v3.20.2

BUSINESS COMBINATION | 6 Months Ended
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Jun. 30, 2020
Business Combinations [Abstract] |
BUSINESS COMBINATION | BUSINESS COMBINATION ApiFix On April 1, 2020, the Company purchased all the issued and outstanding membership interest of ApiFix for $2,000 in cash, including $343 of cash acquired, 934,783 shares of the Company's common stock, $0.00025 par value per share, representing approximately $35,176 (based on a closing share price of $37.63 on April 1, 2020), $30,000 in anniversary payments, and approximately $41,741 in a system sales payment. The total consideration transferred of $87,379 is preliminary and subject to certain limitations and adjustments. ApiFix, a corporation organized under the laws of Israel, has developed a minimally invasive deformity correction system for patients with Adolescent Idiopathic Scoliosis ("ApiFix System"). The Company incurred $310 of acquisition-related costs that are included in general and administrative expenses on the consolidated statements of operations. The purchase price allocation set forth herein is preliminary. The following table summarizes the total consideration paid for ApiFix and allocation of purchase price to the estimated fair value of the assets acquired and liabilities assumed at the acquisition date (in thousands):
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 |
Intangible assets |  | 24,330 |
Other intangible assets |  | 8,620 |
Operating lease right-of-use asset |  | 104 |
Total assets |  | 34,558 |
Liabilities |  |
Accounts payable and accrued liabilities |  | 226 |
Operating lease liabilities |  | 106 |
Other long-term liabilities |  | 270 |
Total liabilities |  | 602 |
Less: total net assets |  | 33,956 |
Goodwill |  | $ | 53,423 |
The fair value of identifiable intangible assets were based on valuations using a combination of the income and cost approach. The estimated fair value and useful life of identifiable intangible assets are as follows:
|  | Amount |  | Remaining Economic Useful Life
Trademarks / Names |  | $ | 8,620 |  |  | Indefinite
Patents |  | 23,790 |  |  | 15 years
Customer Relationships |  | 340 |  |  | 10 years
Non-competition Agreements |  | 200 |  |  | 4 years
|  | $ | 32,950 |  |  |
The Company is obligated to make anniversary payments of: (i) $13,000 on the second anniversary of the closing date, provided that such payment will be paid earlier if 150 clinical procedures using the ApiFix System are completed in the United States before such anniversary date, (ii) $8,000 on the third anniversary of the closing date; and (iii) $9,000 on the fourth anniversary of the closing date, subject to adjustments. The Company anticipates making the second anniversary payment of $13,000 during the first half of 2021. In addition, to the extent that the product of our revenues from the ApiFix System for the twelve months ended June 30, 2024 multiplied by 2.25 exceeds the anniversary payments actually made for the third and fourth years, we have agreed to pay the selling shareholders a system sales payment in the amount of such excess. The anniversary payments and system sales payment may each be made in cash or cash and common stock, subject to certain limitations; provided that the Company makes the determination with respect to anniversary payments and a representative of the former ApiFix shareholders may make the determination with respect to the system sales payment, if any. The fair value of the contingent consideration payments is considered a Level 3 investment and were determined by an independent valuation specialist at the original issuance date using an option pricing model and a Monte Carlo simulation based on forecast annual revenue, expected volatility and an implied probability of achieving revenue forecasts. The fair value of the payments will continue to be adjusted as additional information becomes available regarding the progress toward achievement of the revenue forecast. The adjustment in the fair value of the contingent consideration payments of $910 was recognized as an expense for the six month period ended June 30, 2020 in other expenses on the condensed consolidated statements of operations. An additional $886 was recognized as interest expense for the six month period ended June 30, 2020 on the condensed consolidated statements of operations for the adjustment in the fair value of the acquisition installment payable. Presented below is a summary of the present value of the anniversary payments and system sales payment related to the ApiFix acquisition:
|  | April 1, 2020 |  | June 30, 2020
Anniversary Payments: |  |  |  |
Second Year Payment |  | $ | 10,980 |  |  | $ | 11,485 |
Third Year Payment |  | 5,780 |  |  | 5,965 |
Fourth Year Payment |  | 5,860 |  |  | 6,056 |
Total acquisition installment payable |  | 22,620 |  |  | 23,506 |
Less: current portion of acquisition installment payable |  | 10,980 |  |  | 11,485 |
Acquisition installment payable, net of current portion |  | 11,640 |  |  | 12,021 |
System sales payment |  | 27,190 |  |  | 28,100 |
ApiFix future consideration, net of current portion |  | $ | 38,830 |  |  | $ | 40,121 |
Pre-acquisition revenues and earnings for ApiFix were not material to the condensed consolidated operations. 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):
Description |  | Amount
Preliminary fair value of estimated total acquisition consideration |  | $ | 3,318 |
Assets |  |
Cash |  | 81 |
Accounts receivable-trade |  | 215 |
Property and equipment |  | 10 |
Intangible assets |  | 950 |
Other intangible assets |  | $ | 210 |
Total assets |  | 1,466 |
Liabilities |  |
Accounts payable and accrued liabilities |  | 60 |
Total liabilities |  | 60 |
Less: total net assets |  | 1,406 |
Goodwill |  | $ | 1,912 |
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 |  |  |
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, adjusted for working capital, 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 as to working capital amounts, intangible values and tax accounting matters. The following table summarizes the total consideration paid for Vilex and Orthex and allocation of purchase price to the estimated fair value of the assets acquired and liabilities assumed at the acquisition date (in thousands):
Description |  | Amount
Fair value of estimated 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 |
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 |
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 |  | $ | 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 |  |  |
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. 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.Pro forma net revenue and net loss from continuing operations for the six months ended June 30, 2019 assuming the Orthex and Vilex acquisition occurred on January 1, 2019 would have been $34,792 and ($4,948), respectively.

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- Definition The entire disclosure for a business combination (or series of individually immaterial business combinations) completed during the period, including background, timing, and recognized assets and liabilities. The disclosure may include leverage buyout transactions (as applicable). + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -URI http://asc.fasb.org/topic&trid=2303972 + Details
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