You should read the following discussion in conjunction with our financial statements and related notes appearing elsewhere in this report and our audited consolidated financial statements and related notes contained in our Annual Report on Form 10-K for the year endedDecember 31, 2021 , or our 2021 Form 10-K. In addition to historical information, this report contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 concerning our business, consolidated financial condition, and results of operations.The Securities and Exchange Commission , or theSEC , encourages companies to disclose forward-looking statements so that investors can better understand a company's prospects and make informed investment decisions. Forward-looking statements are subject to risks and uncertainties, many of which are outside our control, which could cause actual results to differ materially from these statements. Therefore, you should not rely on any of these forward-looking statements. Forward-looking statements can be identified by such words as "will," "likely," "may," "believe," "expect," "anticipate," "intend," "seek," "designed," "develop," "would," "future," "can," "could," "estimate," "potential," and other expressions that are predictions of or indicate future events and trends and that do not relate to historical matters. All statements other than statements of historical facts included in this report regarding our strategies, prospects, financial condition, operations, costs, plans, and objectives are forward-looking statements. Examples of forward-looking statements include, among others, statements regarding the effect of COVID-19 and related impacts on our business, operations, and financial results, expected future operating results, expectations regarding the timing and receipt of regulatory results, anticipated levels of capital expenditures, and expectations of the effect on our financial condition of claims, litigation, and governmental and regulatory proceedings. Please also refer to those factors described in "Part I, Item 1A. Risk Factors" of our 2021 Form 10-K for important factors that we believe could cause actual results to differ materially from those in our forward-looking statements. Any forward-looking statement made by us in this report is based only on information currently available to us and speaks only as of the date on which it is made. We undertake no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise. Management Overview We are a global joint preservation company that creates and delivers meaningful advancements in early intervention orthopedic care. Based on our collaborations with clinicians to understand what they need most to treat their patients, we develop minimally invasive products that restore active living for people around the world. We are committed to leading in high opportunity spaces within orthopedics, including osteoarthritis, or OA, pain management, regenerative solutions, sports medicine soft tissue repair and bone preserving joint technologies. We have thirty years of global expertise developing, manufacturing and commercializing products based on and/or enhanced with our hyaluronic acid, or HA, technology platform. HA is a naturally occurring polymer found throughout the body that is vital for proper joint health and tissue function. Our proprietary technologies for modifying the HA molecule allow product properties to be tailored specifically to multiple uses, including enabling longer residence time to support OA pain management and creating a solid form of HA called Hyaff, which is a platform utilized in our regenerative solutions portfolio. In early 2020, we expanded our overall technology platform, product portfolio, and significantly enhanced and accelerated our commercial infrastructure, especially inthe United States , through our strategic acquisitions ofParcus Medical, a sports medicine and instrumentation solutions provider focused on soft tissue repair, and Arthrosurface, a company specializing in bone preserving partial and total joint replacement solutions. Through these acquisitions, we have transformed our company. We expanded our addressable market from the over$1 billion global OA pain management market to the over$8 billion global joint preservation market (which includes the faster growing sports medicine soft tissue repair and extremities segments), advanced our commercial capabilities, instituted systems and processes to support our transformation, and expanded our product pipeline and research and development expertise in our target markets.
As we look towards the future, our business is positioned to capture value within our target market of joint preservation. We believe our success will be driven by our:
? Decades of experience in HA-based regenerative solutions and early intervention orthopedics combined under new seasoned leadership with a strong financial foundation for future investment in meaningful solutions for our customers and their patients; 19
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? Robust network of stakeholders in our target markets to identify evolving unmet patient treatment needs; ? Prioritized investment in differentiated pipeline of regenerative solutions, bone preserving implants and sports medicine soft tissue repair products; ? Leveraging our global commercial expertise and building out our capabilities to drive growth across the portfolio, with an intentional and increased focus on the ambulatory surgery centers site of care inthe United States ; ? Opportunity to pursue strategic inorganic growth opportunities, including potential partnerships and smaller acquisitions, technology licensing, and leveraging our strong financial foundation and operational capabilities; and
? Energized and experienced team focused on strong values, talent, and culture.
COVID-19 Pandemic InMarch 2020 , theWorld Health Organization declared the spread of the COVID-19 virus a pandemic. This pandemic has caused an economic downturn on a global scale, as well as significant volatility in the financial markets. There has been significant volatility in our results on a quarterly basis due to the worldwide cancellation or delay of elective procedures, staffing shortages and supply chain disruptions, as well as the impact on timelines associated with certain clinical studies. Resurgence of COVID-19 as a result of emerging variants or other factors could result in additional staffing shortages or supply chain disruptions that could impact our business and operations. We have had some disruption in our ability to supply products to our customers due to supply chain disruptions and staffing shortages which has caused back orders or delays in certain shipments to our customers. The companies that produce our products, product components or otherwise support our manufacturing processes, the distribution centers where we manage our inventory, or the operations of our logistics and other service providers, including third parties that sterilize and store our products, are or could be disrupted, temporarily close or experience worker shortages for a sustained period of time. To date, we believe we have taken adequate precaution to mitigate the impact of the current disruption of key materials, components and parts to the extent possible and reasonable. We expect, however, the current supply chain disruption with certain key suppliers to continue, which could have a material adverse effect on our operations. For additional information on the impact of supply chain disruption related to the COVID-19 pandemic on our manufacturing operations, please refer to the section captioned "Part II, Item 1A. Risk Factors. Our commercial day-to-day operations have been impacted due to the worldwide cancellations and/or delays of elective procedures and restrictions on travel for both our employees and our clinician customers, and timelines associated with certain clinical studies and research and development programs have been delayed. While the impact has been limited to these items to date, we caution that there continues to be a possibility for potential future implementation of certain additional restrictions or other challenges associated with infections, staffing shortages, volatility in elective surgical procedures or supply chain disruptions due to COVID-19 and its current or new variants in certain jurisdictions. In particular, supply constraints that have continued into 2022 that we have partially been able to mitigate to date could be expected to impact our ability to produce and supply our products. The impact of these challenges is currently unknown, but could be significant. Products OA Pain Management
Our OA Pain Management product family consists of:
? Monovisc and Orthovisc, our single- and multi-injection, HA-based
viscosupplement product offerings indicated to provide pain relief from OA
conditions solely for use in the knee. Our OA Pain Management products are
generally administered to patients in an office setting. In
Monovisc and Orthovisc are marketed exclusively by
Medicine, part of the Johnson & Johnson Medical Companies. The Monovisc and
Orthovisc products have been the market leaders, based on combined overall
revenue in the viscosupplement market, since 2018. Internationally, we market
our OA Pain Management products directly through a worldwide network of commercial distributors.
? Cingal, our novel, third-generation, single-injection OA Pain Management
product consisting of our proprietary cross-linked HA material combined with a
fast-acting steroid. Cingal is designed to provide both short- and long-term
pain relief. Cingal is CE Mark approved and for several years has been sold
outside
distributors. In
under clinical trial studies and is not available for commercial sale.
? Hyvisc, our high molecular weight injectable HA veterinary product approved
for the treatment of joint dysfunction in horses due to non-infectious synovitis associated with equine OA. 20
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Joint Preservation and Restoration
Our Joint Preservation and Restoration product family consists of:
? Bone Preserving Joint Technologies. Our portfolio of more than 150 bone
preserving joint technologies, including partial joint replacement, joint
resurfacing, and minimally invasive and bone sparing implants, is designed to
treat upper and lower extremity orthopedic conditions as well as knee and hip
conditions caused by arthritic disease, acute trauma and injury. These
products span multiple joints including the shoulder, foot/ankle, wrist, knee
and hip and are generally intended to restore a patient's natural anatomy and
movement. These products are often used to treat patients with OA progression
beyond where our OA Pain Management products can allow the patients to retain
an active lifestyle when early surgical intervention becomes preferable.
? Soft Tissue Repair. Our line of soft tissue repair solutions is used by
surgeons to repair and reconstruct damaged ligaments and tendons resulting
from sports injuries, acute trauma and disease. These more traditional sports
medicine solutions include screws, sutures, suture anchors, grafts and other
surgical systems that facilitate surgical procedures on the shoulder, knee,
hip, upper and lower extremities, and other soft tissues.
? Regenerative Solutions. Our portfolio of orthopedic regenerative solutions
leveraging our proprietary technologies based on HA and Hyaff, which is a
solid form of HA. These products include Tactoset Injectable Bone Substitute,
an HA-enhanced injectable bone repair therapy designed to treat insufficiency
fractures and for augmenting hardware fixation, such as suture anchors and
Hyalofast, a biodegradable support for human bone marrow mesenchymal stem
cells used for cartilage regeneration and as an adjunct for microfracture
surgery. Tactoset cleared and commercialized principally in
whereas Hyalofast is CE Mark approved and currently available outside the
certain other international markets. In
product under clinical trial studies and is not available for commercial sale.
We currently commercialize Bone Preserving Joint Technologies, Soft Tissue Repair products, and Tactoset (from our Regenerative Solutions portfolio) inthe United States by selling to hospitals and ambulatory surgery centers, through an independent network of sales representatives and distributors, and utilize our distributor network for sales in certain international markets. Non-Orthopedic Our Non-Orthopedic product family consists of legacy HA-based products that are marketed principally for non-orthopedic applications. These products include Hyalobarrier, an anti-adhesion barrier indicated for use after abdomino-pelvic surgeries, Hyalomatrix, used for the treatment of complex wounds such as burns and ulcers, as well as products used in connection with the treatment of ears, nose and throat disorders, and ophthalmic products, including injectable, high molecular weight HA products such as Anikavisc and Nuvisc, used as viscoelastic agents in ophthalmic surgical procedures such as cataract extraction and intraocular lens implantation. These Non-Orthopedic products are sold through commercial sales and marketing partners around the world. 21
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Results of Operations Three and Six Months EndedJune 30, 2022 Compared to Three and Six Months EndedJune 30, 2021 Three Months Ended June 30, Six Months Ended June 30, 2022 2021 $ Inc/(Dec) % Inc/(Dec) 2022 2021 $ Inc/(Dec) % Inc/(Dec) (in thousands, except percentages) (in thousands, except percentages) Revenue$ 39,657 $ 38,145 $ 1,512 4 %$ 76,350 $ 72,437 $ 3,913 5 % Cost of revenue 14,795 17,333 (2,538 ) (15% ) 29,684 30,651 (967 ) (3% ) Gross Profit 24,862 20,812 4,050 19 % 46,666 41,786 4,880 12 % Gross Margin 63 % 55 % 61 % 58 % Operating expenses: Research & development 6,975 7,293 (318 ) (4% ) 13,132 13,654 (522 ) (4% ) Selling, general & administrative 21,268 17,989 3,279 18 % 40,469 36,164 4,305 12 % Change in fair value of contingent consideration - (13,650 ) 13,650 (100% ) - (18,470 ) 18,470 (100% ) Total operating expenses 28,243 11,632 16,611
143 % 53,601 31,348 22,253 71 % Loss (income) from operations (3,381 ) 9,180 (12,561 ) (137% ) (6,935 ) 10,438 (17,373 ) (166% ) Interest and other income (expense), net 96 (50 ) 146 (292% ) (58 ) (93 ) 35 (38% ) (Loss) income before income taxes (3,285 ) 9,130 (12,415 ) (136% ) (6,993 ) 10,345 (17,338 ) (168% ) (Benefit from) provision for income taxes (442 ) 2,599 (3,041 ) (117% ) (1,217 ) 976 (2,193 ) (225% ) Net (loss) income$ (2,843 ) $ 6,531 $ (9,374 ) (144% )$ (5,776 ) $ 9,369 $ (15,145 ) (162% ) Revenue Revenue for the three-month period endedJune 30, 2022 was$39.7 million , an increase of$1.6 million as compared to$38.1 million for the three-month period endedJune 30, 2021 . Revenue for the six-month period endedJune 30, 2022 was$76.4 million , an increase of$4.0 million as compared to$72.4 million for the six-month period endedJune 30, 2021 . For the three- and six-month periods endedJune 30, 2021 , the increases in revenue were mainly due an increase in OA Pain Management revenues, primarily related to the continued recovery from the impact of the COVID-19 pandemic on global sales volumes as well as favorable timing of ordering patterns from international distributors and strategic partners.
The following tables present product revenue by product family:
Three Months Ended June 30, 2022 2021 $ Inc/(Dec) % Inc/(Dec) OA Pain Management$ 25,741 $ 24,321 $ 1,420 6 % Joint Preservation and Restoration 12,095 11,884 211 2 % Non-Orthopedic 1,821 1,940 (119 ) (6% )$ 39,657 $ 38,145 $ 1,512 4 % Six Months Ended June 30, 2022 2021 $ Inc/(Dec) % Inc/(Dec) OA Pain Management$ 48,474 $ 43,637 $ 4,837 11 % Joint Preservation and Restoration 24,234 24,103 131 1 % Non-Orthopedic 3,642 4,697 (1,055 ) (22% )$ 76,350 $ 72,437 $ 3,913 5 % 22
-------------------------------------------------------------------------------- Revenue from our OA Pain Management product family increased 6% and 11%, respectively, for the three-month and six-month periods endedJune 30, 2022 , as compared to the same periods in 2021, due primarily to continued recovery from the impact of the COVID-19 pandemic on global sales volumes as well as favorable timing of ordering patterns from international distributors and strategic partners which can vary significantly on a quarterly basis. Revenue from our Joint Preservation and Restoration product family increased 2% and 1%, respectively, for the three-month and six-month periods endedJune 30, 2022 , as compared to the same periods in 2021, due primarily to recovery in elective procedures from the COVID-19 pandemic, which however remained limited due in part to constraints on staffing. Revenue from our Non-Orthopedic product family decreased 6% and 22%, respectively, for the three-month and six-month periods endedJune 30, 2022 , respectively, as compared to the same periods in 2021, primarily due to timing of distributor sales as well as due to higher revenues in 2021 from certain legacy products related to end-of-life purchases. Gross Profit and Margin Gross profit for the three -and six -month periods endedJune 30, 2022 increased$4.1 million and$4.9 million , to$24.9 million and$46.7 million , respectively. Gross profit for the three- and six-month periods endedJune 30, 2021 , was$20.8 million and$41.8 million , respectively. The increases in gross profit for the three-month and six-month periods endedJune 30, 2022 , as compared to the same period in 2021 were primarily due to increased revenue as well as the impact of inventory step-up charges associated with the acquisitions of Arthrosurface and Parcus Medical in 2021 and product rationalization charges taken in the second quarter of 2021. Gross margin for the three- and six-month periods endedJune 30, 2022 was 63% and 61%, respectively. Gross margin for the three- and six-month periods endedJune 30, 2021 was 55% and 58%, respectively. The increases to gross margin for the three-month and six-month periods endedJune 30, 2022 was due primarily to the unfavorable impact of inventory step-up charges associated with the Arthrosurface and Parcus Medical in 2021 and product rationalization charges taken in the second quarter of 2021. Research and Development Research and development expenses for the three- and six-month periods endedJune 30, 2022 were$7.0 million and$13.1 million , a decrease of$0.3 million and$0.6 million respectively as compared to the same period in 2021. The decreases for the three-month and six-month periods endedJune 30, 2022 was primarily due to lower clinical trial spending, primarily on Cingal pilot study which is expected to be complete in 2022.
Selling, General and Administrative
Selling, general and administrative, or SG&A expenses for the three- and six-month periods endedJune 30, 2022 were$21.3 million and$40.5 million representing an increase of$3.3 million and$4.3 million , respectively as compared to the same period in 2021. This increase in SG&A expense for the three-month and six-month periods endedJune 30, 2022 , was primarily due to expansion of our commercial capabilities inthe United States and expanded marketing activities and other operational capabilities to support the growing business needs. Certain marketing and medical education activities also were more limited in 2021 due to the COVID-19 pandemic. The increase in SG&A expense was also due to higher stock-based compensation expense in 2022 driven by additional headcount associated with the Company's strategic transformation that accelerated in 2020 and 2021.
Contingent Consideration Fair Value Change
The fair value of contingent consideration as ofJune 30, 2022 did not change compared toDecember 31, 2021 . During the three-month and six-month periods endedJune 30, 2021 , the change in the fair value of contingent consideration liabilities was$13.7 million and$18.5 million , respectively, resulting in a non-cash benefit to net income. Income Taxes The benefit from income taxes was$0.4 million and$1.2 million for the three- and six-month periods endedJune 30, 2022 , resulting in effective tax rates of 13.5% and 17.4%, respectively. The provision for income taxes was$2.6 million and$1.0 million for the three- and six-month periods endedJune 30, 2021 , based on effective tax rates of 28.5% and 9.4%, respectively. 23 -------------------------------------------------------------------------------- The decrease in the effective tax rate for the three-month period endedJune 30, 2022 , as compared to the same period in 2021, was primarily due to$0.7 million recorded as tax expense for the change in the fair value of contingent consideration, recognized as a discrete charge in the second quarter of 2021 and a discrete charge of$0.6 million during second quarter of 2022 related to non-deductible stock compensation. The increase in the effective tax rate for the six-month period endedJune 30, 2022 , as compared to the same period in 2021, was primarily due to the year to date net tax benefits in 2021 on the change in the fair value of contingent consideration, in the amount of$1.1 million resulting in a net decrease in the effective tax rate for the six-month period endedJune 30, 2021 . Net (Loss) Income For the three and six-month period ended June, 2022, net loss was$2.8 million and$5.8 million , or$0.20 per diluted share and$0.44 per diluted share, respectively, compared to net income of$6.5 million and$9.4 million , or$0.45 per diluted share and$0.64 per diluted share, for the same periods in prior year. The decrease in net income and diluted earnings per share was primarily due to gains recorded in the three-month and six-month periods endedJune 30, 2021 related to the change in fair value of contingent consideration, as well as increased spending to expand our commercial capability inthe United States , partially offset by increased revenue. Non-GAAP Financial Measures We present certain information with respect to adjusted gross profit and adjusted gross margin, adjusted Earnings Before Interest, Tax, Depreciation and Amortization, or EBITDA, adjusted net income, adjusted diluted earnings per share or adjusted EPS, which are financial measures not based on any standardized methodology prescribed by accounting principles generally accepted inthe United States , or GAAP, and is not necessarily comparable to similarly titled measures presented by other companies. We have presented adjusted gross profit and adjusted gross margin, adjusted EBITDA, adjusted net income, adjusted EPS, because they are key measures used by our management and board of directors to understand and evaluate our operating performance and to develop operational goals for managing our business. We believe these financial measures help identify underlying trends in our business that could otherwise be masked by the effect of the expenses that we exclude. In particular, we believe that the exclusion of these items in calculating these measures can provide a useful tool for period-to-period comparisons of our core operating performance. Accordingly, we believe that these measures provide useful information to investors and others in understanding and evaluating our operating results, enhancing the overall understanding of our past performance and future prospects and allowing for greater transparency with respect to key financial metrics used by our management in their financial and operational decision-making.
Adjusted Gross Profit and Adjusted Gross Margin
We define adjusted gross profit as our gross profit excluding amortization of certain acquired intangible assets, the impact of inventory fair-value step up associated with our recent acquisitions and certain product rationalization charges. The amortized assets contribute to revenue generation, and the amortization of such assets will likely continue in future periods until such assets are fully amortized. These assets include the fair value of certain identified assets acquired in acquisitions, including developed technology and acquired tradenames. We define adjusted gross margin as adjusted gross profit divided by total revenue.
The following is a reconciliation of adjusted gross profit to gross profit for
the three- and six-month periods ended
For the Three Months Ended For the Six Months Ended June 30, June 30, 2022 2021 2022 2021 Gross Profit$ 24,862 $ 20,812 $ 46,666 $ 41,786 Product rationalization related charges - 2,063 - 2,063 Acquisition related intangible asset amortization 1,562 1,562 3,124 3,124 Acquisition related inventory step up - 2,208 - 4,786 Adjusted Gross Profit$ 26,424 $ 26,645 $ 49,790 $ 51,759 Adjusted Gross Margin 67 % 70 % 65 % 71 % 24
-------------------------------------------------------------------------------- Adjusted gross profit for the three- and six-month periods endedJune 30, 2022 decreased$0.2 million and$2.0 million to$26.4 million and$49.8 million , respectively, representing 67% and 65% of revenue. Adjusted gross profit for the three- and six-month periods endedJune 30, 2021 was$26.6 million and$51.8 million , respectively, or 70% and 71% of revenue for the periods, respectively. The decrease in adjusted gross profit for the three- and six-month periods endedJune 30, 2022 , was primarily due to unfavorable revenue mix and production inefficiencies caused in part by supply chain and staffing challenges. Adjusted EBITDA We present information below with respect to adjusted EBITDA, which we define as our net income (loss) excluding interest and other income, net, income tax benefit (expense), depreciation and amortization, stock-based compensation, product rationalization, and acquisition related expenses. In light of the COVID-19 pandemic, we have also excluded the impacts of goodwill impairment charges and changes in the fair value of contingent consideration associated with our acquisition transactions in early 2020. Adjusted EBITDA is not prepared in accordance with US GAAP, and should not be considered in isolation of, or as an alternative to, measures prepared in accordance with US GAAP. There are a number of limitations related to the use of adjusted EBITDA rather than net income (loss), which is the nearest US GAAP equivalent. Some of these limitations are: ? adjusted EBITDA excludes depreciation and amortization, and, although these are non-cash expenses, the assets being depreciated or amortized may have to be replaced in the future, the cash requirements for which are not reflected in adjusted EBITDA? ? we exclude stock-based compensation expense from adjusted EBITDA although (a) it has been, and will continue to be for the foreseeable future, a significant recurring expense for our business and an important part of our employee compensation strategy and (b) if we did not pay out a portion of our compensation in the form of stock-based compensation, the cash salary expense included in operating expenses likely would be higher, which would affect our cash position? ? we exclude acquisition related expenses, including transaction costs and other related expenses, amortization and depreciation of acquired assets in recent acquisitions, and the impact of inventory fair-value step up on cost of revenue? ? we exclude certain impairment charges, including certain product rationalization charges as a result of managing our financial position in light of our recent acquisitions, the impact of COVID-19 and changing regulatory requirements? ? we exclude goodwill impairment charges and changes in the fair value of contingent consideration? ? the expenses and other items that we exclude in our calculation of adjusted EBITDA may differ from the expenses and other items, if any, that other companies may exclude from adjusted EBITDA when they report their operating results? ? adjusted EBITDA does not reflect changes in, or cash requirements for, working capital needs? ? adjusted EBITDA does not reflect (benefit from) provision for income taxes or the cash requirements to pay taxes? and ? adjusted EBITDA does not reflect historical cash expenditures or future requirements for capital expenditures or contractual commitments. 25
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The following is a reconciliation of net income (loss) to adjusted EBITDA for
the three- and six-month periods ended
For the Three Months Ended For the Six Months Ended June 30, June 30, 2022 2021 2022 2021 Net (loss) income$ (2,843 ) $ 6,531 $ (5,776 ) $ 9,369 Interest and other expense, net (96 ) 50 58 93 Benefit from income taxes (442 ) 2,599 (1,217 ) 976 Depreciation and amortization 1,933 1,716 3,753 3,437 Share-based compensation 4,081 2,797 6,626 5,056 Product rationalization - 2,063 - 2,063 Acquisition related intangible asset amortization 1,787 1,787 3,574 3,574 Acquisition related inventory step up - 2,208 - 4,786 Change in fair value of contingent consideration - (13,650 ) - (18,470 ) Adjusted EBITDA$ 4,420 $ 6,101 $ 7,018 $ 10,884 Adjusted EBITDA for the three-month period endedJune 30, 2022 , decreased$1.7 million as compared with the same period in 2021. The decrease in adjusted EBITDA for the period was primarily due to increased commercial spending to support future growth as certain marketing and medical education activities were more limited in 2021. Adjusted EBITDA for the six-month period endedJune 30, 2022 , decreased$3.9 million as compared with the same period in 2021. The decrease in adjusted EBITDA for the period was primarily due to lower adjusted gross profit, from unfavorable revenue mix and production inefficiencies caused in part by supply chain and staffing challenges, as well as an increase in operating expenses primarily attributable to expansion of our commercial capability inthe United States .
Adjusted Net Income (Loss) and Adjusted EPS
We present information below with respect to adjusted net income (loss) and adjusted EPS. We define adjusted net income (loss) as our net income (loss) excluding acquisition-related expenses, amortization and depreciation of acquired assets, the impact of inventory fair-value step up on cost of revenue and the impacts of goodwill impairment charges and changes in the fair value of contingent consideration, as well as certain impairment charges, including product rationalization charges, on a tax effected basis. Acquisition related expenses are those that we would not have incurred except as a direct result of acquisition transactions. Acquisition related expenses consist of investment banking, legal, accounting, and other professional and related expenses. The amortized assets contribute to revenue generation, and the amortization of such assets will recur in future periods until such assets are fully amortized. These assets include the estimated fair value of certain identified assets acquired in acquisitions, including in-process research and development, developed technology, customer relationships and acquired tradenames. We define adjusted EPS as US GAAP diluted earnings (loss) per share excluding the above adjustments to net income used in calculating adjusted net income, each on a per share and tax effected basis. 26
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The following is a reconciliation of adjusted net income (loss) to net income
(loss) for the three- and six-month periods ended
For the Three Months Ended June For the Six Months Ended June 30, 30, 2022 2021 2022 2021 Net (loss) income$ (2,843 ) $ 6,531 $ (5,776 ) $ 9,369 Product rationalization, tax effected - 1,590 - 1,590 Acquisition related intangible asset amortization; tax effected 1,219 1,356 2,565 2,754 Acquisition related inventory step up, tax effected - 1,675 - 3,688 Change in fair value of contingent consideration, tax effected - (9,789 ) - (15,287 ) Adjusted net (loss) income$ (1,624 ) $ 1,363 $ (3,211 ) $ 2,114
The following is a reconciliation of adjusted EPS to diluted earnings (loss) per
share for the three- and six-month periods ended
For the Three Months Ended June 30, For the Six Months Ended June 30, 2022 2021 2022 2021
Diluted (loss) earnings per share (EPS)
$ (0.40 ) $ 0.64 Product rationalization, tax effected - 0.11 - 0.11 Acquisition related intangible asset amortization; tax effected 0.08 0.09 0.18 0.19 Acquisition related inventory step up, tax effected - 0.11 - 0.25 Change in fair value of contingent consideration, tax effected - (0.67 ) - (1.05 ) Adjusted diluted (loss) earnings per share (EPS)$ (0.12 ) $ 0.09 $ (0.22 ) $ 0.14 Adjusted net (loss) income and adjusted diluted (loss) income per share in the three-month period endedJune 30, 2022 decreased by$3.0 million or$0.21 , respectively, as compared with the same period in 2021. The decrease for the period was primarily due to increased commercial spending to support future growth as certain marketing and medical education activities were more limited in 2021. Adjusted net (loss) income in and adjusted diluted (loss) income per share the six-month period endedJune 30, 2022 , decreased$5.3 million or$0.36 , as compared with the same period in 2021. The decrease in adjusted net income for the period was primarily due to lower adjusted gross profit, from unfavorable revenue mix and production inefficiencies caused in part by supply chain and staffing challenges due largely to the impact of the COVID-19 pandemic, as well as an increase in selling and marketing expenses primarily attributable to increased cost to support our commercial capability inthe United States and an increase in stock-based compensation expense driven by incremental headcount associated with the Company's strategic transformation that accelerated in 2020 and 2021.
Liquidity and Capital Resources
We require cash to fund our operating activities and to make capital expenditures and other investments in the business. We expect that our requirements for cash to fund these uses will increase as our operations expand. We continue to generate cash from operating activities and believe that our operating cash flows, cash currently on our condensed consolidated balance sheet and availability under our credit facility will be sufficient to allow us to continue to invest in our existing business, to manage our capital structure on a short and long-term basis, and to meet our anticipated operating cash needs. Cash, cash equivalents, and investments aggregated$91.4 million and$94.4 million , and working capital totaled$138.4 million and$138.7 million , atJune 30, 2022 andDecember 31, 2021 , respectively. We are closely monitoring our liquidity and capital resources for any potential impact that the COVID-19 pandemic may have on our operations. 27 -------------------------------------------------------------------------------- OnNovember 12, 2021 , we entered into a Third Amendment to Credit Agreement withBank of America N.A . as administrative agent, amended and restated our existing revolving line of credit agreement datedOctober 24, 2017 which provides up to$75.0 million in the form of a senior revolving line of credit. Subject to certain conditions, we may request up to an additional$75.0 million for a maximum aggregate commitment of$150.0 million . As ofJune 30, 2022 , andDecember 31, 2021 , there were no outstanding borrowings, and we are in compliance with the terms of the credit facility. Six Months Ended June 30, 2022 2021 Cash provided by (used in) Operating activities$ 1,219 $ 1,863 Investing activities (3,266 ) (583 ) Financing activities (908 ) 143 Effect of exchange rate changes on cash (39 )
(59 )
Net (decrease) in cash and cash equivalents
The following changes contributed to the net change in cash and cash equivalents in the three-month period endedJune 30, 2022 as compared to the same period in 2021. Operating Activities Cash provided by operating activities was$1.2 million for the six-month period endedJune 30, 2022 , as compared to cash provided by operating activities of$1.9 million for the same period in 2021. The decrease in cash provided operating activities in 2022 was primarily due to net loss incurred in 2022 and offset by an improvement in working capital attributable to timing of collections and inventory purchases and lower income tax payments. For the foreseeable future, we expect to continue to invest substantial resources in research and development for new products and clinical studies as well as continued investment in our commercial infrastructure to support our growth strategy. These costs will be funded with a combination of cash on hand and cash expected to be generated from future operations. Investing Activities Cash used in investing activities was$3.3 million for the six-month period endedJune 30, 2022 , as compared to cash used in investing activities of$0.6 million for the same period in 2021. The change was primarily due to an increase in capital expenditures to support commercial growth of the business in the six-month period endedJune 30, 2022 and proceeds from maturities of investments that occurred in 2021. Financing Activities Cash used in financing activities was$0.9 million for the six-month period endedJune 30, 2022 , as compared to cash provided by financing activities of$0.1 million for the same period in 2021. The change was primarily attributable to an increase in the utilization of cash for employee tax withholding in exchange for shares surrendered by equity award holders and lower stock option exercises in 2022. 28
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Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements in conformity with US GAAP requires management to use judgment in making estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. We believe that our accounting policies for revenue recognition, accounts receivable and allowance for credit losses, goodwill, acquired in-process research and development, inventory and contingencies are based on, among other things, judgments and assumptions made by management that include inherent risks and uncertainties. There have been no significant changes to the above critical accounting policies or in the underlying accounting assumptions and estimates used in such policies from those disclosed in our annual consolidated financial statements and accompanying notes included in our 2021 Form 10-K for the year endedDecember 31, 2021 We monitor our estimates on an ongoing basis for changes in facts and circumstances, and material changes in these estimates could occur in the future. Changes in estimates are recorded in the period in which they become known. We base our estimates on historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from our estimates, if past experience or other assumptions do not turn out to be substantially accurate.
Recent Accounting Pronouncements
A discussion of Recent Accounting Pronouncements is included in our 2021 Form
10-K for the fiscal year ended
Contractual Obligations and Other Commercial Commitments
Our contractual obligations and other commercial commitments are summarized in the section captioned "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources-Contractual Obligations and Other Commercial Commitments" in our 2021 Form 10-K for the year endedDecember 31, 2021 . There were no material changes to our contractual obligations reported in our 2021 Form 10-K during the six months endedJune 30, 2022 other than changes in operating leases reported in Note 8. For additional discussion, see Note 10 to the condensed consolidated financial statements included in this report. To the extent that funds generated from our operations, together with our existing capital resources, are insufficient to meet future requirements, we will be required to obtain additional funds through equity or debt financings, strategic alliances with corporate partners and others, or through other sources. No assurance can be given that any additional financing will be made available to us or will be available on acceptable terms should such a need arise.
Off-Balance Sheet Arrangements
We do not use special purpose entities or other off-balance sheet financing techniques that we believe have, or are reasonably likely to have, a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, or capital resources.
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