SURGALIGN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data or otherwise noted)
Surgalign Holdings, Inc. (the “Company”), (formerly known as RTI Surgical Holdings, Inc. (“RTI”)) is 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. The Company also has a portfolio of advanced and traditional orthobiologics, or biomaterials. In addition to its spinal hardware and biomaterials portfolios, the Company is developing an Augmented Reality and Artificial Intelligence digital surgery platform called ARAITM (referred to “ARAI”) to enable digital spine surgery, which the Company believes is one of the most advanced artificial intelligence technologies being applied to surgery. ARAI is designed to automatically segment, identify, and recognize patient anatomy to autonomously assist the surgeon throughout the surgical procedure. This proprietary artificial intelligence-based platform system is an intelligent anatomical mapping technology designed to assist surgeons by allowing them to remain in safe anatomical zones, and to enhance surgical performance. The Company plans to leverage its digital surgery platform to improve patient outcomes and drive adoption of its spinal hardware implants and biomaterials products. The Company is developing a pipeline of new innovative technologies that it plans to integrate with its digital surgery platform. The Company currently markets and sells products to hospitals, ambulatory surgery centers, and healthcare providers in the United States in more than 40 countries worldwide. The Company is headquartered in Deerfield, Illinois, with commercial, innovation, and design centers in San Diego, CA; Wurmlingen, Germany; and Warsaw, Poland.
OEM Disposition
On July 20, 2020, pursuant to the Equity Purchase Agreement, dated as of January 13, 2020 (as amended from time to time, the “OEM Purchase Agreement”), by and between the Company and Ardi Bidco Ltd. (the “Buyer”), the Company completed the sale of its former original equipment manufacturing business, and business related to processing donated human musculoskeletal and other tissue and bovine and porcine animal tissue in producing allograft and xenograft implants using BIOCLEANSE®, TUTOPLAST® and CANCELLE®SP sterilization processes (collectively, the “OEM Businesses”) to Buyer and its affiliates for a purchase price of $440.0 million of cash, subject to certain adjustments (the “Transactions”). More specifically, pursuant to the terms of the OEM Purchase Agreement, the Company sold to the Buyer and its affiliates all of the issued and outstanding shares of RTI OEM, LLC (which, prior to the Transactions, was converted to a corporation and changed its name to “RTI Surgical, Inc.”), RTI Surgical, LLC (which, prior to the Transactions, was converted to a corporation and changed its name to “Pioneer Surgical Technology, Inc.”), Tutogen Medical, Inc. and Tutogen Medical GmbH. The Transactions were previously described in the Proxy Statement filed by the Company with the SEC on June 18, 2020. Subsequent to the Transactions, the Company changed its name to Surgalign Holdings, Inc, operating through its primary subsidiary, Surgalign Spine Technologies, Inc. Where obvious and appropriate from the context, references herein to Surgalign or the Company refer to the Company excluding the disposed OEM Businesses.
Prior to the sale of the OEM Businesses, the Company operated two reportable segments: Spine and OEM. Subsequent to the sale of the OEM Businesses, the Company operates only one reportable segment. Refer to Note 3 for further discussion on Discontinued Operations.
COVID-19
The coronavirus (“COVID-19”) pandemic, as well as the corresponding governmental response and the Company’s management of the crisis has had a significant impact on the Company’s business. The consequences of the outbreak and impact on the global economy continues to evolve, and the full extent of the impact is uncertain with the existence of variant strains of COVID-19. The variant strains could lead to a rise in infections resulting in the reinstatement of certain restrictions previously in place on a global scale.
Beginning in 2020, many hospitals and other medical facilities canceled elective surgeries, reduced and diverted staffing and diverted other resources to patients suffering from the infectious disease and limited hospital access for non-patients, including the Company’s direct and indirect sales representatives. Because of the COVID-19 pandemic, surgeons and their patients have been required, or are choosing, to defer procedures in which the Company’s products would be used, and many facilities that specialize in the procedures in which the Company’s products would be used have closed or reduced operating hours. These circumstances have negatively impacted the ability of the Company’s employees and distributors to effectively market and sell its products. In addition, even after the pandemic has subsided and/or governmental orders no longer prohibit or recommend against performing such procedures, patients may continue to defer such procedures out of concern of being exposed to COVID-19 for other reasons.
6
The COVID-19 pandemic has also caused adverse effects on general commercial activity and the global economy, which has led to an economic slowdown or recession, and which has adversely affected the Company’s business, operating results or financial condition. The adverse effect of the pandemic on the broader economy has also negatively affected demand for procedures using the Company’s products, and could cause one or more of the Company’s distributors, customers, and suppliers to experience financial distress, cancel, postpone or delay orders, be unable to perform under a contract, file for bankruptcy protection, go out of business, or suffer disruptions in their business. This could impact the Company’s ability to provide products and otherwise operate its business, as well as increase its costs and expenses.
The COVID-19 pandemic has also led to and could continue to lead to severe disruption and volatility in the global capital markets, which could increase the Company’s cost of future capital and adversely affect its ability to access the capital markets in the future.
The Company cannot predict when its operations will fully return to pre-pandemic levels and will continue to carefully monitor the situation and the needs of the business.
The above and other continued disruptions to the Company’s business as a result of COVID-19 has resulted in a material adverse effect on its business, operating results and financial condition. Although vaccines have recently been made available, it remains uncertain when our business will return to normal operations. The full extent to which the COVID-19 pandemic will impact the Company’s business will depend on future developments that are highly uncertain and cannot be accurately predicted, including the possibility that new adverse information may emerge concerning COVID-19 and additional actions to contain it or treat its impact may be required.
Liquidity
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.
Going Concern
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared assuming the Company will continue as a going concern and in accordance with generally accepted accounting principles in the United States of America. The going concern basis of presentation assumes that we will continue in operation one year after the date these unaudited condensed consolidated financial statements are issued, and we will be able to realize our assets and discharge our liabilities and commitments in the normal course of business.
As of June 30, 2021, we had cash of $69.3 million and an accumulated deficit of $516.3 million. For the six months ended June 30, 2021, we had a loss from continuing operations of $25.8 million. 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 for the six months ended June 30, 2021.
On June 14, 2021, we issued and sold in a registered direct offering an aggregate of 28,985,508 shares of our common stock and investor warrants to purchase up to an aggregate of 28,985,508 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 1,739,130 million shares of our common stock at a strike price of $2.15625 per share. We received net proceeds of $45.8 million from the offering after deducting investor fees of $4.2 million.
On February 1, 2021, we closed a public offering and sold a total 28.7 million shares of our common stock at a price of $1.50 per share, less the underwriter discounts and commissions. We received net proceeds of $36.5 million from the offering after deducting the underwriting discounts and commission of $4.0 million.
The Company is projecting it 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, and iii) approximately $18.5 million of the total contingent consideration of $54.2 million is expected to become due to the former owners of Holo Surgical as we anticipate two of the milestones to be achieved within the next 12 months. These payments will be paid through a combination of common stock and cash; the Company has 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. The Company’s ability to raise additional capital may be adversely impacted by potential worsening global economic conditions and the recent disruptions to, and volatility in, financial markets in the United States, and worldwide, resulting from the ongoing COVID-19 pandemic. If cash resources are insufficient to satisfy the Company’s on-going cash requirements through the second fiscal quarter of 2022, the Company will be required to scale back operations, reduce research and development expenses, and
7
postpone, as well as suspend capital expenditures, in order to preserve liquidity. No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing, or cause substantial dilution for our stockholders, in the case of equity financing.
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 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 accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring accruals, which the Company considers necessary for a fair presentation of the results of operations for the periods shown. The unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X, and, therefore, do not include all information and footnotes necessary for a fair presentation of the unaudited condensed consolidated financial position, results of operations, comprehensive loss and cash flows in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of our unaudited condensed consolidated financial statements in accordance with GAAP often requires us to make estimates and judgments that affect reported amounts. These estimates and judgments are based on historical experience and assumptions that we believe to be reasonable under the circumstances. Assumptions and judgments based on historical experience may provide reported results which differ from actual results; however, these assumptions and judgments historically have not varied significantly from actual experience, and we therefore do not expect them to vary significantly in the future. All intercompany balances and transactions have been eliminated in consolidation. The results of operations for any interim period are not necessarily indicative of the results to be expected for the full year. The Company includes acquisition, disposal, integration and separation related costs, which are predominantly composed of legal, consulting, and advisor fee expenses, within the “Transaction and integration expense” line on the condensed consolidated statements of comprehensive income (loss).
The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Surgalign Spine Technologies, Inc., Paradigm Spine, LLC (“Paradigm”), Pioneer Surgical Technology, Inc. (“Pioneer Surgical”), Zyga Technology, Inc. (“Zyga”), Holo Surgical Inc. (“Holo Surgical”), and Prompt Prototypes, LLC (“Prompt”). The operating results of the disposed OEM Businesses have been reported as discontinued operations in the unaudited condensed consolidated financial statements in the prior comparative periods.
For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 filed with the Securities and Exchange Commission (“SEC”) on March 16, 2021.
Accounting Standards Issued But Not Yet Adopted
In August 2020, the FASB issued ASU 2020-06, "Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40)." The guidance provides simplifications of the accounting for convertible instruments and reduces the number of accounting models for convertible debt instruments and convertible preferred stock. Limiting the accounting models results in fewer embedded conversion features being separately recognized from the host contract as compared with current U.S. GAAP. The guidance is effective for public business entities for fiscal years beginning after December 15, 2021. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. The Company is currently evaluating this guidance to determine the impact on its disclosures.
Immaterial restatement of earnings per share (“EPS”)
During the first fiscal quarter of 2021, the Company identified errors in the calculation of its historical basic and diluted EPS. In the historical periods presented in the filing, the weighted average basic and diluted shares incorrectly included treasury stock,
8
restricted stock awards, and restricted stock units. The weighted average shares used in the restated basic and diluted EPS from continuing operations and discontinued operations has been corrected.
Significant New Accounting Policies
Warrant Liability
The Company accounts for its warrants in accordance with ASC 815-40, “Derivatives and Hedging—Contracts in Entity’s Own Equity” (“ASC 815”), under which the warrants did not meet the criteria for equity classification and thus were recorded as liabilities. Since the warrants met the definition of a derivative in accordance with ASC 815, these warrants were measured at fair value at inception and will be remeasured at each reporting date in accordance with ASC 820, “Fair Value Measurement”, with changes in fair value recognized in earnings in the period of change. The Company determined the fair value of its warrants based on the Black Scholes Option Pricing Model.
|
3.
|
Discontinued Operations
|
In connection with the Transactions, on July 20, 2020, the Company completed the disposition of its OEM Businesses. Accordingly, the OEM Businesses are reported as discontinued operations in accordance with ASC 205-20, Discontinued Operations (“ASC 205-20”). The results of operations from the OEM Businesses are classified as discontinued operations in the condensed consolidated statements of comprehensive income/(loss). There were no assets or liabilities of the OEM Businesses as of December 31, 2020 or June 30, 2021 due to the transaction occurring on July 20, 2020. Applicable amounts in prior years have been recast to conform to this discontinued operations presentation.
The following table presents the financial results of the discontinued operations:
|
|
|
Three Months
Ended
June 30,
|
|
|
Six Months
Ended
June 30,
|
|
|
|
|
2020
|
|
|
2020
|
|
|
Major classes of line items constituting net income from discontinued operations
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
33,691
|
|
|
$
|
80,316
|
|
|
Costs of processing and distribution
|
|
|
21,625
|
|
|
|
45,674
|
|
|
Gross profit
|
|
|
12,066
|
|
|
|
34,642
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
Marketing, general and administrative
|
|
|
4,917
|
|
|
|
10,377
|
|
|
Severance and restructuring costs
|
|
|
604
|
|
|
|
604
|
|
|
Transaction and integration expenses
|
|
|
4,917
|
|
|
|
11,789
|
|
|
Total expenses
|
|
|
10,438
|
|
|
|
22,770
|
|
|
Operating income
|
|
|
1,628
|
|
|
|
11,872
|
|
|
Other expense - net:
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
5,972
|
|
|
|
9,537
|
|
|
Derivative loss
|
|
|
12,641
|
|
|
|
12,641
|
|
|
Foreign exchange gain
|
|
|
(22
|
)
|
|
|
(20
|
)
|
|
Total other expense - net
|
|
|
18,591
|
|
|
|
22,158
|
|
|
Loss from discontinued operations
|
|
|
(16,963
|
)
|
|
|
(10,286
|
)
|
|
Income tax (benefit)
|
|
|
(3,345
|
)
|
|
|
(3,345
|
)
|
|
Net loss from discontinued operations
|
|
$
|
(13,618
|
)
|
|
$
|
(6,941
|
)
|
In accordance with ASC 205-20, only expenses specifically identifiable and related to a business to be disposed may be presented in discontinued operations. As such, the marketing and general and administrative expenses in discontinued operations include corporate costs incurred directly to solely support the Company’s OEM Businesses.
Pursuant to the OEM Purchase Agreement, the Company and the Buyer have also entered into a Transition Services Agreement, through which the disposed OEM Businesses will provide to the Company transitional services related to IT support, customer and vendor management, procurement, and other services for periods ranging from 3 to 12 months after the disposal.
9
The Company applied the “Intraperiod Tax Allocation” rules under ASC 740, Income Taxes (“ASC 740”), which requires the allocation of an entity’s total annual income tax provision among continuing operations and, in the Company’s case, discontinued operations.
On December 1, 2020, pursuant to the OEM Purchase Agreement, the Company 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. On June 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 disputed amount, which was finalized and paid during the second quarter. The final settlement was expensed under (Loss) from operations of discontinued operations in our condensed consolidated statements of comprehensive income/(loss).
Total operating and investing cash flows of discontinued operations for the six months ended June 30, 2020 is comprised of the following, which exclude the effect of income taxes:
|
|
|
Six Months Ended
|
|
|
|
|
June 30,
|
|
|
|
|
2020
|
|
|
Significant operating non-cash reconciliation items:
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
|
1,936
|
|
|
Provision for bad debt and products returns
|
|
$
|
|
452
|
|
|
Revenue recognized due to change in deferred revenue
|
|
$
|
|
(2,375
|
)
|
|
Deferred income tax provision
|
|
$
|
|
(3,644
|
)
|
|
Stock-based compensation
|
|
$
|
|
240
|
|
|
Paid in kind interest expense
|
|
$
|
|
3,434
|
|
|
Amortizations of debt issuance costs
|
|
$
|
|
283
|
|
|
Amortizations of debt discount
|
|
$
|
|
2,479
|
|
|
|
|
|
|
|
|
|
Significant investing items:
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
$
|
|
(1,856
|
)
|
|
Patent and acquired intangible asset costs
|
|
$
|
|
(419
|
)
|
The Company’s leases are classified as operating leases that include office space, automobiles, and copiers. The Company does not have any finance leases and the Company’s operating leases do not have any residual value guarantees, restrictions, or covenants. The Company’s leases have remaining lease terms of 1 to 8 years, some of which include options to extend or terminate the leases. The option to extend is only included in the lease term if the Company is reasonably certain of exercising that option. Operating lease right-of-use assets are presented within other assets-net on the condensed consolidated balance sheet. The current portion of operating lease liabilities are presented within accrued expenses, and the non-current portion of operating lease liabilities are presented within other long-term liabilities on the condensed consolidated balance sheet. The Company’s lease agreements do not provide a readily determinable implicit rate nor is it available to the Company from its lessors. Instead, the Company estimates its incremental borrowing rate based on information available at lease commencement in order to discount lease payments to present value.
A subset of the Company’s automobile and copier leases contain variable payments. The variable lease payments for such automobile leases are based on actual mileage incurred at the standard contractual rate. The variable lease payments for such copier leases are based on actual copies incurred at the standard contractual rate. The variable lease costs for all leases are immaterial.
10
The components of operating lease expense were as follows:
|
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
Operating lease cost
|
|
$
|
195
|
|
|
$
|
362
|
|
|
$
|
378
|
|
|
$
|
738
|
|
|
Short-term operating lease cost
|
|
|
112
|
|
|
|
—
|
|
|
|
149
|
|
|
|
—
|
|
|
Total operating lease cost
|
|
$
|
307
|
|
|
$
|
362
|
|
|
$
|
527
|
|
|
$
|
738
|
|
Supplemental cash flow information related to operating leases was as follows:
|
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
Cash paid for amounts included in the
measurement of lease liabilities
|
|
$
|
332
|
|
|
$
|
374
|
|
|
$
|
576
|
|
|
$
|
733
|
|
|
ROU assets obtained in exchange for
lease obligations
|
|
|
80
|
|
|
|
—
|
|
|
|
80
|
|
|
|
—
|
|
Supplemental balance sheet information related to operating leases was as follows:
|
|
|
|
|
Balance at
|
|
|
Balance at
|
|
|
|
|
Balance Sheet Classification
|
|
June 30, 2021
|
|
|
December 31, 2020
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Right-of-use assets
|
|
Other assets - net
|
|
$
|
1,178
|
|
|
$
|
1,425
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
Accrued expenses
|
|
$
|
470
|
|
|
$
|
650
|
|
|
Noncurrent
|
|
Other long-term liabilities
|
|
|
1,092
|
|
|
|
1,200
|
|
|
Total operating lease liabilities
|
|
|
|
$
|
1,562
|
|
|
$
|
1,850
|
|
The weighted-average remaining lease terms and discount rates were as follows:
|
|
|
For the Six Months Ended
|
|
|
|
|
June 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Weighted-average remaining lease term (years)
|
|
|
5.8
|
|
|
|
4.7
|
|
|
Weighted-average discount rate
|
|
|
5.0
|
%
|
|
|
4.8
|
%
|
As of June 30, 2021, maturities of operating lease liabilities were as follows:
|
|
|
Balance at
|
|
|
Maturity of Operating Lease Liabilities
|
|
June 30,
2021
|
|
|
2021 (remaining)
|
|
$
|
514
|
|
|
2022
|
|
|
382
|
|
|
2023
|
|
|
219
|
|
|
2024
|
|
|
173
|
|
|
2025
|
|
|
162
|
|
|
2026 and beyond
|
|
|
557
|
|
|
Total future minimum lease payments
|
|
|
2,007
|
|
|
Less imputed interest
|
|
|
(445
|
)
|
|
Total
|
|
$
|
1,562
|
|
|
5.
|
Revenue from Contracts with Customers
|
The Company recognizes revenue upon transfer of control of promised products in an amount that reflects the consideration it expects to receive in exchange for those products. The Company typically transfers control at a point in time upon shipment or
11
delivery of the implants for direct sales, or upon implantation for sales of consigned inventory. The customer is able to direct the use of and obtain substantially all of the benefits from the implant at the time the implant is shipped, delivered, or implanted, based on the terms of the contract.
Disaggregation of Revenue
The Company’s entire revenue for the three and six months ended June 30, 2021 and 2020 was recognized at a point in time. The following table represents total revenue by geographical region for the three and six months ended June 30, 2021 and 2020, respectively:
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
$
|
20,726
|
|
|
$
|
16,951
|
|
|
$
|
40,574
|
|
|
$
|
39,227
|
|
|
International
|
|
4,108
|
|
|
|
3,583
|
|
|
|
7,551
|
|
|
|
8,409
|
|
|
Total revenues from contracts with customers
|
$
|
24,834
|
|
|
$
|
20,534
|
|
|
$
|
48,125
|
|
|
$
|
47,636
|
|
The Company’s performance obligations consist mainly of transferring control of implants identified in the contracts. Some of the Company’s contracts offer assurance-type warranties in connection with the sale of a product to a customer. Assurance-type warranties provide a customer with assurance that the related product will function as the parties intended because it complies with agreed-upon specifications. Such warranties do not represent a separate performance obligation and are not material to the unaudited condensed consolidated financial statements.
On April 30, 2021, the Company, entered into an Asset Purchase Agreement (the “Agreement”) with Prompt Prototypes LLC (“Prompt”), a California limited liability company, and Peter Kopley, an individual residing in the State of California (the “Sellers”). The Company purchased the assets of Prompt to expand its research and development capabilities, and create the capacity to produce certain medical prototypes. Pursuant to the terms of the Agreement, the Company purchased specific assets and assumed certain liabilities of Prompt for a purchase price of $1.1 million. At the closing, the Company paid $0.3 million of cash and issued restricted shares with an aggregate fair market value of $0.2 million to the sellers. The remaining $0.6 million of the purchase price will be paid to Mr. Kopley, contingent on the continued employment with the Company, in the form of cash and restricted shares in two equal amounts on the 18th and 36th month anniversary of the closing date and is considered future compensation.
The following table summarizes the fair value of the identifiable assets acquired and liabilities assumed from the acquisition of Prompt as of June 30, 2021:
|
(thousands)
|
|
|
|
|
Inventories
|
$
|
140
|
|
|
Right-of-use assets
|
|
78
|
|
|
Property and equipment
|
|
528
|
|
|
Operating lease liabilities
|
|
(78
|
)
|
|
Deferred tax liability
|
|
(28
|
)
|
|
Net assets acquired
|
$
|
640
|
|
|
Bargain purchase gain
|
|
(90
|
)
|
|
Total purchase price
|
$
|
550
|
|
Based on the preliminary purchase price, the fair value of the assets acquired and liabilities assumed exceeded the purchase price consideration resulting in a bargain purchase gain of $0.1 million, and was recorded in Other (income) expense – net in our condensed consolidated statements of comprehensive income/(loss) during the second quarter ended June 30, 2021. The bargain purchase was primarily driven by the potential future compensation expense in lieu of an increased purchase price.
12
Holo Surgical Acquisition
On September 29, 2020, the Company entered into a Stock Purchase Agreement (the “Holo Purchase Agreement”), with Roboticine, Inc, a Delaware corporation (the “Seller”), Holo Surgical S.A., a Polish joint-stock company (“Holo S.A.”), Pawel Lewicki, PhD (“Lewicki”), and Krzysztof Siemionow, MD, PhD (“Siemionow”), which provides for the Company to acquire all of the issued and outstanding equity interests in Holo Surgical Inc., a Delaware corporation and a wholly owned subsidiary of the Seller (“Holo Surgical”). The Seller, Holo S.A., Lewicki and Siemionow are together referred to herein as the “Seller Group Members”. The Acquisition was closed on October 23, 2020.
As consideration for the Holo Surgical Acquisition, the Company paid to the Seller $30.0 million in cash and issued to the Seller 6,250,000 shares of common stock, par value $0.001 of the Company (“Common Stock”). In addition, the Seller is entitled to receive contingent consideration from the Company valued in an aggregate amount of up to $83.0 million, to be paid through the issuance of Common Stock or the payment of cash, contingent upon and following the achievement of certain regulatory, commercial and utilization milestones by specified time periods occurring up to the sixth (6th) anniversary of the closing. The Purchase Agreement provides that the Company will issue Common Stock to satisfy any contingent consideration payable to the Seller, until the total number of shares of Common Stock issued to the Seller pursuant to the Purchase Agreement (including the 6,250,000 shares of Common Stock issued at closing) is equal to 14,900,000 shares of Common Stock. Following the attainment of that limitation, the post-closing contingent payments would be payable in cash. The number of shares of Common Stock issued as contingent consideration with respect to the achievement of a post-closing milestone, if any, will be calculated based on the volume weighted average price of the Common Stock for the five (5) day trading period commencing on the opening of trading on the third trading day following the achievement of the applicable milestone. The Purchase Agreement also includes certain covenants and obligations of the Company with respect to the operation of the business of Holo Surgical that apply during the period in which the milestones may be achieved.
The Company determined that substantially all of the fair value was concentrated in the acquired in-process research and development (“IPR&D”) asset in accordance with the guidance of ASC 805, Business Combinations. As such, the acquisition was accounted for as an asset acquisition. The total consideration of the asset acquisition was determined to be $95.0 million which consisted of a cash consideration of $30.0 million, $12.3 million of the 6,250,000 shares of Common Stock issued to the Seller, direct and incremental costs of $2.1 million incurred for the Holo Surgical Acquisition, and an estimated fair value of $50.6 million related to the contingent consideration. The Company has determined that the contingent consideration was part of the consideration of the asset acquisition and was accounted for as a liability at fair value on the acquisition date of October 23, 2020 in accordance with ASC 480, Distinguishing Liabilities from Equity. Subsequently, the liability shall be marked to market at the end of each reporting period with any change recognized in current earnings. The fair value of the liability was $54.2 million as of June 30, 2021 with $18.5 million classified as current liabilities within accrued expenses, while $35.7 million is included as other long-term liabilities in the Company’s accompanying condensed consolidated balance sheets. The change in the fair value of the liability of $2.2 million since December 31, 2020 was recognized in the gain on acquisition contingency line of the condensed consolidated statements of comprehensive income/(loss).
|
7.
|
Stock-Based Compensation
|
The following tables summarize our stock option and stock grant awards by plan:
For the six months ended June 30, 2021:
|
Plan
|
|
Stock Options
|
|
|
Restricted Stock Awards
|
|
|
Restricted Stock Units
|
|
|
Total
|
|
|
2021 Incentive Inducement Plan
|
|
|
422,162
|
|
|
|
—
|
|
|
|
224,909
|
|
|
|
647,071
|
|
|
2021 Incentive Compensation Plan
|
|
|
114,091
|
|
|
|
—
|
|
|
|
4,449,713
|
|
|
|
4,563,804
|
|
|
2018 Incentive Compensation Plan
|
|
|
240,311
|
|
|
|
147,719
|
|
|
|
—
|
|
|
|
388,030
|
|
|
Total
|
|
|
776,564
|
|
|
|
147,719
|
|
|
|
4,674,622
|
|
|
|
5,598,905
|
|
For the Six months ended June 30, 2020:
|
Plan
|
|
Stock Options
|
|
|
Restricted Stock Awards
|
|
|
Restricted Stock Units
|
|
|
Total
|
|
|
2018 Incentive Compensation Plan
|
|
|
755,866
|
|
|
|
944,289
|
|
|
|
—
|
|
|
|
1,700,155
|
|
|
Total
|
|
|
755,866
|
|
|
|
944,289
|
|
|
|
—
|
|
|
|
1,700,155
|
|
13
The Company recognized stock-based compensation as follows:
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
Stock-based compensation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of goods sold
|
$
|
—
|
|
|
$
|
36
|
|
|
$
|
21
|
|
|
$
|
72
|
|
|
Marketing, general and administrative
|
|
1,344
|
|
|
|
868
|
|
|
|
2,233
|
|
|
|
2,002
|
|
|
Research and development
|
|
69
|
|
|
|
15
|
|
|
|
95
|
|
|
|
30
|
|
|
Total
|
$
|
1,413
|
|
|
$
|
919
|
|
|
$
|
2,349
|
|
|
$
|
2,104
|
|
For the three and six months ended June 30, 2020, the Company incurred $0.1 million, and $0.2 million, respectively, of stock-based compensation expense related to the disposed OEM Businesses. These expenses have been presented in the results from discontinued operations. No stock-based compensation expense related to the disposed OEM Business was incurred in 2021.
|
8.
|
Net Loss Per Common Share
|
A reconciliation of the number of shares of common stock used in the calculation of basic and diluted net income per common share is presented below:
|
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
|
Weighted average basic and dilutive shares
|
|
|
114,271,780
|
|
|
|
72,642,215
|
|
|
|
106,279,658
|
|
|
|
72,981,134
|
|
For the three and six months and ended June 30, 2021 and 2020, the Company has recorded a net loss from its continuing operations. As a result, the Company has excluded all potential dilutive shares from the computation of the diluted net loss per common share to avoid the anti-dilutive effect.
The following table includes the number of potential dilutive shares that were excluded due to the anti-dilutive effect:
|
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
Stock Option
|
|
|
131,756
|
|
|
|
188,397
|
|
|
|
537,244
|
|
|
|
194,276
|
|
|
RSU and RSA
|
|
|
1,147,272
|
|
|
|
1,540,464
|
|
|
|
1,302,648
|
|
|
|
1,455,510
|
|
|
Convertible Series A Preferred Stock
|
|
|
—
|
|
|
|
15,152,761
|
|
|
|
—
|
|
|
|
15,152,761
|
|
|
Total
|
|
|
1,279,028
|
|
|
|
16,881,622
|
|
|
|
1,839,892
|
|
|
|
16,802,547
|
|
For the three months ended June 30, 2021 and 2020, the company excluded 5,225,931 and 4,819,238, respectively, of issued stock options in the computation of diluted net loss per share, and for the six months ended June 30, 2021 and 2020, the company excluded 4,665,063 and 4,838,639, respectively, of issued stock options in the computation of diluted net loss per common share because their exercise price exceeded the average market price during the respective periods. The Company’s outstanding warrants were also excluded from the computation of diluted net loss per common share as they were considered “out-of-the-money” as of June 30, 2021.
14
On October 23, 2020, the Company completed the acquisition of Holo Surgical and became obligated for a contingent consideration in an aggregate amount of $50.6 million which must be first paid in shares of the Company’s common stock (in an amount up to 8,650,000 shares) and then paid in cash thereafter, contingent upon and following the achievement of certain regulatory, commercial and utilization milestones by specified time periods occurring up to the sixth (6th) anniversary of the closing. The number of shares of common stock issued as contingent consideration with respect to the achievement of a post-closing milestone, if any, will be calculated based on the volume weighted average price of the common stock for the five (5) day trading period commencing on the opening of trading on the third trading day following the achievement of the applicable milestone. As of June 30, 2021, none of the contingent events have occurred. See Note 6 – Business Combinations for further discussion of the Holo Surgical Acquisition.
The inventory balances as of June 30, 2021 and December 31, 2020 consist entirely of finished goods and are stated on a consistent basis using the first-in, first-out method.
For the three months ended June 30, 2021 and 2020, the Company had inventory write-downs of $1.6 million and $2.8 million, respectively, and for the six months ended June 30, 2021 and 2020, the Company had inventory write-downs of $4.4 million and $4.0 million, respectively.
|
10.
|
Prepaid and Other Current Assets
|
Prepaid and other current assets are as follows:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
Insurance recovery receivable
|
$
|
12,493
|
|
|
$
|
-
|
|
|
Income tax receivable
|
|
6,890
|
|
|
|
4,836
|
|
|
Prepaid expenses
|
|
3,137
|
|
|
|
1,543
|
|
|
Other receivables
|
|
902
|
|
|
|
3,905
|
|
|
|
$
|
23,422
|
|
|
$
|
10,284
|
|
|
11.
|
Property and Equipment
|
The net book value of property and equipment after accumulated depreciation and all impairment is as follows:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
Processing equipment
|
$
|
529
|
|
|
$
|
35
|
|
|
Surgical instruments
|
|
469
|
|
|
|
440
|
|
|
Office equipment, furniture and fixtures
|
|
25
|
|
|
|
34
|
|
|
Computer equipment and software
|
|
11
|
|
|
|
12
|
|
|
Construction in process
|
|
11
|
|
|
|
—
|
|
|
|
$
|
1,045
|
|
|
$
|
521
|
|
For the three months ended June 30, 2021 and 2020, the Company recorded depreciation expense in connection with property and equipment of $0.6 million and $1.1 million, respectively. For the six months ended June 30, 2021 and 2020, the Company recorded depreciation expense in connection with property and equipment of $1.1 million and $2.0 million, respectively. The Company uses the straight-line method of depreciation.
For the three months ended June 30, 2021 and 2020, the Company recorded asset impairment and abandonment charges of $2.2 million and $0.9 million, respectively. For the six months ended June 30, 2021 and 2020, the Company recorded asset impairment and abandonment charges of $4.4 million and $2.8 million, respectively. The fair value of property and equipment was measured utilizing an orderly liquidation value of each of the underlying assets.
As of June 30, 2021 and December 31, 2020, the Company capitalized a total of $1.1 million and $0.0 million of internal software expense related to the implementation of a new ERP system. These expenses have been recorded within construction in process as the development is still on going. As part of the quarterly impairment analysis, the Company impaired $0.3 million in March 2021 and $0.8 million in June 2021. The impairment charges were triggered by continued negative operating cash flows. In addition, for the three-month periods ended June 30, 2021 and 2020, the Company expensed $0.0 million and $0.0 million, respectively, related to the ERP implementation. For the six months ended June 30, 2021 and 2020, the company expensed $0.1 million and $0.0 million, respectively,
15
related to the ERP implementation costs which were not capitalizable. These non-capitalizable expenses are recorded in the “Marketing, general, and administrative” line on the condensed consolidated statements of comprehensive income/(loss).
12.Warrants
On June 14, 2021, the Company issued and sold in a registered direct offering priced at-the-market an aggregate of 28,985,508 shares of its common stock and warrants exercisable for an aggregate of 28,985,508 shares of Company common stock, at a combined purchase price of $1.725 per share. The warrants have an exercise price equal to $1.725 per share, are exercisable immediately upon issuance and will expire three years from the issuance date. The net proceeds from the direct offering, after deducting investor and management fees, were $45.8 million. Upon any exercise of the offering warrants issued in the offering for cash, the Company agreed to pay the placement agent a total cash fee equal to 7.0% of the aggregate gross proceeds from the exercise of the offering warrants and a management fee equal to 1.0% of the aggregate gross proceeds from the exercise of the offering warrants. The Company, also in connection with the direct offering, issued the placement agent or its designees warrants to purchase an aggregate of up to 1,739,130 shares of its common stock. The placement agent warrants have substantially the same terms as the warrants described above, except that the placement agent warrants will have an exercise price of $2.15625 per share, and holders of the placement agent warrants are not entitled to receive cash dividends issued by the Company during such time as the placement agent warrant is outstanding.
The Company accounts for its warrants in accordance with ASC 815-40, “Derivatives and Hedging—Contracts in Entity’s Own Equity” (“ASC 815”), under which the warrants did not meet the criteria for equity classification and thus were recorded as liabilities. Since the warrants met the definition of a derivative in accordance with ASC 815, these warrants were measured at fair value at inception and will be remeasured at each reporting date in accordance with ASC 820, Fair Value Measurement, with changes in fair value recognized in earnings in the period of change. The Company determined the fair value of its warrants based on the Black Scholes Option Pricing Model.
|
13.
|
Fair Value Information
|
Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy defines a three-level valuation hierarchy for classification and disclosure of fair value measurements as follows:
Level 1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Acquisition Contingencies
Zyga - On January 4, 2018, the Company acquired Zyga Technology, Inc. (“Zyga”) as further explained in Note 18. As of March 31, 2020, and December 31, 2019, based on a probability weighted model, the Company estimated a contingent liability related to the clinical and revenue milestones of $1.1 million. The fair value of the contingent liability was measured using Level 3 inputs. As of December 31, 2020, the Company determined that Zyga was not expected to meet the clinical milestone to earn the contingent consideration. As such, the liability for the milestone payment was reduced to zero as of December 31, 2020 and continues to be zero at June 30, 2021.
Holo - On October 23, 2020, the Company acquired Holo Surgical as previously explained in Note 6 above. A portion of the consideration is contingent upon the achievement of certain regulatory, commercial and utilization milestones (the “milestone payment”). The contingent consideration is evaluated quarterly, or more frequently, if circumstances dictate. Changes in the fair value of contingent consideration are recorded in the loss (gain) on acquisition contingency line item in the condensed consolidated statements of income/(loss). Significant changes in unobservable inputs, mainly the probability of success and cash flows projected, could result in material changes to the contingent consideration liabilities.
16
The Company determined the fair value of each milestone payment to be the present value of the future payment amount estimated using a probability weighted model. As of June 30, 2021 and December 31, 2020, a probability of success factor ranging from 0% to 90%, and 60% to 90%, respectively, was used in the fair value calculation to reflect inherent regulatory, development and commercial risk of the contingent payments. As of June 30, 2021 and December 31, 2020, the discount rate applied ranged from 0.06% to 8.22%, and 0.11% to 16.86%, respectively. This fair value measurement is based on significant unobservable inputs in the market and thus represents a Level 3 measurement within the fair value hierarchy. The fair value of the milestone payments is based on several factors, such as: the probability of expected achievement of the specific milestones, including risks associated with uncertainty regarding achievement and payment of milestones; obtaining regulatory approvals in the United States and Europe; development of new features used with the product; adaption of the new technology by surgeons; and placement of the devices within the field.
As of December 31, 2020, the fair value of the contingent liability was $56.5 million with $9.0 million classified as current liability included within the accrued expenses line, and $47.5 million as long-term liability included within other long-term liabilities. As of June 30, 2021, the fair value of the contingent liability was $54.2 million with $18.5 million classified as current liability included within the accrued expenses line, and $35.7 million as long-term liability included within other long-term liabilities. A reconciliation of the Company’s acquisition contingencies is as follows:
|
|
|
2021
|
|
|
2020
|
|
|
Beginning balance as of January 1
|
|
$
|
56,515
|
|
|
$
|
1,130
|
|
|
(Gain) loss
|
|
|
(2,287
|
)
|
|
|
—
|
|
|
Ending balance as of June 30
|
|
$
|
54,228
|
|
|
$
|
1,130
|
|
Property and Equipment, Intangibles and Other Assets
Fair value is measured using Level 3 inputs for property and equipment, other intangible assets, and other assets. As of June 30, 2021, the Level 3 fair value was measured based on orderly liquidation value for the property and equipment and other assets. Other intangible assets Level 3 fair value was measured based on the income approach. Because the Company’s forecasted cash flow is negative, any intangible assets acquired during the period were immediately impaired, as the underlying business could not support the asset value.
Unobservable inputs for the orderly liquidation value included replacement costs (unobservable), physical deterioration estimates (unobservable) and market sales data for comparable assets and unobservable inputs for the income approach included forecasted cash flows generated from use of the intangible assets (unobservable).
Property and equipment, other intangibles and other assets were impaired and written down to their estimated fair values during the six months ended June 30, 2021 and year ended December 31, 2020. As a result of impairments recognized, the following table summarizes the fair value of assets subject to fair value measured using Level 3 inputs for the periods presented:
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Property and equipment - net
|
|
$
|
1,045
|
|
|
$
|
521
|
|
|
Other assets - net
|
|
|
10,228
|
|
|
|
10,145
|
|
|
|
|
$
|
11,273
|
|
|
$
|
10,666
|
|
Property and equipment was impaired and written down to their estimated fair values during the six months ended June 30, 2021 and 2020. Other intangible assets and other assets were impaired and written down to their estimated fair values during the six months ended June 30, 2021. The following table summarizes the impairment of assets subject to fair value measured using Level 3 inputs for the periods presented:
|
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
Property and equipment - net
|
|
$
|
2,012
|
|
|
$
|
882
|
|
|
$
|
3,791
|
|
|
$
|
2,761
|
|
|
Other intangibles - net
|
|
|
150
|
|
|
|
—
|
|
|
|
311
|
|
|
|
—
|
|
|
Other assets - net
|
|
|
44
|
|
|
|
—
|
|
|
|
280
|
|
|
|
—
|
|
|
|
|
$
|
2,206
|
|
|
$
|
882
|
|
|
$
|
4,382
|
|
|
$
|
2,761
|
|
17
Warrant Liability
Warrants are accounted for as liabilities in accordance with ASC 815-40 and are presented within warrant liabilities in the Company’s condensed consolidated balance sheet.
The following table presents information about the Company’s liabilities that are measured at fair value on a recurring basis at June 30, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level
|
|
|
June 30, 2021
|
|
|
December 31, 2020
|
|
|
Warrant liability
|
|
|
3
|
|
|
$
|
24,226
|
|
|
$
|
—
|
|
The table presented below is a summary of changes in the fair value of the Company’s Level 3 valuation for the warrant liability for the six months ended June 30, 2021:
|
|
|
|
|
|
|
Warrant Liability
|
|
|
Balance - December 31, 2020
|
|
|
|
|
|
$
|
—
|
|
|
Initial fair value of warrant liability
|
|
|
|
|
|
|
26,749
|
|
|
Change in fair value
|
|
|
|
|
|
|
(2,523
|
)
|
|
Balance - June 30, 2021
|
|
|
|
|
|
$
|
24,226
|
|
The warrant liability is revalued each reporting period with the change in fair value recorded in the accompanying consolidated statements of operations until the warrants are exercised or expire. The fair value of the warrant liability is estimated using the Black-Scholes Option Pricing Model using the following valuation inputs:
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Stock price
|
|
$
|
1.39
|
|
|
|
—
|
|
|
Risk-free interest rate
|
|
|
0.45
|
%
|
|
|
—
|
|
|
Dividend yield
|
|
|
0.0
|
%
|
|
|
—
|
|
|
Volatility
|
|
|
100
|
%
|
|
|
—
|
|
Accrued expenses are as follows:
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Current portion of accrued acquisition contingency - Holo
|
|
$
|
18,485
|
|
|
$
|
8,996
|
|
|
Accrued securities class action settlement
|
|
|
10,500
|
|
|
|
—
|
|
|
Accrued distributor commissions
|
|
|
3,786
|
|
|
|
4,113
|
|
|
Accrued compensation
|
|
|
3,320
|
|
|
|
2,268
|
|
|
Accrued severance and restructuring costs
|
|
|
131
|
|
|
|
—
|
|
|
Other
|
|
|
6,503
|
|
|
|
6,267
|
|
|
|
|
$
|
42,725
|
|
|
$
|
21,644
|
|
During the first half of 2021, management implemented a plan as part of its reorganization which resulted in $0.2 million of accrued severance and restructuring expense for the six months ended June 30, 2021 which was included in severance and restructuring costs within the condensed consolidated statements of comprehensive income/(loss). The severance plan is the transition of certain employees’ responsibilities from Marquette, MI to Deerfield, IL or San Diego, CA and is composed of payroll and related healthcare expenses. The total severance and restructuring costs are anticipated to be paid in full by the third quarter of 2021 and are not expected to have a material impact on cash flows of the Company in any quarterly period. Severance paid for the six months ended June 30, 2021 was $0.1 million.
18
|
15.
|
Other long-term liabilities
|
Other long-term liabilities are as follows:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
Acquisition contingencies
|
$
|
35,743
|
|
|
$
|
47,519
|
|
|
Warrant Liability
|
|
24,226
|
|
|
|
—
|
|
|
Lease obligations
|
|
1,092
|
|
|
|
1,200
|
|
|
Other
|
|
3,138
|
|
|
|
2,992
|
|
|
|
$
|
64,199
|
|
|
$
|
51,711
|
|
The Company evaluates the need for deferred tax asset valuation allowances based on a more likely than not standard. The ability to realize deferred tax assets depends on the ability to generate sufficient taxable income within the carryback or carryforward periods provided for in the tax law for each applicable tax jurisdiction. The Company has evaluated all evidence, both positive and negative, and determined that its deferred tax assets are not more likely than not to be realized. In making this determination, numerous factors were considered including the Company’s cumulative losses in recent years.
For the three months ended June 30, 2021 and 2020, the Company recorded $0.1 million of income tax provision and less than $0.1 million of income tax provision, respectively, in continuing operations. The June 30, 2021 three-month income tax provision was primarily a result of impact of uncertain tax position interest accrual. The June 30, 2020 three-month income tax provision was a result of the full valuation allowance recorded against the loss from continuing operations.
For the six months ended June 30, 2021 and 2020, the Company recorded $0.3 million of income tax provision and $3.5 million of income tax benefit, respectively. The June 30, 2021 six-month income tax provision was primarily a result of federal interest liability as a result of timing of payments and impact of uncertain tax position interest accrual. The June 30, 2020 six-month income tax benefit was primarily impacted by the CARES Act tax benefit.
Preferred stock is as follows:
|
|
|
Preferred
Stock
Liquidation
|
|
|
Preferred
Stock
Issuance
|
|
|
Net
|
|
|
|
|
Value
|
|
|
Costs
|
|
|
Total
|
|
|
Balance at January 1, 2021
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Amortization of preferred stock issuance costs
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Balance at June 30, 2021
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Stock
Liquidation
|
|
|
Preferred
Stock
Issuance
|
|
|
Net
|
|
|
|
|
Value
|
|
|
Costs
|
|
|
Total
|
|
|
Balance at January 1, 2020
|
|
$
|
66,519
|
|
|
$
|
(109
|
)
|
|
$
|
66,410
|
|
|
Amortization of preferred stock issuance costs
|
|
|
—
|
|
|
|
46
|
|
|
|
46
|
|
|
Balance at June 30, 2020
|
|
|
66,519
|
|
|
|
(63
|
)
|
|
|
66,456
|
|
On July 17, 2020, the Company received a notification from Water Street Healthcare Partners (“WSHP”) seeking redemption on or before September 14, 2020 of all of the outstanding shares of the Company’s Series A Convertible Preferred Stock (“Series A Preferred Stock”), all of which are held by WSHP. On July 24, 2020, the Company redeemed the Series A Preferred Stock for approximately $66.5 million and a Certificate of Retirement was filed with the Delaware Secretary of State retiring the Series A Preferred Stock.
19
|
18.
|
Commitments and Contingencies
|
Acquisition of Paradigm – On March 8, 2019, pursuant to the Master Transaction Agreement, the Company acquired Paradigm in a cash and stock transaction valued at up to $300.0 million consisting of $150.0 million of cash on March 8, 2019, plus potential future milestone payments. Paradigm’s primary product is the coflex® Interlaminar Stabilization® device, a minimally invasive motion preserving stabilization implant that is FDA premarket approved for the treatment of moderate to severe lumbar spinal stenosis in conjunction with decompression.
Under the terms of the agreement, the Company paid $100.0 million in cash and issued 10,729,614 shares of the Company’s common stock. The shares of Company common stock issued on March 8, 2019, were valued based on the volume weighted average closing trading price for the five trading days prior to the date of execution of the definitive agreement, representing $50.0 million of value. In addition, under the terms of the agreement, the Company may have been required to pay up to an additional $150.0 million in a combination of cash and Company common stock based on a revenue earnout consideration. The first potential earnout payment of $20.0 million was based on revenues achieved during any twelve-month period ending on December 31, 2020. As the revenue milestone was not achieved, there was no consideration due with respect to the first earnout period and the Company has no further liability with respect thereto. Based on a probability weighted model, the Company estimates a contingent liability related to the revenue based earnout of zero utilizing a Monte-Carlo simulation model. A Monte-Carlo simulation is an analytical method used to estimate fair value by performing a large number of simulations or trial runs and thereby determining a value based on the possible outcomes. Accounted for as a liability to be revalued at each reporting period, the fair value of the contingent liability was measured using Level 3 inputs, which includes weighted average cost of capital and projected revenues and costs.
Acquisition of Zyga – On January 4, 2018, the Company acquired Zyga, a spine-focused medical device company that develops and produces innovative minimally invasive devices to treat underserved conditions of the lumbar spine. Zyga’s primary product is the SImmetry® Sacroiliac Joint Fusion System. Under the terms of the merger agreement dated January 4, 2018, the Company acquired Zyga for $21.0 million in consideration paid at closing (consisting of borrowings of $18.0 million on its revolving credit facility and $3.0 million cash on hand), $1.0 million contingent upon the successful achievement of a clinical milestone, and a revenue based earnout consideration of up to an additional $35.0 million. As of June 30, 2021, the Company determined that Zyga was not expected to meet the clinical milestone to earn the contingent consideration.
Aziyo – On August 1, 2018, the Company and Aziyo Biologics, Inc. entered into a Distribution Agreement which was subsequently amended on December 3, 2018, and November 15, 2020 (the “Distribution Agreement”). Pursuant to the Distribution Agreement, the Company has exclusive distribution rights to certain biologic implants manufactured by Aziyo and marketed under the ViBone trade name (“ViBone”). The Distribution Agreement provides for minimum purchases of ViBone implants on an annual basis through calendar 2025. If the minimum purchase obligations for a particular year are not fulfilled, the Distribution Agreement provides various options for the Company to satisfy such obligations (“Shortfall Obligations”) in subsequent years, including a combination of payments and/or providing purchase orders for the amount the shortfall in a given year. For calendar years 2022 and beyond, if the Company does not satisfy the Shortfall Obligations using one of the methods specified in the Distribution Agreement, the Company can continue to market the ViBone implants on a non-exclusive basis. In January 2021, the Company issued a purchase order to Aziyo for $12.4 million relating to the 2020 Shortfall Obligation.
Acquisition of Holo Surgical – As part of the Holo Surgical acquisition, the Company estimated a total contingent liability of $50.6 million with $9.0 million classified as current liabilities and $41.6 million classified as long-term liabilities in the accompanying condensed consolidated balance sheets on the acquisition date of October 23, 2020. The fair value of the liability was subsequently changed to $56.5 million on December 31, 2020 with $9.0 million classified as current liabilities within accrued expenses while $47.5 million classified as other long-term liabilities. The fair value of the liability was $54.2 million as of June 30, 2021 with $18.5 million classified as current liabilities within accrued expenses in the accompanying condensed consolidated balance sheets, while $35.7 million is included as other long-term liabilities. The change in the fair value of the liability of $2.3 million since December 31, 2020 was recognized in the gain (loss) on acquisition contingency line of the condensed consolidated statements of comprehensive income/(loss). See Note 6 for further information of the Holo Surgical acquisition.
Manufacturing Agreements with Former OEM Affiliates – In connection with the closing of the OEM Transaction, on July 20, 2020 the Company entered into three manufacturing and distribution agreements with affiliates of Montague Private Equity: (i) a Manufacture and Distribution Agreement (the “Hardware MDA”) with Pioneer Surgical Technology, Inc. (“Pioneer”) pursuant to which Pioneer will manufacture certain hardware implants for the Company; (ii) a Processing and Distribution Agreement with RTI Surgical, Inc. (“RTI”), an affiliate of Pioneer, pursuant to which RTI would process certain biologic implants for the Company (the “PDA”); and (ii) a Manufacture and Distribution Agreement (NanOss) pursuant to which Pioneer would manufacture certain synthetic implants for the Company (the “NanOss MDA”), and together with the Hardware MDA and the PDA, the “OEM Distribution Agreements”. The OEM Distribution Agreements contain aggregate minimum purchase obligations for each of the first three years of the agreements as follows:
20
|
|
|
|
|
|
|
|
|
|
•
|
Year 1: $24.2 million
|
|
|
•
|
Year 2: $25.8 million
|
|
|
•
|
Year 3: $27.2 million
|
The OEM Distribution Agreements contain provisions whereby the minimum purchase obligations are reduced under certain circumstances, including certain force majeure events and termination of the agreements for certain specified reasons.
In addition, on July 20, 2020, the Company entered into a Design and Development Agreement with Pioneer pursuant to which Pioneer will provide certain design and development services with respect to certain implants (the “Design and Development Agreement”). The Design and Development Agreement contains a provision whereby the Company will pay Pioneer a minimum of $1.7 million for direct labor costs and certain services with respect to maintaining design history files in each of the first two years under the Design and Development Agreement.
OPM Agreement – On January 20, 2021, the Company and Oxford Performance Materials, Inc. (“Oxford”) entered into an Amended and Restated License and Supply Agreement (the “Oxford Supply Agreement”) pursuant to which Oxford licenses certain intellectual property to the Company and supplies the Company on an exclusive basis in the United States with Polyetherketoneketone (“PEKK”) material for use in spinal implants. In addition to certain royalties under the Oxford Supply Agreement, the Company is obligated to issue binding purchase orders in each quarter of 2021 of at least $0.2 million, or $0.6 million in the aggregate. Although the contract extends through 2025, there are no minimum purchase obligations beyond 2021.
San Diego Lease – On March 12, 2021, the Company entered into a Lease (the “Lease”) with SNH Medical Office Properties Trust, a Maryland real estate investment trust (the “Landlord”), to house the Company’s offices, lab and innovation space (the “Building”) in San Diego, California. The initial term of the Lease is twelve (12) years, with one (1) extension option for a period of seven (7) years.
Under the terms of the Lease, the Company will lease an aggregate of approximately 94,457 rentable square feet building located at 3030 Science Park Road, San Diego, California (the “Premises”). The Landlord will make improvements over the next 12 months, after which occupancy is expected to be delivered to the Company.
Aggregate payments towards base rent for the Premises over the term of the lease will be approximately $64.6 million, including 13-months of rent abatement. The Company will recognize the lease assets and liabilities when the Landlord makes the underlying asset available to the Company. Concurrent with the Company’s execution of the Lease, as a security deposit, the Company delivered to the Landlord a payment in the amount of $2.5 million which is recorded within other assets – net in our condensed consolidated balance sheet.
The Company is, from time to time, involved in litigation relating to claims arising out of its operations in the ordinary course of business. Based on the information currently available to the Company, including the availability of coverage under its insurance policies, the Company does not believe that any of these claims that were outstanding as of June 30, 2021 will have a material adverse impact on its financial position or results of operations. The Company’s accounting policy is to accrue for legal costs as they are incurred.
OEM Purchase Agreement Working Capital Dispute — On December 1, 2020, pursuant to the OEM Purchase Agreement, we received a notice from the Buyer indicating that a post-closing adjustment in an amount of up to $14.0 million may be owed in respect of the working capital adjustment paid at closing. We disagreed with the Buyer’s proposed post-closing adjustment and disputed the adjustment in accordance with the terms of the OEM Purchase Agreement. On June 3, 2021, the firm engaged to resolve the dispute issued a binding, non-appealable resolution whereby it was determined the Company is liable for $5.8 million of the amount remaining in dispute, which was finalized and paid during the second quarter. The final settlement was expensed under (Loss) from operations of discontinued operations in our condensed consolidated statements of comprehensive income/(loss).
Coloplast — RTI Surgical, Inc., as a predecessor to the Company, is presently named as co-defendant along with other companies in a small percentage of the transvaginal surgical mesh (“TSM”) mass tort claims being brought in various state and federal courts. The TSM litigation has as its catalyst various Public Health Notifications issued by the FDA with respect to the placement of certain TSM implants that were the subject of 510(k) regulatory clearance prior to their distribution. The Company does not process or otherwise manufacture for distribution in the U.S. any implants that were the subject of these FDA Public Health Notifications. The Company denies any allegations against it and intends to continue to vigorously defend itself.
In addition to claims made directly against the Company, Coloplast, a distributor of TSM’s and certain allografts processed and private labeled for them under a contract with the Company, has also been named as a defendant in individual TSM cases in
21
various federal and state courts. Coloplast requested that the Company indemnify or defend Coloplast in those claims which allege injuries caused by the Company’s allograft implants, and on April 24, 2014, Coloplast sued RTI Surgical, Inc. in the Fourth Judicial District of Minnesota for declaratory relief and breach of contract. On December 11, 2014, Coloplast entered into a settlement agreement with RTI Surgical, Inc. and Tutogen Medical, Inc. (the “Company Parties”) resulting in dismissal of the case. Under the terms of the settlement agreement, the Company Parties are responsible for the defense and indemnification of two categories of present and future claims: (1) tissue only (where Coloplast is solely the distributor of Company processed allograft tissue and no Coloplast-manufactured or distributed synthetic mesh is identified) (“Tissue Only Claims”), and (2) tissue plus non-Coloplast synthetic mesh (“Tissue-Non-Coloplast Claims”) (the Tissue Only Claims and the Tissue-Non-Coloplast Claims being collectively referred to as “Indemnified Claims”). As of June 30, 2021, there are a cumulative total of 1,157 Indemnified Claims for which the Company Parties are providing defense and indemnification. In connection with the transactions, liabilities related to these claims remained a liability retained by the Company. The defense and indemnification of these cases are covered under the Company’s insurance policy subject to a reservation of rights by the insurer.
Based on the current information available to the Company, the impact that current or any future TSM litigation may have on the Company cannot be reasonably estimated.
LifeNet — On June 27, 2018, LifeNet Health, Inc. (“LifeNet”) filed a patent infringement lawsuit in the United States District Court for the Middle District of Florida (since moved to the Northern District of Florida) claiming infringement of five of its patents by the Company’s predecessor RTI Surgical, Inc. The suit requests damages, enhanced damages, reimbursement of costs and expenses, reasonable attorney fees, and an injunction. The asserted patents are expired. On April 7, 2019, the Court granted the Company’s request to stay the lawsuit pending the U.S. Patent Trial and Appeal Board’s (“PTAB”) decision whether to institute review of the patentability of LifeNet’s patents. On August 12, 2019 the PTAB instituted review of three LifeNet patents, and on September 3, 2019 the PTAB instituted review of the remaining two. On August 4, 2020 and August 26, 2020, the PTAB issued final written decisions finding that certain claims were shown to be unpatentable and others not. Neither party appealed the PTAB’s decisions with respect to the three LifeNet patents on which the PTAB instituted review on August 12, 2019. With respect to the remaining two LifeNet patents, Surgalign filed Notices of Appeal with the Federal Circuit on October 27, 2020 and LifeNet filed a Notice of Cross-appeal on November 9, 2020. The briefings related to these appeals were filed in the March through July timeframe. In connection with the transactions, liabilities related to these claims remained a liability retained by the Company. The Company continues to believe the suit is without merit and will vigorously defend its position. Based on the current information available to the Company, the impact that current or any future litigation may have on the Company cannot be reasonably estimated.
Securities Class Action— There is currently ongoing stockholder litigation related to the Company’s Investigation (as defined below). A class action complaint was filed by Patricia Lowry, a purported shareholder of the Company, against the Company, and certain current and former officers of the Company, in the United States District Court for the Northern District of Illinois on March 23, 2020 asserting claims under Sections 10(b) and 20(a) the Securities Exchange Act of 1934 (the “Exchange Act”) and demanding a jury trial (the “Lowry Action”). The court appointed a different shareholder as Lead Plaintiff and she filed an amended complaint on August 31, 2020. On October 15, 2020, the Company and the other-named defendants moved to dismiss the amended complaint. In April 2021, the court denied the defendants’ motions to dismiss. On June 30, 2021, the parties to the Lowry Action conducted a mediation session, after which negotiations among the parties continued into July. On July 27, 2021 a binding term sheet settling the Lowry Action was entered into whereby the defendants will pay $10.5 million (inclusive of attorneys’ fees and administrative costs) in exchange for the dismissal with prejudice of all claims against the defendants in connection with the Lowry Action (the “Lowry Settlement”). The Lowry Settlement is subject to court approval, among other conditions. The Company anticipates that the settlement payment will be paid by the Company’s insurance providers under its directors and officers’ insurance policy. As such the Company has recorded a $10.5 million loss contingency and a $10.5 million insurance recovery as of June 30, 2021 within the marketing, general and administrative expense line on the condensed consolidated statements of comprehensive income (loss). A corresponding receivable and liability of $10.5 million was recorded within prepaid and other current assets, and accrued expenses on the condensed consolidated balance sheet.
22
Derivative Lawsuits—Three derivative lawsuits have also been filed on behalf of the Company, naming it as a nominal defendant, and demanding a jury trial. On June 5, 2020, David Summers filed a shareholder derivative lawsuit (the “Summers Action”) against certain current and former directors and officers of the Company (as well as the Company as a nominal defendant), in the United States District Court for the Northern District of Illinois asserting statutory claims under Sections 10(b), 14(a) and 20(a) of the Exchange Act, as well as common law claims for breach of fiduciary duty, unjust enrichment and corporate waste. Thereafter, two similar shareholder derivative lawsuits asserting many of the same claims were filed in the same court against the same current and former directors and officers of the Company (as well as the Company as a nominal defendant). The three derivative lawsuits have been consolidated into the first-filed Summers Action. On September 6, 2020 the court entered an order staying the Summers Action pending resolution of the motions to dismiss in the Lowry Action. The court has not yet taken action regarding the derivative actions.
In the future, we may become subject to additional litigation or governmental proceedings or investigations that could result in additional unanticipated legal costs regardless of the outcome of the litigation. If we are not successful in any such litigation, we may be required to pay substantial damages or settlement costs. Based on the current information available to the Company, the impact that current or any future stockholder litigation may have on the Company cannot be reasonably estimated.
SEC Investigations— As previously disclosed in the Company’s Current Report on Form 8-K filed with the SEC on March 16, 2020, and the Form 10-K filed with the SEC on June 8, 2020, the Audit Committee of the Board of Directors, with the assistance of independent legal and forensic accounting advisors, conducted an internal investigation of matters relating to the Company’s revenue recognition practices for certain contractual arrangements, primarily with customers of the Company’s formerly-owned OEM Businesses, including the accounting treatment, financial reporting and internal controls related to such arrangements (the “Investigation”). The Investigation also examined transactions to understand the practices related to manual journal entries for accrual and reserve accounts. As a result of the Investigation, the Audit Committee concluded that the Company would restate its previously issued audited financial statements for fiscal years 2018, 2017 and 2016, selected financial data for fiscal years 2015 and 2014, the unaudited condensed consolidated financial statements for the quarterly periods within these years commencing with the first quarter of 2016, as well as the unaudited condensed consolidated financial statements for the quarterly periods within the 2019 fiscal year. The Investigation was precipitated by an investigation by the SEC initially related to the periods 2014 through 2016 (the “SEC Investigation”). The SEC Investigation is ongoing and the Company is cooperating with the SEC. The Company has contacted the SEC regarding a potential settlement of the SEC Investigation and is awaiting a response. Based on the current information available to the Company the financial or other impact of the SEC Investigation cannot be reasonably determined. In addition, On April 30, 2021, the Company and one of its executive officers each received a subpoena from the SEC requesting documents in an investigation relating to trading in the Company’s securities in late 2019 and early 2020. The Company and the executive officer are cooperating with the investigation. The Company is, at this time, unable to predict what action, if any, might be taken in the future by the SEC as a result of the matters that are the subject of the subpoenas.
|
21.
|
Related Party Transactions
|
The Company’s related parties include: i) a person who is or was (since the beginning of the last fiscal year for which the Company has filed a Form 10-K and proxy statement, even if he or she does not presently serve in that role) an executive officer, director or nominee for election as a director; ii) granter than five percent beneficial owner of the Company’s common stock; or iii) immediate family member of any of the foregoing. The Company did not enter into any related party transactions in 2018 and 2019. In 2020, the Company has entered into the following related party transactions:
The Holo Surgical Acquisition
As discussed in Note 6, on September 29, 2020, the Company entered into the Holo Purchase Agreement, pursuant to which, among other things, the Company consummated the Acquisition on October 23, 2020. As consideration for the Acquisition, the Company paid to Seller $30.0 million in cash and issued to Seller 6,250,000 shares of its common stock with a fair value of $12.3 million. In addition, the Seller will be entitled to receive contingent consideration from the Company valued at $50.6 million as of October 23, 2020, which must be first paid in shares of our common stock (in an amount up to 8,650,000 shares) and then paid in cash thereafter, contingent upon and following the achievement of certain regulatory, commercial and utilization milestones by specified time periods occurring up to the sixth (6th) anniversary of the Closing Date. Dr. Pawel Lewicki, a member of the Company’s board of directors, indirectly owns approximately 57.5% of the outstanding ownership interests in the Seller. Dr. Lewicki was appointed to the Company’s board of directors on November 23, 2020.
Simpson Consulting Agreement
On July 15, 2020, the Board appointed Stuart F. Simpson to serve as the Chairman of the Board, effective immediately upon consummation of the transactions contemplated by the Holo Surgical Purchase Agreement. On July 20, 2020, Mr. Simpson entered into a consulting agreement (“the Consulting Agreement”) with the Company, pursuant to which he will provide consulting services to the Company. The Consulting Agreement has an initial term of three years, but may be extended with the mutual agreement of the
23
parties. Mr. Simpson will be entitled to an annual consulting fee of $0.3 million per year during the term of the Consulting Agreement, payable in 12 equal monthly installments, and the Company agreed to enter into a restricted stock award agreement, pursuant to which the Company will grant to Mr. Simpson a restricted stock award equal to $0.8 million. The restricted stock grant shall vest in three equal amounts on the first, second and third anniversaries of the grant date. These amounts are in lieu of any amounts Mr. Simpson would otherwise receive as a director.
The Company evaluated subsequent events as of the issuance date of the unaudited condensed consolidated financial statements as defined by FASB ASC 855, Subsequent Events.
24