ORTHOPEDIATRICS CORP 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of OrthoPediatrics Corp. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of OrthoPediatrics Corp. and subsidiaries (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive loss, stockholders' equity (deficit) and cash flows, for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Emphasis of Matter The Company has significant transactions and relationships with a related party that are described in Note 15 to the consolidated financial statements. Our opinion is not modified with respect to this matter. /s/ Deloitte & Touche LLP Indianapolis, Indiana March 11, 2021 We have served as the Company's auditor since 2015. 88 ORTHOPEDIATRICS CORP. CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share information) As of December 31, 2020 2019 ASSETS Current assets: Cash and cash equivalents $ 28,758 $ 70,777 Restricted cash 1,374 1,250 Short term investments 55,141 — Accounts receivable - trade, less allowance for doubtful accounts of $ 433 and $ 506 , respectively 17,212 16,003 Inventories, net 52,989 38,000 Notes receivable 337 564 Prepaid expenses and other current assets 2,618 1,464 Total current assets 158,429 128,058 Property and equipment, net 27,227 21,349 Other assets: Amortizable intangible assets, net 50,284 14,484 Goodwill 70,511 13,773 Other intangible assets 13,961 4,490 Total other assets 134,756 32,747 Total assets $ 320,412 $ 182,154 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable - trade $ 10,038 $ 6,467 Accrued compensation and benefits 4,540 4,349 Accrued legal settlements 6,342 — Current portion of long-term debt with affiliate 131 124 Current portion of acquisition installment payable 12,233 — Other current liabilities 1,744 2,723 Total current liabilities 35,028 13,663 Long-term liabilities: Long-term debt with affiliate, net of current portion 1,044 26,067 Acquisition installment payable, net of current portion 12,784 — Contingent consideration 30,710 — Deferred income taxes 5,755 — Other long-term liabilities 323 63 Total long-term liabilities 50,616 26,130 Total liabilities 85,644 39,793 Commitments and contingencies (Note 16) Stockholders' equity: Common stock, $ 0.00025 par value; 50,000,000 shares authorized; 19,560,291 shares and 16,723,128 shares issued and outstanding as of December 31, 2020 and December 31, 2019 5 4 Additional paid-in capital 388,622 271,182 Accumulated deficit ( 161,766 ) ( 128,822 ) Accumulated other comprehensive income (loss) 7,907 ( 3 ) Total stockholders' equity 234,768 142,361 Total liabilities and stockholders' equity $ 320,412 $ 182,154 See notes to consolidated financial statements. 89 ORTHOPEDIATRICS CORP. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share and per share information) Year Ended December 31, 2020 2019 2018 Net revenue $ 71,078 $ 72,552 $ 57,559 Cost of revenue 16,047 17,933 14,879 Gross profit 55,031 54,619 42,680 Operating expenses: Sales and marketing 31,854 31,284 26,563 General and administrative 38,317 26,664 20,938 Legal settlement expenses 6,342 — — Research and development 5,273 5,748 4,732 Total operating expenses 81,786 63,696 52,233 Operating loss ( 26,755 ) ( 9,077 ) ( 9,553 ) Other expenses: Interest expense, net 3,412 3,538 2,255 Fair value adjustment of contingent consideration 3,520 — — Other expense (income) ( 20 ) 70 217 Total other expenses 6,912 3,608 2,472 Loss before income taxes ( 33,667 ) ( 12,685 ) ( 12,025 ) Provision for income taxes (benefit) ( 723 ) — — Net loss from continuing operations ( 32,944 ) ( 12,685 ) ( 12,025 ) Net loss from discontinued operations — ( 1,046 ) — Net loss $ ( 32,944 ) $ ( 13,731 ) $ ( 12,025 ) Net loss attributable to common stockholders $ ( 32,944 ) $ ( 13,731 ) $ ( 12,025 ) Weighted average common shares - basic and diluted 18,056,828 14,624,194 12,567,387 Net loss from continuing operations per share attributable to common stockholders - basic and diluted $ ( 1.82 ) $ ( 0.87 ) $ ( 0.96 ) Net loss from discontinued operations per share attributable to common stockholders - basic and diluted $ — $ ( 0.07 ) $ — Net loss per share attributable to common stockholders - basic and diluted $ ( 1.82 ) $ ( 0.94 ) $ ( 0.96 ) See notes to consolidated financial statements. 90 ORTHOPEDIATRICS CORP. CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (in thousands) Year Ended December 31, 2020 2019 2018 Net loss $ ( 32,944 ) $ ( 13,731 ) $ ( 12,025 ) Other comprehensive (loss) income: Foreign currency translation adjustment 7,857 620 ( 758 ) Unrealized gain (loss) on short-term investments 53 — — Other comprehensive (loss) income, net of tax 7,910 620 ( 758 ) Comprehensive loss $ ( 25,034 ) $ ( 13,111 ) $ ( 12,783 ) See notes to consolidated financial statements. 91 ORTHOPEDIATRICS CORP. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) ( in thousands, except share information) Common Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Total Stockholders' Equity (Deficit) Shares Value Balance at January 1, 2018 12,621,781 $ 2 $ 150,424 $ ( 103,066 ) $ 135 $ 47,495 Net loss — — — ( 12,025 ) — ( 12,025 ) Restricted stock 177,208 1 3,185 — — 3,186 Stock option exercise 14,213 — 410 — — 410 Issuance of common stock, net of issuance cost 1,725,000 1 43,423 — — 43,424 Other comprehensive income — — — — ( 758 ) ( 758 ) Balance at December 31, 2018 14,538,202 4 197,442 ( 115,091 ) ( 623 ) 81,732 Net loss — — — ( 13,731 ) — ( 13,731 ) Consideration for Vilex and Orthex Acquisition 245,352 — 10,000 — — 10,000 Restricted stock 145,153 — 2,603 — — 2,603 Stock option exercise 38,921 — 1,141 — — 1,141 Issuance of common stock, net of issuance cost 1,755,500 — 59,996 — — 59,996 Other comprehensive income — — — — 620 620 Balance at December 31, 2019 16,723,128 4 271,182 ( 128,822 ) ( 3 ) 142,361 Net loss — — — ( 32,944 ) — ( 32,944 ) Restricted stock 162,125 — 6,196 — — 6,196 Stock option exercise 53,270 — 1,650 — — 1,650 Consideration for ApiFix and Telos acquisitions and Band-Lok intellectual property purchase 1,025,782 — 39,388 — — 39,388 Issuance of common stock, net of issuance cost 1,595,986 1 70,206 — — 70,207 Other comprehensive income — — — — 7,910 7,910 Balance at December 31, 2020 19,560,291 $ 5 $ 388,622 $ ( 161,766 ) $ 7,907 $ 234,768 See notes to consolidated financial statements. 92 ORTHOPEDIATRICS CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Year Ended December 31, 2020 2019 2018 OPERATING ACTIVITIES Net loss $ ( 32,944 ) $ ( 13,731 ) $ ( 12,025 ) Adjustments to reconcile net loss to net cash used in operating activities: Loss on sale of discontinued operations — 210 — Depreciation and amortization 8,010 4,671 2,892 Stock-based compensation 6,196 2,603 3,185 Fair value adjustment of contingent consideration 3,520 — — Acquisition installment payable 2,397 — — Deferred income taxes ( 723 ) — — Changes in certain current assets and liabilities: Accounts receivable - trade ( 451 ) ( 5,820 ) ( 3,801 ) Inventories ( 12,070 ) ( 9,767 ) ( 4,801 ) Prepaid expenses and other current assets ( 719 ) ( 137 ) ( 425 ) Accounts payable - trade 3,071 2,401 ( 1,524 ) Accrued legal settlements 6,342 — — Accrued expenses and other liabilities ( 1,074 ) 1,946 947 Other ( 85 ) ( 1 ) ( 31 ) Net cash used in operating activities - continuing operations ( 18,530 ) ( 17,625 ) ( 15,583 ) Net cash used by operating activities - discontinued operations — ( 144 ) — Net cash used in operating activities ( 18,530 ) ( 17,769 ) ( 15,583 ) 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 — ( 49,836 ) — Purchase of notes receivable — — ( 502 ) Purchases of licenses — ( 270 ) ( 210 ) Purchase of short term investments ( 55,000 ) — — Purchases of property and equipment ( 10,504 ) ( 11,816 ) ( 5,253 ) Net cash used in investing activities ( 69,693 ) ( 61,922 ) ( 5,965 ) FINANCING ACTIVITIES Payments on note with affiliate ( 25,000 ) — — Proceeds from issuance of debt with affiliate — 30,000 — Payment of revolving credit facility with affiliate — — ( 4,065 ) Proceeds from issuance of common stock, net of issuance costs 70,207 59,996 43,425 Proceeds from exercise of stock options 1,650 1,141 410 Payments on mortgage notes ( 125 ) ( 118 ) ( 113 ) Net cash provided by financing activities 46,732 91,019 39,657 Effect of exchange rate changes on cash ( 404 ) 8 — NET INCREASE (DECREASE) IN CASH AND RESTRICTED CASH ( 41,895 ) 11,336 18,109 Cash and restricted cash, beginning of period 72,027 60,691 42,582 Cash and restricted cash, end of period 30,132 72,027 60,691 93 2020 2019 2018 SUPPLEMENTAL DISCLOSURES Cash paid for interest $ 1,233 $ 4,229 $ 2,255 Transfer of instruments from property and equipment to inventory $ 415 $ 1,037 $ 362 Issuance of common share sto 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 purchase Band-Lok intellectual property $ 2,644 $ — $ — Divestiture consideration allocated to assets held for sale (See Note 4) $ — $ 25,000 $ — Payment of Term Note B with revolving credit facility (See Note 8) $ — $ 5,000 $ — See notes to consolidated financial statements. 94 ORTHOPEDIATRICS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 2020 and 2019 and for the three years in the period ended December 31, 2020 ( dollars in thousands, except per share information ) NOTE 1 – BUSINESS OrthoPediatrics Corp., a Delaware corporation, is a medical device company committed to designing, developing and marketing anatomically appropriate implants and devices for children with orthopedic conditions, giving pediatric orthopedic surgeons and caregivers the ability to treat children with technologies specifically designed to meet their needs. We sell our specialized products, including PediLoc ® , PediPlates ® , Cannulated Screws, PediFlex TM nail, PediNail TM , PediLoc ® Tibia, ACL Reconstruction System, Locking Cannulated Blade, Locking Proximal Femur, Spica Tables, RESPONSE TM Spine, BandLoc TM , Pediguard, Pediatric Nailing Platform | Femur, Orthex, QuickPack TM and ApiFix ® Mid-C System, 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. We began selling direct to Canada in September 2018, Belgium and the Netherlands in January 2019, Italy in March 2020 and Germany, Switzerland and Austria in January 2021. Additionally, in March 2019, we established an operating company in the Netherlands in order to enhance 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 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 (refer to Note 3). 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 (refer to Note 4). 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 (refer to Note 3). 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, subject to certain limitations and adjustments: (i) approximately $ 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 (refer to Note 3). 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 95 5.5/6.0 System. We were previously the sole licensee of the purchased assets under a license agreement with Band-Lok (refer to Note 3). Our largest investor is Squadron, a private investment firm based in Granby, Connecticut. A novel strain of the coronavirus disease ("COVID-19") was first identified in Wuhan, China in December 2019, and the related outbreak was subsequently declared a pandemic by the World Health Organization and a national emergency by the President of the United States. As a result of the pandemic, we have experienced significant business disruption. For example, in preparation for COVID-19-related hospitalizations, various governments, governmental agencies and hospital administrators have instructed hospitals to postpone some elective procedures. As a majority of our products are utilized in elective surgeries or procedures, the deferrals of such surgeries and procedures have had, and may continue to have, a significant negative impact on our business and results of operations. Despite the impact COVID-19 has had on our business, we continued to invest in research and development, invest in our people, and take steps to position ourselves for long-term success. During 2020, we raised additional capital to solidify our financial foundation. We continued to train and educate our sales team and our surgeons on our products. During 2020, we continued to focus on developing innovative solutions, acquired multiple enabling technologies and continued to deploy additional consigned instrument and implant sets in furtherance of our strategy. The extent to which COVID-19 may continue to negatively impact the Company's consolidated financial position, results of operations or cash flows is uncertain and will be closely monitored. NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying 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., Orthex, LLC, Telos Partners, LLC and ApiFix, Ltd. (collectively, the “Company,” “we,” “our” or “us”). All intercompany balances and transactions have been eliminated. The results of Vilex have been classified as discontinued operations within the consolidated financial statements for the year ended December 31, 2019. We have prepared the accompanying consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The accompanying consolidated financial statements have been prepared assuming our Company will continue as a going concern. We have experienced recurring losses from operations since our inception and had an accumulated deficit of $ 161,766 and $ 128,822 as of December 31, 2020 and 2019, respectively. 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. On August 4, 2020, the Company entered into a Second Amendment to its First Amended Loan Agreement with Squadron. The Loan Agreement’s revolving credit commitment was increased from the previously established $ 15,000 to $ 25,000 . The Company did no t have an outstanding balance as of December 31, 2020. Management continues to monitor cash flows and liquidity on a regular basis. We believe that our cash balance at December 31, 2020 and expected cash flows from operations for the next twelve months subsequent to the issuance of the consolidated financial statements, are sufficient to enable us to maintain current and essential planned operations for more than the next twelve months. On December 11, 2018, we completed a follow-on offering of our common stock, in which we issued and sold 1.725 million shares of common stock at a public offering price of $ 27.00 per share for aggregate gross proceeds of $ 46,575 . We received $ 43,423 in net proceeds after deducting $ 2,800 of underwriting discounts and commissions and paying $ 352 in offering costs. On December 13, 2019, we completed a follow-on offering of our common stock, in which we issued and sold 1.755 million shares at a public offering price of $ 36.50 per share for aggregate gross proceeds of $ 64,076 . We received $ 59,996 in net proceeds after deducting $ 3,845 of underwriting discounts and commissions and paying $ 235 in underwriting commissions and offering costs. 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. 96 Use of Estimates Preparation of our consolidated financial statements requires the use of estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as of the date of the consolidated financial statements. By their nature, these judgments are subject to an inherent degree of uncertainty. We use historical experience and other assumptions as the basis for our judgments and estimates. Because future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Any changes in these estimates will be reflected in our consolidated financial statements. Foreign Currency Transactions We currently bill our international stocking distributors in U.S. dollars, resulting in minimal foreign exchange transaction expense. Beginning in 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.We began selling direct to Canada in September 2018, Belgium and the Netherlands in January 2019, Italy in March 2020 and Germany, Switzerland and Austria in January 2021. In the year ended December 31, 2020, the Company recorded a $ 2,730 revenue reduction due to the repurchase of inventory from a stocking distributor in Germany, Austria and Switzerland that we converted to a sales agency. Additionally, in March 2019, we established an operating company in the Netherlands in order to enhance our operations in Europe. The financial statements of our foreign subsidiaries are accounted for in local functional currencies and have been translated into U.S. dollars using end-of-period exchange rates for assets and liabilities and average exchange rates during each reporting period for results of operations. Foreign currency translation adjustments have been recorded as a separate component of the consolidated statements of comprehensive loss. Fair Value of Financial Instruments The accounting standards related to fair value measurements define fair value and provide a consistent framework for measuring fair value under the authoritative literature. Valuation techniques are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect market assumptions. This guidance only applies when other standards require or permit the fair value measurement of assets and liabilities. The guidance does not expand the use of fair value measurements. A fair value hierarchy was established, which prioritizes the inputs used in measuring fair value into three broad levels. Level 1 – Quoted prices in active markets for identical assets or liabilities; Level 2 – Observable market-based inputs or unobservable inputs that are corroborated by market data; and Level 3 – Significant unobservable inputs that are not corroborated by market data. Generally, these fair value measures are model-based valuation techniques such as discounted cash flows, and are based on the best information available, including our own data. The Company's financial instruments include cash and cash equivalents, short-term investments, accounts receivable, accounts payable, acquisition installment payables, contingent consideration and long-term debt. The carrying amounts of accounts receivable, accounts payable, acquisition installment payables and long-term debt approximate the fair value due to the short-term nature or market rates of these instruments. The company bases the fair value of short-term investments on quoted market prices for identical or comparable assets. Contingent consideration represents the system sales payment the Company is obligated to make. The fair value of the contingent consideration payment is considered a level 3 fair value measurement and was determined with the assistance of an independent valuation specialist at the original issuance date and as of the balance sheet date. See Note 6 for further discussion of financial instruments that carried a fair value on a recurring and nonrecurring basis. Revenue from Contracts with Customers The Company adopted ASC 606, " Revenue From Contracts with Customers (ASC 606)", on January 1, 2018 using the modified retrospective method for all contracts not completed as of the date of adoption. The adoption of ASC 606 did not have any impact on the Company's consolidated historical financial statements. The reported 97 results for 2019 and 2018 reflect the application of ASC 606 guidance. In accordance with ASC 606, revenue is recognized when our performance obligations under the terms of a contract with our customer are satisfied. This typically occurs when we transfer control of our products to the customers, generally upon implantation or when title passes upon shipment. 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. The products are generally consigned to our independent sales agencies, and revenue is recognized when the products are used by or shipped to the hospital for surgeries on a case by case basis. On rare occasions, hospitals purchase product for their own inventory, and revenue is recognized when the 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. Sales through two of our independent sales agencies in the United States accounted for 14.2 % and 13.8 % of our global revenue in 2020. Sales through two of our independent sales agencies in the United States accounted for 12.3 % and 12.2 % of our global revenue in 2019, respectively. Sales through two of our independent sales agencies in the United States accounted for 12.1 % and 11.2 % of our global revenue in 2018, respectively. Revenue Recognition – International Outside of the United States, we sell our products directly to hospitals through independent sales agencies or to independent stocking distributors. Generally, the distributors are allowed to return products, and some are thinly capitalized. 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 a history of reliable collections, we have concluded that a contract exists and revenue should be recognized when we transfer control of our products to the customer, generally when title passes upon shipment. Additionally, based on our history of immaterial returns from international customers, we have historically estimated no reserve for returns. In early 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. We began selling direct to Canada in September 2018, Belgium and the Netherlands in January 2019, Italy in March 2020 and Germany, Switzerland and Austria in January 2021. In the year ended December 31, 2020, the Company recorded a $ 2,730 revenue reduction due to the repurchase of inventory from a stocking distributor in Germany, Austria and Switzerland that we converted to a sales agency. Additionally, in March 2019, we established an operating company in the Netherlands in order to enhance our operations in Europe. The products are generally consigned to our independent sales agencies, and revenue is recognized when the products are used by or shipped to the hospital for surgeries on a case by case basis. On rare occasions, hospitals purchase products for their own inventory, and revenue is recognized when title passes upon shipment. Pricing for each customer is dictated by a unique pricing agreement. Cash, Cash Equivalents and Short Term Investments We maintain cash in bank deposit accounts which, at times, may exceed federally insured limits. To date, we have not experienced any loss in such accounts. We consider all highly liquid investments with original maturity of three months or less at inception to be cash equivalents. The carrying amounts reported in the balance sheets for cash are valued at cost, which approximates fair value. The Company invests in available-for-sale short term investments. The Company has the ability, if necessary, to liquidate without penalty any of its short term investments to meet its liquidity needs in the next twelve months. As such, those investments with contractual maturities greater than one year from the date of purchase are classified 98 as short-term on the accompanying Consolidated Balance Sheets. The company includes unrealized gains or losses in stockholders' equity. If the adjustment to fair value reflects a decline in the value of the investment, the Company considers available information to determine whether the decline is "other than temporary" and, if so, reflects the change on the Consolidated Statements of Operations. Restricted Cash In conjunction with the sale of Vilex, $ 1,250 was placed into a separate escrow account. This cash is reported as restricted cash on the December 31, 2020 and 2019 consolidated balance sheet. These funds will remain restricted until August 31, 2021 at which time, they will be released to the Company subject to no claims related to the purchase. The Company also maintains restricted cash of 100 Euro at its Netherlands entity for potential Italian tenders. Accounts Receivable and Allowance for Doubtful Accounts Accounts receivable are uncollateralized customer obligations due under normal trade terms, generally requiring payment within 30 days from the invoice date in the United States and within 90 days internationally. Account balances with invoices over 30 or 90 days past due for domestic and international accounts, respectively, are considered delinquent. 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. The allowance for doubtful accounts was $ 433 and $ 506 as of year ended December 31, 2020 and 2019, respectively. The following table summarizes activity in the allowance for doubtful accounts: December 31, 2020 2019 2018 Balance at beginning of year $ 506 $ 134 $ 143 Additions charged to expense 274 424 3 Write-offs 347 52 12 Balance at end of year $ 433 $ 506 $ 134 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, with third-party independent sales agencies or distributors, or consigned directly with hospitals, are considered finished goods and are purchased from third parties. We evaluate the carrying value of our inventories in relation to the estimated forecast of product demand, which takes into consideration the life cycle of the product. A significant decrease in demand could result in an increase in the amount of excess inventory on hand, which could lead to additional charges for excess and obsolete inventory. The need to maintain substantial levels of inventory impacts our estimates for excess and obsolete inventory. Each of our implant systems are designed to include implantable products that come in different sizes and shapes to accommodate the surgeon’s needs. Typically, a small number of the set components are used in each surgical procedure. Certain components within each set may become obsolete before other components based on the usage patterns. We adjust inventory values, as needed, to reflect these usage patterns and life cycle. 99 In addition, we continue to introduce new products, which may require us to take additional charges for excess and obsolete inventory in the future. Charges for excess and obsolete inventory are included in cost of revenue and were $ 1,269 , $ 604 and $ 504 for the years ended December 31, 2020, 2019 and 2018, respectively. Costs Related to the Initial Public Offering At the time of the IPO, $ 1,840 of additional costs, primarily consisting of legal, accounting and other direct fees and costs related to the IPO incurred during 2017 and were initially deferred and capitalized and then reclassified to stockholders’ equity at the conclusion of our IPO on October 12, 2017. Additionally, $ 1,986 of additional non-cash expense related to the accelerated vesting of restricted stock was included in general and administrative expenses in 2018. Costs Related to the Follow-on Offerings On December 11, 2018, we completed a follow-on offering of our common stock. Offering expenses of $ 352 , primarily consisting of legal, accounting and other direct fees and costs related to the offering, were initially deferred and capitalized and then reclassified to stockholders' equity at the conclusion of our follow-on offering on December 11, 2018. On December 13, 2019, we completed another offering of our common stock. Offering expenses of $ 235 , primarily consisting of legal, accounting and other direct fees and costs related to the offering were recorded in stockholders' equity at the conclusion of our offering. On June 22, 2020, we completed another offering of our common stock. Offering expenses of $ 481 , primarily consisting of legal, accounting and other direct fees and costs related to the offering were recorded in stockholders' equity at the conclusion of our offering. Property and Equipment, net Property and equipment are carried at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful life of the assets. When assets are retired or otherwise disposed of, costs and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is recognized in operations for the period. Maintenance and repairs that prolong or extend the useful life are capitalized, whereas standard maintenance, replacements, and repair costs are expensed as incurred. Instruments are hand-held devices, specifically designed for use with our implants and are used by surgeons during surgery. Instruments deployed in the field are carried at cost less accumulated depreciation and are recorded in property and equipment, net on the consolidated balance sheets. Sample inventory consists of our implants and instruments, and is maintained to market and promote our products. Sample inventory is carried at cost less accumulated depreciation. Depreciable lives are generally as follows: Building and building improvements 25 to 30 years Furniture and fixtures 5 to 7 years Computer equipment 3 to 5 years Business software 3 years Office and other equipment 5 to 7 years Instruments 5 years Sample inventory 2 years Amortizable Intangible Assets, net Amortizable intangible assets include fees necessary to secure various patents and licenses, including Band-Lok, the value of internally developed software, customer relationships, and non-competition agreements related to the 100 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 for licenses upon market launch, respectively. Amortization for assets acquired commences upon acquisition. Intangible assets are amortized over a 3 to 20 year period. Amortizable intangible assets are assessed for impairment upon triggering events that indicate that the carrying value of an asset may not be recoverable. Recoverability is measured by a comparison of the carrying amount to future net undiscounted cash flows expected to be generated by the associated asset. If such assets are determined to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount exceeds the fair market value of the intangible assets. No impairment charges were recorded in any of the periods presented. Goodwill and Other Intangible Assets Our goodwill represents the excess of the cost over the fair value of net assets acquired. The determination of the value of goodwill and intangible assets arising from acquisitions requires extensive use of accounting estimates and judgments to allocate the purchase price to the fair value of net tangible and intangible assets acquired. Goodwill is not amortized and is assessed for impairment using fair value measurement techniques on an annual basis or more frequently if facts and circumstances warrant such a review. The goodwill is considered to be impaired if we determine that the carrying value of our one reporting unit exceeds its respective fair value. No impairment changes were recorded in the current year. The Company tests goodwill for impairment by either performing a qualitative evaluation or a quantitative test. The quantitative assessment for goodwill requires us to estimate the fair value of our one reporting unit using either an income or market approach or a combination thereof. We have indefinite lived tradename assets that are reviewed for impairment by performing a quantitative analysis, which occurs annually in the fourth quarter, utilizing balances as of October 1, or whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability is measured by a comparison of the carrying amount to future net discounted cash flows expected to be generated by the associated asset. If such assets are determined to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount exceeds the fair market value of the assets. No impairment charges were recorded in any of the periods presented. Acquisition Payable and Contingent Consideration Upon the completion of an acquisition the Company may record an acquisition installment payable, contingent consideration or both. Both are recorded at their fair values as determined by management with the assistance of an independent valuation specialist at the original issuance date and are adjusted on a recurring basis. Accretion of interest expense attributable to the acquisition installment payable are recorded as a component of interest expense, net. Changes in the fair value of the contingent consideration are included in fair value adjustments of contingent consideration. The amount of expense recorded in interest expense, net and fair value adjustments of contingent consideration for the year ended December 31, 2020 were $ 2,397 and $ 3,520 , respectively. Shipping and Handling Costs Shipping and handling costs that are billed to the customer are included in net revenue and were $ 635 , $ 599 and $ 513 , for the years ended December 31, 2020, 2019 and 2018, respectively. Shipping and handling costs that are not billed to the customer are included in sales and marketing expenses and were $ 2,261 , $ 2,788 and $ 2,148 , for the years ended December 31, 2020, 2019 and 2018, respectively. 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 Food and Drug Administration (the “FDA”), International Organization for 101 Standardization and 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. Advertising costs were $ 1,231 , $ 1,422 and $ 978 for the years ended December 31, 2020, 2019 and 2018, respectively. Research and Development Costs Research and development costs are expensed as incurred. Our research and development expenses primarily consist of costs associated with engineering, product development, consulting services, outside prototyping services, outside research activities, materials, development and protection of our intellectual property portfolio, as well as other costs associated with development of our products. Research and development costs also include related personnel and consultants’ compensation expense. Stock-Based Compensation Prior to our IPO, we maintained an Amended and Restated 2007 Equity Incentive Plan (the “2007 Plan”) that provides for grants of options and restricted stock to employees, directors and associated third-party representatives of our company as determined by the Board of Directors. The 2007 Plan had authorized 1,585,000 shares for award. Immediately prior to our IPO, we adopted our 2017 Incentive Award Plan (the “2017 Plan”) which replaced the 2007 Plan. The 2017 Plan provides for grants of options and restricted stock to officers, employees, consultants or directors of our Company. The 2017 Plan has authorized 1,789,647 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 a three year period. No stock options were granted in any of the periods presented. Restricted stock may not be transferred prior to the expiration of the restricted period. The restricted stock that has been granted under the 2007 Plan has restriction periods that generally last until the earlier of six years from the date of grant, or an initial public offering or change in control, as defined in the 2007 Plan. All restricted stock granted prior to May 2014 vested upon our IPO and the remaining grants under the 2007 Plan vested in April 2018. Generally under the 2017 plan, restricted stock vests over a three year period. We have elected to recognize the reversal of stock compensation expense when a restricted stock forfeiture occurs as opposed to estimating future forfeitures. We record the fair value of restricted stock at the grant date. Stock-based compensation is recognized ratably over the requisite service period, which is generally the restriction period for restricted stock. In determining the fair value of our common stock at the grant date for awards issued prior to our IPO, which is the basis for the fair value of stock based awards, we use the market approach, which is based on the assumption that the value of an asset is equal to the value of a substitute asset with the same characteristics. In using the market approach, we consider both the guideline public company method and the precedent transaction method. Given the absence of a public trading market for our common stock at that time, we exercise reasonable judgment and consider a number of objective and subjective factors to determine the best estimate of the fair value of our common stock, including: the preferences and dividends of our redeemable convertible preferred stock relative to those of our common stock; our operating results and financial conditions, including our level of available capital 102 resources; equity market conditions affecting comparable public companies; general U.S. market conditions; and the lack of marketability of our common stock. Prior to our IPO, for restricted stock awards we applied a discount for lack of marketability to the fair value of common shares due to estimate the impact of valuing a minority interest in our Company as a closely held, non-public company with no liquid market for its shares. Foundation for Advancing Pediatric Orthopedics The Company may periodically make contributions to the Foundation for Advancing Pediatric Orthopedics (the "Foundation"). The Foundation was incorporated in 2018 exclusively for pediatric orthopedic research and education and qualifies under IRC 501(c)(3) as an exempt private foundation. The mission of the Foundation is to enhance the knowledge and experience, through education and research, of surgical trainees or practicing surgeons who are involved in helping children with orthopaedic disorders and injuries. The Foundation is a separate legal entity and is not a subsidiary of the Company; therefore, its results are not included in these consolidated financial statements. The Company contributed $ 325 , $ 500 and $ 200 to the Foundation during the years ended December 31, 2020, 2019 and 2018, respectively. These contributions were recorded in general and administrative expenses. 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 financial statements. Under this method, we determine deferred tax assets and liabilities on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. We recognize deferred tax assets to the extent that we believe that these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence. If we determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make an adjustment to the valuation allowance. We record uncertain tax positions on the bases of a two-step process in which (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the positions and (2) for those tax positions that do not meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50% likely to be realized upon ultimate settlement with the related tax authority. Litigation and Contingencies Accruals for litigation and contingencies are reflected in the consolidated financial statements based on management’s assessment, including advice of legal counsel, of the expected outcome of litigation or other dispute resolution proceedings and/or the expected resolution of contingencies. Liabilities for estimated losses are accrued if the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated. Significant judgment is required in both the determination of probability of loss and the determination as to whether the amount is reasonably estimable. Accruals are based only on information available at the time of the assessment due to the uncertain nature of such matters. As additional information becomes available, management reassesses potential liabilities related to pending claims and litigation and may revise its previous estimates, which could materially affect the Company’s results of operations in a given period. The Company recorded an accrual of $ 6,342 for legal settlements for the year ended December 31, 2020. 103 “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. The Company will adopt ASU 2016-16 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. 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 $ 344 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), approximately $ 30,000 in anniversary payments, and approximately $ 41,741 in a system sales payment. The total 104 consideration transferred of $ 87,379 , as calculated after discounting future payments to present value, 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 following table reconciles the total consideration transferred after discounting the future payments, excluding the impact of foreign currency translation: Consideration Present Value Cash consideration $ 2,000 $ 2,000 Payment of ApiFix transaction related costs 67 67 Issuance of common stock 35,176 35,176 Anniversary Payments 30,000 22,620 System sales payment 41,741 27,190 Total consideration transferred $ 108,984 $ 87,053 The Company incurred $ 311 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 Assets Cash 344 Accounts receivable-trade 245 Inventories 685 Prepaid expenses and other current assets 77 Property and equipment 153 Amortizable intangible assets 32,150 Other intangible assets 8,640 Operating lease right-of-use asset 104 Total assets 42,398 Liabilities Accounts payable and accrued liabilities 226 Operating lease liabilities 106 Other current liabilities 270 Deferred income taxes 6,487 Total liabilities 7,089 Less: total net assets 35,309 Goodwill $ 52,070 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 $ 8,640 Indefinite Patents 31,720 15 years Customer Relationships 230 10 years Non-competition Agreements 200 4 years $ 40,790 105 The Company recorded a measurement period adjustment of $ 7,930 during fiscal 2020 to increase patents, increase deferred tax liabilities by $ 6,487 and decrease goodwill by $ 1,443 related to the refinement of inputs of the acquisition valuation. The Company is obligated to make anniversary payments of: (i) approximately $ 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 payment is considered a Level 3 fair value measurement and was determined with the assistance of an independent valuation specialist at the original issuance date using an option pricing model and a Monte Carlo simulation based on forecasted annual revenue, expected volatility and an implied probability of achieving revenue forecasts. The fair value of the payment 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 payment of $ 3,520 was recognized as an expense for the twelve month period ended December 31, 2020, in other expenses on the consolidated statements of operations. An additional $ 2,397 was recognized as interest expense for the twelve month period ended December 31, 2020, on the consolidated statements of operations for the accretion 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 December 31, 2020 Anniversary Payments: Second Year Payment $ 10,980 $ 12,233 Third Year Payment 5,780 6,335 Fourth Year Payment 5,860 6,449 Total acquisition installment payable 22,620 25,017 Less: current portion of acquisition installment payable 10,980 12,233 Acquisition installment payable, net of current portion 11,640 12,784 System sales payment 27,190 30,710 ApiFix future consideration, net of current portion $ 38,830 $ 43,494 Pre-acquisition revenues and earnings for ApiFix were not material to the consolidated operations. Telos 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 $ 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. The purchase price allocation set forth herein is preliminary. The following table summarizes the total consideration paid for Telos and allocation of purchase price to the estimated fair value of the assets acquired and liabilities assumed at the acquisition date (in thousands): 106 Description Amount Preliminary fair value of estimated total acquisition consideration $ 3,318 Assets Cash 81 Accounts receivable-trade 215 Prepaid expenses and other current assets 38 Property and equipment 10 Amortizable intangible assets 950 Other intangible assets $ 210 Total assets 1,504 Liabilities Accounts payable and accrued liabilities 60 Total liabilities 60 Less: total net assets 1,444 Goodwill $ 1,874 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 $ 210 Indefinite Customer Relationships 910 10 years Non-competition Agreements 40 5 years $ 1,160 The Company recorded a measurement period adjustment during fiscal 2020 to increase prepaid expenses and decrease goodwill related to contractual terms. Vilex and Orthex On June 4, 2019, the Company purchased all the issued and outstanding shares of stock of Vilex and units of membership interests in Orthex for $ 50,000 in cash, net of working capital adjustments, and 245,352 shares of common stock, $ 0.00025 par value per share, of the Company. The shares of common stock were valued at $ 40.76 per share, the volume weighted average trading price during the thirty day trading period ending on May 30, 2019. In addition, $ 3,000 was placed in an escrow account for a period of up to twenty months to cover certain indemnification obligations and to secure certain closing adjustments. 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 final. 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: 107 Description Amount Estimated fair value of total acquisition consideration $ 60,184 Assets Cash 348 Accounts receivable-trade 2,088 Inventories 3,652 Prepaid expenses and other current assets 12 Property and equipment 7,540 Amortizable intangible assets 31,180 Operating lease right-of-use asset 323 Total assets 45,143 Liabilities Accounts payable and accrued liabilities 563 Operating lease liabilities 323 Deferred tax liability 1,175 Other long-term liabilities 68 Total liabilities 2,129 Less: total net assets 43,014 Goodwill $ 17,170 Measurement period adjustments during fiscal year 2019 included $ 239 to accounts receivable - trade, $ 253 to inventory, $ 92 to working capital, $ 1,400 to deferred tax liability and $ 510 to intangible assets as a result of information identified as of the date of acquisition. These measurement period adjustments to the purchase price allocation increased goodwill by $ 586 . The fair value of identifiable intangible assets were based on valuations using a combination of the income and cost approach, inputs which would be considered Level 3 under the fair value hierarchy. The estimated fair value and useful life of identifiable intangible assets are as follows: Amount Remaining Economic Useful Life Trademarks / Names $ 4,610 Indefinite Patents 22,390 15 years Internally Developed Software 1,550 10 years Customer Relationships 2,570 12 years Non-competition Agreements 60 5 years $ 31,180 Pro forma net revenue and net loss from continuing operations for 2019 and 2018 assuming the acquisition occurred on January 1, 2018 would have been $ 74,488 and $ 62,607 and ($ 12,601 ) and ($ 13,439 ), respectively. The Company recorded a measurement period adjustment during fiscal 2020 to increase inventory and decrease goodwill related to working capital adjustments to allocate inventory between Orthex and Vilex. Since the Vilex products include adult offerings that are 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. 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 liabilities divested. 108 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. We have evaluated the adjustment and, based on an analysis of quantitative and qualitative factors, determined that the related impact was not material to our consolidated financial statements for any prior annual or interim period presented. 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. NOTE 4 – DISCONTINUED OPERATIONS On June 4, 2019, the Company acquired Vilex, a manufacturer of foot and ankle surgical implants. Since the Vilex products include adult offerings that are 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. 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 the sale of intellectual property rights. Assets and liabilities divested consisted of the following as of December 31, 2019: Description Amount Cash $ 515 Accounts Receivable - trade, less allowance for doubtful accounts 928 Inventories, net 2,060 Prepaid expenses and other current assets 24 Property and equipment, net 6,246 Amortizable intangible assets 13,390 Goodwill 3,397 Other intangible assets 380 Operating lease right-of-use asset 216 Total assets divested $ 27,156 Accounts payable - trade $ 37 Accrued compensation and benefits 171 Operating lease liabilities 199 Deferred tax liability 1,175 Other current liabilities 13 Total liabilities divested $ 1,595 Net assets sold $ 25,561 Allocated purchase price 25,000 Loss on divestiture $ ( 561 ) 109 Major classes of line items constituting loss of discontinued operations 2019 Net revenue $ 3,069 Cost of revenue ( 286 ) Sales and marketing ( 692 ) General and administrative ( 2,103 ) Other income (expense), net ( 9 ) Pretax net loss of discontinued operations $ ( 21 ) Income tax expense ( 464 ) Net loss on discontinued operations $ ( 485 ) The divestiture does not represent a strategic shift that will have a major effect on the Company's operations and financial statements. Goodwill was allocated to the assets and liabilities divested using the relative fair value method. The Company recognized a total net loss on discontinued operations of $ 1,046 , net of taxes, in its consolidated statement of operations for the year ended December 31, 2019. NOTE 5 - GOODWILL AND INTANGIBLE ASSETS Goodwill The Company tests goodwill for impairment by either performing a qualitative evaluation or a quantitative test. The qualitative evaluation is an assessment of factors including reporting unit specific operating results as well as industry, market and general economic conditions, to determine whether it is more likely than not that the fair values of a reporting unit is less than its carrying amount, including goodwill. The Company may elect to bypass the qualitative assessment for its one reporting unit and perform a quantitative test. The assumptions used in evaluating goodwill for impairment are subject to change and are tracked against historical results by management. The Company elected to perform a qualitative analysis for its reporting unit as of October 1, 2020. The Company determined, after performing the qualitative analysis that there was no evidence that it is more likely than not that the fair value of its reporting unit was less than the carrying amount, therefore, it was not necessary to perform a quantitative impairment test. Changes in the carrying amount of goodwill in 2019 and 2020 were as follows: Total Goodwill at January 1, 2019 $ — Vilex Companies acquisition 17,170 Divestiture of Vilex in Tennessee, Inc. ( 3,397 ) Goodwill at January 1, 2020 $ 13,773 Telos 1,874 Orthex measurement period adjustment ( 688 ) ApiFix acquisition 52,070 Foreign currency translation impact 3,482 Goodwill at December 31, 2020 $ 70,511 110 Intangible Assets As of December 31, 2020, the balances of amortizable intangible assets were as follows: Weighted-Average Amortization Period Gross Intangible Assets Accumulated Amortization Net Intangible Assets Patents 14.7 years $ 43,363 $ ( 2,650 ) $ 40,713 Intellectual Property 10.3 years 8,990 ( 744 ) 8,246 License agreements 2.7 years 2,765 ( 1,440 ) 1,325 Total amortizable assets $ 55,118 $ ( 4,834 ) $ 50,284 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 Amortization expense was $ 3,246 , $ 887 and $ 378 for the years ended December 31, 2020, 2019 and 2018, respectively. Future amortization expenses are expected as follows: Year Ending December 31: 2021 $ 3,930 2022 3,895 2023 3,778 2024 3,734 2025 3,712 Thereafter 31,235 $ 50,284 Licenses are tied to product launches and do not begin amortizing until the product is launched to the market. Anticipated market launch is in 2021 and 2022 for products for which we obtained licensing in 2020. Trademarks are non-amortizing intangible assets which were $ 13,961 and $ 4,490 as of December 31, 2020 and 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 $ 8,640 . Trademarks are recorded in Other Intangible assets on the Consolidated Balance Sheets. 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 $ 3,394 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. The Company tests intangible assets with indefinite lives for impairment annually on October 1 st or whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability is measured by a comparison of the carrying amount to future net discounted cash flows expected to be generated by the associated asset. If such assets are determined to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount exceeds the fair market value of the intangible assets. Based upon the Company's analysis, no impairment chargers were recorded to its intangible assets. 111 NOTE 6 - FAIR VALUE OF FINANCIAL INSTRUMENTS The Company measures certain financial assets and liabilities at fair value. The accounting standards related to fair value measurements define fair value and provide a consistent framework for measuring fair value under the authoritative literature. A fair value hierarchy was established, which prioritizes the inputs used in measuring fair value into three broad levels. Level 1 – Quoted prices in active markets for identical assets or liabilities; Level 2 – Observable market-based inputs or unobservable inputs that are corroborated by market data; and Level 3 – Significant unobservable inputs that are not corroborated by market data. Generally, these fair value measures are model-based valuation techniques such as discounted cash flows, and are based on the best information available, including our own data. There were no assets or liabilities measured at fair value on a recurring basis as of the year ended December 31, 2019. The following table summarize the assets and liabilities measured at fair value on a recurring basis as of December 31, 2020. 12/31/2020 Level 1 Level 2 Level 3 Financial Assets Cash Equivalents $ 15,002 15,002 — — Short term investments 55,141 55,141 Financial Liabilities Contingent Consideration $ 30,710 — — 30,710 The Company's level 1 assets consist of cash equivalents which are generally comprised of short-term, liquid investments with original maturity of three months or less at inception and other short term investments which are comprised of exchange traded mutual funds and marketable securities with a maturity date greater than 3 months. The following table summarizes the change in fair value of Level 3 instruments in 2020: Total Balance at January 1, 2020 $ — Contingent consideration recorded as a result of the acquisition (Note 3) 27,190 Change in fair value of contingent consideration 3,520 Balance at December 31, 2020 $ 30,710 The Company's Level 3 instruments consist of contingent consideration. The fair value of contingent consideration liabilities assumed in business combinations is recorded as part of the purchase price consideration of the acquisition and is determined using a discounted cash flow model or probability simulation model. The significant inputs of such models are not always observable in the market, such as certain financial metric growth rates, volatility rates, projections associated with the applicable milestone, the interest rate, and the related probabilities and payment structure in the contingent consideration arrangement. Fair value adjustments to contingent consideration liabilities are recorded through operating expenses in the Consolidated Statement of Operations. Contingent consideration arrangements assumed by an asset purchase will be measured and accrued when such contingency is resolved. The recurring Level 3 fair value measurements of contingent consideration liabilities associated with commercial sales milestones include the following significant unobservable inputs as of December 31, 2020: 112 April 1, 2020 December 31, 2020 Valuation techniques Discounted cash flow, Monte Carlo Present value discount rate (1) 23.1 % 25.8 % Volatility factor 43.7 % 51.8 % Expected Years 4.1 years 3.5 years (1) The present value discount rate includes estimated risk premium NOTE 7 - PROPERTY AND EQUIPMENT, NET Property and equipment, net consisted of the following: December 31, 2020 2019 Land $ 1,645 $ 1,645 Building and building improvements 2,591 1,951 Computer equipment and software 2,218 2,070 Office and other equipment 1,060 751 Instruments 29,916 21,963 Sample inventory 2,453 2,213 Construction in progress 4,995 3,734 44,878 34,327 Less: accumulated depreciation ( 17,651 ) ( 12,978 ) Total property and equipment, net $ 27,227 $ 21,349 Depreciation expense is included in general and administrative expenses and was $ 4,660 , $ 3,749 and $ 2,514 for the years ended December 31, 2020, 2019 and 2018, respectively. NOTE 8 – ACCRUED COMPENSATION AND BENEFITS Accrued compensation and benefits consisted of the following: December 31, 2020 2019 Accrued compensation and related costs $ 1,896 $ 1,573 Accrued commissions 2,644 2,776 Total accrued compensation and benefits $ 4,540 $ 4,349 NOTE 9 - DEBT AND CREDIT ARRANGEMENTS Long-term debt consisted of the following: December 31, 2020 2019 Note payable to Squadron $ — $ 19,891 Revolving credit facility with Squadron — 5,000 Mortgage payable to affiliate 1,175 1,300 Total debt 1,175 26,191 Less: current maturities 131 124 Long-term debt, net of current maturities $ 1,044 $ 26,067 113 On December 31, 2017, we entered into a Fourth Amended and Restated Loan and Security Agreement, or the Loan Agreement, with Squadron Capital LLC, or Squadron. Pursuant to the Loan Agreement, a majority of the term loan amounts under a previous agreement with Squadron were consolidated into a $ 20,000 term note, represented by a Term Note A, and a $ 15,000 revolving credit facility was established. Both facilities include interest only payments and provide for an interest rate equal to the greater of (a) three month LIBOR plus 8.61 % and (b) 10 %. 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 "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 repaid $ 5,000 on the revolving credit facility with Squadron. On July 15, 2020, the Company repaid the $ 20,000 principal amount outstanding under the Term Note A, together with all unpaid interest and other related amounts payable. 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 and is recorded in interest, net. For the year ended December 31, 2020 the unused commitment fee paid to Squadron was $ 52 . 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 %. There are no outstanding term loan obligations under the Second Amended Loan Agreement. Borrowings under the Second 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 Second 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. In connection with the purchase of our office and warehouse space in Warsaw, Indiana in August 2013, we entered into a mortgage note payable to Tawani Enterprises Inc., an affiliate of Squadron. Pursuant to the terms of the mortgage note, we pay Tawani Enterprises Inc. monthly principal and interest installments of $ 16 with interest compounded at 5 % until maturity in 2028, at which time a final payment of remaining principal and interest is due. The mortgage is secured by the related real estate and building. As of December 31, 2020 and 2019, the mortgage balance was $ 1,175 and $ 1,300 , respectively, of which current principal due of $ 131 and $ 124 , respectively, was included in current portion of long-term debt. 114 At December 31, 2020, the aggregate future principal payments on our debt arrangements are as follows: 2021 $ 131 2022 137 2023 144 2024 152 2025 160 Thereafter 451 $ 1,175 Interest expense relating to notes payable to Squadron and mortgage note payable with Tawani was $ 1,233 , $ 4,229 and $ 2,255 for the years ended December 31, 2020, 2019 and 2018, respectively. NOTE 10 - STRATEGIC ARRANGEMENTS Effective December 1, 2007, we entered into a 10 year agreement with Case Western Reserve University (“CASE”) to assist in certain aspects of our research and development. Effective August 2, 2017, we entered into an Amended and Restated License Agreement to account for additional licensed product and extend the agreement for another ten years . The main focus of this research and development involves leveraging our exclusive rights to the Hamann-Todd Collection of the Cleveland National History Museum, the world's largest pediatric osteological collection, to assist in the design of implants which match pediatric bone curvature and structure. In exchange for services, CASE receives certain royalties and up-front fees. The royalties and certain fees are contingent upon our obtaining FDA approval and the launch of our products into the marketplace. CASE receives a minimum annual royalty of $ 10 or a royalty of 3 % of net sales on products, whichever is greater. Additionally, for each new product developed, CASE will receive milestone payments of $ 5 for FDA approval to sell our products within the United States and a milestone payment of $ 10 for general product launch. 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 amounted to $ 125 , $ 153 and $ 145 for the years ended December 31, 2020, 2019 and 2018, respectively. As of December 31, 2020 and 2019, $ 35 and $ 39 , respectively, was due to CASE. NOTE 11 - INCOME TAXES On December 22, 2017, the Tax Cuts and Jobs Act (the Tax Act) was signed into United States tax law. The Tax Act made broad and complex changes to the U.S. tax code, including, but not limited to, (1) reduction of the U.S. federal corporate tax rate from 35 percent to 21 percent; (2) elimination of the corporate alternative minimum tax (AMT); (3) a general elimination of U.S. federal income taxes on dividends from foreign subsidiaries; (4) current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations; (5) a new limitation on deductible interest expense; (6) limitations on the deductibility of certain executive compensation; (7) limitations on the use of FTCs to reduce the U.S. income tax liability; and (8) limitations on net operating losses (NOLs) generated after December 31, 2017, to 80 percent of taxable income. The Tax Act reduced the US federal corporate tax rate from a graduated rate up to 35% to a flat rate of 21%, effective January 1, 2018. The Company adjusted its deferred tax assets and liabilities at December 31, 2017 to reflect the Tax Act’s reduction of corporate income tax rates which are expected to be in effect in future years as the deferred tax assets and liabilities are realized. The effect of this provisional adjustment in the deferred provision for income taxes is a discrete net expense of $ 11,095 , however this is offset with a reduction in the valuation allowance as of December 31, 2018. In response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") was signed into law on March 27, 2020. The CARES Act lifts certain deduction limitations originally imposed by the Tax Act. Corporate taxpayers may carryback net operating losses originating during 2018 through 2020 for up to five years, which was not previously allowed under the Tax Act. The CARES Act also eliminates the 80% of taxable income limitation allowing corporate entities to fully utilize net operating loss carryforwards to offset 115 taxable income in 2018, 2019 and 2020. The enactment of the CARES Act did not result in any material impact to the Company’s income tax provision. On December 27, 2020 the Consolidated Appropriations Act, 2021 (“CAA”) was signed into law. The CAA includes the COVID-related Tax Relief Act of 2020 (“COVID TRA”). The Company is continuing to assess the effect of the CAA and does not believe it will result in a material impact to the Company’s income tax provision. Total income tax expense (benefit) for the years ended December 31, 2020, 2019 and 2018 was allocated as follows: 2020 2019 2018 Income from continuing operations $ ( 723 ) $ — $ — Income from discontinued operations — ( 660 ) — Total tax expense (benefit) $ ( 723 ) $ ( 660 ) $ — For the years ended December 31, 2020, 2019 and 2018 loss from continuing operations before taxes of the Company consists of the following: 2020 2019 2018 Domestic $ ( 28,756 ) $ ( 12,010 ) $ ( 11,768 ) Foreign ( 4,911 ) ( 675 ) ( 257 ) Total $ ( 33,667 ) $ ( 12,685 ) $ ( 12,025 ) The components of income tax expense (benefit) from continuing operations for the years ended December 31, 2020, 2019 and 2018 are as follows: 2020 2019 2018 Deferred: Federal $ — $ 1,033 $ ( 3,663 ) State — 37 564 Foreign ( 723 ) — — (Decrease) Increase in valuation allowance — ( 1,070 ) 3,099 Total income tax expense (benefit) $ ( 723 ) $ — $ — The reconciliation between the effective tax rate and the statutory tax rate is as follows: December 31, 2020 2019 2018 Federal statutory rate 21.0 % 21.0 % 21.0 % State statutory rate, net of federal benefit 1.8 % ( 0.7 ) % 0.9 % Effect of foreign rates different from statutory 0.1 % — % 0.2 % Change in state rate ( 2.5 ) % ( 1.3 ) % ( 1.2 ) % Nondeductible/nontaxable or other items 1.1 % .3 % 4.9 % Unborn foreign tax deduction 4.0 % — % — % Change in valuation allowance ( 23.4 ) % ( 19.3 ) % ( 25.8 ) % Income tax (expense) benefit 2.1 % — % — % Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The primary temporary differences that give rise to the deferred tax assets and liabilities are certain inventory adjustments, depreciation and amortization, interest expense, stock based compensation and net operating loss carryforwards. 116 The deferred tax assets and liabilities consisted of the following at December 31, 2020 and 2019: 2020 2019 Deferred tax assets: Inventories, net $ 2,715 $ 1,759 Stock based compensation 1,938 980 Loss carryforwards 29,050 22,153 Credit carryforwards 176 260 Interest carryforward 1,851 655 Accrued Settlements 1,467 — Other 382 417 Total deferred tax assets 37,579 26,224 Valuation allowance ( 33,160 ) ( 25,392 ) Net deferred tax assets 4,419 832 Deferred tax liabilities: Intangibles ( 9,120 ) ( 113 ) Property, plant and equipment ( 1,054 ) ( 719 ) Total deferred tax liabilities ( 10,174 ) ( 832 ) Deferred tax assets (liabilities), net $ ( 5,755 ) $ — The deferred tax assets were fully offset by a valuation allowance at December 31, 2020 and 2019, with the exception of certain deferred tax liabilities recognized in a foreign jurisdiction as a result of fair value adjustments recorded upon the acquisition of ApiFix. The Company has recorded a tax benefit during the year ended December 31, 2020, for losses generated in Israel. During 2019, the Company assumed certain deferred tax liabilities in connection with the acquisition of Vilex, which allowed for a release of $ 1,124 of the valuation allowance. Such amount was recognized in discontinued operations. As of December 31, 2020, we had available federal, state and foreign tax loss carryforwards of $ 98,918 , $ 68,901 and $ 16,905 , respectively. We had available federal tax credits of $ 176 . Net operating losses generated prior to December 31, 2017 will begin to expire in 2028. Federal net operating losses generated after January 1, 2018 will have an indefinite carryforward period. An ownership change under Section 382 of the Internal Revenue Code was deemed to occur on May 30, 2014. Given the limitation calculation, we anticipate approximately $ 16,200 in losses generated prior to the ownership change date will be subject to potential limitation. The estimated annual limitation is $ 1,062 . A second ownership change under Section 382 was deemed to occur on December 11, 2018. The estimated annual limitation is $ 9,736 , which is increased by $ 22,430 over the first five years as a result of an unrealized built in gain. NOLs sustained prior to May 30, 2014 will still be constricted by the lower limitation. Management assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year period ended December 31, 2020. Such objective evidence limits the ability to consider other subjective evidence, such as our projections for future growth. As a result, a full valuation continues to be recorded against the Company's net deferred tax assets, with the exception of Israel. We are subject to taxation in the United States, Indiana and various other state and international jurisdictions. As of December 31, 2020, all tax years from 2008 remain open to examination by the major taxing jurisdictions to which we are subject due to our net operating loss and credit carryforwards from those years. We believe that the income tax filing positions will be sustained on audit and do not anticipate any adjustments that will result in a material change. Therefore, no reserve for uncertain income tax positions has been recorded. Interest and penalties, if any, associated with income tax examinations will be to record such items as a component of income taxes. At December 31, 2020, our foreign operations held cash totaling $ 5,398 . We have not provided for foreign withholding tax on the undistributed earnings from our non-U.S. subsidiaries that are considered to be indefinitely reinvested. If such earnings were to be distributed, any foreign withholding tax would not be significant. NOTE 12 - STOCKHOLDERS’ EQUITY Prior to our IPO, we maintained an Amended and Restated 2007 Equity Incentive Plan (the “2007 Plan”) that provides for grants of options and restricted stock to employees, directors and associated third-party 117 representatives of our company as determined by the Board of Directors. The 2007 Plan had authorized 1,585,000 shares for award. Immediately prior to our IPO, we adopted our 2017 Incentive Award Plan (the “2017 Plan”) which replaced the 2007 Plan. The 2017 Plan provides for grants of options and restricted stock to officers, employees, consultants or directors of our Company. The 2017 Plan has authorized 1,789,647 shares for award. Stock Options The fair value for options granted at the time of issuance were estimated at the date of grant using a Black-Scholes options pricing model. Significant assumptions included in the option value model include the fair value of our common stock at the grant date, weighted average volatility, risk-free interest rate, dividend yield and the forfeiture rate. There were no stock options granted in any of the periods presented. Our stock option activity and related information are summarized as follows: Options Weighted-Average Exercise Price Weighted-Average Remaining Contractual Terms (in Years) Outstanding at January 1, 2018 176,959 $ 29.42 2.0 Forfeited or expired ( 50,652 ) $ 27.61 Exercised ( 14,213 ) $ 29.85 Outstanding at December 31, 2018 112,094 $ 30.32 1.8 Forfeited or expired ( 2,546 ) $ 27.61 Exercised ( 38,920 ) $ 29.3 Outstanding at December 31, 2019 70,628 $ 30.97 1.2 Forfeited or expired ( 4,556 ) $ 30.97 Exercised ( 53,270 ) $ 30.97 Outstanding at December 31, 2020 12,802 $ 30.97 1.6 Options generally include a time-based vesting schedule permitting the options to vest ratably over three years . At December 31, 2020 and 2019, all options were fully vested. There was no stock-based compensation expense on stock options for all periods presented. Restricted Stock Our restricted stock activity and related information are summarized as follows: Restricted Stock Weighted-Average Remaining Contractual Terms (in Years) Outstanding at January 1, 2018 548,005 0.3 Granted 178,543 Forfeited ( 1,335 ) Outstanding at Vested ( 547,920 ) Outstanding at December 31, 2018 177,293 2.2 Granted 154,769 Forfeited ( 9,616 ) Outstanding at Vested ( 4,444 ) Outstanding at December 31, 2019 318,002 1.7 Granted 164,010 Forfeited ( 1,885 ) Vested ( 43,397 ) Outstanding at December 31, 2020 436,730 1.1 Restricted stock exercisable at December 31, 2020 — At December 31, 2020, there was $ 7,114 of unrecognized compensation expense remaining related to our service-based restricted stock awards. The unrecognized compensation cost is expected to be recognized over a 118 weighted average period of 1.1 years. 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. Stock-based compensation expense on restricted stock amounted to $ 6,196 , $ 2,603 and $ 3,185 for the years ended December 31, 2020, 2019 and 2018, respectively. The increase in the stock compensation expense for the twelve months ended December 31, 2020 was primarily driven by a third year of restricted stock grants in a three year vesting cycle and one-time stock grants related to executive management transitions that vested immediately resulting in an additional $ 1,542 of expense. Warrants Our warrant activity and related information are summarized below: Warrants Weighted-Average Exercise Price Outstanding at January 1, 2018 44,101 $ 27.03 Forfeited or expired ( 37,311 ) $ 26.89 Outstanding at December 31, 2018 6,790 $ 27.81 Forfeited or expired ( 6,386 ) $ 27.61 Outstanding at December 31, 2019 404 $ 30.97 Forfeited or expired ( 404 ) $ 30.97 Outstanding at December 31, 2020 — For all periods presented, the warrants were issued at exercise prices ranging from $ 26.27 to $ 30.97 per share. The warrants generally have a 10 -year term. No warrants have been exercised during each of the three years in the period ended December 31, 2020. At inception and as of December 31, 2020, 2019 and 2018, no fair value was assigned to the warrants. NOTE 13 – NET LOSS PER SHARE The following is a reconciliation of basic and diluted net loss per share attributable to common stockholders: Year Ended December 31, 2020 2019 2018 Net loss from continuing operations $ ( 32,944 ) $ ( 12,685 ) $ ( 12,025 ) Net loss from discontinued operations — ( 1,046 ) — Net loss attributable to common stockholders - basic and diluted $ ( 32,944 ) $ ( 13,731 ) $ ( 12,025 ) Weighted average number of shares - basic and diluted 18,056,828 14,624,194 12,567,387 Net loss from continuing operations per share attributable to common stockholders - basic and diluted $ ( 1.82 ) $ ( 0.87 ) $ ( 0.96 ) Net loss from discontinued operations per share attributable to common stockholders - basic and diluted — ( 0.07 ) — Net loss per share attributable to common stockholders - basic and diluted $ ( 1.82 ) $ ( 0.94 ) $ ( 0.96 ) Our basic and diluted net loss per share is computed using the two-class method. The two-class method is an earnings allocation that determines net income per share for each class of common stock and participating securities according to their participation rights in dividends and undistributed earnings or losses. Non-vested restricted stock that includes non-forfeitable rights to dividends are considered participating securities. Because we have incurred a net loss for all periods presented, diluted net loss per common share is the same as basic net loss per common share. 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: 119 Year Ended December 31, 2020 2019 2018 Restricted stock 436,730 318,002 177,293 Stock options 12,802 70,628 112,094 Warrants — 404 6,790 449,532 389,034 296,177 NOTE 14 – BUSINESS SEGMENT Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. We have one operating and reportable segment, OrthoPediatrics, which designs, develops and markets anatomically appropriate implants and devices for children with orthopedic problems. Our chief operating decision-maker, our Chief Executive Officer, reviews financial information presented on a consolidated basis for purposes of making operating decisions and assessing financial performance, accompanied by disaggregated revenue information by product category. We do not assess the performance of our individual product categories on measures of profit or loss, or other asset-based metrics. Therefore, the information below is presented only for revenue by category and geography. Product sales attributed to a country or region includes product sales to hospitals, physicians and distributors and is based on the final destination where the products are sold. No individual customer accounted for more than 10% of total product sales for any of the periods presented. No customer accounted for more than 10% of consolidated accounts receivable as of December 31, 2020 or 2019. Disaggregated revenue - product sales by source were as follows: Year Ended December 31, Product sales by geographic location: 2020 2019 2018 U.S. $ 62,966 $ 55,055 $ 43,461 International 8,112 17,497 14,098 Total $ 71,078 $ 72,552 $ 57,559 Year Ended December 31, Product sales by category: 2020 2019 2018 Trauma and deformity $ 47,677 $ 49,371 $ 39,695 Scoliosis 20,738 21,485 16,662 Sports medicine/other 2,663 1,696 1,202 Total $ 71,078 $ 72,552 $ 57,559 No individual country with sales originating outside of the United States accounted for more than 10% of consolidated revenue for the years ended December 31, 2020, 2019 and 2018. NOTE 15 - RELATED PARTY TRANSACTIONS In addition to the debt and credit agreements and mortgage with Squadron and its affiliate (refer to Note 6), we currently use Structure Medical, LLC (“Structure Medical”) as one of our suppliers. Structure Medical is affiliated with Squadron and a supplier with which we maintain certain long-term agreements. Our aggregate payments to Structure Medical for inventory purchases were $ 2,622 , $ 3,933 and $ 4,026 for the years ended December 31, 2020, 2019 and 2018, respectively. On December 31, 2019, the Company divested Vilex for $ 25,000 to an affiliate of Squadron. In conjunction with the divestiture, the Company also entered into an exclusive perpetual license agreement to permit the purchasers of Vilex the ability to access intellectual property and sell products using the external fixation technology of Orthex, LLC to non-pediatric accounts. For the year ended December 31, 2020, sales and payments related to inventory purchases to Squadron's affiliate, now known as Vilex, LLC, were $ 595 and $ 2,900 , respectively. 120 NOTE 16 - EMPLOYEE BENEFIT PLAN We have a defined-contribution plan, OrthoPediatrics 401(k) Retirement Plan (the “401(k) Plan”), which includes a cash or deferral (Section 401(k)) arrangement. The 401(k) Plan covers those employees who meet certain eligibility requirements and elect to participate. Employee contributions are limited to the annual amounts permitted under the Internal Revenue Code. The 401(k) Plan allows us to make a discretionary matching contribution. Discretionary matching contributions are determined annually by management. Effective January 1, 2019, we elected to match our employees' 401(k) contributions up to 3 % of employees' salary. This was increased to 4 % effective January 1, 2020. For the years ended December 31, 2020 and 2019, we matched $ 439 and $ 246 , respectively of our employees' 401(k) contributions. NOTE 17 – COMMITMENTS AND CONTINGENCIES From time to time, we are involved in various legal proceedings arising in the ordinary course of our business. On January 20, 2017, K2M, Inc. filed suit against us in the United States District Court for the District of Delaware (K2M, Inc. v. OrthoPediatrics Corp. et al., Case No. 1:17-cv-0061) seeking unspecified damages for alleged infringement of U.S. Patent No. 9,532,816. The complaint was amended on August 21, 2017 to add, among other things, a claim of patent infringement regarding U.S. Patent No. 9,655,664. These patents relate to certain instruments used in our RESPONSE™ spine systems, which represent a portion of our total scoliosis portfolio. We have denied these claims and responded with counterclaims seeking declaratory relief that the patents in question are both invalid and not infringed. The parties attended a court-ordered mediation on October 24, 2017, which did not resolve the dispute, but as we move forward with this matter we welcome constructive discussions on a negotiated settlement. Nevertheless, we view our case as particularly strong and will continue to vigorously defend this matter. On June 28, 2018, the United States Patent and Trademark Office's Patent Trial and Appeal Board ("PTAB") instituted limited review concerning whether certain third parties had described the invention of certain of K2M's patent claims before allegedly invented by K2M. On July 10, 2018, the Court stayed the litigation pending the outcome of PTAB's review. 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 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. Patent Nos. 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 its 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. Subsequent to year end, we entered into settlement negotiations regarding this matter and anticipate that it will be settled in the near term. However, no assurance can be given that a final settlement will be reached and, were negotiations to cease, we would vigorously defend the claims asserted against us. As intellectual property litigation can involve complex factual and legal questions, an adverse resolution of this proceeding could have a material adverse effect on our business, operating results and financial condition. On December 30, 2020, Dr. Mark Barry filed suit against us in the United States District Court for the District of Delaware (Barry v. OrthoPediatrics Corp. et al., Case No. 1:20-cv-01786) seeking unspecified damages for alleged infringement of U.S. Patent Nos. 7,670,358; 8,361,121; 9,339,301; 9,668,787; and 9,668,788, which relate to systems and methods concerning derotation of spinal bodies to correct spinal deformities. 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. The parties reached a verbal settlement in February 2021, but have not finalized the written settlement agreement, and do not expect to do so for several weeks. As of December 31, 2020, we have accrued $ 6,342 related to the potential outcome of outstanding legal matters. We are not presently a party to any other legal proceedings the outcome of which, if determined adversely to us, would individually or in the aggregate materially affect our financial position or results of operations or cash flows. As of December 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 $ 10 annually through 2026. 121 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 December 31, 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 18. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The quarterly financial data presented should be read in conjunction with the consolidated financial statements and related notes. Three Months Ended Mar. 31, 2020 Jun. 30, 2020 Sep. 30, 2020 Dec. 31, 2020 Net revenue $ 16,356 $ 13,593 $ 22,205 $ 18,924 Gross profit 12,213 10,061 17,639 15,118 Operating loss ( 4,497 ) ( 7,017 ) ( 2,498 ) ( 12,743 ) Loss before income tax benefit ( 4,945 ) ( 9,447 ) ( 4,539 ) ( 14,736 ) Provision for income taxes (benefit) — — — ( 723 ) Net loss ( 4,945 ) ( 9,447 ) ( 4,539 ) ( 14,013 ) Net loss attributable to common stockholders ( 4,945 ) ( 9,447 ) ( 4,539 ) ( 14,013 ) Net loss per share attributable to common stockholders - basic and diluted $ ( 0.30 ) $ ( 0.54 ) $ ( 0.24 ) $ ( 0.73 ) Three Months Ended Mar. 31, 2019 Jun. 30, 2019 Sep. 30, 2019 Dec. 31, 2019 Net revenue $ 14,656 $ 18,200 $ 20,744 $ 18,952 Gross profit 10,655 13,619 15,895 14,450 Operating loss ( 2,717 ) ( 1,790 ) ( 1,539 ) ( 3,031 ) Net loss from continuing operations ( 3,020 ) ( 2,459 ) ( 2,877 ) ( 4,329 ) Gain (Loss) from discontinued operations — 159 ( 213 ) ( 1,100 ) Net loss ( 3,020 ) ( 2,618 ) ( 2,664 ) ( 5,429 ) Net loss attributable to common stockholders ( 3,020 ) ( 2,618 ) ( 2,664 ) ( 5,429 ) Net loss from continuing operations per share attributable to common stockholders - basic and diluted $ ( 0.21 ) $ ( 0.17 ) $ ( 0.19 ) $ ( 0.29 ) Net loss from discontinued operations per share attributable to common stockholders - basic and diluted $ — $ 0.01 $ ( 0.01 ) $ ( 0.07 ) Net loss per share attributable to common stockholders - basic and diluted $ ( 0.21 ) $ ( 0.16 ) $ ( 0.20 ) $ ( 0.36 ) During the fourth quarter ended December 31, 2020, the Company recorded a $ 2,730 revenue reduction due to the repurchase of inventory from a stocking distributor in Germany, Austria and Switzerland that we converted to a sales agency. The aforementioned $ 2,730 reduction of revenue reduced gross profit in the fourth quarter and total year by $ 1,115 . NOTE 19. SUBSEQUENT EVENTS On January 15, 2021, the Company expanded to 14 international agents, broadening its reach into the largest European market of Germany, Austria and Switzerland by converting long-standing distribution partners. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE In connection with its audits for the two most recent fiscal years ended December 31, 2020, there have been no disagreements with the Company’s independent registered public accounting firm on any matter of accounting 122 principles or practices, financial statement disclosure or audit scope or procedure, nor have there been any changes in accountants.