On January 13, 2016, the Company completed the acquisition of Stability Inc., 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 $6.0 million cash, $3.3 million (or 441,009 shares) of the Company’s common stock, and assumed debt of $1.8 million. Additional one-time costs incurred in connection with the transaction totaled $1.1 million and were included within selling, general and administrative expenses on the consolidated statements of operations. Contingent consideration might have been payable based on a formula determined by sales less certain expenses for the years 2016 and 2017. The contingent consideration was valued at $17.5 million as of January 13, 2016 and is shown in the schedule below as fair value of earn-out. The contingent consideration was classified as a liability.

The Company evaluated the contingent consideration for accounting purposes under GAAP and determined that the classification of 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 the Company’s 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)		$	3,718
Less: Marketability Discount @ 10%	[a]	(371		)
Fair Value of Equity Consideration Transferred		$	3,347
[a] Shares transferred to the Sellers were restricted securities pursuant to Rule 144. As such, the Sellers were prevented from selling the shares until July 13, 2016. In addition, they were subject to contractual lockups which restricted sales for up to twelve months following the closing of the transaction.



Cash paid at closing	$	6,000
Working capital adjustment	(481		)
Common stock issued (441,009 shares)	3,347
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 ASC 805, “Business Combinations.” The fair value of the contingent consideration is measured as a Level 3 instrument. The contingent consideration liability was 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:

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 acquired is not 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 ASC 350, “Intangibles - Goodwill and Other.”

Pursuant to the terms of the earn-out arrangement, the Company was obligated to pay, for each of the years ended 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 was less than $12 million, the earn-out amount would decrease to 0.5 times the gross profit margin for such earn-out period.

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, 2016, as required by ASC 805, “Business Combinations.” The Company does not present the consolidated financial statements as of and for the year ended December 31, 2015 and did not provide pro forma financial information for the year then ended. 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.

The 2016 supplemental pro forma earnings were adjusted to exclude $1.1 million of acquisition-related legal, audit and other costs, net of tax. The number of shares outstanding used in calculating the income per share for 2016 was adjusted to include 441,009 shares issued as part of the purchase price.

On September 30, 2017, the Company completed its divestiture of Stability pursuant to the Membership Interest Purchase Agreement by and among the Company, Stability LLC, each person that, as of January 13, 2016, was a stockholder of Stability Inc., a Florida corporation and a predecessor-in-interest to Stability LLC (“Stability, Inc.”), and Brian Martin, as stockholder representative. Under the agreement the Company was released from its obligations with respect to the contingent consideration.



	Year ended
	December 31, 2017

Assets divested
Trade receivables	$	2,406
Inventories	3,455
Prepaid expenses and other assets	955
Goodwill (a)	227
Intangible assets	11,857
Property and equipment, net	1,446
Total assets divested	20,346

Liabilities divested
Accounts payable and accrued liabilities	3,488
Total liabilities divested	3,488

Total net assets divested	$	16,858

Transaction costs	400

Consideration received
Non-trade receivable (b)	150
Note receivable (c)	3,190
Intangible assets (d)	630
Extinguishment of earn out liability (e)	12,240
Total consideration received	$	16,210

Loss on sale	$	(1,048	)

(a) In accordance with ASC 350-20-35-52 when a portion of a reporting unit is disposed of, goodwill associated with that business shall be included in the carrying amount of the business in determining the gain on disposal. In accordance with ASC 350-20-35-53, the amount of goodwill to be included in that carrying amount shall be based on the relative fair values of the business to be disposed of and the portion of the reporting unit that will be retained. Based on an estimated fair value of Stability LLC of $16.2 million representing a consideration received for the business compared to the fair value of business retained determined based on the market approach, approximately $0.2 million of the total goodwill of $20.2 million residing in the reporting unit was included in the carrying amount of the business sold.

(e) a waiver by the former stockholders of Stability Inc. of all claims and rights to earn-out consideration, which was recorded as a liability at a fair value of $12.2 million immediately prior to the divestiture. The fair value of the earn-out liability was determined based on the income approach and includes the actual realized results of operations and expected future performance over the remaining earn-out period.

The earn-out arrangement was classified as a liability on the Stability LLC acquisition date of January 13, 2016 and remeasured at fair value each reporting period until the Stability LLC was divested on September 30, 2017. A decrease in fair value of $1.7 million and $3.6 million for the years ended December 31, 2016 and 2017, respectively, are included in selling, general and administration expenses on the Consolidated Statements of Operations.