What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2023-03-01 compared with 2022-03-03 · 270 added, 352 removed, 797 unchanged (44% of the section changed)

21 unchanged sentences

Emphasis of Matter

The Company has significant transactions and relationships with a related party that are described in Note 14 to the consolidated financial statements.

The Company has significant transactions and relationships with related parties that are described in Note 13 to the Consolidated financial statements.

Our opinion is not modified with respect to this matter.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Intangible Assets – ApiFix Trademark Impairment – Refer to Notes 2 and 4 to the financial statements

Critical Audit Matter Description

During the third quarter of 2022, the Company determined that a triggering event occurred, indicating that it was more likely than not that the fair value of the ApiFix trademark asset was less than the carrying value.

As such, the Company completed a quantitative analysis whereby the Company determined the fair value of the trademark

asset associated with the ApiFix acquisition was below the carrying value.

The Company recorded a $3.6 million impairment charge during the year ended December 31, 2022.

We identified the impairment of the ApiFix trademark asset as a critical audit matter because the estimate of the fair value of the trademark and associated impairment is based on a discounted cash flow model.

This involves significant estimates and assumptions including preparation of forecasted revenue, selection of a royalty rate and discount rate and estimate of the terminal year revenue growth rate.

The determination and extent of audit procedures related to these assumptions required a high degree of auditor judgment and an increased extent of effort, including the need to involve fair value specialists, when performing audit procedures to evaluate the reasonableness of management’s assessment of the fair value of the asset.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the estimate of the fair values of the asset impaired included the following, among others:

• We evaluated the reasonableness of management’s forecast of future revenue by comparing the forecast to:

– Historical revenues

– Scheduled and anticipated surgeries

– Publicly available industry information

– Evidence obtained in other areas of the audit

• With the assistance of fair value specialists, we evaluated the reasonableness of the Company’s estimate of fair value for the intangible asset by:

– Assessing the appropriateness of the Company’s valuation methodology.

– Testing the source information underlying the determination of the discount rate and the mathematical accuracy of the calculation.

– Comparing the Company’s selected discount rate to an independently estimated range of discount rates using a process consistent with generally accepted valuation practices.

– Evaluating the reasonableness of the terminal growth rate through comparison to industry reports and peer companies.

– Assessing the reasonableness of the royalty rate used in the fair value analysis by comparing to recent acquisitions for the Company, as well as publicly available industry information.

/s/ Deloitte & Touche LLP

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Current assets:

Cash and cash equivalents $ 7,641 $ 28,758

Cash $ 8,991 $ 7,641

Restricted cash 1,471 1,365

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Inventories, net 78,192 57,569

Notes receivable — 337

Prepaid expenses and other current assets 3,966 3,229

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Accrued compensation and benefits 6,744 5,351

Accrued legal settlements — 6,342

Current portion of long-term debt with affiliate 144 137

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Accumulated deficit ( 176,768 ) ( 178,026 )

Accumulated other comprehensive income 8,491 7,907

Accumulated other comprehensive income (loss) ( 5,400 ) 8,491

Total stockholders' equity 378,648 225,369

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Legal settlement expenses — 150 6,342

Trademark impairment 3,609 — —

Research and development 8,014 5,543 5,273

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Other expense (income) 1,796 ( 1,083 ) ( 20 )

Total other expenses ( 636 ) 6,912 3,608

Total other (income) expenses ( 21,710 ) ( 636 ) 6,912

Loss before income taxes ( 3,689 ) ( 17,388 ) ( 33,667 )

Provision for income taxes (benefit) ( 4,947 ) ( 1,128 ) ( 723 )

Net loss from continuing operations ( 16,260 ) ( 32,944 ) ( 12,685 )

Net loss from discontinued operations — — ( 1,046 )

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

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

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

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

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

Net income (loss) $ 1,258 $ ( 16,260 ) $ ( 32,944 )

Weighted average shares outstanding

Basic 20,704,556 19,268,255 18,056,828

Diluted 20,947,727 19,268,255 18,056,828

Net income (loss) per share

Basic $ 0.06 $ ( 0.84 ) $ ( 1.82 )

Diluted $ 0.06 $ ( 0.84 ) $ ( 1.82 )

See notes to consolidated financial statements.

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2022 2021 2020

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

Net income (loss) $ 1,258 $ ( 16,260 ) $ ( 32,944 )

Other comprehensive (loss) income:

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Unrealized gain (loss) on short-term investments ( 871 ) ( 573 ) 53

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

Adjustment for realized loss on securities 1,550 — —

Other comprehensive income (loss), net of tax ( 13,891 ) 584 7,910

Comprehensive loss $ ( 12,633 ) $ ( 15,676 ) $ ( 25,034 )

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

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

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

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

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Stock option exercise 4,422 — 137 — — 137

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

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

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

Other comprehensive income — — — — 584 584

Balance at December 31, 2021 19,677,214 $ 5 $ 394,899 $ ( 178,026 ) $ 8,491 $ 225,369

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

Stock option exercise 4,422 — 137 — — 137

Net income — — — 1,258 — 1,258

Restricted stock 188,537 — 6,449 — — 6,449

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

Other comprehensive income — — — — 584 584

Stock option exercise 2,010 — 63 — — 63

Consideration for MD Ortho and Pega acquisitions 208,140 — 9,707 — — 9,707

Stock portion of Apifix anniversary installment payment 185,811 — 10,410 — — 10,410

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

Other comprehensive loss — — — — ( 13,891 ) ( 13,891 )

Balance at December 31, 2022 22,877,962 $ 6 $ 560,810 $ ( 176,768 ) $ ( 5,400 ) $ 378,648

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OPERATING ACTIVITIES

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

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

Loss on sale of discontinued operations — — 210

Net income (loss) $ 1,258 $ ( 16,260 ) $ ( 32,944 )

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

Trademark impairment 3,609 — —

Depreciation and amortization 13,099 10,680 8,010

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Other 536 ( 584 ) ( 85 )

Net cash used in operating activities - continuing operations ( 13,063 ) ( 18,530 ) ( 17,625 )

Net cash used by operating activities - discontinued operations — — ( 144 )

Net cash used in operating activities ( 21,766 ) ( 13,063 ) ( 18,530 )

INVESTING ACTIVITIES

Acquisition of MDO, net of cash acquired ( 8,360 ) — —

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

Acquisition of Devise Ortho assets — ( 650 ) —

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Acquisition of Band-Lok intangible assets — — ( 796 )

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

Purchases of licenses — ( 7,908 ) —

Sale of short term investments 9,250 — —

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

Sale of short-term marketable securities 46,872 9,250 —

Purchase of short-term marketable securities ( 110,122 ) — ( 55,000 )

Purchases of property and equipment ( 10,031 ) ( 8,103 ) ( 10,504 )

1 unchanged sentence

FINANCING ACTIVITIES

Payments on note with affiliate — ( 25,000 ) —

Payments on debt with affiliate ( 31,000 ) — ( 25,000 )

Proceeds from issuance of debt with affiliate 31,000 — —

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Proceeds from exercise of stock options 63 137 1,650

Installment payment for ApiFix ( 3,234 ) — —

Payments on mortgage notes ( 137 ) ( 131 ) ( 125 )

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Transfer of instruments from property and equipment to inventory $ ( 234 ) $ 453 $ 415

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

Issuance of common shares to acquire MDO $ 9,707 $ — $ —

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

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

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

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

Payment of Term Note B with revolving credit facility (See Note 9) $ — $ — $ 5,000

See notes to consolidated financial statements.

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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 , 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 ® , The Fassier-Duval Telescopic Intramedullary System ® , ApiFix ® Mid-C System and Mitchell Ponseti ® specialized bracing products to various hospitals and medical facilities throughout the United States and various international markets.

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

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

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

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

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

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

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

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

For example, in preparation for COVID-19-related hospitalizations, various governments, governmental agencies and hospital administrators have instructed hospitals to postpone some elective procedures.

As a majority of our products are utilized in elective surgeries or procedures, the deferrals of such surgeries and procedures have had, and may continue to have, a significant negative impact on our business and results of operations.

Despite the impact COVID-19 has had on our business, we continued to invest in research and development, invest in our people, and take steps to position ourselves for long-term success.

During 2020, we raised additional capital to solidify our financial foundation.

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

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

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

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES

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

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

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

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

The results of Vilex have been classified as discontinued operations within the consolidated financial statements for the year ended December 31, 2019.

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

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

We have experienced

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

We have experienced recurring losses from operations since our inception and had an accumulated deficit of $ 176,768 and $ 178,026 as of December 31, 2022 and 2021, respectively.

Use of Estimates

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Beginning in early 2017 and continuing through 2022, we expanded operations and established legal entities outside the United States, permitting us to sell under an agency model direct to local hospitals internationally.

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

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

The 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.

In order to further enhance our operations in Europe, we established operating companies in the Netherlands and Germany in March 2019 and April 2022, respectively.

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

The Company's financial instruments include cash and cash equivalents, short-term investments, accounts receivable, accounts payable, acquisition installment payables, contingent consideration and long-term debt.

The Company's financial instruments include cash, restricted cash, cash equivalents, short-term investments, accounts receivable, accounts payable, acquisition installment payables, contingent consideration and long-term debt.

The carrying amounts of accounts receivable, accounts payable, acquisition installment payables and long-term debt approximate the fair value due to the short-term nature or market rates of these instruments.

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

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

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Contingent consideration represents the system sales payment the Company is obligated to make.

The fair value of the contingent consideration payment is considered a level 3 fair value measurement and was determined with the assistance of an independent valuation specialist at the original issuance date and as of the

balance sheet date.

See Note 5 for further discussion of financial instruments that carried a fair value on a recurring and nonrecurring basis.

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Revenue Recognition – United States

Revenue in the United States is generated primarily from the sale of our implants and, to a much lesser extent, from the sale of our instruments.

Sales in the United States are primarily to hospital accounts through independent sales agencies.

Revenue in the United States is generated primarily from the sale of our specialized braces, implants and, to a much lesser extent, from the sale of our instruments.

Sales of our implants and instruments in the United States are primarily to hospital accounts through independent sales agencies.

Sales of our braces are primarily direct to

hospital, orthotist or end customers.

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

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

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

Generally, we consider our performance obligation of our braces to be settled upon shipment, and revenue is therefore recognized at that time.

Revenue Recognition – International

Outside of the United States, we sell our products directly to hospitals through independent sales agencies or to independent stocking distributors.

Outside of the United States, we sell our products, including our specialized braces, directly to hospitals through independent sales agencies or to independent stocking distributors.

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

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On rare occasions, hospitals purchase products for their own inventory, and revenue is recognized when title passes upon shipment.

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

Cash, Cash Equivalents and Short Term Investments

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The carrying amounts reported in the balance sheets for cash are valued at cost, which approximates fair value.

The Company invests in available-for-sale short term investments.

The Company invests in both certificate of deposits and 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.

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

Additionally, the Company recognizes any previously unrealized gain or loss at the time the Company liquidates any of its investments based on the value at the time of liquidation.

In 2022, the Company recognized a loss of $ 1,550 that were previously unrealized.

No such gains or losses were recognized for the years ended December 31, 2021 or 2020.

Restricted Cash

9 unchanged sentences

No interest is charged on past due accounts.

Payments of accounts receivable are applied to the specific invoices identified on the customer's remittance advice or, if unspecified, to the customer's account as an unapplied credit.

Payments of accounts receivable are applied

to the specific invoices identified on the customer's remittance advice or, if unspecified, to the customer's account as an unapplied credit.

The carrying amount of accounts receivable is reduced by an allowance that reflects management's best estimate of the amounts that will not be collected, determined principally on the basis of historical experience, management's assessment of the collectability of specific customer accounts and the aging of the accounts receivable.

5 unchanged sentences

Adjustments charged to expense (income) 723 $ ( 5 ) 274

Write-offs 81 347 52

Write-offs & other adjustments 174 81 347

Carrying amount as a result of acquisitions 160 — —

Balance at end of year $ 1,056 $ 347 $ 433

12 unchanged sentences

Costs Related to Common Stock Offerings

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

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

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

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

On August 15, 2022, we completed a public offering of our common stock and pre-funded warrants exercisable for an aggregate of up to 1,525,000 shares of common stock to Squadron Capital LLC (“Squadron”), our largest investor.

Offering expenses of $ 293 , primarily consisting of legal, accounting and other direct fees and costs related to the offering were recorded in stockholders' equity at the conclusion of our offering.

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

Goodwill is not amortized and is assessed for impairment using fair value measurement techniques on an annual

basis or more frequently if facts and circumstances warrant such a review.

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

No impairment changes were recorded in the current year.

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 tested at the reporting unit level as defined in the Glossary to ASC 350.

Per this definition, a reporting unit is an operating segment or one level below an operating segment.

The Company has determined the reporting units to be our legacy surgical implants unit and the bracing reporting unit established with the acquisition of MD Ortho.

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

No impairment charges were recorded in the current year.

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

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

The quantitative assessment for goodwill requires us to estimate the fair value of our two reporting units 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.

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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.

The calculation of the fair value of the trademark assets involves Level 3 fair value measurements.

To estimate the fair value of the trademark asset and associated impairment, we utilized an income approach, or discounted cash flow model.

This approach requires us to make significant estimates and assumptions including preparation of forecasted revenue, selection of a royalty rate and discount rate and estimate of the terminal year revenue growth rate.

During 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 ApiFix trademark asset associated was below the carrying value.

The primary reason for the impairment is the lower forecasted revenue of our ApiFix product than previously expected.

We recorded a $ 3,609 impairment charge for the year ended December 31, 2022 to reduce the carrying amount of the intangible asset to its estimated fair value.

No impairment charges were recorded in any of the other periods presented or for any other indefinite lived trademark assets.

Acquisition Payable and Contingent Consideration

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The amount of expense recorded in interest expense, net was $ 2,307 and $ 2,155 for the twelve month period ended December 31, 2022 and 2021, respectively.

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

Adjustments in the fair value of the contingent consideration payment were recognized as income of $ 25,930 and $ 1,800 for the twelve month period ended December 31, 2022 and 2021, respectively.

Shipping and Handling Costs

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Stock-based compensation is recognized ratably over the requisite service period, which is generally the restriction period for restricted stock.

In determining the fair value of our common stock at the grant date for awards issued prior to our IPO, which is the basis for the fair value of stock based awards, we use the market approach, which is based on the assumption that the value of an asset is equal to the value of a substitute asset with the same characteristics.

In using the market approach, we consider both the guideline public company method and the precedent transaction method.

Given the absence of a public trading market for our common stock at that time, we exercise reasonable judgment and consider a number of objective and subjective factors to determine the best estimate of the fair value of our common stock, including:

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

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

equity market conditions affecting comparable public companies;

market conditions;

and the lack of marketability of our common stock.

Prior to our IPO, for restricted stock awards we applied a discount for lack of marketability to the fair value of common shares due to estimate the impact of valuing a minority interest in our Company as a closely held, non-public company with no liquid market for its shares.

Foundation for Advancing Pediatric Orthopedics

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

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

No accrued legal fees outside the course of ordinary business were recorded for the years ended December 31, 2022 or 2021.

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

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

“Emerging Growth Company” Reporting Requirements

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

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

Among other things, we are not required to provide an auditor attestation report on the

assessment of the internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act of 2002.

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

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

Section 107 of the JOBS Act also provides that an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies.

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

Recent Accounting Pronouncements

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Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates.

The Company will adopt ASU 2016-16 effective January 1, 2023.

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

In May 2021, the FASB issued ASU No.

2021-04 " Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity's Own Equity (Subtopic 815-40):

Issuer's Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (a consensus of the FASB Emerging Issues Task Force)".

This ASU is intended to clarify and reduce diversity in an issuer's accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange.

The guidance clarifies whether an issuer should account for a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange as (1) an adjustment to equity and, if so, the related earnings per share effects, if any, or (2) an expense and, if so, the manner and pattern of recognition.

The amendments in this ASU affect all entities that issue freestanding written call options that are classified in equity.

The amendments do not apply to modifications or exchanges of financial instruments that are within the scope of another Topic and do not affect a holder’s accounting for freestanding call options.

The amendments in this ASU are effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years.

An entity should apply the amendments prospectively to modifications or exchanges occurring on or after the effective date of the amendments.

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

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

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

The Company adopted ASU 2016-16 effective January 1, 2023.

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

In October 2021, the FASB issued ASU No.

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An entity that early adopts in an interim period should apply the amendments (1) retrospectively to all business combinations for which the acquisition date occurs on or after the beginning of the fiscal year that includes the interim period of early application and (2) prospectively to all business combinations that occur on or after the date of initial application.

The Company is currently evaluating the impact of adopting ASU 2021-08 on its consolidated financial statements.

The Company adopted ASU 2021-08 effective January 1, 2023.

The adoption will be applied prospectively to business combinations that occur after January 1, 2023 and is not expected to have a significant impact on the Company's consolidated financial statements and related disclosures.

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 bone 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 Company incurred approximately $ 382 of acquisition-related costs that are included in general and administrative expenses on the consolidated statement of operations for the year ended December 31, 2022.

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 4,875

Prepaid expenses and other current assets 366

Property and equipment 582

Amortizable intangible assets 10,370

Other intangible assets 3,040

Total assets 21,645

Accounts payable-trade 1,682

Other current liabilities 1,141

Deferred tax liability 3,305

Total liabilities 6,128

total net assets 15,517

Goodwill $ 16,528

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 7,229 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

On April 1, 2022, OrthoPediatrics Iowa Holdco, Inc., a newly-formed, wholly-owned subsidiary of the Company, merged with and into MD Orthopaedics, Inc., an Iowa corporation (“MD Ortho”).

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

The acquisition expands our total addressable market, serving as a specialty bracing platform company within our Trauma and Deformity business.

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 ).

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 year ended December 31, 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

Accounts receivable-trade 1,062

Inventories 1,126

Prepaid expenses and other current assets 100

Property and equipment 2,444

Amortizable intangible assets 9,120

Other intangible assets 2,410

Total assets 16,682

Accounts payable and accrued liabilities 45

Other current liabilities 586

Deferred tax liability 3,014

Total liabilities 3,645

total net assets 13,037

Goodwill $ 5,450

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

Amount Remaining Economic Useful Life

Trademarks / Names $ 2,410 Indefinite

Patents 2,660 10 years

Customer Relationships 6,460 15 years

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.

Net revenue $ 128,648 $ 113,899

Net income (loss) $ 2,110 $ ( 12,810 )

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.

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

The estimated fair value

and useful life of identifiable intangible assets are as follows:

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

Amount Remaining Economic Useful Life

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

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

The Company anticipates making the third anniversary payment of $ 8,000 on the anniversary date.

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

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

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

The adjustments in the fair value of the contingent consideration payment were recognized as income of $ 25,930 , income of $ 1,800 and expense of $ 3,520 for the twelve month period ended December 31, 2022, 2021 and 2020, respectively, in other expenses on the consolidated statements of operations.

An additional $ 2,307 , $ 2,155 and $ 2,397 was recognized as interest expense for the twelve month period ended December 31, 2022, 2021 and 2020, respectively, on the consolidated statements of operations for the accretion of the acquisition installment payable.

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

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

December 31, 2022 December 31, 2021 December 31, 2020

Anniversary Payments:

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

On March 9, 2020, the Company purchased the issued and outstanding membership interest of Telos for $ 1,750 in cash, including $ 81 of cash acquired, and 36,628 shares of common stock, $ 0.00025 par value per share, of the Company.

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

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

administrative expenses on the consolidated statements of operations.

The purchase price allocation set forth herein is final.

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

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

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Non-competition Agreements 40 5 years

Vilex and Orthex

On June 4, 2019, the Company purchased all the issued and outstanding shares of stock of Vilex and units of membership interests in Orthex for $ 50,000 in cash, net of working capital adjustments, and 245,352 shares of common stock, $ 0.00025 par value per share, of the Company.

The shares of common stock were valued at $ 40.76 per share, the volume weighted average trading price during the thirty day trading period ending on May 30, 2019.

In addition, $ 3,000 was placed in an escrow account for a period of up to twenty months to cover certain indemnification obligations and to secure certain closing adjustments.

The Company incurred $ 737 of acquisition-related costs, that are included in general and administrative expenses on the consolidated statements of operations.

The purchase price allocation set forth herein is final.

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

Description Amount

Fair value of total acquisition consideration $ 60,184

Accounts receivable-trade 2,088

Inventories 3,652

Prepaid expenses and other current assets 12

Property and equipment 7,540

Amortizable intangible assets 31,180

Operating lease right-of-use asset 323

Total assets 45,143

Accounts payable and accrued liabilities 563

Operating lease liabilities 323

Deferred tax liability 1,175

Other long-term liabilities 68

Total liabilities 2,129

total net assets 43,014

Goodwill $ 17,170

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

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

Amount Remaining Economic Useful Life

Trademarks / Names $ 4,610 Indefinite

Patents 22,390 15 years

Internally Developed Software 1,550 10 years

Customer Relationships 2,570 12 years

Non-competition Agreements 60 5 years

Pro forma net revenue and net loss from continuing operations for 2019 and 2018 assuming the acquisition occurred on January 1, 2018 would have been $ 74,488 and $ 62,607 and ($ 12,601 ) and ($ 13,439 ), respectively.

The Company recorded a measurement period adjustment during fiscal 2020 to increase inventory and decrease goodwill related to working capital adjustments to allocate inventory between Orthex and Vilex.

Since the Vilex products include adult offerings that are not core to the Company's pediatric business, the Company received Board approval to take the steps necessary to divest the non-core Vilex assets.

On December 31, 2019, the Company divested substantially all of the assets relating to Vilex's adult product offering to a wholly-owned subsidiary of Squadron Capital, LLC in exchange for a $ 25,000 reduction in a term note owed to Squadron in connection with the initial acquisition along with certain ongoing intellectual property rights.

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

NOTE 4 – DISCONTINUED OPERATIONS

On June 4, 2019, the Company acquired Vilex, a manufacturer of foot and ankle surgical implants.

On December 31, 2019, the Company divested substantially all of the assets relating to Vilex's adult product offering to a wholly-owned subsidiary of Squadron Capital, LLC.

in exchange for a $ 25,000 reduction in a term note owed to Squadron in connection with the initial acquisition along with the sale of intellectual property rights.

Assets and liabilities divested consisted of the following as of December 31, 2019:

Description Amount

Accounts Receivable - trade, less allowance for doubtful accounts 928

Inventories, net 2,060

Prepaid expenses and other current assets 24

Property and equipment, net 6,246

Amortizable intangible assets 13,390

Goodwill 3,397

Other intangible assets 380

Operating lease right-of-use asset 216

Total assets divested $ 27,156

Accounts payable - trade $ 37

Accrued compensation and benefits 171

Operating lease liabilities 199

Deferred tax liability 1,175

Other current liabilities 13

Total liabilities divested $ 1,595

Net assets sold $ 25,561

Allocated purchase price 25,000

Loss on divestiture $ ( 561 )

Major classes of line items constituting loss of discontinued operations 2019

Net revenue $ 3,069

Cost of revenue ( 286 )

Sales and marketing ( 692 )

General and administrative ( 2,103 )

Other income (expense), net ( 9 )

Pretax net loss of discontinued operations $ ( 21 )

Income tax expense ( 464 )

Net loss on discontinued operations $ ( 485 )

The divestiture does not represent a strategic shift that will have a major effect on the Company's operations and financial statements.

Goodwill was allocated to the assets and liabilities divested using the relative fair value method.

The Company recognized a total net loss on discontinued operations of $ 1,046 , net of taxes, in its consolidated statement of operations for the year ended December 31, 2019.

NOTE 4 - GOODWILL AND INTANGIBLE ASSETS

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The qualitative evaluation is an assessment of factors including reporting unit specific operating results as well as industry, market and general economic conditions, to determine whether it is more likely than not that the fair values of a reporting unit is less than its carrying amount, including goodwill.

The Company may elect to bypass the qualitative assessment for its one reporting unit and perform a quantitative test.

The Company may elect to bypass the qualitative assessment for its two reporting units, a legacy surgical implants unit and a bracing reporting unit established with the acquisition of MD Ortho, and perform a quantitative test on each.

The assumptions used in evaluating goodwill for impairment are subject to change and are tracked against historical results by management.

The Company elected to perform a qualitative analysis for its reporting unit as of October 1, 2021.

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

The Company elected to perform a qualitative analysis for its reporting units as of October 1, 2022.

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

Changes in the carrying amount of goodwill were as follows:

Goodwill at January 1, 2021

Telos acquisition 1,874

Orthex measurement period adjustment ( 688 )

ApiFix acquisition 52,070

Foreign currency translation impact 1,838

Goodwill at January 1, 2022

MD Ortho acquisition 5,450

Pega acquisition 16,528

Foreign currency translation impact ( 7,506 )

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Intangible Assets

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

As of December 31, 2022, the balances of total intangible assets were as follows:

Weighted-Average Amortization Period

Gross Intangible Assets Accumulated Amortization Net Intangible Assets

Gross Intangible Assets Accumulated Amortization Impairment Net Intangible Assets

Patents 12.2 years $ 46,005 $ ( 7,953 ) $ — $ 38,052

Intellectual Property 9.8 years 5,859 ( 1,382 ) — 4,477

Customer Relationships & Other 13.4 years 17,262 ( 1,805 ) — 15,457

License agreements 4.5 years 10,697 ( 3,703 ) — 6,994

Total amortizable assets $ 79,823 $ ( 14,843 ) $ — $ 64,980

Other intangible assets

Trademark assets Indefinite $ 18,530 $ — $ 3,609 $ 14,921

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

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

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

The total consideration of $ 948 was paid using $ 650 in cash and 4,599 shares of the

Company's common stock, representing approximately $ 298 (based on the closing share price of $ 64.83 on October 20, 2021).

On September 3, 2021, we entered into a five-year license agreement, resulting in exclusive distribution rights of the 7D Surgical FLASH TM Navigation platform for pediatric applications.

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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.

On March 19, 2021, we recorded a license agreement in the amount of $ 2,858 in settlement of an alleged patent infringement suit related to scoliosis derotation.

Amortization is recorded based on the cases completed in the given period.

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Trademarks are recorded as indefinite-lived intangible assets in the amounts of $ 14,921 and $ 14,268 as of December 31, 2022 and 2021, respectively.

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

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 .

In 2022 we acquired trademarks associated with MD Ortho and Pega Medical for approximately $ 2,410 and $ 3,040 , respectively.

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

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

The Company tests intangible assets with indefinite lives for impairment annually on October 1 st or whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable.

Recoverability is measured by a comparison of the carrying amount to the estimated fair value of the asset, as represented by the net discount future cash flows expected to be generated by the associated asset.

If such assets are determined to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount exceeds the fair market value of the intangible assets.

Based upon the Company's analysis, no impairment chargers were recorded to its intangible assets.

During 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.

We recorded a $ 3,609 impairment charge for the year ended December 31, 2022 to reduce the carrying amount of the intangible asset to its estimated fair value.

NOTE 5 - FAIR VALUE OF FINANCIAL INSTRUMENTS

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Short term investments

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

Certificates of Deposit $ — $ 25,148 $ — $ 25,148

Exchange Trade Mutual Funds $ 18,939 $ — $ — $ 18,939

Treasury Bonds $ 65,040 $ — $ — $ 65,040

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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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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 2 asset pertains to certain asset-backed securities, collateralized by non-mortgage-related consumer debt.

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

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

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

The Company's level 2 assets pertain to certain asset-backed securities, collateralized by non-mortgage-related consumer debt, or certificates of deposit.

These securities are predominately priced by third parties, either by a pricing vendor or dealer with significant inputs observable in active markets.

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

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

The significant inputs of such models are not always observable in the market, such as forecasted annual revenues, expected volatility and discount rates.

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

No expense was recorded in 2019.

The adjustments in the fair value of the contingent consideration payments resulted in income of $ 25,930 and income of $ 1,800 for the year ended December 31, 2022 and 2021, respectively.

$ 3,520 of expense was recorded in 2020.

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

Balance at January 1, 2020 $ —

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

Increase in fair value of contingent consideration 3,520

Balance at December 31, 2020 30,710

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

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

Balance at December 31, 2021

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

Change in fair value of contingent consideration ( 25,930 )

Balance at December 31, 2022

2022 December 31,

2020 April 1,

2021 December 31,

Valuation techniques Discounted cash flow, Monte Carlo

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Long-term debt, net of current maturities $ 763 $ 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, a majority of the term loan amounts under a previous agreement with Squadron were consolidated into a $ 20,000 term note, represented by a Term Note A, and a $ 15,000 revolving credit facility was established.

Both facilities include interest only payments and provide for an interest rate equal to the greater of (a) three month LIBOR plus 8.61 % and (b) 10 %.

The Loan Agreement also extended the maturity date to January 31, 2023.

In order to finance a portion of the cash consideration for the acquisition of the Vilex Companies, the Company entered into a first Amendment, or the Amendment, to the Loan Agreement (as so amended, the "First Amended Loan Agreement"), with Squadron.

The First Amended Loan Agreement provided for a new $ 30,000 term loan facility, represented by a Term Note B, in addition to the existing $ 20,000 Term Note A and $ 15,000 revolving credit facility.

Similar to the other facilities under the First Amended Loan Agreement, the Term Note B was subject to interest only payments at an interest rate equal to the greater of (a) three month LIBOR plus 8.61 %, and (b) 10.00 %.

The Term Note B, which would have matured no later than May 31, 2020, was paid in full on December 31, 2019 using $ 25,000 received in exchange for the divestiture of the adult product offerings of Vilex and the related Orthex license agreement, and $ 5,000 from the available Squadron revolving credit facility.

On January 4, 2020, the Company repaid $ 5,000 on the revolving credit facility with Squadron.

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

On August 4, 2020, the Company entered into a Second Amendment (the “Second Amendment”) to its First Amended Loan Agreement with Squadron (as so further amended, the “Second Amended Loan Agreement”).

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

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

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

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

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

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

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

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

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

The Amended Revolving Note will mature at the earlier of:

The Company is party to a Fourth Amended and Restated Loan and Security Agreement with Squadron Capital LLC (“Squadron”), as amended from time to time (as amended, the “Loan Agreement”), which provides the Company with a $ 50,000 revolving credit facility.

As of December 31, 2022, there was no outstanding indebtedness under the Loan Agreement.

Borrowings under the credit facility accrue interest at an annual rate equal to the greater of (a) six month SOFR plus 8.69 % and (b) 10.0 %, and the Company is permitted to make interest only payments on amounts outstanding.

Prior to December 31, 2021, the interest rate on the facility had been equal to the greater of (a) three month LIBOR plus 8.61 % 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.

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 matures at the earlier of:

(i) the date on which any person or persons acquire (x) capital stock of the Company possessing the voting power to elect a majority of the Company’s Board of Directors (whether by merger, consolidation, reorganization, combination, sale or transfer), or (y) all or substantially all of the Company’s assets, determined on a consolidated basis;

and (ii) January 1, 2024.

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

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

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

However, there are negative

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.

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

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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NOTE 9 - INCOME TAXES

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

The CARES Act lifts certain deduction limitations originally imposed by the Tax Act.

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

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

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

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

The CAA includes the COVID-related Tax Relief Act of 2020 (“COVID TRA”).

The Company is continuing to assess the effect of the CAA and does not believe it will result in a material impact to the Company’s income tax provision.

Total income tax expense (benefit) for the years ended December 31, 2021, 2020 and 2019 was allocated as follows:

Total income tax benefit for the years ended December 31, 2022, 2021 and 2020 was allocated as follows:

2022 2021 2020

Income from continuing operations $ ( 1,128 ) $ ( 723 ) $ —

Income from discontinued operations — — ( 660 )

Total tax expense (benefit) $ ( 4,947 ) $ ( 1,128 ) $ ( 723 )

For the years ended December 31, 2021, 2020 and 2019 loss from continuing operations before taxes of the Company consists of the following:

For the years ended December 31, 2022, 2021 and 2020 loss before taxes of the Company consists of the following:

2022 2021 2020

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Total $ ( 3,689 ) $ ( 17,388 ) $ ( 33,667 )

The components of income tax expense (benefit) from continuing operations for the years ended December 31, 2021, 2020 and 2019 are as follows:

The components of income tax benefit for the years ended December 31, 2022, 2021 and 2020 are as follows:

2022 2021 2020

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Foreign 17 — —

Federal $ — $ — $ —

Foreign ( 2,018 ) ( 1,128 ) ( 723 )

Decrease in valuation allowance ( 3,014 ) — —

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Unborn foreign tax deduction 6.8 % ( 1.5 ) % 4.0 %

US benefit of foreign branches 64.4 % — % — %

Nondeductible executive compensation ( 4.4 ) % — % — %

Change in valuation allowance 57.8 % ( 33.1 ) % ( 23.4 ) %

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Interest carryforward 520 338

Accrued Settlements — 1,467

Other 787 444

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The deferred tax assets were fully offset by a valuation allowance at December 31, 2022 and 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 years ended December 31, 2021 and 2020, for losses generated in Israel.

The Company has recorded a tax benefit during the year ended December 31, 2022 for losses generated in Canada and Israel and 2021, for losses generated in Israel.

A portion of the valuation allowance was reversed during the year ended December 31, 2022 as a result of the MD Ortho and corresponding deferred tax liabilities acquired reducing the deferred tax assets of the Company.

As of December 31, 2022, we had available federal, state and foreign tax loss carryforwards of $ 117,095 , $ 74,794 and $ 24,374 , respectively.

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An ownership change under Section 382 of the Internal Revenue Code was deemed to occur on May 30, 2014.

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

change date will be subject to potential limitation.

Given the limitation calculation, we anticipate approximately $ 23,920 in losses generated prior to the ownership change date will be subject to potential limitation.

The estimated annual limitation is $ 1,062 .

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

As a result, a full valuation continues to be recorded against the Company's net deferred tax assets, with the exception of Israel.

As a result, a full valuation continues to be recorded against the Company's net deferred tax assets, with the exception of Canada and Israel.

We are subject to taxation in the United States, Indiana and various other state and international jurisdictions.

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

Restricted Stock Weighted-Average Remaining Contractual Terms (in Years)

Restricted Stock Awards Weighted-Average Remaining Contractual Terms (in Years) Restricted Stock Units Weighted-Average Remaining Contractual Terms (in Years)

Outstanding at January 1, 2020 318,002 1.7 — —

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Stock-based compensation expense on restricted stock amounted to $ 6,679 , $ 5,842 and $ 6,196 for the years ended December 31, 2022, 2021 and 2020, respectively.

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

Our warrant activity and related information are summarized below:

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Outstanding at December 31, 2021 — $ —

Forfeited or expired — $ —

Issued 1,525,000 $ 0.00025

Exercised ( 1,525,000 ) $ 0.00025

Outstanding at December 31, 2022 — $ —

For all periods presented, the warrants were issued at exercise prices ranging from $ 27.61 to $ 30.97 per share.

The warrants generally have a 10-year term.

No warrants have been exercised during each of the three years in the period ended December 31, 2021.

At inception and as of December 31, 2021, 2020 and 2019, no fair value was assigned to the warrants.

NOTE 12 – NET LOSS PER SHARE

No warrants were exercised during the years 2020 and 2021.

On August 15, 2022, the Company completed a public offering of securities that included the issuance and sale to Squadron of pre-funded warrants to purchase up to 1,525,000 shares of the Company’s common stock.

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

The warrants issued to Squadron were exercised on September 20, 2022, following the expiration of all waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”), that were applicable to Squadron as a result of it beneficially owning shares of the Company’s common stock with a value in excess of the HSR Act notification threshold.

As of December 31, 2022, 2021 and 2020, no fair value was assigned to the warrants.

NOTE 11 – NET EARNINGS (LOSS) PER SHARE

The following is a reconciliation of basic and diluted net loss per share attributable to common stockholders:

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2022 2021 2020

Net loss from continuing operations $ ( 16,260 ) $ ( 32,944 ) $ ( 12,685 )

Net loss from discontinued operations — — ( 1,046 )

Net loss attributable to common stockholders - basic and diluted $ ( 16,260 ) $ ( 32,944 ) $ ( 13,731 )

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

Net loss from continuing operations per share - basic and diluted

Net income (loss) $ 1,258 $ ( 16,260 ) $ ( 32,944 )

Earnings allocated to participating securities 23 — —

Net income (loss) available to common shareholders $ 1,235 $ ( 16,260 ) $ ( 32,944 )

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

Weighted average shares outstanding for basic 20,704,556 19,268,255 18,056,828

Weighted average shares outstanding for diluted

20,947,727 19,268,255 18,056,828

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

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

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

Earnings (loss) per share:

Basic 0.06 ( 0.84 ) ( 1.82 )

Diluted $ 0.06 $ ( 0.84 ) $ ( 1.82 )

Our basic and diluted net income (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:

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:

Year Ended December 31,

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Stock options 3,556 6,638 12,802

Warrants — — 404

416,960 375,084 449,532

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Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance.

We have one operating and reportable segment, OrthoPediatrics, which designs, develops and markets anatomically appropriate implants and devices for children with orthopedic problems.

We have one operating and reportable segment, OrthoPediatrics, which designs, develops and markets anatomically appropriate specialized braces, implants and devices for children with orthopedic problems.

Our chief operating decision-maker, our Chief Executive Officer, reviews financial information presented on a consolidated basis for purposes of making operating decisions and assessing financial performance, accompanied by disaggregated revenue information by product category.

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No individual country with sales originating outside of the United States accounted for more than 10% of consolidated revenue for the years ended December 31, 2022, 2021 and 2020.

As of December 31, 2022, our ApiFix, Ltd.

held greater than 10% of our net assets.

Excluding the goodwill and other intangible assets acquired, no individual subsidiary holds greater than 10% of net assets.

NOTE 13 - RELATED PARTY TRANSACTIONS

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Our aggregate payments to Structure Medical for inventory purchases were $ 956 , $ 750 and $ 2,622 for the years ended December 31, 2022, 2021 and 2020, respectively.

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

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

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

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

NOTE 14 - EMPLOYEE BENEFIT PLAN

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Discretionary matching contributions are determined annually by management.

Effective January 1, 2019, we elected to match our employees' 401(k) contributions up to 3 % of employees' salary.

This was increased to 4 % effective January 1, 2020.

For the years ended December 31, 2021 and 2020, we matched $ 510 and $ 439 , respectively of our employees' 401(k) contributions.

We match our employees' 401(k) contributions up to 4 %.

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

For the years ended December 31, 2022, 2021 and 2020, the total 401(k) match resulted in expense of $ 718 , $ 510 and $ 439 , respectively.

NOTE 15 – COMMITMENTS AND CONTINGENCIES

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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 satisfied 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.

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.

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

Barry - Alleged Patent Infringement

On December 30, 2020, Dr.

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

OrthoPediatrics Corp.

et al., Case No.

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

and 9,668,788, which relate

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

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

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

The balance of the amount otherwise paid to Dr.

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

Wishbone Medical, Inc.

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Purchase Obligations and Performance Requirements

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

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

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

As of December 31, 2021 the remaining balance of the commitment was $ 1,900 .

During the year ended December 31, 2022, the Company met the minimum purchase commitment as required for the first twelve months of the agreement.

Additionally, the contract requires future purchase commitments based upon a percentage of historical purchases.

As a result and as of December 31, 2022, the Company has a minimum purchase commitment for approximately $ 3,120 and $ 2,340 for the years ending December 31, 2023 and 2024, respectively.

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 number of required surgeries varies each year of the agreement.

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

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

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

During the years ended December 31, 2022 and 2021, the Company did not reach the minimum performance metrics.

As such, the Company recorded $ 1,104 and $ 512 as a component of cost of revenue for the shortfall which occurred during 2022 and 2021, respectively.

No expense was recorded for the years ended December 31, 2020.

As of December 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.

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

QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

The quarterly financial data presented should be read in conjunction with the consolidated financial statements and related notes.

Three Months Ended

31, 2021 Jun.

30, 2021 Sep.

30, 2021 Dec.

Net revenue $ 21,462 $ 26,695 $ 25,079 $ 24,813

Gross profit 16,325 20,443 18,554 18,081

Operating loss ( 5,973 ) ( 2,846 ) ( 3,644 ) ( 5,561 )

Loss before income tax benefit ( 10,691 ) ( 4,042 ) ( 2,489 ) ( 166 )

Provision for income taxes (benefit) ( 312 ) ( 286 ) ( 292 ) ( 238 )

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

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

Three Months Ended

31, 2020 Jun.

30, 2020 Sep.

30, 2020 Dec.

Net revenue $ 16,356 $ 13,593 $ 22,205 $ 18,924

Gross profit 12,213 10,061 17,639 15,118

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

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

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

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

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

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

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

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

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

What changed 10-K

Item 8. Financial Statements and Supplementary Data