ORTHOPEDIATRICS CORP 10-Q

ITEM 1. FINANCIAL STATEMENTS ORTHOPEDIATRICS CORP. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (In Thousands, Except Share Data) September 30, 2023 December 31, 2022 ASSETS Current assets: Cash and cash equivalents $ 10,640 $ 8,991 Restricted cash 1,592 1,471 Short-term investments 71,780 109,299 Accounts receivable - trade, net of allowances of $ 1,412 and $ 1,056 , respectively 37,647 24,800 Inventories, net 100,533 78,192 Prepaid expenses and other current assets 3,980 3,966 Total current assets 226,172 226,719 Property and equipment, net 40,236 34,286 Other assets: Amortizable intangible assets, net 69,513 64,980 Goodwill 80,894 86,821 Other intangible assets 15,008 14,921 Other non-current assets 621 — Total other assets 166,036 166,722 Total assets $ 432,444 $ 427,727 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable - trade $ 22,587 $ 11,150 Accrued compensation and benefits 8,671 6,744 Current portion of long-term debt with affiliate 150 144 Current portion of acquisition installment payable 9,937 7,815 Other current liabilities 6,582 5,018 Total current liabilities 47,927 30,871 Long-term liabilities: Long-term debt with affiliate, net of current portion 650 763 Acquisition installment payable, net of current portion 3,489 8,019 Contingent consideration — 2,980 Deferred income taxes 5,492 5,954 Other long-term liabilities 557 492 Total long-term liabilities 10,188 18,208 Total liabilities 58,115 49,079 Stockholders' equity: Common stock, $ 0.00025 par value; 50,000,000 shares authorized; 23,350,976 shares and 22,877,962 shares issued as of September 30, 2023 and December 31, 2022, respectively 6 6 Additional paid-in capital 577,540 560,810 Accumulated deficit ( 191,051 ) ( 176,768 ) Accumulated other comprehensive loss ( 12,166 ) ( 5,400 ) Total stockholders' equity 374,329 378,648 Total liabilities and stockholders' equity $ 432,444 $ 427,727 See notes to condensed consolidated financial statements. 4 ORTHOPEDIATRICS CORP. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In Thousands, Except Share and Per Share Data) Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Net revenue $ 39,972 $ 34,950 $ 111,119 $ 91,295 Cost of revenue 9,019 9,061 26,580 21,859 Gross profit 30,953 25,889 84,539 69,436 Operating expenses: Sales and marketing 13,582 11,919 38,963 34,108 General and administrative 18,507 15,116 55,827 42,829 Trademark impairment 985 3,609 985 3,609 Research and development 2,387 2,206 7,449 5,980 Total operating expenses 35,461 32,850 103,224 86,526 Operating loss ( 4,508 ) ( 6,961 ) ( 18,685 ) ( 17,090 ) Other (income) expenses: Interest expense 21 708 105 2,485 Fair value adjustment of contingent consideration — ( 23,010 ) ( 2,974 ) ( 25,450 ) Other (income) loss ( 787 ) 945 ( 1,407 ) 1,668 Total other income ( 766 ) ( 21,357 ) ( 4,276 ) ( 21,297 ) (Loss) income before income taxes $ ( 3,742 ) $ 14,396 $ ( 14,409 ) $ 4,207 Provision for income taxes (benefit) 849 ( 4,143 ) ( 126 ) ( 4,899 ) Net (loss) income $ ( 4,591 ) $ 18,539 $ ( 14,283 ) $ 9,106 Weighted average shares outstanding Basic 22,762,823 21,150,219 22,646,087 20,703,883 Diluted 22,762,823 21,295,323 22,646,087 20,958,503 Net (loss) income per share Basic $ ( 0.20 ) $ 0.88 $ ( 0.63 ) $ 0.44 Diluted $ ( 0.20 ) $ 0.87 $ ( 0.63 ) $ 0.43 See notes to condensed consolidated financial statements. 5 ORTHOPEDIATRICS CORP. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Unaudited) (In Thousands) Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Net (loss) income $ ( 4,591 ) $ 18,539 $ ( 14,283 ) $ 9,106 Other comprehensive income (loss): Foreign currency translation adjustment ( 3,947 ) ( 4,164 ) ( 6,767 ) ( 15,661 ) Unrealized gain (loss) on short-term investments 251 ( 452 ) 861 ( 1,130 ) Adjustment for realized (gain) loss on securities ( 559 ) 1,205 ( 860 ) 1,205 Other comprehensive loss, net of tax ( 4,255 ) ( 3,411 ) ( 6,766 ) ( 15,586 ) Comprehensive (loss) income $ ( 8,846 ) $ 15,128 $ ( 21,049 ) $ ( 6,480 ) See notes to condensed consolidated financial statements. 6 ORTHOPEDIATRICS CORP. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited) (In Thousands, Except Share Data) Three and Nine Months Ended September 30, 2023 Accumulated Additional Other Total Common Stock Paid-in Accumulated Comprehensive Stockholders' Shares Value Capital Deficit Loss Equity Balance at January 1, 2023 22,877,962 $ 6 $ 560,810 $ ( 176,768 ) $ ( 5,400 ) $ 378,648 Net loss — — — ( 6,806 ) — ( 6,806 ) Other comprehensive loss — — — — ( 646 ) ( 646 ) Restricted stock 264,156 — 1,959 — — 1,959 Balance at March 31, 2023 23,142,118 $ 6 $ 562,769 $ ( 183,574 ) $ ( 6,046 ) $ 373,155 Net loss — — — ( 2,886 ) — ( 2,886 ) Other comprehensive loss — — — — ( 1,865 ) ( 1,865 ) Consideration for MedTech acquisition 43,751 — 2,274 — — 2,274 Stock portion of ApiFix anniversary installment 140,003 — 6,178 — — 6,178 Restricted stock 14,591 — 3,456 — — 3,456 Balance at June 30, 2023 23,340,463 $ 6 $ 574,677 $ ( 186,460 ) $ ( 7,911 ) $ 380,312 Net loss — — — ( 4,591 ) — ( 4,591 ) Other comprehensive loss — — — — ( 4,255 ) ( 4,255 ) Stock option exercise 670 — 21 — — 21 Restricted stock ( 1,290 ) — 2,364 — — 2,364 Consideration for Rhino 11,133 — 478 — — 478 Balance at September 30, 2023 23,350,976 $ 6 $ 577,540 $ ( 191,051 ) $ ( 12,166 ) $ 374,329 See notes to condensed consolidated financial statements. 7 ORTHOPEDIATRICS CORP. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited) (In Thousands, Except Share Data) Three and Nine Months Ended September 30, 2022 Accumulated Additional Other Total Common Stock Paid-in Accumulated Comprehensive Stockholders' Shares Value Capital Deficit Income (Loss) Equity Balance at January 1, 2022 19,677,214 $ 5 $ 394,899 $ ( 178,026 ) $ 8,491 $ 225,369 Net loss — — — ( 9,100 ) — ( 9,100 ) Other comprehensive loss — — — — ( 2,751 ) ( 2,751 ) 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 — — — ( 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 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 See notes to condensed consolidated financial statements. 8 ORTHOPEDIATRICS CORP. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In Thousands) Nine Months Ended September 30, 2023 2022 OPERATING ACTIVITIES Net (loss) income $ ( 14,283 ) $ 9,106 Adjustments to reconcile net loss to net cash used in operating activities: Trademark impairment 985 3,609 Depreciation and amortization 12,198 9,579 Stock-based compensation 7,779 4,978 Fair value adjustment of contingent consideration ( 2,974 ) ( 25,450 ) Accretion of acquisition installment payable 1,092 1,926 Deferred income taxes ( 899 ) ( 4,804 ) Changes in certain operating assets and liabilities: Accounts receivable - trade ( 12,878 ) ( 5,567 ) Inventories ( 22,198 ) ( 14,812 ) Prepaid expenses and other current assets ( 196 ) 696 Accounts payable - trade 11,492 ( 389 ) Accrued expenses and other liabilities 3,288 1,800 Other ( 2,909 ) 903 Net cash used in operating activities ( 19,503 ) ( 18,425 ) INVESTING ACTIVITIES Acquisition of MD Ortho, net of cash acquired — ( 8,360 ) Acquisition of Pega Medical, net of cash acquired — ( 31,730 ) Acquisition of Rhino ( 546 ) — Acquisition of MedTech ( 3,097 ) — Sale of short-term marketable securities 89,040 45,529 Purchase of short-term marketable securities ( 48,600 ) ( 85,029 ) Purchases of property and equipment ( 13,042 ) ( 10,554 ) Net cash provided by (used in) investing activities 23,755 ( 90,144 ) FINANCING ACTIVITIES Proceeds from issuance of debt with affiliate — 31,000 Installment payment for ApiFix ( 2,000 ) ( 3,234 ) Payments on debt with affiliate — ( 31,000 ) Proceeds from issuance of common stock, net of issuance costs — 139,282 Proceeds from exercise of stock options 21 63 Payments on mortgage notes ( 107 ) ( 102 ) Net cash (used in) provided by financing activities ( 2,086 ) 136,009 Effect of exchange rate changes on cash, cash equivalents and restricted cash ( 396 ) 426 NET INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH 1,770 27,866 Cash, cash equivalents and restricted cash, beginning of year $ 10,462 $ 9,006 Cash, cash equivalents and restricted cash, end of period $ 12,232 $ 36,872 9 SUPPLEMENTAL DISCLOSURES Cash paid for interest $ 32 $ 512 Transfer of instruments between property and equipment and inventory $ 431 $ ( 193 ) Issuance of common shares to acquire MD Ortho $ — $ 9,707 Issuance of common shares for ApiFix installment $ 6,178 $ 10,410 Issuance of common shares to acquire MedTech $ 2,274 $ — Issuance of common shares to acquire Rhino $ 478 $ — Right-of-use assets obtained in exchange for lease liabilities $ 367 $ 116 See notes to condensed consolidated financial statements. 10 ORTHOPEDIATRICS CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Dollars In Thousands, Except Share and Per Share data) NOTE 1 – BUSINESS OrthoPediatrics Corp., a Delaware corporation, is a medical device company committed to designing, developing and marketing anatomically appropriate implants and devices for children with orthopedic conditions, giving pediatric orthopedic surgeons and caregivers the ability to treat children with technologies specifically designed to meet their needs. We sell our specialized products, including PediLoc ® , PediPlates ® , Cannulated Screws, PediFlex TM nail, PediNail TM , PediLoc ® Tibia, ACL Reconstruction System, Locking Cannulated Blade, Locking Proximal Femur, Spica Tables, RESPONSE TM Spine, BandLoc Duo ® , Pediatric Nailing Platform | Femur, Devise Rail, Orthex ® , The Fassier-Duval Telescopic Intramedullary System ® , ApiFix ® Mid-C System and Mitchell Ponseti ® specialized bracing products to various hospitals and medical facilities throughout the United States and various international markets. We currently use a contract manufacturing model for the manufacturing of implants and related surgical instrumentation. We are the only global medical device company focused exclusively on providing a comprehensive trauma and deformity correction, scoliosis and sports medicine product offering to the pediatric orthopedic market in order to improve the lives of children with orthopedic conditions. We design, develop and commercialize innovative orthopedic implants, instruments and specialized braces to meet the needs of pediatric surgeons or orthotists and their patients, who we believe have been largely neglected by the orthopedic industry. We currently serve three of the largest categories in this market. NOTE 2 – 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 (collectively, the “Company,” “we,” “our” or “us”). All intercompany balances and transactions have been eliminated. Unaudited Interim Condensed Consolidated Financial Statements 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 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. As such, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to applicable rules and regulations thereunder. 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, 2023 are not necessarily indicative of the results to be expected for the full fiscal year or for any other period. 11 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 $ 191,051 and $ 176,768 as of September 30, 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, 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. We use historical experience and other assumptions as the basis for our judgments and estimates. Because future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Any changes in these estimates will be reflected in our consolidated financial statements. 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 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 June 2016, the FASB issued ASU No. 2016-13 " Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ". The ASU is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The ASU requires the measurement of all expected credit losses for financials assets including trade receivables held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. 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. 12 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. 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. An entity that early adopts in an interim period should apply the amendments (1) retrospectively to all business combinations for which the acquisition date occurs on or after the beginning of the fiscal year that includes the interim period of early application and (2) prospectively to all business combinations that occur on or after the date of initial application. The Company adopted ASU 2021-08 effective January 1, 2023 prospectively, resulting in no material impacts to the condensed consolidated financial statements. In October 2023, the FASB issued ASU No. 2023-06 " Disclosure Improvements - Codification Amendments in Response to SEC's Disclosure Update and Simplification Initiative". This amendment modifies the disclosure or presentation requirements of a variety of Topics in the Codification. Certain of the amendments represent clarifications to or technical corrections of the current requirements. For entities subject to the SEC's existing disclosure requirements and entities required to file or furnish financial statements with or to the SEC in preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on transfer, the effective date for each amendment will be the date on which the SEC's removal of that related disclosure from Regulation S-X or Regulation S-K becomes effective, with early adoption prohibited. For all other entities, the amendments will be effective two years later. Amendments in this Update should be applied prospectively. The Company continues to analyze this ASU. The update is specific to disclosures and, therefore, is not expected to have a material impact to the condensed consolidated financial statements. NOTE 3 - BUSINESS COMBINATIONS AND ASSET ACQUISITIONS Rhino Pediatric Orthopedic Designs, Inc. On July 1, 2023, the Company completed an acquisition of assets, including inventory and certain intangible assets, of Rhino Pediatric Orthopedic Designs, Inc. ("Rhino"). Rhino's product portfolio included several pediatric orthopedic products in the bracing and soft goods space, including the Cruiser TM , Kicker TM , and Rhino Stomper TM . The Company paid $ 1,024 in total consideration for the assets which was comprised of $ 546 of cash, including $ 46 of transactions costs, and 11,133 shares of the Company’s common stock, par value $ 0.00025 per share, representing approximately $ 478 (based on closing price of $ 42.91 on July 1, 2023). 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. 13 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"), as amended, relating to the transaction. The Company concluded that the business acquired did not comprise an integrated set of activities that meet the definition of a business and therefore did not result in the acquisition of a business. Instead, the Company accounted for the transaction as an asset acquisition for accounting purposes. Under the Purchase Agreement, a number of future payments in the form of common stock are contingent on continued service through each applicable payment anniversary date. As such, these amounts have been excluded from measuring the cost of the acquisition. The result is $ 4,500 of stock compensation which will be recognized on a straight-line basis over the four year service period. Future cash payments and stock issuances that are not contingent on continuous service are included in the calculation of consideration. The total consideration is $ 10,043 after discounting the future guaranteed fixed payments to their present value. Additionally, since this was treated as an asset acquisition, the Company included $ 97 of transaction costs in the total consideration. The table below reconciles the payments and issuances to total consideration transferred after discounting the future payments to present value. Consideration Present Value Cash consideration $ 3,000 $ 3,000 Issuance of common stock 2,274 2,274 Anniversary payments 5,500 4,672 Transaction costs 97 97 Total consideration transferred $ 10,871 $ 10,043 As result of this asset acquisition, the Company recorded a trademark asset in the amount of $ 520 with an indefinite useful life and an intellectual property asset relating to software acquired of $ 9,523 which will be amortized over a useful life of ten years . 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). Pega Medical 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. 14 The Company acquired Pega Medical for approximately $ 32,042 in cash. Approximately $ 1,052 of the cash consideration was deposited into escrow and will be held for a period of up to eighteen ( 18 ) months to cover certain indemnification obligations of the selling shareholders of Pega Medical. Final purchase consideration is subject to certain working capital adjustments yet to be finalized. Additionally, 34,899 shares of unregistered common stock, $ 0.00025 par value per share, of the Company, representing approximately $ 1,497 (based on the July 1, 2022 closing share price of $ 42.90 ) were issued to the selling shareholders. The common stock issued to the selling shareholders is not considered part of the purchase consideration and is subject to a repurchase right. The Company will recognize expense over the three-year service period at which point the right to repurchase will expire. In the event the repurchase right is triggered, the Company will have the right to repurchase the shares of common stock issued to such selling shareholder at a price of $ 0.10 per share. As of September 30, 2023, 23,266 of these shares were still subject to the repurchase feature. Pursuant to the terms of the transaction, the Company also issued $ 499 in restricted stock units to employees of Pega Medical, which are subject to an approximate three-year vesting schedule. The restricted stock units are not considered part of the purchase consideration. The following table summarizes the total consideration paid for Pega Medical and the 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 $ 32,042 Assets Cash 312 Accounts receivable - trade 2,100 Inventories 4,875 Prepaid expenses and other current assets 509 Property and equipment 600 Amortizable intangible assets 12,286 Other intangible assets 3,878 Total assets 24,560 Liabilities Accounts payable-trade 1,682 Other current liabilities 1,393 Deferred tax liability 4,035 Total liabilities 7,110 Less: total net assets 17,450 Goodwill $ 14,592 The fair value of identifiable intangible assets was based on valuations using a combination of the income and cost approach, inputs which would be considered Level 3 under the fair value hierarchy. The estimated fair value and useful life of identifiable intangible assets are as follows: 15 Amount Remaining Economic Useful Life Trademarks / Names $ 3,878 Indefinite Patents 3,545 10 years Customer Relationships & Other 8,741 15 years $ 16,164 The fair value estimates and purchase price allocation included above are considered final. For the three and nine month periods ended September 30, 2023, the Company recorded measurement period adjustments. The adjustments were primarily the result of updated valuations of the intangible assets and updated estimates of certain liabilities and assets. 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 $ 133 for the nine months ended September 30, 2023. Goodwill declined as a net result of these adjustments. MD Orthopaedics On April 1, 2022, OrthoPediatrics Iowa Holdco, Inc., a newly-formed, wholly-owned subsidiary of the Company, merged with and into MD Orthopaedics, Inc., an Iowa corporation (“MD Ortho”). MD Ortho has developed and manufactures a portfolio of orthopedic clubfoot products. The acquisition expands our total addressable market, serving as a specialty bracing platform company within our Trauma and Deformity business. Under the terms of the related merger agreement, the Company paid to the indirect, sole shareholder of MD Ortho consideration of (a) $ 8,781 in cash, after adjusting for closing net working capital, and (b) 173,241 shares of unregistered common stock, $ 0.00025 par value per share, of the Company, representing approximately $ 9,707 (based on the April 1, 2022 closing share price of $ 56.03 ). The 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: 16 Fair value of estimated total acquisition consideration $ 18,487 Assets Cash 420 Accounts receivable - trade 1,062 Inventories 1,126 Prepaid expenses and other current assets 100 Property and equipment 2,444 Amortizable intangible assets 9,120 Other intangible assets 2,410 Total assets 16,682 Liabilities Accounts payable and accrued liabilities 45 Other current liabilities 586 Deferred tax liability 3,014 Total liabilities 3,645 Less: total net assets 13,037 Goodwill $ 5,450 The fair value of identifiable intangible assets was based on 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: Amount Remaining Economic Useful Life Trademarks / Names $ 2,410 Indefinite Patents 2,660 10 years Customer Relationships 6,460 15 years $ 11,530 The following table represents the pro forma net revenue and net (loss) income assuming the acquisitions of MD Ortho and Pega Medical occurred on January 1, 2022. Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Net revenue $ 39,972 $ 34,950 $ 111,119 $ 98,779 Net (loss) income $ ( 4,591 ) $ 18,539 $ ( 14,283 ) $ 10,013 17 NOTE 4 - GOODWILL AND INTANGIBLE ASSETS Goodwill Changes in the carrying amount of goodwill for the nine months ended September 30, 2023 were as follows: Total Goodwill at January 1, 2023 $ 86,821 Pega Medical measurement period adjustment ( 1,936 ) Foreign currency translation impact ( 3,991 ) Goodwill at September 30, 2023 $ 80,894 Intangible Assets As of September 30, 2023, the balances of amortizable intangible assets were as follows: Weighted-Average Amortization Period Gross Intangible Assets Accumulated Amortization Net Intangible Assets Patents 11.5 years $ 44,044 $ ( 9,830 ) $ 34,214 Intellectual Property & Capitalized Software 9.4 years 16,027 ( 2,154 ) 13,873 Customer Relationships & Other 12.6 years 18,632 ( 2,884 ) 15,748 License Agreements 3.9 years 10,483 ( 4,805 ) 5,678 Total amortizable assets $ 89,186 $ ( 19,673 ) $ 69,513 As of December 31, 2022, the balances of amortizable intangible assets were as follows: Weighted-Average Amortization Period Gross Intangible Assets Accumulated Amortization Net Intangible Assets Patents 12.2 years $ 46,005 $ ( 7,953 ) $ 38,052 Intellectual Property & Capitalized Software 9.8 years 5,859 ( 1,382 ) 4,477 Customer Relationships & Other 13.4 years 17,262 ( 1,805 ) 15,457 License Agreements 4.5 years 10,697 ( 3,703 ) 6,994 Total amortizable assets $ 79,823 $ ( 14,843 ) $ 64,980 Licenses are tied to product launches and do not begin amortizing until the product is launched to the market. Trademarks are non-amortizing intangible assets which were $ 15,008 and $ 14,921 as of September 30, 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 nine months ended September 30, 2023 was the result of the measurement period adjustments associated with Pega Medical, the trademarks recorded as a result of the MedTech and Rhino acquisitions, foreign currency translation adjustments and the impairment of the ApiFix trademark. 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 18 Company completed a quantitative analysis whereby we determined the fair value of the ApiFix trademark asset 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 partial impairment charge during the three and nine months ended September 30, 2022 to reduce the carrying amount of the intangible asset to its estimated fair value. During the three and nine months ended September 30, 2023, we determined that a triggering event had occurred, indicating it was more likely than not the fair value of the ApiFix trademark was less than the associated carrying value. Subsequently, the Company completed a quantitative analysis and concluded that the fair value was in fact less than the carrying value and a partial impairment loss of $ 985 was recorded in the period ended September 30, 2023. NOTE 5 - FAIR VALUE OF FINANCIAL INSTRUMENTS The Company measures certain financial assets and liabilities at fair value. The accounting standards related to fair value measurements define fair value and provide a consistent framework for measuring fair value under the authoritative literature. A fair value hierarchy was established, which prioritizes the inputs used in measuring fair value into three broad levels. Level 1 – Quoted prices in active markets for identical assets or liabilities; Level 2 – Observable market-based inputs or unobservable inputs that are corroborated by market data; and Level 3 – Significant unobservable inputs that are not corroborated by market data. Generally, these fair value measures are model-based valuation techniques such as discounted cash flows, and are based on the best information available, including our own data. The following tables summarize the assets and liabilities measured at fair value on a recurring basis as of September 30, 2023 and December 31, 2022. 19 September 30, 2023 Level 1 Level 2 Level 3 Total Financial Assets Short-term investments Certificates of Deposit $ — $ 25,527 $ — $ 25,527 Exchange Trade Mutual Funds $ 35,991 $ — $ — $ 35,991 Treasury Bonds $ 10,261 $ — $ — $ 10,261 Other $ 1 $ — $ — $ 1 Financial Liabilities Contingent Consideration $ — $ — $ 6 $ 6 December 31, 2022 Level 1 Level 2 Level 3 Total Financial Assets Short-term investments Certificates of Deposit $ — $ 25,148 $ — $ 25,148 Exchange Trade Mutual Funds $ 18,939 $ — $ — $ 18,939 Treasury Bonds $ 65,040 $ — $ — $ 65,040 Other $ 172 $ — $ — $ 172 Financial Liabilities Contingent Consideration $ — $ — $ 2,980 $ 2,980 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 $ 0 and $ 23,010 for the three months ended September 30, 2023 and September 30, 2022, respectively, and $ 2,974 and $ 25,450 for the nine months ended September 30, 2023 and September 30, 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: Total Balance at January 1, 2023 $ 2,980 Change in fair value of contingent consideration ( 2,974 ) Balance at September 30, 2023 $ 6 20 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, 2023 and December 31, 2022: September 30, 2023 December 31, 2022 Valuation techniques Discounted cash flow, Monte Carlo Present value discount rate (1) 15.5 % 16.6 % Volatility factor 38.1 % 48.0 % Expected years 0.6 years 1.4 years (1) The present value discount rate includes estimated risk premium. The estimated fair value reflects assumptions made by management as of September 30, 2023; however, the actual amount ultimately paid could be higher or lower than the fair value of the remaining contingent consideration. NOTE 6 - DEBT AND CREDIT ARRANGEMENTS Long-term debt consisted of the following: September 30, 2023 December 31, 2022 Mortgage payable to affiliate $ 800 $ 907 Less: current maturities 150 144 Long-term debt with affiliate, net of current maturities $ 650 $ 763 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 September 30, 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 %. The Company pays Squadron an unused commitment fee in an amount equal to the per annum rate of 0.50 % (computed on the basis of a year of 360 days and the actual number of days elapsed) times the daily unused portion of the revolving credit commitment. The unused commitment fee is payable quarterly in arrears. Borrowings under the revolving credit facility are made under a Second Amended and Restated Revolving Note, dated June 13, 2022 (the “Amended Revolving Note”), payable, jointly and severally, by the Company and each of its subsidiaries party thereto. The Amended Revolving Note matures at the earlier of: (i) the date on which any person or persons acquire (x) capital stock of the Company possessing the voting power to elect a majority of the Company’s Board of Directors (whether by merger, consolidation, reorganization, combination, sale or transfer), or (y) all or substantially all of the Company’s assets, determined on a consolidated basis; and (ii) January 1, 2024. Borrowings under the Loan Agreement are secured by substantially all of the Company's assets and are unconditionally guaranteed by each of its subsidiaries with the exception of Vilex. There are no traditional financial covenants associated with the Loan Agreement. However, there are negative covenants that prohibit us from, among other things, transferring any of our material assets, merging with or acquiring another entity, entering into a transaction that would result in a change of control, incurring additional indebtedness, creating any lien on our property, making investments in third parties and redeeming stock or paying dividends, in each case subject to certain exceptions. 21 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, 2023, the mortgage balance was $ 800 of which current principal of $ 150 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 $ 10 and $ 12 for the three months ended September 30, 2023 and 2022, respectively, and $ 32 and $ 512 for the nine months ended September 30, 2023 and 2022, respectively. NOTE 7 - INCOME TAXES The Company utilizes an estimated annual effective tax rate to determine its provision or benefit for income taxes for interim periods. 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, 2023, the income tax benefit was $ 126 compared to $ 4,899 for the nine months ended September 30, 2022. Our effective income tax rate was 0.9 % and ( 116.4 )% for the nine months ended September 30, 2023 and 2022, respectively. The deferred tax assets were fully offset by a valuation allowance at September 30, 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 expense and tax benefit during the period ended September 30, 2023 for losses generated in Canada and Israel, respectively. NOTE 8 - STOCKHOLDERS’ EQUITY Stock Options The fair value for options granted at the time of issuance were estimated at the date of grant using a Black-Scholes options pricing model. Significant assumptions included in the option value model include the fair value of our common stock at the grant date, weighted average volatility, risk-free interest rate, dividend yield and the forfeiture rate. There were no stock options granted in any of the periods presented. Our stock option activity and related information are summarized as follows: Weighted-Average Remaining Contractual Terms Options Exercise Price (in Years) Outstanding at January 1, 2023 3,556 $ 30.97 0.7 Exercised ( 670 ) 30.97 Forfeited or expired ( 2,886 ) — Outstanding at September 30, 2023 — $ — — Options generally included a time-based vesting schedule permitting the options to vest ratably over three years . At December 31, 2022, all options were fully vested. 22 There was no stock-based compensation expense on stock options for the three and nine months ended September 30, 2023 and 2022, respectively. As of September 30, 2023 all options were either exercised or cancelled. Restricted Stock Our restricted stock activity and related information are summarized as follows: Weighted-Average Weighted-Average 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 Granted 283,585 4,005 Forfeited ( 6,128 ) ( 234 ) Vested ( 115,760 ) — Outstanding at September 30, 2023 565,021 1.8 13,851 1.9 At September 30, 2023, there was $ 15,857 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 1.8 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 $ 2,368 and $ 1,682 for the three months ended September 30, 2023 and 2022, respectively, and $ 7,779 and $ 4,978 for the nine months ended September 30, 2023 and 2022, respectively. The increase in the stock compensation for the three and nine months ended September 30, 2023 is primarily due to increase in plan participants as we continue to hire employees to support the continued expansion of our business. Additionally, stock was issued as a component of both the Pega Medical and MedTech acquisitions. A portion of these shares have a service-based restriction, resulting in an increase in stock compensation over the life of the required years of service. 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, 2023 2022 2023 2022 Net (loss) income $ ( 4,591 ) $ 18,539 $ ( 14,283 ) $ 9,106 Less: Earnings allocated to participating securities — 353 — 174 Net income available to common shareholders $ ( 4,591 ) $ 18,186 $ ( 14,283 ) $ 8,932 Denominator for basic and diluted net (loss) income per share: Weighted average shares outstanding for basic 22,762,823 21,150,219 22,646,087 20,703,883 Weighted average shares outstanding for diluted 22,762,823 21,295,323 22,646,087 20,958,503 (Loss) earnings per share: Basic $ ( 0.20 ) $ 0.88 $ ( 0.63 ) $ 0.44 Diluted $ ( 0.20 ) $ 0.87 $ ( 0.63 ) $ 0.43 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, 23 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 Company had 578,872 and zero contingently issuable and convertible equity shares excluded from the calculation of diluted net (loss) earnings per share as of September 30, 2023 and 2022, respectively, because their effect would have been anti-dilutive. The contingently issuable shares in the paragraph above do not include shares of our common stock associated with our obligation to issue a variable number of our common shares as a result of our recent acquisitions of Pega Medical, ApiFix or MedTech. See Note 3 for additional information regarding our commitment to issue future equity under each of the Pega Medical and MedTech acquisitions. Additionally, as a component of the acquisition of ApiFix, the Company is obligated to make anniversary installment payments on the second, third and fourth anniversary of the acquisition date. Also on the fourth anniversary, the Company is potentially subject to a system sales payment. These payments included a minimum cash component with the remaining settled in common stock. See Note 3 under Item 8 in the Company's Annual Report on Form 10-K for additional information regarding this business combination. NOTE 10 – BUSINESS SEGMENT Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. We have one operating and reportable segment, 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. We determined that disaggregating revenue into these categories achieves the disclosure objective of illustrating the differences in the nature, timing and uncertainty of our revenue streams. We do not assess the performance of our individual product categories on measures of profit or loss, or other asset-based metrics. Therefore, the information below is presented only for revenue by category and geography. Product sales attributed to a country or region includes product sales to hospitals, physicians and distributors and is based on the final destination where the products are sold. No customers accounted for more than 10% of total product sales for the three and nine months ended September 30, 2023 or 2022. No customer accounted for more than 10% of consolidated accounts receivable as of September 30, 2023 and December 31, 2022. 24 Product sales by source were as follows: Three Months Ended September 30, Nine Months Ended September 30, Product sales by geographic location: 2023 2022 2023 2022 U.S. $ 29,360 $ 26,539 $ 82,748 $ 69,687 International 10,612 8,411 28,371 21,608 Total $ 39,972 $ 34,950 $ 111,119 $ 91,295 Three Months Ended September 30, Nine Months Ended September 30, Product sales by category: 2023 2022 2023 2022 Trauma and deformity $ 28,806 $ 23,892 $ 79,715 $ 62,976 Scoliosis 10,304 9,979 28,270 25,383 Sports medicine/other 862 1,079 3,134 2,936 Total $ 39,972 $ 34,950 $ 111,119 $ 91,295 NOTE 11 - RELATED PARTY TRANSACTIONS In addition to the debt and credit agreements and mortgage with Squadron and its affiliate (see Note 6), we currently use Structure Medical, LLC (“Structure Medical”) as one of our suppliers. Structure Medical is affiliated with Squadron and a supplier with which we maintain certain long-term agreements. We made aggregate payments to Structure Medical for inventory purchases of $ 234 and $ 218 for the three months ended September 30, 2023 and 2022, respectively, and $ 628 and $ 768 for the nine months ended September 30, 2023 and 2022, respectively. NOTE 12 - EMPLOYEE BENEFIT PLAN We have a defined-contribution plan, OrthoPediatrics 401(k) Retirement Plan (the “401(k) Plan”), which includes a cash or deferral (Section 401(k)) arrangement. The 401(k) Plan covers those employees who meet certain eligibility requirements and elect to participate. Employee contributions are limited to the annual amounts permitted under the Internal Revenue Code. The 401(k) Plan allows us to make a discretionary matching contribution. Discretionary matching contributions are determined annually by management. We have elected to match our employees' 401(k) contributions up to 4 % of employees' salary. Additionally, employees of MD Ortho receive contribution matches up to 3 % of their salary. NOTE 13 – COMMITMENTS AND CONTINGENCIES Leases As of September 30, 2023, the Company has recorded a lease liability of $ 434 and corresponding right-of-use-asset of $ 497 on its condensed consolidated balance sheet . Legal Proceedings From time to time, we are involved in various legal proceedings arising in the ordinary course of our business. IMED Surgical - Software Ownership Dispute 25 On October 16, 2020, the Company, its wholly-owned subsidiary, Orthex, LLC (“Orthex”), the Company’s largest investor, Squadron Capital, LLC (“Squadron”), and certain other defendants, were named in a lawsuit filed by IMED Surgical, LLC, a New Jersey company (the “Plaintiff”), in Broward County, Florida Circuit Court. In the lawsuit, the Plaintiff claims, among other things, that it is the rightful owner of certain patented point-and-click planning software being used by the Company, Orthex and Squadron (specifically, U.S. Patent No. 10,258,377 (titled “Point and click alignment method for orthopedic surgeons, and surgical and clinical accessories and devices,” issued on April 16, 2019) (hereinafter, the “’377 Patent”). In June 2019, the Company purchased all the issued and outstanding units of membership interests in Orthex, and all the issued and outstanding shares of stock of Vilex in Tennessee, Inc. for $ 60,000 in total consideration. Vilex and Orthex are primarily manufacturers of foot and ankle surgical implants, including cannulated screws, fusion devices, surgical staples and bone plates, as well as the Orthex Hexapod technology, a system of rings, struts, implants, hardware accessories, and the Point & Click Software used to treat congenital deformities and limb length discrepancies. On December 31, 2019, the Company divested substantially all of the assets relating to Vilex's adult product offerings to a wholly-owned subsidiary of Squadron, in exchange for a $ 25,000 reduction in a term note owed to Squadron in connection with the initial acquisition. As part of the sale, the Company also executed an exclusive license arrangement with Squadron providing for perpetual access to certain intellectual property, including the ‘377 Patent. According to the lawsuit, the other defendants, who are unrelated to the Company, assigned the ‘377 Patent to Orthex in violation of certain agreements with the Plaintiff. The Plaintiff, among other things, requests that the defendants be ordered to convey and assign to Plaintiff all of their rights, title and interests in and to the ’377 Patent and seeks certain compensatory, consequential and unjust enrichment damages from Orthex and the unrelated defendants. On May 13, 2021, the Court ordered the lawsuit stayed pending arbitration. To the extent the Plaintiff desires to further pursue the matter, it must first do so through a separate arbitration proceeding. In mid-November 2021, the Plaintiff initiated an arbitration proceeding; however, the Plaintiff failed to pay the fees it was required to pay for the arbitration to continue, resulting in the arbitration panel terminating the arbitration proceedings in mid-October 2022. In connection with the stay order, the Court also ordered the Company, Orthex and Squadron to give notice to the Plaintiff before any attempt to dispose, assign, sell or otherwise encumber the ‘377 Patent. The Company, Orthex and Squadron filed an appeal of this component of the order, but the appellate court affirmed the lower court’s decision. The Company, Orthex and Squadron have not sought to further pursue an appeal of the subject order. Although we believe the Company has strong defenses to the IMED lawsuit and we intend to vigorously defend the claims asserted against us, arbitration and litigation can involve complex factual and legal questions, and an adverse resolution of such proceedings could have a material adverse effect on our business, operating results and financial condition. Wishbone Medical, Inc. – Patent Infringement Litigation On October 30, 2020, OrthoPediatrics, along with its wholly-owned subsidiary, Orthex, LLC, filed a lawsuit in federal district court (N.D. Indiana, South Bend Division, Case No. 3:20-cv-00929) against Wishbone Medical, Inc. and Nick A. Deeter (collectively “Wishbone”), claiming infringement of ’377 Patent, unfair competition, false advertising, breach of contract, defamation per se, tortious interference with contractual relationships, and tortious interference with prospective contractual relationships. In early January 2021, OrthoPediatrics amended its lawsuit by adding a declaratory judgment claim of infringement of the ‘377 Patent against Wishbone. Thereafter, in January 2021, Wishbone filed a motion to dismiss all OrthoPediatrics’ causes of action. In late August 2021, the Court denied Wishbone's motion to dismiss with respect to OrthoPediatrics’ 26 infringement and breach of contract claims and dismissed OrthoPediatrics' remaining causes of action. In late September 2021, Wishbone filed its answer and counterclaims, in part, seeking declaratory judgment of non-infringement and invalidity of the ‘377 Patent, and alleging OrthoPediatrics patent infringement claim(s) against Wishbone was made in bad faith. In mid-October 2021, OrthoPediatrics filed its answer to Wishbone’s counterclaims, denying all of them. 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. In mid-June 2023, the Court denied Wishbone's motion for judgment on the pleadings. In September 2023, the Company and Wishbone Medical, Inc. reached a settlement of all claims against one another, resulting in a payment to the Company that was not material. However, OrthoPediatrics’ breach of contract claim against Mr. Deeter and Mr. Deeter’s breach of contract counterclaim remain. Although we believe the Company has strong defenses to Mr. Deeter’s counterclaims and we intend to vigorously defend the claims asserted against us, litigation can involve complex factual and legal questions, and an adverse resolution of this proceeding could have an adverse effect on our business, operating results and financial condition. We are not presently a party to any other legal proceedings the outcome of which, if determined adversely to us, would individually or in the aggregate materially affect our financial position or results of operations or cash flows. Purchase Obligations and Performance Requirements As a result of entering into a license agreement for the exclusive distribution of the 7D Surgical FLASH TM Navigation platform during 2021, the Company agreed to a minimum purchase commitment for the first twelve months of that agreement. Additionally, the contract requires future purchase commitments based upon a percentage of historical purchases. As a result and as of September 30, 2023, the remaining purchase commitment under the agreement was $ 1,345 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. As a component of the agreement the Company is required to meet minimum performance metrics, measured by the number of spine procedures in the fiscal year which used the FIREFLY products against the annual requirement in the agreement. This includes any scheduled surgeries whereby the Company has committed to payment of the product. The number of required surgeries varies each year of the agreement. The Company analyzes its projected achievement of these performance metrics and accrues for any estimated shortfall. During the nine months ended September 30, 2023, the Company recorded an expense of $ 1,053 based on current estimates. The Company recorded $ 442 of expense for the nine months ended September 30, 2022. Royalties As of September 30, 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 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, 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. 27