kids-20200630
2020Q2FALSE0001425450--12-31P10YP10Y00014254502020-01-012020-06-30xbrli:shares00014254502020-08-04iso4217:USD00014254502020-06-3000014254502019-12-31iso4217:USDxbrli:shares00014254502020-04-012020-06-3000014254502019-04-012019-06-3000014254502019-01-012019-06-300001425450us-gaap:CommonStockMember2019-12-310001425450us-gaap:TreasuryStockMember2019-12-310001425450us-gaap:AdditionalPaidInCapitalMember2019-12-310001425450us-gaap:RetainedEarningsMember2019-12-310001425450us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-12-310001425450us-gaap:RetainedEarningsMember2020-01-012020-03-3100014254502020-01-012020-03-310001425450us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-01-012020-03-310001425450us-gaap:CommonStockMember2020-01-012020-03-310001425450us-gaap:AdditionalPaidInCapitalMember2020-01-012020-03-310001425450us-gaap:TreasuryStockMember2020-01-012020-03-310001425450us-gaap:CommonStockMember2020-03-310001425450us-gaap:TreasuryStockMember2020-03-310001425450us-gaap:AdditionalPaidInCapitalMember2020-03-310001425450us-gaap:RetainedEarningsMember2020-03-310001425450us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-03-3100014254502020-03-310001425450us-gaap:RetainedEarningsMember2020-04-012020-06-300001425450us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-04-012020-06-300001425450us-gaap:CommonStockMember2020-04-012020-06-300001425450us-gaap:AdditionalPaidInCapitalMember2020-04-012020-06-300001425450us-gaap:TreasuryStockMember2020-04-012020-06-300001425450us-gaap:CommonStockMember2020-06-300001425450us-gaap:AdditionalPaidInCapitalMember2020-06-300001425450us-gaap:RetainedEarningsMember2020-06-300001425450us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-06-300001425450us-gaap:CommonStockMember2018-12-310001425450us-gaap:AdditionalPaidInCapitalMember2018-12-310001425450us-gaap:RetainedEarningsMember2018-12-310001425450us-gaap:AccumulatedOtherComprehensiveIncomeMember2018-12-3100014254502018-12-310001425450us-gaap:RetainedEarningsMember2019-01-012019-03-3100014254502019-01-012019-03-310001425450us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-01-012019-03-310001425450us-gaap:CommonStockMember2019-01-012019-03-310001425450us-gaap:AdditionalPaidInCapitalMember2019-01-012019-03-310001425450us-gaap:CommonStockMember2019-03-310001425450us-gaap:AdditionalPaidInCapitalMember2019-03-310001425450us-gaap:RetainedEarningsMember2019-03-310001425450us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-03-3100014254502019-03-310001425450us-gaap:RetainedEarningsMember2019-04-012019-06-300001425450us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-04-012019-06-300001425450us-gaap:CommonStockMember2019-04-012019-06-300001425450us-gaap:AdditionalPaidInCapitalMember2019-04-012019-06-300001425450us-gaap:CommonStockMember2019-06-300001425450us-gaap:AdditionalPaidInCapitalMember2019-06-300001425450us-gaap:RetainedEarningsMember2019-06-300001425450us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-06-3000014254502019-06-300001425450kids:TelosPartnersLLCMember2020-01-012020-06-300001425450kids:TelosPartnersLLCMember2019-01-012019-06-300001425450kids:ApiFixLtdMember2020-01-012020-06-300001425450kids:ApiFixLtdMember2019-01-012019-06-300001425450kids:BandLokMember2020-01-012020-06-300001425450kids:BandLokMember2019-01-012019-06-300001425450kids:VilexAndOrthexMember2020-01-012020-06-300001425450kids:VilexAndOrthexMember2019-01-012019-06-300001425450kids:VilexAndOrthexMember2019-06-042019-06-040001425450us-gaap:DiscontinuedOperationsDisposedOfBySaleMember2019-12-310001425450kids:TelosPartnersLLCMember2020-03-092020-03-090001425450kids:ApiFixLtdMember2020-04-012020-04-010001425450kids:ApiFixLtdMember2020-04-010001425450kids:ApiFixLtdMemberkids:SecondAnniversaryMember2020-04-012020-04-01kids:facility0001425450kids:ThirdAnniversaryMemberkids:ApiFixLtdMember2020-04-012020-04-010001425450kids:FourthAnniversaryMemberkids:ApiFixLtdMember2020-04-012020-04-01xbrli:pure0001425450kids:BandLokMember2020-06-102020-06-100001425450kids:FollowOnOfferingMember2020-06-222020-06-220001425450kids:FollowOnOfferingMember2020-06-220001425450srt:MinimumMemberus-gaap:BuildingAndBuildingImprovementsMember2020-01-012020-06-300001425450us-gaap:BuildingAndBuildingImprovementsMembersrt:MaximumMember2020-01-012020-06-300001425450srt:MinimumMemberus-gaap:FurnitureAndFixturesMember2020-01-012020-06-300001425450us-gaap:FurnitureAndFixturesMembersrt:MaximumMember2020-01-012020-06-300001425450us-gaap:ComputerEquipmentMembersrt:MinimumMember2020-01-012020-06-300001425450us-gaap:ComputerEquipmentMembersrt:MaximumMember2020-01-012020-06-300001425450us-gaap:SoftwareAndSoftwareDevelopmentCostsMember2020-01-012020-06-300001425450srt:MinimumMemberus-gaap:OfficeEquipmentMember2020-01-012020-06-300001425450us-gaap:OfficeEquipmentMembersrt:MaximumMember2020-01-012020-06-300001425450us-gaap:TechnologyEquipmentMember2020-01-012020-06-300001425450kids:SampleInventoryMember2020-01-012020-06-300001425450srt:MinimumMember2020-01-012020-06-300001425450srt:MaximumMember2020-01-012020-06-300001425450kids:A2007EquityIncentivePlanMember2017-12-310001425450kids:New2017EquityIncentivePlanMember2020-06-300001425450us-gaap:EmployeeStockOptionMembersrt:MaximumMember2020-01-012020-06-300001425450us-gaap:ShareBasedCompensationAwardTrancheOneMemberus-gaap:RestrictedStockMember2020-01-012020-06-300001425450us-gaap:ShareBasedCompensationAwardTrancheTwoMemberus-gaap:RestrictedStockMember2020-01-012020-06-3000014254502020-04-010001425450kids:ApiFixLtdMemberus-gaap:TrademarksAndTradeNamesMember2020-03-092020-03-090001425450us-gaap:PatentsMemberkids:ApiFixLtdMember2020-03-092020-03-090001425450us-gaap:PatentsMemberkids:ApiFixLtdMember2019-06-042019-06-040001425450kids:ApiFixLtdMemberus-gaap:CustomerRelationshipsMember2020-03-092020-03-090001425450kids:ApiFixLtdMemberus-gaap:CustomerRelationshipsMember2019-06-042019-06-040001425450us-gaap:NoncompeteAgreementsMemberkids:ApiFixLtdMember2020-03-092020-03-090001425450us-gaap:NoncompeteAgreementsMemberkids:ApiFixLtdMember2019-06-042019-06-040001425450kids:ApiFixLtdMember2020-03-092020-03-090001425450kids:ApiFixLtdMemberkids:SecondAnniversaryMember2020-04-010001425450kids:ApiFixLtdMemberkids:SecondAnniversaryMember2020-06-300001425450kids:ThirdAnniversaryMemberkids:ApiFixLtdMember2020-04-010001425450kids:ThirdAnniversaryMemberkids:ApiFixLtdMember2020-06-300001425450kids:FourthAnniversaryMemberkids:ApiFixLtdMember2020-04-010001425450kids:FourthAnniversaryMemberkids:ApiFixLtdMember2020-06-300001425450kids:ApiFixLtdMember2020-06-300001425450kids:TelosPartnersLLCMember2020-03-090001425450kids:TelosPartnersLLCMemberus-gaap:TrademarksAndTradeNamesMember2020-03-092020-03-090001425450kids:TelosPartnersLLCMemberus-gaap:CustomerRelationshipsMember2020-03-092020-03-090001425450us-gaap:NoncompeteAgreementsMemberkids:TelosPartnersLLCMember2020-03-092020-03-090001425450kids:VilexAndOrthexMember2019-06-0400014254502019-06-0400014254502019-06-042019-06-040001425450kids:VilexAndOrthexMemberus-gaap:TrademarksAndTradeNamesMember2019-06-042019-06-040001425450kids:VilexAndOrthexMemberus-gaap:PatentsMember2019-06-042019-06-040001425450us-gaap:DevelopedTechnologyRightsMemberkids:VilexAndOrthexMember2019-06-042019-06-040001425450kids:VilexAndOrthexMemberus-gaap:CustomerRelationshipsMember2019-06-042019-06-040001425450us-gaap:NoncompeteAgreementsMemberkids:VilexAndOrthexMember2019-06-042019-06-040001425450kids:VilexMember2019-01-012019-12-310001425450kids:OrthexMember2020-01-012020-06-300001425450us-gaap:PatentsMember2020-01-012020-06-300001425450us-gaap:PatentsMember2020-06-300001425450us-gaap:IntellectualPropertyMember2020-01-012020-06-300001425450us-gaap:IntellectualPropertyMember2020-06-300001425450us-gaap:LicensingAgreementsMember2020-01-012020-06-300001425450us-gaap:LicensingAgreementsMember2020-06-300001425450us-gaap:PatentsMember2019-01-012019-12-310001425450us-gaap:PatentsMember2019-12-310001425450us-gaap:IntellectualPropertyMember2019-01-012019-12-310001425450us-gaap:IntellectualPropertyMember2019-12-310001425450us-gaap:LicensingAgreementsMember2019-01-012019-12-310001425450us-gaap:LicensingAgreementsMember2019-12-310001425450us-gaap:DiscontinuedOperationsHeldforsaleMember2019-01-012019-06-300001425450us-gaap:DiscontinuedOperationsHeldforsaleMember2019-04-012019-06-300001425450us-gaap:NotesPayableOtherPayablesMember2020-06-300001425450us-gaap:NotesPayableOtherPayablesMember2019-12-310001425450us-gaap:LineOfCreditMemberus-gaap:RevolvingCreditFacilityMember2020-06-300001425450us-gaap:LineOfCreditMemberus-gaap:RevolvingCreditFacilityMember2019-12-310001425450us-gaap:MortgagesMember2020-06-300001425450us-gaap:MortgagesMember2019-12-310001425450us-gaap:NotesPayableOtherPayablesMemberkids:LoanAgreementMember2017-12-310001425450kids:LoanAgreementMemberus-gaap:RevolvingCreditFacilityMember2017-12-310001425450us-gaap:NotesPayableOtherPayablesMemberkids:LoanAgreementMemberus-gaap:LondonInterbankOfferedRateLIBORMember2019-06-042019-06-040001425450us-gaap:RevolvingCreditFacilityMemberus-gaap:LondonInterbankOfferedRateLIBORMember2017-12-312017-12-310001425450us-gaap:NotesPayableOtherPayablesMemberkids:LoanAgreementMemberus-gaap:LondonInterbankOfferedRateLIBORMember2019-06-040001425450us-gaap:RevolvingCreditFacilityMemberus-gaap:LondonInterbankOfferedRateLIBORMember2017-12-310001425450kids:LoanAgreementMemberus-gaap:LineOfCreditMember2019-06-040001425450kids:TermNoteBMembersrt:AffiliatedEntityMemberkids:SquadronMember2019-12-312019-12-310001425450kids:RevolvingLoanMemberus-gaap:LineOfCreditMembersrt:AffiliatedEntityMemberkids:SquadronMember2019-12-312019-12-310001425450kids:RevolvingLoanMembersrt:AffiliatedEntityMemberkids:SquadronMember2020-01-042020-01-040001425450us-gaap:MortgagesMember2013-08-012013-08-310001425450us-gaap:MortgagesMember2013-08-310001425450us-gaap:NotesPayableOtherPayablesMember2020-04-012020-06-300001425450us-gaap:NotesPayableOtherPayablesMember2019-04-012019-06-300001425450us-gaap:RoyaltyAgreementTermsMemberkids:CaseWesternReserveUniversityMember2007-12-012007-12-010001425450us-gaap:RoyaltyAgreementTermsMemberkids:CaseWesternReserveUniversityMember2017-08-022017-08-020001425450kids:CaseWesternReserveUniversityMember2020-04-012020-06-300001425450kids:CaseWesternReserveUniversityMember2019-04-012019-06-300001425450kids:CaseWesternReserveUniversityMember2020-06-300001425450kids:CaseWesternReserveUniversityMember2019-12-310001425450us-gaap:DomesticCountryMember2019-12-310001425450us-gaap:StateAndLocalJurisdictionMember2019-12-3100014254502014-05-3000014254502018-12-1100014254502019-01-012019-12-310001425450us-gaap:EmployeeStockOptionMember2020-01-012020-06-300001425450us-gaap:EmployeeStockOptionMember2020-04-012020-06-300001425450us-gaap:EmployeeStockOptionMember2019-01-012019-06-300001425450us-gaap:EmployeeStockOptionMember2019-04-012019-06-300001425450us-gaap:RestrictedStockMember2019-12-310001425450us-gaap:RestrictedStockMember2019-01-012019-12-310001425450us-gaap:RestrictedStockMember2020-01-012020-06-300001425450us-gaap:RestrictedStockMember2020-06-300001425450srt:ChiefExecutiveOfficerMember2020-04-012020-06-300001425450us-gaap:RestrictedStockMember2020-01-012020-06-300001425450us-gaap:RestrictedStockMember2019-01-012019-06-300001425450us-gaap:EmployeeStockOptionMember2020-01-012020-06-300001425450us-gaap:EmployeeStockOptionMember2019-01-012019-06-300001425450us-gaap:WarrantMember2020-01-012020-06-300001425450us-gaap:WarrantMember2019-01-012019-06-30kids:segment0001425450country:US2020-04-012020-06-300001425450country:US2019-04-012019-06-300001425450country:US2020-01-012020-06-300001425450country:US2019-01-012019-06-300001425450us-gaap:NonUsMember2020-04-012020-06-300001425450us-gaap:NonUsMember2019-04-012019-06-300001425450us-gaap:NonUsMember2020-01-012020-06-300001425450us-gaap:NonUsMember2019-01-012019-06-300001425450kids:TraumaAndDeformityMember2020-04-012020-06-300001425450kids:TraumaAndDeformityMember2019-04-012019-06-300001425450kids:TraumaAndDeformityMember2020-01-012020-06-300001425450kids:TraumaAndDeformityMember2019-01-012019-06-300001425450kids:SpineMember2020-04-012020-06-300001425450kids:SpineMember2019-04-012019-06-300001425450kids:SpineMember2020-01-012020-06-300001425450kids:SpineMember2019-01-012019-06-300001425450kids:SportsMedicineandOtherMember2020-04-012020-06-300001425450kids:SportsMedicineandOtherMember2019-04-012019-06-300001425450kids:SportsMedicineandOtherMember2020-01-012020-06-300001425450kids:SportsMedicineandOtherMember2019-01-012019-06-30kids:supplier0001425450srt:AffiliatedEntityMember2020-01-012020-06-300001425450kids:FMIHansaMedicalProductsMembersrt:AffiliatedEntityMember2020-04-012020-06-300001425450kids:FMIHansaMedicalProductsMembersrt:AffiliatedEntityMember2019-04-012019-06-300001425450us-gaap:DiscontinuedOperationsDisposedOfBySaleMembersrt:AffiliatedEntityMember2019-12-310001425450srt:AffiliatedEntityMember2019-12-3100014254502020-01-012020-01-010001425450us-gaap:SubsequentEventMemberkids:FirstAmendedLoanAgreementMemberkids:SquadronMember2020-08-030001425450us-gaap:SubsequentEventMemberkids:FirstAmendedLoanAgreementMemberkids:SquadronMember2020-08-040001425450us-gaap:SubsequentEventMemberkids:SquadronMember2020-08-042020-08-040001425450kids:SecondAmendedLoanAgreementMemberus-gaap:SubsequentEventMemberus-gaap:LondonInterbankOfferedRateLIBORMemberkids:SquadronMember2020-08-042020-08-040001425450kids:SecondAmendedLoanAgreementMemberus-gaap:SubsequentEventMemberkids:SquadronMember2020-08-040001425450us-gaap:NotesPayableOtherPayablesMemberkids:TermNoteAMemberus-gaap:SubsequentEventMember2020-07-152020-07-15

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)

 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2020

OR

 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _______

Commission file number: 001-38242
OrthoPediatrics Corp.
(Exact name of registrant as specified in its charter)
Delaware
26-1761833
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)

2850 Frontier Drive
Warsaw, IN 46582
(574) 268-6379
(Address of principal executive offices, including zip code)
(Registrant’s telephone number, including area code)

Title of Each ClassTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.00025 par value per shareKIDSNasdaq Global Market
________________________________________________________________________________________
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes     No

As of August 4, 2020, the registrant had 19,549,201 outstanding shares of common stock, $0.00025 par value per share.



OrthoPediatrics Corp.
Form 10-Q
For the Quarterly Period Ended June 30, 2020

TABLE OF CONTENTS
Page No.
PART I. FINANCIAL INFORMATION
Item 1
Item 2
Item 3
Item 4
PART II. OTHER INFORMATION
Item 1
Item 1A
Item 2
Item 3
Item 4
Item 5
Item 6








NOTE REGARDING FORWARD-LOOKING STATEMENTS

All statements, other than statements of historical facts, contained in this quarterly report, including statements regarding our business, operations and financial performance and condition, as well as our plans, objectives and expectations for our business, operations and financial performance and condition, are forward-looking statements. You can often identify forward-looking statements by words such as "anticipate," "believe," "continue," "could," "estimate," "expect," "intend," "may," "might," "target," "ongoing," "plan," "potential," "predict," "project," "should," "will" or "would," or the negative of these terms or other terms. Forward-looking statements involve known and unknown risks, uncertainties and other factors, such as the impact of the COVID-19 pandemic, that may cause our results, activity levels, performance or achievements to be materially different from the information expressed or implied by the forward-looking statements. Forward-looking statements may include, among other things, statements relating to:

our ability to achieve or sustain profitability in the future;

our ability to raise additional capital to fund our existing commercial operations, develop and commercialize new products and expand our operations;

our ability to commercialize our products in development and to develop and commercialize additional products through our research and development efforts, and if we fail to do so we may be unable to compete effectively;

our ability to generate sufficient revenue from the commercialization of our products to achieve and sustain profitability;

our ability to comply with extensive government regulation and oversight both in the United States and abroad;

our ability to maintain and expand our network of third-party independent sales agencies and distributors to market and distribute our products; and

our ability to protect our intellectual property rights or if we are accused of infringing on the intellectual property rights of others;

We cannot assure you that forward-looking statements will prove to be accurate, and you are encouraged not to place undue reliance on forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations expressed or implied by the forward-looking statements. You are urged to carefully review and consider the various disclosures made by us in this quarterly report, in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "SEC") on March 5, 2020 and in other reports filed with the SEC that discuss the risks and factors that may affect our business. Other than as required by law, we undertake no obligation to update or revise any forward-looking statements to reflect new information, events or circumstances occurring after the date of this quarterly report.
3


PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS
ORTHOPEDIATRICS CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In Thousands, Except Share Data)
June 30, 2020December 31, 2019
ASSETS
Current assets:
Cash$113,054  $70,777  
Restricted Cash1,361  1,250  
Accounts receivable - trade, less allowance for doubtful accounts of $185 and $506, respectively
14,897  16,003  
Inventories, net48,875  38,000  
Notes receivable656  564  
Prepaid expenses and other current assets1,534  1,464  
Total current assets180,377  128,058  
Property and equipment, net24,131  21,349  
Other assets:
Amortizable intangible assets, net42,206  14,484  
Goodwill68,420  13,773  
Other intangible assets13,357  4,490  
Total other assets123,983  32,747  
Total assets$328,491  $182,154  
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade$6,003  $6,467  
Accrued compensation and benefits4,501  4,349  
Current portion of long-term debt with affiliate128  124  
Current portion of acquisition installment payable11,485    
Other current liabilities2,654  2,723  
Total current liabilities24,771  13,663  
Long-term liabilities:
Long-term debt with affiliate, net of current portion21,017  26,067  
Acquisition installment payable, net of current portion12,021    
Contingent consideration28,100    
Other long-term liabilities120  63  
Total long-term liabilities61,258  26,130  
Total liabilities86,029  39,793  
Stockholders' equity:
Common stock, $0.00025 par value; 50,000,000 shares authorized; 19,544,008 shares and 16,723,128 shares issued as of June 30, 2020 (unaudited) and December 31, 2019, respectively
5  4  
Additional paid-in capital385,510  271,182  
Accumulated deficit(143,214) (128,822) 
Accumulated other comprehensive loss161  (3) 
Total stockholders' equity242,462  142,361  
Total liabilities and stockholders' equity$328,491  $182,154  

See notes to condensed consolidated financial statements.
4


ORTHOPEDIATRICS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In Thousands, Except Share and Per Share Data)
Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
Net revenue$13,593  $18,200  $29,949  $32,856  
Cost of revenue3,532  4,581  7,675  8,582  
Gross profit10,061  13,619  22,274  24,274  
Operating expenses:
Sales and marketing5,620  7,606  13,184  14,153  
General and administrative10,577  6,569  18,458  12,181  
Research and development881  1,234  2,146  2,447  
Total operating expenses17,078  15,409  33,788  28,781  
Operating loss(7,017) (1,790) (11,514) (4,507) 
Other expenses:
Interest expense, net1,399  632  1,778  935  
Fair value adjustment of contingent consideration910    910    
Other expense121  37  190  37  
Total other expenses2,430  669  2,878  972  
Net loss from continuing operations(9,447) (2,459) (14,392) (5,479) 
Net loss from discontinued operations  (159)   (159) 
Net loss$(9,447) $(2,618) $(14,392) $(5,638) 
Weighted average common stock - basic and diluted17,549,118  14,451,979  16,986,485  14,409,752  
Net loss per share - basic and diluted$(0.54) $(0.18) $(0.85) $(0.39) 

See notes to condensed consolidated financial statements.
5


ORTHOPEDIATRICS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
(In Thousands)
Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
Net loss$(9,447) $(2,618) $(14,392) $(5,638) 
Other comprehensive (loss) income:
     Foreign currency translation adjustment1,522  (133) 164  168  
Other comprehensive (loss) income1,522  (133) 164  168  
Comprehensive loss$(7,925) $(2,751) $(14,228) $(5,470) 

See notes to condensed consolidated financial statements.
6


ORTHOPEDIATRICS CORP.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(Unaudited)
(In Thousands, Except Share Data)
Three and Six Months Ended June 30, 2020
Accumulated
AdditionalOtherTotal
Common StockTreasury StockPaid-inAccumulatedComprehensiveStockholders'
SharesValueSharesValueCapitalDeficitIncome (Loss)Equity
Balance at January 1, 202016,723,128  $4    $  $271,182  $(128,822) $(3) $142,361  
Net loss—  —  —  —  —  (4,945) —  (4,945) 
Other comprehensive income—  —  —  —  —  —  (1,358) (1,358) 
Stock option exercise22,208  —  —  —  688  —  —  688  
Restricted stock105,710  —  —  —  958  —  —  958  
Consideration for Telos Acquisition36,628  —  —  —  1,750  —  —  1,750  
Repurchase of common stock—  —  (4,014) (187) —  —  —  (187) 
Balance at March 31, 202016,887,674  $4  (4,014) $(187) $274,578  $(133,767) $(1,361) $139,267  
Net Loss—  —  —  —  —  (9,447) —  (9,447) 
Other comprehensive loss—  —  —  —  —  —  1,522  1,522  
Stock option exercise19,162  —  —  —  593  —  —  593  
Restricted stock52,032  —  —  —  2,495  —  —  2,495  
Consideration for ApiFix acquisition and Band-Lok intellectual property purchase989,154  —  —  —  37,638  —  —  37,638  
Issuance of common stock, net of issuance cost1,595,986  1  4,014  187  70,206  —  —  70,394  
Balance at June 30, 202019,544,008  $5  —  $—  $385,510  $(143,214) $161  $242,462  

Three and Six Months Ended June 30, 2019
Accumulated
AdditionalOtherTotal
Common StockPaid-inAccumulatedComprehensiveStockholders'
SharesValueCapitalDeficitIncome (Loss)Equity
Balance at January 1, 201914,538,202  $4  $197,442  $(115,091) $(623) $81,732  
Net loss—  —  —  (3,020) —  (3,020) 
Other comprehensive income—  —  —  —  301  301  
Stock option exercise18,427  —  565  —  —  565  
Restricted stock125,769  —  471  —  —  471  
Balance at March 31, 201914,682,398  $4  $198,478  $(118,111) $(322) $80,049  
Net Loss—  —  —  (2,618) —  (2,618) 
Other comprehensive loss—  —  —  —  (133) (133) 
Acquisition consideration245,352  —  10,000  —  —  10,000  
Stock option exercise2,983  —  92  —  —  92  
Restricted stock8,729  —  692  —  —  692  
Balance at June 30, 201914,939,462  $4  $209,262  $(120,729) $(455) $88,082  

See notes to condensed consolidated financial statements.
7


ORTHOPEDIATRICS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
Six Months Ended
June 30,
20202019
OPERATING ACTIVITIES
Net loss$(14,392) $(5,638) 
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization3,285  1,912  
Stock-based compensation3,453  1,163  
Fair value adjustment of contingent consideration910    
Acquisition installment payable886    
Changes in certain current assets and liabilities:
Accounts receivable - trade1,609  (5,499) 
Inventories(9,599) (5,139) 
Prepaid expenses and other current assets66  (14) 
Accounts payable - trade(746) 1,934  
Accrued expenses and other liabilities(129) 357  
Other(50) 139  
Net cash used in operating activities - continuing operations(14,707) (10,785) 
Net cash provided by operating activities - discontinued operations  371  
Net cash used in operating activities(14,707) (10,414) 
INVESTING ACTIVITIES
Acquisition of Telos, net of cash acquired(1,670)   
Acquisition of ApiFix, net of cash acquired(1,723)   
Acquisition of Band-Lok intangible assets(796)   
Acquisition of Vilex and Orthex, net of cash acquired  (49,926) 
Purchases of licenses  (170) 
Purchases of property and equipment(5,160) (8,514) 
Net cash used in investing activities - continuing operations(9,349) (58,610) 
Net cash used in investing activities - discontinued operations  (47) 
Net cash used in investing activities(9,349) (58,657) 
FINANCING ACTIVITIES
Proceeds from issuance of debt with affiliate  30,000  
Payments on note with affiliate(5,000)   
Proceeds from issuance of common stock, net of issuance costs70,207    
Proceeds from exercise of stock options1,281  657  
Payments on mortgage notes(61) (59) 
Net cash provided by financing activities66,427  30,598  
Effect of exchange rate changes on cash17    
NET INCREASE (DECREASE) IN CASH42,388  (38,473) 
Cash and restricted cash, beginning of year$72,027  $60,691  
Cash and restricted cash, end of period$114,415  $22,218  
Less cash of discontinued operations, end of period$  $360  
Cash of continuing operations, end of period$114,415  $21,858  
8


SUPPLEMENTAL DISCLOSURES
Cash paid for interest$513  $935  
Transfer of instruments from property and equipment to inventory$229  $267  
Issuance of common shares to acquire Vilex and Orthex$  10,000  
Issuance of common shares to acquire Telos$1,568  $  
Issuance of common shares to acquire ApiFix$35,176  $  
Issuance of common shares to acquire Band-Lok$2,644  $  
See notes to condensed consolidated financial statements.
9


ORTHOPEDIATRICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars In Thousands, Except Share and Per Share data)

NOTE 1 – BUSINESS

OrthoPediatrics Corp., a Delaware corporation, is a medical device company committed to designing, developing and marketing anatomically appropriate implants and devices for children with orthopedic conditions, giving pediatric orthopedic surgeons and caregivers the ability to treat children with technologies specifically designed to meet their needs. We sell our specialized products, including PediLoc®, PediPlates®, Cannulated Screws, PediFlexTM nail, PediNailTM, PediLoc® Tibia, ACL Reconstruction System, Locking Cannulated Blade, Locking Proximal Femur, Spica Tables, RESPONSE Spine, Bandloc, Pediguard, Pediatric Nailing Platform | Femur, Orthex, QuickPackTM and ApiFix 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.

In 2017, we expanded operations and established legal entities in the United Kingdom, Australia and New Zealand, permitting us to sell under an agency model direct to local hospitals in these countries. In September 2018, we further expanded operations in Canada selling direct to local hospitals, and in January 2019 we expanded to Belgium and the Netherlands. Additionally, in March 2019 we established a holding company and an operating company in the Netherlands and began selling direct to Italy in March 2020 enhancing our operations in Europe.

On June 4, 2019, we purchased all the issued and outstanding shares of stock of Vilex in Tennessee, Inc. ("Vilex") and all the issued and outstanding units of membership interests in Orthex, LLC ("Orthex") for $60,000 in total consideration. Vilex and Orthex (the "Vilex Companies") are primarily manufacturers of foot and ankle surgical implants, including cannulated screws, fusion devices, surgical staples and bone plates, as well as Orthex Hexapod technology which is used to treat pediatrics congenital deformities and limb length discrepancies.

On December 31, 2019, we divested substantially all of the assets relating to Vilex's adult product offerings to a wholly-owned subsidiary of Squadron Capital LLC ("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, we also executed an exclusive license arrangement with Squadron providing for perpetual access to certain intellectual property and a mutual distribution agreement.

On March 9, 2020, we purchased all the issued and outstanding membership interest of Telos Partners, LLC ("Telos") for $3,300 in total consideration. Telos is a boutique regulatory consulting firm formed in Colorado.

On April 1, 2020, we purchased all the issued and outstanding membership interest of ApiFix, Ltd. ("ApiFix") for (a) $2,000 in cash, and (b) 934,783 shares of the Company's common stock, $0.00025 par value per share, representing approximately $35,000 (based on a closing share price of $37.63 on April 1, 2020. ApiFix, a corporation organized under the laws of Israel, has developed a minimally invasive deformity correction system for patients with Adolescent Idiopathic Scoliosis ("ApiFix System"). In addition, we have also agreed to pay as part of the purchase price the following anniversary payments: (i) $13,000 on the second anniversary of the closing date, provided that such payment will be paid earlier if 150 clinical procedures using the ApiFix System are completed in the United States before such anniversary date, (ii) $8,000 on the third anniversary of the closing date; and (iii) $9,000 on the fourth anniversary of the closing date. In addition, to the extent that the product of our revenues from the ApiFix System for the twelve months ended June 30, 2024 multiplied by 2.25 exceeds the anniversary payments
10


actually made for the third and fourth years, we have agreed to pay the selling shareholders a system sales payment in the amount of such excess. The anniversary payments and system sales payment may each be made in cash or cash and common stock.

On June 10, 2020, we purchased certain intellectual property assets from Band-Lok, LLC, a North Carolina limited liability company ("Band-Lok"), related to its Tether Clamp and Implantation System ("Tether Clamp System") for approximately $3,400 in total consideration. We use the Tether Clamp System in connection with our Bandloc 5.5/6.0 System. We were previously the sole licensee of the purchased assets under a license agreement with Band-Lok.

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


NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying condensed consolidated financial statements include the accounts of OrthoPediatrics Corp. and its wholly-owned subsidiaries, OrthoPediatrics US Distribution Corp., OrthoPediatrics EU Limited, OrthoPediatrics AUS PTY LTD, OrthoPediatrics NZ Limited, OP EU B.V., OP Netherlands B.V., Vilex in Tennessee, Inc., Orthex, LLC, Telos Partners, LLC, ApiFix Ltd. and ApiFix Inc. (collectively, the “Company,” “we,” “our” or “us”). All intercompany balances and transactions have been eliminated.

Unaudited Interim Condensed Consolidated Financial Statements

We have prepared the accompanying condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The accompanying condensed consolidated balance sheets as of June 30, 2020 and December 31, 2019, the condensed consolidated statements of operations for the three and six months ended June 30, 2020 and 2019, the condensed consolidated statements of comprehensive loss for the three and six months ended June 30, 2020 and 2019, the condensed consolidated statements of stockholders’ equity for the three and six months ended June 30, 2020 and 2019 and the condensed consolidated statements of cash flows for the six months ended June 30, 2020 and 2019 are unaudited and should be read in conjunction with the annual consolidated financial statements as of and for the year ended December 31, 2019 and related notes thereto contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC") on March 5, 2020. The financial data and other financial information disclosed in the notes to the accompanying condensed consolidated financial statements are also unaudited. As such, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to applicable rules and regulations thereunder.

The unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements as of and for the year ended December 31, 2019 and, in management’s opinion, include all adjustments, consisting of only normal recurring adjustments, necessary for the fair presentation of the financial statements for the interim periods. The results of operations for the three and six months ended June 30, 2020 are not necessarily indicative of the results to be expected for the full fiscal year or for any other period.

The accompanying condensed consolidated financial statements have been prepared assuming our Company will continue as a going concern. We have experienced recurring losses from operations since our inception and had an accumulated deficit of $143,214 and $128,822 as of June 30, 2020 and December 31, 2019, respectively. Management continues to monitor cash flows and liquidity on a regular basis. We believe that our cash balance at June 30, 2020 and expected cash flows from operations for the next twelve months subsequent to the issuance of the accompanying condensed consolidated
11


financial statements, are sufficient to enable us to maintain current and essential planned operations for more than the next twelve months.

On June 22, 2020, we completed a follow-on offering of our common stock, in which we issued and sold 1.6 million shares of common stock at a public offering price of $47.00 per share for aggregate gross proceeds of $75,200. We received $70,207 in net proceeds after deducting $4,512 of underwriting discounts and commissions and paying $481 in offering costs.

Use of Estimates

Preparation of the condensed consolidated financial statements requires the use of estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as of the date of the condensed consolidated financial statements. By their nature, these judgments are subject to an inherent degree of uncertainty. The impact of the coronavirus disease ("COVID-19") has significantly increased economic and demand 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 the condensed consolidated financial statements.

Foreign Currency Transactions

We currently bill our international distributors in United States ("U.S.") dollars, resulting in minimal foreign exchange transaction expense.

Beginning in the second quarter of 2017, we began selling direct within the United Kingdom, Ireland, Australia and New Zealand and billing using the local currency for each country. In September 2018, we began selling direct in Canada, in January 2019 in Belgium and the Netherlands, in March 2020 in Italy and in April 2020 in Israel. The financial statements of our foreign subsidiaries are accounted for 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 condensed consolidated statements of comprehensive loss.

Revenue from Contracts with Customers

In accordance with ASC 606, "Revenue From Contracts With Customers (ASC 606)", revenue is recognized when a customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these goods or services, and excludes any sales incentives or taxes collected from a customer which are subsequently remitted to government authorities.

Revenue Recognition – United States

Revenue in the United States is generated primarily from the sale of our implants and, to a much lesser extent, from the sale of our instruments. Sales in the United States are primarily to hospital accounts through independent sales agencies. We recognize revenue when our performance obligations under the terms of a contract with our customer are satisfied. This typically occurs when we transfer control of our products to the customers, 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 products for their own inventory, and revenue is recognized when the products are shipped and the title and risk of loss passes to the customer. Pricing for each customer is dictated by a unique pricing agreement, which does not generally include rebates or discounts.

12


Revenue Recognition – International

Outside of the United States, we primarily sell our products through independent stocking distributors. Generally, the distributors are allowed to return products, and some are thinly capitalized. Based on our history of collections and returns from international customers, prior to 2019, we concluded that collectability was not reasonably assured at the time of delivery for certain customers who had not evidenced a consistent pattern of timely payment. Accordingly, in the past we did not recognize international revenue and associated cost of revenue at the time title transfers for these customers for whom collectability had not been deemed probable based on the customer’s history and ability to pay, but rather when cash had been received.
Following a review of our collection history, we deemed collectability was probable for all international stocking distributors effective January 1, 2019. Based on a history of reliable collections, we have concluded that a contract exists and revenue should be recognized when our performance obligations under the terms of the contract with our customer are satisfied. This typically occurs when we transfer control of our products to the customer, generally upon implantation or when title passes upon shipment.
In the countries where we sell under an agency model direct to local hospitals, 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 the products are shipped and the title and risk of loss passes to the customer. Pricing for each customer is dictated by a unique pricing agreement, which does not generally include rebates or discounts.

Cash and Cash Equivalents

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 sheet for cash are valued at cost, which approximates fair value.

Accounts Receivable

Accounts receivable are uncollateralized customer obligations due under normal trade terms, generally requiring payment within 30 days from the invoice date. Account balances with invoices over 30 days past due are considered delinquent. No interest is charged on past due accounts. Payments of accounts receivable are applied to the specific invoices identified on the customer's remittance advice or, if unspecified, to the customer's account as an unapplied credit.

The carrying amount of accounts receivable is reduced by an allowance that reflects management's best estimate of the amounts that will not be collected, determined principally on the basis of historical experience, management's assessment of the collectability of specific customer accounts and the aging of the accounts receivable. All accounts or portions thereof deemed to be uncollectible or to require an excessive collection cost are written off to the allowance for doubtful accounts.

Inventories, net

Inventories are stated at the lower of cost or net realizable value, with cost determined using the first-in-first-out method. Inventories, which consist of implants and instruments held in our warehouse or with third-party independent sales agencies or distributors, 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
13


in an increase in the amount of excess inventory on hand, which could lead to additional charges for excess and obsolete inventory.

The need to maintain substantial levels of inventory impacts our estimates for excess and obsolete inventory. Each of our implant systems are designed to include implantable products that come in different sizes and shapes to accommodate the surgeon’s needs. Typically, a small number of the set components are used in each surgical procedure. Certain components within each set may become obsolete before other components based on the usage patterns. We adjust inventory values, as needed, to reflect these usage patterns and life cycle.

In addition, we continue to introduce new products, which may require us to take additional charges for excess and obsolete inventory in the future.

Property and Equipment, net

Property and equipment are carried at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful life of the assets. When assets are retired or otherwise disposed of, costs and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is recognized in operations for the period. Maintenance and repairs that prolong or extend the useful life are capitalized, whereas standard maintenance, replacements, and repair costs are expensed as incurred.

Instruments are hand-held devices, specifically designed for use with our implants and are used by surgeons during surgery. Instruments deployed within the United States, United Kingdom, Australia, New Zealand, Canada, Belgium, the Netherlands and Italy are carried at cost less accumulated depreciation and are recorded in property and equipment, net on the condensed consolidated balance sheets.

Sample inventory consists of our implants and instruments, and is maintained to market and promote our products. Sample inventory is carried at cost less accumulated depreciation.

Depreciable lives are generally as follows:
Building and building improvements
25 to 30 years
Furniture and fixtures
5 to 7 years
Computer equipment
3 to 5 years
Business software
3 years
Office and other equipment
5 to 7 years
Instruments
5 years
Sample inventory
2 years

Amortizable Intangible Assets, net

Amortizable intangible assets include fees necessary to secure various patents and licenses, including Band-Lok, the value of internally developed software, customer relationships, and non-competition agreements related to the acquisition of Orthex, and customer relationships and non-competition agreements related to the acquisitions of Telos and ApiFix. Amortization is calculated on a straight-line basis over the estimated useful life of the asset. Amortization for patents and licenses commences at the time of patent approval and 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 annually or whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability is
14


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

We have indefinite lived tradename assets that are reviewed for impairment by performing a quantitative analysis, which occurs annually in the fourth quarter 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 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 assets. No impairment charges were recorded in any of the periods presented.

Cost of Revenue

Cost of revenue consists primarily of products purchased from third-party suppliers, excess and obsolete inventory adjustments, inbound freight, and royalties. Our implants and instruments are manufactured to our specifications by third-party suppliers who meet our manufacturer qualifications standards. Our third-party manufacturers are required to meet the standards of the Food and Drug Administration (the “FDA”), and the International Organization for Standardization, as well as other country-specific quality standards. The majority of our implants and instruments are produced in the United States.

Sales and Marketing Expenses

Sales and marketing expenses primarily consist of commissions to our domestic and select international independent sales agencies and consignment distributors, as well as compensation, commissions, benefits and other related costs for personnel we employ. Commissions and bonuses are generally based on a percentage of sales. Our international independent stocking distributors purchase instrument sets and replenishment stock for resale, and we do not pay commissions or any other sales related costs for international sales to distributors.

Advertising Costs

Advertising costs consist primarily of print advertising, trade shows, and other related expenses. Advertising costs are expensed as incurred and are recorded as a component of sales and marketing expense.

Research and Development Costs

Research and development costs are expensed as incurred. Our research and development expenses primarily consist of costs associated with engineering, product development, consulting services, outside prototyping services, outside research activities, materials, development and protection of our intellectual property portfolio, as well as other costs associated with development of our products. Research and development costs also include related personnel and consultants’ compensation expense.
15



Stock-Based Compensation

Prior to our Initial Public Offering ("IPO") in October 2017, we maintained an Amended and Restated 2007 Equity Incentive Plan (the “2007 Plan”) that provided for grants of options and restricted stock to employees, directors and associated third-party representatives of the 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 1,789,647 shares for award.

Options holders, upon vesting, may purchase common stock at the exercise price, which is the estimated fair value of our common stock on the date of grant. Option grants generally vest immediately or over three years. No stock options were granted in any of the periods presented.

Restricted stock may not be transferred prior to the expiration of the restricted period, which is typically three years. The restricted stock that had been granted under the 2007 Plan had restriction periods that generally lasted until the earlier of six years from the date of grant, or an IPO or change in control, as defined in the 2007 Plan. All restricted stock granted prior to May 2014 vested upon our IPO and the remaining grants under the 2007 Plan vested six months after the IPO. We recognize the reversal of stock compensation expense when a restricted stock forfeiture occurs as opposed to estimating future forfeitures.

We record the fair value of restricted stock at the grant date. Stock-based compensation is recognized ratably over the requisite service period, which is generally the restriction period for restricted stock.

Comprehensive Income (Loss)

Comprehensive income (loss) is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. Comprehensive income (loss) includes foreign currency translation adjustments.

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 condensed consolidated financial statements. Under this method, we determine deferred tax assets and liabilities on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

We recognize deferred tax assets to the extent that we believe that these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence. If we determine that we would be able to realize our deferred tax assets in the future in excess of 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 (i) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the positions and (ii) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50% likely to be realized upon ultimate settlement with the related tax authority.

16


“Emerging Growth Company” Reporting Requirements

We qualify as an “emerging growth company” as defined in the JOBS Act. For as long as a company is deemed to be an emerging growth company, it may take advantage of specified reduced reporting and other regulatory requirements that are generally unavailable to other public companies. Among other things, we are not required to provide an auditor attestation report on the assessment of the internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act of 2002.

Section 107 of the JOBS Act also provides that an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

In April 2017, the SEC adopted new rules that included an inflation-adjusted threshold in the definition of an emerging growth company. Under the new inflation-adjusted threshold, we would cease to be an emerging growth company on the last day of the fiscal year in which our annual gross revenues exceed $1.07 billion. This is an increase of $70 million from the previous $1 billion threshold.

Recent Accounting Pronouncements

In June 2016, the FASB issued ASU No. 2016-13 "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments". The ASU is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The ASU requires the measurement of all expected credit losses for financials assets including trade receivables held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Based on ASU 2019-10 and our status as a Smaller Reporting Company, the Company will adopt ASU 2016-13 effective January 1, 2023. The adoption of this guidance is not expected to have a significant impact on the Company's consolidated financial statements and related disclosures.

In January 2017, the FASB issued ASU 2017-04, "Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment". This pronouncement eliminates Step 2 from the goodwill impairment test and requires an entity to perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. Under this guidance, an entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. It is effective for reporting periods beginning after December 15, 2020, although earlier adoption is permitted. The Company adopted this standard on January 1, 2020 and it did not have a significant impact on the Company's consolidated financial statements and related disclosures.

In December 2019, the FASB issued ASU No. 2019-12 "Income Taxes: Simplifying the Accounting for Income Taxes" intended to simplify the accounting for income taxes by eliminating certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside cost basis differences. The new guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The standard is effective for annual periods beginning after December 15, 2020 and interim periods within, with early adoption permitted. Adoption of the standard requires certain changes to be made prospectively, with some changes to be made retrospectively. The Company adopted this standard on January 1, 2020 and it did not have a significant impact on the Company's consolidated financial statements and related disclosures.


17


NOTE 3 – BUSINESS COMBINATION

ApiFix

On April 1, 2020, the Company purchased all the issued and outstanding membership interest of ApiFix for $2,000 in cash, including $343 of cash acquired, 934,783 shares of the Company's common stock, $0.00025 par value per share, representing approximately $35,176 (based on a closing share price of $37.63 on April 1, 2020), $30,000 in anniversary payments, and approximately $41,741 in a system sales payment. The total consideration transferred of $87,379 is preliminary and subject to certain limitations and adjustments. ApiFix, a corporation organized under the laws of Israel, has developed a minimally invasive deformity correction system for patients with Adolescent Idiopathic Scoliosis ("ApiFix System").

The Company incurred $310 of acquisition-related costs that are included in general and administrative expenses on the consolidated statements of operations. The purchase price allocation set forth herein is preliminary.

The following table summarizes the total consideration paid for ApiFix and allocation of purchase price to the estimated fair value of the assets acquired and liabilities assumed at the acquisition date (in thousands):
DescriptionAmount
Preliminary fair value of estimated total acquisition consideration$87,379  
Assets
Cash344  
Accounts receivable-trade245  
Inventories685  
Prepaid expenses and other current assets77  
Property and equipment153  
Intangible assets24,330  
Other intangible assets8,620  
Operating lease right-of-use asset104  
Total assets34,558  
Liabilities
Accounts payable and accrued liabilities226  
Operating lease liabilities106  
Other long-term liabilities270  
Total liabilities602  
Less: total net assets33,956  
Goodwill$53,423  

The fair value of identifiable intangible assets were based on valuations using a combination of the income and cost approach. The estimated fair value and useful life of identifiable intangible assets are as follows:
18


AmountRemaining Economic Useful Life
Trademarks / Names$8,620  Indefinite
Patents23,790  15 years
Customer Relationships340  10 years
Non-competition Agreements200  4 years
$32,950  

The Company is obligated to make anniversary payments of: (i) $13,000 on the second anniversary of the closing date, provided that such payment will be paid earlier if 150 clinical procedures using the ApiFix System are completed in the United States before such anniversary date, (ii) $8,000 on the third anniversary of the closing date; and (iii) $9,000 on the fourth anniversary of the closing date, subject to adjustments. The Company anticipates making the second anniversary payment of $13,000 during the first half of 2021. In addition, to the extent that the product of our revenues from the ApiFix System for the twelve months ended June 30, 2024 multiplied by 2.25 exceeds the anniversary payments actually made for the third and fourth years, we have agreed to pay the selling shareholders a system sales payment in the amount of such excess. The anniversary payments and system sales payment may each be made in cash or cash and common stock, subject to certain limitations; provided that the Company makes the determination with respect to anniversary payments and a representative of the former ApiFix shareholders may make the determination with respect to the system sales payment, if any.

The fair value of the contingent consideration payments is considered a Level 3 investment and were determined by an independent valuation specialist at the original issuance date using an option pricing model and a Monte Carlo simulation based on forecast annual revenue, expected volatility and an implied probability of achieving revenue forecasts. The fair value of the payments will continue to be adjusted as additional information becomes available regarding the progress toward achievement of the revenue forecast. The adjustment in the fair value of the contingent consideration payments of $910 was recognized as an expense for the six month period ended June 30, 2020 in other expenses on the condensed consolidated statements of operations. An additional $886 was recognized as interest expense for the six month period ended June 30, 2020 on the condensed consolidated statements of operations for the adjustment in the fair value of the acquisition installment payable.

Presented below is a summary of the present value of the anniversary payments and system sales payment related to the ApiFix acquisition:
April 1, 2020June 30, 2020
Anniversary Payments:
Second Year Payment$10,980  $11,485  
Third Year Payment5,780  5,965  
Fourth Year Payment5,860  6,056