What changed in this filing

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Item 1. Financial Statements

2022-11-01 compared with 2022-08-04 · 247 added, 146 removed, 590 unchanged (40% of the section changed)

3 unchanged sentences

(In Thousands, Except Share Data)

June 30, 2022 December 31, 2021

September 30, 2022 December 31, 2021

Current assets:

Cash and cash equivalents $ 37,198 $ 7,641

Cash $ 35,423 $ 7,641

Restricted cash 1,449 1,365

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50,000,000 shares authorized;

20,238,870 shares and 19,677,214 shares issued as of June 30, 2022 (unaudited) and December 31, 2021, respectively

22,896,031 shares and 19,677,214 shares issued as of September 30, 2022 (unaudited) and December 31, 2021, respectively

Additional paid-in capital 559,339 394,899

Accumulated deficit ( 168,920 ) ( 178,026 )

Accumulated other comprehensive income ( 3,684 ) 8,491

Accumulated other comprehensive income (loss) ( 7,095 ) 8,491

Total stockholders' equity 383,330 225,369

4 unchanged sentences

(In Thousands, Except Share and Per Share Data)

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

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

2022 2021 2022 2021

5 unchanged sentences

General and administrative 15,116 11,034 42,829 34,163

Trademark impairment 3,609 — 3,609 —

Research and development 2,206 1,302 5,980 3,935

6 unchanged sentences

Total other expenses (income) ( 21,357 ) ( 1,155 ) ( 21,297 ) 4,759

Loss before income taxes $ ( 772 ) $ ( 4,042 ) $ ( 10,189 ) $ ( 14,733 )

Income (loss) before income taxes $ 14,396 $ ( 2,489 ) $ 4,207 $ ( 17,222 )

Provision for income taxes (benefit) ( 4,143 ) ( 292 ) ( 4,899 ) ( 890 )

Net loss $ ( 333 ) $ ( 3,756 ) $ ( 9,433 ) $ ( 14,135 )

Weighted average common stock - basic and diluted 19,792,286 19,275,779 19,693,216 19,263,506

Net loss per share - basic and diluted $ ( 0.02 ) $ ( 0.19 ) $ ( 0.48 ) $ ( 0.73 )

Net income (loss) $ 18,539 $ ( 2,197 ) $ 9,106 $ ( 16,332 )

Weighted average shares outstanding

Basic 21,150,219 19,291,374 20,703,883 19,256,128

Diluted 21,295,323 19,291,374 20,958,503 19,256,128

Net income (loss) per share

Basic $ 0.88 $ ( 0.11 ) $ 0.44 $ ( 0.85 )

Diluted $ 0.87 $ ( 0.11 ) $ 0.43 $ ( 0.85 )

See notes to condensed consolidated financial statements.

ORTHOPEDIATRICS CORP.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In Thousands)

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

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

2022 2021 2022 2021

Net loss $ ( 333 ) $ ( 3,756 ) $ ( 9,433 ) $ ( 14,135 )

Other comprehensive loss:

Net income (loss) $ 18,539 $ ( 2,197 ) $ 9,106 $ ( 16,332 )

Other comprehensive income (loss):

Foreign currency translation adjustment ( 4,164 ) 288 ( 15,661 ) ( 1,343 )

Unrealized loss on short-term investments ( 452 ) ( 88 ) ( 1,130 ) ( 282 )

Other comprehensive loss, net of tax ( 9,424 ) 1,797 ( 12,175 ) ( 1,825 )

Comprehensive loss $ ( 9,757 ) $ ( 1,959 ) $ ( 21,608 ) $ ( 15,960 )

Adjustment for realized loss on securities 1,205 — 1,205 —

Other comprehensive income (loss), net of tax ( 3,411 ) 200 ( 15,586 ) ( 1,625 )

Comprehensive income (loss) $ 15,128 $ ( 1,997 ) $ ( 6,480 ) $ ( 17,957 )

See notes to condensed consolidated financial statements.

2 unchanged sentences

(In Thousands, Except Share Data)

Three and Six Months Ended June 30, 2022

Three and Nine Months Ended September 30, 2022

Additional Other Total

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Balance at June 30, 2022 20,238,870 $ 5 $ 418,354 $ ( 187,459 ) $ ( 3,684 ) $ 227,216

Net income — — — 18,539 — 18,539

Other comprehensive loss — — — — ( 3,411 ) ( 3,411 )

Stock option exercise 670 — 21 — — 21

Restricted stock 5,342 — 1,682 — — 1,682

Issuance of common stock, net of issuance cost 2,616,250 1 139,282 — — 139,283

Issuance of unregistered shares 34,899 — — — — —

Balance at September 30, 2022 22,896,031 $ 6 $ 559,339 $ ( 168,920 ) $ ( 7,095 ) $ 383,330

ORTHOPEDIATRICS CORP.

1 unchanged sentence

(In Thousands, Except Share Data)

Three and Six Months Ended June 30, 2021

Three and Nine Months Ended September 30, 2021

Additional Other Total

11 unchanged sentences

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 income — — — — 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

See notes to condensed consolidated financial statements.

2 unchanged sentences

(In Thousands)

Six Months Ended

Nine Months Ended

September 30,

OPERATING ACTIVITIES

Net loss $ ( 9,433 ) $ ( 14,135 )

Adjustments to reconcile net loss to net cash used in operating activities:

Net income (loss) $ 9,106 $ ( 16,332 )

Adjustments to reconcile net income (loss) to net cash used in operating activities:

Depreciation and amortization 9,579 7,870

Stock-based compensation 4,978 4,170

Trademark impairment 3,609 —

Fair value adjustment of contingent consideration ( 25,450 ) 3,710

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Acquisition of MD Ortho, net of cash acquired ( 8,360 ) —

Acquisition of Pega, net of cash acquired ( 31,730 ) —

Sale of short-term marketable securities 45,529 4,000

Purchases of licenses — ( 7,908 )

Purchase of short-term marketable securities ( 85,029 ) —

Purchases of property and equipment ( 10,554 ) ( 6,468 )

Net cash provided by (used in) investing activities 13,775 ( 7,332 )

Net cash used in investing activities ( 90,144 ) ( 10,376 )

FINANCING ACTIVITIES

Proceeds from issuance of debt with affiliate 31,000 —

Payments on debt with affiliate ( 31,000 ) —

Installment payment for ApiFix ( 3,234 ) —

Proceeds from issuance of common stock, net of issuance costs 139,282 —

Proceeds from exercise of stock options 63 137

Payments on mortgage notes ( 102 ) ( 97 )

Net cash (used in) provided by financing activities 27,741 ( 2 )

Net cash provided by financing activities 136,009 40

Effect of exchange rate changes on cash 426 ( 266 )

NET (DECREASE) INCREASE IN CASH 29,549 ( 18,196 )

NET INCREASE (DECREASE) IN CASH AND RESTRICTED CASH 27,866 ( 22,430 )

Cash and restricted cash, beginning of year $ 9,006 $ 30,132

4 unchanged sentences

Issuance of common shares to acquire MD Ortho $ 9,707 $ —

Issuance of common shares for ApiFix installment $ 10,410 $ —

Issuance of common shares for ApiFix acquisition installment $ 10,410 $ —

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, instruments and braces 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 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, Devise Rail, Orthex, Cerament ® 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.

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We estimate that the portion of this market that we currently serve represents a $ 3,300,000 opportunity globally, including over $ 1,500,000 in the United States.

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

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

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 order to meet the demand for COVID-19-related hospitalizations, various governments, governmental agencies and hospital administrators required certain hospitals to postpone some elective procedures.

In addition, elective procedures are also being delayed in some cases as hospitals continue to struggle with adequate staffing levels.

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.

Since then, the pandemic has presented a significant public health and economic challenge around the world and has adversely impacted our business.

Specifically, we have seen surgeons and their patients deferring elective procedures in which our products would have otherwise been used.

The volatility in COVID cases and hospitalizations, including the impacts of the Delta variant in the third quarter of 2021 and the current hospital support staffing shortages in certain geographies, continue to drive volatility into our business.

We continue to closely monitor developments related to the pandemic and the related staffing shortages and our decisions will continue to focus on the safety and security of our employees, distributors, surgeons and their patients while maintaining operations to support our customers.

The full extent of the impact of the pandemic on our business is uncertain and cannot be accurately predicted and will depend on future developments that are also uncertain and cannot be predicted.

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, ApiFix, Ltd., OrthoPediatrics Iowa Holdco, Inc., MD Orthopaedics, Inc., and MD International, Inc.

(collectively, the “Company,” “we,” “our” or “us”).

MD International Inc., OrthoPediatrics GMbH, OrthoPediatrics GP LLC, OrthoPediatrics US L.P.

and OrthoPediatrics Canada ULC doing business as Pega Medical (collectively, the “Company,” “we,” “our” or “us”).

All intercompany balances and transactions have been eliminated.

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

The accompanying condensed consolidated balance sheets as of June 30, 2022 and December 31, 2021, the condensed consolidated statements of operations for the three and six months ended June 30, 2022 and 2021, the condensed consolidated statements of comprehensive loss for the three and six months ended June 30, 2022 and 2021, the condensed consolidated statements of stockholders’ equity for the three and six months ended June 30, 2022 and 2021 and the condensed consolidated statements of cash flows for the six months ended June 30, 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 accompanying condensed consolidated balance sheets as of September 30, 2022 and December 31, 2021, the condensed consolidated statements of operations for the three and nine months ended September 30, 2022 and 2021, the condensed consolidated statements of comprehensive income (loss) for the three and nine months ended September 30, 2022 and 2021, the condensed consolidated statements of stockholders’ equity for the three and nine months ended September 30, 2022 and 2021 and the condensed consolidated statements of cash flows for the nine months ended September 30, 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 six months ended June 30, 2022 are not necessarily indicative of the results to be expected for the full fiscal year or for any other period.

The results of operations for the three and nine months ended September 30, 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 $ 187,459 and $ 178,026 as of June 30, 2022 and December 31, 2021, respectively.

We have experienced recurring losses from operations since our inception and had an accumulated deficit of $ 168,920 and $ 178,026 as of September 30, 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 June 30, 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.

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

On August 15, 2022, we completed a public offering of our common stock, in which we issued 1,091,250 shares of common stock at a public offering price of $ 55.00 per share and 1,525,000 pre-funded warrants to Squadron.

The purchase price of each warrant was equal to the price per share at which the common shares were sold to the public, minus $ 0.00025 , which was the exercise price of each warrant.

The aggregate gross proceeds for both the warrants and common shares were $ 143,894 .

The total net proceeds from the offering were $ 139,282 , after deducting $ 4,318 of underwriting discounts and commissions and paying $ 294 in offering costs.

The Company has used $ 31,000 of the net proceeds to pay off the outstanding debt on the line of credit with Squadron.

On September 20, 2022, the Company issued an aggregate of 1,525,000 shares of common stock to Squadron upon exercise of the pre-funded warrants.

Use of Estimates

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.

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.

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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.

Additionally, in July 2022, we established an operating company in Germany and 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.

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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.

The products are generally consigned to our independent sales agencies, and revenue is recognized when the products are used by or shipped to the customer for surgeries or other treatment 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.

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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 June 30, 2022 and December 31, 2021 condensed consolidated balance sheets.

This cash is reported as restricted cash on the September 30, 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;

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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.

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.

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Instruments are hand-held devices, specifically designed for use with our implants and are used by surgeons during surgery.

Instruments deployed within the United States, United Kingdom, Australia, New

Zealand, Canada, Belgium, the Netherlands, Italy, Germany, Switzerland and Austria are carried at cost less accumulated depreciation and are recorded in property and equipment, net on the condensed consolidated balance sheets.

Instruments deployed within the United States, United Kingdom, Australia, New Zealand, Canada, Belgium, the Netherlands, Italy, Germany, Switzerland and Austria are carried at cost less accumulated depreciation and are recorded in property and equipment, net on the condensed consolidated balance sheets.

Sample inventory consists of our implants and instruments, and is maintained to market and promote our products.

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Amortizable Intangible Assets, net

Amortizable intangible assets include fees necessary to secure various patents and licenses (including those acquired in the Band-Lok and MD Ortho transactions), the value of internally developed software (including by Orthex), and the value of acquired customer relationships and non-competition agreements (including in the Orthex, Telos, ApiFix and MD Ortho transactions, as applicable).

Amortizable intangible assets include fees necessary to secure various patents and licenses (including those acquired in the Band-Lok, MD Ortho and Pega transactions), the value of internally developed software (including by Orthex), and the value of acquired customer relationships and non-competition agreements (including in the Orthex, Telos, ApiFix, MD Ortho and Pega transactions, as applicable).

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

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The determination of the value of goodwill and intangible assets arising from acquisitions requires extensive use of accounting estimates and judgments to allocate the purchase price to the fair value of net tangible and intangible assets acquired.

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

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

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.

No goodwill impairment charges were recorded in any period presented.

The Company tests goodwill for impairment by either performing a qualitative evaluation or a quantitative test.

2 unchanged sentences

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.

During the three months ended September 30, 2022, management determined that a triggering event occurred, indicating that it was more likely than not the fair value of the ApiFix trademark asset was less than the carrying value.

As such, the company completed a quantitative analysis whereby we determined the fair value of the trademark asset associated with our ApiFix acquisition was below the carrying value.

We recorded a $ 3,609 impairment charge in the three months ended September 30, 2022.

No impairment charges were recorded in any other period presented.

Acquisition Payable and Contingent Consideration

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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 six months ended June 30, 2022 were $ 1,092 and $ 1,545 , respectively, and $ 569 and $ 1,212 , respectively, for the same periods last year.

The fair value adjustments of contingent consideration for the three and six months ended June 30, 2022 were income adjustments of $ 5,010 and $ 2,440 , respectively, and expense adjustments of $ 990 and $ 5,140 , respectively, for the same periods last year.

The amount of expense related to acquisition installment payables recorded in interest expense, net for the three and nine months ended September 30, 2022 were $ 381 and $ 1,926 , respectively, and $ 489 and $ 1,701 , respectively, for the same periods last year.

The fair value adjustments of contingent consideration for the three and nine months ended September 30, 2022 were income adjustments of $ 23,010 and $ 25,450 , respectively, and for the same periods last year, were an income adjustment of $ 1,430 and an expense adjustment of $ 3,710 , respectively.

Cost of Revenue

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Comprehensive income (loss) includes foreign currency translation adjustments and unrealized gain (loss) on our short term investments.

I ncome Taxes

We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the condensed consolidated financial statements.

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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.

If we determine that we would be able to realize our deferred tax assets in the future in excess of the net recorded amount, we would make an adjustment to the valuation allowance.

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

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

To the extent that we continue to qualify as a smaller reporting company, after we cease to qualify as an emerging growth company, certain of the exemptions available to us as an emerging growth company may continue to be available to us as a smaller reporting company.

To the extent that we continue to qualify as a smaller reporting company, after we cease to

qualify as an emerging growth company, certain of the exemptions available to us as an emerging growth company may continue to be available to us as a smaller reporting company.

Recent Accounting Pronouncements

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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

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.

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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

NOTE 3 – BUSINESS COMBINATIONS

On July 1, 2022, the Company, along with its newly-formed, indirect wholly-owned subsidiary OrthoPediatrics Canada ULC, purchased all of the issued and outstanding share capital of Pega Medical Inc., a corporation incorporated under the Canada Business Corporations Act (“Pega Medical”).

Pega Medical has developed and sells a portfolio of trauma and deformity correction devices for children, including the Fassier-Duval Telescopic Intramedullary System, a well-recognized, innovative implant designed to treat bony deformities in children with osteogenesis imperfecta without disrupting their normal growth.

Pega's product portfolio increases our total systems and increases the percentage of total trauma and deformity cases we can treat.

The Company acquired Pega Medical for approximately $ 32,045 , comprised of $ 32,042 in cash and $ 3 in stock, representing the repurchase right price to be paid by the Company in the event a selling shareholder leaves employment with Pega Medical for certain reasons during the three-year period following the closing.

Approximately $ 1,052 of the cash consideration was deposited into escrow and will be held for a period of up to eighteen ( 18) months to cover certain indemnification obligations of the selling shareholders of Pega Medical.

Final purchase consideration is subject to certain working capital adjustments yet to be finalized.

Additionally, 34,899 shares of unregistered common stock, $ 0.00025 par value per share, of the Company, representing approximately $ 1,497 (based on the July 1, 2022 closing share price of $ 42.90 ) were issued to the selling shareholders.

The common stock issued to the selling shareholders, excluding the value attributable to the repurchase right, is not considered part of the purchase consideration and is subject to a repurchase right previously mentioned.

The Company will recognize expense over the three-year service period at which point the right to repurchase will expire.

In the event the repurchase right is triggered, the Company will have the right to repurchase the shares of common stock issued to such selling shareholder at a price of $ 0.10 per share.

Pursuant to the terms of the transaction, the Company also issued $ 499 in restricted stock units to employees of Pega Medical, which are subject to an approximate three-year vesting schedule.

The restricted stock units are not considered part of the purchase consideration.

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

Fair value of estimated total acquisition consideration $ 32,045

Accounts receivable-trade 2,100

Inventories 4,876

Prepaid expenses and other current assets 360

Property and equipment 604

Amortizable intangible assets 10,362

Other intangible assets 3,040

Total assets 21,654

Accounts payable and accrued liabilities 2,527

Other current liabilities 160

Deferred tax liability 3,305

Total liabilities 5,992

total net assets 15,662

Goodwill $ 16,383

The fair value of identifiable intangible assets was based on preliminary 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 $ 3,040 Indefinite

Patents 3,141 10 years

Customer Relationships & Other 7,221 15 years

The fair value estimates and purchase price allocation included above are preliminary while the Company finalizes fair value estimates of the acquired intangible assets and related tax considerations.

MD Orthopaedics

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Under the terms of the related merger agreement, the Company paid to the indirect, sole shareholder of MD Ortho consideration of (a) $ 8,781 in cash, after adjusting for closing net working capital, 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 ).

Company incurred approximately $ 381 of acquisition-related costs, that are included in general and administrative expenses on the consolidated statement of operations for the six months ended June 30, 2022.

The Company incurred approximately $ 381 of acquisition-related costs, that are included in general and administrative expenses on the consolidated statement of operations for the nine months ended September 30, 2022.

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

Fair value of estimated total acquisition consideration $ 18,487

Cash and cash equivalents 420

Accounts receivable-trade 1,062

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Goodwill $ 5,450

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

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

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The following table represents the pro forma net revenue and net loss assuming the acquisition occurred on January 1, 2021.

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

During the third quarter ended September 30, 2022, the Company increased the deferred tax liability recorded as a result of the acquisition of MD Ortho based on newly obtained prior year tax information.

This resulted in an increase to goodwill.

The following table represents the pro forma net revenue and net loss assuming the acquisitions of MD Ortho and Pega Medical occurred on January 1, 2021.

From the date of acquisition through September 30, 2022, combined revenue for the acquisitions was approximately $ 7,006 and combined net income was approximately $ 1,145 .

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

2022 2021 2022 2021

Net Revenue $ 34,950 $ 29,680 $ 98,779 $ 86,544

Net loss $ ( 333 ) $ ( 3,336 ) $ ( 9,024 ) $ ( 12,897 )

Net income (loss) $ 18,539 $ ( 1,859 ) $ 10,013 $ ( 13,576 )

NOTE 4 - GOODWILL AND INTANGIBLE ASSETS

Changes in the carrying amount of goodwill for the six months ended June 30, 2022 were as follows:

Changes in the carrying amount of goodwill for the nine months ended September 30, 2022 were as follows:

Goodwill at January 1, 2022 $ 72,349

MD Ortho acquisition 5,450

Pega Medical acquisition 16,383

Foreign currency translation impact ( 6,138 )

Goodwill at June 30, 2022

Goodwill at September 30, 2022

Intangible Assets

As of June 30, 2022, the balances of amortizable intangible assets were as follows:

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

As of September 30, 2022, the balances of intangible assets were as follows:

Amortizable intangible assets Weighted-Average Amortization Period Gross Intangible Assets Accumulated Amortization Impairment Net Intangible Assets

Patents 12.2 years $ 45,763 $ ( 7,334 ) $ — $ 38,429

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Total amortizable assets $ 79,489 $ ( 13,204 ) $ — $ 66,285

Other intangible assets

Trademark assets Indefinite $ 18,463 $ — $ ( 3,609 ) $ 14,854

As of December 31, 2021, the balances of amortizable intangible assets were as follows:

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

Trademarks are non-amortizing intangible assets which were $ 15,708 and $ 14,268 as of June 30, 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 six months ended June 30, 2022 was the result of foreign currency translation of the ApiFix trademark and the acquisition of Trademarks associated with MD Ortho.

Trademarks are non-amortizing intangible assets and are recorded in Other intangible assets on the condensed consolidated balance sheets.

During the three months ended September 30, 2022, management determined that a triggering event occurred, indicating that it was more likely than not the fair value of the trademark assets is less than the carrying value.

As such, the company completed a quantitative analysis whereby we determined the fair value of the trademark asset associated with our ApiFix acquisition was below the carrying value.

The primary reason for the impairment is the lower forecasted revenue of our ApiFix product than previously expected and the subsequent impact to the discounted cash flow model utilized to calculate the fair value.

We recorded a $ 3,609 impairment charge in the three months ended September 30, 2022 to reduce the carrying amount of the intangible asset to its estimated fair value.

Following the impairment, the newly calculated fair value becomes the new accounting basis and carrying value of the trademark.

No impairment charges were recorded in any other period presented.

The following table represents the significant unobservable inputs utilized in the calculation of estimated fair value associated with the ApiFix trademark asset:

September 30, 2022

Discount rate 28.0 %

Estimated royalty rate 5.0 %

Long term growth rate 3.0 %

Changes in the carrying amount of trademark assets for the nine months ended September 30, 2022 were as follows:

Trademark assets at January 1, 2022 $ 14,268

MD Ortho Acquisition 2,410

Pega Medical Acquisition 3,040

Trademark impairment ( 3,609 )

Foreign currency translation impact ( 1,255 )

Trademark assets at September 30, 2022

NOTE 5 - 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 summarizes the assets and liabilities measured at fair value on a recurring basis as of June 30, 2022 and December 31, 2021.

June 30, 2022

The following table summarizes the assets and liabilities measured at fair value on a recurring basis as of September 30, 2022 and December 31, 2021.

September 30, 2022

Level 1 Level 2 Level 3 Total

Financial Assets

Cash Equivalents $ — $ — $ — $ —

Short term investments

Exchange Trade Mutual Funds $ 42,634 $ — $ 42,634

Corporate Bonds $ 9,680 $ — $ — $ 9,680

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Financial Assets

Cash Equivalents $ — $ — $ — $ —

Short term investments

Exchange Trade Mutual Funds $ — $ — $ — $ —

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

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

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 1 assets consist of short term investments which are comprised of exchange traded mutual funds and marketable securities with a maturity date greater than 3 months.

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.

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

The adjustments in the fair value of the contingent consideration payments included an income adjustment of $ 5,010 and an expense adjustment of $ 990 for the three month periods ended June 30, 2022 and June 30, 2021, respectively, and an income adjustment of $ 2,440 and an expense adjustment of $ 5,140 for the six month periods ended June 30, 2022 and June 30, 2021, respectively, in other expenses on the condensed consolidated statements of operations.

The adjustments in the fair value of the contingent consideration payments included an income adjustment of $ 23,010 and $ 1,430 for the three month periods ended September 30, 2022 and September 30, 2021, respectively, and an income adjustment of $ 25,450 and an expense adjustment of $ 3,710 for the nine month periods ended September 30, 2022 and September 30, 2021, respectively, in other expenses on the condensed consolidated statements of operations.

For both the three and nine months ended September 30, 2022, the significant factor driving the reported fair value adjustment is the reduction in forecasted revenue which subsequently reduces the final expected payment.

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 ( 25,450 )

Balance at June 30, 2022

The recurring Level 3 fair value measurements of contingent consideration liabilities associated with commercial sales milestones include the following significant unobservable inputs as of June 30, 2022 and December 31, 2021:

June 30, 2022 December 31, 2021

Balance at September 30, 2022

September 30, 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 June 30, 2022;

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

June 30, 2022 December 31, 2021

Revolving credit facility with Squadron 31,000 —

September 30, 2022 December 31, 2021

Mortgage payable to affiliate $ 942 $ 1,044

Total debt 31,977 1,044

current maturities 143 137

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On June 13, 2022, the Company entered into a Fourth Amendment (the “Fourth Amendment”) to its Fourth Amended and Restated Loan and Security Agreement with Squadron Capital LLC, or Squadron (as so amended, the “Loan Agreement”).

The Fourth Amendment increased the amount available under

the revolving credit facility from $ 25,000 to $ 50,000 in anticipation of using the facility to fund the cash portion of the Company’s July 1, 2022 acquisition of Pega Medical Inc.

See Note 14 – Subsequent Events for information relating to the acquisition.

The Fourth Amendment increased the amount available under the revolving credit facility from $ 25,000 to $ 50,000 in anticipation of using the facility to fund the cash portion of the Company’s July 1, 2022 acquisition of Pega Medical Inc.

After borrowing $ 31,000 under the Loan Agreement in June 2022 to fund such acquisition, the Company repaid the entire amount on August 15, 2022 with proceeds from a public offering of securities.

See Note 3 – Business Combinations for information relating to the acquisition and Note 8 – Stockholders’ Equity for information relating to the public offering.

The Loan Agreement provides a 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 %.

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The unused commitment fee is payable quarterly in arrears.

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:

Borrowings under the revolving credit facility are made under a Second Amended and Restated Revolving Note, dated June 13, 2022 (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

(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;

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

At June 30, 2022 the mortgage balance was $ 977 of which current principal of $ 141 was included in the current portion of long-term debt.

At September 30, 2022 the mortgage balance was $ 942 of which current principal of $ 143 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.

The aggregate interest expense relating to the notes payable to Squadron and the mortgage note payable to Tawani was $ 47 and $ 14 for the three months ended June 30, 2022 and 2021, respectively, and $ 60 and $ 29 for the six months ended June 30, 2022 and 2021, respectively.

The unused commitment fee paid to Squadron was $ 36 and $ 32 for the three months ended June 30, 2022 and 2021, respectively, and $ 67 and $ 63 for the six months ended June 30, 2022 and 2021, respectively.

The aggregate interest expense relating to the notes payable to Squadron and the mortgage note payable to Tawani was $ 12 and $ 14 for the three months ended September 30, 2022 and 2021, respectively, and $ 512 and $ 42 for the nine months ended September 30, 2022 and 2021, respectively.

The unused commitment fee paid to Squadron was $ 44 and $ 32 for the three months ended September 30, 2022 and 2021, respectively, and $ 111 and $ 95 for the nine months ended September 30, 2022 and 2021, respectively.

NOTE 7 - INCOME TAXES

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

For the six months ended June 30, 2022, the income tax benefit was $ 756 compared to $ 598 for the six months ended June 30, 2021.

Our effective income tax rate was 7.4 % and 4.0 % for the six months ended June 30, 2022 and 2021, respectively.

The deferred tax assets were fully offset by a valuation allowance at June 30, 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 June 30, 2022 for losses generated in the foreign jurisdiction.

For the nine months ended September 30, 2022, the income tax benefit was $ 4,899 compared to $ 890 for the nine months ended September 30, 2021.

Our effective income tax (benefit) rate was ( 116.5 )% and 5.2 % for the nine months ended September 30, 2022 and 2021, respectively.

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

The company has recorded a tax benefit during the period ended September 30, 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 June 30, 2022.

A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year period ended September 30, 2022.

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

Management has reviewed the tax implications of the MD Ortho purchase accounting and recorded approximately $ 3,010 of deferred tax liabilities.

This resulted in a decrease to the overall net US deferred tax assets, thereby causing a remeasurement of the valuation allowance during the quarter ended September 30, 2022, such that an approximately $ 3,010 of tax benefit was recorded for the reversal of the valuation allowance.

NOTE 8 - STOCKHOLDERS’ EQUITY

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Exercised ( 2,010 ) 30.97

Outstanding at June 30, 2022

Forfeited or expired ( 1,072 ) —

Outstanding at September 30, 2022

3,556 $ 30.97 0.9

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

At June 30, 2022 and December 31, 2021, all options were fully vested.

There was no stock-based compensation expense on stock options for the three and six months ended June 30, 2022 and 2021, respectively.

Restricted Stock

At September 30, 2022 and December 31, 2021, all options were fully vested.

There was no stock-based compensation expense on stock options for the three and nine months ended September 30, 2022 and 2021, respectively.

Restricted Stock Awards & Restricted Stock Units

Our restricted stock activity and related information are summarized as follows:

Weighted-Average

Restricted Contractual Terms

Stock (in Years)

Weighted-Average Weighted-Average

Remaining Remaining

Restricted Contractual Terms Restricted Contractual Terms

Stock Awards in Years Stock Units in Years

Outstanding at January 1, 2022 368,446 1.1 — —

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Vested ( 150,067 ) —

Outstanding at June 30, 2022

Restricted stock exercisable at June 30, 2022

At June 30, 2022, there was $ 13,753 of unrecognized compensation expense remaining related to our service-based restricted stock awards.

Outstanding at September 30, 2022

424,985 1.7 11,634 2.8

Restricted stock exercisable at September 30, 2022

At September 30, 2022, there was $ 12,374 of unrecognized compensation expense remaining related to our service-based restricted stock awards and stock units.

The unrecognized compensation cost was expected to be recognized over a weighted-average period of 1.7 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 $ 1,770 and $ 1,415 for the three months ended June 30, 2022 and 2021, respectively, and $ 3,296 and $ 2,731 for the six months ended June 30, 2022 and 2021, respectively.

The increase in the stock compensation for the three and six months ended June 30, 2022 is primarily due to increase in plan participants from acquired businesses and newly hired employees to support the continued expansion of our business.

Stock-based compensation expense on restricted stock amounted to $ 1,682 and $ 1,440 for the three months ended September 30, 2022 and 2021, respectively, and $ 4,978 and $ 4,170 for the nine months ended September 30, 2022 and 2021, respectively.

The increase in the stock compensation for the three and nine months ended September 30, 2022 is primarily due to increase in plan participants from acquired businesses and newly hired employees to support the continued expansion of our business.

During the three months ended September 30, 2022 the Company purchased all of the issued and outstanding share capital of Pega Medical Inc.

See Note 3 - Business Combinations for additional detail.

As a component of that acquisition, the Company issued 34,899 shares of unregistered common stock.

The Company determined that these shares were not part of the purchase consideration and would recognize expense over three years.

During the three months ended September 30, 2022 the Company recognized expense of $ 133 associated with these shares.

During the three months ended September 30, 2022 the Company completed a following-on offering in which we issued 1,525,000 of pre-funded warrants to Squadron.

The warrants had an exercise price of $ 0.00025 .

All warrants issued in the quarter were exercised and included in our outstanding common stock as of and during the three months ended September 30, 2022.

As of September 30, 2022 and 2021 the Company had no warrants outstanding.

NOTE 9 – NET LOSS PER SHARE

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

Three Months Ended Six Months Ended

June 30, June 30,

Three Months Ended Nine Months Ended

September 30, September 30,

2022 2021 2022 2021

Net loss $ ( 333 ) $ ( 3,756 ) $ ( 9,433 ) $ ( 14,135 )

Weighted average number of shares - basic and diluted 19,792,286 19,275,779 19,693,216 19,263,506

Net loss per share - basic and diluted $ ( 0.02 ) $ ( 0.19 ) $ ( 0.48 ) $ ( 0.73 )

Net income (loss) $ 18,539 $ ( 2,197 ) $ 9,106 $ ( 16,332 )

Earnings allocated to participating securities 353 — 174 —

Net income available to common shareholders 18,186 ( 2,197 ) 8,932 ( 16,332 )

Denominator for basic and diluted net income (loss) per share:

Weighted average shares outstanding for basic 21,150,219 19,291,374 20,703,883 19,256,128

Weighted average shares outstanding for diluted 21,295,323 19,291,374 20,958,503 19,256,128

Earnings (loss) per share:

Basic $ 0.88 $ ( 0.11 ) $ 0.44 $ ( 0.85 )

Diluted $ 0.87 $ ( 0.11 ) $ 0.43 $ ( 0.85 )

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.

For purposes of our equity disclosures and calculation of weighted average shares for basic earnings per share calculations, 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:

Six Months Ended June 30,

For the periods presented with a net loss the weighted average shares outstanding remains consistent between basic and diluted as the effect would have been anti-dilutive.

The following table shows the contingently issuable and convertible equity shares that were excluded from the calculation of diluted net earnings (loss) per share because their effect would have been anti-dilutive:

Nine Months Ended September 30,

Restricted stock — 375,915

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

No customers accounted for more than 10% of total product sales for the three and six months ended June 30, 2022 or 2021.

No customer accounted for more than 10% of consolidated accounts receivable as of June 30, 2022 and December 31, 2021.

No customers accounted for more than 10% of total product sales for the three and nine months ended September 30, 2022 or 2021.

No customer accounted for more than 10% of consolidated accounts receivable as of September 30, 2022 and December 31, 2021.

Product sales by source were as follows:

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

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

Product sales by geographic location:

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Total $ 34,950 $ 25,079 $ 91,295 $ 73,236

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

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

Product sales by category:

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Total $ 34,950 $ 25,079 $ 91,295 $ 73,236

No individual country with sales originating outside of the United States accounted for more than 10% of consolidated revenue for the three and six months ended June 30, 2022 and 2021.

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, 2022 and 2021.

NOTE 11 - RELATED PARTY TRANSACTIONS

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

We made aggregate payments to Structure Medical for inventory purchases of $ 234 and $ 197 for the three months ended June 30, 2022 and 2021, respectively, and $ 550 and $ 269 for the six months ended June 30, 2022 and 2021, respectively.

We made aggregate payments to Structure Medical for inventory purchases of $ 218 and $ 173 for the three months ended September 30, 2022 and 2021, respectively, and $ 768 and $ 441 for the nine months ended September 30, 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 $ 52 and $ 6 , respectively, for the three months ended June 30, 2022, and sales and payments of $ 60 and $ 32 , respectively, for the six months ended June 30, 2022.

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

We had sales and payments related to inventory purchases to Squadron's affiliate, now known as Vilex, LLC, of $ 51 and $ 7 , respectively, for the three months ended September 30, 2022, and sales and payments of $ 111 and $ 39 , respectively, for the nine months ended September 30, 2022.

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

NOTE 12 - EMPLOYEE BENEFIT PLAN

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We have elected to match our employees' 401(k) contributions up to 4 % of employees' salary.

Additionally, employees of MD Ortho receive contribution matches up to 3 % of their salary.

NOTE 13 – COMMITMENTS AND CONTINGENCIES

As of June 30, 2022, the Company has recorded a lease liability of $ 300 and corresponding right-of-use-asset of $ 302 on its condensed consolidated balance sheet .

As of September 30, 2022, the Company has recorded a lease liability of $ 303 and corresponding right-of-use-asset of $ 304 on its condensed consolidated balance sheet .

Legal Proceedings

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In the lawsuit, the Plaintiff claims, among other things, that it is the rightful owner of certain patented point-and-click planning software being used by the Company, Orthex and Squadron (specifically, U.S.

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

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.

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In mid-November 2021, the Plaintiff initiated an arbitration proceeding;

however, the Plaintiff failed to pay the fees it was required to pay for the arbitration to continue, resulting in the arbitration panel terminating the arbitration proceedings in mid-October 2022.

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.

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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.

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.

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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 June 30, 2022, the remaining purchase commitment under the agreement was $ 1,140 .

As of September 30, 2022, the remaining purchase commitment under the agreement was $ 0 .

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.

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

During the three and six months ended June 30, 2022, the Company recorded an expense of $ 240 and $ 341 , respectively.

No expense was recorded for either the three or six months ended June 30, 2021.

As of June 30, 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.

During the three and nine months ended September 30, 2022, the Company recorded an expense of $ 101 and $ 442 , respectively.

No expense was recorded for either the three or nine months ended September 30, 2021.

As of September 30, 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 June 30, 2022, we have not been able to determine the amount and timing of payments.

In any development project, there are significant variables that will affect the amount and timing of these payments and as of September 30, 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.

NOTE 14 – SUBSEQUENT EVENTS

Pega Medical Acquisition

Pega's product portfolio increases our total systems and increases the percentage of total trauma and deformity cases we can treat.

The Company acquired Pega Medical for $ 32,047 in cash.

Approximately $ 1,052 of the cash consideration was deposited into escrow and will be held for a period of up to eighteen ( 18 ) months to cover certain indemnification obligations of the selling shareholders of Pega Medical.

Final purchase consideration is subject to certain working capital adjustments yet to be finalized.

The common stock issued to the selling shareholders is not considered part of the purchase consideration and is subject to a repurchase right by the Company in the event a selling shareholder leaves employment with Pega Medical for certain reasons during the three-year period following the closing.

In the event the repurchase right is triggered, the Company will have the right to repurchase the shares of common stock issued to such selling shareholder at a price of $ 0.10 per share.

Pursuant to the terms of the transaction, the Company also issued $ 499 in restricted stock units to employees of Pega Medical, which are subject to an approximate three-year vesting schedule.

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