ORTHOPEDIATRICS CORP 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of OrthoPediatrics Corp. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of OrthoPediatrics Corp. 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. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. 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 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. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Emphasis of Matter The Company has significant transactions and relationships with a related party that are described in Note 14 to the consolidated financial statements. Our opinion is not modified with respect to this matter. /s/ Deloitte & Touche LLP Indianapolis, Indiana March 3, 2022 We have served as the Company's auditor since 2015. 84 ORTHOPEDIATRICS CORP. CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share information) As of December 31, 2021 2020 ASSETS Current assets: Cash and cash equivalents $ 7,641 $ 28,758 Restricted cash 1,365 1,374 Short term investments 45,902 55,141 Accounts receivable - trade, less allowance for doubtful accounts of $ 347 and $ 433 , respectively 17,942 17,212 Inventories, net 57,569 52,989 Notes receivable — 337 Prepaid expenses and other current assets 3,229 2,618 Total current assets 133,648 158,429 Property and equipment, net 28,515 27,227 Other assets: Amortizable intangible assets, net 55,494 50,284 Goodwill 72,349 70,511 Other intangible assets 14,268 13,961 Total other assets 142,111 134,756 Total assets $ 304,274 $ 320,412 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable - trade $ 9,325 $ 10,038 Accrued compensation and benefits 5,351 4,540 Accrued legal settlements — 6,342 Current portion of long-term debt with affiliate 137 131 Current portion of acquisition installment payable 12,862 12,233 Other current liabilities 2,040 1,744 Total current liabilities 29,715 35,028 Long-term liabilities: Long-term debt with affiliate, net of current portion 907 1,044 Acquisition installment payable, net of current portion 14,309 12,784 Contingent consideration 28,910 30,710 Deferred income taxes 4,771 5,755 Other long-term liabilities 293 323 Total long-term liabilities 49,190 50,616 Total liabilities 78,905 85,644 Commitments and contingencies (Note 16) Stockholders' equity: Common stock, $ 0.00025 par value; 50,000,000 shares authorized; 19,677,214 shares and 19,560,291 shares issued and outstanding as of December 31, 2021 and December 31, 2020 5 5 Additional paid-in capital 394,899 388,622 Accumulated deficit ( 178,026 ) ( 161,766 ) Accumulated other comprehensive income 8,491 7,907 Total stockholders' equity 225,369 234,768 Total liabilities and stockholders' equity $ 304,274 $ 320,412 See notes to consolidated financial statements. 85 ORTHOPEDIATRICS CORP. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share and per share information) Year Ended December 31, 2021 2020 2019 Net revenue $ 98,049 $ 71,078 $ 72,552 Cost of revenue 24,646 16,047 17,933 Gross profit 73,403 55,031 54,619 Operating expenses: Sales and marketing 39,673 31,854 31,284 General and administrative 46,061 38,317 26,664 Legal settlement expenses 150 6,342 — Research and development 5,543 5,273 5,748 Total operating expenses 91,427 81,786 63,696 Operating loss ( 18,024 ) ( 26,755 ) ( 9,077 ) Other expenses: Interest expense, net 2,247 3,412 3,538 Fair value adjustment of contingent consideration ( 1,800 ) 3,520 — Other expense (income) ( 1,083 ) ( 20 ) 70 Total other expenses ( 636 ) 6,912 3,608 Loss before income taxes ( 17,388 ) ( 33,667 ) ( 12,685 ) Provision for income taxes (benefit) ( 1,128 ) ( 723 ) — Net loss from continuing operations ( 16,260 ) ( 32,944 ) ( 12,685 ) Net loss from discontinued operations — — ( 1,046 ) Net loss $ ( 16,260 ) $ ( 32,944 ) $ ( 13,731 ) Weighted average common shares - basic and diluted 19,268,255 18,056,828 14,624,194 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. 86 ORTHOPEDIATRICS CORP. CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (in thousands) Year Ended December 31, 2021 2020 2019 Net loss $ ( 16,260 ) $ ( 32,944 ) $ ( 13,731 ) Other comprehensive (loss) income: Foreign currency translation adjustment 1,157 7,857 620 Unrealized gain (loss) on short-term investments ( 573 ) 53 — Other comprehensive income, net of tax 584 7,910 620 Comprehensive loss $ ( 15,676 ) $ ( 25,034 ) $ ( 13,111 ) See notes to consolidated financial statements. 87 ORTHOPEDIATRICS CORP. 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 Shares Value 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 Stock option exercise 38,921 — 1,141 — — 1,141 Issuance of common stock, net of issuance cost 1,755,500 — 59,996 — — 59,996 Other comprehensive income — — — — 620 620 Balance at December 31, 2019 16,723,128 $ 4 $ 271,182 $ ( 128,822 ) $ ( 3 ) $ 142,361 Net loss — — — ( 32,944 ) — ( 32,944 ) 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 Other comprehensive income — — — — 7,910 7,910 Balance at December 31, 2020 19,560,291 $ 5 $ 388,622 $ ( 161,766 ) $ 7,907 $ 234,768 Net Loss — — — ( 16,260 ) — ( 16,260 ) Stock option exercise 4,422 — 137 — — 137 Restricted stock 107,902 — 5,842 — — 5,842 Consideration for Devise Ortho acquired assets 4,599 — 298 — — 298 Other comprehensive income — — — — 584 584 Balance at December 31, 2021 19,677,214 $ 5 $ 394,899 $ ( 178,026 ) $ 8,491 $ 225,369 See notes to consolidated financial statements. 88 ORTHOPEDIATRICS CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Year Ended December 31, 2021 2020 2019 OPERATING ACTIVITIES Net loss $ ( 16,260 ) $ ( 32,944 ) $ ( 13,731 ) Adjustments to reconcile net loss to net cash used in operating activities: Loss on sale of discontinued operations — — 210 Depreciation and amortization 10,680 8,010 4,671 Stock-based compensation 5,842 6,196 2,603 Fair value adjustment of contingent consideration ( 1,800 ) 3,520 — Acquisition installment payable 2,154 2,397 — Deferred income taxes ( 1,128 ) ( 723 ) — Changes in certain current assets and liabilities: Accounts receivable - trade ( 466 ) ( 451 ) ( 5,820 ) Inventories ( 5,050 ) ( 12,070 ) ( 9,767 ) Prepaid expenses and other current assets ( 637 ) ( 719 ) ( 137 ) Accounts payable - trade ( 567 ) 3,071 2,401 Accrued legal settlements ( 6,342 ) 6,342 — Accrued expenses and other liabilities 1,095 ( 1,074 ) 1,946 Other ( 584 ) ( 85 ) ( 1 ) Net cash used in operating activities - continuing operations ( 13,063 ) ( 18,530 ) ( 17,625 ) Net cash used by operating activities - discontinued operations — — ( 144 ) Net cash used in operating activities ( 13,063 ) ( 18,530 ) ( 17,769 ) INVESTING ACTIVITIES Acquisition of Devise Ortho assets ( 650 ) — — Acquisition of Telos, net of cash acquired — ( 1,670 ) — Acquisition of ApiFix, net of cash acquired — ( 1,723 ) — Acquisition of Band-Lok intangible assets — ( 796 ) — Acquisition of Vilex and Orthex, net of cash acquired — — ( 49,836 ) Purchases of licenses ( 7,908 ) — ( 270 ) Sale of short term investments 9,250 — — Purchase of short term investments — ( 55,000 ) — Purchases of property and equipment ( 8,103 ) ( 10,504 ) ( 11,816 ) Net cash used in investing activities ( 7,411 ) ( 69,693 ) ( 61,922 ) FINANCING ACTIVITIES Payments on note with affiliate — ( 25,000 ) — Proceeds from issuance of debt with affiliate — — 30,000 Proceeds from issuance of common stock, net of issuance costs — 70,207 59,996 Proceeds from exercise of stock options 137 1,650 1141 Payments on mortgage notes ( 131 ) ( 125 ) ( 118 ) Net cash provided by financing activities 6 46,732 91,019 Effect of exchange rate changes on cash ( 658 ) ( 404 ) 8 NET INCREASE (DECREASE) IN CASH AND RESTRICTED CASH ( 21,126 ) ( 41,895 ) 11,336 Cash and restricted cash, beginning of period 30,132 72,027 60,691 Cash and restricted cash, end of period $ 9,006 $ 30,132 $ 72,027 89 2021 2020 2019 SUPPLEMENTAL DISCLOSURES Cash paid for interest $ 56 $ 1,233 $ 4,229 Transfer of instruments from property and equipment to inventory $ 453 $ 415 $ 1,037 Issuance of common shares to acquire Vilex and Orthex $ — $ — $ 10,000 Issuance of common shares to acquire Telos $ — $ 1,568 $ — Issuance of common shares to acquire ApiFix $ — $ 35,176 $ — 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 Payment of Term Note B with revolving credit facility (See Note 9) $ — $ — $ 5,000 See notes to consolidated financial statements. 90 ORTHOPEDIATRICS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 2021 and 2020 and for the three years in the period ended December 31, 2021 ( dollars in thousands, except per share information ) 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 , 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. 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. For example, in preparation for COVID-19-related hospitalizations, various governments, governmental agencies and hospital administrators have instructed hospitals to postpone some elective procedures. As a majority of our products are utilized in elective surgeries or procedures, the deferrals of such surgeries and procedures have had, and may continue to have, a significant negative impact on our business and results of operations. Despite the impact COVID-19 has had on our business, we continued to invest in research and development, invest in our people, and take steps to position ourselves for long-term success. During 2020, we raised additional capital to solidify our financial foundation. We continued to train and educate our sales team and our surgeons on our products. 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. NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying 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. The results of Vilex have been classified as discontinued operations within the consolidated financial statements for the year ended December 31, 2019. We have prepared the accompanying consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The accompanying consolidated financial statements have been prepared assuming our Company will continue as a going concern. We have experienced 91 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 Preparation of our 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 consolidated financial statements. By their nature, these judgments are subject to an inherent degree of 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 our 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 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. The financial statements of our foreign subsidiaries are accounted for in local functional currencies 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. Foreign currency translation adjustments have been recorded as a separate component of the consolidated statements of comprehensive loss. 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 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 92 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 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. 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 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. 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 product 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. 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. 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. 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. 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. 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, 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. 93 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, 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. Accounts Receivable and Allowance for Doubtful Accounts Accounts receivable are uncollateralized customer obligations due under normal trade terms, generally requiring payment within 30 days from the invoice date in the United States and within 90 days internationally. Account balances with invoices over 30 or 90 days past due for domestic and international accounts, respectively, 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. The allowance for doubtful accounts was $ 347 and $ 433 as of year ended December 31, 2021 and 2020, respectively. The following table summarizes activity in the allowance for doubtful accounts: December 31, 2021 2020 2019 Balance at beginning of year $ 433 $ 506 $ 134 Adjustments charged to expense (income) ( 5 ) 274 424 Write-offs 81 347 52 Balance at end of year $ 347 $ 433 $ 506 Inventories, net Inventories are stated at the lower of cost or net realizable value, with cost determined using the first-in-first-out method. Inventories, which consist of implants and instruments held in our warehouse, with third-party independent sales agencies or distributors, or consigned directly with hospitals, are considered finished goods and are purchased from third parties. 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. 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. 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. 94 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 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. 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 in the field are carried at cost less accumulated depreciation and are recorded in property and equipment, net on the 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 for licenses upon 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 upon triggering events that 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 intangible 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 95 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. No impairment changes were recorded in the current year. The Company tests goodwill for impairment by either performing a qualitative evaluation or a quantitative test. 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 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. 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. Both are recorded at their fair values as determined by management with the assistance of an independent valuation specialist at the original issuance date and are adjusted on a recurring basis. Accretion of interest expense attributable to the acquisition installment payable are recorded as a component of interest expense, net. Changes in the fair value of the contingent consideration are included in fair value adjustments of contingent consideration. 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 Shipping and handling costs that are billed to the customer are included in net revenue and were $ 803 , $ 635 and $ 599 , for the years ended December 31, 2021, 2020 and 2019, respectively. Shipping and handling costs that are not billed to the customer are included in sales and marketing expenses and were $ 2,899 , $ 2,261 and $ 2,788 , for the years ended December 31, 2021, 2020 and 2019, 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 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. 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 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. Advertising costs were $ 898 , $ 1,231 and $ 1,422 for the years ended December 31, 2021, 2020 and 2019, respectively. 96 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 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. 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 1,832,460 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 a three year period. 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. The restricted stock that has been granted under the 2007 Plan has restriction periods that generally last until the earlier of six years from the date of grant, or an initial public offering 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 in April 2018. Generally under the 2017 plan, restricted stock vests over a three year period. We have elected to 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. In determining the fair value of our common stock at the grant date for awards issued prior to our IPO, which is the basis for the fair value of stock based awards, we use the market approach, which is based on the assumption that the value of an asset is equal to the value of a substitute asset with the same characteristics. In using the market approach, we consider both the guideline public company method and the precedent transaction method. Given the absence of a public trading market for our common stock at that time, we exercise reasonable judgment and consider a number of objective and subjective factors to determine the best estimate of the fair value of our common stock, including: 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 resources; equity market conditions affecting comparable public companies; general U.S. market conditions; and the lack of marketability of our common stock. Prior to our IPO, for restricted stock awards we applied a discount for lack of marketability to the fair value of common shares due to estimate the impact of valuing a minority interest in our Company as a closely held, non-public company with no liquid market for its shares. Foundation for Advancing Pediatric Orthopedics The Company may periodically make contributions to the Foundation for Advancing Pediatric Orthopedics (the "Foundation"). The Foundation was incorporated in 2018 exclusively for pediatric orthopedic research and education and qualifies under IRC 501(c)(3) as an exempt private foundation. The mission of the Foundation is to enhance the knowledge and experience, through education and research, of surgical trainees or practicing surgeons who are involved in helping children with orthopaedic disorders and injuries. The Foundation is a separate legal entity and is not a subsidiary of the Company; therefore, its results are not included in these consolidated financial statements. The Company contributed $ 88 , $ 325 and $ 500 to the Foundation during the years ended December 31, 2021, 2020 and 2019, respectively. These contributions were recorded in general and administrative expenses. 97 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 gains (losses) on marketable securities. 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 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 (1) 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 (2) for those tax positions that do not 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. Litigation and Contingencies Accruals for litigation and contingencies are reflected in the consolidated financial statements based on management’s assessment, including advice of legal counsel, of the expected outcome of litigation or other dispute resolution proceedings and/or the expected resolution of contingencies. Liabilities for estimated losses are accrued if the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated. Significant judgment is required in both the determination of probability of loss and the determination as to whether the amount is reasonably estimable. Accruals are based only on information available at the time of the assessment due to the uncertain nature of such matters. As additional information becomes available, management reassesses potential liabilities related to pending claims and litigation and may revise its previous estimates, which could materially affect the Company’s results of operations in a given period. 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. 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. “Emerging Growth Company” Reporting Requirements We qualify as an “emerging growth company” as defined in the JOBS Act. "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 98 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. Recent Accounting Pronouncements 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. The Company will adopt ASU 2016-16 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. 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. 99 NOTE 3 – BUSINESS COMBINATIONS 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 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 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 Fair value of 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 Amortizable 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 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 100 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 on the anniversary 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, 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. 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 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 discount rates. The fair value of the payment will continue to be adjusted as additional information becomes available regarding the progress toward achievement of the revenue forecast. The adjustments in the fair value of the contingent consideration 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: Second Year Payment $ 12,862 $ 12,233 $ 10,980 Third Year Payment 7,075 6,335 5,780 Fourth Year Payment 7,234 6,449 5,860 Total acquisition installment payable 27,171 25,017 22,620 Less: current portion of acquisition installment payable 12,862 12,233 10,980 Acquisition installment payable, net of current portion 14,309 12,784 11,640 System sales payment 28,910 30,710 27,190 ApiFix future consideration, net of current portion $ 43,219 $ 43,494 $ 38,830 Pre-acquisition revenues and earnings for ApiFix were not material to the consolidated operations. Telos On March 9, 2020, the Company purchased the issued and outstanding membership interest of Telos for $ 1,750 in cash, including $ 81 of cash acquired, and 36,628 shares of common stock, $ 0.00025 par value per share, of the Company. 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 101 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 Fair value of total acquisition consideration $ 3,318 Assets Cash 81 Accounts receivable-trade 215 Prepaid expenses and other current assets 38 Property and equipment 10 Amortizable intangible assets 950 Other intangible assets $ 210 Total assets 1,504 Liabilities Accounts payable and accrued liabilities 60 Total liabilities 60 Less: total net assets 1,444 Goodwill $ 1,874 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 Trademarks / Names $ 210 Indefinite Customer Relationships 910 10 years Non-competition Agreements 40 5 years $ 1,160 Vilex and Orthex On June 4, 2019, the Company purchased all the issued and outstanding shares of stock of Vilex and units of membership interests in Orthex for $ 50,000 in cash, net of working capital adjustments, and 245,352 shares of common stock, $ 0.00025 par value per share, of the Company. The shares of common stock were valued at $ 40.76 per share, the volume weighted average trading price during the thirty day trading period ending on May 30, 2019. In addition, $ 3,000 was placed in an escrow account for a period of up to twenty months to cover certain indemnification obligations and to secure certain closing adjustments. The Company incurred $ 737 of acquisition-related costs, that are included in general and administrative expenses on the consolidated statements of operations. The purchase price allocation set forth herein is final. 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: 102 Description Amount Fair value of total acquisition consideration $ 60,184 Assets Cash 348 Accounts receivable-trade 2,088 Inventories 3,652 Prepaid expenses and other current assets 12 Property and equipment 7,540 Amortizable intangible assets 31,180 Operating lease right-of-use asset 323 Total assets 45,143 Liabilities Accounts payable and accrued liabilities 563 Operating lease liabilities 323 Deferred tax liability 1,175 Other long-term liabilities 68 Total liabilities 2,129 Less: total net assets 43,014 Goodwill $ 17,170 The fair value of identifiable intangible assets were based on valuations using a combination of the income and cost approach, 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 Trademarks / Names $ 4,610 Indefinite Patents 22,390 15 years Internally Developed Software 1,550 10 years Customer Relationships 2,570 12 years Non-competition Agreements 60 5 years $ 31,180 Pro forma net revenue and net loss from continuing operations for 2019 and 2018 assuming the acquisition occurred on January 1, 2018 would have been $ 74,488 and $ 62,607 and ($ 12,601 ) and ($ 13,439 ), respectively. The Company recorded a measurement period adjustment during fiscal 2020 to increase inventory and decrease goodwill related to working capital adjustments to allocate inventory between Orthex and Vilex. Since the Vilex products include adult offerings that are not core to the Company's pediatric business, the Company received Board approval to take the steps necessary to divest the non-core Vilex assets. On December 31, 2019, the Company divested substantially all of the assets relating to Vilex's adult product offering to a wholly-owned subsidiary of Squadron Capital, LLC in exchange for a $ 25,000 reduction in a term note owed to Squadron in connection with the initial acquisition along with certain ongoing intellectual property rights. Of the $ 25,000 purchase price, $ 12,410 was attributable to the license of the Orthex intellectual property and the remaining $ 12,590 was applied to the Vilex assets and liabilities divested. 103 NOTE 4 – DISCONTINUED OPERATIONS On June 4, 2019, the Company acquired Vilex, a manufacturer of foot and ankle surgical implants. Since the Vilex products include adult offerings that are not core to the Company's pediatric business, the Company received Board approval to take the steps necessary to divest the non-core Vilex assets. On December 31, 2019, the Company divested substantially all of the assets relating to Vilex's adult product offering to a wholly-owned subsidiary of Squadron Capital, LLC. in exchange for a $ 25,000 reduction in a term note owed to Squadron in connection with the initial acquisition along with the sale of intellectual property rights. Assets and liabilities divested consisted of the following as of December 31, 2019: Description Amount Cash $ 515 Accounts Receivable - trade, less allowance for doubtful accounts 928 Inventories, net 2,060 Prepaid expenses and other current assets 24 Property and equipment, net 6,246 Amortizable intangible assets 13,390 Goodwill 3,397 Other intangible assets 380 Operating lease right-of-use asset 216 Total assets divested $ 27,156 Accounts payable - trade $ 37 Accrued compensation and benefits 171 Operating lease liabilities 199 Deferred tax liability 1,175 Other current liabilities 13 Total liabilities divested $ 1,595 Net assets sold $ 25,561 Allocated purchase price 25,000 Loss on divestiture $ ( 561 ) Major classes of line items constituting loss of discontinued operations 2019 Net revenue $ 3,069 Cost of revenue ( 286 ) Sales and marketing ( 692 ) General and administrative ( 2,103 ) Other income (expense), net ( 9 ) Pretax net loss of discontinued operations $ ( 21 ) Income tax expense ( 464 ) Net loss on discontinued operations $ ( 485 ) The divestiture does not represent a strategic shift that will have a major effect on the Company's operations and financial statements. Goodwill was allocated to the assets and liabilities divested using the relative fair value method. The Company recognized a total net loss on discontinued operations of $ 1,046 , net of taxes, in its consolidated statement of operations for the year ended December 31, 2019. 104 NOTE 5 - GOODWILL AND INTANGIBLE ASSETS Goodwill The Company tests goodwill for impairment by either performing a qualitative evaluation or a quantitative test. The qualitative evaluation is an assessment of factors including reporting unit specific operating results as well as industry, market and general economic conditions, to determine whether it is more likely than not that the fair values of a reporting unit is less than its carrying amount, including goodwill. The Company may elect to bypass the qualitative assessment for its one reporting unit and perform a quantitative test. The assumptions used in evaluating goodwill for impairment are subject to change and are tracked against historical results by management. The Company elected to perform a qualitative analysis for its reporting unit as of October 1, 2021. 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 were as follows: Total Goodwill at January 1, 2020 $ 13,773 Telos acquisition 1,874 Orthex measurement period adjustment ( 688 ) ApiFix acquisition 52,070 Foreign currency translation impact 3,482 Goodwill at January 1, 2021 $ 70,511 Foreign currency translation impact 1,838 Goodwill at December 31, 2021 $ 72,349 Intangible Assets As of December 31, 2021, the balances of amortizable intangible assets were as follows: Weighted-Average Amortization Period Gross Intangible Assets Accumulated Amortization Net Intangible Assets Patents 13.7 years $ 44,493 $ ( 5,664 ) $ 38,829 Intellectual Property 10.1 years 9,847 ( 1,408 ) 8,439 License agreements 5.5 years 10,674 ( 2,448 ) 8,226 Total amortizable assets $ 65,014 $ ( 9,520 ) $ 55,494 As of December 31, 2020, the balances of amortizable intangible assets were as follows: 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 ) 50,284 105 Amortization expense was $ 4,531 , $ 3,246 and $ 887 for the years ended December 31, 2021, 2020 and 2019, respectively. Future amortization expenses are expected as follows: Year Ending December 31: 2022 $ 5,216 2023 5,245 2024 5,144 2025 4,954 2026 4,936 Thereafter 29,999 $ 55,494 Licenses are tied to product launches and do not begin amortizing until the product is launched to the market. 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. 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. 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. 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. 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 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. Based upon the Company's analysis, no impairment chargers were recorded to its intangible assets. NOTE 6 - 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. 106 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 $ — $ — 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 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: Total Balance at January 1, 2020 $ — Contingent consideration recorded as a result of the acquisition (Note 3) 27,190 Increase in fair value of contingent consideration 3,520 Balance at December 31, 2020 $ 30,710 Decrease in fair value of contingent consideration ( 1,800 ) Balance at December 31, 2021 $ 28,910 107 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: December 31, 2021 December 31, 2020 April 1, 2020 Valuation techniques Discounted cash flow, Monte Carlo Present value discount rate (1) 18.4 % 25.8 % 23.1 % Volatility factor 50.3 % 51.8 % 43.7 % Expected Years 2.4 years 3.5 years 4.1 years (1) The present value discount rate includes estimated risk premium. NOTE 7 - PROPERTY AND EQUIPMENT, NET Property and equipment, net consisted of the following: December 31, 2021 2020 Land $ 1,645 $ 1,645 Building and building improvements 4,078 2,591 Computer equipment and software 2,541 2,218 Office and other equipment 1,958 1,060 Instruments 34,094 29,916 Sample inventory 2,483 2,453 Construction in progress 4,805 4,995 51,604 44,878 Less: accumulated depreciation ( 23,089 ) ( 17,651 ) Total property and equipment, net $ 28,515 $ 27,227 Depreciation expense is included in general and administrative expenses and was $ 6,148 , $ 4,660 and $ 3,749 for the years ended December 31, 2021, 2020 and 2019, respectively. NOTE 8 – ACCRUED COMPENSATION AND BENEFITS Accrued compensation and benefits consisted of the following: December 31, 2021 2020 Accrued compensation and related costs $ 2,357 $ 1,896 Accrued commissions 2,994 2,644 Total accrued compensation and benefits $ 5,351 $ 4,540 108 NOTE 9 - DEBT AND CREDIT ARRANGEMENTS Long-term debt consisted of the following: December 31, 2021 2020 Mortgage payable to affiliate $ 1,044 $ 1,175 Total debt 1,044 1,175 Less: current maturities 137 131 Long-term debt, net of current maturities $ 907 $ 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, a majority of the term loan amounts under a previous agreement with Squadron were consolidated into a $ 20,000 term note, represented by a Term Note A, and a $ 15,000 revolving credit facility was established. Both facilities include interest only payments and provide for an interest rate equal to the greater of (a) three month LIBOR plus 8.61 % and (b) 10 %. The Loan Agreement also extended the maturity date to January 31, 2023. In order to finance a portion of the cash consideration for the acquisition of the Vilex Companies, the Company entered into a first Amendment, or the Amendment, to the Loan Agreement (as so amended, the "First Amended Loan Agreement"), with Squadron. The First Amended Loan Agreement provided for a new $ 30,000 term loan facility, represented by a Term Note B, in addition to the existing $ 20,000 Term Note A and $ 15,000 revolving credit facility. Similar to the other facilities under the First Amended Loan Agreement, the Term Note B was subject to interest only payments at an interest rate equal to the greater of (a) three month LIBOR plus 8.61 %, and (b) 10.00 %. The Term Note B, which would have matured no later than May 31, 2020, was paid in full on December 31, 2019 using $ 25,000 received in exchange for the divestiture of the adult product offerings of Vilex and the related Orthex license agreement, and $ 5,000 from the available Squadron revolving credit facility. On January 4, 2020, the Company repaid $ 5,000 on the revolving credit facility with Squadron. On July 15, 2020, the Company repaid the $ 20,000 principal amount outstanding under the Term Note A, together with all unpaid interest and other related amounts payable. On August 4, 2020, the Company entered into a Second Amendment (the “Second Amendment”) to its First Amended Loan Agreement with Squadron (as so further amended, the “Second Amended Loan Agreement”). Pursuant to the Second Amendment, the First Amended Loan Agreement’s revolving credit commitment was increased from the previously established $ 15,000 to $ 25,000 . The Company 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. 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. 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. 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 109 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, 2021 and 2020, the mortgage balance was $ 1,044 and $ 1,175 , respectively, of which current principal due of $ 137 and $ 131 , respectively, was included in current portion of long-term debt. At December 31, 2021, the aggregate future principal payments on our debt arrangements are as follows: 2022 $ 137 2023 144 2024 152 2025 160 2026 168 Thereafter 283 $ 1,044 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 - INCOME TAXES 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. The CARES Act lifts certain deduction limitations originally imposed by the Tax Act. 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 enactment of the CARES Act did not result in any material impact to the Company’s income tax provision. On December 27, 2020 the Consolidated Appropriations Act, 2021 (“CAA”) was signed into law. The CAA includes the COVID-related Tax Relief Act of 2020 (“COVID TRA”). The Company is continuing to assess the effect of the CAA and does not believe it will result in a material impact to the Company’s income tax provision. Total income tax expense (benefit) for the years ended December 31, 2021, 2020 and 2019 was allocated as follows: 2021 2020 2019 Income from continuing operations $ ( 1,128 ) $ ( 723 ) $ — Income from discontinued operations — — ( 660 ) Total tax expense (benefit) $ ( 1,128 ) $ ( 723 ) $ ( 660 ) For the years ended December 31, 2021, 2020 and 2019 loss from continuing operations before taxes of the Company consists of the following: 2021 2020 2019 Domestic $ ( 9,232 ) $ ( 28,756 ) $ ( 12,010 ) Foreign ( 8,156 ) ( 4,911 ) ( 675 ) Total $ ( 17,388 ) $ ( 33,667 ) $ ( 12,685 ) 110 The components of income tax expense (benefit) from continuing operations for the years ended December 31, 2021, 2020 and 2019 are as follows: 2021 2020 2019 Deferred: Federal $ — $ — $ 1,033 State — — 37 Foreign ( 1,128 ) ( 723 ) — Decrease in valuation allowance — — ( 1,070 ) Total income tax expense (benefit) $ ( 1,128 ) $ ( 723 ) $ — The reconciliation between the effective tax rate and the statutory tax rate is as follows: December 31, 2021 2020 2019 Federal statutory rate 21.0 % 21.0 % 21.0 % State statutory rate, net of federal benefit 2.0 % 1.8 % ( 0.7 ) % Effect of foreign rates different from statutory ( 0.1 ) % 0.1 % — % 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 % — % Unborn foreign tax deduction ( 1.5 ) % 4.0 % — % Change in valuation allowance ( 33.1 ) % ( 23.4 ) % ( 19.3 ) % Income tax (expense) benefit 6.3 % 2.1 % — % Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The primary temporary differences that give rise to the deferred tax assets and liabilities are certain inventory adjustments, depreciation and amortization, interest expense, stock based compensation and net operating loss carryforwards. The deferred tax assets and liabilities consisted of the following at December 31, 2021 and 2020: 2021 2020 Deferred tax assets: Inventories, net $ 4,206 $ 2,715 Stock based compensation 2,454 1,938 Loss carryforwards 35,421 29,050 Credit carryforwards 176 176 Interest carryforward 338 1,851 Accrued Settlements — 1,467 Other 444 382 Total deferred tax assets 43,039 37,579 Valuation allowance ( 38,911 ) ( 33,160 ) Net deferred tax assets 4,128 4,419 Deferred tax liabilities: Intangibles ( 7,518 ) ( 9,120 ) Property, plant and equipment ( 1,238 ) ( 1,054 ) 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 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. 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 $ 23,920 in losses generated prior to the ownership 111 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 over the first five years as a result of an unrealized built in gain. NOLs sustained prior to May 30, 2014 will still be constricted 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 December 31, 2021. Such objective evidence limits the ability to consider other subjective evidence, such as our projections for future growth. As a result, a full valuation continues to be recorded against the Company's net deferred tax assets, with the exception of Israel. We are subject to taxation in the United States, Indiana and various other state and international jurisdictions. As of December 31, 2021, all tax years from 2008 remain open to examination by the major taxing jurisdictions to which we are subject due to our net operating loss and credit carryforwards from those years. We believe that the income tax filing positions will be sustained on audit and do not anticipate any adjustments that will result in a material change. Therefore, no reserve for uncertain income tax positions has been recorded. Interest and penalties, if any, associated with income tax examinations will be to record such items as a component of income taxes. At December 31, 2021, our foreign operations held cash totaling $ 2,444 . We have not provided for foreign withholding tax on the undistributed earnings from our non-U.S. subsidiaries that are considered to be indefinitely reinvested. If such earnings were to be distributed, any foreign withholding tax would not be significant. 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. 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 1,832,460 shares for award. As of December 31, 2021, the Plan had 694,186 shares available for issuance. 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: Options Weighted-Average Exercise Price Weighted-Average Remaining Contractual Terms (in Years) Outstanding at January 1, 2019 112,094 $ 30.32 1.8 Forfeited or expired ( 2,546 ) $ 27.61 Exercised ( 38,920 ) $ 29.30 Outstanding at December 31, 2019 70,628 $ 30.97 1.2 Forfeited or expired ( 4,556 ) $ 30.97 Exercised ( 53,270 ) $ 30.97 Outstanding at December 31, 2020 12,802 $ 30.97 1.6 Forfeited or expired ( 1,742 ) $ 30.97 Exercised ( 4,422 ) $ 30.97 Outstanding at December 31, 2021 6,638 $ 30.97 1.3 112 Options generally include a time-based vesting schedule permitting the options to vest ratably over three years . At December 31, 2021 and 2020, all options were fully vested. There was no stock-based compensation expense on stock options for all periods presented. Restricted Stock Our restricted stock activity and related information are summarized as follows: Restricted Stock Weighted-Average Remaining Contractual Terms (in Years) Outstanding at January 1, 2019 177,293 2.2 Granted 154,769 Forfeited ( 9,616 ) Outstanding at Vested ( 4,444 ) Outstanding at December 31, 2019 318,002 1.7 Granted 164,010 Forfeited ( 1,885 ) Outstanding at Vested ( 43,397 ) Outstanding at December 31, 2020 436,730 1.1 Granted 114,256 Forfeited ( 6,354 ) Vested ( 176,186 ) Outstanding at December 31, 2021 368,446 1.1 Restricted stock exercisable at December 31, 2021 — 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. 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 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. Warrants Our warrant activity and related information are summarized below: Warrants Weighted-Average Exercise Price Outstanding at January 1, 2019 6,790 $ 27.81 Forfeited or expired ( 6,386 ) $ 27.61 Outstanding at December 31, 2019 404 $ 30.97 Forfeited or expired ( 404 ) $ 30.97 Outstanding at December 31, 2020 — $ — Forfeited or expired — $ — Outstanding at December 31, 2021 — $ — For all periods presented, the warrants were issued at exercise prices ranging from $ 27.61 to $ 30.97 per share. The warrants generally have a 10-year term. No warrants have been exercised during each of the three years in the period ended December 31, 2021. At inception and as of December 31, 2021, 2020 and 2019, no fair value was assigned to the warrants. 113 NOTE 12 – NET LOSS PER SHARE The following is a reconciliation of basic and diluted net loss per share attributable to common stockholders: Year Ended December 31, 2021 2020 2019 Net loss from continuing operations $ ( 16,260 ) $ ( 32,944 ) $ ( 12,685 ) Net loss from discontinued operations — — ( 1,046 ) Net loss attributable to common stockholders - basic and diluted $ ( 16,260 ) $ ( 32,944 ) $ ( 13,731 ) Weighted average number of shares - basic and diluted 19,268,255 18,056,828 14,624,194 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 ) 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 been anti-dilutive for all periods presented: Year Ended December 31, 2021 2020 2019 Restricted stock 368,446 436,730 318,002 Stock options 6,638 12,802 70,628 Warrants — — 404 375,084 449,532 389,034 NOTE 13 – 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 reportable segment, OrthoPediatrics, 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 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 individual customer accounted for more than 10% of total product sales for any of the periods presented. No customer accounted for more than 10% of consolidated accounts receivable as of December 31, 2021 or 2020. 114 Disaggregated revenue - product sales by source were as follows: Year Ended December 31, Product sales by geographic location: 2021 2020 2019 U.S. $ 77,781 $ 62,966 $ 55,055 International 20,268 8,112 17,497 Total $ 98,049 $ 71,078 $ 72,552 Year Ended December 31, Product sales by category: 2021 2020 2019 Trauma and deformity $ 65,829 $ 47,677 $ 49,371 Scoliosis 28,046 20,738 21,485 Sports medicine/other 4,174 2,663 1,696 Total $ 98,049 $ 71,078 $ 72,552 No individual country with sales originating outside of the United States accounted for more than 10% of consolidated revenue for the years ended December 31, 2021, 2020 and 2019. NOTE 14 - RELATED PARTY TRANSACTIONS In addition to the debt and credit agreements and mortgage with Squadron and its affiliate (refer to 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. Our aggregate payments to Structure Medical for inventory purchases were $ 750 , $ 2,622 and $ 3,933 for the years ended December 31, 2021, 2020 and 2019, 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. 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 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. Effective January 1, 2019, we elected to match our employees' 401(k) contributions up to 3 % of employees' salary. This was increased to 4 % effective January 1, 2020. For the years ended December 31, 2021 and 2020, we matched $ 510 and $ 439 , respectively of our employees' 401(k) contributions. NOTE 16 – COMMITMENTS AND CONTINGENCIES Leases 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 115 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 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. 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. 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. 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 116 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. 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. Royalties 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. Additionally, we have minimum royalty commitments of $ 10 annually through 2026. 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 December 31, 2021, we have not been able to determine the amount and timing of payments. We do not anticipate these future payments will have a material impact on our financial results. 117 NOTE 17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The quarterly financial data presented should be read in conjunction with the consolidated financial statements and related notes. Three Months Ended Mar. 31, 2021 Jun. 30, 2021 Sep. 30, 2021 Dec. 31, 2021 Net revenue $ 21,462 $ 26,695 $ 25,079 $ 24,813 Gross profit 16,325 20,443 18,554 18,081 Operating loss ( 5,973 ) ( 2,846 ) ( 3,644 ) ( 5,561 ) Loss before income tax benefit ( 10,691 ) ( 4,042 ) ( 2,489 ) ( 166 ) Provision for income taxes (benefit) ( 312 ) ( 286 ) ( 292 ) ( 238 ) Net loss ( 10,379 ) ( 3,756 ) ( 2,197 ) 72 Net loss per share - basic and diluted $ ( 0.54 ) $ ( 0.19 ) $ ( 0.11 ) $ — Three Months Ended Mar. 31, 2020 Jun. 30, 2020 Sep. 30, 2020 Dec. 31, 2020 Net revenue $ 16,356 $ 13,593 $ 22,205 $ 18,924 Gross profit 12,213 10,061 17,639 15,118 Operating loss ( 4,497 ) ( 7,017 ) ( 2,498 ) ( 12,743 ) 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 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 . ITEM 9. 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, 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.