ORTHOPEDIATRICS CORP 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of OrthoPediatrics Corp. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of OrthoPediatrics Corp. and subsidiaries (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive loss, stockholders' equity and cash flows, for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Emphasis of Matter The Company has significant transactions and relationships with 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 84 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 Indianapolis, Indiana March 1, 2023 We have served as the Company's auditor since 2015. 85 ORTHOPEDIATRICS CORP. CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share information) As of December 31, 2022 2021 ASSETS Current assets: Cash $ 8,991 $ 7,641 Restricted cash 1,471 1,365 Short term investments 109,299 45,902 Accounts receivable - trade, less allowance for doubtful accounts of $ 1,056 and $ 347 , respectively 24,800 17,942 Inventories, net 78,192 57,569 Prepaid expenses and other current assets 3,966 3,229 Total current assets 226,719 133,648 Property and equipment, net 34,286 28,515 Other assets: Amortizable intangible assets, net 64,980 55,494 Goodwill 86,821 72,349 Other intangible assets 14,921 14,268 Total other assets 166,722 142,111 Total assets $ 427,727 $ 304,274 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable - trade $ 11,150 $ 9,325 Accrued compensation and benefits 6,744 5,351 Current portion of long-term debt with affiliate 144 137 Current portion of acquisition installment payable 7,815 12,862 Other current liabilities 5,018 2,040 Total current liabilities 30,871 29,715 Long-term liabilities: Long-term debt with affiliate, net of current portion 763 907 Acquisition installment payable, net of current portion 8,019 14,309 Contingent consideration 2,980 28,910 Deferred income taxes 5,954 4,771 Other long-term liabilities 492 293 Total long-term liabilities 18,208 49,190 Total liabilities 49,079 78,905 Commitments and contingencies (Note 15) Stockholders' equity: Common stock, $ 0.00025 par value; 50,000,000 shares authorized; 22,877,962 shares and 19,677,214 shares issued and outstanding as of December 31, 2022 and December 31, 2021 6 5 Additional paid-in capital 560,810 394,899 Accumulated deficit ( 176,768 ) ( 178,026 ) Accumulated other comprehensive income (loss) ( 5,400 ) 8,491 Total stockholders' equity 378,648 225,369 Total liabilities and stockholders' equity $ 427,727 $ 304,274 See notes to consolidated financial statements. 86 ORTHOPEDIATRICS CORP. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share and per share information) Year Ended December 31, 2022 2021 2020 Net revenue $ 122,289 $ 98,049 $ 71,078 Cost of revenue 31,629 24,646 16,047 Gross profit 90,660 73,403 55,031 Operating expenses: Sales and marketing 45,053 39,673 31,854 General and administrative 59,383 46,061 38,317 Legal settlement expenses — 150 6,342 Trademark impairment 3,609 — — Research and development 8,014 5,543 5,273 Total operating expenses 116,059 91,427 81,786 Operating loss ( 25,399 ) ( 18,024 ) ( 26,755 ) Other expenses: Interest expense, net 2,424 2,247 3,412 Fair value adjustment of contingent consideration ( 25,930 ) ( 1,800 ) 3,520 Other expense (income) 1,796 ( 1,083 ) ( 20 ) 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 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. 87 ORTHOPEDIATRICS CORP. CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (in thousands) Year Ended December 31, 2022 2021 2020 Net income (loss) $ 1,258 $ ( 16,260 ) $ ( 32,944 ) Other comprehensive (loss) income: Foreign currency translation adjustment ( 14,570 ) 1,157 7,857 Unrealized gain (loss) on short-term investments ( 871 ) ( 573 ) 53 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 ) See notes to consolidated financial statements. 88 ORTHOPEDIATRICS CORP. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY ( in thousands, except share information) Common Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Total Stockholders' Equity Shares Value Balance at January 1, 2020 16,723,128 $ 4 $ 271,182 $ ( 128,822 ) $ ( 3 ) $ 142,361 Net loss — — — ( 32,944 ) — ( 32,944 ) 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 Stock option exercise 53,270 — 1,650 — — 1,650 Issuance of common stock, net of issuance cost 1,595,986 1 70,206 — — 70,207 Other comprehensive income — — — — 7,910 7,910 Balance at December 31, 2020 19,560,291 $ 5 $ 388,622 $ ( 161,766 ) $ 7,907 $ 234,768 Net loss — — — ( 16,260 ) — ( 16,260 ) Restricted stock 107,902 — 5,842 — — 5,842 Stock option exercise 4,422 — 137 — — 137 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 income — — — 1,258 — 1,258 Restricted stock 188,537 — 6,449 — — 6,449 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 See notes to consolidated financial statements. 89 ORTHOPEDIATRICS CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Year Ended December 31, 2022 2021 2020 OPERATING ACTIVITIES 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 Stock-based compensation 6,679 5,842 6,196 Fair value adjustment of contingent consideration ( 25,930 ) ( 1,800 ) 3,520 Acquisition installment payable 2,307 2,154 2,397 Deferred income taxes ( 5,032 ) ( 1,128 ) ( 723 ) Changes in certain current assets and liabilities: Accounts receivable - trade ( 3,983 ) ( 466 ) ( 451 ) Inventories ( 16,938 ) ( 5,050 ) ( 12,070 ) Prepaid expenses and other current assets ( 506 ) ( 637 ) ( 719 ) Accounts payable - trade ( 209 ) ( 567 ) 3,071 Accrued legal settlements — ( 6,342 ) 6,342 Accrued expenses and other liabilities 3,344 1,095 ( 1,074 ) Other 536 ( 584 ) ( 85 ) 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 ) — Acquisition of Telos, net of cash acquired — — ( 1,670 ) Acquisition of ApiFix, net of cash acquired — — ( 1,723 ) Acquisition of Band-Lok intangible assets — — ( 796 ) Purchases of licenses — ( 7,908 ) — 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 ) Net cash used in investing activities ( 113,371 ) ( 7,411 ) ( 69,693 ) FINANCING ACTIVITIES Payments on debt with affiliate ( 31,000 ) — ( 25,000 ) Proceeds from issuance of debt with affiliate 31,000 — — Proceeds from issuance of common stock, net of issuance costs 139,282 — 70,207 Proceeds from exercise of stock options 63 137 1,650 Installment payment for ApiFix ( 3,234 ) — — Payments on mortgage notes ( 137 ) ( 131 ) ( 125 ) Net cash provided by financing activities 135,974 6 46,732 Effect of exchange rate changes on cash 619 ( 658 ) ( 404 ) NET INCREASE (DECREASE) IN CASH AND RESTRICTED CASH 1,456 ( 21,126 ) ( 41,895 ) Cash and restricted cash, beginning of period 9,006 30,132 72,027 Cash and restricted cash, end of period $ 10,462 $ 9,006 $ 30,132 90 2022 2021 2020 SUPPLEMENTAL DISCLOSURES Cash paid for interest $ 700 $ 56 $ 1,233 Transfer of instruments from property and equipment to inventory $ ( 234 ) $ 453 $ 415 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 Issuance of common shares to acquire ApiFix $ — $ — $ 35,176 Issuance of common shares to purchase Band-Lok intellectual property $ — $ — $ 2,644 Issuance of common shares to purchase Devise Ortho assets $ — $ 298 $ — See notes to consolidated financial statements. 91 ORTHOPEDIATRICS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 2022 and 2021 and for the three years in the period ended December 31, 2022 ( dollars in thousands, except per share information ) NOTE 1 – BUSINESS OrthoPediatrics Corp., a Delaware corporation, is a medical device company committed to designing, developing and marketing anatomically appropriate implants and devices for children with orthopedic conditions, giving pediatric orthopedic surgeons and caregivers the ability to treat children with technologies specifically designed to meet their needs. We sell our specialized products, including PediLoc ® , PediPlates ® , Cannulated Screws, PediFlex TM nail, PediNail TM , PediLoc ® Tibia, ACL Reconstruction System, Locking Cannulated Blade, Locking Proximal Femur, Spica Tables, RESPONSE TM Spine, BandLoc TM , Pediatric Nailing Platform | Femur, 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. 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. NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying consolidated financial statements include the accounts of OrthoPediatrics Corp. and its wholly-owned subsidiaries, OrthoPediatrics US Distribution Corp., OrthoPediatrics EU Limited, OrthoPediatrics AUS PTY LTD, OrthoPediatrics NZ 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. 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 $ 176,768 and $ 178,026 as of December 31, 2022 and 2021, respectively. Use of Estimates Preparation of our consolidated financial statements requires the use of estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as of the date of the consolidated financial statements. By their nature, these judgments are subject to an inherent degree of uncertainty. We use historical experience and other assumptions as the basis for our judgments and estimates. Because future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Any changes in these estimates will be reflected in our consolidated financial statements. Foreign Currency Transactions We currently bill our international stocking distributors in U.S. dollars, resulting in minimal foreign exchange transaction expense. 92 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 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. dollars using end-of-period exchange rates for assets and liabilities and average exchange rates during each reporting period for results of operations. Foreign currency translation adjustments have been recorded as a separate component of the consolidated statements of comprehensive loss. Fair Value of Financial Instruments The accounting standards related to fair value measurements define fair value and provide a consistent framework for measuring fair value under the authoritative literature. Valuation techniques are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect market assumptions. This guidance only applies when other standards require or permit the fair value measurement of assets and liabilities. The guidance does not expand the use of fair value measurements. A fair value hierarchy was established, which prioritizes the inputs used in measuring fair value into three broad levels. Level 1 – Quoted prices in active markets for identical assets or liabilities; Level 2 – Observable market-based inputs or unobservable inputs that are corroborated by market data; and Level 3 – Significant unobservable inputs that are not corroborated by market data. Generally, these fair value measures are model-based valuation techniques such as discounted cash flows, and are based on the best information available, including our own data. The Company's financial instruments include cash, 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 or certificates of deposit which we identify as Level 2. These securities are predominately priced by third parties, either a pricing vendor or dealer. When a quoted price in an active market for an identical security is not available these third parties will utilize an alternative market approach, such as a recent trade or matrix pricing, or an income approach, such as a discounted cash flow pricing model that calculates values from observable inputs such as quoted interest rates, yield curves and other observable market information. Contingent consideration represents the system sales payment the Company is obligated to make. The fair value of the contingent consideration payment is considered a level 3 fair value measurement and was determined with the assistance of an independent valuation specialist at the original issuance date and as of the balance sheet date. See Note 5 for further discussion of financial instruments that carried a fair value on a recurring and nonrecurring basis. Revenue from Contracts with Customers In accordance with ASC 606, "Revenue from Contracts with Customers," revenue is recognized when our performance obligations under the terms of a contract with our customer are satisfied. This typically occurs when we transfer control of our products to the customers, generally upon implantation or when title passes upon shipment. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these goods or services, and excludes any sales incentives or taxes collected from a customer which are subsequently remitted to government authorities. Revenue Recognition – United States Revenue in the United States is generated primarily from the sale of our 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 93 hospital, orthotist or end customers. We recognize revenue when our performance obligations under the terms of a contract with our customer are satisfied. 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. 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, 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. Based on a history of reliable collections, we have concluded that a contract exists and revenue should be recognized when we transfer control of our products to the customer, generally when title passes upon shipment. Additionally, based on our history of immaterial returns from international customers, we have historically estimated no reserve for returns. Beginning in early 2017 and continuing through 2021, we expanded operations and established legal entities outside the United States, permitting us to sell under an agency model direct to local hospitals internationally. In the year ended December 31, 2020, the Company recorded a $ 2,730 revenue reduction due to the repurchase of inventory from a stocking distributor in Germany, Austria and Switzerland that we converted to a sales agency. The products are generally consigned to our independent sales agencies, and revenue is recognized when the products are used by or shipped to the hospital for surgeries on a case by case basis. On rare occasions, hospitals purchase products for their own inventory, and revenue is recognized when title passes upon shipment. Cash, Cash Equivalents and Short Term Investments We maintain cash in bank deposit accounts which, at times, may exceed federally insured limits. To date, we have not experienced any loss in such accounts. We consider all highly liquid investments with original maturity of three months or less at inception to be cash equivalents. The carrying amounts reported in the balance sheets for cash are valued at cost, which approximates fair value. The Company invests in 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. As such, those investments with contractual maturities greater than one year from the date of purchase are classified as short-term on the accompanying Consolidated Balance Sheets. The company includes unrealized gains or losses, as a component of other comprehensive income in stockholders' equity. If the adjustment to fair value reflects a decline in the value of the investment, the Company considers available information to determine whether the decline is "other than temporary" and, if so, reflects the change on the Consolidated Statements of Operations. There were no such losses recognized in the accompanying Consolidated Statements of Operations. 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 In conjunction with the sale of Vilex, $ 1,250 was placed into a separate escrow account. This cash is reported as restricted cash on the December 31, 2022 and 2021 Consolidated Balance Sheets. These funds were to remain restricted until August 31, 2021 at which time, they were to be released to the Company subject to no claims related to the purchase; however, due to the pending IMED Surgical litigation, the cash remains reported as restricted until the conclusion of the legal matter. See Note 15 - Commitments and Contingencies for further detail. The Company also maintains restricted cash of 200 Euro at its Netherlands entity for potential Italian tenders. Accounts Receivable and Allowance for Doubtful Accounts Accounts receivable are uncollateralized customer obligations due under normal trade terms, generally requiring payment within 30 days from the invoice date in the United States and within 90 days internationally. Account balances with invoices over 30 or 90 days past due for domestic and international accounts, respectively, are considered delinquent. No interest is charged on past due accounts. Payments of accounts receivable are applied 94 to the specific invoices identified on the customer's remittance advice or, if unspecified, to the customer's account as an unapplied credit. The carrying amount of accounts receivable is reduced by an allowance that reflects management's best estimate of the amounts that will not be collected, determined principally on the basis of historical experience, management's assessment of the collectability of specific customer accounts and the aging of the accounts receivable. All accounts or portions thereof deemed to be uncollectible or to require an excessive collection cost are written off to the allowance for doubtful accounts. The allowance for doubtful accounts was $ 1,056 and $ 347 as of year ended December 31, 2022 and 2021, respectively. The following table summarizes activity in the allowance for doubtful accounts: December 31, 2022 2021 2020 Balance at beginning of year $ 347 $ 433 $ 506 Adjustments charged to expense (income) 723 $ ( 5 ) 274 Write-offs & other adjustments 174 81 347 Carrying amount as a result of acquisitions 160 — — Balance at end of year $ 1,056 $ 347 $ 433 Inventories, net Inventories are stated at the lower of cost or net realizable value, with cost determined using the first-in-first-out method. Inventories, which consist of implants and instruments held in our warehouse, with third-party independent sales agencies or distributors, or consigned directly with hospitals, are considered finished goods and are purchased from third parties. We evaluate the carrying value of our inventories in relation to the estimated forecast of product demand, which takes into consideration the life cycle of the product. A significant decrease in demand could result in an increase in the amount of excess inventory on hand, which could lead to additional charges for excess and obsolete inventory. The need to maintain substantial levels of inventory impacts our estimates for excess and obsolete inventory. Each of our implant systems are designed to include implantable products that come in different sizes and shapes to accommodate the surgeon’s needs. Typically, a small number of the set components are used in each surgical procedure. Certain components within each set may become obsolete before other components based on the usage patterns. We adjust inventory values, as needed, to reflect these usage patterns and life cycle. In addition, we continue to introduce new products, which may require us to take additional charges for excess and obsolete inventory in the future. Charges for excess and obsolete inventory are included in cost of revenue and were $ 1,011 , $ 1,100 and $ 1,269 for the years ended December 31, 2022, 2021 and 2020, respectively. Costs Related to Common Stock Offerings 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 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. 95 Property and Equipment, net Property and equipment are carried at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful life of the assets. When assets are retired or otherwise disposed of, costs and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is recognized in operations for the period. Maintenance and repairs that prolong or extend the useful life are capitalized, whereas standard maintenance, replacements, and repair costs are expensed as incurred. Instruments are hand-held devices, specifically designed for use with our implants and are used by surgeons during surgery. Instruments deployed in the field are carried at cost less accumulated depreciation and are recorded in property and equipment, net on the consolidated balance sheets. Sample inventory consists of our implants and instruments, and is maintained to market and promote our products. Sample inventory is carried at cost less accumulated depreciation. Depreciable lives are generally as follows: Building and building improvements 25 to 30 years Furniture and fixtures 5 to 7 years Computer equipment 3 to 5 years Business software 3 years Office and other equipment 5 to 7 years Instruments 5 years Sample inventory 2 years Amortizable Intangible Assets, net Amortizable intangible assets include fees necessary to secure various patents and licenses, including Band-Lok, the value of internally developed software, customer relationships, and non-competition agreements related to the acquisition of Orthex, and customer relationships and non-competition agreements related to the acquisitions of Telos and ApiFix. Amortization is calculated on a straight-line basis over the estimated useful life of the asset. Amortization for patents and licenses commences at the time of patent approval, and for licenses upon market launch, respectively. Amortization for assets acquired commences upon acquisition. Intangible assets are amortized over a 3 to 20 year period. Amortizable intangible assets are assessed for impairment upon triggering events that indicate that the carrying value of an asset may not be recoverable. Recoverability is measured by a comparison of the carrying amount to future net undiscounted cash flows expected to be generated by the associated asset. If such assets are determined to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount exceeds the fair market value of the intangible assets. No impairment charges were recorded in any of the periods presented. Goodwill and Other Intangible Assets Our goodwill represents the excess of the cost over the fair value of net assets acquired. The determination of the value of goodwill and intangible assets arising from acquisitions requires extensive use of accounting estimates and judgments to allocate the purchase price to the fair value of net tangible and intangible assets acquired. Goodwill is not amortized and is assessed for impairment using fair value measurement techniques on an annual 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 two reporting units using either an income or market approach or a combination thereof. 96 We have indefinite lived trademark assets that are reviewed for impairment by performing a quantitative analysis, which occurs annually in the fourth quarter, utilizing balances as of October 1, or whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability is measured by a comparison of the carrying amount to future net discounted cash flows expected to be generated by the associated asset. If such assets are determined to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount exceeds the fair market value of the assets. 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 Upon the completion of an acquisition the Company may record an acquisition installment payable, contingent consideration or both. Both are recorded at their fair values as determined by management with the assistance of an independent valuation specialist at the original issuance date and are adjusted on a recurring basis. Accretion of interest expense attributable to the acquisition installment payable are recorded as a component of interest expense, net. Changes in the fair value of the contingent consideration are included in fair value adjustments of contingent consideration. Both are included as a component of other expenses on the consolidated statement of operations. The amount of expense recorded in interest expense, net was $ 2,307 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 $ 25,930 and $ 1,800 for the twelve month period ended December 31, 2022 and 2021, respectively. Shipping and Handling Costs Shipping and handling costs that are billed to the customer are included in net revenue and were $ 1,027 , $ 803 and $ 635 , for the years ended December 31, 2022, 2021 and 2020, respectively. Shipping and handling costs that are not billed to the customer are included in sales and marketing expenses and were $ 4,270 , $ 2,899 and $ 2,261 , for the years ended December 31, 2022, 2021 and 2020, respectively. Cost of Revenue Cost of revenue consists primarily of products purchased from third-party suppliers, excess and obsolete inventory adjustments, inbound freight, and royalties. Our implants and instruments are manufactured to our specifications by third-party suppliers who meet our manufacturer qualifications standards. Our third-party manufacturers are required to meet Food and Drug Administration (the “FDA”), International Organization for Standardization and other country-specific quality standards. The majority of our implants and instruments are produced in the United States. Sales and Marketing Expenses Sales and marketing expenses primarily consist of commissions to our domestic and select international independent sales agencies and consignment distributors, as well as compensation, commissions, benefits and other related costs for personnel we employ. Commissions and bonuses are generally based on a percentage of sales. Our international independent stocking distributors purchase instrument sets and replenishment stock for resale, and we do not pay commissions or any other sales related costs for international sales to distributors. Advertising Costs 97 Advertising costs consist primarily of print advertising, trade shows, and other related expenses. Advertising costs are expensed as incurred and are recorded as a component of sales and marketing expense. Advertising costs were $ 1,906 , $ 898 and $ 1,231 for the years ended December 31, 2022, 2021 and 2020, respectively. Research and Development Costs Research and development costs are expensed as incurred. Our research and development expenses primarily consist of costs associated with engineering, product development, consulting services, outside prototyping services, outside research activities, materials, development and protection of our intellectual property portfolio, as well as other costs associated with development of our products. Research and development costs also include related personnel and consultants’ compensation expense. Stock-Based Compensation Prior to our IPO, we maintained an Amended and Restated 2007 Equity Incentive Plan (the “2007 Plan”) that provides for grants of options and restricted stock to employees, directors and associated third-party representatives of our company as determined by the Board of Directors. The 2007 Plan had authorized 1,585,000 shares for award. Immediately prior to our IPO, we adopted our 2017 Incentive Award Plan (the “2017 Plan”) which replaced the 2007 Plan. The 2017 Plan provides for grants of options and restricted stock to officers, employees, consultants or directors of our Company. The 2017 Plan has authorized 1,832,460 shares for award. Options holders, upon vesting, may purchase common stock at the exercise price, which is the estimated fair value of our common stock on the date of grant. Option grants generally vest immediately or over a three year period. No stock options were granted in any of the periods presented. Restricted stock may not be transferred prior to the expiration of the restricted period. The restricted stock that has been granted under the 2007 Plan has restriction periods that generally last until the earlier of six years from the date of grant, or an initial public offering or change in control, as defined in the 2007 Plan. All restricted stock granted prior to May 2014 vested upon our IPO and the remaining grants under the 2007 Plan vested in April 2018. Generally under the 2017 plan, restricted stock vests over a three year period. We have elected to recognize the reversal of stock compensation expense when a restricted stock forfeiture occurs as opposed to estimating future forfeitures. We record the fair value of restricted stock at the grant date. Stock-based compensation is recognized ratably over the requisite service period, which is generally the restriction period for restricted stock. Foundation for Advancing Pediatric Orthopedics The Company may periodically make contributions to the Foundation for Advancing Pediatric Orthopedics (the "Foundation"). The Foundation was incorporated in 2018 exclusively for pediatric orthopedic research and education and qualifies under IRC 501(c)(3) as an exempt private foundation. The mission of the Foundation is to enhance the knowledge and experience, through education and research, of surgical trainees or practicing surgeons who are involved in helping children with orthopaedic disorders and injuries. The Foundation is a separate legal entity and is not a subsidiary of the Company; therefore, its results are not included in these consolidated financial statements. The Company contributed $ 524 , $ 88 and $ 325 to the Foundation during the years ended December 31, 2022, 2021 and 2020, respectively. These contributions were recorded in general and administrative expenses. Comprehensive Income (Loss) Comprehensive income (loss) is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. Comprehensive income (loss) includes foreign currency translation adjustments and unrealized gains (losses) on marketable securities. 98 Income Taxes We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, we determine deferred tax assets and liabilities on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. We recognize deferred tax assets to the extent that we believe that these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence. If we determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make an adjustment to the valuation allowance. We record uncertain tax positions on the bases of a two-step process in which (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the positions and (2) for those tax positions that do not meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50% likely to be realized upon ultimate settlement with the related tax authority. Litigation and Contingencies Accruals for litigation and contingencies are reflected in the consolidated financial statements based on management’s assessment, including advice of legal counsel, of the expected outcome of litigation or other dispute resolution proceedings and/or the expected resolution of contingencies. Liabilities for estimated losses are accrued if the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated. Significant judgment is required in both the determination of probability of loss and the determination as to whether the amount is reasonably estimable. Accruals are based only on information available at the time of the assessment due to the uncertain nature of such matters. As additional information becomes available, management reassesses potential liabilities related to pending claims and litigation and may revise its previous estimates, which could materially affect the Company’s results of operations in a given period. No accrued legal fees outside the course of ordinary business were recorded for the 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. During 2021, there were no material adjustments to the accrued legal settlements recorded in 2020 and the settlement amounts were paid, resolving the related legal proceedings. Leases At the inception of a contractual arrangement, the Company determines whether the contract contains a lease by assessing whether there is an identified asset and whether the contract conveys the right to control the use of the identified asset in exchange for consideration over a period of time. If both criteria are met, the Company calculates the associated lease liability and corresponding right-of-use asset upon lease commencement using a discount rate based on a borrowing rate commensurate with the term of the lease. The Company records lease liabilities within current liabilities or long-term liabilities based upon the length of time associated with the lease payments. The Company records its operating lease right-of-use assets as long-term assets. Recent Accounting Pronouncements In June 2016, the FASB issued ASU No. 2016-13 "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments". The ASU is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The ASU requires the measurement of all expected credit losses for financials assets including trade receivables held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. The Company 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. 99 In October 2021, the FASB issued ASU No. 2021-08 "Business Combinations (Topic 805)-Accounting for Contract Assets and Contract Liabilities from Contracts with Customers". The amendments in this Update address diversity and inconsistency related to the recognition and measurement of contract assets and contract liabilities acquired in a business combination. The amendments in this Update require that an acquirer recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606, Revenue from Contracts with Customers. The amendments in this Update require that an entity (acquirer) recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. The amendments in this Update should be applied prospectively to business combinations occurring on or after the effective date of the amendments. Early adoption of the amendments is permitted, including adoption in an interim period. An entity that early adopts in an interim period should apply the amendments (1) retrospectively to all business combinations for which the acquisition date occurs on or after the beginning of the fiscal year that includes the interim period of early application and (2) prospectively to all business combinations that occur on or after the date of initial application. The Company 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 Pega Medical 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. 100 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 Assets Cash 312 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 Liabilities Accounts payable-trade 1,682 Other current liabilities 1,141 Deferred tax liability 3,305 Total liabilities 6,128 Less: 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 $ 13,410 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. 101 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 Assets Cash 420 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 Liabilities Accounts payable and accrued liabilities 45 Other current liabilities 586 Deferred tax liability 3,014 Total liabilities 3,645 Less: total net assets 13,037 Goodwill $ 5,450 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 $ 2,410 Indefinite Patents 2,660 10 years Customer Relationships 6,460 15 years $ 11,530 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. 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. 102 December 31, 2022 2021 Net revenue $ 128,648 $ 113,899 Net income (loss) $ 2,110 $ ( 12,810 ) ApiFix On April 1, 2020, the Company purchased all the issued and outstanding membership interest of ApiFix for $ 2,000 in cash, including $ 344 of cash acquired, 934,783 shares of the Company's common stock, $ 0.00025 par value per share, representing approximately $ 35,176 (based on a closing share price of $ 37.63 on April 1, 2020), approximately $ 30,000 in anniversary payments, and approximately $ 41,741 in a system sales payment. The total consideration transferred of $ 87,379 , as calculated after discounting future payments to present value, is final. ApiFix, a corporation organized under the laws of Israel, has developed a minimally invasive deformity correction system for patients with Adolescent Idiopathic Scoliosis ("ApiFix System"). The following table reconciles the total consideration transferred after discounting the future payments: Consideration Present Value Cash consideration $ 2,000 $ 2,000 Payment of ApiFix transaction related costs 67 67 Issuance of common stock 35,176 35,176 Anniversary payments 30,000 22,620 System sales payment 41,741 27,190 Total consideration transferred $ 108,984 $ 87,053 The Company incurred $ 311 of acquisition-related costs that are included in general and administrative expenses on the consolidated statements of operations. The purchase price allocation set forth herein is final. The following table summarizes the total consideration paid for ApiFix and allocation of purchase price to the final fair value of the assets acquired and liabilities assumed at the acquisition date (in thousands): Description Amount Fair value of total acquisition consideration $ 87,379 Assets Cash 344 Accounts receivable-trade 245 Inventories 685 Prepaid expenses and other current assets 77 Property and equipment 153 Amortizable intangible assets 32,150 Other intangible assets 8,640 Operating lease right-of-use asset 104 Total assets 42,398 Liabilities Accounts payable and accrued liabilities 226 Operating lease liabilities 106 Other current liabilities 270 Deferred income taxes 6,487 Total liabilities 7,089 Less: total net assets 35,309 Goodwill $ 52,070 103 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 $ 8,640 Indefinite Patents 31,720 15 years Customer Relationships 230 10 years Non-competition Agreements 200 4 years $ 40,790 The Company is obligated to make anniversary payments of: (i) approximately $ 13,000 on the second anniversary of the closing date, provided that such payment will be paid earlier if 150 clinical procedures using the ApiFix System are completed in the United States before such anniversary date, (ii) $ 8,000 on the third anniversary of the closing date; and (iii) $ 9,000 on the fourth anniversary of the closing date, subject to adjustments. The Company anticipates making the 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. The anniversary payments and system sales payment may each be made in cash or cash and common stock, subject to certain limitations; provided that the Company makes the determination with respect to anniversary payments and a representative of the former ApiFix shareholders may make the determination with respect to the system sales payment, if any. Pursuant to the acquisition agreement, both the anniversary installments and the system sales payment require a minimum cash payment of 25 percent of the total amount due. The remaining 75 percent may be paid with common stock. The fair value of the contingent consideration payment is considered a Level 3 fair value measurement and was determined with the assistance of an independent valuation specialist at the original issuance date using an option pricing model and a Monte Carlo simulation based on forecasted annual revenue, expected volatility and discount rates. The fair value of the payment will continue to be adjusted as additional information becomes available regarding the progress toward achievement of the revenue forecast. The adjustments in the fair value of the contingent consideration payment were recognized as income of $ 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, 2022 December 31, 2021 December 31, 2020 Anniversary Payments: Second Year Payment $ — $ 12,862 $ 12,233 Third Year Payment 7,815 7,075 6,335 Fourth Year Payment 8,019 7,234 6,449 Total acquisition installment payable 15,834 27,171 25,017 Less: current portion of acquisition installment payable 7,815 12,862 12,233 Acquisition installment payable, net of current portion 8,019 14,309 12,784 System sales payment 2,980 28,910 30,710 ApiFix future consideration, net of current portion $ 10,999 $ 43,219 $ 43,494 Pre-acquisition revenues and earnings for ApiFix were not material to the consolidated operations. Telos On March 9, 2020, the Company purchased the issued and outstanding membership interest of Telos for $ 1,750 in cash, including $ 81 of cash acquired, and 36,628 shares of common stock, $ 0.00025 par value per share, of 104 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 following table summarizes the total consideration paid for Telos and allocation of purchase price to the final fair value of the assets acquired and liabilities assumed at the acquisition date (in thousands): Description Amount Fair value of total acquisition consideration $ 3,318 Assets Cash 81 Accounts receivable-trade 215 Prepaid expenses and other current assets 38 Property and equipment 10 Amortizable intangible assets 950 Other intangible assets $ 210 Total assets 1,504 Liabilities Accounts payable and accrued liabilities 60 Total liabilities 60 Less: total net assets 1,444 Goodwill $ 1,874 The fair value of identifiable intangible assets were based on valuations using a combination of the income and cost approach, inputs which would be considered Level 3 under the fair value hierarchy. The estimated fair value and useful life of identifiable intangible assets are as follows: Amount Remaining Economic Useful Life Trademarks / Names $ 210 Indefinite Customer Relationships 910 10 years Non-competition Agreements 40 5 years $ 1,160 NOTE 4 - GOODWILL AND INTANGIBLE ASSETS Goodwill The Company tests goodwill for impairment by either performing a qualitative evaluation or a quantitative test. The qualitative evaluation is an assessment of factors including reporting unit specific operating results as well as industry, market and general economic conditions, to determine whether it is more likely than not that the fair values of a reporting unit is less than its carrying amount, including goodwill. The Company may elect to bypass the qualitative assessment for its 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 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. 105 Changes in the carrying amount of goodwill were as follows: Total Goodwill at January 1, 2021 $ 70,511 Foreign currency translation impact 1,838 Goodwill at January 1, 2022 $ 72,349 MD Ortho acquisition 5,450 Pega acquisition 16,528 Foreign currency translation impact ( 7,506 ) Goodwill at December 31, 2022 $ 86,821 Intangible Assets As of December 31, 2022, the balances of total intangible assets were as follows: Weighted-Average Amortization Period 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: Weighted-Average Amortization Period Gross Intangible Assets Accumulated Amortization Net Intangible Assets Patents 13.7 years $ 44,493 $ ( 5,664 ) $ 38,829 Intellectual Property 10.1 years 9,847 ( 1,408 ) 8,439 License agreements 5.5 years 10,674 ( 2,448 ) 8,226 Total amortizable assets $ 65,014 $ ( 9,520 ) 55,494 Amortization expense was $ 5,977 , $ 4,531 and $ 3,246 for the years ended December 31, 2022, 2021 and 2020, respectively. Future amortization expenses are expected as follows: Year Ending December 31: 2023 $ 6,370 2024 6,247 2025 6,058 2026 6,040 2027 5,686 Thereafter 34,579 $ 64,980 Licenses are tied to product launches and do not begin amortizing until the product is launched to the market. Anticipated market launch is in 2022 through 2024 for products for which we previously obtained licensing. On October 20, 2021, we purchased certain intellectual property assets from Devise Ortho, Inc. related to its Drive Rail external fixation system. We recorded $ 840 which will be amortized over the life of the patents, or approximately 16 years. In addition to the intellectual property, the Company purchased $ 108 of inventory from Devise Ortho, Inc. The total consideration of $ 948 was paid using $ 650 in cash and 4,599 shares of the 106 Company's common stock, representing approximately $ 298 (based on the closing share price of $ 64.83 on October 20, 2021). On September 3, 2021, we entered into a five-year license agreement, resulting in exclusive distribution rights of the 7D Surgical FLASH TM Navigation platform for pediatric applications. We paid $ 750 which will be amortized over the initial three years of the agreement. On July 20, 2021, we entered into an amended license agreement, resulting in a five-year extension of our exclusive distribution rights of the FIREFLY Technology in children's hospitals across the United States. We paid $ 4,300 for the amended agreement and the amount will be amortized over the life of the agreement. On March 19, 2021, we recorded a license agreement in the amount of $ 2,858 in settlement of an alleged patent infringement suit related to scoliosis derotation. Amortization is recorded based on the cases completed in the given period. On June 10, 2020, we purchased certain intellectual property assets from Band-Lok, LLC, a North Carolina limited liability company ("Band-Lok"), related to its Tether Clamp and Implantation System ("Tether Clamp System") for $ 3,394 in total consideration. We use the Tether Clamp System in connection with our Bandloc 5.5/6.0 System. We were previously the sole licensee of the purchased assets under a license agreement with Band-Lok. Trademarks are recorded as indefinite-lived intangible assets in the amounts of $ 14,921 and $ 14,268 as of December 31, 2022 and 2021, respectively. Concurrently with our acquisition of each company, we acquired the trademark of Telos on March 9, 2020 valued at $ 210 and the trademark of ApiFix on April 1, 2020 valued at $ 8,640 . 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. 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 The Company measures certain financial assets and liabilities at fair value. The accounting standards related to fair value measurements define fair value and provide a consistent framework for measuring fair value under the authoritative literature. 107 The following table summarize the assets and liabilities measured at fair value on a recurring basis as of December 31, 2022 and 2021, respectively. December 31, 2022 Level 1 Level 2 Level 3 Total Financial Assets Short term investments Certificates of Deposit $ — $ 25,148 $ — $ 25,148 Exchange Trade Mutual Funds $ 18,939 $ — $ — $ 18,939 Treasury Bonds $ 65,040 $ — $ — $ 65,040 Asset Backed Securities $ — $ — $ — $ — Other $ 172 $ — $ — $ 172 Financial Liabilities Contingent Consideration $ — $ — $ 2,980 $ 2,980 December 31, 2021 Level 1 Level 2 Level 3 Total Financial Assets Short term investments Corporate Bonds $ 22,476 $ — $ — $ 22,476 Treasury Bonds $ 14,317 $ — $ — $ 14,317 Asset Backed Securities $ — $ 8,272 $ — $ 8,272 Other $ 837 $ — $ — $ 837 Financial Liabilities Contingent Consideration $ — $ — $ 28,910 $ 28,910 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 $ 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: Total Balance at December 31, 2020 30,710 Change in fair value of contingent consideration ( 1,800 ) Balance at December 31, 2021 $ 28,910 Change in fair value of contingent consideration ( 25,930 ) Balance at December 31, 2022 $ 2,980 108 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, 2022, 2021 and 2020, respectively: December 31, 2022 December 31, 2021 December 31, 2020 Valuation techniques Discounted cash flow, Monte Carlo Present value discount rate (1) 16.6 % 18.4 % 25.8 % Volatility factor 48.0 % 50.3 % 51.8 % Expected Years 1.4 years 2.4 years 3.5 years (1) The present value discount rate includes estimated risk premium. NOTE 6 - PROPERTY AND EQUIPMENT, NET Property and equipment, net consisted of the following: December 31, 2022 2021 Land $ 1,725 $ 1,645 Building and building improvements 5,729 4,078 Computer equipment and software 3,319 2,541 Office and other equipment 4,328 1,958 Instruments 43,596 34,094 Sample inventory 2,674 2,483 Construction in progress 3,719 4,805 65,090 51,604 Less: accumulated depreciation ( 30,804 ) ( 23,089 ) Total property and equipment, net $ 34,286 $ 28,515 Depreciation expense is included in general and administrative expenses and was $ 7,121 , $ 6,148 and $ 4,660 for the years ended December 31, 2022, 2021 and 2020, respectively. NOTE 7 – ACCRUED COMPENSATION AND BENEFITS Accrued compensation and benefits consisted of the following: December 31, 2022 2021 Accrued compensation and related costs $ 3,282 $ 2,357 Accrued commissions 3,462 2,994 Total accrued compensation and benefits $ 6,744 $ 5,351 109 NOTE 8 - DEBT AND CREDIT ARRANGEMENTS Long-term debt consisted of the following: December 31, 2022 2021 Mortgage payable to affiliate $ 907 $ 1,044 Total debt 907 1,044 Less: current maturities 144 137 Long-term debt, net of current maturities $ 763 $ 907 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. 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. Pursuant to the terms of the mortgage note, we pay Tawani Enterprises Inc. monthly principal and interest installments of $ 16 with interest compounded at 5 % until maturity in 2028, at which time a final payment of remaining principal and interest is due. The mortgage is secured by the related real estate and building. As of December 31, 2022 and 2021, the mortgage balance was $ 907 and $ 1,044 , respectively, of which current principal due of $ 144 and $ 137 , respectively, was included in current portion of long-term debt. At December 31, 2022, the aggregate future principal payments on our debt arrangements are as follows: 2023 $ 144 2024 152 2025 160 2026 168 2027 176 Thereafter 107 $ 907 Interest expense relating to notes payable to Squadron and mortgage note payable with Tawani was $ 525 , $ 56 and $ 1,233 for the years ended December 31, 2022, 2021 and 2020, respectively. 110 NOTE 9 - INCOME TAXES Total income tax benefit for the years ended December 31, 2022, 2021 and 2020 was allocated as follows: 2022 2021 2020 Total tax expense (benefit) $ ( 4,947 ) $ ( 1,128 ) $ ( 723 ) For the years ended December 31, 2022, 2021 and 2020 loss before taxes of the Company consists of the following: 2022 2021 2020 Domestic $ 6,451 $ ( 9,232 ) $ ( 28,756 ) Foreign ( 10,140 ) ( 8,156 ) ( 4,911 ) Total $ ( 3,689 ) $ ( 17,388 ) $ ( 33,667 ) The components of income tax benefit for the years ended December 31, 2022, 2021 and 2020 are as follows: 2022 2021 2020 Current: Federal $ — $ — $ — State 68 — — Foreign 17 — — 85 — — Deferred: Federal $ — $ — $ — State — — — Foreign ( 2,018 ) ( 1,128 ) ( 723 ) Decrease in valuation allowance ( 3,014 ) — — Total income tax expense (benefit) $ ( 4,947 ) $ ( 1,128 ) $ ( 723 ) The reconciliation between the effective tax rate and the statutory tax rate is as follows: December 31, 2022 2021 2020 Federal statutory rate 21.0 % 21.0 % 21.0 % State statutory rate, net of federal benefit ( 6.3 ) % 2.0 % 1.8 % Effect of foreign rates different from statutory 6.4 % ( 0.1 ) % 0.1 % Change in state rate 0.9 % ( 1.3 ) % ( 2.5 ) % Excess tax benefits from stock plans 9.6 % 7.5 % 0.6 % Nondeductible/nontaxable or other items ( 22.1 ) % 11.9 % 0.5 % 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 ) % Income tax (expense) benefit 134.1 % 6.3 % 2.1 % Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The primary temporary differences that give rise to the deferred tax assets and liabilities are certain inventory adjustments, depreciation and amortization, interest expense, stock based compensation and net operating loss carryforwards. 111 The deferred tax assets and liabilities consisted of the following at December 31, 2022 and 2021: 2022 2021 Deferred tax assets: Inventories, net $ 5,804 $ 4,206 Stock based compensation 2,534 2,454 Loss carryforwards 38,443 35,421 Credit carryforwards 176 176 Interest carryforward 520 338 Other 787 444 Total deferred tax assets 48,264 43,039 Valuation allowance ( 36,778 ) ( 38,911 ) Net deferred tax assets 11,486 4,128 Deferred tax liabilities: Intangibles ( 15,737 ) ( 7,518 ) Property, plant and equipment ( 1,703 ) ( 1,238 ) Total deferred tax liabilities ( 17,440 ) ( 8,756 ) Foreign currency translation impact — ( 143 ) Deferred tax assets (liabilities), net $ ( 5,954 ) $ ( 4,771 ) 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 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. We had available federal tax credits of $ 176 . Net operating losses generated prior to December 31, 2017 will begin to expire in 2028. Federal net operating losses generated after January 1, 2018 will have an indefinite carryforward period. An ownership change under Section 382 of the Internal Revenue Code was deemed to occur on May 30, 2014. Given the limitation calculation, we anticipate approximately $ 23,920 in losses generated prior to the ownership change date will be subject to potential limitation. The estimated annual limitation is $ 1,062 . A second ownership change under Section 382 was deemed to occur on December 11, 2018. The estimated annual limitation is $ 9,736 , which is increased by $ 22,430 over the first five years as a result of an unrealized built in gain. NOLs sustained prior to May 30, 2014 will still be constricted by the lower limitation. Management assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year period ended December 31, 2022. 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 Canada and Israel. We are subject to taxation in the United States, Indiana and various other state and international jurisdictions. As of December 31, 2022, all tax years from 2008 remain open to examination by the major taxing jurisdictions to which we are subject due to our net operating loss and credit carryforwards from those years. We believe that the income tax filing positions will be sustained on audit and do not anticipate any adjustments that will result in a material change. Therefore, no reserve for uncertain income tax positions has been recorded. Interest and penalties, if any, associated with income tax examinations will be to record such items as a component of income taxes. At December 31, 2022, our foreign operations held cash totaling $ 2,468 . We have not provided for foreign withholding tax on the undistributed earnings from our non-U.S. subsidiaries that are considered to be indefinitely reinvested. If such earnings were to be distributed, any foreign withholding tax would not be significant. NOTE 10 - STOCKHOLDERS’ EQUITY 112 Prior to our IPO, we maintained an Amended and Restated 2007 Equity Incentive Plan (the “2007 Plan”) that provides for grants of options and restricted stock to employees, directors and associated third-party representatives of our company as determined by the Board of Directors. The 2007 Plan had authorized 1,585,000 shares for award. Immediately prior to our IPO, we adopted our 2017 Incentive Award Plan (the “2017 Plan”) which replaced the 2007 Plan. The 2017 Plan provides for grants of options and restricted stock to officers, employees, consultants or directors of our Company. The 2017 Plan has authorized 1,832,460 shares for award. As of December 31, 2022, the Plan had 495,569 shares available for issuance. Stock Options The fair value for options granted at the time of issuance were estimated at the date of grant using a Black-Scholes options pricing model. Significant assumptions included in the option value model include the fair value of our common stock at the grant date, weighted average volatility, risk-free interest rate, dividend yield and the forfeiture rate. There were no stock options granted in any of the periods presented. Our stock option activity and related information are summarized as follows: Options Weighted-Average Exercise Price Weighted-Average Remaining Contractual Terms (in Years) Outstanding at January 1, 2020 70,628 $ 30.97 1.2 Forfeited or expired ( 4,556 ) $ 30.97 Exercised ( 53,270 ) $ 30.97 Outstanding at December 31, 2020 12,802 $ 30.97 1.6 Forfeited or expired ( 1,742 ) $ 30.97 Exercised ( 4,422 ) $ 30.97 Outstanding at December 31, 2021 6,638 $ 30.97 1.3 Forfeited or expired ( 1,072 ) $ 30.97 Exercised ( 2,010 ) $ 30.97 Outstanding at December 31, 2022 3,556 $ 30.97 0.7 Options generally include a time-based vesting schedule permitting the options to vest ratably over three years . At December 31, 2022 and 2021, all options were fully vested. There was no stock-based compensation expense on stock options for all periods presented. Restricted Stock Our restricted stock activity and related information are summarized as follows: Restricted Stock 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 — — Granted 164,010 — Forfeited ( 1,885 ) — Outstanding at Vested ( 43,397 ) — Outstanding at December 31, 2020 436,730 1.1 — — Granted 114,256 — Forfeited ( 6,354 ) — Outstanding at Vested ( 176,186 ) — Outstanding at December 31, 2021 368,446 1.1 — — Granted 216,881 11,634 Forfeited ( 28,344 ) ( 1,554 ) Vested ( 153,659 ) — Outstanding at December 31, 2022 403,324 1.4 10,080 2.5 Restricted stock exercisable at December 31, 2022 — — 113 At December 31, 2022, there was $ 10,012 of unrecognized compensation expense remaining related to our service-based restricted stock awards. The unrecognized compensation cost is expected to be recognized over a weighted average period of 1.5 years. 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. Warrants Our warrant activity and related information are summarized below: Warrants Weighted-Average Exercise Price Outstanding at January 1, 2020 404 $ 30.97 Forfeited or expired ( 404 ) $ 30.97 Outstanding at December 31, 2020 — $ — Forfeited or expired — $ — Outstanding at December 31, 2021 — $ — Issued 1,525,000 $ 0.00025 Exercised ( 1,525,000 ) $ 0.00025 Outstanding at December 31, 2022 — $ — 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: Year Ended December 31, 2022 2021 2020 Net income (loss) $ 1,258 $ ( 16,260 ) $ ( 32,944 ) Less: 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 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. 114 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, 2022 2021 2020 Restricted stock 413,404 368,446 436,730 Stock options 3,556 6,638 12,802 416,960 375,084 449,532 NOTE 12 – BUSINESS SEGMENT Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. We have one operating and reportable segment, OrthoPediatrics, which designs, develops and markets anatomically appropriate 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. We do not assess the performance of our individual product categories on measures of profit or loss, or other asset-based metrics. Therefore, the information below is presented only for revenue by category and geography. Product sales attributed to a country or region includes product sales to hospitals, physicians and distributors and is based on the final destination where the products are sold. No individual customer accounted for more than 10% of total product sales for any of the periods presented. No customer accounted for more than 10% of consolidated accounts receivable as of December 31, 2022 or 2021. Disaggregated revenue - product sales by source were as follows: Year Ended December 31, Product sales by geographic location: 2022 2021 2020 U.S. $ 92,419 $ 77,781 $ 62,966 International 29,870 20,268 8,112 Total $ 122,289 $ 98,049 $ 71,078 Year Ended December 31, Product sales by category: 2022 2021 2020 Trauma and deformity $ 85,055 $ 65,829 $ 47,677 Scoliosis 33,428 28,046 20,738 Sports medicine/other 3,806 4,174 2,663 Total $ 122,289 $ 98,049 $ 71,078 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 In addition to the debt and credit agreements and mortgage with Squadron and its affiliate (refer to Note 8), we currently use Structure Medical, LLC (“Structure Medical”) as one of our suppliers. Structure Medical is affiliated with Squadron and a supplier with which we maintain certain long-term agreements. Our aggregate payments to Structure Medical for inventory purchases were $ 956 , $ 750 and $ 2,622 for the years ended December 31, 2022, 2021 and 2020, respectively. 115 NOTE 14 - EMPLOYEE BENEFIT PLAN We have a defined-contribution plan, OrthoPediatrics 401(k) Retirement Plan (the “401(k) Plan”), which includes a cash or deferral (Section 401(k)) arrangement. The 401(k) Plan covers those employees who meet certain eligibility requirements and elect to participate. Employee contributions are limited to the annual amounts permitted under the Internal Revenue Code. The 401(k) Plan allows us to make a discretionary matching contribution. Discretionary matching contributions are determined annually by management. 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 Leases As of December 31, 2022, the Company has recorded a lease liability of $ 258 and corresponding right-of-use asset of $ 259 on its consolidated balance sheet . Legal Proceedings From time to time, we are involved in various legal proceedings arising in the ordinary course of our business. IMED Surgical - Software Ownership Dispute On October 16, 2020, the Company, its wholly-owned subsidiary, Orthex, LLC (“Orthex”), the Company’s largest investor, Squadron Capital, LLC (“Squadron”), and certain other defendants, were named in a lawsuit filed by IMED Surgical, LLC, a New Jersey company (the “Plaintiff”), in Broward County, Florida Circuit Court. In the lawsuit, the Plaintiff claims, among other things, that it is the rightful owner of certain patented point-and-click planning software being used by the Company, Orthex and Squadron (specifically, U.S. Patent No. 10,258,377 (titled “Point and click alignment method for orthopedic surgeons, and surgical and clinical accessories and devices,” issued on April 16, 2019) (hereinafter, the “’377 Patent”). In June 2019, the Company purchased all the issued and outstanding units of membership interests in Orthex, and all the issued and outstanding shares of stock of Vilex in Tennessee, Inc. for $ 60,000 in total consideration. Vilex and Orthex are primarily manufacturers of foot and ankle surgical implants, including cannulated screws, fusion devices, surgical staples and bone plates, as well as the Orthex Hexapod technology, a system of rings, struts, implants, hardware accessories, and the Point & Click Software used to treat congenital deformities and limb length discrepancies. On December 31, 2019, the Company divested substantially all of the assets relating to Vilex's adult product offerings to a wholly-owned subsidiary of Squadron, in exchange for a $ 25,000 reduction in a term note owed to Squadron in connection with the initial acquisition. As part of the sale, the Company also executed an exclusive license arrangement with Squadron providing for perpetual access to certain intellectual property, including the ‘377 Patent. According to the lawsuit, the other defendants, who are unrelated to the Company, assigned the ‘377 Patent to Orthex in violation of certain agreements with the Plaintiff. The Plaintiff, among other things, requests that the defendants be ordered to convey and assign to Plaintiff all of their rights, title and interests in and to the ’377 Patent and seeks certain compensatory, consequential and unjust enrichment damages from Orthex and the unrelated defendants. On May 13, 2021, the Court ordered the lawsuit stayed pending arbitration. To the extent the Plaintiff desires to further pursue the matter, it must first do so through a separate arbitration proceeding. In mid-November 2021, the Plaintiff initiated an arbitration proceeding; 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. The Company, Orthex and Squadron filed an appeal of this component of the order, but the appellate court affirmed the lower court’s decision. The Company, Orthex and Squadron have not sought to further pursue an appeal of the subject order. 116 Although we believe the IMED lawsuit is without merit and will vigorously defend the claims asserted against us, arbitration and litigation can involve complex factual and legal questions, and an adverse resolution of such proceedings could have a material adverse effect on our business, operating results and financial condition. Wishbone Medical, Inc. – Patent Infringement Litigation On October 30, 2020, OrthoPediatrics, along with its wholly-owned subsidiary, Orthex, LLC, filed a lawsuit in federal district court (N.D. Indiana, South Bend Division, Case No. 3:20-cv-00929) against Wishbone Medical, Inc. and Nick A. Deeter (collectively “Wishbone”), claiming infringement of ’377 Patent, unfair competition, false advertising, breach of contract, defamation per se, tortious interference with contractual relationships, and tortious interference with prospective contractual relationships. In early January 2021, OrthoPediatrics amended its lawsuit by adding a declaratory judgment claim of infringement of the ‘377 Patent against Wishbone. Thereafter, in January 2021, Wishbone filed a motion to dismiss all OrthoPediatrics’ causes of action. In late August 2021, the Court denied Wishbone's motion to dismiss with respect to OrthoPediatrics’ infringement and breach of contract claims and dismissed OrthoPediatrics' remaining causes of action. In late September 2021, Wishbone filed its answer and counterclaims, in part, seeking declaratory judgment of non-infringement and invalidity of the ‘377 Patent, and alleging OrthoPediatrics patent infringement claim(s) against Wishbone was made in bad faith. In mid-October 2021, OrthoPediatrics filed its answer to Wishbone’s counterclaims, denying all of them. Although we believe Wishbone’s counterclaims are without merit and will vigorously defend the claims asserted against us, litigation can involve complex factual and legal questions, and an adverse resolution of this proceeding could have an adverse effect on our business, operating results and financial condition. We are not presently a party to any other legal proceedings the outcome of which, if determined adversely to us, would individually or in the aggregate materially affect our financial position or results of operations or cash flows. Purchase Obligations and Performance Requirements As a result of entering into a license agreement for the exclusive distribution of the 7D Surgical FLASH TM Navigation platform during 2021, the Company 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. As a component of the agreement the Company is required to meet minimum performance metrics, measured by the number of spine procedures in the fiscal year which used the FIREFLY products against the annual requirement in the agreement. This includes any scheduled surgeries whereby the Company has committed to payment of the product. The number of required surgeries varies each year of the agreement. During the 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. Royalties 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. Additionally, we have minimum royalty commitments of $ 10 annually through 2026. We have products in development that have milestone payments and royalty commitments. In any development project, there are significant variables that will affect the amount and timing of these payments and as of December 31, 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. 117 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE In connection with its audits for the two most recent fiscal years ended December 31, 2022, there have been no disagreements with the Company’s independent registered public accounting firm on any matter of accounting principles or practices, financial statement disclosure or audit scope or procedure, nor have there been any changes in accountants.