Item 8. Financial Statements and Supplementary Data
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of OrthoPediatrics Corp.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of OrthoPediatrics Corp. and subsidiaries (the “Company”) as of December 31, 2024, and 2023, the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows, for each of the three years in the period ended December 31, 2024, and the related notes (collectively referred to as the “financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2024, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
As described in Management’s Report on Internal Control Over Financial Reporting, management excluded from its assessment the internal control over financial reporting of Boston O&P, which was acquired on January 5, 2024, and whose financial statements constitute 8% and 16% of total assets and net revenue, respectively, of the consolidated financial statement amounts as of and for the year ended December 31, 2024. Accordingly, our audit did not include the internal control over financial reporting of Boston O&P.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2024 and 2023, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2024, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2024, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
Basis for Opinions
The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
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Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Emphasis of Matter
The Company has significant transactions and relationships with related parties that are described in Notes 9 and 14 to the consolidated financial statements. Our opinion is not modified with respect to this matter.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Other Intangible Assets – Trademarks – Refer to Notes 2 and 5 to the financial statements
Critical Audit Matter Description
As described in Notes 2 and 5 of the consolidated financial statements, the Company records trademarks within their consolidated balance of Other Intangible Assets. We identified the specific trademarks related to Pega Medical, MD Ortho, Orthex and ApiFix, which are components of the Other Intangible Assets consolidated balance, as our critical audit matter. Impairment testing of the trademarks is performed on an annual basis, and more frequently if events and circumstances indicated that the asset might be impaired. The fair values of the trademarks are based on a relief from royalty method, and an impairment of $1,836,000 was recorded related to the ApiFix trademark during 2024. This approach requires significant estimates and assumptions including preparation of forecasted revenue, selection of a royalty rate and discount rate and estimate of the terminal year revenue growth rate.
The principal considerations for our determination that performing procedures related to the annual trademark impairment assessments of Pega Medical, MD Ortho, Orthex, and ApiFix is a critical audit matter are (i) the significant judgments required to be exercised by management when developing the fair value estimates of its trademarks; (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to revenue growth rates, discount rates, and royalty rates for the trademarks; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.
The determination and extent of audit procedures related to these assumptions required a high degree of auditor judgment and an increased extent of effort, including the need to involve fair value specialists, when performing audit procedures to evaluate the reasonableness of management’s assessment of the fair value of these specific trademarks.
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How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the estimate of the fair value of the Pega Medical, MD Ortho, Orthex and ApiFix trademarks included the following, among others:
• We tested the effectiveness of controls over management’s evaluation of the fair value of its trademarks, including those over the selection of the discount rates, royalty rates and management’s development of future revenues.
• We evaluated the reasonableness of management’s forecast of future revenue by comparing the forecast for each trademark to:
– Historical revenues.
– Projected revenues.
– Publicly available industry information.
– Evidence obtained in other areas of the audit.
• With the assistance of fair value specialists, we evaluated the reasonableness of the Company’s estimate of fair value for each trademark by:
– Assessing the appropriateness of the Company’s valuation methodology.
– Testing the source information underlying the determination of the discount rate and the mathematical accuracy of the calculation.
– Comparing the Company’s selected discount rate to an independently estimated range of discount rates using a process consistent with generally accepted valuation practices.
– Evaluating the reasonableness of the terminal growth rate through comparison to industry reports.
– Assessing the reasonableness of the selected royalty rate used in the fair value analysis by comparing against an independently-sourced set of comparable licensing agreements.
/s/ Deloitte & Touche LLP
Indianapolis, Indiana
March 5, 2025
We have served as the Company's auditor since 2015.
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ORTHOPEDIATRICS CORP.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share information)
As of December 31,
2024 2023
ASSETS
Current assets:
Cash $ 43,820 $ 31,055
Restricted cash 1,957 1,972
Short-term investments 25,013 49,251
Accounts receivable - trade, net of allowances of $ 1,145 and $ 1,373 , respectively
42,357 34,617
Inventories, net 117,005 105,851
Prepaid expenses and other current assets 7,021 3,750
Total current assets 237,173 226,496
Property and equipment, net 50,596 41,048
Other assets:
Amortizable intangible assets, net 64,427 69,275
Goodwill 93,844 83,699
Other intangible assets 16,752 15,287
Other non-current assets 10,417 2,940
Total other assets 185,440 171,201
Total assets $ 473,209 $ 438,745
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade $ 8,908 12,649
Accrued compensation and benefits 13,888 11,325
Current portion of long-term debt with affiliate 160 152
Current portion of acquisition installment payable 1,347 10,149
Other current liabilities 9,659 7,391
Total current liabilities 33,962 41,666
Long-term liabilities:
Long-term term loan 23,957 9,297
Long-term convertible note 47,913 —
Long-term debt with affiliate, net of current portion 451 611
Other long-term debt, net of current portion 635 —
Acquisition installment payable, net of current portion 2,452 3,551
Deferred income taxes 3,381 5,483
Other long-term liabilities 5,892 1,112
Total long-term liabilities 84,681 20,054
Total liabilities 118,643 61,720
Commitments and contingencies (Note 17)
Stockholders' equity:
Common stock, $ 0.00025 par value; 50,000,000 shares authorized; 24,217,508 shares and 23,378,408 shares issued and outstanding as of December 31, 2024 and December 31, 2023, respectively
6 6
Additional paid-in capital 600,897 580,287
Accumulated deficit ( 235,564 ) ( 197,742 )
Accumulated other comprehensive loss ( 10,773 ) ( 5,526 )
Total stockholders' equity 354,566 377,025
Total liabilities and stockholders' equity $ 473,209 $ 438,745
See notes to consolidated financial statements.
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ORTHOPEDIATRICS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share information)
Year Ended December 31,
2024 2023 2022
Net revenue $ 204,727 $ 148,732 $ 122,289
Cost of revenue 56,129 37,479 31,629
Gross profit 148,598 111,253 90,660
Operating expenses:
Sales and marketing 64,296 52,824 46,094
General and administrative 102,789 73,300 57,904
Tradename impairment 1,836 985 3,609
Restructuring 3,653 — —
Research and development 11,034 10,895 8,452
Total operating expenses 183,608 138,004 116,059
Operating loss ( 35,010 ) ( 26,751 ) ( 25,399 )
Other expenses (income):
Interest expense (income), net 2,621 ( 198 ) 2,424
Loss on early extinguishment of debt 3,230 — —
Fair value adjustment of contingent consideration — ( 2,980 ) ( 25,930 )
Other expense (income) 1,068 ( 2,261 ) 1,796
Total other expenses (income), net 6,919 ( 5,439 ) ( 21,710 )
Net loss before income taxes ( 41,929 ) ( 21,312 ) ( 3,689 )
Income tax benefit ( 4,107 ) ( 338 ) ( 4,947 )
Net (loss) income $ ( 37,822 ) $ ( 20,974 ) $ 1,258
Weighted average shares outstanding
Basic 23,077,704 22,675,477 20,704,556
Diluted 23,077,704 22,675,477 20,947,727
Net (loss) income per share
Basic $ ( 1.64 ) $ ( 0.92 ) $ 0.06
Diluted $ ( 1.64 ) $ ( 0.92 ) $ 0.06
See notes to consolidated financial statements.
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ORTHOPEDIATRICS CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
Year Ended December 31,
2024 2023 2022
Net (loss) income $ ( 37,822 ) $ ( 20,974 ) $ 1,258
Other comprehensive (loss) income:
Foreign currency translation adjustment ( 5,090 ) ( 1,631 ) ( 14,570 )
Unrealized (loss) gain on short term investments ( 276 ) 68 ( 871 )
Adjustment for realized gains 119 1,437 1,550
Other comprehensive loss, net of tax ( 5,247 ) ( 126 ) ( 13,891 )
Comprehensive loss $ ( 43,069 ) $ ( 21,100 ) $ ( 12,633 )
See notes to consolidated financial statements.
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ORTHOPEDIATRICS CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
( in thousands, except share information)
Common Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Total Stockholders' Equity
Shares Value
Balance at January 1, 2022 19,677,214 $ 5 $ 394,899 $ ( 178,026 ) $ 8,491 $ 225,369
Net income — — — 1,258 — 1,258
Restricted stock 188,537 — 6,449 — — 6,449
Stock option exercise 2,010 — 63 — — 63
Consideration for MD Ortho and Pega acquisitions 208,140 — 9,707 — — 9,707
Stock portion of ApiFix anniversary installment payment 185,811 — 10,410 — — 10,410
Issuance of common stock, net of issuance cost 2,616,250 1 139,282 — — 139,283
Other comprehensive loss — — — — ( 13,891 ) ( 13,891 )
Balance at December 31, 2022 22,877,962 $ 6 $ 560,810 $ ( 176,768 ) $ ( 5,400 ) $ 378,648
Net loss — — — ( 20,974 ) — ( 20,974 )
Stock option exercise 670 — 21 — — 21
Restricted stock 304,889 — 10,526 — — 10,526
Consideration for MedTech and Rhino acquisitions 54,884 — 2,752 — — 2,752
Stock portion of ApiFix anniversary installment payment 140,003 — 6,178 — — 6,178
Other comprehensive loss — — — — ( 126 ) ( 126 )
Balance at December 31, 2023 23,378,408 $ 6 $ 580,287 $ ( 197,742 ) $ ( 5,526 ) $ 377,025
Net loss — — — ( 37,822 ) — ( 37,822 )
Restricted stock 589,000 — 13,548 — — 13,548
Acquisition consideration - MedTech installment 4,288 — 133 — — 133
Acquisition consideration - ApiFix final installment 245,812 — 6,929 — — 6,929
Other comprehensive loss — — — — ( 5,247 ) ( 5,247 )
Balance at December 31, 2024 24,217,508 $ 6 $ 600,897 $ ( 235,564 ) $ ( 10,773 ) $ 354,566
See notes to consolidated financial statements.
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ORTHOPEDIATRICS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
2024 2023 2022
OPERATING ACTIVITIES
Net (loss) income $ ( 37,822 ) $ ( 20,974 ) $ 1,258
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Impairment 1,836 985 3,609
Depreciation and amortization 19,080 17,385 13,099
Loss on early extinguishment of debt 3,230 — —
Stock-based compensation 13,548 10,526 6,679
Fair value adjustment of contingent consideration — ( 2,980 ) ( 25,930 )
Accretion of acquisition installment payable 661 1,372 2,307
Deferred income taxes ( 4,736 ) ( 1,163 ) ( 5,032 )
Non-cash other 90 — —
Changes in certain operating assets and liabilities:
Accounts receivable - trade ( 4,749 ) ( 9,724 ) ( 3,983 )
Inventories ( 13,197 ) ( 26,279 ) ( 16,938 )
Prepaid expenses and other current assets ( 1,561 ) 94 ( 506 )
Accounts payable - trade ( 4,280 ) 1,491 ( 209 )
Accrued expenses and other liabilities 537 6,852 3,344
Other 315 ( 4,631 ) 536
Net cash used in operating activities ( 27,048 ) ( 27,046 ) ( 21,766 )
INVESTING ACTIVITIES
Acquisition of Boston O&P, net of cash acquired ( 20,225 ) — —
Clinic acquisitions, net of cash acquired ( 2,882 ) — —
Acquisition of MedTech, net of cash acquired — ( 3,097 ) —
Acquisition of Rhino assets — ( 546 ) —
Acquisition of MDO, net of cash acquired — — ( 8,360 )
Acquisition of Pega, net of cash acquired — — ( 31,730 )
Sale of short-term marketable securities 49,855 112,904 46,872
Purchase of short-term marketable securities ( 25,000 ) ( 48,600 ) ( 110,122 )
Investment in private companies and purchases of licenses ( 647 ) ( 2,106 ) —
Purchases of property and equipment ( 14,263 ) ( 16,878 ) ( 10,031 )
Net cash provided by (used in) investing activities ( 13,162 ) 41,677 ( 113,371 )
FINANCING ACTIVITIES
Payments on debt with affiliate — — ( 31,000 )
Proceeds from issuance of debt with affiliate — — 31,000
Proceeds from issuance of debt 73,533 9,424 —
Payment of debt issuance costs ( 3,407 ) — —
Proceeds from issuance of common stock, net of issuance costs — — 139,282
Proceeds from exercise of stock options — 21 63
Installment payment for ApiFix ( 2,250 ) ( 2,000 ) ( 3,234 )
Installment payment for MedTech ( 1,250 ) — —
Payments on mortgage notes ( 152 ) ( 144 ) ( 137 )
Payments on clinic acquisition notes ( 1,108 ) — —
Payment on debt ( 12,231 ) — —
Net cash provided by financing activities 53,135 7,301 135,974
Effect of exchange rate changes on cash ( 175 ) 633 619
NET INCREASE IN CASH AND RESTRICTED CASH 12,750 22,565 1,456
Cash and restricted cash, beginning of period 33,027 10,462 9,006
Cash and restricted cash, end of period $ 45,777 $ 33,027 $ 10,462
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2024 2023 2022
SUPPLEMENTAL DISCLOSURES
Cash paid for interest $ 2,752 $ 42 $ 700
Transfer of instruments between property and equipment and inventory $ 420 $ 57 $ ( 234 )
Issuance of common shares for ApiFix installment $ 6,929 $ 6,178 $ 10,410
Issuance of common shares to acquire MedTech $ — $ 2,274 $ —
Issuance of common shares for MedTech installment $ 133 $ — $ —
Issuance of common shares to acquire Rhino assets $ — $ 478 $ —
Issuance of common shares to acquire MDO $ — $ — $ 9,707
Right-of-use assets obtained in exchange for lease liabilities $ 8,957 $ 706 $ 213
Debt issuance costs not yet paid $ — $ 127 $ —
See notes to consolidated financial statements.
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ORTHOPEDIATRICS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2024 and 2023 and for the three years in the period ended
December 31, 2024
( dollars in thousands, except per share information )
NOTE 1 – BUSINESS
OrthoPediatrics Corp., a Delaware corporation, is a medical device company committed to designing, developing and marketing anatomically appropriate implants, 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, including PediLoc ® , PediPlates ® , Cannulated Screws, PediFlex TM nail, PediNail TM , PediLoc ® Tibia, ACL Reconstruction System, Locking Cannulated Blade, Locking Proximal Femur, Spica Tables, RESPONSE TM Spine, BandLoc TM , Pediatric Nailing Platform | Femur, Devise Rail, Orthex ® , The Fassier-Duval Telescopic Intramedullary System ® , SLIM TM Nail, The GAP Nail TM , The Free Gliding SCFE Screw System TM , GIRO TM Growth Modulation System, PNP Tibia System, ApiFix ® Mid-C System and Mitchell Ponseti ® and Boston Brace 3D 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 while our orthopedic bracing products are manufactured in-house. We also operate multiple 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 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 braces as well as provide O&P clinic services to meet the specialized needs of pediatric surgeons and their patients, who we believe have been largely neglected by the orthopedic industry. We currently serve three of the largest categories in this market.
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements include the accounts of OrthoPediatrics Corp. and its wholly-owned subsidiaries (collectively, the “Company,” “we,” “our” or “us”). All intercompany balances and transactions have been eliminated.
We have prepared the accompanying consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The accompanying consolidated financial statements have been prepared assuming our Company will continue as a going concern. We have experienced recurring losses from operations since our inception and had an accumulated deficit of $ 235,564 and $ 197,742 as of December 31, 2024 and 2023, respectively.
Use of Estimates
Preparation of our consolidated financial statements requires the use of estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as of the date of the consolidated financial statements. By their nature, these judgments are subject to an inherent degree of uncertainty. We use historical experience and other assumptions as the basis for our judgments and estimates. Because future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Any changes in these estimates will be reflected in our consolidated financial statements.
Foreign Currency Transactions
We currently bill our international stocking distributors in U.S. dollars, resulting in minimal foreign exchange transaction expense.
Beginning in early 2017 and continuing through 2024, we expanded operations and established legal entities outside the United States, permitting us to sell under an agency model direct to local hospitals internationally. The
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countries we serve under the agency model include the United Kingdom, Ireland, Australia, New Zealand, Canada, Belgium, the Netherlands, Poland, Italy, Israel, Germany, Switzerland, and Austria. In order to further enhance our operations in Europe, we established operating companies in the Netherlands and Germany in March 2019 and April 2022, respectively. In 2023 and 2024, we hired operating and sales representatives in Germany and Australia, respectively, to better serve our customers. In 2024, we opened warehouses in Germany and Australia, and hired a European operations director to continue our growth in the European market. The financial statements of our foreign subsidiaries are accounted for in local functional currencies and have been translated into U.S. dollars using end-of-period exchange rates for assets and liabilities and average exchange rates during each reporting period for results of operations. Foreign currency translation adjustments have been recorded as a separate component of the consolidated statements of comprehensive loss.
Fair Value of Financial Instruments
The accounting standards related to fair value measurements define fair value and provide a consistent framework for measuring fair value under the authoritative literature. Valuation techniques are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect market assumptions. This guidance only applies when other standards require or permit the fair value measurement of assets and liabilities. The guidance does not expand the use of fair value measurements. A fair value hierarchy was established, which prioritizes the inputs used in measuring fair value into three broad levels.
Level 1 – Quoted prices in active markets for identical assets or liabilities;
Level 2 – Observable market-based inputs or unobservable inputs that are corroborated by market data; and
Level 3 – Significant unobservable inputs that are not corroborated by market data. Generally, these fair value measures are model-based valuation techniques such as discounted cash flows, and are based on the best information available, including our own data.
The Company's financial instruments include cash, restricted cash, cash equivalents, short-term investments, accounts receivable, accounts payable, acquisition installment payables, contingent consideration and long-term debt. The carrying amounts of accounts receivable, accounts payable, acquisition installment payables and long-term debt approximate the fair value due to the short-term nature or market rates of these instruments. The company bases the fair value of short-term investments on quoted market prices for identical or comparable assets except for investments classified as asset backed securities or certificates of deposit which we identify as Level 2. These securities are predominately priced by third parties, either a pricing vendor or dealer. When a quoted price in an active market for an identical security is not available these third parties will utilize an alternative market approach, such as a recent trade or matrix pricing, or an income approach, such as a discounted cash flow pricing model that calculates values from observable inputs such as quoted interest rates, yield curves and other observable market information. Contingent consideration represents the system sales payment the Company is obligated to make. The fair value of the contingent consideration payment is considered a level 3 fair value measurement and was determined with the assistance of an independent valuation specialist at the original issuance date and as of the balance sheet date. See Note 6 for further discussion of financial instruments that carried a fair value on a recurring and nonrecurring basis.
Revenue from Contracts with Customers
In accordance with ASC 606, " Revenue from Contracts with Customers ," revenue is recognized when our performance obligations under the terms of a contract with our customer are satisfied. This typically occurs when we transfer control of our products to the customers. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these goods or services, and excludes any sales incentives or taxes collected from a customer which are subsequently remitted to government authorities.
Revenue Recognition – United States
Revenue in the United States is generated primarily from the sale of our implants, specialized braces, O&P clinic services and, to a much lesser extent, from the sale of our instruments. Sales of our implants and instruments in the United States are primarily to hospital accounts through independent sales agencies. We recognize revenue
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when our performance obligations under the terms of a contract with our customer are satisfied. For our implants and instruments, this typically occurs when we transfer control of our products to the customer, generally upon implantation or when title passes upon shipment. The products are generally consigned to our independent sales agencies, and revenue is recognized when the products are used by or shipped to the hospital for surgeries on a case by case basis. On rare occasions, hospitals purchase product for their own inventory, and revenue is recognized when the hospital obtains control of the product, typically either upon shipment or delivery of the product dependent on the terms of the contract. Sales of our bracing products are sold to stocking distributors, hospitals, orthotist and other medical professionals or directly to end customers. For such sales, we consider our performance obligation to be settled upon shipment, and revenue is recognized at that time. For our O&P clinics, we recognize revenue when our custom manufactured braces or other products are fitted to and accepted by patients. Revenue from these O&P clinics is primarily derived from contracts with third party payors. At, or subsequent to delivery, an invoice is issued to the third-party payor, which primarily consists of commercial insurance companies, Medicare, Medicaid and private or patient pay individuals. Revenue is recognized for the amounts expected to be received from payors based on contractual reimbursement rates, which are net of estimated contractual discounts and other implicit price concessions. These revenue amounts are further revised as claims are adjudicated, which may result in additional disallowances, which are considered as part of the transaction price and recorded as a reduction of revenues.
Revenue Recognition – International
Outside of the United States, we sell our products, including our specialized braces, directly to hospitals through independent sales agencies or to independent stocking distributors. Generally, the distributors are allowed to return products, and some are thinly capitalized. Based on a history of reliable collections, we have concluded that a contract exists and revenue should be recognized when we transfer control of our products to the customer, generally when title passes upon shipment. Additionally, based on our history of immaterial returns from international customers, we have historically estimated no reserve for returns.
Beginning in early 2017 and continuing through 2024, we expanded operations and established legal entities outside the United States, permitting us to sell under an agency model direct to local hospitals internationally. The products are generally consigned to our independent sales agencies, and revenue is recognized when the products are used by or shipped to the hospital for surgeries on a case by case basis. On rare occasions, hospitals purchase products for their own inventory, and revenue is recognized when title passes upon shipment.
Cash, Cash Equivalents and Short Term Investments
We maintain cash in bank deposit accounts which, at times, may exceed federally insured limits. To date, we have not experienced any loss in such accounts. We consider all highly liquid investments with original maturity of three months or less at inception to be cash equivalents. The carrying amounts reported in the balance sheets for cash are valued at cost, which approximates fair value.
The Company invests in both certificate of deposits and available-for-sale short term investments. The Company has the ability, if necessary, to liquidate without penalty any of its short term investments to meet its liquidity needs in the next twelve months. As such, those investments with contractual maturities greater than one year from the date of purchase are classified as short-term on the accompanying consolidated balance sheets. The Company includes unrealized gains or losses, as a component of other comprehensive income in stockholders' equity. If the adjustment to fair value reflects a decline in the value of the investment, the Company evaluates whether any impairment is a result of a credit loss or other factors. This evaluation includes, but is not limited to, significant quantitative and qualitative assessments and estimates regarding credit ratings, significance of a security's loss position, adverse conditions specifically related to the security, and the payment structure of the security. There were no such losses recognized in the accompanying consolidated statements of operations. Additionally, the Company recognizes any previously unrealized gain or loss at the time the Company liquidates any of its investments based on the value at the time of liquidation. In 2024, 2023, and 2022, the Company recognized gains of $ 119 , $ 1,437 , and $ 1,550 , respectively, that were previously unrealized.
Restricted Cash
In conjunction with the sale of Vilex, $ 1,250 was placed into a separate escrow account. This cash is reported as restricted cash on the December 31, 2024 and 2023 consolidated balance sheets. These funds were to remain restricted until August 31, 2021 at which time, they were to be released to the Company subject to no claims related to the purchase; however, due to the pending IMED Surgical litigation, the cash remains reported as
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restricted until the conclusion of the legal matter. See Note 17 - Commitments and Contingencies for further detail. The Company also maintains restricted cash of 625 Euro at its Netherlands entity for potential Italian tenders.
Accounts Receivable
Accounts receivable are uncollateralized customer obligations due under normal trade terms, generally requiring payment within 30 days from the invoice date in the United States and within 90 days internationally. Account balances with invoices over 30 or 90 days past due for domestic and international accounts, respectively, are considered delinquent. For O&P clinic goods and services, accounts receivables are adjusted for unapplied cash and estimated allowances for implicit price concessions (like disallowed revenue and patient non-payments). These allowances are based on historical collection experience for different primary payor class groups (Medicare and non-Medicare). Management uses historical data to estimate collections by aging category and adjusts these estimates as needed based on trends and new information. No interest is charged on past due accounts. Payments of accounts receivable are applied to the specific invoices identified on the customer's remittance advice or, if unspecified, to the customer's account as an unapplied credit.
The carrying amount of accounts receivable is reduced by an allowance that reflects management's best estimate of the amounts that will not be collected, determined principally on the basis of historical experience, management's assessment of the collectability of specific customer accounts and the aging of the accounts receivable. All accounts or portions thereof deemed to be uncollectible or to require an excessive collection cost are written off against the established reserve.
The following table summarizes activity in our reserves recorded against accounts receivable:
December 31,
2024 2023 2022
Balance at beginning of year $ 1,373 $ 1,056 $ 347
Adjustments charged to expense (income) 101 499 723
Write-offs & other adjustments ( 1,132 ) ( 182 ) ( 174 )
Carrying amount as a result of acquisitions 803 — 160
Balance at end of year $ 1,145 $ 1,373 $ 1,056
Inventories, net
Inventories are stated at the lower of cost or net realizable value, with cost determined using the first-in-first-out method. Inventories, which consist of implants and instruments held in our warehouses, with third-party independent sales agencies or distributors, or consigned directly with hospitals, are considered finished goods and are purchased from third parties.
We evaluate the carrying value of our inventories in relation to the estimated forecast of product demand, which takes into consideration the life cycle of the product. A significant decrease in demand could result in an increase in the amount of excess inventory on hand, which could lead to additional charges for excess and obsolete inventory.
The need to maintain substantial levels of inventory impacts our estimates for excess and obsolete inventory. Each of our implant systems are designed to include implantable products that come in different sizes and shapes to accommodate the surgeon’s needs. Typically, a small number of the set components are used in each surgical procedure. Certain components within each set may become obsolete before other components based on the usage patterns. We adjust inventory values, as needed, to reflect these usage patterns and life cycle.
In addition, we continue to introduce new products, which may require us to take additional charges for excess and obsolete inventory in the future.
Charges for excess and obsolete inventory are included in cost of revenue and were $ 914 , $ 995 and $ 1,011 for the years ended December 31, 2024, 2023 and 2022, respectively. We also incurred an additional charge during 2024 of $ 1,756 for excess and obsolete inventory in connection with our 2024 Restructuring Plan that is included within restructuring expense in the consolidated statement of operations. See Note 4 - Restructuring for additional information.
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Costs Related to Common Stock Offerings
On August 15, 2022, we completed a public offering of our common stock and pre-funded warrants exercisable for an aggregate of up to 1,525,000 shares of common stock to Squadron Capital LLC (“Squadron”), our largest investor. Offering expenses of $ 293 , primarily consisting of legal, accounting and other direct fees and costs related to the offering were recorded in stockholders' equity at the conclusion of our offering.
Property and Equipment, net
Property and equipment are carried at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful life of the assets. When assets are retired or otherwise disposed of, costs and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is recognized in operations for the period. Maintenance and repairs that prolong or extend the useful life are capitalized, whereas standard maintenance, replacements, and repair costs are expensed as incurred.
Instruments are hand-held devices, specifically designed for use with our implants and are used by surgeons during surgery. Instruments deployed in the field are carried at cost less accumulated depreciation and are recorded in property and equipment, net on the consolidated balance sheets.
Sample inventory consists of our implants and instruments, and is maintained to market and promote our products. Sample inventory is carried at cost less accumulated depreciation.
Depreciable lives are generally as follows:
Building and building improvements 25 to 30 years
Furniture and fixtures 5 to 7 years
Computer equipment 3 to 5 years
Business software 3 years
Office and other equipment 5 to 7 years
Instruments 5 years
Sample inventory 2 years
Amortizable Intangible Assets, net
Amortizable intangible assets include fees necessary to secure various patents and licenses, including Band-Lok, the value of internally developed software, customer relationships, and non-competition agreements related to the acquisition of Orthex, and customer relationships and non-competition agreements related to the acquisitions of Telos, ApiFix, MD Ortho, Pega Medical, MedTech Concepts, Rhino, Boston O&P, and O&P clinics. Amortization is calculated on a straight-line basis over the estimated useful life of the asset. Amortization for patents and licenses commences at the time of patent approval, and for licenses upon market launch, respectively. Amortization for assets acquired commences upon acquisition. Intangible assets are amortized over a 3 to 20 year period.
Amortizable intangible assets are assessed for impairment upon triggering events that indicate that the carrying value of an asset may not be recoverable. Recoverability is measured by a comparison of the carrying amount to future net undiscounted cash flows expected to be generated by the associated asset. If such assets are determined to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount exceeds the fair market value of the intangible assets. No impairment charges were recorded in any of the periods presented.
Goodwill and Other Intangible Assets
Our goodwill represents the excess of the cost over the fair value of net assets acquired. The determination of the value of goodwill and intangible assets arising from acquisitions requires extensive use of accounting estimates and judgments to allocate the purchase price to the fair value of net tangible and intangible assets acquired. Goodwill is not amortized and is assessed for impairment using fair value measurement techniques on an annual basis or more frequently if facts and circumstances warrant such a review. Goodwill is tested at the reporting unit level as defined in the Glossary to ASC 350. Per this definition, a reporting unit is an operating segment or one level below an operating segment. The Company has determined the reporting units to be our legacy surgical
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implants unit and the bracing reporting unit established with the acquisition of MD Ortho, Boston O&P and O&P clinics. The goodwill is considered to be impaired if we determine that the carrying value of either of our reporting units exceeds its respective fair value. No impairment charges were recorded in any of the years presented.
The Company tests goodwill for impairment annually in the fourth quarter by either performing a qualitative evaluation or a quantitative test. The quantitative assessment for goodwill requires us to estimate the fair value of our two reporting units using either an income or market approach or a combination thereof.
We have indefinite-lived trademark assets that are reviewed for impairment by performing a quantitative analysis, which occurs annually in the fourth quarter, utilizing balances as of October 1, or whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability is measured by a comparison of the carrying amount to future net discounted cash flows expected to be generated by the associated asset. If such assets are determined to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount exceeds the fair market value of the assets. The calculation of the fair value of the trademark assets involves Level 3 fair value measurements. To estimate the fair value of the trademark asset and associated impairment, we utilized the relief-from-royalty method, which is a form of the income approach. This approach requires us to make significant estimates and assumptions including preparation of forecasted revenue, selection of a royalty rate and discount rate and estimate of the terminal year revenue growth rate.
During 2024, 2023, and 2022, management determined that a triggering event occurred, indicating that it was more likely than not the fair value of the ApiFix trademark asset was less than the carrying value. As such, the company completed a quantitative analysis whereby we determined the fair value of the ApiFix trademark asset associated was below the carrying value. The primary reason for the impairment is the lower forecasted revenue of our ApiFix product than previously expected. We recorded impairment charges of $ 1,836 , $ 985 , and $ 3,609 for the years ended December 31, 2024, 2023 and 2022, respectively, to reduce the carrying amount of the intangible asset to its estimated fair value. No impairment charges were recorded in any of the other periods presented or for any other indefinite-lived trademark assets.
Investments in Privately Held Companies
The Company determines whether its investments in privately held companies are debt or equity based on their characteristics. The Company also evaluates the investee to determine if the entity is a variable interest entity (“VIE”) and, if so, whether the Company is the primary beneficiary of the VIE, in order to determine whether consolidation of the VIE is required. If consolidation is not required and the Company does not have voting control of the entity, the investment is evaluated to determine if the equity method of accounting should be applied. The equity method applies to investments in common stock or in substance common stock where the Company exercises significant influence over the investee.
Investments in privately held companies determined to be equity securities are accounted for as non-marketable securities. The Company adjusts the carrying value of its non-marketable equity securities for changes from observable transactions for identical or similar investments of the same issuer, less impairment. All gains and losses on non-marketable equity securities, realized and unrealized, are recognized as a component of other expenses (income) in the consolidated statements of operations.
Investments in privately held companies determined to be debt securities are accounted for as available-for-sale or held-to-maturity securities unless the fair value option is elected. The Company has investments of $ 2,180 as and $ 1,855 of December 31, 2024 and 2023, respectively. which are recorded within other non-current assets on its consolidated balance sheet.
Acquisition Payable and Contingent Consideration
Upon the completion of an acquisition the Company may record an acquisition installment payable, contingent consideration or both. Both are recorded at their fair values as determined by management with the assistance of an independent valuation specialist at the original issuance date and are adjusted on a recurring basis. Accretion of interest expense attributable to the acquisition installment payable are recorded as a component of interest expense (income), net. Changes in the fair value of the contingent consideration are included in fair value adjustments of contingent consideration. Both are included as a component of other expenses (income) on the consolidated statements of operations. The amount of expense recorded was $ 661 , $ 1,372 and $ 2,307 for the
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years ended December 31, 2024, 2023 and 2022, respectively related to the accretion of the acquisition installment payable. Adjustments in the fair value of the contingent consideration payment were recognized as income of $ 0 , $ 2,980 and $ 25,930 for the years ended December 31, 2024, 2023 and 2022, respectively. Following the fourth year anniversary of our acquisition of ApiFix in April 2024, the sales performance period associated with our ApiFix system sales milestone ended, and no additional amounts were owed to the sellers. There is no additional contingent consideration owed as of December 31, 2024.
Shipping and Handling Costs
Shipping and handling costs that are billed to the customer are included in net revenue and were $ 1,385 , $ 1,244 and $ 1,027 , for the years ended December 31, 2024, 2023 and 2022, respectively. Shipping and handling costs that are not billed to the customer are included in sales and marketing expenses and were $ 6,827 , $ 5,655 and $ 4,270 , for the years ended December 31, 2024, 2023 and 2022, respectively.
Cost of Revenue
Cost of revenue consists primarily of products purchased from third-party suppliers, excess and obsolete inventory adjustments, inbound freight, royalties, material, labor and overhead related to the manufacturing of our braces. Our implants and instruments are manufactured to our specifications by third-party suppliers who meet our manufacturer qualifications standards. We purchase the raw materials to make our specialized bracing products in our facilities in Wayland, IA and Boston, MA. Our manufacturing sites as well as our third-party manufacturers are required to meet Food and Drug Administration (the “FDA”), International Organization for Standardization and other country-specific quality standards. The majority of our implants, instruments, and braces are produced in the United States.
Sales and Marketing Expenses
Sales and marketing expenses primarily consist of commissions to our domestic and select international independent sales agencies and consignment distributors, as well as compensation, commissions, benefits and other related costs, including stock-based compensation, for personnel we employ. Commissions and bonuses are generally based on a percentage of sales. Our international independent stocking distributors purchase instrument sets and replenishment stock for resale, and we do not pay commissions or any other sales related costs for international sales to distributors.
Advertising Costs
Advertising costs consist primarily of print advertising, trade shows, and other related expenses. Advertising costs are expensed as incurred and are recorded as a component of sales and marketing expense. Advertising costs were $ 2,395 , $ 2,409 and $ 1,906 for the years ended December 31, 2024, 2023 and 2022, respectively.
Research and Development Costs
Research and development costs are expensed as incurred. Our research and development expenses primarily consist of costs associated with engineering, product development, consulting services, outside prototyping services, outside research activities, materials, development and protection of our intellectual property portfolio, as well as other costs associated with development of our products. Research and development costs also include related personnel and consultants’ compensation expense, including stock-based compensation.
Stock-Based Compensation
Prior to our IPO, we maintained an Amended and Restated 2007 Equity Incentive Plan (the “2007 Plan”) that provides for grants of options and restricted stock to employees, directors and associated third-party representatives of our company as determined by the Board of Directors. The 2007 Plan had authorized 1,585,000 shares for award.
Immediately prior to our IPO, we adopted our 2017 Incentive Award Plan (the “2017 Plan”) which replaced the 2007 Plan. The 2017 Plan provides for grants of options and restricted stock to officers, employees, consultants or directors of our Company. The 2017 Plan has authorized 1,832,460 shares for award.
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In 2024 we adopted the 2024 Incentive Award Plan (the "2024 Plan") which replaced the 2017 Plan. The 2024 Plan provides for grants of options and restricted stock to officers, employees, consultants or directors of the Company. The 2024 Plan has authorized 1,629,000 shares for award. As of December 31, 2024, the 2024 Plan had 1,231,564 shares available for issuance.
Options holders, upon vesting, may purchase common stock at the exercise price, which is the estimated fair value of our common stock on the date of grant. Option grants generally vest immediately or over a three-year period. No stock options were granted in any of the periods presented.
Restricted stock may not be transferred prior to the expiration of the restricted period. The restricted stock that has been granted under the 2007 Plan has restriction periods that generally last until the earlier of six years from the date of grant, or an initial public offering or change in control, as defined in the 2007 Plan. All restricted stock granted prior to May 2014 vested upon our IPO and the remaining grants under the 2007 Plan vested in April 2018. The restricted stock that has been granted under the 2017 Plan typically vests at the end of a three-year period. Remaining grants under the 2017 Plan will vest by February 2027. Generally under the 2024 Plan, restricted stock vests at the end of a three-year period. We have elected to recognize the reversal of stock compensation expense when a restricted stock forfeiture occurs as opposed to estimating future forfeitures.
We record the fair value of restricted stock at the grant date. Stock-based compensation is recognized ratably over the requisite service period, which is generally the restriction period for restricted stock.
Comprehensive Loss
Comprehensive loss is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. Comprehensive loss includes foreign currency translation adjustments and unrealized gains (losses) on marketable securities.
Income Taxes
We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, we determine deferred tax assets and liabilities on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
We recognize deferred tax assets to the extent that we believe that these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence. If we determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make an adjustment to the valuation allowance.
We record uncertain tax positions on the bases of a two-step process in which (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the positions and (2) for those tax positions that do not meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50% likely to be realized upon ultimate settlement with the related tax authority.
Litigation and Contingencies
Accruals for litigation and contingencies are reflected in the consolidated financial statements based on
management’s assessment, including advice of legal counsel, of the expected outcome of litigation or other dispute resolution proceedings and/or the expected resolution of contingencies. Liabilities for estimated losses are accrued if the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated. Significant judgment is required in both the determination of probability of loss and the determination as to whether the amount is reasonably estimable. Accruals are based only on information available at the time of the assessment due to the uncertain nature of such matters. As additional information becomes available, management reassesses potential liabilities related to pending claims and litigation and may revise its previous estimates, which could materially affect the Company’s results of operations in a given period.
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Debt Issuance Costs
Debt issuance costs are deferred and presented as a reduction to long-term debt. Debt issuance costs are amortized using the effective interest rate method over the term of the loan. Amortization of deferred debt issuance costs are included within interest expense (income), net in the consolidated statements of operations.
Leases
At the inception of a contractual arrangement, the Company determines whether the contract is or contains a lease by assessing whether there is an identified asset and whether the contract conveys the right to control the use of the identified asset in exchange for consideration over a period of time. If both criteria are met, the Company calculates the associated lease liability and corresponding right-of-use asset upon lease commencement using a discount rate based on a borrowing rate commensurate with the term of the lease.
The Company has elected not to recognize leases with an original term of one year or less on the balance sheet. The Company typically only includes an initial lease term in its assessment of a lease arrangement. Options to renew a lease are not included in the Company’s assessment unless there is reasonable certainty that the Company will renew. Assumptions made by the Company at the commencement date are re-evaluated upon occurrence of certain events, including a lease modification. A lease modification results in a separate contract when the modification grants the lessee an additional right of use not included in the original lease and when lease payments increase commensurate with the standalone price for the additional right of use. When a lease modification results in a separate contract, it is accounted for in the same manner as a new lease.
Operating lease liabilities and their corresponding right-of-use assets are initially recorded based on the present value of lease payments over the expected remaining lease term. Certain adjustments to the right-of-use asset may be required for items such as incentives received. The interest rate implicit in lease contracts is typically not readily determinable. As a result, the Company utilizes its incremental borrowing rate to discount lease payments, which reflects the fixed rate at which the Company could borrow on a collateralized basis the amount of the lease payments in the same currency, for a similar term, in a similar economic environment. To estimate its incremental borrowing rate, the Company considers its current interest rate on its secured Term Loan, adjusted as necessary based on the lease term and the Company’s credit spread.
The Company records lease liabilities within current liabilities or long-term liabilities based upon the length of time associated with the lease payments. The Company records its operating lease right-of-use assets within other non-current assets. The Company has elected to account for lease and non-lease components together as a single lease component for all underlying assets.
Reclassification
In the 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 consolidated statements of operations.
The following tables present the impact of the reclassification on our consolidated statements of operations for the years ended December 31, 2023 and 2022:
Year Ended December 31,
2023 2022
Sales and marketing (prior presentation) $ 51,402 $ 45,053
Reclassification 1,422 1,041
Sales and marketing (new presentation) $ 52,824 $ 46,094
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Year Ended December 31,
2023 2022
General and administrative (prior presentation) $ 75,421 $ 59,383
Reclassification ( 2,121 ) ( 1,479 )
General and administrative (new presentation) $ 73,300 $ 57,904
Year Ended December 31,
2023 2022
Research and development (prior presentation) $ 10,196 $ 8,014
Reclassification 699 438
Research and development (new presentation) $ 10,895 $ 8,452
Recent Accounting Pronouncements
In October 2023, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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 ASU 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 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. We adopted this ASU for the annual period ended December 31, 2024 retrospectively for all periods presented. See Note 13 - Business Segments for additional information.
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 on a prospective basis. Retrospective application is permitted. We are currently evaluating the effect of this ASU on our consolidated financial statements and disclosures.
In November 2024, the FASB issued ASU No. 2024-03, "Disaggregation of Income Statement Expenses" which requires disaggregated disclosure of income statement expenses into specified categories in disclosures within the footnotes to the financial statements. The standard is effective for annual periods beginning after December 15, 2026. We are currently evaluating the effect of this ASU 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.
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Under the terms of the stock purchase agreement, the Company paid to the shareholders of Boston O&P consideration of $ 21,535 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 is not considered part of the purchase consideration.
The following table summarizes the total consideration paid for Boston O&P and the 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 $ 21,535
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 2,617
Other non-current liabilities 1,803
Total liabilities 8,222
Less: total net assets 13,178
Goodwill $ 8,357
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 unaudited pro forma net revenue and net loss assuming the acquisition of Boston O&P occurred on January 1, 2023.
Year Ended December 31,
2024 2023
Net revenue $ 205,158 $ 176,154
Net loss $ ( 37,849 ) $ ( 20,510 )
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In 2024, Boston O&P purchased all the issued and outstanding share capital or acquired the assets of multiple domestic orthotic and prosthetic device clinics. Total consideration for all O&P clinics acquired during 2024 was approximately $ 4,818 in total consideration, which comprised of cash of $ 3,388 and promissory notes in the original principal amount of $ 1,430 payable in installment s with an interest rate of 5.0 % per annum. We allocated $ 680 to customer relationship intangible assets and $ 3,367 to goodwill, and the rest to net working capital and other assets acquired and liabilities assumed. The allocation of the purchase price is considered preliminary.
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 or 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 $ 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 (as amended, the "Purchase Agreement") 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
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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 year ended December 31, 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 consolidated balance sheet. The present value of the remaining acquisition installment payable is $ 3,799 as of December 31, 2024, of which $ 1,347 is recorded as a current liability. 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).
NOTE 4 - RESTRUCTURING
In the fourth quarter of 2024, we initiated a global restructuring plan (the "2024 Restructuring Plan"). The 2024 Restructuring Plan aims to improve operational efficiency, exit our physical site in Israel, and reduce costs by integrating the ApiFix product into the broader OP Scoliosis portfolio, and effect additional staff reduction across all of OrthoPediatrics Corp. The 2024 Restructuring Plan is expected to result in total restructuring charges of approximately $ 3,877 . In 2024, we recognized expenses of $ 3,653 related to reducing the ApiFix portfolio inventory, reserving for excess inventory, and employee termination benefits. In 2025, we expect to expense $ 246 of retention bonuses as part of the 2024 Restructuring Plan.
The Company's restructuring expenses are comprised of the following:
Year Ended December 31, 2024
Severance and employee costs $ 1,196
Write-down of inventory and property and equipment 1,771
Other exit costs 686
Balance at December 31, 2024 $ 3,653
The following table summarizes the changes in our accrued restructuring balance, which is included in accrued expenses and other current liabilities in the accompanying consolidated balance sheets. Such costs are all expected to be paid by December 31, 2025.
Accrued Restructuring Balance
Balance at December 31, 2023 $ —
Restructuring charges 1,306
Payments ( 234 )
Balance at December 31, 2024 $ 1,072
NOTE 5 - GOODWILL AND INTANGIBLE ASSETS
Goodwill
The Company tests goodwill for impairment by either performing a qualitative evaluation or a quantitative test.
The qualitative evaluation is an assessment of factors including reporting unit specific operating results as well as industry, market and general economic conditions, to determine whether it is more likely than not that the fair values of a reporting unit is less than its carrying amount, including goodwill. The Company may elect to bypass the qualitative assessment for its two reporting units, a legacy surgical implants unit and a bracing reporting unit
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established with the acquisition of MD Ortho, and perform a quantitative test on each. The assumptions used in evaluating goodwill for impairment are subject to change and are tracked against historical results by management.
The Company elected to perform a qualitative analysis for its reporting units as of October 1, 2024. The Company determined, after performing the qualitative analysis that there was no evidence that it is more likely than not that the fair value of its reporting units were less than the carrying amount, therefore, it was not necessary to perform a quantitative impairment test.
Changes in the carrying amount of goodwill were as follows:
Total
Goodwill at January 1, 2024 $ 83,699
Boston O&P acquisition 8,357
Other clinic acquisitions 3,367
Foreign currency translation impact ( 1,579 )
Goodwill at December 31, 2024
$ 93,844
Intangible Assets
As of December 31, 2024, the balances of amortizable intangible assets were as follows:
Weighted-Average Amortization Period
Gross Intangible Assets Accumulated Amortization Impairment Net Intangible Assets
Patents 10.2 years $ 45,064 $ ( 13,984 ) $ — $ 31,080
Intellectual Property 8.2 years 16,027 ( 4,065 ) — 11,962
Customer Relationships & Other 11.5 years 21,850 ( 4,783 ) — 17,067
License agreements 2.7 years 10,710 ( 6,392 ) — 4,318
Total amortizable assets $ 93,651 $ ( 29,224 ) $ — $ 64,427
As of December 31, 2023, the balances of amortizable intangible assets were as follows:
Weighted-Average Amortization Period
Gross Intangible Assets Accumulated Amortization Impairment Net Intangible Assets
Patents 11.2 years $ 45,646 $ ( 11,008 ) $ — $ 34,638
Intellectual Property 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
Amortization expense was $ 7,812 , $ 7,149 and $ 5,977 for the years ended December 31, 2024, 2023 and 2022, respectively. Future amortization expenses are expected as follows:
Year Ending December 31:
2025 $ 7,676
2026 7,669
2027 7,264
2028 6,319
2029 6,186
Thereafter 29,313
Total $ 64,427
Licenses are tied to product launches and do not begin amortizing until the product is launched to the market. Anticipated market launches are expected to occur through 2026 for products for which we previously obtained licensing rights.
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Trademarks are recorded as indefinite-lived intangible assets in the amounts of $ 16,752 and $ 15,287 as of December 31, 2024 and 2023, respectively. In 2022, we acquired trademarks associated with MD Ortho and Pega Medical for approximately $ 2,410 and $ 3,878 , respectively. In 2023, we acquired trademarks associated with MedTech and Rhino for approximately $ 520 and $ 140 , respectively. In 2024, we acquired trademarks associated with Boston O&P for approximately $ 3,610 . Trademarks are recorded in other intangible assets on the consolidated balance sheets.
During 2024, 2023 and 2022, management determined that a triggering event occurred for our ApiFix trademark, indicating that it was more likely than not the fair value of the trademark assets is less than the carrying value. As such, we completed a quantitative analysis whereby we determined the fair value of the trademark asset associated with our ApiFix acquisition was below the carrying value. We recorded impairment charges of $ 1,836 , $ 985 and $ 3,609 for the years ended December 31, 2024, 2023 and 2022, respectively, to reduce the carrying amount of the intangible asset to its estimated fair value.
NOTE 6 - 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.
The following tables summarize the assets and liabilities measured at fair value on a recurring basis as of December 31, 2024 and 2023, respectively.
December 31, 2024
Level 1 Level 2 Level 3 Total
Financial Assets
Short-term Investments
Corporate Bonds $ 10,598 $ — $ — $ 10,598
Treasury Bonds $ 9,274 $ — $ — $ 9,274
Asset-Backed Securities $ 4,889 $ — $ — $ 4,889
Exchange Trade Mutual Funds $ 252 $ — $ — $ 252
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 certificates of deposit. These securities are predominately priced by third parties, either by a pricing vendor or dealer with significant inputs observable in active markets.
The Company's Level 3 instruments consist of contingent consideration. The fair value of the contingent consideration liability assumed in business combinations is recorded as part of the purchase price consideration of the acquisition and is determined using a discounted cash flow model or probability simulation model. The significant inputs of such models are not always observable in the market, such as forecasted annual revenues, expected volatility and discount rates. The adjustments in the fair value of the contingent consideration payments resulted in income of $ 0 , $ 2,980 and $ 25,930 for the years ended December 31, 2024, 2023 and 2022, respectively.
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The following table summarizes the change in fair value of the Level 3 instrument:
Total
Balance at December 31, 2022
$ 2,980
Change in fair value of contingent consideration ( 2,980 )
Balance at December 31, 2023
—
Change in fair value of contingent consideration —
Balance at December 31, 2024
$ —
The recurring Level 3 fair value measurements of the contingent consideration liability associated with the ApiFix system sales milestone include the following significant unobservable inputs as of December 31, 2023 and 2022, respectively:
December 31,
2023 December 31,
2022
Valuation techniques
Present value discount rate (1)
— % 16.6 %
Volatility factor — % 48.0 %
Expected Years 0.4 years 1.4 years
(1) The present value discount rate includes estimated risk premium.
NOTE 7 - PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of the following:
December 31,
2024 2023
Land $ 2,350 $ 1,725
Building and building improvements 11,318 5,870
Computer equipment and software 5,029 5,828
Office and other equipment 6,377 5,821
Instruments 60,878 53,093
Sample inventory 3,419 2,780
Construction in progress 7,342 5,519
96,713 80,636
Less: accumulated depreciation ( 46,117 ) ( 39,588 )
Total property and equipment, net $ 50,596 $ 41,048
Depreciation expense is primarily included in general and administrative expenses and was $ 10,948 , $ 10,236 and $ 7,121 for the years ended December 31, 2024, 2023 and 2022, respectively.
NOTE 8 – ACCRUED COMPENSATION AND BENEFITS
Accrued compensation and benefits consisted of the following:
December 31,
2024 2023
Accrued compensation and related costs $ 6,368 $ 4,279
Accrued commissions 7,520 7,046
Total accrued compensation and benefits $ 13,888 $ 11,325
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NOTE 9 - DEBT AND CREDIT ARRANGEMENTS
Long-term debt consisted of the following:
December 31,
2024 2023
Term loan and Final Payment $ 25,500 $ 10,300
Convertible note 50,000 —
Mortgage payable to affiliate 611 763
Acquisition note payable 1,372 —
Total debt 77,483 11,063
Less: debt discount and issuance costs 3,630 1,003
Less: current maturities 897 152
Long-term debt, net of current maturities $ 72,956 $ 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.
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
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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 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.
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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 Credit Agreement
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 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. No amounts were drawn under the Revolving Loan as of December 31, 2023 or at any time during 2024.
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
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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 year ended December 31, 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 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 % until maturity in 2028, at which time a final payment of remaining principal and interest is due. The mortgage is secured by the related real estate and building. As of December 31, 2024 and 2023, the mortgage balance was $ 611 and $ 763 , respectively, of which current principal due of $ 160 and $ 152 , respectively, was included in current portion of long-term debt.
Interest expense relating to notes payable to Squadron and mortgage note payable with Tawani wa s $ 35 , $ 42 and $ 525 for the years ended December 31, 2024, 2023 and 2022, respectively.
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At December 31, 2024, the aggregate future principal payments on our debt arrangements, including the Final Payment, are as follows:
Year Ending December 31:
2025 $ 898
2026 527
2027 451
2028 107
2029 25,500
Thereafter 50,000
Total $ 77,483
NOTE 10 - INCOME TAXES
Total income tax benefit for the years ended December 31, 2024, 2023 and 2022 was allocated as follows:
2024 2023 2022
Total income tax benefit $ ( 4,107 ) $ ( 338 ) $ ( 4,947 )
For the years ended December 31, 2024, 2023 and 2022 loss before taxes of the Company consists of the following:
2024 2023 2022
Domestic $ ( 27,327 ) $ ( 12,582 ) $ 6,451
Foreign ( 14,602 ) ( 8,730 ) ( 10,140 )
Total $ ( 41,929 ) $ ( 21,312 ) $ ( 3,689 )
The components of income tax benefit for the years ended December 31, 2024, 2023 and 2022 are as follows:
2024 2023 2022
Current:
Federal $ — $ — $ —
State 104 85 68
Foreign 525 740 17
629 825 85
Deferred:
Federal $ — $ — $ —
State — — —
Foreign ( 2,107 ) ( 1,163 ) ( 2,018 )
Decrease in valuation allowance ( 2,629 ) — ( 3,014 )
Total income tax benefit $ ( 4,107 ) $ ( 338 ) $ ( 4,947 )
The reconciliation between the effective tax rate and the statutory tax rate is as follows:
December 31,
2024 2023 2022
Federal statutory rate 21.0 % 21.0 % 21.0 %
State statutory rate, net of federal benefit 1.8 % 1.2 % ( 6.3 ) %
Effect of foreign rates different from statutory 0.5 % 0.2 % 6.4 %
Change in state rate 0.4 % ( 0.3 ) % 0.9 %
Excess tax benefits from stock plans ( 1.2 ) % ( 0.2 ) % 9.6 %
Nondeductible/nontaxable or other items 9.3 % ( 3.3 ) % ( 22.1 ) %
Unborn foreign tax deduction ( 1.7 ) % ( 0.5 ) % 6.8 %
US benefit of foreign branches 8.0 % 8.6 % 64.4 %
Nondeductible executive compensation ( 0.1 ) % ( 1.0 ) % ( 4.4 ) %
Change in valuation allowance ( 28.2 ) % ( 24.1 ) % 57.8 %
Income tax benefit 9.8 % 1.6 % 134.1 %
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Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The primary temporary differences that give rise to the deferred tax assets and liabilities are certain inventory adjustments, depreciation and amortization, interest expense, stock-based compensation and net operating loss carryforwards.
The deferred tax assets and liabilities consisted of the following at December 31, 2024 and 2023:
2024 2023
Deferred tax assets:
Inventories, net $ 4,236 $ 5,979
Stock-based compensation 4,996 3,158
Loss carryforwards 50,831 42,199
Credit carryforwards 176 176
Interest carryforward 534 134
Lease liabilities 2,103 615
Other 1,360 507
Total deferred tax assets 64,236 52,768
Valuation allowance ( 53,742 ) ( 41,927 )
Net deferred tax assets 10,494 10,841
Deferred tax liabilities:
Intangibles ( 8,726 ) ( 14,426 )
Property and equipment ( 2,933 ) ( 1,898 )
Right-of-use assets ( 2,216 ) —
Total deferred tax liabilities ( 13,875 ) ( 16,324 )
Deferred tax liabilities, net $ ( 3,381 ) $ ( 5,483 )
The deferred tax assets were fully offset by a valuation allowance at December 31, 2024 and 2023, with the exception of certain deferred tax liabilities in Canada in 2024 and Canada and Israel in 2023. The Company has recorded a tax benefit during the years ended December 31, 2024 and 2023, for losses generated in certain foreign jurisdictions.
As of December 31, 2024, we had available federal, state and foreign tax loss carryforwards of $ 136,597 , $ 85,383 and $ 35,172 , respectively. We had available federal tax credits of $ 176 . Net operating losses ("NOLs") generated prior to December 31, 2017 will begin to expire in 2028. Federal net operating losses generated after January 1, 2018 will have an indefinite carryforward period. An ownership change under Section 382 of the Internal Revenue Code was deemed to occur on May 30, 2014. Given the limitation calculation, we anticipate approximately $ 23,920 in losses generated prior to the ownership change date will be available to be utilized after applying the limitation. The estimated annual limitation is $ 1,062 . A second ownership change under Section 382 was deemed to occur on December 11, 2018. The estimated annual limitation is $ 9,736 , which is increased by $ 22,430 over the first five years as a result of an unrealized built in gain. NOLs sustained prior to May 30, 2014 will still be constricted by the lower limitation.
Management assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year period ended December 31, 2024. Such objective evidence limits the ability to consider other subjective evidence, such as our projections for future growth. As a result, a full valuation continues to be recorded against the Company's net deferred tax assets, with the exception of Canada and Israel.
We are subject to taxation in the United States, Indiana and various other state and international jurisdictions. As of December 31, 2024, all tax years from 2008 remain open to examination by the major taxing jurisdictions to which we are subject due to our net operating loss and credit carryforwards from those years. We believe that the income tax filing positions will be sustained on audit and do not anticipate any adjustments that will result in a material change. Therefore, no reserve for uncertain income tax positions has been recorded. Interest and penalties, if any, associated with income tax examinations will be recorded as a component of income taxes.
At December 31, 2024, our foreign operations held cash totaling $ 3,166 . We have not provided for foreign withholding tax on the undistributed earnings from our non-U.S. subsidiaries that are considered to be indefinitely reinvested. If such earnings were to be distributed, any foreign withholding tax would not be significant.
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NOTE 11 - 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:
Options Weighted-Average Exercise Price Weighted-Average Remaining Contractual Terms (in Years)
Outstanding at January 1, 2022 6,638 $ 30.97 1.3
Forfeited or expired ( 1,072 ) $ 30.97
Exercised ( 2,010 ) $ 30.97
Outstanding at December 31, 2022 3,556 $ 30.97 0.7
Forfeited or expired ( 2,886 ) $ 30.97
Exercised ( 670 ) $ 30.97
Outstanding at December 31, 2023 — $ — —
Outstanding at December 31, 2024 — $ — —
Options generally include a time-based vesting schedule permitting the options to vest ratably over three years . At December 31, 2024 and 2023, all options were fully vested. No stock options were granted during any of the years presented.
There was no stock-based compensation expense on stock options for all periods presented.
Restricted Stock
Our restricted stock activity and related information are summarized as follows:
Restricted Stock Awards Weighted-Average Remaining Contractual Terms (in Years) Restricted Stock Units Weighted-Average Remaining Contractual Terms (in Years)
Outstanding at January 1, 2022 368,446 1.1 — —
Granted 216,881 11,634
Forfeited ( 28,344 ) ( 1,554 )
Outstanding at Vested ( 153,659 ) —
Outstanding at December 31, 2022 403,324 1.4 10,080 2.5
Granted 311,689 4,005
Forfeited ( 6,800 ) ( 234 )
Outstanding at Vested ( 115,760 ) —
Outstanding at December 31, 2023 592,453 1.6 13,851 1.7
Granted 560,252 7,900
Forfeited ( 12,503 ) ( 200 )
Vested ( 96,009 ) —
Outstanding at December 31, 2024 1,044,193 1.5 21,551 1.2
At December 31, 2024, there was $ 18,753 of unrecognized compensation expense remaining related to our service-based restricted stock awards. The unrecognized compensation cost is expected to be recognized over a weighted average period of 1.5 years.
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Stock-based compensation expense on restricted stock amounted to $ 13,548 , $ 10,526 and $ 6,679 for the years ended December 31, 2024, 2023 and 2022, respectively, and is classified as follows:
Year Ended December 31,
2024 2023 2022
Sales and marketing $ 1,774 $ 1,422 $ 1,041
General and administrative 10,502 8,405 5,200
Research and development 1,170 699 438
Restructuring 102 — —
Total $ 13,548 $ 10,526 $ 6,679
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 December 31, 2024. The dollar limit on repurchases under the program after December 31, 2024 was reduced to $ 250 per annum.
Warrants
On August 15, 2022, the Company completed a public offering of securities that included the issuance and sale to Squadron of pre-funded warrants to purchase up to 1,525,000 shares of the Company’s common stock. The price per warrant was equal to the price per share at which common shares were concurrently sold to the public, minus $ 0.00025 , which nominal amount was the exercise price of each warrant. The warrants issued to Squadron were exercised on September 20, 2022, following the expiration of all waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”), that were applicable to Squadron as a result of it beneficially owning shares of the Company’s common stock with a value in excess of the HSR Act notification threshold.
NOTE 12 – NET (LOSS) EARNINGS PER SHARE
The following is a reconciliation of basic and diluted net (loss) earnings per share attributable to common stockholders:
Year Ended December 31,
2024 2023 2022
Net (loss) income $ ( 37,822 ) $ ( 20,974 ) $ 1,258
Less: Earnings allocated to participating securities — — 23
Net (loss) income available to common shareholders $ ( 37,822 ) $ ( 20,974 ) $ 1,235
Denominator for basic and diluted net (loss) income per share
Weighted average shares outstanding for basic 23,077,704 22,675,477 20,704,556
Weighted average shares outstanding for diluted
23,077,704 22,675,477 20,947,727
(Loss) earnings per share:
Basic $ ( 1.64 ) $ ( 0.92 ) $ 0.06
Diluted $ ( 1.64 ) $ ( 0.92 ) $ 0.06
Our basic and diluted net income (loss) per share is computed using the two-class method. The two-class method is an earnings allocation that determines net income per share for each class of common stock and participating securities according to their participation rights in dividends and undistributed earnings or losses. Non-vested restricted stock that includes non-forfeitable rights to dividends are considered participating securities.
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.
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The following table shows the contingently issuable and convertible equity shares that were excluded from the calculation of diluted net earnings (loss) per share because their effect would have been anti-dilutive:
Year Ended December 31,
2024 2023 2022
Restricted stock 1,065,744 606,304 413,404
Stock options — — 3,556
1,065,744 606,304 416,960
The contingently issuable shares in the table 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, or our convertible note. As of December 31, 2024, we are obligated to issue additional shares of our common stock to the sellers of MedTech. See Note 3 - Business Combinations and Asset Acquisitions for additional information. We are obligated to issue additional shares of our common stock to Braidwell in the event that our convertible note is converted into shares of common stock. See Note 9 - Debt and Credit Arrangements for additional information.
NOTE 13 – BUSINESS SEGMENT
Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. We have one operating and reportable segment, OrthoPediatrics, which designs, develops and markets anatomically appropriate specialized braces, implants and devices for children with orthopedic problems. Our chief operating decision-maker, our Chief Executive Officer, reviews financial information presented on a consolidated basis for purposes of making operating decisions and assessing financial performance, accompanied by disaggregated revenue information by product category. The Chief Executive Officer is regularly provided with consolidated expenses consistent with those presented in the consolidated statements of operations. We do not assess the performance of our individual product categories on measures of profit or loss, or other asset-based metrics. Therefore, the information below is presented only for revenue by category and geography.
Product sales attributed to a country or region includes product sales to hospitals, physicians and distributors and is based on the final destination where the products are sold. No individual customer accounted for more than 10% of total product sales for any of the periods presented. No customer accounted for more than 10% of consolidated accounts receivable as of December 31, 2024 or 2023.
Disaggregated revenue - product sales by source were as follows:
Year Ended December 31,
Product sales by geographic location: 2024 2023 2022
U.S. $ 161,163 $ 111,010 $ 92,419
International 43,564 37,722 29,870
Total $ 204,727 $ 148,732 $ 122,289
Year Ended December 31,
Product sales by category: 2024 2023 2022
Trauma and deformity $ 145,126 $ 106,781 $ 85,055
Scoliosis 55,153 37,933 33,428
Sports medicine/other 4,448 4,018 3,806
Total $ 204,727 $ 148,732 $ 122,289
No individual country with sales originating outside of the United States accounted for more than 10% of consolidated revenue for the years ended December 31, 2024, 2023 and 2022.
No individual country outside of the United States held long-lived assets in excess of 10% of consolidated long-lived assets as of December 31, 2024 or 2023.
NOTE 14 - RELATED PARTY TRANSACTIONS
In addition to the expired debt and credit agreements and mortgage with Squadron and its affiliate (refer to Note 9), we currently use Structure Medical, LLC (“Structure Medical”) as one of our suppliers. Structure Medical is
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affiliated with Squadron and a supplier with which we maintain certain long-term agreements. Our aggregate payments to Structure Medical for inventory purchases were $ 1,006 , $ 1,060 and $ 956 for the years ended December 31, 2024, 2023 and 2022, respectively.
NOTE 15 - 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. OrthoPediatrics Corp. matches our employees' 401(k) contributions up to 4 %. Employees of MD Ortho and Boston O&P receive contribution matches up to 3 % of their salary. For the years ended December 31, 2024, 2023 and 2022, the total 401(k) match resulted in expense of $ 1,130 , $ 900 and $ 718 , respectively.
NOTE 16 – LEASES
As of December 31, 2024, and 2023 we have recorded an operating lease liability of $ 7,781 and $ 1,000 , respectively, and a corresponding right-of-use asset of $ 8,237 and $ 1,084 , respectively, on our consolidated balance sheets. The increase during 2024 is primarily the result of our Boston O&P acquisition and our subsequent O&P clinic acquisitions where office space is leased at or in close proximity to pediatric hospitals to better serve our patients.
Short-term lease costs were not material for the years ended December 31, 2024, 2023 or 2022. The components of lease expense and supplemental cash flow information were as follows for the years ended December 31, 2024, 2023 and 2022:
For the Years Ended December 31,
2024 2023 2022
Operating lease cost $ 1,776 $ 263 $ 148
Cash paid for amounts included in the measurement of lease liabilities $ 2,082 $ 305 $ 32
Right-of-use assets obtained in exchange for new lease liabilities, including leases assumed through business combinations $ 8,957 $ 706 $ 213
Supplemental balance sheet information related to our operating leases as of December 31, 2024 and 2023 includes:
As of December 31,
2024 2023
Right-of-use assets recognized in Other non-current assets $ 8,237 $ 1,084
Lease liabilities recognized in Other current liabilities 2,120 340
Lease liabilities recognized in Other long-term liabilities 5,661 660
Weighted-average remaining lease term 4.5 years 3.3 years
Weighted-average discount rate 11.2 % 11.7 %
Our future minimum lease payments as of December 31, 2024 were:
For the Years Ended December 31,
2025 $ 2,913
2026 2,397
2027 1,844
2028 1,468
2029 1,054
Thereafter 973
Total 10,649
Less imputed interest 2,868
Total $ 7,781
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NOTE 17 – COMMITMENTS AND CONTINGENCIES
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”).
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.
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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.
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. As part of the Company's purchase of Boston O&P, the selling equityholders of Boston O&P expressly agreed to indemnify the Company for any claims related to this lawsuit pursuant to the Stock Purchase Agreement.
We are not presently a party to any other legal proceedings the outcome of which, if determined adversely to us, would individually or in the aggregate materially affect our financial position or results of operations or cash flows.
Purchase Obligations and Performance Requirements
As a result of entering into a license agreement for the exclusive distribution of the 7D Surgical FLASH TM Navigation platform during 2021, the Company agreed to a minimum purchase commitment for the first twelve months of that agreement. As of December 31, 2021 the remaining balance of the commitment was $ 1,900 . During the year ended December 31, 2022, 2023, and 2024, the Company met the minimum purchase commitment as required for the first twelve months of the agreement. Additionally, the contract requires future purchase commitments based upon a percentage of historical purchases. As a result and as of December 31, 2024, the Company has a minimum purchase commitment for approximately $ 1,456 for the year ending 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. During the years ended December 31, 2024, 2023 and 2022, the Company did not reach the minimum performance metrics. As such, the Company recorded $ 1,760 , $ 2,000 and $ 1,104 as a component of cost of revenue for the shortfall which occurred during 2024, 2023 and 2022, respectively.
Clinic acquisition promissory notes
As of result of multiple O&P clinic acquisitions in 2024, as part of the consideration transferred, the Company is contracted to pay promissory notes to the previous owners. As of December 31, 2024, we had $ 1,372 remaining in present value, of which $ 737 is classified as short-term on the consolidated balance sheet. The payments are paid in installments with an interest rate of 5.0 % per annum.
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Royalties
As of December 31, 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. Currently, we have no minimum royalty commitments.
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 December 31, 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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.