SEAE HLDG The terms "we," "us," "our," "SeaSpine" or the "Company" refer collectively toSeaSpine Holdings Corporation and its wholly-owned subsidiaries, unless otherwise stated. All information in this report is based on our fiscal year. Unless otherwise stated, references to particular years, quarters, months or periods refer to our fiscal years endingDecember 31 and the associated quarters, months and periods of those fiscal years. This Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). The matters discussed in these forward-looking statements are subject to risk and uncertainties that could cause actual results to differ materially from those made, projected or implied in the forward-looking statements. Such risks and uncertainties may also give rise to future claims and increase exposure to contingent liabilities. Please see the "Risk Factors" section in our Annual Report on Form 10-K for the year endedDecember 31, 2021 (the 2021 10-K) for a discussion of the uncertainties, risks and assumptions associated with these statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
You can identify these forward-looking statements by forward-looking words such as "believe," "may," "could," "will," "estimate," "continue," "anticipate," "intend," "seek," "plan," "expect," "should," "would" and similar expressions.
These risks and uncertainties arise from (among other factors):
•our expectations and estimates concerning future financial performance, financing plans and the impact of competition;
•our ability to successfully develop new and next-generation products and the costs associated with designing and developing those new and next-generation products, including risks inherent in collaborations, such as with restor3d, Inc. or use of nascent manufacturing techniques, such as additive processing/3D printing; •physicians' willingness to adopt our recently launched and planned products, customers' continued willingness to pay for our products and third-party payors' willingness to provide or continue coverage and appropriate reimbursement for any of our products and our ability to secure regulatory clearance and/or approval for products in development; •our ability to attract and retain new, high-quality distributors, whether as a result of perceived deficiencies, or gaps, in our existing product portfolio, inability to reach agreement on financial or other contractual terms or otherwise, as well as disruption associated with restrictive covenants to, which distributors may be subject and potential litigation and expense associate therewith; •the full extent to which the COVID-19 pandemic will, directly or indirectly, impact our business, results of operations and financial condition, including our sales, expenses, supply chain integrity, manufacturing capability, research and development activities, including arising from or relating to deferrals of procedures using our products, disruptions or restrictions on the ability of many of our employees and of third parties on which we rely to work effectively, and temporary closures of our facilities and of the facilities of our customers and suppliers; •the full extent to which the ongoing conflict inUkraine will, directly or indirectly, impact our business, results of operations and financial condition, including our sales, expenses, supply chain integrity, manufacturing capability, and research and development activities;
•our ability to continue to invest in medical education and training, product development, and/or sales and commercial marketing initiatives at levels sufficient to drive future revenue growth;
•anticipated trends in our business, including consolidation among hospital systems, healthcare reform inthe United States , increased pricing pressure from our competitors or hospitals, exclusion from major healthcare systems, whether as a result of unwillingness to provide required pricing or otherwise, and changes in third-party payment systems;
•the risk of supply shortages, and the associated potentially long-term
disruption to product sales, including as a result of the pandemic, the ongoing
conflict in
•unexpected expenses and delay and our ability to manage timelines and costs
related to manufacturing our products including as a result of litigation or
developing and supporting the full commercial launch of new products or relating
to the pandemic;
24
--------------------------------------------------------------------------------•our ability to obtain additional debt and equity financing to fund capital expenditures and working capital requirements and acquisitions;
•our ability to complete acquisitions, integrate operations post-acquisition and maintain relationships with customers of acquired entities;
•our ability to support the safety and efficacy of our products with long-term clinical data;
•existing and future regulations affecting our business, both in
•our ability to protect our intellectual property, including unpatented trade secrets, and to operate without infringing or misappropriating the proprietary rights of others;
•general economic and business conditions, in both domestic and international markets; and
•other risk factors described in the section entitled "Risk Factors" of the 2021 10-K.
These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements included in this report.
Overview
We are a global medical technology company focused on the design, development, and commercialization of surgical solutions for the treatment of patients suffering from spinal disorders. We offer procedural solutions that feature our FLASH™ Navigation, a system designed to improve accuracy of screw placement and provide a cost-effective, rapid, radiation-free solution to surgical navigation, and a comprehensive portfolio of spinal implants and orthobiologics to meet the varying combinations of products that neurosurgeons and orthopedic spine surgeons need to facilitate spinal fusion in degenerative, minimally invasive surgery (MIS), and complex spinal deformity procedures on the lumbar, thoracic and cervical spine. We believe our offerings are essential to meet the "complete solution" requirements of these surgeons. We report revenue in two product categories: (i) orthobiologics and (ii) spinal implants and enabling technologies. Our orthobiologics products consist of a broad range of advanced and traditional bone graft substitutes designed to improve bone fusion rates following a wide range of orthopedic surgeries, including spine, hip, and extremities procedures. Our spinal implants and enabling technologies portfolio consists of an extensive line of products and image-guided surgical solutions to facilitate spinal fusion in degenerative, minimally invasive surgery (MIS), and complex spinal deformity procedures. OurU.S. spinal implants and orthobiologics sales organization consists primarily of regional and territory managers who oversee a broad network of independent sales agents. We pay these sales agents commissions based on the sales of our products. Our enabling technologies sales organization consists of a direct sales force that works together with our independent sales agents to generate either a capital sale or to place systems and components in an account in a capital efficient manner in return for a longer-term revenue commitment for our spinal implant systems and/or orthobiologics products. Our international sales organization consists of a sales management team that oversees a network of independent stocking distributors that purchase products directly from us and independently sell them. For the three months endedJune 30, 2022 and 2021, international sales accounted for approximately 12% and 10% of our revenue, respectively, and 11% and 10% for the six months endedJune 30, 2022 and 2021, respectively. Our policy is not to sell our products through or to participate in physician-owned distributorships.
Acquisition
InMay 2021 , we acquired 7DSurgical, Inc. , a pioneer in the image-guided surgery market, that developed and commercialized advanced machine-vision-based registration algorithms to improve surgical workflow and patient care, currently with applications in spine and cranial surgeries. Its flagship system, founded on its machine-vision, image-guided surgery platform, reduces radiation exposure in open spine surgery by eliminating intra-operative CT (computed tomography) and fluoroscopy for purposes of registration, both of which commonly are used for patient registration with traditional navigational systems.
European Spinal Implant Sales and Marketing
During the third quarter of 2021, we ceased in-person sales and marketing operations inFrance to reduce operating expenses and to centralize the management of our European sales and marketing operations in our headquarters located inCarlsbad, California . As a result, we closed our office located inLyon, France , and eliminated all employment positions at that location. 25 -------------------------------------------------------------------------------- During the fourth quarter of 2021, we notified our European distributors that we will discontinue all sales and marketing activities for our spinal implant portfolio in the European market effective inAugust 2022 due to the significantly higher upfront and recurring annual costs required to comply with European medical device regulations. We will continue to market and sell our orthobiologics and enabling technologies products in the European market.
Components of Our Results of Operations
Revenue
Our net revenue is derived primarily from the sale of orthobiologics, spinal implants and enabling technology products inNorth America ,Europe ,Asia Pacific andLatin America . Sales are reported net of returns, rebates, group purchasing organization fees and other customer allowances. Inthe United States , we generate most of our revenue by consigning our orthobiologics products and by consigning or loaning our spinal implant sets to hospitals and independent sales agents, who in turn either deliver them to hospitals for a single surgical procedure, after which they are returned to us, or leave them with hospitals that are high volume users for multiple procedures. The spinal implant sets typically contain the instruments, disposables, and spinal implants required to complete a surgery. We ship replacement inventory to independent sales agents to replace the consigned inventory used in surgeries. We maintain and replenish loaned sets at our kitting and distribution centers and return replenished sets to a hospital or independent sales agent for the next procedure. We recognize revenue on these consigned or loaned products when they have been used or implanted in a surgical procedure. Enabling technologies revenue related to capital equipment, tools and software is typically recognized upon acceptance by the customer. Revenue from training and installation is recognized upon completion of the training and installation process. Revenue from service contracts is recognized over the term of the contract. Under certain contracts, the transfer of capital equipment occurs over time as the customer's purchase commitments on other spinal implant and orthobiologics products are met. We allocate the transaction price to the multiple performance obligations under these contracts related to the sale of the products (recognized either upon the shipment or delivery of goods), the lease of capital equipment (recognized over the contract period), and the sale of capital equipment (recognized once the purchase commitments are met). For all other sales transactions, including sales to international stocking distributors and private label partners, we generally recognize revenue when the products are shipped and the customer or stocking distributor obtains control of the products. There is generally no customer acceptance or other condition that prevents us from recognizing revenue in accordance with the delivery terms for these sales transactions. Cost of Goods Sold Cost of goods sold primarily consists of the costs of finished goods purchased directly from third parties and raw materials used in the manufacturing of our products, plant and equipment overhead, labor costs and packaging costs. The majority of our orthobiologics products are designed and manufactured internally. The cost of human tissue and fixed manufacturing overhead costs are significant drivers of the cost of goods sold, and consequently our orthobiologics products, at current production volumes, generate lower gross margin than our spinal implant products. We rely on third-party suppliers to manufacture our spinal implants and enabling technology products, and we assemble the spinal implants into surgical sets at our kitting and distribution centers. The cost to inspect incoming finished goods is included in the cost of goods sold. Other costs included in cost of goods sold include amortization of product technology intangible assets, royalties, scrap and consignment losses, and charges for expired, excess and obsolete inventory.
Selling and Marketing Expense
Our selling and marketing expenses consist primarily of sales commissions, payroll and other headcount related expenses, marketing expenses, shipping, third-party logistics expenses, depreciation of instrument sets, instrument replacement expense, and cost of medical education and training.
General and Administrative Expense
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Our general and administrative expenses consist primarily of payroll and other
headcount related expenses, and expenses for information technology, legal,
human resources, insurance, finance, and management. We also record gains or
losses associated with changes in the fair value of contingent consideration
liabilities in general and administrative expenses.
Research and Development Expense
Our research and development (R&D) expenses primarily consist of expenses related to the headcount for engineering, product development, clinical affairs and regulatory functions, as well as consulting services, third-party prototyping services, outside research and clinical studies activities, and materials, production and other costs associated with development of our products. We expense R&D costs as they are incurred.
While our R&D expenses fluctuate from period to period based on the timing of specific initiatives, we expect these costs will increase over time as we continue to design and commercialize new products and expand our product portfolio, add related personnel and conduct additional clinical activities.
Intangible Amortization
Our intangible amortization, including the amounts reported in cost of goods sold, consists of acquisition-related amortization. We expect total annual amortization expense (including amounts reported in cost of goods sold) to be approximately$7.3 million in 2022,$6.6 million in 2023,$4.6 million in 2024,$3.3 million in 2025 and$3.3 million in 2026.
COVID-19 Pandemic - Impact on our Business
The COVID-19 pandemic has presented a substantial public health and economic challenge around the world and has materially and adversely affected our business. From lateMarch 2020 tomid-May 2020 , among other impacts on our business related to the pandemic, surgeons and their patients deferred surgical procedures in which our products otherwise could have been used. This decrease in demand for our products temporarily recovered to varying degrees beginning in the latter half ofMay 2020 as conditions improved in certain geographies, allowing patients to resume receiving their treatments. However, from lateNovember 2020 tomid-February 2021 , a significant and sustained increase in COVID-19 cases and hospitalization rates once again caused the deferral of surgical procedures in which our products otherwise could have been used. Additionally, in the third quarter of 2021, hospitalization rates in many geographies increased as a result of the spread of the Delta variant. This, along with hospital support staffing shortages in certain geographies, adversely impacted the number of elective surgical procedures and slowed the partial recovery we had been experiencing. There is a risk that we will see continued volatility in the demand for our products in 2022 and thereafter as geographies respond to local conditions. We will continue to closely monitor developments related to the pandemic and our decisions will continue to be driven by the health and well-being of our employees, our distributor and surgeon customers, and their patients while maintaining operations to support our customers and their patients in the near-term. At this time, the full extent of the impact of the pandemic on our business, financial condition and results of operations is uncertain and cannot be predicted with reasonable accuracy and will depend on future developments that are also uncertain and cannot be predicted with reasonable accuracy.
The effect of the pandemic will not be fully reflected in our results of operations and overall financial performance until future periods. For additional information on the various risks posed by the pandemic on our business, financial condition and results of operations, please see "Item 1A. Risk Factors" in Part II of this report.
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RESULTS OF OPERATIONS
Three Months Ended June 30, 2022 vs. 2021 Six Months Ended June 30, 2022 vs. 2021
(In thousands, except
percentages) 2022 2021 % Change 2022 2021 % Change
Total revenue, net $ 56,318 $ 47,463 19 % $ 107,011 $ 89,417 20 %
Cost of goods sold 19,127 17,482 9 % 39,503 32,848 20 %
Gross profit 37,191 29,981 24 % 67,508 56,569 19 %
Gross margin 66.0 % 63.2 % 63.1 % 63.3 %
Operating expenses:
Selling and marketing 33,029 25,436 30 % 62,535 48,835 28 %
General and administrative 12,192 9,986 22 % 23,131 20,413 13 %
Research and development 5,649 4,850 16 % 11,499 9,356 23 %
Intangible amortization 856 843 2 % 1,712 1,635 5 %
Total operating expenses 51,726 41,115 26 % 98,877 80,239 23 %
Operating loss (14,535) (11,134) 31 % (31,369) (23,670) 33 %
Other (expense) income, net (559) 6,079 (109) % (557) 5,920 NM
Loss before income taxes (15,094) (5,055) 199 % (31,926) (17,750) 80 %
(Benefit) provision for income
taxes (1,147) 158 NM (1,375) 183 (851) %
Net loss $ (13,947) $ (5,213) 168 % $ (30,551) $ (17,933) 70 %
__________
NM: not meaningful
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Three Months Ended
Revenue
Total revenue, net for the three months ended
Three Months Ended June 30, 2022 vs. 2021
2022 2021 % Change
(In thousands)
Orthobiologics $ 26,983 $ 23,571 14 %
United States 24,520 21,184 16 %
International 2,463 2,387 3 %
Spinal Implants and Enabling Technologies $ 29,335 $ 23,892 23 %
United States 24,980 21,385 17 %
International 4,355 2,507 74 %
Total revenue, net $ 56,318 $ 47,463 19 %
Three Months Ended June 30, 2022 vs. 2021
2022 2021 % Change
(In thousands)
United States $ 49,500 $ 42,569 16 %
International 6,818 4,894 39 %
Total revenue, net $ 56,318 $ 47,463 19 %
Revenue from orthobiologics sales totaled $27.0 million for the three months
ended June 30, 2022 , an increase of $3.4 million or 14%, from the same period in
2021. Revenue from orthobiologics sales in the United States increased $3.3
million to $24.5 million for the three months ended June 30, 2022 compared to
the same period in 2021. The increase was primarily driven by higher sales of
new and recently launched products. During the three months ended June 30, 2022 ,
sales of products launched within the past five years increased to 43% of U.S.
orthobiologics revenue compared to 40% for the same period in 2021. Revenue from
orthobiologics sales internationally, which can be volatile from quarter to
quarter because of irregular ordering patterns from our stocking distributors,
increased $0.1 million for the three months ended June 30, 2022 compared to the
same period in 2021.
Revenue from spinal implants and enabling technology sales was $29.3 million for
the three months ended June 30, 2022 , an increase of $5.4 million or 23%, from
the same period in 2021. Revenue from spinal implants and enabling technology
sales in the United States increased $3.6 million to $25.0 million for the three
months ended June 30, 2022 compared to the same period in 2021 and included $1.1
million of capital sales from recently acquired 7D Surgical. The remaining
revenue growth in the current year period was driven by recently launched
products, predominantly those products that were alpha or fully launched since
2020, and which have been important catalysts to our ability to take market
share in the U.S. spinal implants market. Revenue from spinal implants and
enabling technology sales internationally increased $1.8 million for the three
months ended June 30, 2022 as compared to the same period in 2021 and included
$1.1 million of capital sales from recently acquired 7D Surgical. The remaining
revenue growth for international was primarily driven by early shipments of a
portion of final stocking orders to European distributors.
Cost of Goods Sold and Gross Margin
Cost of goods sold increased$1.6 million , to$19.1 million for the three months endedJune 30, 2022 , compared to the same period in 2021. Gross margin was 66.0% for the three months endedJune 30, 2022 and 63.2% for the same period in 2021. The increase in gross margin was due to lower excess and obsolete inventory charges and production efficiencies gained at ourIrvine manufacturing facility. Cost of goods sold included$1.0 million and$0.6 million of amortization for product technology intangible assets for the three months endedJune 30, 2022 and 2021, respectively. 29 --------------------------------------------------------------------------------
Selling and Marketing
Selling and marketing expenses increased$7.6 million to$33.0 million for the three months endedJune 30, 2022 compared to the same period in 2021. The increase was driven primarily by 7D Surgical sales and marketing costs, higher distributor commissions, higher tradeshow and travel costs, as well as higher selling, customer service, and supply chain headcount and related expenses.
General and Administrative
General and administrative expenses increased$2.2 million to$12.2 million for the three months endedJune 30, 2022 , primarily due to the addition of general and administrative expenses attributable to 7D Surgical, higher travel and headcount related expenses, and higher information technology costs, which were partially offset by the legal, accounting and other due diligence costs incurred in the prior year quarter related to the 7D Surgical acquisition.
Research and Development
Research and development expenses increased$0.8 million to$5.6 million , or 10% of revenue, for the three months endedJune 30, 2022 compared to the same period in 2021 due to research and development headcount and related project expenses attributable to 7D Surgical operations.
Intangible Amortization
Intangible amortization expense, excluding the amounts reported in cost of goods sold for product technology intangible assets was$0.9 million and$0.8 million for the three months endedJune 30, 2022 and 2021, respectively. Income Taxes Three Months Ended June 30, 2022 2021 (In thousands) Loss before income taxes$ (15,094) $ (5,055) (Benefit) provision for income taxes (1,147) 158 Effective tax rate 7.6 % (3.1) %
We recorded an income tax benefit for the three months ended
In addition, for any pretax losses incurred by the consolidatedU.S. tax group, we recorded no corresponding tax benefit because we have concluded that it is not more-likely-than-not that the full value of any resulting deferred tax assets will be realized. We will continue to assess our position in future periods to determine if it is appropriate to reduce a portion of our valuation allowance. The acquisition of 7D Surgical was a treated as an asset purchase for US tax purposes and a stock purchase for Canadian tax purposes in 2021. As such, the we recorded deferred tax assets and liabilities on its Canadian tax attributes. We continue to use our deferred tax liabilities as a source of income against a portion of our deferred tax assets. A valuation allowance was recorded for the portion of the deferred tax assets that are not more-likely-than-not to be realized. For the three months endedJune 30, 2022 , a net tax benefit of$1.0 million was recorded as a result of the 7D Surgical current year losses. This was offset by expenses recorded for indefinite lived intangibles, current foreign and state taxes and prior year foreign tax true-ups. As part of the Tax Cuts and Jobs Act of 2017 (TCJA), beginning with our 2022 tax year, we are required to capitalize research and development expenses, as defined under Internal Revenue Code section 174. For expenses that are incurred for research and development in theU.S. , the amounts will be amortized over 5 years, and expenses that are incurred for research and experimentation outside theU.S. will be amortized over 15 years. This provision is not expected to have a significant impact to the consolidated financial statements. 30 --------------------------------------------------------------------------------
Other Income
Other income for the three months endedJune 30, 2021 primarily consisted of the gain on the forgiveness of debt related to the loan we obtained under the Paycheck Protection Program (PPP) of the Coronavirus Aid, Relief, and Economic Security Act.
Six Months Ended
Revenue
Total revenue, net for the six months ended
Six Months Ended June 30, 2022 vs. 2021
2022 2021 % Change
(In thousands)
Orthobiologics $ 50,505 $ 45,059 12 %
United States 45,841 40,244 14 %
International 4,664 4,815 (3) %
Spinal Implants and Enabling Technologies $ 56,506 $ 44,358 27 %
United States 49,152 39,795 24 %
International 7,354 4,563 61 %
Total revenue, net $ 107,011 $ 89,417 20 %
Six Months Ended June 30, 2022 vs. 2021
2022 2021 % Change
(In thousands)
United States $ 94,993 $ 80,039 19 %
International 12,018 9,378 28 %
Total revenue, net $ 107,011 $ 89,417 20 %
Revenue from orthobiologics sales totaled $50.5 million for the six months ended
June 30, 2022 , an increase of $5.4 million , from the same period in 2021.
Revenue from orthobiologics sales in the United States increased $5.6 million
for the six months ended June 30, 2022 compared to the same period in 2021. The
increase was primarily driven by higher sales of new and recently launched
products. During the six months ended June 30, 2022 , sales of products launched
within the past five years increased to 42% of U.S. orthobiologics revenue
compared to 39% for the same period in 2021. Revenue from orthobiologics sales
internationally, which can be volatile from quarter to quarter because of
irregular ordering patterns from our stocking distributors, decreased $0.2
million for the three months ended June 30, 2022 compared to the same period in
2021.
Revenue from spinal implants and enabling technology sales totaled $56.5 million
for the six months ended June 30, 2022 , an increase of $12.1 million , from the
same period in 2021. Revenue from spinal implants and enabling technology sales
in the United States increased $9.4 million for the six months ended June 30,
2022 compared to the same period in 2021, and included $2.9 million of capital
sales from recently acquired 7D Surgical. The remaining revenue growth in the
current year period was driven by recently launched products, predominantly
those products that were alpha or fully launched since 2020, and which have been
important catalysts to our ability to take market share in the U.S. spinal
implants market. Revenue from spinal implants and enabling technology sales
internationally increased $2.8 million for the six months ended June 30, 2022
compared to the same period in 2021, and included $1.6 million of capital sales
from recently acquired 7D Surgical. The remaining revenue growth for
international was primarily driven by early shipments of a portion of final
stocking orders to European distributors.
Cost of Goods Sold and Gross Margin
Cost of goods sold increased$6.7 million to$39.5 million for the six months endedJune 30, 2022 , compared to the same period in 2021. Gross margin was 63.1% for the six months endedJune 30, 2022 , compared to 63.3% for the same period in 2021. The decrease in gross margin was due to increased technology-related intangible asset amortization and inventory purchase accounting fair market value adjustments associated with the 7D Surgical acquisition. 31 -------------------------------------------------------------------------------- Cost of goods sold included$2.0 million and$0.9 million of amortization for product technology intangible assets, for the six months endedJune 30, 2022 and 2021, respectively. Selling and Marketing Selling and marketing expenses increased$13.7 million to$62.5 million for the six months endedJune 30, 2022 compared to the same period in 2021. The increase was driven by higher commissions due to the revenue increase, 7D Surgical sales and marketing costs, higher sales, marketing, customer service and logistics headcount and related expenses, additional spinal instrument set depreciation and instrument replacement expense due to product launches, and higher freight and third-party logistics expenses.
General and Administrative
General and administrative expenses increased$2.7 million to$23.1 million for the six months endedJune 30, 2022 compared to the same period in 2020, mostly due to the addition of general and administrative expenses attributable to 7D Surgical operations, and higher travel and headcount related expenses, which were partially offset by the legal, accounting and other due diligence costs incurred in the prior year quarter related to the 7D Surgical acquisition.
Research and Development
Research and development expenses increased
Intangible Amortization
Intangible amortization expense, excluding the amounts reported in cost of goods sold for product technology intangible assets, was$1.7 million and$1.6 million for the six months endedJune 30, 2022 and 2021. Income Taxes Six Months Ended June 30, 2022 2021 (In thousands) Loss before income taxes$ (31,926) $ (17,750) (Benefit) provision for income taxes (1,375) 183 Effective tax rate 4.3 % (1.0) %
We recorded an income tax benefit for the six months ended
In addition, for any pretax losses incurred by the consolidatedU.S. tax group, we recorded no corresponding tax benefit because we have concluded that it is not more-likely-than-not that the full value of any resulting deferred tax assets will be realized. We will continue to assess our position in future periods to determine if it is appropriate to reduce a portion of our valuation allowance.
See "-Three Months Ended
Other Income
Other income for the six months ended
Business Factors Affecting the Results of Operations
Special Charges and Gains
32
--------------------------------------------------------------------------------We define special charges and gains as expenses or non-operating gains and losses for which the amount or timing can vary significantly from period to period, and for which the amounts are non-cash in nature, or the amounts are not expected to recur at the same magnitude.
We believe that identification of these special charges and gains provides important supplemental information to investors regarding financial and business trends relating to our financial condition and results of operations. Investors may find this information useful in assessing comparability of our operating performance from period to period, against the business model objectives that management has established, and against other companies in our industry. We provide this information to investors so that they can analyze our operating and financial results in the same way that management does and use this information in their assessment of our core business and valuation.
Loss before income taxes includes the following special charges and gains for
the three and six months ended
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Special Charges and (Gains): (In thousands)
Severance and other costs associated with $ 127 $ - $ 406 $ -
European sales and marketing reorganization
Purchase accounting inventory fair market value 83 - 208 -
and adjustments
Acquisition and integration-related charges for (10) 519 363 1,795 7D Surgical Gain on forgiveness of PPP Loan - (6,173) - (6,173) Total Special Charges and (Gains), net$ 200 $
(5,654)
The items reported above are reflected in the consolidated statements of operations as follows:
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
(In thousands)
Cost of goods sold $ 83 $ - $ 208 $ -
General and administrative 117 519 769 1,795
Other expense (income), net - (6,173) - (6,173)
Total Special Charges and (Gains), net $ 200 $
(5,654)
33
--------------------------------------------------------------------------------Other Matters
Critical Accounting Policies and the Use of Estimates
Our discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States of America . Preparing these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities, and the reported amounts of revenues and expenses. Significant estimates affecting amounts reported or disclosed in the consolidated financial statements include revenue recognition, allowances for doubtful accounts receivable and sales return and other credits, net realizable value of inventories, amortization periods for acquired intangible assets, estimates of projected cash flows and discount rates used to value intangible assets and test them for impairment, estimates of projected cash flows and assumptions related to the timing and probability of the product launch dates, discount rates matched to the timing of payments, and probability of success rates used to value contingent consideration liabilities from business combinations, estimates of projected cash flows and depreciation and amortization periods for long-lived assets, valuation of stock-based compensation, computation of taxes and valuation allowances recorded against deferred tax assets, and loss contingencies. These estimates are based on historical experience and on various other assumptions believed to be reasonable under the current circumstances. Actual results could differ from these estimates. The full extent to which the COVID-19 pandemic or the ongoing conflict inUkraine will directly or indirectly impact our business, results of operations and financial condition, including sales, expenses, manufacturing, research and development costs and employee-related compensation, will depend on future developments that are highly uncertain, with respect to COVID-19, including as a result of genetic variations of, or other information that may emerge concerning, COVID-19 and the actions taken to contain it or treat COVID-19, and with respect to the ongoing conflict inUkraine , the impact thereof on the supply chain for titanium, which is used in certain of our products, as well as the broader macroeconomic impact arising from both COVID-19 and the conflict on local, regional, national and international customers and markets. We have made estimates of the impact of COVID-19 within our financial statements and there may be changes to those estimates in future periods. Actual results may differ from these estimates. Note 2, "Summary of Significant Accounting Policies" to the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this report and included in Part II, Item 8 of the 2021 10-K describe the significant accounting policies and estimates used in the preparation of our condensed consolidated financial statements.
Recently Issued Accounting Pronouncements
Information regarding new accounting pronouncements is included in Note 2, "Summary of Significant Accounting Policies," to the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this report.
Liquidity and Capital Resources
Overview
As ofJune 30, 2022 , we had cash and cash equivalents totaling approximately$66.1 million and$1.2 million of borrowing capacity available under our credit facility. Subsequent to amending the credit facility inJuly 2022 , we had$7.3 million of current borrowing capacity. We believe that our cash and cash equivalents, and the amount currently available to us under our credit facility, will be sufficient to fund our operations and meet our contractual obligations for at least the next twelve months.
Capital Resources
In addition to cash from operations, our existing credit facility is our primary source of capital. However, we have raised funds in the capital markets in the past and may continue to do so from time-to-time.
Risks and Uncertainties
We have incurred net losses in each year since inception. Our net losses were$30.6 million and$17.9 million for the six months endedJune 30, 2022 and 2021, respectively. As ofJune 30, 2022 , we had an accumulated deficit of$304.2 million . We anticipate that our expenses will increase as we continue invest in the expansion of our business, primarily in sales, marketing and research and development; invest in inventory, spinal implant set builds and instrument capital expenditures; and continue 34 -------------------------------------------------------------------------------- to operate as a public company. Based on our updated operating plans, we believe that we have sufficient resources to fund operations and meet our contractual obligations through the second quarter of 2023 with our existing cash and equivalents and borrowing capacity under our extended and expanded credit facility. However, based on our recurring losses from operations and the expectation of continued operating losses, we will need to raise additional capital to finance our future operations. If we are unable to raise such additional capital, it may raise substantial doubt about our ability to continue as a going concern. Longer term, we expect to raise additional capital through the sale of common stock in public offerings and/or private placements, debt financings, or through other capital sources. Although we have been successful in raising capital in the past, there is no assurance that we will be successful in obtaining such additional financing on terms acceptable to us, if at all. If we are unable to obtain sufficient funding on acceptable terms,we could be forced to delay, reduce or eliminate some or all of our projected inventory and capital expenditures spend, research and development programs or commercialization activities, which could materially adversely affect our business prospects or our ability to continue operations.
Credit Facility
We have a$30.0 million credit facility withWells Fargo Bank, National Association which matures inJuly 2027 . AtJune 30, 2022 , we had$25.0 million of outstanding borrowings under the credit facility. The borrowing capacity under the credit facility is determined monthly and is based on the amount of our eligible accounts receivable and inventory balances and qualified cash (as defined in the credit facility). Depending on the extent to which our eligible accounts receivable and inventory balances increase, our borrowing capacity could increase or decrease in the future. The credit facility contains various customary affirmative and negative covenants, including prohibiting us from incurring indebtedness without the lender's consent. Under the terms of the credit facility, if our Total Liquidity (as defined in the credit facility) is less than$5.0 million , we are required to maintain a minimum fixed charge coverage ratio of 1.10 to 1.00 for the applicable measurement period. Our Total Liquidity was$62.5 million atJune 30, 2022 , and therefore that financial covenant was not applicable at that time.
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