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Item 1. Financial Statements

2023-05-02 compared with 2022-11-01 · 193 added, 481 removed, 356 unchanged (65% of the section changed)

3 unchanged sentences

(In Thousands, Except Share Data)

September 30, 2022 December 31, 2021

March 31, 2023 December 31, 2022

Current assets:

Cash $ 35,423 $ 7,641

Cash and cash equivalents $ 34,656 $ 8,991

Restricted cash 1,481 1,471

Short-term investments 73,074 109,299

Accounts receivable - trade, less allowance for doubtful accounts of $ 608 and $ 347 , respectively

Accounts receivable - trade, net of allowances of $ 942 and $ 1,056 , respectively

26,838 24,800

28 unchanged sentences

50,000,000 shares authorized;

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

23,142,118 shares and 22,877,962 shares issued as of March 31, 2023 and December 31, 2022, respectively

Additional paid-in capital 562,769 560,810

Accumulated deficit ( 183,574 ) ( 176,768 )

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

Accumulated other comprehensive loss ( 6,046 ) ( 5,400 )

Total stockholders' equity 373,155 378,648

4 unchanged sentences

(In Thousands, Except Share and Per Share Data)

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

2022 2021 2022 2021

Three Months Ended March 31,

Net revenue $ 31,588 $ 23,417

4 unchanged sentences

General and administrative 17,666 13,167

Trademark impairment 3,609 — 3,609 —

Research and development 2,270 2,027

1 unchanged sentence

Operating loss ( 8,591 ) ( 6,386 )

Other expenses (income):

Interest expense, net 708 542 2,485 1,851

Other (income) expenses:

Interest (income) expense, net ( 210 ) 566

Fair value adjustment of contingent consideration ( 670 ) 2,570

Other expense (income) 945 ( 267 ) 1,668 ( 802 )

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

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

Other income ( 331 ) ( 105 )

Total other (income) expenses ( 1,211 ) 3,031

Loss before income taxes $ ( 7,380 ) $ ( 9,417 )

Provision for income taxes (benefit) ( 574 ) ( 317 )

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

Weighted average shares outstanding

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

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

Net income (loss) per share

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

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

Net loss $ ( 6,806 ) $ ( 9,100 )

Weighted average common stock - basic and diluted 22,506,024 19,366,911

Net loss per share - basic and diluted $ ( 0.30 ) $ ( 0.47 )

See notes to condensed consolidated financial statements.

ORTHOPEDIATRICS CORP.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In Thousands)

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

2022 2021 2022 2021

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

Three Months Ended March 31,

Net loss $ ( 6,806 ) $ ( 9,100 )

Other comprehensive income (loss):

Foreign currency translation adjustment ( 962 ) ( 2,198 )

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

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

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

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

Unrealized gain (loss) on short-term investments 617 ( 553 )

Adjustment for realized (gain) loss on securities ( 301 ) —

Other comprehensive loss, net of tax ( 646 ) ( 2,751 )

Comprehensive loss $ ( 7,452 ) $ ( 11,851 )

See notes to condensed consolidated financial statements.

2 unchanged sentences

(In Thousands, Except Share Data)

Three and Nine Months Ended September 30, 2022

Three Months Ended March 31, 2023

Additional Other Total

Common Stock Paid-in Accumulated Comprehensive Stockholders'

Shares Value Capital Deficit Income (Loss) Equity

Shares Value Capital Deficit Loss Equity

Balance at January 1, 2023 22,877,962 $ 6 $ 560,810 $ ( 176,768 ) $ ( 5,400 ) $ 378,648

3 unchanged sentences

Balance at March 31, 2023 23,142,118 $ 6 $ 562,769 $ ( 183,574 ) $ ( 6,046 ) $ 373,155

Net loss — — — ( 333 ) — ( 333 )

Other comprehensive loss — — — — ( 9,424 ) ( 9,424 )

Stock option exercise 1,340 — 42 — — 42

Restricted stock 57,180 — 1,770 — — 1,770

Consideration for MD Ortho acquisition 173,241 — 9,707 — — 9,707

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

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

Net income — — — 18,539 — 18,539

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

Stock option exercise 670 — 21 — — 21

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

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

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

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

ORTHOPEDIATRICS CORP.

1 unchanged sentence

(In Thousands, Except Share Data)

Three and Nine Months Ended September 30, 2021

Three Months Ended March 31, 2022

Additional Other Total

Common Stock Paid-in Accumulated Comprehensive Stockholders'

Shares Value Capital Deficit Income (Loss) Equity

Shares Value Capital Deficit Income Equity

Balance at January 1, 2022 19,677,214 $ 5 $ 394,899 $ ( 178,026 ) $ 8,491 $ 225,369

1 unchanged sentence

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

Stock option exercise 2,010 — 62 — — 62

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

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

Net loss — — — ( 3,756 ) — ( 3,756 )

Other comprehensive income — — — — 1,797 1,797

Restricted stock 10,632 — 1,415 — — 1,415

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

Net loss — — — ( 2,197 ) — ( 2,197 )

Other comprehensive income — — — — 200 200

Stock option exercise 2,412 — 75 — — 75

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

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

See notes to condensed consolidated financial statements.

2 unchanged sentences

(In Thousands)

Nine Months Ended

September 30,

Three Months Ended

OPERATING ACTIVITIES

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

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

Net loss $ ( 6,806 ) $ ( 9,100 )

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

Depreciation and amortization 3,848 2,961

Stock-based compensation 2,113 1,526

Trademark impairment 3,609 —

Fair value adjustment of contingent consideration ( 670 ) 2,570

Acquisition installment payable 1,926 1,701

Accretion of acquisition installment payable 381 453

Deferred income taxes ( 574 ) ( 317 )

4 unchanged sentences

Accounts payable - trade 5,541 5,258

Accrued legal settlements — ( 6,342 )

Accrued expenses and other liabilities ( 1,571 ) ( 690 )

2 unchanged sentences

INVESTING ACTIVITIES

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

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

Sale of short-term marketable securities 37,250 18,500

Purchases of licenses — ( 7,908 )

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

Purchases of property and equipment ( 4,940 ) ( 4,197 )

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

Net cash provided by investing activities 32,310 14,303

FINANCING ACTIVITIES

Proceeds from issuance of debt with affiliate 31,000 —

Payments on debt with affiliate ( 31,000 ) —

Installment payment for ApiFix ( 3,234 ) —

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

Proceeds from exercise of stock options 63 137

Payments on mortgage notes ( 36 ) ( 33 )

Net cash provided by financing activities 136,009 40

Effect of exchange rate changes on cash 426 ( 266 )

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

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

Cash and restricted cash, end of period $ 36,872 $ 7,702

Net cash used in financing activities ( 36 ) ( 33 )

Effect of exchange rate changes on cash, cash equivalents and restricted cash ( 138 ) 241

NET INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH 25,675 10,314

Cash, cash equivalents and restricted cash, beginning of year $ 10,462 $ 9,006

Cash, cash equivalents and restricted cash, end of period $ 36,137 $ 19,320

SUPPLEMENTAL DISCLOSURES

1 unchanged sentence

Transfer of instruments from property and equipment to inventory $ 332 $ ( 54 )

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

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

See notes to condensed consolidated financial statements.

3 unchanged sentences

NOTE 1 – BUSINESS

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

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

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.

Since inception we have impacted the lives of over 613,000 children.

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

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

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

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

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

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

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

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

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

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

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

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

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

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”).

and its wholly-owned subsidiaries (collectively, the “Company,” “we,” “our” or “us”).

All intercompany balances and transactions have been eliminated.

1 unchanged sentence

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

The accompanying condensed consolidated balance sheets as of September 30, 2022 and December 31, 2021, the condensed consolidated statements of operations for the three and nine months ended September 30, 2022 and 2021, the condensed consolidated statements of comprehensive income (loss) for the three and nine months ended September 30, 2022 and 2021, the condensed consolidated statements of stockholders’ equity for the three and nine months ended September 30, 2022 and 2021 and the condensed consolidated statements of cash flows for the nine months ended September 30, 2022 and 2021 are unaudited and should be read in conjunction with the annual consolidated financial statements as of and for the year ended December 31, 2021 and related notes thereto contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC") on March 3, 2022.

The accompanying condensed consolidated financial statements are unaudited and should be read in conjunction with the annual consolidated financial statements as of and for the year ended December 31, 2022 and related notes thereto contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC") on March 1, 2023.

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

1 unchanged sentence

The unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements as of and for the year ended December 31, 2022 and, in management’s opinion, include all adjustments, consisting of only normal recurring adjustments, necessary for the fair presentation of the financial statements for the interim periods.

The results of operations for the three and nine months ended September 30, 2022 are not necessarily indicative of the results to be expected for the full fiscal year or for any other period.

The results of operations for the three months ended March 31, 2023 are not necessarily indicative of the results to be expected for the full fiscal year or for any other period.

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

We have experienced recurring losses from operations since our inception and had an accumulated deficit of $ 168,920 and $ 178,026 as of September 30, 2022 and December 31, 2021, respectively.

We have experienced recurring losses from operations since our inception and had an accumulated deficit of $ 183,574 and $ 176,768 as of March 31, 2023 and December 31, 2022, respectively.

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

We believe that our cash balance, including short term investments, at September 30, 2022 and expected cash flows from operations for the next twelve months subsequent to the issuance of the accompanying condensed consolidated financial statements, are sufficient to enable us to maintain current and essential planned operations for more than the next twelve months.

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

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

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

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

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

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

We believe that our cash balance, including short-term investments, at March 31, 2023 and expected cash flows from operations for the next twelve months subsequent to the issuance of the accompanying condensed consolidated financial statements, are sufficient to enable us to maintain current and essential planned operations for more than the next twelve months.

Use of Estimates

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

By their nature, these judgments are subject to an

inherent degree of uncertainty.

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

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

1 unchanged sentence

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

Foreign Currency Transactions

We currently bill our international stocking distributors in U.S.

dollars, resulting in minimal foreign exchange transaction expense.

Beginning in early 2017 and continuing through 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.

Additionally, in July 2022, we established an operating company in Germany and in March 2019, we established an operating company in the Netherlands in order to enhance our operations in Europe.

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

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.

Revenue from Contracts with Customers

In accordance with ASC 606, " Revenue from Contracts with Customers ," revenue is recognized when our performance obligations under the terms of a contract with our customer are satisfied.

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

The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these goods or services, and excludes any sales incentives or taxes collected from a customer which are subsequently remitted to government authorities.

Revenue Recognition – United States

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

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

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

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

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

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

Revenue Recognition – International

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

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

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

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

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

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

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

Cash, Cash Equivalents and Short Term Investments

We maintain cash in bank deposit accounts which, at times, may exceed federally insured limits.

To date, we have not experienced any loss in such accounts.

We consider all highly liquid investments with original maturity of three months or less at inception to be cash equivalents.

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

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

The Company has the ability, if necessary, to liquidate without penalty any of its short term investments to meet its liquidity needs in the next twelve months.

As such, those investments with contractual maturities greater than one year from the date of purchase are classified as short-term on the accompanying Consolidated Balance Sheets.

The company includes unrealized gains or losses 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.

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

These funds were to remain restricted until August 31, 2021, at which time, they were to be released to the Company subject to no claims related to the purchase being asserted;

however, due to the pending IMED Surgical litigation, the cash remains reported as restricted until the conclusion of the legal matter (see “Legal Proceedings” under Note 13 – Commitments and Contingencies for additional information).

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.

Account balances with invoices over 30 days past due are considered delinquent.

No interest is charged on past due accounts.

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

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

All accounts or portions thereof deemed to be uncollectible or to require an excessive collection cost are written off to the allowance for doubtful accounts.

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;

Level 3 – Significant unobservable inputs that are not corroborated by market data.

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

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

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

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

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

When a quoted price in an active market for an identical security is not available these third parties will utilize an alternative market approach, such as a recent trade or matrix pricing, or an income approach, such as a discounted cash flow pricing model that calculates values from observable inputs such as quoted interest rates, yield curves and other observable market information.

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

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

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

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 purchased from third parties, which consist of implants and instruments held in our warehouse or with third-party independent sales agencies or distributors, are considered finished goods.

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.

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

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

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 those acquired in the Band-Lok, MD Ortho and Pega transactions), the value of internally developed software (including by Orthex), and the value of acquired customer relationships and non-competition agreements (including in the Orthex, Telos, ApiFix, MD Ortho and Pega transactions, as applicable).

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

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

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

No goodwill impairment charges were recorded in any period presented.

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

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

We have indefinite lived trademark assets that are reviewed for impairment by performing a quantitative analysis, which occurs annually in the fourth quarter, utilizing balances as of October 1, or whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable.

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

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

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

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

No impairment charges were recorded in any other period presented.

Acquisition Payable and Contingent Consideration

Upon the completion of an acquisition, the Company may record an acquisition installment payable, contingent consideration or both.

Acquisition installment payables, which are fixed future payments, are recorded at their net present value, and contingent consideration is recorded at fair value as determined by management with the assistance of an independent valuation specialist at the original issuance date and is marked to fair value on a recurring basis.

Accretion of interest expense attributable to the acquisition installment payable is 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 on the condensed consolidated statement of operations.

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

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

Cost of Revenue

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 the standards of the Food and Drug Administration (the “FDA”), and the International Organization for Standardization, as well as other country-specific quality standards.

The majority of our implants and instruments are produced in the United States.

Sales and Marketing Expenses

Sales and marketing expenses primarily consist of commissions to our domestic and select international independent sales agencies and consignment distributors, as well as compensation, commissions, benefits and other related costs for personnel we employ.

Commissions and bonuses are generally based on a percentage of sales.

Our international independent stocking distributors purchase instrument sets and replenishment stock for resale, and we do not pay commissions or any other sales related costs for international sales to distributors.

Advertising Costs

Advertising costs consist primarily of print advertising, trade shows, and other related expenses.

Advertising costs are expensed as incurred and are recorded as a component of sales and marketing expense.

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

Immediately prior to our IPO, we adopted our 2017 Incentive Award Plan (the "2017 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 three years .

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, which is typically three years .

The restricted stock that had been granted under the 2007 Plan had restriction periods that generally lasted until the earlier of six years from the date of grant, or an IPO 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 six months after the IPO.

We 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.

Litigation and Contingencies

Accruals for litigation and contingencies are reflected in the condensed 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.

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 gain (loss) on our short term investments.

I ncome Taxes

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

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 the net recorded amount, we would make an adjustment to the valuation allowance.

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

At the inception of a contractual arrangement, the Company determines whether the contract contains a lease by assessing whether there is an identified asset and whether the contract conveys the right to control the use of the identified asset in exchange for consideration over a period of time.

If both criteria are met, the Company calculates the associated lease liability and corresponding right-of-use asset upon lease commencement using a discount rate based on a borrowing rate commensurate with the term of the lease.

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

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

“Emerging Growth Company” and "Smaller Reporting Company" Reporting Requirements

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

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

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

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

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

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

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

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

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

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

Significant Accounting Policies

There have been no changes in the Company's significant accounting polices as disclosed in Note 2 to the audited consolidated financial statements included in the 2022 Annual Report on Form 10-K, except as disclosed below.

Financial Instruments and Concentration of Credit Risk

Financial instruments that could subject the Company to credit risk consist primarily of cash, cash equivalents, short-term investments and accounts receivable.

We consider all highly liquid investments with original maturity of three months or less at inception to be cash equivalents.The Company performs ongoing credit evaluations of customers and and maintains a reserve for expected credit losses.

The Company believes the risk of credit losses associated with accounts receivable is low given the history of collections and customer base.

Additionally, the Company considers the risk for credit losses associated with short-term investments to be low given the types of investments which primarily include Certificates of Deposits and Treasury Bonds.

Recent Accounting Pronouncements

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 entity (acquirer) recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606.

For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.

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

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

Early adoption of the amendments is permitted, including adoption in an interim period.

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

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

In May 2021, the FASB issued ASU No.

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

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

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

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

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

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

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

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

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

The Company adopted this guidance effective January 1, 2022.

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

In June 2016, the FASB issued ASU No.

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

Based on ASU 2019-10 and our status as a smaller reporting company, the Company will adopt ASU 2016-13 effective January 1, 2023.

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

This applies to the Company when trade receivables are recorded.

At that point in time, they become subject to the new credit loss model and estimates of expected credit losses on trade receivables over their contractual life will be required to be recorded at inception.

Additionally, to the extent that any of the securities investments classified as available-for-sale are in an unrealized loss position, the Company will also be required record an estimate, if any, of those losses driven by credit losses.

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

The adoption is on a prospective basis and did not have a material impact to the result of operations.

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 ASU 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 ASU 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 ASU 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 ASU 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 ASU 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.

The Company adopted ASU 2021-08 effective January 1, 2023 prospectively, resulting in no material impacts to the condensed consolidated financial statements.

NOTE 3 - BUSINESS COMBINATIONS

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

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

On July 1, 2022, the Company 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.

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Total assets 24,399

Accounts payable and accrued liabilities 2,527

Accounts payable-trade 1,682

Other current liabilities 1,325

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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.

During the three months ended March 31, 2023, the Company recorded a measurement period adjustment.

The adjustment was the result of updated valuation of the intangible assets and an updated estimate of certain liabilities.

The adjustment to the intangible assets also resulted in an adjustment to the deferred tax liability.

Additionally, the increase in the value of intangible assets resulted in additional amortization expense of approximately $ 101 for the three months ended March 31, 2023.

Goodwill declined as a net result of these adjustments.

MD Orthopaedics

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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.

The acquisition expands our total

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

Under the terms of the related merger agreement, the Company paid to the indirect, sole shareholder of MD Ortho consideration of (a) $ 8,781 in cash, after adjusting for closing net working capital, and (b) 173,241 shares of unregistered common stock, $ 0.00025 par value per share, of the Company, representing approximately $ 9,707 (based on the April 1, 2022 closing share price of $ 56.03 ).

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

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

The following table summarizes the total consideration paid for MD Ortho and the final 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

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

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

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Customer Relationships 6,460 15 years

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

This resulted in an increase to goodwill.

The following table represents the pro forma net revenue and net loss assuming the acquisitions of MD Ortho and Pega Medical occurred on January 1, 2022.

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

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

2022 2021 2022 2021

Net revenue $ 31,588 $ 27,862

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

Net loss $ ( 6,806 ) $ ( 8,987 )

NOTE 4 - GOODWILL AND INTANGIBLE ASSETS

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

Changes in the carrying amount of goodwill for the three months ended March 31, 2023 were as follows:

Goodwill at January 1, 2023 $ 86,821

MD Ortho acquisition 5,450

Pega Medical acquisition 16,383

Pega measurement period adjustment ( 1,839 )

Foreign currency translation impact ( 855 )

Goodwill at September 30, 2022

Goodwill at March 31, 2023

Intangible Assets

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

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

As of March 31, 2023, the balances of amortizable intangible assets were as follows:

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

Patents 12.0 years $ 45,817 $ ( 8,656 ) $ 37,161

License Agreements 4.9 years 10,697 ( 3,342 ) — 7,355

Customer Relationships & Other 13.6 years 17,170 ( 1,271 ) — 15,899

Intellectual Property 9.5 years 5,859 ( 1,507 ) 4,352

Customer Relationships & Other 13.0 years 18,696 ( 2,200 ) 16,496

License Agreements 4.3 years 10,697 ( 4,064 ) 6,633

Total amortizable assets $ 81,069 $ ( 16,427 ) $ 64,642

Other intangible assets

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

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

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Intellectual Property 9.8 years 5,859 ( 1382 ) 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

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

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

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

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

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

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

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

No impairment charges were recorded in any other period presented.

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

September 30, 2022

Discount rate 28.0 %

Estimated royalty rate 5.0 %

Long term growth rate 3.0 %

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

Trademark assets at January 1, 2022 $ 14,268

MD Ortho Acquisition 2,410

Pega Medical Acquisition 3,040

Trademark impairment ( 3,609 )

Foreign currency translation impact ( 1,255 )

Trademark assets at September 30, 2022

Trademarks are non-amortizing intangible assets which were $ 15,629 and $ 14,921 as of March 31, 2023 and December 31, 2022, respectively.

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

The change in balance during the three months ended

March 31, 2023 was the result of the measurement period adjustments associated with Pega Medical as well as foreign currency translation adjustments.

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.

NOTE 5 - FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

September 30, 2022

The following table summarize the assets and liabilities measured at fair value on a recurring basis as of March 31, 2023 and December 31, 2022.

March 31, 2023

Level 1 Level 2 Level 3 Total

Financial Assets

Cash Equivalents $ — $ — $ — $ —

Short-term investments

Certificates of Deposit $ — $ 25,419 $ — $ 25,419

Exchange Trade Mutual Funds $ 1,406 $ — $ — $ 1,406

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

Treasury Bonds $ 46,197 $ — $ — $ 46,197

Asset Backed Securities $ — $ — $ — $ —

Other $ 52 $ — $ — $ 52

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Financial Assets

Cash Equivalents $ — $ — $ — $ —

Short-term investments

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

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

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

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

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

Other $ 172 $ — $ — $ 172

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Contingent Consideration $ — $ — $ 2,980 $ 2,980

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

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

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

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

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

The 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 included an income adjustment of $ 670 and an expense adjustment of $ 2,570 for the three month periods ended March 31, 2023 and March 31, 2022, respectively, which are recorded in other (income) expenses on the condensed consolidated statements of operations.

The following table summarizes the change in fair value of Level 3 instruments in 2023:

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Change in fair value of contingent consideration ( 670 )

Balance at September 30, 2022

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

September 30, 2022 December 31, 2021

Balance at March 31, 2023

March 31, 2023 December 31, 2022

Valuation techniques Discounted cash flow, Monte Carlo

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

The estimated fair value reflects assumptions made by management as of September 30, 2022;

The estimated fair value reflects assumptions made by management as of March 31, 2023;

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

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Long-term debt consisted of the following:

September 30, 2022 December 31, 2021

March 31, 2023 December 31, 2022

Mortgage payable to affiliate $ 871 $ 907

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Long-term debt with affiliate, net of current maturities $ 725 $ 763

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

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

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

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

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

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 March 31, 2023 and 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 %.

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Borrowings under the revolving credit facility are made under a Second Amended and Restated Revolving Note, dated June 13, 2022 (the “Amended Revolving Note”), payable, jointly and severally, by the Company and each of its subsidiaries party thereto.

The Amended Revolving Note will mature at the

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;

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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.

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.

("Tawani"), an affiliate of Squadron.

Pursuant to the terms of the mortgage note, we pay Tawani 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.

At September 30, 2022 the mortgage balance was $ 942 of which current principal of $ 143 was included in the current portion of long-term debt.

At March 31, 2023 the mortgage balance was $ 871 of which current principal of $ 146 was included in the current portion of long-term debt.

As of December 31, 2022, the mortgage balance was $ 907 of which current principal due of $ 144 was included in the current portion of long-term debt.

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

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

The aggregate interest expense relating to the notes payable to Squadron and the mortgage note payable to Tawani was $ 11 and $ 13 for the three months ended March 31, 2023 and 2022, respectively.

NOTE 7 - INCOME TAXES

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

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

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

The deferred tax assets were fully offset by a valuation allowance at September 30, 2022 and December 31, 2021, with the exception of certain deferred tax liabilities recognized in a foreign jurisdiction as a result of fair value adjustments recorded upon the acquisition of ApiFix and Pega Medical.

The company has recorded a tax benefit during the period ended September 30, 2022 for losses generated in the foreign jurisdiction.

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

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 annually over the first five years as a result of an unrealized built in gain.

NOLs sustained prior to May 30, 2014 will still be constrained 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 September 30, 2022.

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

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

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

For the three months ended March 31, 2023, the income tax benefit was $ 574 compared to $ 317 for the three months ended March 31, 2022.

Our effective income tax rate was 7.8 % and 3.4 % for the three months ended March 31, 2023 and 2022, respectively.

The deferred tax assets were fully offset by a valuation allowance at March 31, 2023 and December 31, 2022, with the exception of certain deferred tax liabilities recognized in a foreign jurisdiction as a result of fair value adjustments recorded upon the acquisition of ApiFix and Pega Medical.

The Company has recorded a tax benefit during the period ended March 31, 2023 for losses generated in Canada and Israel.

NOTE 8 - STOCKHOLDERS’ EQUITY

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

Weighted-Average Contractual Terms

Weighted-Average Remaining Contractual Terms

Options Exercise Price (in Years)

Outstanding at January 1, 2023 3,556 $ 30.97 0.7

Exercised ( 2,010 ) 30.97

Forfeited or expired ( 1,072 ) —

Outstanding at September 30, 2022

Outstanding at March 31, 2023

3,556 $ 30.97 0.4

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

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

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

Restricted Stock Awards & Restricted Stock Units

At March 31, 2023 and December 31, 2022, all options were fully vested.

There was no stock-based compensation expense on stock options for the three months ended March 31, 2023 and 2022, respectively.

Restricted Stock

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

Weighted-Average Weighted-Average

Remaining Remaining

Restricted Contractual Terms Restricted Contractual Terms

Stock Awards in Years Stock Units in Years

Restricted Remaining Restricted Remaining

Stock Contractual Terms Stock Contractual Terms

Awards (in Years) Units (in Years)

Outstanding at January 1, 2023 403,324 1.4 10,080 2.5

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Vested ( 95,281 ) —

Outstanding at September 30, 2022

Outstanding at March 31, 2023

572,199 2.2 13,885 2.4

Restricted stock exercisable at September 30, 2022

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

The unrecognized compensation cost was expected to be recognized over a weighted-average period of 1.7 years or earlier upon an elimination of the restriction period as a result of a change in control event.

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

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

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

See Note 3 - Business Combinations for additional detail.

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

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

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

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

The warrants had an exercise price of $ 0.00025 .

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

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

At March 31, 2023, there was $ 19,804 of unrecognized compensation expense remaining related to our service-based restricted stock awards and restricted stock units.

The unrecognized compensation cost is expected to be recognized over a weighted-average period of 2.2 years or earlier upon an elimination of the restriction period as a result of a change in control event.

Stock-based compensation expense on restricted stock amounted to $ 1,959 and $ 1,526 for the three months ended March 31, 2023 and 2022, respectively.

The increase in the stock compensation for the three months ended March 31, 2023 is primarily due to increase in plan participants as we continue to hire employees to support the continued expansion of our business.

The Company also maintains 34,899 shares of unregistered common stock, $ 0.00025 par value per share, which is subject to a repurchase right in the event a selling shareholder leaves employment with Pega Medical for certain reasons during the three-year period following the closing of the acquisition.

See Note 3 - Business Combinations for additional detail regarding the business combination transaction.

These shares are, due to the repurchase right, temporarily classified as a liability until the lapse of the three-year period, at which time, the Company will reclassify the liability into equity.

The amount of expense recognized for the three months ended March 31, 2023 was $ 154 and is excluded from the stock-based compensation amount previously mentioned.

No expense for these shares was recognized in the three months ended March 31, 2022.

NOTE 9 – NET LOSS PER SHARE

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

Three Months Ended Nine Months Ended

September 30, September 30,

2022 2021 2022 2021

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

Earnings allocated to participating securities 353 — 174 —

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

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

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

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

Earnings (loss) per share:

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

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

Three Months Ended

Net loss $ ( 6,806 ) $ ( 9,100 )

Weighted average number of shares - basic and diluted 22,506,024 19,366,911

Net loss per share - basic and diluted $ ( 0.30 ) $ ( 0.47 )

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

For purposes of our equity disclosures and calculation of weighted average shares for basic earnings per share calculations, the two-class method is an earnings allocation that determines net income per share for each class of common stock and participating securities according to their participation rights in dividends and undistributed earnings or losses.

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.

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

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

Nine Months Ended September 30,

Because we have incurred a net loss for all periods presented, diluted net loss per common share is the same as basic net loss per common share.

The following contingently issuable equity shares were excluded from the calculation of diluted net loss per share because their effect would have been anti-dilutive for all periods presented:

Three Months Ended March 31,

Restricted stock 586,084 391,874

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

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

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

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

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

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

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

No customers accounted for more than 10% of total product sales for the three months ended March 31, 2023 or 2022.

No customer accounted for more than 10% of consolidated accounts receivable as of March 31, 2023 and December 31, 2022.

Product sales by source were as follows:

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

Three Months Ended March 31,

Product sales by geographic location:

$ 23,800 $ 18,188

$ 26,539 $ 19,354 $ 69,687 $ 57,930

International 7,788 5,229

Total $ 31,588 $ 23,417

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

Three Months Ended March 31,

Product sales by category:

2022 2021 2022 2021

Trauma and deformity $ 23,395 $ 16,516

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Total $ 31,588 $ 23,417

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

NOTE 11 - RELATED PARTY TRANSACTIONS

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

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

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

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

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

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

We made aggregate payments to Structure Medical for inventory purchases of $ 246 and $ 316 for the three months ended March 31, 2023 and 2022, respectively.

NOTE 12 - EMPLOYEE BENEFIT PLAN

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NOTE 13 – COMMITMENTS AND CONTINGENCIES

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

As of March 31, 2023, the Company has recorded a lease liability of $ 257 and corresponding right-of-use-asset of $ 272 on its condensed consolidated balance sheet .

Legal Proceedings

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

10,258,377 (titled “Point and click alignment method for orthopedic

surgeons, and surgical and clinical accessories and devices,” issued on April 16, 2019) (hereinafter, the “’377 Patent”).

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

In June 2019, the Company purchased all the issued and outstanding units of membership interests in Orthex, and all the issued and outstanding shares of stock of Vilex in Tennessee, Inc.

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In mid-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.

In late January 2023, Wishbone amended its counterclaims to add a breach of contract claim against OrthoPediatrics.

In early February 2023, OrthoPediatrics filed its answer to Wishbone's amended counterclaims, denying all of them.

Additionally, in late March 2023, Wishbone filed a motion for judgment on the pleadings regarding the patent eligibility of the '377 patent.

In mid-April 2023, OrthoPediatrics filed its response to Wishbone's late March 2023 motion.

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

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

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.

Additionally, the contract requires future purchase commitments based

upon a percentage of historical purchases.

As a result and as of March 31, 2023, the remaining purchase commitment under the agreement was $ 2,771 for the year ended December 31, 2023 and $ 2,340 for the year ended December 31, 2024.

On July 20, 2021, we entered into an amended license agreement, resulting in a five-year extension of our exclusive distribution rights of the FIREFLY Technology.

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

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

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

As of September 30, 2022, we are contracted to pay royalties to individuals and entities that provide research and development services, which range from 0.5 % to 20 % of sales.

During the three months ended March 31, 2023, the Company recorded an expense of $ 300 based on current estimates.

The Company recorded $ 101 of expense for the three months ended March 31, 2022.

As of March 31, 2023, we are contracted to pay royalties to individuals and entities that provide research and development services, which range from 0.5 % to 20 % of sales.

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

In any development project, there are significant variables that will affect the amount and timing of these payments and as of September 30, 2022, we have not been able to determine the amount and timing of payments.

In any development project, there are significant variables that will affect the amount and timing of these payments and as of March 31, 2023, we have not been able to determine the amount and timing of payments.

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

NOTE 14 – SUBSEQUENT EVENTS

ApiFix Acquisition Installment Payment

On April 3, 2023, the business day immediately following the third-year anniversary of the acquisition of ApiFix, the Company paid $ 2,000 in cash and issued 140,003 shares of the Company's common stock, representing $ 6,178 of fair value (based on the April 3, 2023 closing share price of $ 44.13 ), to fulfill its installment obligation to ApiFix.

This was the second installment payment paid since the acquisition.

Medtech Concepts LLC

On May 1, 2023, the Company purchased all of the issued and outstanding membership interest of Medtech Concepts LLC, a Delaware limited liability company (“Medtech”).

Medtech has developed an early-stage, pre-commercial enabling technology platform designed to increase efficiency in the perioperative environment.

The solution combines hardware, software, and data analytics to help streamline operative care and support better decision making in the operating room.

In the future, the Company believes this enabling technology platform will provide valuable intraoperative resources for surgeons that will improve decision making, drive operating room efficiency, and ultimately improve healthcare for children.

The Company also expects that the acquisition will further support future market share gains for its implant systems, similar to what the Company has experienced with the FIREFLY ® Technology and the 7D Surgical FLASH TM Navigation platform.

The Company does not anticipate material revenue contributions from the platform in 2023.

The sellers of Medtech are being paid a purchase price of approximately $ 15,274 in the following manner:

(i) cash in the aggregate amount of $ 3,000 was paid on May 1, 2023, the transaction closing date (the “Closing Date”);

(ii) 43,751 unregistered shares of the Company’s common stock, par value $ 0.00025 per share, representing approximately $ 2,274 (based on a closing share price of $ 51.98 on May 1, 2023), were issued on the Closing Date;

and (iii) an aggregate of $ 2,500 payable 50 % in cash and 50 % in shares of unregistered common stock, will be paid on each of the first four anniversaries of the Closing

Date, all subject to the conditions set forth in the Membership Interest Purchase Agreement (the "Purchase Agreement") relating to the transaction.

Kevin Unger, a member of the Company’s Board of Directors (the “Board”) through April 28, 2023, was one of the sellers in the transaction.

As a result, the Board formed a special committee comprised of independent and disinterested directors (the “Special Committee”) with the exclusive authority to review, evaluate, and negotiate, or reject, the potential Medtech acquisition.

The Purchase Agreement and the transactions contemplated thereby were approved by both the Special Committee and the full Board (with Mr.

Unger abstaining).

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

What changed 10-Q

Item 1. Financial Statements