0.19 ) $ ( 0.11 ) $ —

Three Months Ended

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Operating loss ( 4,497 ) ( 7,017 ) ( 2,498 ) ( 12,743 )

Net loss from continuing operations ( 3,020 ) ( 2,459 ) ( 2,877 ) ( 4,329 )

Gain (Loss) from discontinued operations — 159 ( 213 ) ( 1,100 )

Loss before income tax benefit ( 4,945 ) ( 9,447 ) ( 4,539 ) ( 14,736 )

Provision for income taxes (benefit) — — — ( 723 )

Net loss ( 4,945 ) ( 9,447 ) ( 4,539 ) ( 14,013 )

Net loss attributable to common stockholders ( 3,020 ) ( 2,618 ) ( 2,664 ) ( 5,429 )

Net loss from continuing operations per share attributable to common stockholders - basic and diluted $ ( 0.21 ) $ ( 0.17 ) $ ( 0.19 ) $ ( 0.29 )

Net loss from discontinued operations per share attributable to common stockholders - basic and diluted $ — $ 0.01 $ ( 0.01 ) $ ( 0.07 )

Net loss per share attributable to common stockholders - basic and diluted $ ( 0.21 ) $ ( 0.16 ) $ ( 0.20 ) $ ( 0.36 )

Net loss per share - basic and diluted $ ( 0.30 ) $ ( 0.54 ) $ ( 0.24 ) $ ( 0.73 )

During the fourth quarter ended December 31, 2020, the Company recorded a $ 2,730 revenue reduction due to the repurchase of inventory from a stocking distributor in Germany, Austria and Switzerland that we converted to a sales agency.

The aforementioned $ 2,730 reduction of revenue reduced gross profit in the fourth quarter and total year by $ 1,115 .

SUBSEQUENT EVENTS

On January 15, 2021, the Company expanded to 14 international agents, broadening its reach into the largest European market of Germany, Austria and Switzerland by converting long-standing distribution partners.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

In connection with its audits for the two most recent fiscal years ended December 31, 2020, there have been no disagreements with the Company’s independent registered public accounting firm on any matter of accounting

principles or practices, financial statement disclosure or audit scope or procedure, nor have there been any changes in accountants.

In connection with its audits for the two most recent fiscal years ended December 31, 2021, there have been no disagreements with the Company’s independent registered public accounting firm on any matter of accounting principles or practices, financial statement disclosure or audit scope or procedure, nor have there been any changes in accountants.

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-K

Item 8. Financial Statements and Supplementary Data