SURGALIGN: Management report and analysis of the financial situation and operating results (form 10-Q)

Caution Regarding Forward-Looking Statements

Information contained in this filing contains "forward-looking statements" which
can be identified by the use of forward-looking terminology such as
"anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates,"
"requires," "hopes," "assumes" or comparable terminology, or by discussions of
strategy. There can be no assurance that the future results covered by these
forward-looking statements will be achieved. Some of the matters described in
the "Risk Factors" section of our Annual Report on Form 10-K for the year ended
December 31, 2020, or in subsequent Quarterly Reports on Form 10-Q (including
this one), constitute cautionary statements which identify some of the factors
regarding these forward-looking statements, including certain risks and
uncertainties, that could cause actual results to vary materially from the
future results indicated in these forward-looking statements. Other factors
could also cause actual results to vary materially from the future results
indicated in such forward-looking statements.

Management presentation

We are a global medical technology company focused on elevating the standard of
care by driving the evolution of digital surgery. We have a broad portfolio of
spinal hardware implants, including solutions for fusion procedures in the
lumbar, thoracic, and cervical spine, motion preservation solutions for the
lumbar spine, and a minimally invasive surgical implant system for fusion of the
sacroiliac joint. We also have a portfolio of advanced and traditional
orthobiologics, or biomaterials. In addition to our spinal hardware and
biomaterials portfolios, we are developing a digital surgery platform that we
call ARAI, for Augmented Reality and Artificial Intelligence, which we believe
is one of the most advanced artificial intelligence technologies being applied
to surgery, designed to automatically segment, identify, and recognize patient
anatomy to autonomously assist the surgeon throughout the surgical procedure.
This proprietary artificial intelligence-based platform system is an intelligent
anatomical mapping technology designed to assist surgeons by allowing them to
remain in safe anatomical zones, and to enhance surgical performance. We plan to
leverage our digital surgery platform to improve patient outcomes and drive
adoption of our spinal hardware implants and biomaterials products. We are
developing a pipeline of new innovative technologies that we plan to integrate
with our digital surgery platform.

Our product portfolio of spinal hardware implants and biomaterials products
address an estimated $12.7 billion global spine market. We estimate that our
current portfolio addresses nearly 87% of all surgeries utilizing spinal
hardware implants and approximately 70% of the biomaterials used in
spine-related uses. Our portfolio of spinal hardware implants consists of a
broad line of solutions for spinal fusion in minimally invasive surgery ("MIS"),
deformity, and degenerative procedures; motion preservation solutions indicated
for use in one or two-level disease; and an implant system designed to relieve
sacroiliac joint pain. Our biomaterials products consist of a broad range of
advanced and traditional bone graft substitutes that are designed to improve
bone fusion rates following spinal surgery.

We offer a portfolio of products for thoracolumbar procedures, including: the
Streamline TL Spinal Fixation system, a system for degenerative and complex
spine procedures; and the Streamline MIS Spinal Fixation System, a broad range
of implants and instruments used via a percutaneous or mini-open approach. We
offer a complementary line of interbody fusion devices, Fortilink-TS,
Fortilink-L, and Fortilink-A, in our TETRAfuse 3D Technology, which is 3D
printed with nano-rough features that have been shown to allow more bone cells
to attach to more of the implant, increasing the potential for fusion. We offer
a portfolio of products for cervical procedures, including: the CervAlign ACP
System, a comprehensive anterior cervical plate system; the Fortilink-C IBF
System, a cervical interbody fusion device that utilizes TETRAfuse 3D
technology; and the Streamline OCT System, a broad range of implants used in the
occipito-cervico-thoracic posterior spine. Our motion preservation systems are
designed to enable restoration of segmental stability, while preserving motion.
These systems include: Coflex Interlaminar Stabilization device, the only FDA
PMA-approved implant for the treatment of moderate to severe lumbar spinal
stenosis in conjunction with decompression; and HPS 2.0 Universal Fixation
System, a pedicle screw system used for posterior stabilization of the
thoracolumbar spine that includes a unique dynamic coupler, shown to preserve
motion and reduce the mechanical burden on adjacent segments. Our implant system
for fusion of the sacroiliac joint, SImmetry SI Joint Fusion System, is a
minimally invasive surgical implant system that has been clinically demonstrated
to produce high rates of sacroiliac joint fusion and statistically significant
decreases in opioid use, pain, and disability.

Through a series of distribution agreements, our product portfolio of
biomaterials consists of a variety of bone graft substitutes including cellular
allografts, demineralized bone matrices ("DBMs") and synthetic bone growth
substitutes that have a balance of osteoinductive and osteoconductive properties
to enhance bone fusion rates following spinal surgery. We market ViBone and
ViBone Moldable, two next-generation viable cellular allograft bone matrix
products intended to provide surgeons with improved results for bone repair.
ViBone and ViBone Moldable are processed using a proprietary method optimized to
protect and preserve the health of native bone cells to potentially enhance new
bone formation and are designed to perform and handle in a manner similar to an
autograft. ViBone and ViBone Moldable contain cancellous bone particles as well
as demineralized cortical bone particles and fibers, delivering osteoinductive,
osteoconductive, and osteogenic properties. Our DBM product offering includes
BioSet, BioReady, and BioAdapt, a DBM portfolio consisting of putty, putty with
chips, strips, and boat configurations for various surgical applications while
providing osteoinductive properties to aid in bone fusion. Our synthetic bone
growth substitutes include nanOss and nanOss 3D Plus, a family of products that
provide osteoconductive nano-structured hydroxyapatite ("HA") and an engineered
extracellular matrix bioscaffold collagen carrier that mimics a natural bone
growth solution.

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To complement our spinal hardware and biomaterials portfolios, we are developing
a proprietary digital surgery platform called ARAI, which is a freestanding
surgical guidance system that combines 3D visualization, data analytics, and
machine learning, without interrupting the current surgical workflow. We believe
it is one of the most advanced artificial intelligence technologies being
applied to surgery, designed to automatically segment, identify, and recognize
patient anatomy to autonomously assist the surgeon throughout the procedure.
ARAI has been designed to address the limitations of current computer-assisted
spine surgery and spine robotics systems that lack 3D visualization, patient
anatomy recognition, and data analytics that may have long setup requirements
and lengthy registration times that can add significant amounts of time to the
overall procedure.

ARAI combines (i) advanced augmented reality to provide the surgeon with an
"X-ray vision"-like 3D overlay rendering of the patient's anatomy, (ii)
automated image processing and modular spine level identification and
segmentation so the system knows the patient's anatomy to enhance navigation,
(iii) autonomous planning software and implant selection, and (iv) artificial
intelligence and predictive analytics to provide autonomous guidance for
preoperative and intraoperative surgeon decision-making. ARAI's artificial
intelligence has the ability to recognize the difference between patient
anatomy, such as a nerve root and a blood vessel, and help identify anatomy
within complex areas of the spine, where it is easy to miscount levels. ARAI has
been designed with a unique setup process of quickly establishing the
synchronization between virtual images and the patient's real anatomy, a process
called registration. Many other computer-assisted spine surgery and robotics
systems have long setup requirements and registration times that can result in
surgery delays, leading to inefficiencies that are cited as a major reason why
surgeons have not yet widely adopted navigation and robotic technology. ARAI has
been designed to provide surgeons with real-time perioperative information such
as alerts and suggestions to ensure the correct operative plan is being
followed, decrease surgical complications, reduce surgical times, and improve
patient outcomes. We filed an FDA 510(k) premarket submission for our ARAI
platform in the first quarter of 2021 and plan to submit a CE mark application
in Europe in 2022.

We plan to develop and commercialize several next-generation features for the
ARAI platform, including smart instrumentation, integration with robotic
platforms, patient-specific 3D printed implants, and diagnostic and predictive
analytics. These surgical devices will be designed with tracking technology
intended to allow real-time 3D visualization and positioning of the instruments
in the surgical field and autonomous safety features to aid in surgical
precision and help avoid potential damage to surrounding tissue and neurological
structures. We are designing ARAI to be integrated with existing robotic
platforms to make them "smart" by identifying relevant anatomy. In addition, we
are designing the ARAI platform with a software application to enable
patient-specific implants with exact dimensions, shape, and contour based on a
patient's specific bone density and height. We are also developing a novel
diagnostic and predictive analytics capability using machine learning that
leverages a large volume of patient data with known outcomes to allow for
autonomous identification of spinal pathology.

We have aligned our core business principles with a focused business strategy
that we believe will advance and scale our business with the ultimate goal of
delivering on our promise to provide better patient outcomes. To support this
effort, we have assembled a spine-industry experienced executive leadership team
to execute against our growth strategy, which includes leveraging our digital
surgery platform to improve patient outcomes and drive adoption of our spinal
hardware implants and biomaterials products, developing and commercializing an
increased cadence of innovative spinal hardware implants and biomaterials
products, validating our innovative products with clinical evidence, growing our
international business, and strategically pursuing acquisition, license, and
distribution opportunities.

We currently market and sell our products to hospitals, ambulatory surgery
centers, and healthcare providers in the United States and in more than 40
countries worldwide. Our U.S. sales organization consists of area sales
directors and regional product specialists who oversee a network of independent
spine and orthobiologics distributors who receive commissions for sales that
they generate. Our international sales organization is composed of a sales
management team that oversees a network of direct sales representatives,
independent spine and orthobiologics distributors, and stocking distributors.

Sale of OEM business, debt repayment and repurchase of preferred shares

On July 20, 2020, pursuant to the OEM Purchase Agreement, by and between us and
Ardi Bidco Ltd. (the "Buyer"), the Company sold the OEM Businesses to Buyer and
its affiliates for a purchase price of $440.0 million of cash, subject to
certain adjustments. In connection therewith on July 20, 2020, we (i) paid in
full our $80.0 million revolving credit facility under that certain Credit
Agreement dated as of June 5, 2018 (the "2018 Credit Agreement"), by and among
Surgalign Spine Technologies, Inc. (formerly known as RTI Surgical, Inc.
("Legacy RTI")), as a borrower, Pioneer Surgical Technology, Inc. ("Pioneer
Surgical"), our wholly-owned subsidiary, as a borrower, the other loan parties
thereto as guarantors (together, with Legacy RTI and Pioneer Surgical, the "JPM
Loan Parties"), JPMorgan Chase Bank, N.A. ("JPM"), as lender (together with the
various financial institutions as in the future may become parties thereto, the
"JPM Lenders") and as administrative agent for the JPM Lenders, as amended, (ii)
terminated the 2018 Credit Agreement, (iii) paid in full our $100.0 million term
loan and $30.0 million incremental term loan commitment under that certain
Second Lien Credit Agreement, dated as of March 8, 2019 (the "2019 Credit
Agreement"), by and among Surgalign Spine Technologies, Inc., as borrower, the
lenders party thereto from time to time and Ares Capital Corporation ("Ares"),
as administrative agent for the other lenders party thereto (the "Ares
Lenders"), as amended and (iv) terminated the 2019 Credit Agreement.

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On July 17, 2020, we received a notification from WSHP seeking redemption on or
before September 14, 2020 of all of the outstanding shares of the Series A
Preferred Stock, all of which are held by WSHP. On July 24, 2020, we redeemed
the Series A Preferred Stock for approximately $67.0 million, a Certificate of
Retirement was filed with the Delaware Secretary of State retiring the Series A
Preferred Stock, and the WSHP representatives resigned from the Company's Board
of Directors.

On December 1, 2020, pursuant to the OEM Purchase Agreement, we received a
notice from the Buyer indicating that a post-closing adjustment in an amount of
up to $14.0 million may be owed in respect of the working capital adjustment
paid at closing. We disagreed with the Buyer's proposed post-closing adjustment
and disputed the adjustment in accordance with the terms of the OEM Purchase
Agreement. On June 3, 2021, the firm engaged to resolve the dispute issued a
binding, non-appealable resolution whereby it was determined the Company is
liable for $5.8 million of the amount remaining in dispute, which was finalized
and paid during the second quarter. The final settlement was expensed under
(Loss) from operations of discontinued operations in our condensed consolidated
statements of comprehensive income/(loss).

The OEM Businesses met the criteria within ASC 205-20 to be reported as
discontinued operations because the Transactions were a strategic shift in
business that had a major effect on our operations and financial results.
Therefore, we are reporting the historical results of the OEM Businesses
including the results of operations and cash flows as discontinued operations,
and related assets and liabilities were retrospectively reclassified as assets
and liabilities of discontinued operations for all periods presented herein.
Unless otherwise noted, applicable amounts in the prior year have been recast to
conform to this discontinued operations presentation. See Note 3 of the
unaudited condensed consolidated financial Statements in Part I, Item 1,
"Unaudited Condensed Consolidated Financial Statements" of this Exhibit for
additional information. Unless otherwise indicated, the following information
relates to continuing operations. A more complete description of our business
prior to the Transactions is included in Item 1. "Business", in Part I of the
Annual Report on Form 10-K for the year ended December 31, 2020 that was
previously filed with the Securities and Exchange Commission ("SEC") on March
16, 2021.

Acquisitions

See Note 6 – Business combinations.




COVID-19

As discussed in more detail above in Part I, Item 1, "Business" of this Exhibit,
the coronavirus (COVID-19) pandemic, as well as the corresponding governmental
response, has had significant negative effects on the majority of the U.S.
economy and has adversely affected our business. The consequences of the
outbreak and impact on the economy continues to evolve and the full extent of
the impact is uncertain as of the date of this filing. The outbreak has already
had, and continues to have, a material adverse effect on our business, operating
results and financial condition, and has significantly disrupted our operations.



Recent supplier quality issues



The Company has recently experienced various quality issues in its global supply
chain. These include product delays, quality holds, and recalls. Given the
Company's focus on patient safety, this has resulted in the Company devoting
significant time and resources to address these issues and prevent similar ones
from occurring in the future. In addition, these quality issues have adversely
affected the Company's results of operations for the six-month period ended June
30, 2021, and is expected to continue to have an effect throughout the remainder
of 2021. Although the Company is diligently working with its suppliers to
remediate these matters, no assurance can be given as to the duration and impact
of these issues.



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Results of operations



The following table set forth, in both thousands of dollars and as a percentage
of revenues, the results of our operations for the three and six months ended
June 30, 2021 and 2020, respectively.





                                      For the Three Months Ended June 30,                        For the Six Months June 30,
                                       2021                        2020                       2021                        2020
Revenues                       $  24,834       100.0 %    $  20,534        100.0 %    $  48,125       100.0 %    $  47,636        100.0 %
Cost of goods sold                 7,229        29.1 %        9,469         46.1 %       13,467        28.0 %       18,693         39.2 %
Gross profit                      17,605        70.9 %       11,065         53.9 %       34,658        72.0 %       28,943         60.8 %
Operating Expenses:
Marketing, general and
administrative                    25,541       102.8 %       32,148        156.6 %       51,701       107.4 %       69,341        145.6 %
Research and development           3,183        12.8 %        3,274         15.9 %        6,059        12.6 %        7,556         15.9 %
Gain on acquisition
contingency                       (2,236 )      (9.0 %)        (130 )       (0.6 %)      (2,287 )      (4.8 %)        (130 )       (0.3 %)
Asset impairment and
abandonments                       2,206         8.9 %          882          4.3 %        4,382         9.1 %        2,761          5.8 %
Transaction and integration
expenses                           2,188         8.8 %            6          0.0 %        2,510         5.2 %        2,415          5.1 %
Total operating expenses          30,882       124.4 %       36,180        176.2 %       62,365       129.6 %       81,943        172.0 %
Operating loss                   (13,277 )     (53.5 %)     (25,115 )    

(122.3%) (27,707) (57.6%) (53,000) (111.3%) Other (income) expense – net: Other (income) expense – net (101) (0.4%) (21) (0.1%) (105) (0.2%) (71) (0.1%) Foreign exchange loss (gain) (95) (0.4%) (195) (0.9% ) 450 0.9%

           49          0.1 %
Change in fair value of
warrant liability                 (2,523 )     (10.2 %)           -          0.0 %       (2,523 )      (5.2 %)           -          0.0 %
Total other (income) expense -
net                               (2,719 )     (10.9 %)        (216 )       (1.1 %)      (2,178 )      (4.5 %)         (22 )       (0.0 %)
(Loss) before income tax
provision (benefit)              (10,558 )     (42.5 %)     (24,899 )    

(121.3%) (25,529) (53.0%) (52,978) (111.2%) Tax provision (profit) 81 0.3%

           47         

0.2% 300 0.6% (3,492) (7.3%) Net loss from continuing operations

                       (10,639 )     (42.8 %)     (24,946 )     (121.5 %)     (25,829 )     (53.7 %)     (49,486 )     (103.9 %)
Discontinued operations (Note
3)
(Loss) from operations of
discontinued operations           (6,316 )     (25.4 %)     (16,963 )      (82.6 %)      (6,316 )     (13.1 %)     (10,286 )      (21.6 %)
Income tax (benefit)                (763 )      (3.1 %)      (3,345 )      (16.3 %)        (763 )      (1.6 %)      (3,345 )       (7.0 %)
Net (loss) from discontinued
operations                        (5,553 )     (22.4 %)     (13,618 )      (66.3 %)      (5,553 )     (11.5 %)      (6,941 )      (14.6 %)
Net (loss) applicable to
common shares                    (16,192 )     (65.2 %)     (38,564 )     (187.8 %)     (31,382 )     (65.2 %)     (56,427 )     (118.5 %)

Other comprehensive loss
(gain):
Unrealized foreign currency
translation loss (gain)               35         0.1 %         (298 )       (1.5 %)         (36 )      (0.1 %)          72          0.2 %
Comprehensive loss             $ (16,227 )     (65.3 %)   $ (38,266 )     (186.4 %)   $ (31,346 )     (65.1 %)   $ (56,499 )     (118.6 %)





Three months ended June 30, 2021, compared to the three months ended June 30, 2020

Revenues - Our revenues increased $4.3 million, or 20.9%, to $24.8 million for
the three months ended June 30, 2021, compared to $20.5 million for the three
months ended June 30, 2020, primarily due to increased demand during the quarter
as a result of the partial return of elective surgical procedures in the current
year quarter.

Cost of Goods Sold - Costs of goods sold decreased $2.2 million, or 23.7%, to
$7.2 million for the three months ended June 30, 2021, compared to $9.5 million
for the three months ended June 30, 2020. Adjusted for the impact of purchase
accounting step-up, cost of goods sold decreased $2.2 million or 25.1%, to $6.7
million, or 26.9% of revenue, for the three months ended June 30, 2021, compared
to $8.9 million, or 43.4% of revenue, for the three months ended June 30, 2020.
The decrease in costs of goods sold was primarily due to the sale of the OEM
business and the reduction of certain direct manufacturing costs related to
excess and obsolete inventory and unfavorable manufacturing variances.

Marketing, General and Administrative Expenses - Marketing, general and
administrative expenses decreased $6.6 million, or 20.6%, to $25.5 million for
the three months ended June 30, 2021, compared to $32.1 million for the three
months ended June 30, 2020. The decrease in marketing, general and
administrative costs is driven by the reduction in spending through the
simplification of the distribution and administrative infrastructure, and
reduction in spending due to the sale of the OEM Businesses, along with $2.0
million in insurance recovery for professional fees incurred during fiscal 2020
related to the SEC investigation

Research and Development Expenses - Research and development expenses decreased
$0.1 million or 2.8%, to $3.2 million for the three months ended June 30, 2021,
compared to $3.3 million for the three months ended June 30, 2020.

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Asset Impairment and Abandonments- Asset impairment and abandonments expenses
were $2.2 million for the three months ended June 30, 2021, which was primarily
the result of property and equipment being impaired.

Transaction and integration costs – Transaction and integration costs have been
$ 2.2 million for the three months ended June 30, 2021 mainly related to the issue costs of the registered direct placement made during the quarter.

Total Other (Income)Expense - Net - Total other (income) expense - net for the
three months ended June 30, 2021 was $2.7 million of income compared to $0.2
million of income for the three months ended June 30, 2020. The $2.5 million
increase was mainly attributable to the $2.5 million decrease in the fair value
of our warrant liability during the three months ended June 30, 2021.



Income Tax (Expense) Benefit - For the three months ended June 30, 2021 and
2020, the Company recorded $0.1 million of income tax provision and less than
$0.1 million of income tax provision, respectively, in continuing operations.
The June 30, 2021 three-month income tax provision was primarily a result of
impact of uncertain tax position interest accrual. The June 30, 2020 three-month
income tax provision was a result of the full valuation allowance recorded
against the loss from continuing operations.



Discontinued Operations - Net loss from discontinued operations for the three
months ended June 30, 2021 was $5.6 million mainly due to the settlement of the
OEM purchase agreement working capital dispute (See Note 19), compared to a
$13.6 million net loss for the three months ended June 30, 2020.



Six months ended June 30, 2021, compared to the six months ended June 30, 2020

Revenues - Our revenues increased $0.5 million, or 1.0%, to $48.1 million for
the six months ended June 30, 2021, compared to $47.6 million for the six months
ended June 30, 2020, primarily due to the partial return of elective procedures
in the first half of the current year.

Cost of Goods Sold - Costs of goods sold decreased $5.2 million, or 28.0%, to
$13.5 million for the six months ended June 30, 2021, compared to $18.7 million
for the six months ended June 30, 2020. Adjusted for the impact of purchase
accounting step-up, cost of goods sold decreased $4.9 million or 28.2%, to $12.4
million, or 25.7% of revenue, for the six months ended June 30, 2021, compared
to $17.3 million, or 36.2% of revenue, for the six months ended June 30, 2020.
The decrease in costs of goods sold was due to the sale of the OEM business and
the reduction of certain direct manufacturing costs related to excess and
obsolete inventory and unfavorable manufacturing variances.

Marketing, General and Administrative Expenses - Marketing, general and
administrative expenses decreased $17.6 million, or 25.4%, to $51.7 million for
the six months ended June 30, 2021, compared to $69.3 million for the six months
ended June 30, 2020. The decrease in marketing, general and administrative costs
is driven by reduction in spending through the simplification of the
distribution and administrative infrastructure, and reduction in spending due to
the sale of the OEM Businesses, along with $2.0 million in insurance recovery
for professional fees incurred during fiscal 2020 related to the SEC
investigation.

Research and Development Expenses - Research and development expenses decreased
$1.5 million or 19.8%, to $6.1 million for the six months ended June 30, 2021,
compared to $7.6 million for the six months ended June 30, 2020.

Asset Impairment and Abandonments- Asset impairment and abandonments expenses
were $4.4 million for the six months ended June 30, 2021, which was primarily
the result of property and equipment being impaired.

Transaction and Integration Expenses - Transaction and integration expenses were
$2.5 million for the six months ended June 30, 2021 primarily related to $2.2
million of issuance costs for the registered direct offering completed during
the second quarter, and $0.4 million related to the acquisition of the Holo
Surgical and Prompt businesses, compared to $2.4 million of Paradigm of expenses
for the six months ended June 30, 2020.

Total Other (Income) Expense - Net - Total other (income) expense - net for the
six months ended June 30, 2021 was $2.2 million of income compared to less than
$0.1 million of income for the six months ended June 30, 2020. The $2.2 million
increase was mainly attributable to a $2.5 million decrease in the fair value of
our warrant liability, partially offset by $0.5 million of foreign exchange loss
during the six months ended June 30, 2021.



Income Tax (Expense) Benefit - For the six months ended June 30, 2021 and 2020,
the Company recorded $0.3 million of income tax provision and $3.5 million
income of tax benefit, respectively. The June 30, 2021 six-month income tax
provision was primarily a result of federal interest liability as a result of
timing of payments and impact of uncertain tax position interest accrual. The
June 30, 2020 six-month income tax benefit was primarily impacted by the CARES
Act tax benefit.



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Discontinued Operations - Net loss from discontinued operations for the six
months ended June 30, 2021 was $5.6 million due to the settlement of the OEM
purchase agreement working capital dispute (See Note 19), compared to a $6.9
million net loss for the six months ended June 30, 2020



Non-GAAP financial measures

We utilize certain financial measures that are not calculated based on Generally
Accepted Accounting Principles ("GAAP"). Certain of these financial measures are
considered "non-GAAP" financial measures within the meaning of Item 10 of
Regulation S-K promulgated by the SEC. We believe that non-GAAP financial
measures provide an additional way of viewing aspects of our operations that,
when viewed with the GAAP results, provide a more complete understanding of our
results of operations and the factors and trends affecting our business. These
non-GAAP financial measures are also used by our management to evaluate
financial results and to plan and forecast future periods. However, non-GAAP
financial measures should be considered as a supplement to, and not as a
substitute for, or superior to, the corresponding measures calculated in
accordance with GAAP. Non-GAAP financial measures used by us may differ from the
non-GAAP measures used by other companies, including our competitors.

To supplement our unaudited condensed consolidated financial statements
presented on a GAAP basis, we disclose non-GAAP net income applicable to common
shares and non-GAAP gross profit adjusted for certain amounts. The calculation
of the tax effect on the adjustments between GAAP net loss applicable to common
shares and non-GAAP net income applicable to common shares is based upon our
estimated annual GAAP tax rate, adjusted to account for items excluded from GAAP
net loss applicable to common shares in calculating non-GAAP net income
applicable to common shares. Reconciliations of each of these non-GAAP financial
measures to the corresponding GAAP measures are included in the reconciliations
below:


Non-GAAP net income applicable to common shares, adjusted:


                                   For the three Months Ended          For the Six Months Ended
                                            June 30,                           June 30,
                                     2021                2020           2021               2020
(In thousands)
Net loss from continuing
operations, as reported         $      (10,639 )     $    (24,946 ) $     (25,829 )     $   (49,486 )
Change in fair value of
warrant liability                       (2,523 )                -          (2,523 )               -
Gain on acquisition
contingency                             (2,236 )             (130 )        (2,287 )            (130 )
Bargain purchase gain                      (90 )                -             (90 )               -
Asset impairment and
abandonments                             2,206                882           4,382             2,761
Transaction and integration
expenses                                 2,188                  6           2,510             2,415
Inventory purchase price
adjustment                                 554                563           1,081             1,441
Severance and restructuring
costs                                       20                  -             237                 -
Tax effect on adjustments                  (28 )                -             (28 )               -
Non-GAAP net loss applicable
to common
  shares, adjusted              $      (10,548 )     $    (23,625 ) $     (22,547 )     $   (42,999 )




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Non-GAAP gross profit, adjusted:


                                   For the Three Months Ended            For the Six Months Ended
                                            June 30,                             June 30,
                                    2021                2020              2021               2020
(In thousands)

Revenues                        $      24,834       $      20,534     $     48,125       $     47,636
Costs of goods sold                     7,229               9,469           13,467             18,693
Gross profit, as reported              17,605              11,065           34,658             28,943
Inventory purchase price
adjustment                                554                 878            1,081              1,752
Non-GAAP gross profit,
adjusted                        $      18,159       $      11,943     $     35,739       $     30,695





The following are explanations of the adjustments that management excluded as
part of the non-GAAP measures for the three and six months ended June 30, 2021
and 2020. Management removes the amount of these costs including the tax effect
on the adjustments from our operating results to supplement a comparison to our
past operating performance.


2021 Change in fair value of warrants liabilities – Other income related to the revaluation of our warrants liabilities.

2021 Gain on contingency of acquisition – The gain on contingency of acquisition relates to an adjustment to our estimate of the obligation for future milestone payments on the acquisition of Holo.

2021 Gain in bargain purchases – Gain linked to our acquisition of Prompt Prototypes.

2021 and 2020 Impairment of assets and abandonments – These costs relate to the impairment of assets and the abandonment of certain long-lived assets within the group of assets.

2021 and 2020 Transaction and Integration Fee – These fees relate to the issuance costs of the registered direct offering and professional fees associated with the acquisition of Holo Surgical and Prompt Prototypes, and other matters.



2021 and 2020 Inventory purchase price adjustment - These costs relate to the
purchase price effects of acquired Paradigm inventory that was sold during the
three and six months ended June 30, 2021 and 2020.



2021 Severance and restructuring benefits – These costs relate to the reduction of our organizational structure, mainly driven by the simplification of our
Marquette, MI place.

Liquidity and capital resources

As the global COVID-19 epidemic continues to evolve rapidly, it could continue to significantly and negatively affect our revenue, financial condition, profitability and cash flow for an indefinite period.



As discussed in Note 20, the Securities and Exchange Commission ("SEC") has an
active investigation that remains ongoing.  The Company continues to cooperate
with the SEC in relation to its investigation. Based on current information
available to the Company, the impact associated with SEC investigation and
shareholder litigation may have on the Company cannot be reasonably estimated.



Going Concern

The accompanying unaudited condensed consolidated financial statements of the
Company have been prepared assuming the Company will continue as a going concern
and in accordance with generally accepted accounting principles in the United
States of America. The going concern basis of presentation assumes that we will
continue in operation one year after the date these unaudited condensed
consolidated financial statements are issued, and we will be able to realize our
assets and discharge our liabilities and commitments in the normal course of
business.



As of June 30, 2021, we had cash of $69.3 million and an accumulated deficit of
$516.3 million. For the three and six months ended June 30, 2021, we had a loss
from continuing operations of $10.6 and $25.8 million, respectively. We have
incurred losses from operations in the previous two fiscal years and did not
generate positive cash flows from operations in fiscal year 2020 or through the
six months ended June 30, 2021.

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On June 14, 2021, we issued and sold in a registered direct offering an
aggregate of 29.0 million shares of our common stock and investor warrants to
purchase up to an aggregate of 29.0 million shares at a strike price of $1.725.
The Company, also in connection with the direct offering, issued placement agent
warrants to purchase an aggregate of up to 1.7 million shares of our common
stock at a strike price of $2.15625 per share. We received net proceeds of $45.8
million from the offering after deducting investor fees of $4.2 million.

On February 1, 2021, we closed a public offering and sold a total 28,700,000
shares of our common stock at a price of $1.50 per share, less the underwriter
discounts and commissions. We received net proceeds of $40.5 million from the
offering after deducting the underwriting discounts and commission of $4.0
million.



We project we will continue to generate significant negative operating cash
flows over the next 12-months and beyond. In consideration of: i) COVID-19
uncertainties, ii) negative cash flows that are projected over the next 12-month
period, iii) the $14.9 million of Federal income tax liability paid in April
2021 related to the gain on sale of the OEM Businesses, iv) uncertainty
regarding potential settlements related to ongoing litigation and regulatory
investigations, and v) approximately $18.5 million of the total contingent
consideration of $54.2 million is expected to become due to the former owners of
Holo Surgical if regulatory approval in the US is obtained in 2021, which would
paid through combination of common stock and cash; we have forecasted the need
to raise additional capital in order to continue as a going concern. The
Company's operating plan for the next 12-month period also includes continued
investments in its product pipeline which will necessitate additional debt
and/or equity financing in addition to the funding of future operations through
2021 and beyond.



In consideration of the inherent risks and uncertainties and the Company's
forecasted negative cash flows as described above, management has concluded that
substantial doubt exists with respect to the Company's ability to continue as a
going concern within one year after the date the unaudited condensed
consolidated financial statements are issued. Management continually evaluates
plans to raise additional debt and/or equity financing and will attempt to
curtail discretionary expenditures in the future, if necessary, however, in
consideration of the risks and uncertainties mentioned, such plans cannot be
considered probable of occurring at this time.



The recoverability of a major portion of the recorded asset amounts shown in the
Company's accompanying condensed consolidated balance sheets is dependent upon
continued operations of the Company, which in turn is dependent upon the
Company's ability to meet its funding requirements on a continuous basis, to
maintain existing financing and to succeed in its future operations. The
Company's unaudited condensed consolidated financial statements do not include
any adjustment relating to the recoverability and classification of recorded
asset amounts and classification of liabilities that might be necessary should
the Company be unable to continue in existence.



The following table is a summary of our cash flow activity for the periods indicated below (in thousands):


                                                        For the Six Months Ended
                                                       June 30             June 30
(In thousands)                                           2021               2020
Net cash used in operating activities              $      (46,147 )     $   (14,589 )
Net cash used in investing activities                     (11,023 )          (7,734 )
Net cash provided by financing activities                  82,216           

18 935

Effect of exchange rate variations on cash and cash equivalents

  equivalents                                                 249           

9

Net increase in cash and cash equivalents $ 25,295 $

  (3,379 )
Cash and cash equivalents, beginning of period             43,962           

5,608

Cash and cash equivalents, end of period           $       69,257       $     2,229






At June 30, 2021, we had 131 days of revenues outstanding in trade accounts
receivable, an increase of 35 days compared to December 31, 2020. The increase
is primarily driven due to timing of collections from our customers as a result
of continued COVID-19 impacts.



At June 30, 2021, excluding the purchase accounting step-up of Paradigm
inventory, we had 416 days of inventory on hand, an increase of 217 days
compared to December 31, 2020. The increase in inventory days is primarily due
to the continued purchase of implants during the six months ended June 30, 2021.
We believe that our inventory levels will be adequate to support our on-going
operations.




From June 30, 2021, we have no material off-balance sheet arrangements.

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Certain Commitments.




The following table provides a summary of our obligations under operating leases and other significant obligations under June 30, 2021.


                                                Contractual Obligations Due by Period
                                            Less than 1                                       More than 5
                              Total            Year           1-3 Years       4-5 Years          Years
                                                            (In thousands)
Operating lease obligations     66,735             1,244           6,464          11,052            47,975
Purchase obligations (1)       130,141            42,725          59,710          27,706                 -
Acquisition contingencies       54,228            18,485          35,743               -                 -
Total                       $  251,104     $      62,454     $   101,917   
 $    38,758     $      47,975



(1) These amounts consist of contractual obligations for capital expenditures

      and open purchase orders.


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