What changed in this filing

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Item 1. Financial Statements

2020-08-06 compared with 2020-05-06 · 245 added, 104 removed, 510 unchanged (41% of the section changed)

3 unchanged sentences

(In Thousands, Except Share Data)

March 31, 2020 December 31, 2019

June 30, 2020 December 31, 2019

Current assets:

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Current portion of long-term debt with affiliate 128 124

Current portion of acquisition installment payable 11,485 —

Other current liabilities 2,654 2,723

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Long-term debt with affiliate, net of current portion 21,017 26,067

Acquisition installment payable, net of current portion 12,021 —

Contingent consideration 28,100 —

Other long-term liabilities 120 63

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50,000,000 shares authorized;

16,887,674 shares and 16,723,128 shares issued as of March 31, 2020 (unaudited) and December 31, 2019, respectively

19,544,008 shares and 16,723,128 shares issued as of June 30, 2020 (unaudited) and December 31, 2019, respectively

Additional paid-in capital 385,510 271,182

Treasury stock, at cost;

4,014 and 0 shares at March 31, 2020 (unaudited) and December 31, 2019, respectively

Accumulated deficit ( 143,214 ) ( 128,822 )

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(In Thousands, Except Share and Per Share Data)

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2020 2019 2020 2019

Net revenue $ 13,593 $ 18,200 $ 29,949 $ 32,856

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Interest expense, net 1,399 632 1,778 935

Fair value adjustment of contingent consideration 910 — 910 —

Other expense 121 37 190 37

Total other expenses 2,430 669 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 diluted 17,549,118 14,451,979 16,986,485 14,409,752

Net loss per share attributable to common stockholders - basic and diluted $ ( 0.30 ) $ ( 0.21 )

Net loss per share - basic and diluted $ ( 0.54 ) $ ( 0.18 ) $ ( 0.85 ) $ ( 0.39 )

See notes to condensed consolidated financial statements.

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(In Thousands)

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2020 2019 2020 2019

Net loss $ ( 9,447 ) $ ( 2,618 ) $ ( 14,392 ) $ ( 5,638 )

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(In Thousands, Except Share Data)

Three Months Ended March 31, 2020

Three and Six Months Ended June 30, 2020

Additional Other Total

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Balance at March 31, 2020 16,887,674 $ 4 ( 4,014 ) $ ( 187 ) $ 274,578 $ ( 133,767 ) $ ( 1,361 ) $ 139,267

Three Months Ended March 31, 2019

Net Loss — — — — — ( 9,447 ) — ( 9,447 )

Other comprehensive loss — — — — — — 1,522 1,522

Stock option exercise 19,162 — — — 593 — — 593

Restricted stock 52,032 — — — 2,495 — — 2,495

Consideration for ApiFix acquisition and Band-Lok intellectual property purchase 989,154 — — — 37,638 — — 37,638

Issuance of common stock, net of issuance cost 1,595,986 1 4,014 187 70,206 — — 70,394

Balance at June 30, 2020 19,544,008 $ 5 — $ — $ 385,510 $ ( 143,214 ) $ 161 $ 242,462

Three and Six Months Ended June 30, 2019

Additional Other Total

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Balance at March 31, 2019 14,682,398 $ 4 $ 198,478 $ ( 118,111 ) $ ( 322 ) $ 80,049

Net Loss — — — ( 2,618 ) — ( 2,618 )

Other comprehensive loss — — — — ( 133 ) ( 133 )

Acquisition consideration 245,352 — 10,000 — — 10,000

Stock option exercise 2,983 — 92 — — 92

Restricted stock 8,729 — 692 — — 692

Balance at June 30, 2019 14,939,462 $ 4 $ 209,262 $ ( 120,729 ) $ ( 455 ) $ 88,082

See notes to condensed consolidated financial statements.

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(In Thousands)

Three Months Ended

Six Months Ended

OPERATING ACTIVITIES

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Stock-based compensation 3,453 1,163

Fair value adjustment of contingent consideration 910 —

Acquisition installment payable 886 —

Changes in certain current assets and liabilities:

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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 )

1 unchanged sentence

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 ) —

Repurchases of common shares ( 187 ) —

Proceeds from issuance of common stock, net of issuance costs 70,207 —

Proceeds from exercise of stock options 1,281 657

Payments on mortgage notes ( 61 ) ( 59 )

Net cash (used in) provided by financing activities ( 4,530 ) 536

Net cash provided by financing activities 66,427 30,598

Effect of exchange rate changes on cash 17 —

NET DECREASE IN CASH ( 17,086 ) ( 7,917 )

NET INCREASE (DECREASE) IN CASH 42,388 ( 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

SUPPLEMENTAL DISCLOSURES

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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.

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

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

We sell our specialized products, including PediLoc ® , PediPlates ® , Cannulated Screws, PediFlex TM nail, PediNail TM , PediLoc ® Tibia, ACL Reconstruction System, Locking Cannulated Blade, Locking Proximal Femur, Spica Tables, RESPONSE Spine, Bandloc, Pediguard, Pediatric Nailing Platform | Femur, Orthex, QuickPack TM 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.

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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

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.

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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, and Telos Partners, LLC (collectively, the “Company,” “we,” “our” or “us”).

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.

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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 March 31, 2020 and December 31, 2019, the condensed consolidated statements of operations for the three months ended March 31, 2020 and 2019, the condensed consolidated statements of comprehensive loss for the three months ended March 31, 2020 and 2019, the condensed consolidated statements of stockholders’ equity for the three months ended March 31, 2020 and 2019 and the condensed consolidated statements of cash flows for the three months ended March 31, 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 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.

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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 months ended March 31, 2020 are not necessarily indicative of the results to be expected for the full fiscal year or for any other period.

The results of operations for the three 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 $ 133,767 and $ 128,822 as of March 31, 2020 and December 31, 2019, respectively.

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 March 31, 2020 and expected cash flows from operations for the next twelve months subsequent to the issuance of the accompanying condensed consolidated financial statements, are sufficient to enable us to maintain current and essential planned operations for more than the next twelve months.

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

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

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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 and in March 2020 in Italy.

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.

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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 collectibility 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 collectibility 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 collectibility was probable for all international stocking distributors effective January 1, 2019.

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.

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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.

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.

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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.

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.

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Amortizable Intangible Assets, net

Amortizable intangible assets include fees necessary to secure various patents and licenses, 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 acquisition of Telos.

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.

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

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.

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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 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.

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NOTE 3 – BUSINESS COMBINATION

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):

Description Amount

Preliminary fair value of estimated total acquisition consideration $ 87,379

Accounts receivable-trade 245

Inventories 685

Prepaid expenses and other current assets 77

Property and equipment 153

Intangible assets 24,330

Other intangible assets 8,620

Operating lease right-of-use asset 104

Total assets 34,558

Accounts payable and accrued liabilities 226

Operating lease liabilities 106

Other long-term liabilities 270

Total liabilities 602

total net assets 33,956

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:

Amount Remaining Economic Useful Life

Trademarks / Names $ 8,620 Indefinite

Patents 23,790 15 years

Customer Relationships 340 10 years

Non-competition Agreements 200 4 years

The Company is obligated to make anniversary payments of:

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, 2020 June 30, 2020

Anniversary Payments:

Second Year Payment $ 10,980 $ 11,485

Third Year Payment 5,780 5,965

Fourth Year Payment 5,860 6,056

Total acquisition installment payable 22,620 23,506

current portion of acquisition installment payable 10,980 11,485

Acquisition installment payable, net of current portion 11,640 12,021

System sales payment 27,190 28,100

ApiFix future consideration, net of current portion $ 38,830 $ 40,121

Pre-acquisition revenues and earnings for ApiFix were not material to the condensed consolidated operations.

On March 9, 2020, the Company purchased the issued and outstanding membership interest of Telos for $ 1,750 in cash, including $ 81 of cash acquired, and 36,628 shares of common stock, $ 0.00025 par value per share, of the Company.

The shares of common stock were valued at $ 47.78 per share.

The shares of common stock were valued at $ 42.81 per share, the Company's closing share price on March 9, 2020.

The Company incurred $ 25 of acquisition-related costs, that are included in general and administrative expenses on the consolidated statements of operations.

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Intangible assets 950

Other intangible assets $ 210

Total assets 1,466

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The Company incurred $ 737 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 as to working capital amounts, intangible values and tax accounting matters.

The purchase price allocation set forth herein is final as to working capital amounts, intangible values and tax accounting matters.

The following table summarizes the total consideration paid for Vilex and Orthex and allocation of purchase price to the estimated fair value of the assets acquired and liabilities assumed at the acquisition date (in thousands):

Description Amount

Preliminary fair value of estimated total acquisition consideration $ 60,184

Fair value of estimated total acquisition consideration $ 60,184

Accounts receivable-trade 2,088

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On December 31, 2019, the Company divested substantially all of the assets relating to Vilex's adult product offering to a wholly-owned subsidiary of Squadron Capital, LLC in exchange for a $ 25,000 reduction in a term note owed to Squadron in connection with the initial acquisition along with certain ongoing intellectual property rights.

Of the $ 25,000 purchase price, $ 12,410 was attributable to the license of the Orthex intellectual property and the remaining $ 12,590 was applied to the Vilex assets and liablities divested.

March 31, 2020, we identified and corrected an immaterial error related to the deferred revenue liability recognized from license of Orthex intellectual property as of December 31, 2019.

Of the $ 25,000 purchase price, $ 12,410 was attributable to the license of the Orthex intellectual property and the remaining $ 12,590 was applied to the Vilex assets and liabilities divested.

After the issuance of our December 31, 2019 annual consolidated financial statements, and in connection with the preparation of our condensed consolidated financial statements for the three months ended March 31, 2020, we identified and corrected an immaterial error related to the deferred revenue liability recognized from license of Orthex intellectual property as of December 31, 2019.

The immaterial correction of the error resulted in a reduction of the deferred revenue liability and goodwill on the consolidated balance sheet as of December 31, 2019 of $ 12,410 , based on the conclusion that the consideration transferred was allocable to a portion of certain Orthex patent assets sold concurrently with the sale of Vilex.

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In order to accurately present the historical period, we have revised our December 31, 2019 balance sheet and related footnotes to reflect the immaterial correction of this error.

Changes in the carrying amount of goodwill for the periods presented were as follows:

Pro forma net revenue and net loss from continuing operations for the six months ended June 30, 2019 assuming the Orthex and Vilex acquisition occurred on January 1, 2019 would have been $ 34,792 and ($ 4,948 ), respectively.

NOTE 4 - GOODWILL AND INTANGIBLE ASSETS

Changes in the carrying amount of goodwill for the six months ended June 30, 2020 were as follows:

Goodwill at January 1, 2019 $ —

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Orthex measurement period adjustment ( 688 )

Goodwill at March 31, 2020 $ 15,179

Pro forma net revenue and net loss from continuing operations for the three months ended March 31, 2019 assuming the Orthex and Vilex acquisition occurred on January 1, 2019 would have been $ 15,830 and ($ 3,491 ), respectively.

ApiFix acquisition 53,423

Goodwill at June 30, 2020 $ 68,420

Intangible Assets

As of June 30, 2020, the balances of amortizable intangible assets were as follows:

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

Patents 15.3 years $ 33,182 $ ( 1,019 ) $ 32,163

Intellectual Property 10.8 years 8,950 ( 473 ) 8,477

License Agreements 3.1 years 2,765 ( 1,199 ) 1,566

Total amortizable assets $ 44,897 $ ( 2,691 ) $ 42,206

As of December 31, 2019, the balances of amortizable intangible assets were as follows:

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

Patents 17.4 years $ 9,287 $ ( 363 ) $ 8,924

Intellectual Property 10.7 years 4,020 ( 213 ) 3,807

License Agreements 3.4 years 2,765 ( 1,012 ) 1,753

Total amortizable assets $ 16,072 $ ( 1,588 ) $ 14,484

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.

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

Trademarks are non-amortizing intangible assets which were $13,357 and $4,490 as of June 30, 2020 and December 31, 2019, respectively.

Concurrently with our acquisition of each company, we acquired the trademark of Orthex on June 4, 2019 valued at $4,230, the trademark of Telos on March 9, 2020 valued at $210 and the trademark of ApiFix on April 1, 2020 valued at $8,620.

Trademarks are recorded in Other Intangible assets on the Condensed Consolidated Balance Sheets.

NOTE 5 - DISCONTINUED OPERATIONS

On June 4, 2019, the Company acquired Vilex, a manufacturer of foot and ankle surgical implants.

Since the Vilex products included adult offerings that were not core to the Company's pediatric business, the Company received Board approval to take the steps necessary to divest the non-core Vilex assets and those Vilex assets were sold on December 31, 2019.

The following summarized financial information has been segregated from continuing operations and reported as discontinued operations for the three and six months ended June 30, 2019:

Three and Six Months Ended

June 30, 2019

Revenue $ 414

Operating expenses 507

Depreciation and amortization 66

Operating loss ( 159 )

Loss from discontinued operations $ ( 159 )

NOTE 6 - DEBT AND CREDIT ARRANGEMENTS

Long-term debt consisted of the following:

March 31, 2020 December 31, 2019

June 30, 2020 December 31, 2019

Note payable to Squadron $ 19,907 $ 19,891

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The Loan Agreement also extended the maturity date to January 31, 2023.

In order to finance a portion of the cash consideration for the acquisition of the Vilex Companies, the Company entered into a first Amendment, or the Amendment, to the Loan Agreement (as so amended, the "Amended Loan Agreement"), with Squadron.

The Amended Loan Agreement provided for a new $ 30,000 term loan facility, represented by a Term Note B, in addition to the existing $ 20,000 Term Note A

and $ 15,000 revolving credit facility.

Similar to the other facilities under the Amended Loan Agreement, the Term Note B was subject to interest only payments at an interest rate equal to the greater of (a) three month LIBOR plus 8.61 %, and (b) 10.00 %.

In order to finance a portion of the cash consideration for the acquisition of the Vilex Companies, the Company entered into a First Amendment, or the First Amendment, to the Loan Agreement (as so amended, the "First Amended Loan Agreement"), with Squadron.

The First Amended Loan Agreement provided for a new $ 30,000 term loan facility, represented by a Term Note B, in addition to the existing $ 20,000 Term Note A and $ 15,000 revolving credit facility.

Similar to the other facilities under the First Amended Loan Agreement, the Term Note B was subject to interest only payments at an interest rate equal to the greater of (a) three month LIBOR plus 8.61 %, and (b) 10.00 %.

The Term Note B, which would have matured no later than May 31, 2020, was paid in full on December 31, 2019 using $ 25,000 received in exchange for the divestiture of the adult product offerings of Vilex and the related Orthex license agreement, and $ 5,000 from the available Squadron revolving credit facility.

On January 4, 2020, the Company paid $ 5,000 on the revolving loan agreement with Squadron.

Borrowings under the Amended Loan Agreement are secured by substantially all of the Company's assets and are unconditionally guaranteed by each of its subsidiaries with the exception of Vilex.

There are no traditional financial covenants associated with the Amended Loan Agreement.

Borrowings under the First Amended Loan Agreement are secured by substantially all of the Company's assets and are unconditionally guaranteed by each of its subsidiaries with the exception of Vilex.

There are no traditional financial covenants associated with the First Amended Loan Agreement.

However, there are negative covenants that prohibit us from, among other things, transferring any of our material assets, merging with or acquiring another entity, entering into a transaction that would result in a change of control, incurring additional indebtedness, creating any lien on our property, making investments in third parties and redeeming stock or paying dividends.

The fair value of our notes payable to Squadron were estimated based on prices for the same or similar issues and the current interest rates offered for the debt of the same remaining maturities, which are considered level 2 inputs in accordance with ASC Topic 820, “ Fair Value Measurements and Disclosures .” At March 31, 2020, the fair value approximated the carrying value.

The fair value of our notes payable to Squadron were estimated based on prices for the same or similar issues and the current interest rates offered for the debt of the same remaining maturities, which are considered level 2 inputs in accordance with ASC Topic 820, “ Fair Value Measurements and Disclosures .” At June 30, 2020, the fair value approximated the carrying value.

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.

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At December 31, 2019, the mortgage balance was $ 1,300 of which current principal due of $ 124 was included in current portion of long-term debt.

At March 31, 2020 the mortgage balance was $ 1,269 of which current principal of $ 126 was included in current portion of long-term debt

Interest expense relating to notes payable to Squadron and Tawani was $ 551 and $ 303 for the three months ended March 31, 2020 and 2019, respectively.

At June 30, 2020 the mortgage balance was $ 1,238 of which current principal of $ 128 was included in current portion of long-term debt.

Interest expense relating to notes payable to Squadron and Tawani was $ 513 and $ 632 for the three months ended June 30, 2020 and 2019, respectively, and $892 and $935 for the six months ended June 30, 2020 and 2019, respectively.

NOTE 7 - STRATEGIC ARRANGEMENTS

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Additionally, CASE receives a royalty of 3 % of net sales on products fully developed and being sold in the marketplace.

The royalty expense recognized related to the CASE agreement is recorded as a component of cost of revenue and was $ 31 and $ 37 for the three months ended March 31, 2020 and 2019, respectively.

At March 31, 2020 and December 31, 2019, $ 31 and $ 39 , respectively, was due to CASE.

The royalty expense recognized related to the CASE agreement is recorded as a component of cost of revenue and was $ 24 and $ 37 for the three months ended June 30, 2020 and 2019, respectively, and $55 and $74 for the six months ended June 30, 2020 and 2019, respectively.

At June 30, 2020 and December 31, 2019, $ 24 and $ 39 , respectively, was due to CASE.

NOTE 8 - INCOME TAXES

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In addition, the CARES Act raises the corporate charitable deduction limit to 25% of taxable income and makes qualified improvement property generally eligible for 15-year cost-recovery and 100% bonus depreciation.

The enactment of the CARES Act did not result in any material adjustments to our income tax provision for the three months ended March 31, 2020.

For the three months ended March 31, 2020 and 2019, we calculated the provision of income taxes by applying an estimate of the annual effective tax rate for the full fiscal year to the ordinary loss for the reporting period resulting in a zero tax provision consistent with prior periods.

The deferred tax assets were fully offset by a valuation allowance at March 31, 2020 and December 31, 2019, and no income tax benefit has been recognized in our condensed consolidated statements of operations for any of the periods presented.

The enactment of the CARES Act did not result in any material adjustments to our income tax provision for the three or six months ended June 30, 2020.

For the three and six months ended June 30, 2020 and 2019, we calculated the provision of income taxes by applying an estimate of the annual effective tax rate for the full fiscal year to the ordinary loss for the reporting period resulting in a zero tax provision consistent with prior periods.

The deferred tax assets were fully offset by a valuation allowance at June 30, 2020 and December 31, 2019, and no income tax benefit has been recognized in our condensed consolidated statements of operations for any of the periods presented.

At December 31, 2019, we had available federal and state tax loss carryforwards of $ 86,807 , state loss carryforwards of $ 64,026 and tax credits for federal and state tax purposes of $ 260 .

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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 March 31, 2020.

A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year period ended June 30, 2020.

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

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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.

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.

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Exercised ( 41,370 ) 30.97

Outstanding at March 31, 2020 48,420 $ 30.97 1.2

Outstanding at June 30, 2020 29,258 $ 30.97 1.2

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

At March 31, 2020 and December 31, 2019, all options were fully vested.

There was no stock-based compensation expense on stock options for the three months ended March 31, 2020 and 2019, respectively.

At June 30, 2020 and December 31, 2019, all options were fully vested.

There was no stock-based compensation expense on stock options for the three and six months ended June 30, 2020 and 2019, respectively.

Restricted Stock

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Granted 158,310

Outstanding at March 31, 2020 423,712 2.3

Restricted stock exercisable at March 31, 2020 —

At March 31, 2020, there was $ 10,014 of unrecognized compensation expense remaining related to our service-based restricted stock awards.

Forfeited ( 568 )

Vested ( 38,397 )

Outstanding at June 30, 2020 437,347 1.6

Restricted stock exercisable at June 30, 2020 —

At June 30, 2020, there was $ 9,865 of unrecognized compensation expense remaining related to our service-based restricted stock awards.

The unrecognized compensation cost was expected to be recognized over a weighted-average period of 1.6 years or earlier upon an elimination of the restriction period as a result of a change in control event.

Stock-based compensation expense on restricted stock amounted to $ 958 and $ 471 for the three months ended March 31, 2020 and 2019, respectively.

Stock-based compensation expense on restricted stock amounted to $ 2,495 and $ 692 for the three months ended June 30, 2020 and 2019, respectively, and $ 3,453 and $ 1,163 for the six months ended June 30, 2020 and 2019, respectively.

The increase in the stock compensation expense for the three months ended June 30, 2020 was due to a one-time stock grant to the Company's Chief Executive Officer that vested immediately resulting in an additional $ 1,322 of expense.

Our warrant activity and related information are summarized as follows:

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Outstanding at January 1, 2020 404 $ 30.97

Outstanding at March 31, 2020 404 $ 30.97

Outstanding at June 30, 2020 404 $ 30.97

For all periods presented, the warrants were issued at an exercise prices of $ 30.97 per share.

The warrants have a ten -year term.

At March 31, 2020, no warrants had been exercised.

At June 30, 2020, no warrants had been exercised.

At inception, no fair value was assigned to the warrants.

Treasury Stock

There were 4,014 shares of treasury stock issued as of March 31, 2020, with a cost of $ 187 , at a weighted average cost of $ 46.51 per share.

NOTE 10 – NET LOSS PER SHARE

The following is a reconciliation of basic and diluted net loss per share attributable to common stockholders:

Three Months Ended

Net loss attributable to common stockholders - basic and diluted $ ( 4,945 ) $ ( 3,020 )

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

Three Months Ended Six Months Ended

June 30, June 30,

2020 2019 2020 2019

Net loss $ ( 9,447 ) $ ( 2,618 ) $ ( 14,392 ) $ ( 5,638 )

Weighted average number of shares - basic and diluted 17,549,118 14,451,979 16,986,485 14,409,752

Net loss per share attributable to common stockholders - basic and diluted $ ( 0.30 ) $ ( 0.21 )

Net loss per share - basic and diluted $ ( 0.54 ) $ ( 0.18 ) $ ( 0.85 ) $ ( 0.39 )

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

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

Three Months Ended March 31,

Six Months Ended June 30,

Restricted stock 437,347 307,347

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

We disaggregate revenue from contracts with customers by operating segment.

We determined that disaggregating revenue into these categories achieves the disclosure objective of illustrating the differences in the nature, timing and uncertainty of our revenue streams.

We do not assess the performance of our individual product categories on measures of profit or loss, or other

asset-based metrics.

We do not assess the performance of our individual product categories on measures of profit or loss, or other asset-based metrics.

Therefore, the information below is presented only for revenue by category and geography.

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

No customers accounted for more than 10% of total product sales for the three months ended March 31, 2020 or 2019.

No customer accounted for more than 10% of consolidated accounts receivable as of March 31, 2020 and December 31, 2019.

No customers accounted for more than 10% of total product sales for the three and six months ended June 30, 2020 or 2019.

No customer accounted for more than 10% of consolidated accounts receivable as of June 30, 2020 and December 31, 2019.

Product sales by source were as follows:

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

Product sales by geographic location:

2020 2019 2020 2019

$ 12,146 $ 13,848 $ 25,530 $ 24,115

International 1,447 4,352 4,419 8,741

Total $ 13,593 $ 18,200 $ 29,949 $ 32,856

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

Product sales by category:

2020 2019 2020 2019

Trauma and deformity $ 9,220 $ 11,887 $ 21,430 $ 21,904

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Total $ 13,593 $ 18,200 $ 29,949 $ 32,856

No individual country with sales originating outside of the United States accounted for more than 10% of consolidated revenue for the three months ended March 31, 2020 and 2019.

No individual country with sales originating outside of the United States accounted for more than 10% of consolidated revenue for the three and six months ended June 30, 2020 and 2019.

NOTE 12 - RELATED PARTY TRANSACTIONS

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Structure Medical is affiliated with Squadron and we do not have a long-term contract with them.

We made aggregate payments to Structure Medical of $ 1,201 and $ 763 for the three months ended March 31, 2020 and 2019, respectively.

We made aggregate payments to Structure Medical of $ 934 and $ 1,729 for the three months ended June 30, 2020 and 2019, respectively, and $2,135 and $2,493 for the six months ended June 30, 2020 and 2019 .

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

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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.

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.

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

As of March 31, 2020, the Company has recorded a lease liability of $ 57 and corresponding right-of-use-asset of $ 58 on its condensed consolidated balance sheet.

As of June 30, 2020, the Company has recorded a lease liability of $ 120 and corresponding right-of-use-asset of $ 123 on its condensed consolidated balance sheet.

Legal Proceedings

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On June 4, 2019, PTAB completed its review, finding, among other things, insufficient evidence of such description by the third parties.

In early October 2019, the Court orally lifted the stay and has set a scheduling conference for November 12, 2019 concerning the matter.

Although we believe that the K2M lawsuit is without merit and will vigorously defend the claims asserted against us, intellectual property litigation can involve complex factual and legal questions, and an adverse resolution of this proceeding could materially affect our financial position, results of operations and cash flows.

In early October 2019, the Court orally lifted the stay in federal district court.

Thereafter, on November 19, 2019, K2M amended its complaint to add two (2) additional issued patents, to add claims of patent infringement regarding U.S.

10,285,735 and 10,292,736 (both issued in May 2019).

Like before, these newly issued patents relate to certain instruments used in our RESPONSE™ spine systems.

Additionally, we have denied these most recent claims and responded with counterclaims seeking declaratory relief that the subject patents are both invalid and not infringed.

Moreover, on November 20, 2019, the Court issued a Scheduling Order, which in part, set a trial date for April 12, 2021.

Subsequently, the parties attended a second court-ordered mediation on February 25, 2020, which did not resolve the dispute, but we continue to welcome constructive discussions on a negotiated settlement.

Although we believe that the K2M lawsuit is without merit and will vigorously defend the claims asserted against us, intellectual property litigation can involve complex factual and legal questions, and an adverse resolution of this proceeding could have a material adverse effect on our business, operating results and financial condition.

We are not presently a party to any other legal proceedings the outcome of which, if determined adversely to us, would individually or in the aggregate materially affect our financial position, results of operations or cash flows.

As of March 31, 2020, 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.

Additionally, we have minimum royalty commitments of $ 500 annually through 2026.

As of June 30, 2020, 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.

Additionally, we had minimum royalty commitments of $ 500 annually through 2026 which ceased upon the purchase of the Band-Lok assets in June 2020.

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

In any development project, there are significant variables that will affect the amount and timing of these payments and as of March 31, 2020, we have not been able to determine the amount and timing of payments.

In any development project, there are significant variables that will affect the amount and timing of these payments and as of June 30, 2020, we have not been able to determine the amount and timing of payments.

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

NOTE 15 – SUBSEQUENT EVENTS

On April 1, 2020, we purchased all the issued and outstanding shares of stock of Apifix Ltd.

("Apifix") for 934,768 shares of OrthoPediatrics common stock $ 0.00025 par value per share, representing approximately $ 37,000 (based on a closing share price of $ 39.64 on March 31, 2020) and $ 2,000 in cash paid at closing.

In addition to the payments made at closing and a working capital adjustment, the Company will make subsequent payments of $ 13,000 on the earlier of the second anniversary of closing or 150 clinical procedures using the Apifix system in the United States, $ 8,000 on the third anniversary of closing and $ 9,000 on the fourth anniversary of closing.

The Company will also make a payment based on Apifix revenue for the twelve months ended June 30, 2024 multiplied by 2.25 , subject to certain limitations.

The amount of the last payment is not yet estimable at this time.

ApiFix is an Israel and Boston, MA based medical device company with a less invasive spinal deformity correction system for non-fusion treatment of progressive adolescent idiopathic scoliosis.

The Company incurred $ 60 of related acquisition costs in the first quarter 2020 which are reflected in general and administrative costs in the condensed consolidated statements of operations.

The acquisition qualifies as a business combination and will be accounted for using the acquisition method of accounting.

As a result of limited access to Apifix information required to prepare initial accounting, together with the limited time since the acquisition date and the effort required to conform the financial statements to the Company's practices and policies, the initial accounting for the business combination is incomplete at the time of this filing.

As a result, the Company is unable to provide the amounts recognized as of the acquisition date for the major classes of assets acquired and liabilities assumed, and goodwill.

Also, the Company is unable to provide pro forma revenues and earnings of the combined entity.

This information will be included in the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2020.

On August 4, 2020, the Company entered into a Second Amendment (the “Second Amendment”) to its First Amended Loan Agreement with Squadron (as so further amended, the “Second Amended Loan Agreement”).

Pursuant to the Second Amendment, the First Amended Loan Agreement’s revolving credit commitment was increased from the previously established $ 15,000 to $ 25,000 .

The Company has agreed to pay Squadron an unused commitment fee in an amount equal to the per annum rate of 0.50 % (computed on the basis of a year of 360 days and the actual number of days elapsed) times the daily unused portion of the revolving credit commitment.

The unused commitment fee is payable quarterly in arrears.

Borrowings under the revolving credit facility will be made under a First Amended and Restated Revolving Note, dated August 4, 2020 (the “Amended Revolving Note”), payable, jointly and severally, by the Company and each of its subsidiaries party thereto.

The Amended Revolving Note will mature at the 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.

Prior to the Second Amendment, the revolving credit facility was to have matured on January 31, 2023.

The Second Amended Loan Agreement continues to provide for interest only payments, which are payable monthly, with interest rates equal to the greater of (a) three month LIBOR plus 8.61 %, and (b) 10.00 %

On July 15, 2020, the Company repaid the $ 20,000 principal amount outstanding under the Loan Agreement’s Term Note A, together with all unpaid interest and other related amounts payable.

Following such repayment, there are no outstanding term loan obligations under the Second Amended Loan Agreement.

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

What changed 10-Q

Item 1. Financial Statements