Acquisition of Stability Inc.

On January 13, 2016, the Company completed the acquisition of Stability Inc., d/b/a Stability Biologics ("Stability"), a provider of human tissue products to surgeons, facilities, and distributors serving the surgical, spine, and orthopedic sectors of the healthcare industry. As a result of this transaction, the Company acquired all of the outstanding shares of Stability in exchange for

$6,000,000 cash, $3,346,000 in stock, represented by 441,009 shares of our common stock, and assumed debt of $1,771,000. Additional one time costs incurred in connection with the transaction totaled $1,088,000 and are included within selling, general and administrative expenses on the consolidated statements of operations. Contingent consideration may be payable in a formula determined by sales less certain expenses for the years 2016 and 2017. The contingent consideration was valued at $17,450,000 as of December 31, 2016 and is shown in the schedule below as fair value of earn-out. The Company used a third party specialist to assist us with the valuation. The purchase price allocation figures should be attributed to the Company and not to the third party valuation firm. The contingent consideration was classified as a liability.

The Company has evaluated the contingent consideration for accounting purposes under GAAP and has determined that the contingent consideration is within the scope of ASC 480 "Distinguishing Liabilities from Equity" whereby a financial instrument, other than an outstanding share, that embodies a conditional obligation that the issuer may settle by issuing a variable number of its equity shares shall be classified as a liability if, at inception, the monetary value of the obligation is based solely or

predominantly on variations in something other than the fair value of the issuer’s equity shares.

The actual purchase price was based on cash paid, the fair value of our stock on the date of the acquisition, and direct costs

associated with the acquisition. The fair value of stock consideration was determined as set forth below:



Common Share Price at Closing on 1/13/2016		$	8.43
Multiplied by: Number of Common Shares Transferred to the Sellers		441,009
Indicated Value of Equity Consideration (on a Freely Tradable Interest Basis)		$	3,717,706
Less: Marketability Discount @ 10%	[a]	(371,771		)
Fair Value of Equity Consideration Transferred		$	3,345,935
[a] Shares transferred to the Sellers are restricted securities pursuant to Rule 144. As such, the Sellers are prevented from selling the shares for a period of six months. In addition, they are subject to contractual lockups which restrict sales for up to twelve months following the closing of the transaction.

The actual purchase price has been allocated as follows (in thousands):



Cash paid at closing	$	6,000
Working capital adjustment	(480		)
Common stock issued (441,009 shares)	3,346
Assumed debt	1,771
Fair value of earn-out	17,450
Total fair value of purchase price	$	28,087

Net assets acquired:
Debt-free working capital	$	2,456
Other long-term assets	199
Property, plant and equipment	1,375
Deferred tax liability	(5,896		)
Subtotal	(1,866		)
Intangible assets:
Customer relationships	5,330
Patents and know-how	6,790
Trade names and trademarks	450
Non compete agreements	830
Licenses and permits	390
Subtotal	13,790
Goodwill	16,163
Total Assets Purchased	$	28,087

Working capital and other assets were composed of the following (in thousands):
Working capital
Cash	$	140
Prepaid Expenses and other current assets	100
Accounts receivable	2,001
Federal and state taxes receivable	28
Inventory	9,002
Accounts payable and accrued expenses	(8,815		)
Debt-free working capital	$	2,456

Current portion of long term debt	$	(194	)
Long-term debt	(560		)
Line of Credit	(932		)
Shareholder loan	(85		)
Assumed debt	$	(1,771	)

Net working capital	$	685

The acquisition was accounted for as a purchase business combination as defined by FASB Topic 805 - "Business Combinations". The fair value of the contingent consideration is measured as a Level 3 instrument. The contingent consideration liability is recorded at fair value on the acquisition date. Increases or decreases in the fair value of contingent consideration can result from changes in anticipated revenue levels and changes in assumed discount periods and rates. As the fair value measured is based on significant inputs that are not observable in the market, they are categorized as Level 3. The income valuation approach was applied in determining the fair value of the contingent consideration using a discounted cash flow valuation technique with significant unobservable inputs comprised of projected sales and certain expenses. The values assigned to intangible assets are subject to amortization. The intangible assets were assigned the following lives for amortization purposes:



		Estimated useful life (in years)
Intangible asset:
Customer relationships		12
Patents and know-how		20
Trade name and Trademarks		Indefinite
Non compete agreements		4
Licenses and permits		2

Goodwill consists of the excess of the purchase price paid over the identifiable net assets and liabilities acquired at fair value. Goodwill is attributable to the assembled workforce of Stability and the synergies expected to arise following the acquisition. Goodwill is not expected to be deductible for tax purposes. Goodwill was determined using the residual method based on an independent appraisal of the assets and liabilities acquired in the transaction. Goodwill is tested for impairment on an annual basis as defined by FASB Topic 350 - "Intangibles - Goodwill and Other".

Goodwill reconciliation (in thousands):



Balance at 3/31/16	$	22,912
Goodwill Adjustments (a)	(6,749		)
Balance at 12/31/16	$	16,163
(a) Goodwill is the result of a residual calculation

The changes in the preliminary fair values of the acquired assets and liabilities were due to adjustments made to the prospective financial information ("PFI") to better reflect an expected case from a market participant's perspective. As the earn-out is limited to the gross profit margin for the first two years after the acquisition, the adjustment to the PFI had a decreasing impact on the estimated fair value of the earn-out at the acquisition date, which resulted in a lower total purchase consideration and a reduction of the estimated fair value of the identifiable intangible assets.

During the measurement period, management determined that the initial PFI should be adjusted to better reflect an expected case from a market participant's perspective. At the time of the acquisition, management believed that certain of the acquired company's products had reached certain marketability milestones. Management subsequently concluded that these milestones had indeed not yet been achieved. Also, at the time of the acquisition Management believed that certain manufacturing processes were at standards aligned with our overall company standards. Management subsequently concluded that the standards required improvements. These factors have resulted in a lower revenue trajectory in the periods that apply to the earn-out thus reducing the fair value of the earn-out.

The measurement period adjustments are as follows (in thousands):



	Provisional Per			Measurement Period
	3/31/2016 Form 10Q			Adjustments 2016			Final

Cash paid at closing	$	6,000		$	—		$	6,000
Working capital adjustment	(480		)	—			(480		)
Common stock issued	3,346			—			3,346
Assumed debt	1,771			—			1,771
Fair value of earn-out	25,620			(8,170		)	17,450
Total fair value of purchase price	$	36,257		$	(8,170	)	$	28,087

Net assets acquired:
Debt-free working capital	$	2,179		$	277		$	2,456
Other assets, net	199			—			199
Property, plant and equipment	1,375			—			1,375
Deferred tax liability	(8,268		)	2,372			(5,896		)
Subtotal	$	(4,515	)	$	2,649		$	(1,866	)
Intangible assets:
Customer relationships	$	6,090		$	(760	)	$	5,330
Patents and know-how	9,170			(2,380		)	6,790
Trade names and trademarks	830			(380		)	450
Non compete agreements	1,080			(250		)	830
Licenses and permits	690			(300		)	390
Subtotal	17,860			(4,070		)	13,790
Goodwill	22,912			(6,749		)	16,163
Total Assets Purchased	$	36,257		$	(8,170	)	$	28,087

Pursuant to the terms of the earn-out arrangement, the Company will pay, for each of the years ending December 31, 2016 and 2017, an amount equal to one times the gross profit margin from (a) the net sales of Stability products sold by Stability's or the Company's sales personnel and (b) the net sales of Company products sold by Stability's sales personnel; provided, however, if the amount of such net sales for either earn-out period is less than $12 million, the earn-out amount will decrease to 0.5 times the gross profit margin for such earn-out period. The full details of the earn-out arrangement are set forth in the acquisition agreement which is filed as Exhibit 2.1 to the Company's Form 8-K filed on January 13, 2016.

The following unaudited pro forma summary financial information presents the consolidated results of operations for the Company as if the acquisition had occurred on January 1, 2015. The pro forma results are shown for illustrative purposes only and do not purport to be indicative of the results that would have been reported if the acquisition had occurred on the date indicated or indicative of the results that may occur in the future.

Unaudited pro forma information for the twelve months ended December 31, 2016 and 2015 (in thousands) is as follows:



	Years Ended December 31,
	2016	2015
Revenue	$245,563	$204,481

Net income	$12,611	$24,960

Income per share, fully diluted	$0.11	$0.22

The 2016 supplemental pro forma earnings were adjusted to exclude $1,088,000 of acquisition-related legal, audit and other

costs, net of tax. The 2015 supplemental pro forma earnings were adjusted to include $1,176,000 of amortization costs (net of tax) related to recorded intangible assets with defined useful lives, and $1,485,000 of inventory step-up charges (net of tax) as a result of the acquisition for comparability to 2016. The number of shares outstanding used in calculating the income per share for 2015 was adjusted to include 441,009 shares issued as part of the purchase price and assumed to be issued on January 1, 2015.

As the Company is managed and operates in one segment, and since Stability was merged with the Company's existing operations, the Company has determined that disaggregation of the Company's operating results to provide the amount of revenue and earnings for Stability since the acquisition date is impracticable.