What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2021-08-05 compared with 2021-05-06 · 151 added, 136 removed, 615 unchanged (32% of the section changed)

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(In Thousands, Except Share Data)

March 31, 2021 December 31, 2020

June 30, 2021 December 31, 2020

Current assets:

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50,000,000 shares authorized;

19,659,412 shares and 19,560,291 shares issued as of March 31, 2021 (unaudited) and December 31, 2020, respectively

19,670,044 shares and 19,560,291 shares issued as of June 30, 2021 (unaudited) and December 31, 2020, respectively

Additional paid-in capital 391,415 388,622

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(In Thousands, Except Share and Per Share Data)

Three Months Ended March 31,

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

2021 2020 2021 2020

Net revenue $ 26,695 $ 13,593 $ 48,157 $ 29,949

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(In Thousands)

Three Months Ended March 31,

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

2021 2020 2021 2020

Net loss $ ( 3,756 ) $ ( 9,447 ) $ ( 14,135 ) $ ( 14,392 )

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(In Thousands, Except Share Data)

Three Months Ended March 31, 2021

Three and Six Months Ended June 30, 2021

Additional Other Total

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Balance at March 31, 2021 19,659,412 $ 5 $ 390,000 $ ( 172,145 ) $ 4,285 $ 222,145

Three Months Ended March 31, 2020

Net loss — — — ( 3,756 ) — ( 3,756 )

Other comprehensive loss — — — — 1,797 1,797

Restricted stock 10,632 — 1,415 — — 1,415

Balance at June 30, 2021 19,670,044 $ 5 $ 391,415 $ ( 175,901 ) $ 6,082 $ 221,601

ORTHOPEDIATRICS CORP.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(In Thousands, Except Share Data)

Three and Six Months Ended June 30, 2020

Additional Other Total

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

Net loss — — — — — ( 9,447 ) — ( 9,447 )

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

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

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

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

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

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

See notes to condensed consolidated financial statements.

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(In Thousands)

Three Months Ended

Six Months Ended

OPERATING ACTIVITIES

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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 )

Purchases of licenses ( 2,858 ) —

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Payments on debt with affiliate — ( 5,000 )

Repurchases of common shares — ( 187 )

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

Proceeds from exercise of stock options 62 1,281

Payments on mortgage notes ( 64 ) ( 61 )

Net cash provided by financing activities 30 ( 4,530 )

Net cash (used in) provided by financing activities ( 2 ) 66,427

Effect of exchange rate changes on cash 29 17

NET DECREASE IN CASH ( 7,337 ) ( 17,086 )

NET (DECREASE) INCREASE IN CASH ( 18,196 ) 42,388

Cash and restricted cash, beginning of year $ 30,132 $ 72,027

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Issuance of common shares to acquire Telos $ — $ 1,568

Issuance of common shares to acquire ApiFix $ — $ 35,176

Issuance of common shares to acquire Band-Lok intellectual property $ — $ 2,644

See notes to condensed consolidated financial statements.

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

We sell our specialized products, including PediLoc ® , PediPlates ® , Cannulated Screws, PediFlex TM nail, PediNail TM , PediLoc ® Tibia, ACL Reconstruction System, Locking Cannulated Blade, Locking Proximal Femur, Spica Tables, RESPONSE 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 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 ® 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.

The Company began selling its products in the United States in 2008 and internationally in 2011.

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.

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("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).

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 pediatric congenital deformities and limb length discrepancies.

On December 31, 2019, we divested substantially all of the assets relating to Vilex's adult product offerings to a wholly-owned subsidiary of Squadron Capital LLC ("Squadron") in exchange for a $ 25,000 reduction in a Term Note owed to Squadron in connection with the initial acquisition.

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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).

Telos is a boutique regulatory consulting firm formed in Colorado.

On April 1, 2020, we purchased all the issued and outstanding membership interest of ApiFix, Ltd.

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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 in both our domestic and international markets to various degrees.

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 continue to invest in research and development, invest in our people, and take steps to position ourselves for long-term success.

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.

The global COVID-19 pandemic (“COVID-19” or the “pandemic”), together with the preventative and precautionary measures taken by governments, governmental agencies, communities, businesses and hospital administrators, has impacted, and may continue to impact significant aspects of our business, including demand for our products, supply chain and distribution systems, our operations generally, and the timing for bringing new products to market.

We also expect medical procedure rates to continue to vary by type and country, and could be impacted by regional COVID-19 case volumes, hospital and clinical occupancy and staffing levels, the willingness of patients to schedule elective procedures, travel and quarantine restrictions, vaccine immunization rates, and new COVID-19 variants.

While COVID-19 case volumes appear to be decreasing in the U.S.

and certain other countries as a result of higher vaccination rates, the global COVID-19 outlook remains uncertain as vaccination rates have slowed and the spread of new variants has accelerated.

While the impact of COVID-19 has had, and may continue to have, an adverse effect on our business, results of operations, financial condition and cash flows, the nature and extent of such impact is unknown, as we cannot predict with confidence the ultimate duration or further severity of the pandemic.

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES

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We have prepared the accompanying condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”).

The accompanying condensed consolidated balance sheets as of March 31, 2021 and December 31, 2020, the condensed consolidated statements of operations for the three months ended March 31, 2021 and 2020, the condensed consolidated statements of comprehensive loss for the three months ended March 31, 2021 and 2020, the condensed consolidated statements of stockholders’ equity for the three months ended March 31, 2021 and 2020 and the condensed consolidated statements of cash flows for the three months ended March 31, 2021 and 2020 are unaudited and should be read in conjunction with the annual consolidated financial statements as of and for the year ended December 31, 2020 and related notes thereto contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC") on March 11, 2021.

The accompanying condensed consolidated balance sheets as of June 30, 2021 and December 31, 2020, the condensed consolidated statements of operations for the three and six months ended June 30, 2021 and 2020, the condensed consolidated statements of comprehensive loss for the three and six months ended June 30, 2021 and 2020, the condensed consolidated statements of stockholders’ equity for the three and six months ended June 30, 2021 and 2020 and the condensed consolidated statements of cash flows for the six months ended June 30, 2021 and 2020 are unaudited and should be read in conjunction with the annual consolidated financial statements as of and for the year ended December 31, 2020 and related notes thereto contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC") on March 11, 2021.

The financial data and other financial information disclosed in the notes to the accompanying condensed consolidated financial statements are also unaudited.

As such, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to applicable rules and regulations thereunder.

As such, certain information and footnote disclosures normally included in financial statements prepared in

accordance with GAAP have been condensed or omitted pursuant to applicable rules and regulations thereunder.

The unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements as of and for the year ended December 31, 2020 and, in management’s opinion, include all adjustments, consisting of only normal recurring adjustments, necessary for the fair presentation of the financial statements for the interim periods.

The results of operations for the three months ended March 31, 2021 are not necessarily indicative of the results to be expected for the full fiscal year or for any other period.

The results of operations for the three and six months ended June 30, 2021 are not necessarily indicative of the results to be expected for the full fiscal year or for any other period.

The accompanying condensed consolidated financial statements have been prepared assuming our Company will continue as a going concern.

We have experienced recurring losses from operations since our inception and had an accumulated deficit of $ 172,145 and $ 161,766 as of March 31, 2021 and December 31, 2020, respectively.

We have experienced recurring losses from operations since our inception and had an accumulated deficit of $ 175,901 and $ 161,766 as of June 30, 2021 and December 31, 2020, respectively.

Management continues to monitor cash flows and liquidity on a regular basis.

We believe that our cash balance, including short term investments, at March 31, 2021 and expected cash flows from operations for the next twelve months subsequent to the issuance of the accompanying condensed consolidated financial statements, are sufficient to enable us to maintain current and essential planned operations for more than the next twelve months.

We believe that our cash balance, including short term investments, at June 30, 2021 and expected cash flows from operations for the next twelve months subsequent to the issuance of the accompanying condensed consolidated financial statements, are sufficient to enable us to maintain current and essential planned operations for more than the next twelve months.

Use of Estimates

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Restricted Cash

In conjunction with the sale of a business acquired in 2019, $ 1,250 was placed into a separate escrow account.

This cash is reported as restricted cash on the March 31, 2021 and 2020 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.

In conjunction with the sale of the assets relating to Vilex's adult product offering to a wholly-owned subsidiary of Squadron in 2019, $ 1,250 was placed into a separate escrow account to cover certain indemnification obligations.

This cash is reported as restricted cash on the June 30, 2021 and December 31, 2020 condensed consolidated balance sheets.

These funds will remain restricted until such time as the software ownership dispute involving IMED Surgical, LLC is resolved (see “Legal Proceedings” under Note 13 – Commitments and Contingencies for additional information).

The Company also maintains restricted cash of 100 Euro at its Netherlands entity for potential Italian tenders.

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Amortizable intangible assets are assessed for impairment annually or whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable.

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

Recoverability is

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

If such assets are determined to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount exceeds the fair market value of the assets.

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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 three months ended March 31, 2021 were $ 644 and $ 4,150 , respectively.

We recorded no interest expense or fair value adjustments for the three months ended March 31, 2020.

Acquisition installment payables, which are fixed future payments, are recorded at their net present value, and contingent consideration is recorded at fair value as determined by management with the assistance of an independent valuation specialist at the original issuance date and is marked to fair value on a recurring basis.

Accretion of interest expense attributable to the acquisition installment payable is 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 on the condensed consolidated statement of operations.

The amount of expense recorded in interest expense, net for the three and six months ended June 30, 2021 were $ 569 and $ 1,212 , respectively, and $ 886 for each of the three and six months ended June 30, 2020.

The fair value adjustments of contingent consideration for the three and six months ended June 30, 2021 were $ 990 and $ 5,140 , respectively, and $ 910 for each of the three and six months ended June 30, 2020.

Cost of Revenue

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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.

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

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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.

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.

Comprehensive Income (Loss)

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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.

We will be able to take advantage of these reduced requirements until December 31, 2022, the date on which we will no longer qualify as an emerging growth company.

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.

We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we are subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

We also qualify as a "smaller reporting company," as such term is defined in Rule 12b-2 under the Exchange Act.

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Recent Accounting Pronouncements

In May 2021, the FASB issued ASU No.

2021-04 " Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity's Own Equity (Subtopic 815-40):

Issuer's Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (a consensus of the FASB Emerging Issues Task Force)".

This ASU is intended to clarify and reduce diversity in an issuer's accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange.

The guidance clarifies whether an issuer should account for a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange as (1) an adjustment to equity and, if so, the related earnings per share effects, if any, or (2) an expense and, if so, the manner and pattern of recognition.

The amendments in this ASU affect all entities that issue freestanding written call options that are classified in equity.

The amendments do not apply to modifications or exchanges of financial instruments that are within the scope of another Topic and do not affect a holder’s accounting for freestanding call options.

The amendments in this ASU are effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years.

An entity should apply the amendments prospectively to modifications or exchanges occurring on or after the effective date of the amendments.

Early adoption is permitted for all entities, including adoption in an interim period.

The Company is currently evaluating the impact of adopting ASU 2021-04 on its consolidated financial statements.

In June 2016, the FASB issued ASU No.

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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 consideration transferred of $ 87,379 , as calculated after discounting future payments to present value, is preliminary and subject to certain limitations and adjustments.

The total consideration transferred of $ 87,379 , as calculated after discounting future payments to present value, is final.

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:

The following table reconciles the total consideration transferred after

discounting the future payments:

Consideration Present Value

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Total consideration transferred $ 108,984 $ 87,053

The purchase price allocation set forth herein is preliminary.

The purchase price allocation set forth herein is final.

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

Fair value of estimated total acquisition consideration $ 87,379

Accounts receivable-trade 245

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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.

The Company anticipates making the second anniversary payment of $ 13,000 during the second 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.

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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.

model and a Monte Carlo simulation based on forecast annual revenue, expected volatility and an implied probability of achieving revenue forecasts.

The fair value of the contingent consideration payments is considered a Level 3 investment and were determined by an independent valuation specialist at the original issuance date using an option pricing model and a Monte Carlo simulation based on forecast annual revenue, expected volatility and an implied probability of achieving revenue forecasts.

The fair value of the payment will continue to be adjusted as additional information becomes available regarding the progress toward achievement of the revenue forecast.

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 March 31, 2021

April 1, 2020 December 31, 2020 June 30, 2021

Anniversary Payments:

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

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

The shares of common stock were valued at $ 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 final.

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):

Description Amount

Fair fair value of total acquisition consideration $ 3,318

Accounts receivable-trade 215

Prepaid expenses and other current assets 38

Property and equipment 10

Intangible assets 950

Other intangible assets $ 210

Total assets 1,504

Accounts payable and accrued liabilities 60

Total liabilities 60

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 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

NOTE 4 - GOODWILL AND INTANGIBLE ASSETS

Changes in the carrying amount of goodwill for the three months ended March 31, 2021 were as follows:

Changes in the carrying amount of goodwill for the six months ended June 30, 2021 were as follows:

Goodwill at January 1, 2021 $ 70,511

Foreign currency translation impact ( 855 )

Goodwill at March 31, 2021 $ 68,463

Goodwill at June 30, 2021

Intangible Assets

As of March 31, 2021, the balances of amortizable intangible assets were as follows:

As of June 30, 2021, the balances of amortizable intangible assets were as follows:

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

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Total amortizable assets $ 55,118 $ ( 4,834 ) $ 50,284

On March 19, 2021, we recorded a license agreement in the amount of $ 2,858 in settlement of the Barry legal matter.

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.

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We were previously the sole licensee of the purchased assets under a license agreement with Band-Lok.

On March 19, 2021, we recorded a license agreement in the amount of $ 2,858 in settlement of the Barry legal matter.

Additional information regarding this matter can be found in Note 13.

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

Trademarks are non-amortizing intangible assets which were $ 13,618 and $ 13,961 as of March 31, 2021 and December 31, 2020, respectively.

Trademarks are non-amortizing intangible assets which were $ 13,817 and $ 13,961 as of June 30, 2021 and December 31, 2020, respectively.

Concurrently with our acquisition of each company, we acquired the trademark of Telos on March 9, 2020 valued at $ 210 and the trademark of ApiFix on April 1, 2020 valued at $ 8,640 .

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Generally, these fair value measures are model-based valuation techniques such as discounted cash flows, and are based on the best information available, including our own data.

The following table summarize the assets and liabilities measured at fair value on a recurring basis as of March 31, 2021 and December 31, 2020.

March 31, 2021

The following table summarize the assets and liabilities measured at fair value on a recurring basis as of June 30, 2021 and December 31, 2020.

June 30, 2021

Level 1 Level 2 Level 3 Total

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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.

The adjustment in the fair value of the contingent consideration payments of $ 4,150 was recognized as an expense for the three month period ended March 31, 2021, in other expenses on the condensed consolidated statements of operations.

An additional $ 644 was recognized as interest expense for the three month period ended March 31, 2021, on the condensed consolidated statements of operations for the accretion of the acquisition installment payable.

The adjustments in the fair value of the contingent consideration payments of $ 990 and $ 5,140 were recognized as expense for the three and six month periods ended June 30, 2021, respectively, in other expenses on the condensed consolidated statements of operations.

Additionally, $ 569 and $ 1,212 was recognized as interest expense for the three and six month periods ended June 30, 2021, respectively, on the condensed consolidated statements of operations for the accretion of the acquisition installment payable.

The following table summarizes the change in fair value of Level 3 instruments in 2021:

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Change in fair value of contingent consideration 5,140

Balance at March 31, 2021 $ 34,860

The recurring Level 3 fair value measurements of contingent consideration liabilities associated with commercial sales milestones include the following significant unobservable inputs as of March 31, 2021 and December 31, 2020:

March 31, 2021 December 31, 2020

Balance at June 30, 2021

June 30, 2021 December 31, 2020

Valuation techniques Discounted cash flow, Monte Carlo

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(1) The present value discount rate includes estimated risk premium.

The estimated fair value reflects assumptions made by management as of March 31, 2021;

The estimated fair value reflects assumptions made by management as of June 30, 2021;

however, the actual amount ultimately paid could be higher or lower than the fair value of the remaining contingent consideration.

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Long-term debt consisted of the following:

March 31, 2021 December 31, 2020

June 30, 2021 December 31, 2020

Mortgage payable to affiliate $ 1,111 $ 1,175

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Pursuant to the Loan Agreement, which has been amended by a First Amendment dated as of June 4, 2019 and a Second Amendment date as of August 4, 2020 (as so amended, the "Second Amendment Loan Agreement"), Squadron is providing the Company a revolving credit facility in the amount of $ 25,000 .

Borrowings under the revolving credit facility are to 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.

party thereto.

The Amended Revolving Note will mature at the earlier of:

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The unused commitment fee is payable quarterly in arrears and is recorded in interest, net.

For the quarter ended March 31, 2021 the unused commitment fee paid to Squadron was $ 52 .

For the three and six months ended June 30, 2021 the unused commitment fee paid to Squadron was $ 32 and $ 63 , respectively.

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.

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As of December 31, 2020, the mortgage balance was $ 1,175 of which current principal due of $ 131 was included in the current portion of long-term debt.

At March 31, 2021 the mortgage balance was $ 1,143 of which current principal of $ 132 was included in the current portion of long-term debt.

Interest expense relating to notes payable to Squadron and mortgage note payable with Tawani was $ 15 and $ 551 for the three months ended March 31, 2021 and 2020, respectively.

At June 30, 2021 the mortgage balance was $ 1,111 of which current principal of $ 134 was included in the current portion of long-term debt.

The aggregate interest expense relating to the notes payable to Squadron and the mortgage note payable to Tawani was $ 14 and $ 513 for the three months ended June 30, 2021 and 2020, respectively, and $ 29 and $ 892 for the six months ended June 30, 2021 and 2020, respectively.

NOTE 7 - INCOME TAXES

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The income tax provision or benefit is computed by multiplying the estimated annual effective tax rate by the year-to-date pre-tax book income (loss).

For the three months ended March 31, 2021, the income tax benefit was $ 312 compared to $ 0 for the three months ended March 31, 2020.

Our effective income tax rate was 2.9 % and 0 % for the three months ended March 31, 2021 and 2020, respectively.

For the six months ended June 30, 2021, the income tax benefit was $ 598 compared to $ 0 for the six months ended June 30, 2020.

Our effective income tax rate was 4.0 % and 0 % for the three months ended June 30, 2021 and 2020, respectively.

Our effective tax rate increased compared to the prior year primarily due to the acquisition of ApiFix in 2020 and the deferred tax liability recorded in the purchase accounting.

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The CARES Act lifts certain deduction limitations originally imposed by the Tax Cuts and Jobs Act of 2017 ("2017 Tax Act").

The enactment of the CARES Act did not result in any material adjustments to our income tax provision for the three or three months ended March 31, 2021.

The enactment of the CARES Act did not result in any material adjustments to our income tax provision for the three or six months ended June 30, 2021.

On December 27, 2020 the Consolidated Appropriations Act, 2021 (“CAA”) was signed into law.

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The Consolidated Appropriations Act did not have a material impact on the Company’s income tax provision.

The deferred tax assets were fully offset by a valuation allowance at March 31, 2021 and December 31, 2020, 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 period ended March 31, 2021 for losses generated in the foreign jurisdiction.

The deferred tax assets were fully offset by a valuation allowance at June 30, 2021 and December 31, 2020, 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 period ended June 30, 2021 for losses generated in the foreign jurisdiction.

As of December 31, 2020, we had available federal, state and foreign tax loss carryforwards of $ 98,918 , $ 68,901 and $ 16,905 , respectively.

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Management assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets.

A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year period ended March 31, 2021.

A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year period ended June 30, 2021.

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

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Exercised ( 2,010 ) 30.97

Outstanding at March 31, 2021 10,792 $ 30.97 1.6

Outstanding at June 30, 2021

10,792 $ 30.97 1.4

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

At March 31, 2021 and December 31, 2020, all options were fully vested.

There was no stock-based compensation expense on stock options for the three months ended March 31, 2021 and 2020, respectively.

At June 30, 2021 and December 31, 2020, all options were fully vested.

There was no stock-based compensation expense on stock options for the three and six months ended June 30, 2021 and 2020, respectively.

Restricted Stock

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Vested ( 162,816 )

Outstanding at March 31, 2021 389,098 1.7

Restricted stock exercisable at March 31, 2021 —

At March 31, 2021, there was $ 11,417 of unrecognized compensation expense remaining related to our service-based restricted stock awards.

Outstanding at June 30, 2021

Restricted stock exercisable at June 30, 2021

At June 30, 2021, there was $ 9,974 of unrecognized compensation expense remaining related to our service-based restricted stock awards.

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

Stock-based compensation expense on restricted stock amounted to $ 1,316 and $ 958 for the three months ended March 31, 2021 and 2020, respectively.

The increase in the stock compensation expense for the three months ended March 31, 2021 was due primarily to a third year of restricted stock grants in a three year vesting cycle.

Stock-based compensation expense on restricted stock amounted to $ 1,415 and $ 2,495 for the three months ended June 30, 2021 and 2020, respectively, and $ 2,731 and $ 3,453 for the six months ended June 30, 2021 and 2020, respectively.

The decrease in the stock compensation expense for the three and six months ended June 30, 2021 was due primarily to one-time grants related to management transition plans that did not repeat in the current year.

NOTE 9 – NET LOSS PER SHARE

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

Three Months Ended

Three Months Ended Six Months Ended

June 30, June 30,

2021 2020 2021 2020

Net loss $ ( 3,756 ) $ ( 9,447 ) $ ( 14,135 ) $ ( 14,392 )

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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:

Three Months Ended March 31,

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:

Six Months Ended June 30,

Restricted stock 381,657 437,347

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

No customers accounted for more than 10% of total product sales for the three months ended March 31, 2021 or 2020.

No customer accounted for more than 10% of consolidated accounts receivable as of March 31, 2021 and December 31, 2020.

No customers accounted for more than 10% of total product sales for the three and six months ended June 30, 2021 or 2020.

No customer accounted for more than 10% of consolidated accounts receivable as of June 30, 2021 and December 31, 2020.

Product sales by source were as follows:

Three Months Ended March 31,

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

Product sales by geographic location:

2021 2020 2021 2020

$ 21,737 $ 12,146 $ 38,576 $ 25,530

International 4,958 1,447 9,581 4,419

Total $ 26,695 $ 13,593 $ 48,157 $ 29,949

Three Months Ended March 31,

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

Product sales by category:

2021 2020 2021 2020

Trauma and deformity $ 17,933 $ 9,220 $ 32,485 $ 21,430

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Total $ 26,695 $ 13,593 $ 48,157 $ 29,949

No individual country with sales originating outside of the United States accounted for more than 10% of consolidated revenue for the three months ended March 31, 2021 and 2020.

No individual country with sales originating outside of the United States accounted for more than 10% of consolidated revenue for the three and six months ended June 30, 2021 and 2020.

NOTE 11 - RELATED PARTY TRANSACTIONS

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Structure Medical is affiliated with Squadron and a supplier with which we maintain certain long-term agreements.

We made aggregate payments to Structure Medical for inventory purchases of $ 72 and $ 1,201 for the three months ended March 31, 2021 and 2020, respectively.

We made aggregate payments to Structure Medical for inventory purchases of $ 197 and $ 934 for the three months ended June 30, 2021 and 2020, respectively and $ 269 and $ 2,135 for the six months ended June 30, 2021 and 2020, 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.

We had sales and payments related to inventory purchases to Squadron's affiliate, now known as Vilex, LLC, of $ 87 and $ 189 , respectively, for the three months ended March 31, 2021.

We had sales and payments related to inventory purchases to Vilex, LLC of $ 386 and $ 640 , respectively, for the three months ended March 31, 2020.

We had sales and payments related to inventory purchases to Squadron's affiliate, now known as Vilex, LLC, of $ 68 and $ 336 , respectively, for the three months ended June 30, 2021, and $ 155 and $ 525 , respectively, for the six months ended June 30, 2021, respectively.

We had sales and payments related to inventory purchases to Vilex, LLC of $ 138 and $ 899 , respectively, for the three months ended June 30, 2020, and $ 524 and $ 1,539 , respectively, for the six months ended June 30, 2020.

NOTE 12 - EMPLOYEE BENEFIT PLAN

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

As of March 31, 2021, the Company has recorded a lease liability of $ 315 and corresponding right-of-use-asset of $ 318 on its condensed consolidated balance sheet.

As of June 30, 2021, the Company has recorded a lease liability of $ 292 and corresponding right-of-use-asset of $ 295 on its condensed consolidated balance sheet.

Legal Proceedings

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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.

We denied these claims and responded with counterclaims seeking declaratory relief that the patents in question are both invalid and not infringed.

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

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

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

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

Moreover, on November 20, 2019, the Court issued 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.

Throughout 2021, we have continued settlement negotiations regarding this matter and anticipate that it will be settled in the near term.

Because the Company considers a potential settlement to be probable, it previously accrued for the related expense during the fourth quarter of 2020.

No material modifications were made to the accrual during the quarter ended March 31, 2021.

While the Company considers it probable, 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.

Like before, these newly issued K2M patents relate to certain instruments used in our RESPONSE spine systems, and we denied these claims and responded with counterclaims seeking declaratory relief that the patents in question are both invalid and not infringed.

On June 29, 2021, the parties settled the matter, and subsequently filed a Joint Stipulation of Dismissal With Prejudice concerning all claims and counterclaims, which the Court subsequently granted and ordered.

The Company previously accrued for the related expense during the fourth quarter of 2020.

No material modifications were made to the accrual during the three or six months ended June 30, 2021, and the payment made during the second quarter satisfies all liabilities associated with this matter.

IMED Surgical - Software Ownership Dispute

On October 16, 2020, the Company, its wholly-owned subsidiary, Orthex, LLC (“Orthex”), the Company’s largest investor, Squadron Capital, LLC (“Squadron”), and certain other defendants, were named in a lawsuit filed by IMED Surgical, LLC, a New Jersey company (the “Plaintiff”), in Broward County, Florida Circuit Court.

In the lawsuit, the Plaintiff claims, among other things, that it is the rightful owner of certain patented point-and-click planning software being used by the Company, Orthex and Squadron (the “Point & Click Software”).

In June 2019, the Company purchased all the issued and outstanding units of membership interests in Orthex, and all the issued and outstanding shares of stock of Vilex in Tennessee, Inc.

(“Vilex”) for $ 60 million in total consideration.

Vilex and Orthex are primarily manufacturers of foot and ankle surgical implants, including cannulated screws, fusion devices, surgical staples and bone plates, as well as the Orthex Hexapod technology, a system of rings, struts, implants, hardware accessories, and the Point & Click Software used to treat congenital deformities and limb length discrepancies.

On December 31, 2019, the Company divested substantially all of the assets relating to Vilex's adult product offerings to a wholly-owned subsidiary of Squadron, in exchange for a $ 25 million reduction in a term note owed to Squadron in connection with the initial acquisition.

As part of the sale, the Company also executed an exclusive license arrangement with Squadron providing for perpetual access to certain intellectual property, including the Point & Click Software.

According to the lawsuit, the other defendants, who are unrelated to the Company, assigned the Point & Click Software to Orthex in violation of certain agreements with the Plaintiff.

The Plaintiff, among other things, requests that the defendants be ordered to convey and assign to Plaintiff all of their rights, title and interests in and to the Software and seeks certain compensatory, consequential and unjust enrichment damages from Orthex and the unrelated defendants.

Although we believe the IMED lawsuit is without merit and will vigorously defend the claims asserted us, 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.

Barry - Alleged Patent Infringement

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1:20-cv-01786) seeking unspecified damages for alleged infringement of U.S.

and 9,668,788, which relate to systems and methods concerning derotation of spinal bodies to correct spinal deformities.

9,668,788, which relate to systems and methods concerning derotation of spinal bodies to correct spinal deformities.

On March 19, 2021, the parties reached a final settlement, which included the Company entering into a license agreement with Dr.

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Barry had been previously accrued for during the fourth quarter of 2020 in anticipation of this final settlement.

Accrued Legal Settlement Costs

As of March 31, 2021, we have an outstanding accrued legal settlement balance of $ 5,250 related to the potential outcome of outstanding legal matters.

As of March 31, 2021, 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.

As of June 30, 2021, we are contracted to pay royalties to individuals and entities that provide research and development services, which range from 0.5 % to 20 % of sales.

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

In any development project, there are significant variables that will affect the amount and timing of these payments and as of March 31, 2021, we have not been able to determine the amount and timing of payments.

In any development project, there are significant variables that will affect the amount and timing of these payments and as of June 30, 2021, 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.

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

What changed 10-Q

Item 1. Financial Statements