ORTHOPEDIATRICS CORP 10-Q

ITEM 1. FINANCIAL STATEMENTS ORTHOPEDIATRICS CORP. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (In Thousands, Except Share Data) September 30, 2024 December 31, 2023 ASSETS Current assets: Cash and cash equivalents $ 51,047 $ 31,055 Restricted cash 1,998 1,972 Short-term investments 25,017 49,251 Accounts receivable - trade, net of allowances of $ 1,025 and $ 1,373 , respectively 42,827 34,617 Inventories, net 120,934 105,851 Prepaid expenses and other current assets 6,489 3,750 Total current assets 248,312 226,496 Property and equipment, net 54,765 41,048 Other assets: Amortizable intangible assets, net 65,955 69,275 Goodwill 91,262 83,699 Other intangible assets 18,744 15,287 Other non-current assets 10,256 2,940 Total other assets 186,217 171,201 Total assets $ 489,294 $ 438,745 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable - trade $ 11,647 $ 12,649 Accrued compensation and benefits 13,221 11,325 Current portion of long-term debt with affiliate 158 152 Current portion of acquisition installment payable 1,325 10,149 Other current liabilities 8,274 7,391 Total current liabilities 34,625 41,666 Long-term liabilities: Long-term term loan 23,948 9,297 Long-term convertible note 47,831 — Long-term debt with affiliate, net of current portion 491 611 Other long-term debt, net of current portion 244 — Acquisition installment payable, net of current portion 2,412 3,551 Deferred income taxes 4,025 5,483 Other long-term liabilities 4,799 1,112 Total long-term liabilities 83,750 20,054 Total liabilities 118,375 61,720 Stockholders' equity: Common stock, $ 0.00025 par value; 50,000,000 shares authorized; 24,214,046 shares and 23,378,408 shares issued as of September 30, 2024 and December 31, 2023, respectively 6 6 Additional paid-in capital 597,009 580,287 Accumulated deficit ( 219,495 ) ( 197,742 ) Accumulated other comprehensive loss ( 6,601 ) ( 5,526 ) Total stockholders' equity 370,919 377,025 Total liabilities and stockholders' equity $ 489,294 $ 438,745 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, 2024 2023 2024 2023 Net revenue $ 54,573 $ 39,972 $ 152,060 $ 111,119 Cost of revenue 14,513 9,019 39,027 26,580 Gross profit 40,060 30,953 113,033 84,539 Operating expenses: Sales and marketing 16,750 13,942 47,512 40,024 General and administrative 26,299 17,973 78,358 54,242 Tradename impairment — 985 — 985 Research and development 2,577 2,561 8,118 7,973 Total operating expenses 45,626 35,461 133,988 103,224 Operating loss ( 5,566 ) ( 4,508 ) ( 20,955 ) ( 18,685 ) Other expense (income): Interest expense, net 404 21 1,302 105 Loss on early extinguishment of debt 3,230 — 3,230 — Fair value adjustment of contingent consideration — — — ( 2,974 ) Other expense (income), net ( 63 ) ( 787 ) 33 ( 1,407 ) Total other expense (income), net 3,571 ( 766 ) 4,565 ( 4,276 ) Loss before income taxes $ ( 9,137 ) $ ( 3,742 ) $ ( 25,520 ) $ ( 14,409 ) Provision for income taxes (benefit) ( 1,218 ) 849 ( 3,767 ) ( 126 ) Net loss $ ( 7,919 ) $ ( 4,591 ) $ ( 21,753 ) $ ( 14,283 ) Weighted average shares outstanding Basic and diluted 23,171,249 22,762,823 23,046,155 22,646,087 Net loss per share Basic and diluted $ ( 0.34 ) $ ( 0.20 ) $ ( 0.94 ) $ ( 0.63 ) 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, 2024 2023 2024 2023 Net loss $ ( 7,919 ) $ ( 4,591 ) $ ( 21,753 ) $ ( 14,283 ) Other comprehensive loss: Foreign currency translation adjustment 3,623 ( 3,947 ) ( 1,066 ) ( 6,767 ) Unrealized gain on short-term investments — 251 109 861 Adjustment for realized gain on securities — ( 559 ) ( 118 ) ( 860 ) Other comprehensive income (loss), net of tax 3,623 ( 4,255 ) ( 1,075 ) ( 6,766 ) Comprehensive loss $ ( 4,296 ) $ ( 8,846 ) $ ( 22,828 ) $ ( 21,049 ) 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, 2024 Accumulated Additional Other Total Common Stock Paid-in Accumulated Comprehensive Stockholders' Shares Value Capital Deficit Loss Equity Balance at January 1, 2024 23,378,408 $ 6 $ 580,287 $ ( 197,742 ) $ ( 5,526 ) $ 377,025 Net loss — — — ( 7,805 ) — ( 7,805 ) Other comprehensive loss — — — — ( 1,435 ) ( 1,435 ) Restricted stock 162,003 — 2,799 — — 2,799 Balance at March 31, 2024 23,540,411 $ 6 $ 583,086 $ ( 205,547 ) $ ( 6,961 ) $ 370,584 Net loss — — — ( 6,029 ) — ( 6,029 ) Other comprehensive loss — — — — ( 3,263 ) ( 3,263 ) Stock portion of MedTech anniversary payment 4,288 — 133 — — 133 Stock portion of ApiFix anniversary installment 245,812 — 6,929 — — 6,929 Restricted stock 426,227 — 2,939 — — 2,939 Balance at June 30, 2024 24,216,738 $ 6 $ 593,087 $ ( 211,576 ) $ ( 10,224 ) $ 371,293 Net loss — — — ( 7,919 ) — ( 7,919 ) Other comprehensive income — — — — 3,623 3,623 Restricted stock ( 2,692 ) — 3,922 — — 3,922 Balance at September 30, 2024 24,214,046 $ 6 $ 597,009 $ ( 219,495 ) $ ( 6,601 ) $ 370,919 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, 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 ) Restricted stock 14,591 — 3,456 — — 3,456 Consideration for MedTech acquisition 43,751 — 2,274 — — 2,274 Stock portion of ApiFix anniversary installment 140,003 — 6,178 — — 6,178 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. 8 ORTHOPEDIATRICS CORP. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In Thousands) Nine Months Ended September 30, 2024 2023 OPERATING ACTIVITIES Net loss $ ( 21,753 ) $ ( 14,283 ) Adjustments to reconcile net loss to net cash used in operating activities: Tradename impairment — 985 Depreciation and amortization 15,087 12,198 Stock-based compensation 9,660 7,779 Loss on early extinguishment of debt 3,230 — Fair value adjustment of contingent consideration — ( 2,974 ) Accretion of acquisition installment payable 599 1,092 Deferred income taxes ( 3,907 ) ( 899 ) Changes in certain operating assets and liabilities: Accounts receivable - trade ( 5,178 ) ( 12,878 ) Inventories, net ( 14,154 ) ( 22,198 ) Prepaid expenses and other current assets ( 2,134 ) ( 196 ) Accounts payable - trade ( 1,768 ) 11,492 Accrued expenses and other liabilities 308 3,288 Other ( 3,051 ) ( 2,909 ) Net cash used in operating activities ( 23,061 ) ( 19,503 ) INVESTING ACTIVITIES Acquisition of Boston O&P, net of cash acquired ( 20,225 ) — Clinic acquisition, net of cash acquired ( 475 ) — Acquisition of MedTech, net of cash acquired — ( 3,097 ) Acquisition of Rhino assets — ( 546 ) Investment in private companies ( 380 ) — Sale of short-term marketable securities 49,855 89,040 Purchase of short-term marketable securities ( 25,000 ) ( 48,600 ) Purchases of property and equipment ( 14,525 ) ( 13,042 ) Net cash (used in) provided by investing activities ( 10,750 ) 23,755 FINANCING ACTIVITIES Installment payment for ApiFix ( 2,250 ) ( 2,000 ) Installment payment for MedTech ( 1,250 ) — Proceeds from issuance of debt 73,533 — Payment on debt ( 12,231 ) — Payment of debt issuance costs ( 3,085 ) — Proceeds from exercise of stock options — 21 Payments on acquisition note ( 928 ) — Payments on mortgage notes ( 113 ) ( 107 ) Net cash provided by (used in) financing activities 53,676 ( 2,086 ) Effect of exchange rate changes on cash, cash equivalents and restricted cash 153 ( 396 ) NET INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH 20,018 1,770 Cash, cash equivalents and restricted cash, beginning of year $ 33,027 $ 10,462 Cash, cash equivalents and restricted cash, end of period $ 53,045 $ 12,232 9 SUPPLEMENTAL DISCLOSURES Cash paid for interest $ 1,381 $ 32 Issuance of common shares to acquire Rhino $ — $ 478 Transfer of instruments between property and equipment and inventory $ 966 $ 431 Issuance of common shares for ApiFix installment $ 6,929 $ 6,178 Issuance of common shares for MedTech installment $ 133 $ 2,274 Right-of-use assets obtained in exchange for lease liabilities $ 3,220 $ 367 Debt issuance costs not yet paid $ 260 $ — 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, instruments, and specialized 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 Duo ® , Pediatric Nailing Platform | Femur, Devise Rail, Orthex ® , The Fassier-Duval Telescopic Intramedullary System ® , SLIM TM Nail, The GAP Nail TM , The Free Gliding SCFE Screw System TM , GIRO ® Growth Modulation System, PNP Tibia 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 Boston Brace 3D, implants and related surgical instrumentation while our orthopedic bracing products are manufactured in-house. We also operate multiple orthotic and prosthetic ("O&P") clinics delivering leading pediatric non-surgical O&P treatment. We are the only global medical device company focused exclusively on providing a comprehensive trauma and deformity correction, scoliosis, sports medicine, specialty bracing and clinical services 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, 2023 and related notes thereto contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC") o n March 8, 2024. 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, 2023 and, in management’s opinion, include all adjustments, consisting of only normal recurring adjustments, 11 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, 2024 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 $ 219,495 and $ 197,742 as of September 30, 2024 and December 31, 2023, respectively. Management continues to monitor cash flows and liquidity on a regular basis. We believe that our cash balance at September 30, 2024 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 2023 Annual Report on Form 10-K. Reclassification In the condensed consolidated financial statements, the Company has reclassified stock-based compensation to conform to the current period presentation. All stock-based compensation was previously recorded within general and administrative expenses, and such costs have now been allocated between general and administrative expenses, research and development expenses and sales and marketing expenses. The current presentation results in stock-based compensation expense being recorded in the same manner in which the award recipient's payroll costs are classified. This reclassification did not affect previously reported total operating expenses, loss before income taxes, or net loss in the condensed consolidated statements of operations. The following tables present the impact of the reclassification on our condensed consolidated statements of operations: Three Months Ended September 30, 2023 Nine Months Ended September 30, 2023 Sales and marketing (prior presentation) $ 13,582 $ 38,963 Reclassification 360 1,061 Sales and marketing (new presentation) $ 13,942 $ 40,024 12 Three Months Ended September 30, 2023 Nine Months Ended September 30, 2023 General and administrative (prior presentation) $ 18,507 $ 55,827 Reclassification ( 534 ) ( 1,585 ) General and administrative (new presentation) $ 17,973 $ 54,242 Three Months Ended September 30, 2023 Nine Months Ended September 30, 2023 Research and development (prior presentation) $ 2,387 $ 7,449 Reclassification 174 524 Research and development (new presentation) $ 2,561 $ 7,973 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 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. In November 2023, the FASB issued ASU No. 2023-07, " Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures ." The standard requires disclosure of significant segment expenses that are regularly provided to the chief operating decision maker ("CODM") and included within each reported measure of segment profit or loss, an amount and description of its composition for other segment items to reconcile to segment profit or loss, and the title and position of the entity's CODM. The amendments in this update also expand the interim segment disclosure requirements. This authoritative guidance will be effective for us in fiscal 2024 for annual periods and in the first quarter of fiscal 2025 for interim periods, with early adoption permitted. We are currently evaluating the effect of this new guidance on our consolidated financial statements and disclosures. In December 2023, the FASB issued ASU No. 2023-09, " Income Taxes (Topic 740): Improvements to Income Tax Disclosures " ("ASU 2023-09), which enhances the transparency and decision usefulness of income tax disclosures. The ASU is effective for public companies for fiscal years beginning on or after December 15, 2024, with early adoption permitted. The amendments in ASU 2023-09 should be applied 13 on a prospective basis. Retrospective application is permitted. We are currently evaluating the effect of this new guidance on our consolidated financial statements and disclosures. NOTE 3 - BUSINESS COMBINATIONS AND ASSET ACQUISITIONS Boston Brace International, Inc. On January 5, 2024, the Company purchased all of the issued and outstanding share capital of Boston Brace International, Inc., a Massachusetts corporation ("Boston O&P"). Boston O&P has developed and manufactures pediatric orthotic and prosthetic devices, including non-surgical scoliosis treatment options, and provides related clinical services. Under the terms of the stock purchase agreement, the Company paid to the shareholders of Boston O&P consideration of $ 21,534 in cash, after adjusting for closing net working capital, transaction expenses, and funded indebtedness. Additionally, certain employees and executives of Boston O&P also received awards of restricted stock of the Company which will vest in three years subject to continuous service. The Restricted Stock Award Agreements were to approximately 170 individuals for an aggregate of approximately 83,000 shares representing approximately $ 2,500 (based on a share price of $ 30.12 , which was the average closing price during the four-month period ending on January 4, 2024) and were granted pursuant to the Company’s 2017 Incentive Award Plan. The restricted stock units are not considered part of the purchase consideration. The following table summarizes the total consideration paid for Boston O&P and the preliminary allocation of purchase price to the estimated fair value of the assets acquired and liabilities assumed at the acquisition date: Fair value of estimated total acquisition consideration $ 21,534 Assets Cash 1,310 Accounts receivable - trade 2,749 Inventories 1,075 Prepaid expenses and other current assets 447 Property and equipment 6,259 Amortizable intangible assets 2,963 Other intangible assets 3,610 Other non-current assets 2,987 Total assets 21,400 Liabilities Accounts payable-trade 581 Other current liabilities 2,064 Long-term debt, including current portion 1,157 Deferred tax liability 2,557 Other non-current liabilities 1,803 Total liabilities 8,162 Less: total net assets 13,238 Goodwill $ 8,296 14 The fair value of identifiable intangible assets and certain long-lived assets were based on valuations using a combination of the income and cost approach, inputs which would be considered Level 3 under the fair value hierarchy. The estimated fair value and useful life of identifiable intangible assets are as follows: Amount Remaining Economic Useful Life Trademarks / Names $ 3,610 Indefinite Customer Relationships & Other 2,963 12 years $ 6,573 The following table represents the pro forma net revenue and net loss assuming the acquisition of Boston O&P occurred on January 1, 2023. Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Net revenue $ 54,573 $ 46,585 $ 152,491 $ 130,857 Net loss $ ( 7,903 ) $ ( 4,475 ) $ ( 21,712 ) $ ( 13,935 ) On July 1, 2024, Boston O&P also completed an acquisition of the assets, including inventory, related to orthotic and prosthetic device clinics located in Virginia and Maryland. Boston O&P paid $ 950 in total consideration, which was comprised of $ 475 of cash and a promissory note in the original principal amount of $ 475 payable in six quarterly installments with interest at a rate of 5.0 % per annum. 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. No revenue was recorded from this platform in 2023, and the Company does not anticipate material revenue contributions from the platform in 2024. 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 15 $ 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 is being 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 is being amortized over a useful life of ten years . During the nine months ended September 30, 2024, the Company paid the first anniversary payment consisting of $ 1,250 in cash and issued 4,288 of the Company's common stock approximating $ 133 which reduced the amount of the acquisition installment payable on our balance sheet. In addition, we issued 38,594 shares of our common stock to one individual on the first anniversary date in exchange for their continued service through the vesting date which had been accounted for as stock based compensation expense in the post-combination consolidated financial statements. 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). 16 NOTE 4 - GOODWILL AND INTANGIBLE ASSETS Goodwill Changes in the carrying amount of goodwill for the nine months ended September 30, 2024 were as follows: Total Goodwill at January 1, 2024 $ 83,699 Boston O&P acquisition 8,296 Other clinic acquisitions 627 Foreign currency translation impact ( 1,360 ) Goodwill at September 30, 2024 $ 91,262 Intangible Assets As of September 30, 2024, the balances of amortizable intangible assets were as follows: Weighted-Average Amortization Period Gross Intangible Assets Accumulated Amortization Net Intangible Assets Patents 10.5 years $ 44,903 $ ( 13,147 ) $ 31,756 Intellectual Property & Capitalized Software 8.4 years 16,027 ( 3,681 ) 12,346 Customer Relationships & Other 11.7 years 21,777 ( 4,462 ) 17,315 License Agreements 3.0 years 10,583 ( 6,045 ) 4,538 Total amortizable assets $ 93,290 $ ( 27,335 ) $ 65,955 As of December 31, 2023, the balances of amortizable intangible assets were as follows: Weighted-Average Amortization Period Gross Intangible Assets Accumulated Amortization Net Intangible Assets Patents 11.2 years $ 45,646 $ ( 11,008 ) $ 34,638 Intellectual Property & Capitalized Software 9.1 years 16,026 ( 2,524 ) 13,502 Customer Relationships & Other 12.4 years 18,862 ( 3,270 ) 15,592 License Agreements 3.8 years 10,733 ( 5,190 ) 5,543 Total amortizable assets $ 91,267 $ ( 21,992 ) $ 69,275 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 $ 18,744 and $ 15,287 as of September 30, 2024 and December 31, 2023, 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, 2024 was driven by foreign currency translation adjustments and the Boston O&P acquisition. During 2023, 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 was below the carrying value. We recorded an impairment charge of $ 985 for the year ended December 31, 2023 to reduce the carrying amount of the intangible asset to its estimated fair value. 17 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 table summarizes the assets and liabilities measured at fair value on a recurring basis as of September 30, 2024 and December 31, 2023. September 30, 2024 Level 1 Level 2 Level 3 Total Financial Assets Short-term investments Exchange Trade Mutual Funds $ 25,017 $ — $ — $ 25,017 December 31, 2023 Level 1 Level 2 Level 3 Total Financial Assets Short-term investments Certificates of Deposit $ — $ 25,792 $ — $ 25,792 Exchange Trade Mutual Funds $ 5,015 $ — $ — $ 5,015 Treasury Bonds $ 18,235 $ — $ — $ 18,235 Other $ 207 $ — $ — $ 207 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 contingent consideration was zero as of both September 30, 2024 and December 31, 2023. 18 NOTE 6 - DEBT AND CREDIT ARRANGEMENTS Long-term debt consisted of the following as of the dates indicated: September 30, 2024 December 31, 2023 Term loan and Final Payment $ 25,500 $ 10,300 Convertible note 50,000 — Mortgage payable to affiliate 649 763 Acquisition note payable 710 — Total debt 76,859 11,063 Less: debt discount and issuance costs 3,721 1,003 Less: current maturities 624 152 Long-term debt, net of current maturities $ 72,514 $ 9,908 Braidwell Term Loan On August 5, 2024, the Company and its wholly owned domestic subsidiaries, as borrowers (collectively, the “Credit Parties”), entered into that certain Credit Agreement and Guaranty (the “Term Loan Agreement”), by and among the Credit Parties, any additional borrowers from time to time party thereto, any guarantors from time to time party thereto, one or more funds managed by Braidwell LP (“Braidwell”), as lenders, the other lenders from time to time party thereto (together with Braidwell, the “Term Lenders”), and Wilmington Trust, National Association, as agent (the “Term Agent”). The Term Loan Agreement provides for (i) an initial term loan facility in the initial principal amount of $ 25,000 , which was funded in its entirety on August 12, 2024 and (ii) a delayed draw term loan facility (the “DDTL”) in an aggregate principal amount not to exceed $ 25,000 , which, subject to certain conditions set forth in the Term Loan Agreement, may be drawn until August 5, 2025. Loans borrowed pursuant to the Term Loan Agreement (the “Term Loans”) bear interest at a rate per annum equal to SOFR Interest Rate (as defined in the Term Loan Agreement and with a floor of 3.25 %) plus 6.50 %. The Company has the option to make a payment-in-kind interest payment equal to 1.00 % per annum of the interest rate. The Term Loans do not amortize and will be interest-only until the August 5, 2029 maturity date, at which time all unpaid principal and accrued and unpaid interest, fees and expenses due under the Term Loan Agreement will become due and payable. The Company is obligated to pay certain upfront fees and agency fees in connection with the Term Loan Agreement. The Company may pay all or a portion of the outstanding principal and accrued and unpaid interest under the Term Loan Agreement at any time upon prior notice to the Term Lenders subject to (i) a repayment fee schedule of, depending on when the repayment is made, 3.00 % of the principal amount of any such repayment during the first 12 months of the Term Loan Agreement or applicable DDTL funding date, 2.00 % of the principal amount of any such repayment during months 13 through 24 of the Term Loan Agreement or applicable DDTL funding date, 1.00 % of the principal amount of any such repayment during months 25 through 36 of the Term Loan Agreement or applicable DDTL funding date, and — % thereafter and (ii) an exit fee equal to 2.00 % of the principal amount of any such repayment ("Final Payment"). The Term Loan Agreement contains customary mandatory prepayment provisions. Once repaid or prepaid, the Term Loans may not be reborrowed. The Term Loan Agreement includes customary conditions to borrowing, representations and warranties and covenants, including affirmative covenants and negative covenants that restrict the Credit Parties’ and their subsidiaries’ ability to, among other things, incur indebtedness, grant liens, merge or consolidate, make investments, dispose of assets, make acquisitions, pay dividends or make distributions, repurchase stock and enter into certain transactions with affiliates, in each case subject to certain exceptions. The Term Loan Agreement also has financial covenants requiring the Credit Parties to (i) maintain at all times unrestricted cash held in US accounts subject to Lenders’ first priority lien equal to at least 25 % of the aggregate principal amount of any outstanding Term Loans and (ii) maintain certain minimum net product sales over a trailing twelve month period as set forth therein. 19 The Term Loan Agreement also contains customary events of default, including among other things, the Credit Parties’ failure to make any principal or interest payments when due, the occurrence of certain bankruptcy or insolvency events, or the Credit Parties’ breach of the covenants under the Term Loan Agreement. Upon the occurrence of an event of default, the Term Lenders may, among other things, accelerate the Credit Parties’ obligations under the Term Loan Agreement. As security for their obligations under the Term Loan Agreement, the Credit Parties granted the Term Agent a continuing first priority security interest in substantially all of their assets (including intellectual property), subject to certain customary exceptions. Braidwell Convertible Note In addition to the Term Loans, on August 5, 2024, the Company entered into a Purchase Agreement (the “Purchase Agreement”) with Braidwell Transaction Holdings LLC – Series 10 (the “Purchaser”), whereby the Purchaser agreed to purchase $ 50,000 in aggregate principal amount of the Company’s 4.75 % Convertible Senior Notes due February 15, 2030 (the “Notes”) for an aggregate purchase price of $ 49,500 . The Notes were issued pursuant to, and are governed by, an indenture (the “Indenture”), dated as of August 12, 2024, between the Company and U.S. Bank Trust Company, National Association, as trustee (the “Trustee”). The Notes represent the Company’s senior, unsecured obligations and are (i) equal in right of payment with the Company’s existing and future senior, unsecured indebtedness; (ii) senior in right of payment to the Company’s existing and future indebtedness that is expressly subordinated to the Notes; and (iii) effectively subordinated to the Company’s existing and future secured indebtedness, to the extent of the value of the collateral securing that indebtedness. The Notes accrue interest at a rate of 4.75 % per annum, payable quarterly in arrears on February 15, May 15, August 15, and November 15 of each year, beginning on November 15, 2024. The Notes will mature on February 15, 2030, unless earlier repurchased, redeemed, or converted. Before November 15, 2029, noteholders will have the right to convert their Notes only upon the occurrence of certain events, including, but not limited to, the Company’s common stock trading above 130 % of the conversion price for a specified period, the Notes per $1 in principal amount trading below 98 % of the product of the trading price of the Company’s common stock and the conversion rate, and certain fundamental changes to corporate structure. From and after November 15, 2029, noteholders may convert their Notes at any time at their election until the close of business on the second scheduled trading day immediately before the maturity date. The Company will settle conversions by paying or delivering, as applicable, cash, shares of its common stock, or a combination of cash and shares of its common stock, at the Company’s election. The initial conversion rate is 24.4021 shares of common stock per $1 principal amount of Notes, which represents an initial conversion price of approximately $ 40.98 per share of common stock. The conversion rate and conversion price are subject to customary adjustments upon the occurrence of certain events. In addition, if certain corporate events that constitute a “Make-Whole Fundamental Change” (as defined in the Indenture) occur, then the conversion rate will, in certain circumstances, be increased for a specified period of time. The Notes are redeemable, in whole or in part, at the Company’s option at any time, and from time to time, on or after February 21, 2028 and on or before the 30th scheduled trading day immediately before the maturity date, at a cash redemption price equal to the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date, but only if (i) the Notes are Freely Tradable (as defined in the Indenture) and any accrued and unpaid additional interest pursuant to the Notes has been paid as of the redemption date, and (ii) the last reported sale price per share of the Company’s common stock exceeds 140 % of the conversion price on (1) each of at least 20 trading days, whether or not consecutive, during the 30 consecutive trading days ending on, and including, the trading day immediately before the date the Company sends the related redemption notice; and (2) the trading day immediately before the date the Company sends such notice. In addition, calling any Note for redemption will constitute a Make-Whole Fundamental Change with respect to that Note, in which case 20 the conversion rate applicable to the conversion of that Note will be increased in certain circumstances if it is converted after it is called for redemption. If certain corporate events that constitute a “Fundamental Change” (as defined in the Indenture) occur, then, subject to a limited exception for certain cash mergers, noteholders may require the Company to repurchase their Notes at a cash repurchase price equal to the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the fundamental change repurchase date. The definition of Fundamental Change includes certain business combination transactions involving the Company and certain de-listing events with respect to the Company’s common stock. The Notes have customary provisions relating to the occurrence of “Events of Default” (as defined in the Indenture), which include the following: (i) certain payment defaults on the Notes (which, in the case of a default in the payment of interest on the Notes, will be subject to a 30-day cure period); (ii) the Company’s failure to send certain notices under the Indenture within specified periods of time; (iii) the Company’s failure to comply with certain covenants in the Indenture relating to the Company’s ability to consolidate with or merge with or into, or sell, lease, or otherwise transfer, in one transaction or a series of transactions, all or substantially all of the assets of the Company and its subsidiaries, taken as a whole, to another person; (iv) a default by the Company in its obligation to convert a note in accordance with the Indenture upon the exercise of the conversion right with respect thereto, if not cured within two business days after its occurrence; (v) a default by the Company in its other obligations or agreements under the Indenture or the Notes if such default is not cured or waived within 60 days after notice is given in accordance with the Indenture; (vi) certain defaults by the Company or any of its significant subsidiaries with respect to indebtedness for borrowed money of at least $ 25,000 ; (vii) the rendering of certain judgments against the Company or any of its significant subsidiaries for the payment of at least $ 25,000 where such judgments are not discharged or stayed within 60 days after the date on which the right to appeal has expired or on which all rights to appeal have been extinguished; and (viii) certain events of bankruptcy, insolvency, and reorganization involving the Company or any of the Company’s significant subsidiaries. If an Event of Default involving bankruptcy, insolvency, or reorganization events with respect to the Company (and not solely with respect to a significant subsidiary of the Company) occurs, then the principal amount of, and all accrued and unpaid interest on, all of the Notes then outstanding will immediately become due and payable without any further action or notice by any person. If any other Event of Default occurs and is continuing, then, the Trustee, by notice to the Company, or noteholders of at least 25 % of the aggregate principal amount of Notes then outstanding, by notice to the Company and the Trustee, may declare the principal amount of, and all accrued and unpaid interest on, all of the Notes then outstanding to become due and payable immediately. However, notwithstanding the foregoing, the Company may elect, at its option, that the sole remedy for an Event of Default relating to certain failures by the Company to comply with certain reporting covenants in the Indenture consists exclusively of the right of the noteholders to receive special interest on the Notes for up to 180 days at a specified rate per annum not exceeding 0.50 % on the principal amount of the Notes. The debt facilities replaced the $ 80,000 Credit, Security, and Guaranty Agreement with MidCap Funding IV Trust and MidCap Financial Trust and other parties named therein, dated December 29, 2023 (the "MidCap Credit Agreement"). There was approximately $ 10,000 outstanding under the MidCap Credit Agreement and it was terminated in connection with the Term Loan Agreement. MidCap Term Loan Borrowings under the MidCap Credit Agreement accrued interest at an annual rate equal to the greater of (a) One Month Term SOFR plus 6.50 % or (b) 9.0 % and interest on the Revolving Loan would have accrued at the greater of (a) One Month Term SOFR plus 4.0 % or (b) 6.50 % (the “Applicable Rate”). The Company paid MidCap 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 21 daily unused portion of the revolving credit commitment. The unused commitment fee was payable quarterly in arrears. Borrowings under the MidCap Credit Agreement were made under a term loan (the "MidCap Term Loan") of $ 10,000 and a Revolving Loan of $ 50,000 , payable, jointly and severally, by the Company and each of its subsidiaries party thereto. The MidCap Term Loan and Revolving Loan matured at the earlier of (i) December 1, 2028; (ii) the occurrence of any transaction or series of transactions pursuant to which any person or entity in the aggregate acquire(s) 35 % or more of the voting capital stock of the Company; (iii) a change in the majority of the Company’s Board of Directors over a 12-month period; (iv) the Company ceases to own directly or indirectly, 100% of the capital stock of any of its subsidiaries (with the exception of any subsidiaries permitted to be dissolved, merged or otherwise disposed of by the MidCap Credit Agreement), or (v) the occurrence of a change in control, fundamental change, deemed liquidation event or terms of similar import under any document or instrument governing or relating to debt of or equity interests of the Company. Borrowings under the MidCap Credit Agreement were secured by a security interest in the Company’s and other Borrowers' assets. The MidCap Credit Agreement provided for customary events of default. If an event of default is not cured within the time periods specified (if any), the Lenders and Agent would have had the right to accelerate the Company’s payment of principal and interest in addition to other rights and remedies. The MidCap Credit Agreement included certain customary non-financial covenants, and also include certain financial covenants related to the Company achieving minimum revenue targets over a trailing twelve month period and maintaining minimum liquidity of $ 10,000 . The MidCap Credit Agreement was amended on May 3, 2024 to clarify the inputs into the financial covenant calculations. As a result of the termination of the MidCap Credit Agreement, the Company recorded a loss on the extinguishment of debt in the amount of $ 3,230 on the consolidated statement of operations for the three and nine months ended September 30, 2024. Squadron Revolver The MidCap Credit Agreement replaced the Fourth Amended and Restated Loan and Security Agreement with Squadron Capital, LLC ("Squadron"), (as amended, the "Squadron Loan Agreement"), which provided the Company with a $ 50,000 revolving credit facility. There was no indebtedness outstanding under the Squadron Loan Agreement when it was terminated in connection with the MidCap Credit Agreement on December 31, 2023. Borrowings under the Squadron Loan Agreement accrued interest at an annual rate equal to the greater of (a) six month SOFR plus 8.69 % and (b) 10.0 %, and the Company was 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 paid 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 was payable quarterly in arrears. Borrowings under the Squadron Loan Agreement were 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 matured 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 Squadron Loan Agreement were secured by substantially all of the Company's assets and were unconditionally guaranteed by each of its subsidiaries with the exception of Vilex in 22 Tennessee, Inc. ("Vilex"). There were no traditional financial covenants associated with the Squadron Loan Agreement. However, there were negative covenants that prohibited 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. Other Debt 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 % unt il maturity in 2028, at which time a final payment of remaining principal and interest is due. At September 30, 2024, the mortgage balance was $ 649 of which current principal of $ 158 was included in the current portion of long-term debt. As of December 31, 2023, the mortgage balance was $ 763 of which current principal due of $ 152 was included in the current portion of long-term debt. The aggregate interest expense relating to the notes payable to Squadron, the mortgage note payable to Tawani Enterprises Inc., the term loan with MidCap, the term loan with Braidwell, and the convertible note with Braidwell, was $ 945 and $ 10 for the three months ended September 30, 2024 and 2023, respectively, and $ 1,705 and $ 32 for the nine months ended September 30, 2024 and 2023, 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, 2024, the income tax benefit was $ 3,767 compared to $ 126 for the nine months ended September 30, 2023. Our effective income tax rate was 14.8 % and 0.9 % for the nine months ended September 30, 2024 and 2023, respectively. The higher effective rate compared to the prior period is from the remeasurement of the valuation allowance subsequent to recording the deferred tax liability as a result of the purchase accounting from the Boston O&P acquisition. The deferred tax assets were fully offset by a valuation allowance at September 30, 2024 and December 31, 2023, 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, Ltd. and Pega Medical (OrthoPediatrics Canada ULC). The Company has recorded a tax benefit for losses generated in Israel and a tax expense for income generated in Canada during the period ended September 30, 2024. 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, 2024. Such objective evidence limits the ability to consider other subjective evidence, such as our projections for future growth. 23 NOTE 8 - STOCKHOLDERS’ EQUITY 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, 2024 592,453 1.6 13,851 1.7 Granted 556,109 7,900 Forfeited ( 9,165 ) ( 200 ) Vested ( 96,616 ) — Outstanding at September 30, 2024 1,042,781 1.8 21,551 1.4 On June 11, 2024, we granted an aggregate of 345,985 shares of restricted stock to eight members of management. The restricted stock was granted pursuant to the Company's 2024 Incentive Award Plan. While restricted stock awards generally vest over three years , these restricted stock awards provide for a vesting period ending on March 15, 2027 in order to align the vesting dates with the vesting dates of other restricted stock awards held by members of management. At September 30, 2024, there was $ 22,247 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 $ 3,922 and $ 2,368 for the three months ended September 30, 2024 and 2023, respectively, and $ 9,660 and $ 7,779 for the nine months ended September 30, 2024 and 2023, respectively. In connection with its approval of the Term Loan Agreement, Purchase Agreement, the Indenture and Notes, on August 2, 2024, the Board of Directors of the Company also approved a stock repurchase program of up to $ 5,000 in aggregate investment of the Company’s outstanding common stock, contingent upon the closing of the Term Loan and the Notes. The stock repurchases may, at the discretion of management, be made from time to time, through solicited or unsolicited transactions in the open market, in privately negotiated transactions or pursuant to a Rule 10b5-1 plan all as effected in accordance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended. The Company is not obligated to purchase any shares under the program, and the program may be discontinued at any time. No shares have been purchased under this program as of September 30, 2024. 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, 2024 2023 2024 2023 Net loss $ ( 7,919 ) $ ( 4,591 ) $ ( 21,753 ) $ ( 14,283 ) Weighted average shares outstanding for basic and diluted 23,171,249 22,762,823 23,046,155 22,646,087 Net loss per share - basic and diluted $ ( 0.34 ) $ ( 0.20 ) $ ( 0.94 ) $ ( 0.63 ) 24 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. 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 remained consistent between basic and diluted as the effect of any outstanding common stock equivalents 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 the MedTech acquisition. Additionally, as a component of the acquisition of ApiFix, the Company was obligated to make anniversary installment payments on the second, third and fourth anniversary of the acquisition date. 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. During the nine months ended September 30, 2024, the final anniversary payment was made to ApiFix and no additional shares of common stock are issuable under the ApiFix acquisition. 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 individual customer accounted for more than 10% of total product sales for the three and nine months ended September 30, 2024 or 2023. No individual customer accounted for more than 10% of consolidated accounts receivable as of September 30, 2024 and December 31, 2023. Product sales by source were as follows: Three Months Ended September 30, Nine Months Ended September 30, Product sales by geographic location: 2024 2023 2024 2023 U.S. $ 42,714 $ 29,360 $ 118,269 $ 82,748 International 11,859 10,612 33,791 28,371 Total $ 54,573 $ 39,972 $ 152,060 $ 111,119 25 Three Months Ended September 30, Nine Months Ended September 30, Product sales by category: 2024 2023 2024 2023 Trauma and deformity $ 37,642 $ 28,806 $ 108,715 $ 79,715 Scoliosis 15,635 10,304 39,521 28,270 Sports medicine/other 1,296 862 3,824 3,134 Total $ 54,573 $ 39,972 $ 152,060 $ 111,119 NOTE 11 - RELATED PARTY TRANSACTIONS In addition to the expired debt and credit agreements and mortgage with Squadron (the Company's largest investor) 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 $ 206 and $ 234 for the three months ended September 30, 2024 and 2023, respectively, and $ 729 and $ 628 for the nine months ended September 30, 2024 and 2023, 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 and Boston O&P receive contribution matches up to 3 % of their salary. NOTE 13 – COMMITMENTS AND CONTINGENCIES Leases As of September 30, 2024, the Company has recorded a lease liability of $ 6,572 and corresponding right-of-use asset of $ 6,940 on its condensed consolidated balance sheet . We assumed $ 2,828 of operating right-of-use assets and lease liabilities in connection with our acquisition of Boston O&P. Legal Proceedings From time to time, we are involved in various legal proceedings arising in the ordinary course of our business. IMED Surgical - Software Ownership Dispute On October 16, 2020, the Company, its wholly-owned subsidiary, Orthex, LLC (“Orthex”), the Company’s largest investor, Squadron, and certain other defendants, were named in a lawsuit filed by IMED Surgical, LLC, a New Jersey company ("IMED"), in Broward County, Florida Circuit Court. In the lawsuit, IMED 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”). 26 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 IMED. IMED, among other things, requests that the defendants be ordered to convey and assign to IMED 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 IMED desires to further pursue the matter, it must first do so through a separate arbitration proceeding. In mid-November 2021, IMED initiated an arbitration proceeding; however, IMED 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 IMED 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. On February 3, 2023, the Court partially lifted the stay in this case for the sole purpose of, as clarified by the Court's order on March 7, 2023, "permitting any party to argue any motion challenging the events that occurred which led to the arbitration panel's termination order." No filing was made in response to that order. No further filings were made in this case until October 30, 2023, when defendants filed a motion to dismiss. On December 12, 2023, the Court ordered IMED has until March 13, 2024, to appear before the Court and show cause why this case should not be dismissed for failure to pursue arbitration consistent with the Court’s orders. On March 13, 2024, a hearing took place to discuss the status of IMED’s effort to re-initiate arbitration. Thereafter, on March 25, 2024, the court ordered, if, by April 27, 2024, IMED has not begun arbitration, resolved this case, or substantiated (in the form of an attorney and client declaration) that it has executed an agreement with a litigation funder to pay for arbitration proceedings, to pay the balance due to the subject arbitration association and to re-instate the arbitration, the Court will dismiss this case without prejudice. On April 26, 2024, IMED informed the Court it has executed an agreement with a litigation funder to pay for arbitration proceedings, to pay the balance due to the subject arbitration association, and to reinstate the arbitration, and is in the final stages of resolving the balance due to the subject arbitration association. On September 20, 2024, the Court dismissed IMED’s lawsuit, without prejudice, for failure to prosecute. However, contemporaneously, IMED re-initiated arbitration. Although we believe the Company has strong defenses to the IMED arbitration and we intend to vigorously defend the claims asserted against us, arbitration 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. 27 Boston O&P Litigation This lawsuit arises from the alleged wrongful death of a patient following his January 2016, tracheal and laryngeal resection procedure at Boston Children’s Hospital, which was performed by two physicians named as defendants in the suit. The Plaintiffs allege that as a result of the patient’s post-operative care, which included placing his neck in a position of flexion in a modified brace provided by Boston O&P, the patient was paralyzed, and years later, he died due to complications caused by his paralysis. The Company acquired all of the outstanding shares of Boston O&P on January 5, 2024 as described more fully under Note 3 - Business Combinations and Asset Acquisitions. The lawsuit commenced in December 2018, in Suffolk Superior Court in Boston, Massachusetts. The Plaintiffs assert counts of negligence against each individual defendant, lack of informed consent against the physician defendants, failure to warn, breach of warranty and alleged improper use against Boston O&P, and loss of consortium against all defendants. Trial is currently scheduled to begin in December 2025. Although we believe Boston O&P has strong defenses to this lawsuit and we intend to vigorously defend the claims asserted against us, 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. 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, 2024, the Company met its purchase commitment for the year ended December 31, 2024 and $ 1,456 future purchase commitments are required for the year ended December 31, 2025. 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, 2024, the Company recorded an expense of $ 1,200 based on current estimates. The Company recorded $ 1,053 of expense for the nine months ended September 30, 2023. Royalties As of September 30, 2024, 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, 2024, 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. 28