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.
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 billionglobal 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. 25
-------------------------------------------------------------------------------- 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
Europein 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 Statesand 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
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 millionof cash, subject to certain adjustments. In connection therewith on July 20, 2020, we (i) paid in full our $80.0 millionrevolving 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 millionterm loan and $30.0 millionincremental 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. 26 -------------------------------------------------------------------------------- On July 17, 2020, we received a notification from WSHP seeking redemption on or before September 14, 2020of 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 DelawareSecretary 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 millionmay 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 millionof 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, 2020that 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. 27
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, 2021and 2020, respectively. For the Three Months Ended June 30, For the Six Months June 30, 2021 2020 2021 2020 Revenues $ 24,834100.0 % $ 20,534100.0 % $ 48,125100.0 % $ 47,636100.0 % 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%
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
Revenues - Our revenues increased
$4.3 million, or 20.9%, to $24.8 millionfor the three months ended June 30, 2021, compared to $20.5 millionfor 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 millionfor the three months ended June 30, 2021, compared to $9.5 millionfor the three months ended June 30, 2020. Adjusted for the impact of purchase accounting step-up, cost of goods sold decreased $2.2 millionor 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 millionfor the three months ended June 30, 2021, compared to $32.1 millionfor 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 millionin insurance recovery for professional fees incurred during fiscal 2020 related to the SECinvestigation Research and Development Expenses - Research and development expenses decreased $0.1 millionor 2.8%, to $3.2 millionfor the three months ended June 30, 2021, compared to $3.3 millionfor the three months ended June 30, 2020. 28 -------------------------------------------------------------------------------- Asset Impairment and Abandonments- Asset impairment and abandonments expenses were $2.2 millionfor 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
Total Other (Income)Expense - Net - Total other (income) expense - net for the three months ended
June 30, 2021was $2.7 millionof income compared to $0.2 millionof income for the three months ended June 30, 2020. The $2.5 millionincrease was mainly attributable to the $2.5 milliondecrease 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, 2021and 2020, the Company recorded $0.1 millionof income tax provision and less than $0.1 millionof income tax provision, respectively, in continuing operations. The June 30, 2021three-month income tax provision was primarily a result of impact of uncertain tax position interest accrual. The June 30, 2020three-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, 2021was $5.6 millionmainly due to the settlement of the OEM purchase agreement working capital dispute (See Note 19), compared to a $13.6 millionnet loss for the three months ended June 30, 2020.
Six months ended
Revenues - Our revenues increased
$0.5 million, or 1.0%, to $48.1 millionfor the six months ended June 30, 2021, compared to $47.6 millionfor 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 millionfor the six months ended June 30, 2021, compared to $18.7 millionfor the six months ended June 30, 2020. Adjusted for the impact of purchase accounting step-up, cost of goods sold decreased $4.9 millionor 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 millionfor the six months ended June 30, 2021, compared to $69.3 millionfor 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 millionin insurance recovery for professional fees incurred during fiscal 2020 related to the SECinvestigation. Research and Development Expenses - Research and development expenses decreased $1.5 millionor 19.8%, to $6.1 millionfor the six months ended June 30, 2021, compared to $7.6 millionfor the six months ended June 30, 2020. Asset Impairment and Abandonments- Asset impairment and abandonments expenses were $4.4 millionfor 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 millionfor the six months ended June 30, 2021primarily related to $2.2 millionof issuance costs for the registered direct offering completed during the second quarter, and $0.4 millionrelated to the acquisition of the Holo Surgical and Prompt businesses, compared to $2.4 millionof 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, 2021was $2.2 millionof income compared to less than $0.1 millionof income for the six months ended June 30, 2020. The $2.2 millionincrease was mainly attributable to a $2.5 milliondecrease in the fair value of our warrant liability, partially offset by $0.5 millionof foreign exchange loss during the six months ended June 30, 2021. Income Tax (Expense) Benefit - For the six months ended June 30, 2021and 2020, the Company recorded $0.3 millionof income tax provision and $3.5 millionincome of tax benefit, respectively. The June 30, 2021six-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, 2020six-month income tax benefit was primarily impacted by the CARES Act tax benefit. 29
-------------------------------------------------------------------------------- Discontinued Operations - Net loss from discontinued operations for the six months ended
June 30, 2021was $5.6 milliondue to the settlement of the OEM purchase agreement working capital dispute (See Note 19), compared to a $6.9 millionnet 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 )30
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 $ 47,636Costs 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 $ 30,695The 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, 2021and 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, 2021and 2020.
2021 Severance and restructuring benefits – These costs relate to the reduction of our organizational structure, mainly driven by the simplification of our
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 SECin relation to its investigation. Based on current information available to the Company, the impact associated with SECinvestigation 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 millionand 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 $10.6and $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. 31 -------------------------------------------------------------------------------- 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 $2.15625per share. We received net proceeds of $45.8 millionfrom 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 $1.50per share, less the underwriter discounts and commissions. We received net proceeds of $40.5 millionfrom 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 millionof Federal income tax liability paid in April 2021related 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 millionof the total contingent consideration of $54.2 millionis 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
Effect of exchange rate variations on cash and cash equivalents
Net increase in cash and cash equivalents
(3,379 ) Cash and cash equivalents, beginning of period 43,962
Cash and cash equivalents, end of period
$ 69,257 $ 2,229At 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.
The following table provides a summary of our obligations under operating leases and other significant obligations under
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. 33
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