SURGALIGN HOLDINGS, INC. Cautionary Statement Relating to 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 endedDecember 31, 2020 , or in subsequent Quarterly Reports on Form 10-Q (including this one), constitute cautionary statements which identify some of the factors regarding these forward-looking statements, including certain risks and uncertainties, that could cause actual results to vary materially from the future results indicated in these forward-looking statements. Other factors could also cause actual results to vary materially from the future results indicated in such forward-looking statements. Management Overview 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. We are developing an augmented reality and artificial intelligence digital surgery platform called HOLO™ to enable digital spine surgery, which we believe is one of the most advanced artificial intelligence technologies being applied to surgery. HOLO Portal™ surgical guidance system, a component of our HOLO™ platform, is designed to automatically recognize, identify, and segment 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$13.6 billion global spine market. We estimate that our current portfolio addresses nearly 87% of all surgeries utilizing spinal hardware implants and approximately 70% of the biomaterials used in spine-related uses. Our portfolio of spinal hardware implants consists of a broad line of solutions for spinal fusion in minimally invasive surgery ("MIS"), deformity, and degenerative procedures; motion preservation solutions indicated for use in one or two-level disease; and an implant system designed to relieve sacroiliac joint pain. Our biomaterials products consist of a broad range of advanced and traditional bone graft substitutes that are designed to improve bone fusion rates following spinal surgery. We offer a portfolio of products for thoracolumbar procedures, including: the Streamline TL Spinal Fixation system, a system for degenerative and complex spine procedures; and the Streamline MIS Spinal Fixation System, a broad range of implants and instruments used via a percutaneous or mini-open approach. We offer a complementary line of interbody fusion devices, Fortilink-TS, Fortilink-L, and Fortilink-A, in our TETRAfuse 3D Technology, which is 3D printed with nano-rough features that have been shown to allow more bone cells to attach to more of the implant, increasing the potential for fusion. We offer a portfolio of products for cervical procedures, including: the CervAlign ACP System, a comprehensive anterior cervical plate system; the Fortilink-C IBF System, a cervical interbody fusion device that utilizes TETRAfuse 3D technology; and the Streamline OCT System, a broad range of implants used in the occipito-cervico-thoracic posterior spine. Our motion preservation systems are designed to enable restoration of segmental stability, while preserving motion. These systems include: Coflex Interlaminar Stabilization device, the only FDA PMA-approved implant for the treatment of moderate to severe lumbar spinal stenosis in conjunction with decompression; and HPS 2.0 Universal Fixation System, a pedicle screw system used for posterior stabilization of the thoracolumbar spine that includes a unique dynamic coupler, shown to preserve motion and reduce the mechanical burden on adjacent segments. Our implant system for fusion of the sacroiliac joint, SImmetry SI Joint Fusion System, is a minimally invasive surgical implant system that has been clinically demonstrated to produce high rates of sacroiliac joint fusion and statistically significant decreases in opioid use, pain, and disability. Through a series of distribution agreements, our product portfolio of biomaterials consists of a variety of bone graft substitutes including cellular allografts, demineralized bone matrices ("DBMs") and synthetic bone growth substitutes that have a balance of osteoinductive and osteoconductive properties to enhance bone fusion rates following spinal surgery. We market ViBone and ViBone Moldable, two next-generation viable cellular allograft bone matrix products intended to provide surgeons with improved results for bone repair. ViBone and ViBone Moldable are processed using a proprietary method optimized to protect and preserve the health of native bone cells to potentially enhance new bone formation and are 27 -------------------------------------------------------------------------------- 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. The HOLO Portal system 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. HOLO™'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. The HOLO Portal system 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. HOLO Portal surgical guidance 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 HOLO Portal platform in the first quarter of 2021. We plan to develop and commercialize several next-generation features for the HOLO technology 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 HOLO technology to be integrated with existing robotic platforms to make them "smart" by identifying relevant anatomy. In addition, we are designing the HOLO 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 inthe United States and in more than 40 countries worldwide. OurU.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, Retirement of Debt and Redemption of Preferred Stock OnJuly 20, 2020 , pursuant to the OEM Purchase Agreement, by and between us andArdi Bidco Ltd. (the "Buyer"), the Company sold the OEM Businesses to Buyer and its affiliates for a purchase price of$440.0 million of cash, subject to certain adjustments. In connection therewith onJuly 20, 2020 , we (i) paid in full our$80.0 million revolving credit facility under that certain Credit Agreement dated as ofJune 5, 2018 (the "2018 Credit Agreement"), by and amongSurgalign Spine Technologies, Inc. (formerly known asRTI 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) 28 -------------------------------------------------------------------------------- paid in full our$100.0 million term loan and$30.0 million incremental term loan commitment under that certain Second Lien Credit Agreement, dated as ofMarch 8, 2019 (the "2019 Credit Agreement"), by and amongSurgalign 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. OnDecember 1, 2020 , pursuant to the OEM Purchase Agreement, we received a notice from the Buyer indicating that a post-closing adjustment in an amount of up to$14.0 million may be owed in respect of the working capital adjustment paid at closing. We disagreed with the Buyer's proposed post-closing adjustment and disputed the adjustment in accordance with the terms of the OEM Purchase Agreement. OnJune 3, 2021 , the firm engaged to resolve the dispute issued a binding, non-appealable resolution whereby it was determined the Company was liable for$5.8 million of the amount remaining in dispute, which was finalized and paid during the second quarter of 2021. 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 endedDecember 31, 2020 that was previously filed with theSecurities and Exchange Commission ("SEC") onMarch 16, 2021 , and as amended by our Annual Report (Amendment No. 1) on Form 10-K/A filed with theSEC onSeptember 24, 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 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 quality issues 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 nine-month period endedSeptember 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. 29 -------------------------------------------------------------------------------- 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 nine months endedSeptember 30, 2021 and 2020, respectively. For the Three Months Ended September 30, For the Nine Months September 30, 2021 2020 2021 2020 Revenues$ 20,545 100.0 %$ 27,926 100.0 %$ 68,670 100.0 %$ 75,562 100.0 % Cost of goods sold 6,811 33.2 % 11,892 42.6 % 20,278 29.5 % 30,585 40.5 % Gross profit 13,734 66.8 % 16,034 57.4 % 48,392 70.5 % 44,977 59.5 % Operating Expenses: Marketing, general and administrative 27,564 134.2 % 27,684 99.1 % 79,264 115.4 % 96,842 128.2 % Research and development 2,901 14.1 % 2,208 7.9 % 8,960 13.0 % 9,764 12.9 % Gain on acquisition contingency (1,266) (6.2 %) - - % (3,553) (5.2 %) (130) (0.2 %) Asset impairment and abandonments 5,411 26.3 % 9,356 33.5 % 9,794 14.3 % 12,117 16.0 % Transaction and integration expenses - 0.0 % 3,411 12.2 % 2,510 3.7 % 5,826 7.7 % Total operating expenses 34,610 168.5 % 42,659 152.8 % 96,975 141.2 % 124,419 164.7 % Other operating income, net (3,932) (19.1 %) - - % (3,932) (5.7 %) - - % Operating loss (16,944) (82.5 %) (26,625) (95.3 %) (44,651) (65.0 %) (79,442) (105.1 %) Other (income) expense - net: Other (income) expense - net (117) (0.6 %) (21) (0.1 %) (221) (0.3 %) (92) (0.1 %) Foreign exchange loss (gain) 471 2.3 % (21) (0.1 %) 921 1.3 % 28 - % Change in fair value of warrant liability (7,739) (37.7) % - 0.0 % (10,262) (14.9) % - 0.0 % Total other (income) expense - net (7,385) (35.9 %) (42) (0.2 %) (9,562) (13.9 %) (64) (0.1 %) Loss before income tax (benefit) (9,559) (46.5 %) (26,583) (95.2 %) (35,089) (51.1 %) (79,378) (105.1 %) Income tax (benefit) (1,304) (6.3) % - - % (1,004) (1.5) % (3,492) (4.6) % Net loss from continuing operations (8,255) (40.2 %) (26,583) (95.2 %) (34,085) (49.6 %) (75,886) (100.4 %) Discontinued operations (Note 3) (Loss) income from operations of discontinued operations (including gain on disposition of$210.9 million for the three and nine months ended September 30, 2020) - - % 191,801 686.8 % (6,316) (9.2 %) 181,333 240.0 % Income tax provision (benefit) (349) (1.7 %) 42,534 152.3 % (1,112) (1.6 %) 39,189 51.9 % Net income (loss) from discontinued operations 349 1.7 % 149,267 534.5 % (5,204) (7.6 %) 142,144 188.1 % Net (loss) income applicable to common shares (7,906) (38.5 %) 122,684 439.3 % (39,289) (57.2 %) 66,258 87.7 % Other comprehensive (loss) income: Unrealized foreign currency translation (gain) loss (362) (1.8 %) 108 0.4 % (398) (0.6 %) 180 0.2 % Total other comprehensive (loss) income$ (7,544) (36.7 %)$ 122,576 438.9 %$ (38,891) (56.6 %)$ 66,078 87.4 % 30
-------------------------------------------------------------------------------- Three Months EndedSeptember 30, 2021 , Compared With Three Months EndedSeptember 30, 2020 Revenues - Our revenues decreased$7.4 million , or 26.4%, to$20.5 million for the three months endedSeptember 30, 2021 , compared to$27.9 million for the three months endedSeptember 30, 2020 , partially due to decreased demand during the quarter as a result of the continued hospital and surgery center decrease in procedures due to COVID-19 and other commercial pressures. Cost of Goods Sold - Costs of goods sold decreased$5.1 million , or 42.7%, to$6.8 million for the three months endedSeptember 30, 2021 , compared to$11.9 million for the three months endedSeptember 30, 2020 . The decrease in costs of goods sold was primarily due to the decrease in sales period over period. Marketing, General and Administrative Expenses - Marketing, general and administrative expenses decreased$0.1 million , or 0.4%, to$27.6 million for the three months endedSeptember 30, 2021 , compared to$27.7 million for the three months endedSeptember 30, 2020 . Research and Development Expenses - Research and development expenses increased$0.7 million or 31.4%, to$2.9 million for the three months endedSeptember 30, 2021 , compared to$2.2 million for the three months endedSeptember 30, 2020 . The increase is driven by the continued focus on the development of the HOLOTM platform and obtaining regulatory approval. Asset Impairment and Abandonments - Asset impairment and abandonments expenses decreased$3.9 million or 42.2% to$5.4 million for the three months endedSeptember 30, 2021 , compared to$9.4 million for the three months endedSeptember 30, 2020 . The decrease was primarily driven by the decrease in instrument purchases during the course of 2021, and due to the impairment of the Spine asset group property, plant and equipment impaired in 2020. Transaction and Integration Expenses - Transaction and integration expenses decreased$3.4 million or 100.0% to$0.0 million for the three months endedSeptember 30, 2021 compared to$3.4 million for the three months endedSeptember 30, 2020 . The decrease was caused by the fact that there were no transaction or integrated expenses incurred during the three month period endedSeptember 30, 2021 . Other Operating Income - Net - Other operating income, net was$3.9 million for the three months endedSeptember 30, 2021 related to the Company's inventory settlement with OEM. Total Other (Income) Expense - Net - Total other (income) expense - net for the three months endedSeptember 30, 2021 was$7.4 million of income compared to less than$0.1 million of income for the three months endedSeptember 30, 2020 . The increase was caused by a decrease in the fair value of our warrant liability of$7.7 million during the three months endedSeptember 30, 2021 . Income Tax (Expense) Benefit - For the three months endedSeptember 30, 2021 and 2020, the Company recorded$1.3 million of income tax benefit and$0.0 million of income tax provision, respectively. TheSeptember 30, 2021 three-month income tax provision was primarily a result of the net change in uncertain tax positions. TheSeptember 30, 2020 three-month income tax provision was a result of the full valuation allowance. Discontinued Operations - Net income from discontinued operations for the three months endedSeptember 30, 2021 was$0.3 million as compared to$149.3 million net income for the three months endedSeptember 30, 2020 . This change period over period is caused by the sale of the OEM business during the third quarter endedSeptember 30, 2020 (See Note 3 for further explanation). Nine Months EndedSeptember 30, 2021 , Compared With Nine Months EndedSeptember 30, 2020 Revenues - Our revenues decreased$6.9 million , or 9.1%, to$68.7 million for the nine months endedSeptember 30, 2021 , compared to$75.6 million for the nine months endedSeptember 30, 2020 , partially due to the continued pressures and shutdowns due to COVID-19 and other commercial pressures. Cost of Goods Sold - Costs of goods sold decreased$10.3 million , or 33.7%, to$20.3 million for the nine months endedSeptember 30, 2021 , compared to$30.6 million for the nine months endedSeptember 30, 2020 . The decrease in costs of goods sold was due to; The lower sales in the current period and certain direct manufacturing costs related to excess and obsolete inventory in the prior period. Marketing, General and Administrative Expenses - Marketing, general and administrative expenses decreased$17.6 million , or 18.2%, to$79.3 million for the nine months endedSeptember 30, 2021 , compared to$96.8 million for the nine months endedSeptember 30, 2020 . The decrease in marketing, general and administrative costs is driven by reduction 31 -------------------------------------------------------------------------------- in spending through the simplification of the distribution and administrative infrastructure, and reduction in spending due to the sale of the OEM Businesses. Research and Development Expenses - Research and development expenses decreased$0.8 million or 8.2%, to$9.0 million for the nine months endedSeptember 30, 2021 , compared to$9.8 million for the nine months endedSeptember 30, 2020 . The decrease is mainly driven by the decrease in product development and spending with the traditional hardware business. Asset Impairment and Abandonments - Asset impairment and abandonments expenses decreased$2.3 million or 19.2% to$9.8 million for the nine months endedSeptember 30, 2021 , compared to$12.1 million for the nine months endedSeptember 30, 2020 . The decrease was primarily driven by the impairment of the Spine property and equipment in 2020. Transaction and Integration Expenses - Transaction and integration expenses decreased$3.3 million or 56.92% to$2.5 million for the nine months endedSeptember 30, 2021 compared to$5.8 million for the nine months endedSeptember 30, 2020 . The decrease was mainly caused by the acceleration of stock compensation related to OEM employees and the acquisition of HoloSurgical, both transactions that did not occur in the current year. Other Operating Income -Net - Other operating income, net was$3.9 million for the nine months endedSeptember 30, 2021 related to the Company's inventory settlement with OEM.. Total Other (Income) Expense - Net - Total other (income) expense - net for the nine months endedSeptember 30, 2021 was$9.6 million of income compared to$0.1 million of income for the nine months endedSeptember 30, 2020 . The$9.5 million increase was mainly attributable to a$10.3 million decrease in the fair value of our warrant liability during the nine months endedSeptember 30, 2021 . Income Tax (Expense) Benefit - For the nine months endedSeptember 30, 2021 and 2020, the Company recorded$1.0 million of income tax benefit and$3.5 million income of tax benefit, respectively. TheSeptember 30, 2021 nine-month income tax provision was primarily a result of federal interest liability as a result of timing of payments and the net change in uncertain tax positions. TheSeptember 30, 2020 nine-month income tax benefit was primarily impacted by the CARES Act tax benefit. Discontinued Operations - Net loss from discontinued operations for the nine months endedSeptember 30, 2021 was$5.2 million due to the settlement of the OEM purchase agreement working capital dispute (See Note 3), compared to$142.1 million net income for the nine months endedSeptember 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 theSEC . 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: 32 --------------------------------------------------------------------------------
Non-GAAP Net Income Applicable to Common Shares, Adjusted:
For the three Months Ended For the Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
(In thousands)
Net loss from continuing operations, as
reported $ (8,255) $
(26,583)
(7,739) - (10,262) -
Gain on acquisition contingency (1,266) - (3,553) (130)
Bargain purchase gain - - (90) -
Other operating income (3,932) - (3,932) -
Inventory write-off - 3,583 - 3,631
Restatement and related costs - 1,381 - 12,637
Asset impairment and abandonments 5,411 9,356 9,794 12,117
Transaction and integration expenses - 3,411 2,510 5,826
Inventory purchase price adjustment 458 788 1,539 2,229
Severance and restructuring costs (10) - 227 -
Tax effect on adjustments - - (28) (1,597)
Non-GAAP net loss applicable to common shares,
adjusted $ (15,333) $
(8,064)
Non-GAAP Gross Profit, Adjusted:
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
(In thousands)
Revenues $ 20,545 $ 27,926 $ 68,670 $ 75,562
Costs of goods sold 6,811 11,892 20,278 30,585
Gross profit, as reported 13,734 16,034 48,392 44,977
Inventory write-off - 3,583 - 3,631
Inventory purchase price adjustment 458 788 1,539 2,229
Non-GAAP gross profit, adjusted $ 14,192 $
20,405
The following are explanations of the adjustments that management excluded as part of the non-GAAP measures for the three and nine months endedSeptember 30, 2021 and 2020. Management removes the amount of these costs including the tax effect on the adjustments from our operating results to supplement a comparison to our past operating performance. 2021 Change in fair value of warrant liability - Other income related to the revaluation of our warrant liability. 2021 Gain on acquisition contingency - The gain on acquisition contingency relates to an adjustment to our estimate of obligation for future milestone payments on the Holo Surgical acquisition. 2021 Bargain purchase gain - Gain related to our acquisition ofPrompt Prototypes, LLC . 2021 Other operating income - Gain related to the Company's inventory settlement with OEM. 2021 and 2020 Asset impairment and abandonments - These costs relate to asset impairment and abandonments of certain long-term assets within the asset group. 33 -------------------------------------------------------------------------------- 2021 and 2020 Transaction and integration expenses - These costs relate to issuance costs for the registered direct offering and professional fees associated with the acquisition ofHolo Surgical and Prompt Prototypes, LLC , 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 nine months endedSeptember 30, 2021 and 2020. 2021 Severance and restructuring costs - These gain and costs relate to the reduction of our organizational structure, primarily driven by simplification of ourMarquette, MI location. 2020 Inventory write-off - These costs relate to the write-off of inventory related to the transition from an integrated manufacturing company to a distributed model. 2020 Restatement and related costs - These costs relate to consulting and legal fees and settlement expenses incurred as a result of the restatement, regulatory and related activities in 2020. Liquidity and Capital Resources As the global outbreak of COVID-19 continues to rapidly evolve, it could continue to materially and adversely affect our revenues, financial condition, profitability, and cash flows for an indeterminate period of time. As discussed in Note 20, theSecurities and Exchange Commission ("SEC") has an active investigation that remains ongoing. The Company continues to cooperate with theSEC in relation to its investigation. Based on current information available to the Company, the financial impact associated withSEC investigation and shareholder litigation may have on the Company cannot be reasonably estimated. Going Concern The accompanying unaudited condensed consolidated financial statements of the Company have been prepared assuming the Company will continue as a going concern and in accordance with generally accepted accounting principles inthe 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 ofSeptember 30, 2021 , we had cash of$68.4 million and an accumulated deficit of$524.3 million . For the three and nine months endedSeptember 30, 2021 , we had a loss from continuing operations of$8.3 million and$34.1 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 nine months endedSeptember 30, 2021 . OnJune 14, 2021 , we issued and sold in a registered direct offering an aggregate of 29.0 million shares of our common stock and investor warrants to purchase up to an aggregate of 29.0 million shares at a strike price of$1.725 . The Company, also in connection with the direct offering, issued placement agent warrants to purchase an aggregate of up to 1.7 million shares of our common stock at a strike price of$2.15625 per share. We received net proceeds of$45.8 million from the offering after deducting investor fees of$4.2 million . OnFebruary 1, 2021 , we closed a public offering and sold a total 28,700,000 shares of our common stock at a price of$1.50 per share, less the underwriter discounts and commissions. We received net proceeds of$40.5 million from the offering after deducting the underwriting discounts and commission of$4.0 million . We project we will continue to generate significant negative operating cash flows over the next 12-months and beyond. In consideration of: i) COVID-19 uncertainties, ii) negative cash flows that are projected over the next 12-month period, iii) uncertainty regarding potential settlements related to ongoing litigation and regulatory investigations, and iv) approximately$18.4 million of the total contingent consideration of$53.0 million is expected to become due to the former owners of Holo Surgical if regulatory approval in the US is obtained in 2021, which would be paid through a 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. 34 -------------------------------------------------------------------------------- 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 presents a summary of our cash flow activity for the periods set forth below (in thousands):
For the Nine Months Ended
September 30 September 30
(In thousands) 2021 2020
Net cash used in operating activities $ (41,611) $ (72,669)
Net cash (used in) provided by investing activities (17,088) 426,940
Net cash provided by (used in) financing activities 82,191 (262,905)
Effect of exchange rate changes on cash and cash equivalents 906 (1,184)
Net increase in cash and cash equivalents $ 24,398 $ 90,182
Cash and cash equivalents, beginning of period 43,962 5,608
Cash and cash equivalents, end of period $
68,360
AtSeptember 30, 2021 , we had 81 days of revenues outstanding in trade accounts receivable, a decrease of 17 days compared toDecember 31, 2020 . The decrease is primarily due to improved collection efforts in addition to reduced sales. AtSeptember 30, 2021 , excluding the purchase accounting step-up of Paradigm inventory, we had 378 days of inventory on hand, an increase of 160 days compared toDecember 31, 2020 . The increase in inventory days is primarily due to the continued purchase of implants during the nine months endedSeptember 30, 2021 . We believe that our inventory levels will be adequate to support our on-going operations. As ofSeptember 30, 2021 , we have no material off-balance sheet arrangements. Certain Commitments. The following table provides a summary of our operating lease obligations and other significant obligations as ofSeptember 30, 2021 . Contractual Obligations Due by Period Less than 1 More than 5 Total Year 1-3 Years 4-5 Years Years (In thousands) Operating lease obligations 66,434 1,038 7,720 11,128 46,548 Purchase obligations (1) 119,579 42,735 53,556 23,288 - Acquisition contingencies 52,962 18,406 34,556 - - Total$ 238,975 $ 62,179 $ 95,832 $ 34,416 $ 46,548
(1)These amounts consist of contractual obligations for capital expenditures and open purchase orders.
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