What changed in this filing

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Item 1. Financial Statements

2022-05-05 compared with 2021-11-04 · 166 added, 308 removed, 506 unchanged (48% of the section changed)

3 unchanged sentences

(In Thousands, Except Share Data)

September 30, 2021 December 31, 2020

March 31, 2022 December 31, 2021

Current assets:

5 unchanged sentences

Inventories, net 64,077 57,569

Notes receivable 59 337

Prepaid expenses and other current assets 3,048 3,229

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Accrued compensation and benefits 4,433 5,351

Accrued legal settlements — 6,342

Current portion of long-term debt with affiliate 139 137

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50,000,000 shares authorized;

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

19,821,298 shares and 19,677,214 shares issued as of March 31, 2022 (unaudited) and December 31, 2021, respectively

Additional paid-in capital 396,425 394,899

7 unchanged sentences

(In Thousands, Except Share and Per Share Data)

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

2021 2020 2021 2020

Three Months Ended March 31,

Net revenue $ 23,417 $ 21,462

10 unchanged sentences

Fair value adjustment of contingent consideration 2,570 4,150

Other (income) expense ( 267 ) 122 ( 802 ) 312

Other income ( 105 ) ( 160 )

Total other expenses 3,031 4,718

8 unchanged sentences

(In Thousands)

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

2021 2020 2021 2020

Three Months Ended March 31,

Net loss $ ( 9,100 ) $ ( 10,379 )

2 unchanged sentences

Unrealized loss on short-term investments ( 553 ) ( 123 )

Other comprehensive loss 200 ( 94 ) ( 1,625 ) 70

Other comprehensive loss, net of tax ( 2,751 ) ( 3,622 )

Comprehensive loss $ ( 11,851 ) $ ( 14,001 )

3 unchanged sentences

(In Thousands, Except Share Data)

Three and Nine Months Ended September 30, 2021

Three Months Ended March 31, 2022

Additional Other Total

3 unchanged sentences

Net loss — — — ( 9,100 ) — ( 9,100 )

Other comprehensive income — — — — ( 3,622 ) ( 3,622 )

Stock option exercise 2,010 — 62 — — 62

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

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

Net loss — — — ( 3,756 ) — ( 3,756 )

Other comprehensive loss — — — — ( 2,751 ) ( 2,751 )

Restricted stock 144,084 — 1,526 — — 1,526

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

Net Loss — — — ( 2,197 ) — ( 2,197 )

Other comprehensive loss — — — — 200 200

Stock option exercise 2,412 — 75 — — 75

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

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

Balance at March 31, 2022 19,821,298 $ 5 $ 396,425 $ ( 187,126 ) $ 5,740 $ 215,044

ORTHOPEDIATRICS CORP.

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(In Thousands, Except Share Data)

Three and Nine Months Ended September 30, 2020

Three Months Ended March 31, 2021

Additional Other Total

Common Stock Treasury Stock Paid-in Accumulated Comprehensive Stockholders'

Shares Value Shares Value Capital Deficit Income (Loss) Equity

Common Stock Paid-in Accumulated Comprehensive Stockholders'

Shares Value Capital Deficit Income (Loss) Equity

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

Net loss — — — ( 10,379 ) — ( 10,379 )

Other comprehensive income — — — — — — ( 1,358 ) ( 1,358 )

Stock option exercise 22,208 — — — 688 — — 688

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

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

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

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

Net loss — — — — — ( 9,447 ) — ( 9,447 )

Other comprehensive loss — — — — ( 3,622 ) ( 3,622 )

1 unchanged sentence

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

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

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

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

Net loss — — — — — ( 4,539 ) — ( 4,539 )

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

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

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

Balance at September 30, 2020 19,554.621 $ 5 — $ — $ 387,117 $ ( 147,753 ) $ 67 $ 239,436

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

See notes to condensed consolidated financial statements.

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(In Thousands)

Nine Months Ended

September 30,

Three Months Ended

OPERATING ACTIVITIES

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INVESTING ACTIVITIES

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

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

Acquisition of Band-Lok intangible assets — ( 796 )

Sale of short-term marketable securities 18,500 —

1 unchanged sentence

Purchases of property and equipment ( 4,197 ) ( 2,749 )

Net cash used in investing activities ( 10,376 ) ( 10,637 )

Net cash provided by (used in) investing activities 14,303 ( 5,607 )

FINANCING ACTIVITIES

Payments on debt with affiliate — ( 25,000 )

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

Proceeds from exercise of stock options — 62

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Transfer of instruments from property and equipment to inventory $ ( 54 ) $ 57

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

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

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

See notes to condensed consolidated financial statements.

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

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

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

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

The Company began selling its products in the United States in 2008 and internationally in 2011.

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

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

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

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

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

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

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

As part of the sale, we also executed an exclusive license arrangement with Squadron providing for perpetual access to certain intellectual property and a mutual distribution agreement.

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

Telos is a boutique regulatory consulting firm formed in Colorado.

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

("ApiFix") for (a) $ 2,000 in cash, and (b) 934,783 shares of the Company's common stock, $ 0.00025 par value per share, representing approximately $ 35,000 (based on a closing share price of $ 37.63 on April 1, 2020.

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

In addition, we have also agreed to pay as part of the purchase price the following anniversary payments, subject to certain limitations and adjustments:

(i) approximately $ 13,000 on the second anniversary of the closing date, provided that such payment will be paid earlier if 150 clinical procedures using the ApiFix System are completed in the United States before such anniversary date, (ii) $ 8,000 on the third anniversary of the closing date;

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

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

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

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

We use the Tether Clamp System in connection with our Bandloc 5.5/6.0 System.

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

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 243,000 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.

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

The global COVID-19 pandemic (“COVID-19” or the “pandemic”), together with the preventative and precautionary measures taken by governments, governmental agencies, communities, businesses and hospital administrators, has impacted, and may continue to impact significant aspects of our business, including demand for our products, supply chain and distribution systems, our operations generally, and the timing for bringing new products to market.

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

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

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

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

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 required certain 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.

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

We have 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

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

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

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”).

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

The accompanying condensed consolidated balance sheets as of September 30, 2021 and December 31, 2020, the condensed consolidated statements of operations for the three and nine months ended September 30, 2021 and 2020, the condensed consolidated statements of comprehensive loss for the three and nine months ended September 30, 2021 and 2020, the condensed consolidated statements of stockholders’ equity for the three and nine months ended September 30, 2021 and 2020 and the condensed consolidated statements of cash flows for the nine months ended September 30, 2021 and 2020 are unaudited and should be read in conjunction with the annual consolidated financial statements as of and for the year ended December 31, 2020 and related notes thereto contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC") on March 11, 2021.

The accompanying condensed consolidated balance sheets as of March 31, 2022 and December 31, 2021, the condensed consolidated statements of operations for the three months ended March 31, 2022 and 2021, the condensed consolidated statements of comprehensive loss for the three months ended March 31, 2022 and 2021, the condensed consolidated statements of stockholders’ equity for the three months ended March 31, 2022 and 2021 and the condensed consolidated statements of cash flows for the three months ended March 31, 2022 and 2021 are unaudited and should be read in conjunction with the annual consolidated financial statements as of and for the year ended December 31, 2021 and related notes thereto contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC") on March 3, 2022.

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

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The unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements as of and for the year ended December 31, 2021 and, in management’s opinion, include all adjustments, consisting of only normal recurring adjustments, necessary for the fair presentation of the financial statements for the interim periods.

The results of operations for the three and nine months ended September 30, 2021 are not necessarily indicative of the results to be expected for the full fiscal year or for any other period.

The results of operations for the three months ended March 31, 2022 are not necessarily indicative of the results to be expected for the full fiscal year or for any other period.

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

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

We have experienced recurring losses from operations since our inception and had an accumulated deficit of $ 187,126 and $ 178,026 as of March 31, 2022 and December 31, 2021, respectively.

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

We believe that our cash balance, including short term investments, at September 30, 2021 and expected cash flows from operations for the next twelve months subsequent to the issuance of the accompanying condensed consolidated financial statements, are sufficient to enable us to maintain current and essential planned operations for more than the next twelve months.

We believe that our cash balance, including short term investments, at March 31, 2022 and expected cash flows from operations for the next twelve months subsequent to the issuance of the accompanying condensed consolidated financial statements, are sufficient to enable us to maintain current and essential planned operations for more than the next twelve months.

Use of Estimates

Preparation of the condensed consolidated financial statements requires the use of estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as of the date of the condensed consolidated financial statements.

Preparation of our condensed consolidated financial statements requires the use of estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as of the date of the condensed consolidated financial statements.

By their nature, these judgments are subject to an inherent degree of uncertainty.

The impact of the coronavirus disease ("COVID-19") has significantly increased economic and demand uncertainty.

We use historical experience and other assumptions as the basis for our judgments and estimates.

Because future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates.

Any changes in these estimates will be reflected in the condensed consolidated financial statements.

Any changes in these estimates will be reflected in our consolidated financial statements.

Foreign Currency Transactions

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dollars, resulting in minimal foreign exchange transaction expense.

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

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

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 Austria.

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

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

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.

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

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

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

Revenue from Contracts with Customers

In accordance with ASC 606, " Revenue From Contracts With Customers (ASC 606)", revenue is recognized when a customer obtains control of promised goods or services.

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.

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We recognize revenue when our performance obligations under the terms of a contract with our customer are satisfied.

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

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

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

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

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

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

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

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

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

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

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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.

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.

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Restricted Cash

In conjunction with the sale of the assets relating to Vilex's adult product offering to a wholly-owned subsidiary of Squadron in 2019, $ 1,250 was placed into a separate escrow account to cover certain indemnification obligations.

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

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

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 March 31, 2022 and December 31, 2021 condensed 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 being asserted;

however, due to the pending IMED Surgical litigation, the cash remains reported as restricted until the conclusion of the legal matter (see “Legal Proceedings” under Note 12 – Commitments and Contingencies for additional information).

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

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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.

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.

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Amortization is calculated on a straight-line basis over the estimated useful life of the asset.

Amortization for patents and licenses commences at the time of patent approval and market launch, respectively.

Amortization for 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 annually or whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable.

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 assets.

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.

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Goodwill is not amortized and is assessed for impairment using fair value measurement techniques on an annual basis or more frequently if facts and circumstances warrant such a review.

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

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

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

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 charges were recorded in any of the periods presented.

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.

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

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

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

The amount of expense related to acquisition installment payables recorded in interest expense, net for the three months ended March 31, 2022 and March 31, 2021 were $ 453 and $ 644 , respectively.

The fair value adjustments of contingent consideration for the three months ended March 31, 2022 and March 31, 2021 were expense adjustments of $ 2,570 and $ 4,150 , respectively.

Cost of Revenue

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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.

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

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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.

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

Comprehensive Income (Loss)

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

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” and "Smaller Reporting Company" Reporting Requirements

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

For as long as a company is deemed to be an emerging growth company, it may take advantage of specified reduced reporting and other regulatory requirements that are generally unavailable to other public companies.

"Emerging growth companies" may take advantage of specified reduced reporting and other regulatory requirements that are generally unavailable to other public companies.

Among other things, we are not required to provide an auditor attestation report on the assessment of the internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act of 2002.

We will be able to take advantage of these reduced requirements until December 31, 2022, the date on which we will no longer qualify as an emerging growth company.

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 over the operating effectiveness 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 are subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we have been and will continue to be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

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

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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.

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

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

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Early adoption is permitted for all entities, including adoption in an interim period.

The Company is currently evaluating the impact of adopting ASU 2021-04 on its consolidated financial statements.

The Company adopted this guidance effective January 1, 2022.

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

In June 2016, the FASB issued ASU No.

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

NOTE 3 – BUSINESS COMBINATION

On April 1, 2020, the Company purchased all the issued and outstanding membership interest of ApiFix for $ 2,000 in cash, including $ 344 of cash acquired, 934,783 shares of the Company's common stock, $ 0.00025 par value per share, representing approximately $ 35,176 (based on a closing share price of $ 37.63 on April 1, 2020), approximately $ 30,000 in anniversary payments, and approximately $ 41,741 in a system sales payment.

The total consideration transferred of $ 87,379 , as calculated after discounting future payments to present value, is final.

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

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

Consideration Present Value

Cash consideration $ 2,000 $ 2,000

Payment of ApiFix transaction related costs 67 67

Issuance of common stock 35,176 35,176

Anniversary Payments 30,000 22,620

System sales payment 41,741 27,190

Total consideration transferred $ 108,984 $ 87,053

The purchase price allocation set forth herein is final.

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

Description Amount

Fair value of estimated total acquisition consideration $ 87,379

Accounts receivable-trade 245

Inventories 685

Prepaid expenses and other current assets 77

Property and equipment 153

Intangible assets 32,150

Other intangible assets 8,640

Operating lease right-of-use asset 104

Total assets 42,398

Accounts payable and accrued liabilities 226

Operating lease liabilities 106

Other current liabilities 270

Deferred income taxes 6,487

Total liabilities 7,089

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.

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

Amount Remaining Economic Useful Life

Trademarks / Names $ 8,640 Indefinite

Patents 31,720 15 years

Customer Relationships 230 10 years

Non-competition Agreements 200 4 years

The Company is obligated to make anniversary payments of:

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

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

In addition, to the extent that the product of our revenues from the ApiFix System for the twelve months ended June 30, 2024 multiplied by 2.25 exceeds the anniversary payments actually made for the third and fourth years, we have agreed to pay the selling shareholders a system sales payment in the amount of such excess.

The anniversary payments and system sales payment may each be made in cash or cash and common stock, subject to certain limitations;

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

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

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

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

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

Anniversary Payments:

Second Year Payment $ 10,980 $ 12,233 $ 12,791

Third Year Payment 5,780 6,335 6,890

Fourth Year Payment 5,860 6,449 7,037

Total acquisition installment payable 22,620 25,017 26,718

current portion of acquisition installment payable 10,980 12,233 12,791

Acquisition installment payable, net of current portion 11,640 12,784 13,927

System sales payment 27,190 30,710 34,420

ApiFix future consideration, net of current portion $ 38,830 $ 43,494 $ 48,347

Pre-acquisition revenues and earnings for ApiFix were not material to the condensed consolidated operations.

NOTE 3 - GOODWILL AND INTANGIBLE ASSETS

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

Changes in the carrying amount of goodwill for the three months ended March 31, 2022 were as follows:

Goodwill at January 1, 2022 $ 72,349

Foreign currency translation impact ( 1,362 )

Goodwill at September 30, 2021

Goodwill at March 31, 2022

Intangible Assets

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

As of March 31, 2022, the balances of amortizable intangible assets were as follows:

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

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Total amortizable assets $ 65,014 $ ( 9,520 ) $ 55,494

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.

We use the Tether Clamp System in connection with our Bandloc 5.5/6.0 System.

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

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

Trademarks are non-amortizing intangible assets which were $ 13,957 and $ 13,961 as of September 30, 2021 and December 31, 2020, respectively.

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

Trademarks are non-amortizing intangible assets which were $ 14,040 and $ 14,268 as of March 31, 2022 and December 31, 2021, respectively.

Trademarks are recorded in Other Intangible assets on the condensed consolidated balance sheets.

The change in balance during the three months ended March 31, 2022 was the result of foreign currency translation of the ApiFix trademark.

NOTE 4 - FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

September 30, 2021

The following table summarize the assets and liabilities measured at fair value on a recurring basis as of March 31, 2022 and December 31, 2021.

March 31, 2022

Level 1 Level 2 Level 3 Total

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Short term investments

Exchange Trade Mutual Funds $ 35,358 $ — $ — $ 35,358

Corporate Bonds $ 13,776 $ — $ — $ 13,776

Treasury Bonds $ 7,445 $ — $ — $ 7,445

Asset Backed Securities $ — $ 5,261 $ — $ 5,261

Other $ 586 $ — $ — $ 586

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Financial Assets

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

Short term investments

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

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

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

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

Other $ 837 $ — $ — $ 837

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

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

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

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

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

Additionally, $ 489 and $ 1,701 was recognized as interest expense for the three and nine month periods ended September 30, 2021, respectively, on the condensed consolidated statements of operations for the accretion of the acquisition installment payable.

The adjustments in the fair value of the contingent consideration payments included expense adjustment of $ 2,570 and $ 4,150 for the three month periods ended March 31, 2022 and March 31, 2021, respectively, in other expenses on the condensed consolidated statements of operations.

The following table summarizes the change in fair value of Level 3 instruments in 2022:

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Change in fair value of contingent consideration 2,570

Balance at September 30, 2021

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

September 30, 2021 December 31, 2020

Balance at March 31, 2022

March 31, 2022 December 31, 2021

Valuation techniques Discounted cash flow, Monte Carlo

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

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

The estimated fair value reflects assumptions made by management as of March 31, 2022;

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

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Long-term debt consisted of the following:

September 30, 2021 December 31, 2020

March 31, 2022 December 31, 2021

Mortgage payable to affiliate $ 1,011 $ 1,044

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Long-term debt with affiliate, net of current maturities $ 872 $ 907

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

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

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

Effective December 31, 2021, the Company entered into a Third Amendment (the "Third Amendment") to its Fourth Amended and Restated Loan and Security Agreement with Squadron Capital LLC, or Squadron (as so amended, the “Loan Agreement”).

The Loan Agreement provides a $ 25,000 revolving credit facility, with interest only payments, at an annual interest rate equal to the greater of (a) six month SOFR plus 8.69 % and (b) 10.0 %.

The Company pays 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.

Prior to the Third Amendment, the interest rate on the facility had been equal to the greater of (a) three month LIBOR plus 8.61 % and (b) 10.0 %.

While the Loan Agreement previously provided for certain term loans, there are no longer any outstanding term loan obligations.

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

The Amended Revolving Note will mature at the earlier of:

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and (ii) January 1, 2024.

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

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

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

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

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

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

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

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

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

Borrowings under the 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 Loan Agreement.

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

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

At March 31, 2022 the mortgage balance was $ 1,011 of which current principal of $ 139 was included in the current portion of long-term debt.

As of December 31, 2021, the mortgage balance was $ 1,044 of which current principal due of $ 137 was included in the current portion of long-term debt.

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

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

The aggregate interest expense relating to the notes payable to Squadron and the mortgage note payable to Tawani was $ 13 and $ 15 for the three months ended March 31, 2022 and 2021, respectively.

NOTE 6 - INCOME TAXES

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

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

Our effective income tax rate was 5.2 % and 0 % for the three months ended September 30, 2021 and 2020, respectively.

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

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

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

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

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

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

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

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

The deferred tax assets were fully offset by a valuation allowance at September 30, 2021 and December 31, 2020, with the exception of certain deferred tax liabilities recognized in a foreign jurisdiction as a result of fair value adjustments recorded upon the acquisition of ApiFix.

The company has recorded a tax benefit during the period ended September 30, 2021 for losses generated in the foreign jurisdiction.

For the three months ended March 31, 2022, the income tax benefit was $ 317 compared to $ 312 for the three months ended March 31, 2021.

Our effective income tax rate was 3.4 % and 2.9 % for the three months ended March 31, 2022 and 2021, respectively.

The deferred tax assets were fully offset by a valuation allowance at March 31, 2022 and December 31, 2021, with the exception of certain deferred tax liabilities recognized in a foreign jurisdiction as a result of fair value adjustments recorded upon the acquisition of ApiFix.

The company has recorded a tax benefit during the period ended March 31, 2022 for losses generated in the foreign jurisdiction.

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

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

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

A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year period ended March 31, 2022.

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

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Outstanding at January 1, 2022 6,638 $ 30.97 1.3

Exercised ( 4,422 ) 30.97

Forfeited or expired ( 1,742 ) 30.97

Outstanding at September 30, 2021

Outstanding at March 31, 2022

6,638 $ 30.97 1.1

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

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

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

At March 31, 2022 and December 31, 2021, all options were fully vested.

There was no stock-based compensation expense on stock options for the three months ended March 31, 2022 and 2021, respectively.

Restricted Stock

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Vested ( 120,656 )

Outstanding at September 30, 2021

Restricted stock exercisable at September 30, 2021

At September 30, 2021, there was $ 8,694 of unrecognized compensation expense remaining related to our service-based restricted stock awards.

Outstanding at March 31, 2022

Restricted stock exercisable at March 31, 2022

At March 31, 2022, there was $ 12,443 of unrecognized compensation expense remaining related to our service-based restricted stock awards.

The unrecognized compensation cost was expected to be recognized over a weighted-average period of 1.9 years or earlier upon an elimination of the restriction period as a result of a change in control event.

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

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

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

Stock-based compensation expense on restricted stock amounted to $ 1,526 and $ 1,440 for the three months ended March 31, 2022 and 2021, respectively.

The increase in the stock compensation for the three months ended March 31, 2022 is primarily due to increase in plan participants as we continue to hire employees to support the continued expansion of our business.

NOTE 8 – NET LOSS PER SHARE

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

Three Months Ended Nine Months Ended

September 30, September 30,

2021 2020 2021 2020

Three Months Ended

Net loss $ ( 9,100 ) $ ( 10,379 )

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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:

Nine Months Ended September 30,

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:

Three Months Ended March 31,

Restricted stock 391,874 389,098

Stock options 6,638 10,792

Warrants — 404

Total shares 398,512 399,890

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

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

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

No customers accounted for more than 10% of total product sales for the three months ended March 31, 2022 or 2021.

No customer accounted for more than 10% of consolidated accounts receivable as of March 31, 2022 and December 31, 2021.

Product sales by source were as follows:

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

Three Months Ended March 31,

Product sales by geographic location:

$ 18,188 $ 16,839

$ 19,354 $ 19,583 $ 57,930 $ 45,113

International 5,229 4,623

Total $ 23,417 $ 21,462

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

Three Months Ended March 31,

Product sales by category:

2021 2020 2021 2020

Trauma and deformity $ 16,516 $ 14,552

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Total $ 23,417 $ 21,462

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

No individual country with sales originating outside of the United States accounted for more than 10% of consolidated revenue for the three months ended March 31, 2022 and 2021.

NOTE 10 - RELATED PARTY TRANSACTIONS

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

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

We made aggregate payments to Structure Medical for inventory purchases of $ 316 and $ 72 for the three months ended March 31, 2022 and 2021, respectively.

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

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

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

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

We had sales and payments related to inventory purchases to Squadron's affiliate, now known as Vilex, LLC, of $ 8 and $ 25 , respectively, for the three months ended March 31, 2022.

We had sales and payments related to inventory purchases to Vilex, LLC of $ 87 and $ 189 , respectively, for the three months ended March 31, 2021 .

NOTE 11 - EMPLOYEE BENEFIT PLAN

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NOTE 12 – COMMITMENTS AND CONTINGENCIES

The Company records lease liabilities within current liabilities or long-term liabilities based upon the length of time associated with the lease payments.

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

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

As of March 31, 2022, the Company has recorded a lease liability of $ 241 and corresponding right-of-use-asset of $ 243 on its condensed consolidated balance sheet .

Legal Proceedings

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

K2M - Alleged Patent Infringement

On January 20, 2017, K2M, Inc.

filed suit against us in the United States District Court for the District of Delaware (K2M, Inc.

OrthoPediatrics Corp.

et al., Case No.

1:17-cv-0061) seeking unspecified damages for alleged infringement of U.S.

The complaint was amended on August 21, 2017 to add, among other things, a claim of patent infringement regarding U.S.

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.

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

Like before, these newly issued K2M patents relate to certain instruments used in our RESPONSE spine systems, and we denied these claims and responded with counterclaims seeking declaratory relief that the patents in question are both invalid and not infringed.

On June 29, 2021, the parties settled the matter, and subsequently filed a Joint Stipulation of Dismissal With Prejudice concerning all claims and counterclaims, which the Court subsequently granted and ordered.

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

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

IMED Surgical - Software Ownership Dispute

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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.

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.

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

The Plaintiff has not yet initiated an arbitration proceeding.

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

assign, sell or otherwise encumber the ‘377 Patent.

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

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

Barry - Alleged Patent Infringement

On December 30, 2020, Dr.

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

OrthoPediatrics Corp.

et al., Case No.

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

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

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

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

The balance of the amount otherwise paid to Dr.

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

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.

Wishbone Medical, Inc.

10 unchanged sentences

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

As of September 30, 2021, we are contracted to pay royalties to individuals and entities that provide research and development services, which range from 0.5 % to 20 % of sales.

We 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, the Company has agreed to a minimum purchase commitment for the first twelve months of that agreement.

As of March 31, 2022, the remaining purchase commitment under the agreement was $ 1,900 .

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.

The Company analyzes its projected achievement of these performance metrics and accrues for any estimated shortfall.

During the three months ended March 31, 2022, the Company recorded an expense of $ 101 based on current estimates.

No expense was recorded for the three months ended March 31, 2021.

As of March 31, 2022, we are contracted to pay royalties to individuals and entities that provide research and development services, which range from 0.5 % to 20 % of sales.

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

In any development project, there are significant variables that will affect the amount and timing of these payments and as of September 30, 2021, we have not been able to determine the amount and timing of payments.

In any development project, there are significant variables that will affect the amount and timing of these payments and as of March 31, 2022, we have not been able to determine the amount and timing of payments.

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

Purchase Obligations

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

NOTE 13 – SUBSEQUENT EVENTS

MD Orthopaedics Acquisition

On April 1, 2022, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with OrthoPediatrics Iowa Holdco, Inc., a Delaware corporation and newly-formed wholly-owned subsidiary of the Company (“Merger Sub”), Mitchell Designs, Inc.

(“Designs”), an Iowa corporation and the sole shareholder of MD Orthopaedics, Inc., also an Iowa corporation (“MD Ortho”) and John Mitchell, the sole shareholder of Designs (“Mitchell”).

MD Ortho has developed and manufactures a portfolio of orthopedic clubfoot products.

Pursuant to the Merger Agreement, Designs merged with and into Merger Sub effective April 1, 2022.

Under the terms of the Merger Agreement, the Company paid to Mitchell consideration of (a) $ 8,200 in cash, and (b) 173,241 shares of unregistered common stock, $ 0.00025 par value per share, of the Company, representing approximately $ 9,707 (based on the April 1, 2022 closing share price of $ 56.03 ).

ApiFix Acquisition Installment Payment

On April 1, 2022, the second-year anniversary of the acquisition of ApiFix, the Company paid $ 3,233 in cash and issued 185,811 shares of the Company's common stock, representing $ 10,411 of fair value (based on the April 1, 2022 closing share price of $ 56.03 ), to fulfill its installment obligation to ApiFix.

This was the first installment payment paid since the acquisition.

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

What changed 10-Q

Item 1. Financial Statements