On June 14, 2021, we issued and sold in a
varietyregistered direct offering an aggregate of
sources including trauma, congenital defects, aging, revision29.0 million shares of
joint replacements, infectious disease, cancerour common stock and
other similar conditions.investor warrants to purchase up to an aggregate of 29.0 million shares at a strike price of $1.725. The
predominant method usedCompany, also in connection with the direct offering, issued placement agent warrants to
repair injured or defective bone and tissue is surgical intervention, primarily through the usepurchase an aggregate of
surgical implants. When consideringup to 1.7 million shares of our common stock at a
surgical procedure for bone or tissue repair, surgeons and patients have a numberstrike price of
treatment options including:“xenograft” tissue from an animal source;
“autograft” tissue$2.15625 per share. We received net proceeds of $45.8 million from the patient;offering after deducting investor fees of $4.2 million.
On February 1, 2021, we closed a public offering and
“allograft” tissue 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 another human donor.
the offering after deducting the underwriting discounts and commission of $4.0 million.Depending
The Company is projecting it will continue to generate significant negative operating cash flows over the next 12-months and beyond. In management's evaluation of the going concern conclusion we considered the following: i) continued 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; iv) approximately $25.6 million of the total contingent consideration of $51.9 million are expected to become due to the former owners of Holo Surgical if certain milestones are met over the next 12 months which would be paid in cash; v) total payments of $10.3 million at fair value for INN related milestones that are expected to be paid in cash when the milestones are achieved in the future; vi) seller notes in the amount of $10.0 million a fair value due to the seller of INN on
December 31, 2024; and vii) various supplier minimum purchase agreements. The Company’s operating plan for the
specific surgery, surgeonsnext 12-month period also includes continued investments in its product pipeline including both within digital health and hardware and biologics, which will necessitate additional financing. In addition to these efforts the Company will need continued capital and cash flows to fund the future operations through 2022 and beyond. The Company’s ability to raise additional capital may
electbe adversely impacted by potential worsening global economic conditions and the recent disruptions to,
use any number of these treatment options. We offer a broad line of metal, synthetic, xenograft and
allograft solutionsvolatility in, financial markets in the United States and worldwide. If cash resources are insufficient to
meet their needs.Metalssatisfy the Company’s on-going cash requirements through 2022, the Company will be required to scale back operations, reduce research and Synthetics
The medical community has used metaldevelopment expenses, and synthetic materials for implant procedures for many years. Metal and synthetic technologies are used to create both surgical implantspostpone, 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 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 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 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.
Segments
The Company operates one reportable segment: Spine.
Strategy
Our goal is to improve patient outcomes in Spine and adjacent specialties through the deployment of intelligent digital and surgical technologies across the continuum of care. To achieve our goal, we are pursuing the following strategies:
•Leverage our digital surgery platform to improve patient outcomes
We believe HOLO Portal™ is the world’s first AI driven augmented reality guidance system for spine and is the first clinical application of our HOLO™ AI platform. HOLO Portal™ guidance includes HOLO™ AI neural networks, which assists the surgeon by autonomously segmenting and labelling anatomic structures from an intraoperative 3D image, and automatically suggesting a patient specific surgical plan. The result is viewed by the surgeon through the AR display and is designed to help them quickly place instruments, used inaccurately achieve surgical procedures. These implantsobjectives, and reduce cognitive load. In parallel, we are used in a varietyworking to expand the indications for HOLO™ AI, our portfolio of proceduresneural networks designed to analyze, segment, and measure medical images including diagnostic, intraoperative, and postoperative modalities. Our vision is to apply AI across the continuum of care to find what drives patient satisfaction, in spine cardiothoracic, traumaas well as adjacent specialties.
•Develop and commercialize an increased cadence of innovative spine implants and biomaterials products. We plan to leverage our current strengths and invest in our research and development platform, in order to expand our product portfolio and develop next-generation, clinically validated products. To support these efforts, we plan to hire additional dedicated engineers and scientists with expertise in product design and development. We plan to continue to deepen our relationships with thought-leading surgeons to develop clinically validated procedures and products that deliver better patient outcomes. We also plan to create seamless integration between our products, procedures, and our digital surgery platform.
•Validate our innovative products with clinical evidence. We have a history of investing in clinical efficacy and outcomes studies to validate our products with peer-reviewed clinical evidence. There are more than 100 peer-reviewed clinical publications spanning our portfolio, including the Coflex® device, HPS® 2.0 fixation and TETRAfuse® 3D technology. We are investing in building a larger research and clinical affairs team that will bolster our clinical evidence. We plan to gather real-world clinical evidence on the safety and efficacy of our new innovative products. We plan to continue collaborating with our surgeon customers and key opinion leaders to share clinical data analyses through peer-reviewed scientific publications and conference presentations to the spine surgery and medical community. We believe such clinical data will bring increased awareness of our products and technologies and attract surgeon and patient interest.
•Grow our international business. We have strong commercial and research and development infrastructure outside the United States. We plan to focus our international commercial efforts on certain key markets that we believe represent a current annual market opportunity of $5.9 billion. We have a direct sales channel in several markets including Germany, which we believe provides us with a competitive advantage. We maintain a hybrid sales channel in other key markets throughout Europe and Asia where we plan to evaluate the potential for conversion to direct sales channels, in order to enhance our market penetration. To facilitate continued growth of our international business, we plan to introduce multiple new innovative products to our surgeon customers.
•Strategically pursue acquisition, license, and distribution opportunities. We have experience identifying acquisition, license, and distribution opportunities and integrating new technologies to complement our product portfolio specifically as it relates to our digital health strategy. We plan to strategically use these business development activities to supplement our internal innovations and fill key product portfolio needs.
Corporate Information
We currently operate at five locations: our corporate headquarters in Deerfield, Illinois; San Diego, California where we are building an innovation and design center; Poznan and Warsaw, Poland facilities, where we have our Digital Surgery Innovation Center and research and development team focused on AR and AI; and our Wurmlingen, Germany facility where we manage our international commercial business and maintain a Research and Development Center of Excellence focused on motion preservation implants and instrumentation.
The original Regeneration Technologies, Inc. (“RTI”) was incorporated in 1997 in Florida as a wholly-owned subsidiary of the University of Florida Tissue Bank (“UFTB”). RTI began operations on February 12, 1998, when UFTB
contributed its allograft processing operations, related equipment and technologies, distribution arrangements, research and development activities, and certain other assets to RTI. At the time of its initial public offering in August 2000, RTI was reincorporated in the State of Delaware, and in February 2008, RTI changed its name to RTI Biologics, Inc. In July 2013, RTI Biologics, Inc. completed the acquisition of Pioneer Surgical Technology, Inc. and, in connection with the acquisition, changed its name from RTI Biologics, Inc. to RTI Surgical, Inc. On January 4, 2018, RTI Surgical, Inc. entered the sacroiliac joint fusion market with the acquisition of Zyga Technology, Inc., a private commercial-stage company that had developed and begun to commercialize the SImmetry® Sacroiliac Joint Fusion System. On March 8, 2019, RTI Surgical, Inc. acquired Paradigm Spine, LLC (“Paradigm”), a private commercial-stage company focused on motion preservation and non-fusion spinal implant technology whose primary product was the Coflex® Interlaminar Stabilization Device, a minimally invasive motion preserving stabilization implant. In connection with the Paradigm transaction, we restructured and RTI Surgical, Inc. became a wholly-owned subsidiary of RTI Surgical Holdings, Inc.
On July 20, 2020, we completed the sale of our former original equipment manufacturer businesses (“OEM Businesses”) to Ardi Bidco Ltd., an entity owned and controlled by Montagu Private Equity LLP. As a result of the disposition, our former OEM Businesses and our former business related to processing donated human musculoskeletal and other areas. Typical metals used include surgical stainless steeltissue and titanium. These materialsbovine and porcine animal tissue in producing allograft and xenograft implants using certain sterilization processes were sold. In connection with this transaction, we changed our name from RTI Surgical Holdings, Inc. to Surgalign Holdings, Inc., operating as Surgalign Spine Technologies, we changed the ticker symbol for our Common Stock to “SRGA,” and we became a pure-play global spine company.
On October 23, 2020, we acquired Holo Surgical Inc. (“Holo Surgical”) and the technology related to HOLOTM.
On December 30, 2021, we acquired a 42% equity interest in Inteneural Networks, Inc. (INN).
Our principal offices are chosenlocated at 520 Lake Cook Road, Suite 315, Deerfield, Illinois, 60015, and our phone number is (224) 303-4651. We maintain a corporate website at www.surgalign.com.
Industry Overview
The global spine surgery industry can be broken into various markets that align with the treatment procedures for their strengthpatients suffering from back-related pain and durability. Syntheticother conditions. The most prevalent markets are spine implants, provide alternative implant options for surgeonscomposed of implantable devices to aid in both fusion and reliable availability duemotion preservation procedures and the biomaterials market consisting of human-derived and synthetic bone growth substitute products.
Enabling Technologies
A relatively new and emerging segment to the
variable supply of xenograft, autograft and allograft. One common example of a synthetic materialspine surgery market is
polyetheretherketone (“PEEK”). A recent trend has emerged for advanced materials in spinal interbodies. RTI has a position in that space through its Fortilink family of products, which is produced by additive manufacturing (i.e.3-D printing) using a proprietary polyetherketoneketone (“PEKK”) material called TETRAfuse®3-D. The Company’s exclusive supplier of TETRAfuse®3-D is Oxford Performance Materials, Inc.Xenograft Tissue
Xenograft tissue-based implantsenabling technologies. These technologies are common in many areas of medicine including cardiac and vascular procedures, soft tissue repair and wound care. Xenograft based implants are also used in the repair of bone defects in orthopedic surgery as carriers for demineralized bone matrix and bone morphogenic protein products. The production of xenograft implants involves recovering animal tissue, typically from cattle (bovine) or pigs (porcine), processing and sterilization, and then transplanting the xenograft implant into a human patient.
Autograft and Allograft Tissue
Manydesigned to aid surgeons use autograft and allograft tissue in their surgical procedures to take advantage of their natural characteristics. Autograft procedures involve a surgeon harvesting tissue from one part of a patient’s body for transplant to another part of the body. Allograft tissues are recovered from cadaveric donors, processed for certain intended uses and then transplanted by a surgeon into the patient’s body to make the needed repair.
Autograft and allograft bone implants are not only “osteoconductive,” meaning they provide a scaffold for new bone to attach itself to, but can be “osteoinductive” as well, meaning they stimulate the growth of new tissue.
Marketing and Distribution
We market and distribute our implants through direct distribution channels and a combination of both exclusive andnon-exclusive OEM distributors depending upon the product category. Our implants are used in the following markets: spine, sports medicine, orthobiologics, trauma, dental, plastic surgery and other surgical specialties. Our implants range from metals, synthetics, allografts and xenografts that are precision machined for specific surgical applications, to grafts conventionally processed for general surgical uses.
Direct Channels
Spine
The human spine consists of four regions: cervical (neck region), thoracic (back region attached to the ribs), lumbar (lower back), and sacral (tail bone). We design, manufacture, and distribute surgical implants, instruments, and biologics used in the treatment of spinal conditions affectingby providing information and tools to enhance treatment planning and execution. Major categories within this segment include surgical navigation systems, robotic targeting devices and pre-surgical planning software.
Spine Implants
The global spine implants annual market opportunity was estimated at $8.8 billion in 2020, with most revenues being generated from spinal fusion devices. Fusion devices are designed and developed to aid in the restoration of spinal alignment and to provide fixation during the fusion process. Conversely, motion preservation devices are designed predominantly to stabilize the spine
caused by degenerative conditions, deformities or traumatic injury. Our principal implant offering includes a wide varietyand allow for motion of
systems composed of components such as spine screws and rods, spinal spacers, plates, and various biologics offerings all designed to support, enhance, or promote spinal fusion. Our principal implant offerings by market segment are as follows: | • | | Thoracolumbar: Streamline® TL Spinal Fixation System, Quantum® Spinal Fixation System, Streamline® MIS Spinal Fixation System, MIS FusionTM Instrumentation, Contact® Anterior Lumbar Plate System
|
| • | | Cervical: Streamline® Posterior Cervical Spinal Fixation System, Slimfuse® Anterior Cervical Plate System, Aspect® Anterior Cervical Plate System
|
| • | | Lateral: Clarity® Retractor System,Lat-FuseTM Lateral Plate System
|
| • | | Interbody: C PlusTM PEEK IBF System, BulletTM PEEK IBF System, Cross-Fuse II® PEEK VBR/IBF System
|
| • | | Biologics: The BioSet® DBM, BioReady® DBM, and BioAdapt® DBM families of pastethe segments. Spine implants
|
| • | | Synthetics: nanOss® advanced bone graft substitute
|
Sports
Many repetitive use and sports-related injuries can be addressed with allograft implants. The most prevalent surgeriessurgically applied via traditional open surgery or via minimally invasive surgery. We provide devices in both segments of the knee include repairs to the anterior cruciate ligament, articular cartilage repair, and meniscus transplantation. The most prevalent surgeries in the shoulder include rotator cuff repair and articular cartilage repair. Our principal sports medicine allografts are tendons for ligament reconstruction, fresh osteochondral grafts for cartilage repair, and our meniscal allografts for advanced meniscus injuries. Many of our sports medicine tendon allografts utilize our patentedpre-shaped technology, which greatly reduces preparation time in the operating room and are generally easier tospine implant than nonpre-shaped allografts. We also distribute Matrix HD human dermis implants for wound repair and soft tissue augmentation. We also market and distribute implants for abdominal wall repair,via both surgical methodologies.
Biomaterials
The global biomaterials annual market opportunity was estimated at $4.8 billion in 2020. The biomaterials segment covers a large range of bone growth substitutes, including growth factors, cellular allografts, Demineralized Bone Matrices ("DBMs"), traditional allografts, and
plastic and reconstructive surgery. These implantssynthetic bone graft substitutes. Biomaterials are
processed through our validated Tutoplast tissue sterilization process, which has a proven track recordutilized during spine surgery procedures to promote fusion by substituting or augmenting the normal regenerative capacity of
safety and performance. Principal products include Cortiva human dermis, Fortiva porcine dermis and Tutopatch and Tutomesh bovine pericardium.OEM Channels
We also market and distribute our implants through relationships with OEM distributors.
bone.
Our
spine interbody allograft implants are marketed and distributed domestically through ournon-exclusive relationships with Aesculap Implant Systems, Inc., Integra Life Sciences Corporation (“Integra”), Medtronic, PLC (“Medtronic”), Orthofix International NV (“Orthofix”), Stryker Spine, a division of Stryker Corporation (“Stryker”), and Zimmer Biomet Holdings, Inc. (“Zimmer”).Our allograft paste implants are marketed and distributed under Puros® DBM by Zimmer and BIO DBMTM by Stryker.
Our surgical specialty implants are marketed and distributed through distributors including: Integra for dural repair applications; Davol, Inc., a subsidiary of C. R. Bard, Inc. (“Davol”) for hernia repair and breast reconstruction; Katena Products Inc. for ophthalmology and Coloplast A/S of Denmark (“Coloplast”) for urology.
Our allograft dental implants including cancellous and cortical bone and human and bovine membranes primarily for dental procedures related to augmenting ridge restoration are distributed exclusively by Zimmer.
Our trauma implants are distributed through Zimmer and DePuy Synthes (“Synthes”), a Johnson & Johnson Inc. subsidiary. Zimmer across all implants represents approximately 18% of our total revenues.
Our cardiothoracic hardware implants are distributed through A&E.
International
InternationallyOn January 14, 2022 we market and distribute our implants through a direct distribution organization and a network of independent distributors.
The BIOCLEANSE® Tissue Sterilization Process
We have developed and utilized in the United States the patented BIOCLEANSE® tissue sterilization process, which is an automated, pharmaceutical grade chemical sterilization process for musculoskeletal bone and certain soft tissue. This process is fully validated to kill or inactivate all classes of conventional pathogens, viruses, microbes, bacteria and fungi. Our BIOCLEANSE® process is able to remove greater than 99% of the blood, fats, lipids and other unwanted materials from the tissue we process. An important element of the BIOCLEANSE® process is that while it removes unwanted materials embedded within the tissue, it maintains the tissue’s structural integrity and compression strength. Studies have shown that bone tissue sterilized with the BIOCLEANSE® process maintains the same compression strength as untreated tissue.
The BIOCLEANSE® process has been reviewed by thereceived U.S. Food and Drug Administration (“FDA”("FDA") which concluded that BIOCLEANSE® was a validated tissue sterilization process demonstrated to prevent contaminationclearance on HOLO Portal™, our AI-driven AR surgical navigation system for spine. This is the first of tissue grafts. To our knowledge, no other tissue sterilization processmany FDA submission related to human tissue in our industry has been reviewed or approved by the FDA. It should be noted that the FDA does notdigital health platform and strategy to improve patient outcomes. We have a formal approval processbroad portfolio of spine implants, including solutions for fusion procedures in placethe lumbar, thoracic, and cervical spine, motion preservation solutions for tissue related processing techniques.
Two typesthe lumbar spine, and a minimally invasive surgical implant system for fusion of preserved allografts are processed using the BIOCLEANSE® process: soft tissue, consistingsacroiliac joint. We also have a broad portfolio of tendonsbiomaterial products.
Surgical Guidance
On January 14, 2022, we received FDA 510(k) clearance for HOLO Portal™, a surgical guidance system utilizing AR and cartilage;AI for use in spine surgery. HOLO Portal™ surgical guidance incorporates HOLO™ AI technology with a unique AR interface to enhance intraoperative image-based navigation with AI driven insights. The system features intraoperative surgical planning that uses AI to automate manual and bone tissue, consisting of various configurations of cancelloustime-consuming tasks, such as anatomic labelling, implant sizing, and cortical bone material. Tendonstrajectory planning. The surgical plan is then presented to the surgeon through the augmented reality display.
Patented HOLO Portal™ software includes several convolutional neural networks to segment and cartilage are used to repair/replace native tissue primarily in sports medicine reconstructive surgeries. Processed cortical and cancellous bone materials are usedgroup patient anatomy based on intraoperative CT scans. This results in a wide varietypatient-specific 3D model that is automatically labeled with anatomic structures for use during surgery, including: pedicle, vertebral body, spinal canal, articular processes, transverse process, lamina, spinous process, ribs, pelvis.
HOLO Portal™ software suggests screw trajectories and measures pedicle sizes from the patient-specific 3D model. The system then suggests the appropriate screw size based on a surgeon-defined pedicle fill ratio. The resulting surgical plan is designed to maximize accuracy and eliminate time spent manually planning trajectories and measuring screw sizes.
Once the segmentation and screw plan is generated, HOLO Portal™ software displays the surgical plan intraoperatively through the interactive AR display and provides a 3D guidance overlay on the patient’s anatomy. 3D trajectory and targeting are superimposed on surgical instruments in real time within the surgical field. This innovative design may reduce the surgeon’s cognitive load by providing intuitive guidance that allows the surgeon to keep focus on the surgical field. We believe that HOLO Portal™ may help surgeons achieve better surgical outcomes, reduce complications, and improve patient satisfaction.
We are developing additional applications utilizing HOLO™ AI technology for use in multiple clinical specialties across the patient continuum of applicationscare. We believe HOLO™ AI, our portfolio of neural network technologies, is one of the most advanced artificial intelligence technologies being applied to surgery.
Spine Implants
As of 2021, all of our revenues related to the spine implants portfolio are generated from spinal fusion devices and motion preservation devices. Fusion devices are designed and developed to aid in the restoration of spinal alignment and to provide fixation during the fusion process. Conversely, motion preservation devices are designed to stabilize the spine and allow for motion of the segments. Sacroiliac joint fusion implant systems are designed to relieve sacroiliac joint pain. We provide devices in each of these three segments of the spinal hardware implant market.
Thoracolumbar and Cervical Spine Fusion Devices
We offer a broad portfolio of cervical, thoracic and lumbar interbody (e.g., Fortilink® cages with TETRAfuse® technology) and fixation (e.g., Streamline® MIS/Degen/OCT pedicle screws) devices for conventional spine fusion procedures including anterior cervical ciscectomy and fusion (ACDF), posterior cervical fusion (PCF), posterior lumbarinterbody fusion (PLIF), transforaminal lumbar interbody fusion (TLIF), anterior lumbar interbody fusion (ALIF) and lateral lumbar interbody fusion (LLIF).
Sacroiliac Joint Fusion Devices
We are one of the market-leaders in the sacroiliac joint ("SI"), fusion segment of the spinal hardware implant market. Our SImmetry® system allows for minimally invasive SI joint fusion surgery that eliminates the movement of the joint in two ways:
1.True SI joint fusion – The surgeon decorticates the joint surfaces with special instruments, in accordance with orthopedic surgeries.The TUTOPLAST® Tissue Sterilization Process
The TUTOPLAST® tissue sterilization process utilizes solvent dehydrationprinciples, to create the appropriate environment to fuse the joint.
2.Immediate fixation – By placing an implant across the joint, the joint is instantly immobilized, allowing fusion.
Two-year data from the EVoluSIon study showed high rates of joint fusion and
chemical inactivation to remove blood, lipidsstatistically significant decreases in opioid use, pain, and
extraneous materials, and inactivate viruses and break down RNA and DNA into fragments not capable of replication and disease transmission while preserving the biological and mechanical properties.Two types of preserved allografts are processed using the TUTOPLAST® process: soft tissue, consisting of fascia lata, pericardium, dermis, sclera and cornea; and bone tissue, consisting of various configurations of cancellous and cortical bone material. Processed pericardium, fascia lata and dermis are collagenous tissue used to repair, replace or line native connective tissue primarily in dental, ophthalmology, urology, plastic and reconstructive surgeries. Dermis is also used in hernia repair and pelvic floor reconstruction. Sclera and cornea are used in ophthalmology procedures such as anterior and posterior segment patch grafting applications for glaucoma, retina and trauma surgery and oculoplastics,disability scores, as well as contour wrappingthe possibility of faster recovery times.
Motion Preservation Devices
Our motion preservation portfolio includes the Coflex® Interlaminar Stabilization device, the only U.S. Food and Drug Administration ("FDA") premarket approval application ("PMA") approved implant for the treatment of moderate to severe lumbar spinal stenosis in conjunction with direct decompression. The Coflex® device is the first and only posterior lumbar motion preservation solution with Level I evidence, the highest possible level of clinical data, from two prospective, randomized studies against two treatment options—decompression alone and decompression with fusion—across two countries, the United States and Germany. The Coflex® device has demonstrated long-term clinical outcomes for durable pain relief and stability. The device has been implanted in more than 163,000 patients worldwide.
Biomaterials
We have a significant portfolio across the biomaterials market for spinal fusion procedures. Our portfolio of biomaterials includes products ranging from innovative tissue-based solutions to advanced synthetic bone graft substitutes for a range of surgical applications. Our biomaterials products complement our spine implants product line with the synergistic goal to improve fusion rates.
Cellular Allograft
The ViBone® family of products, supplied by Aziyo Biologics, Inc. (“Aziyo”), is a next-generation viable cellular allograft bone matrix processed using a proprietary method optimized to protect and preserve the health of native bone cells to potentially enhance new bone formation.
Demineralized Bone Matrices (DBM)
DBM formulations are designed to provide naturally occurring bone proteins and other growth factors at varying stages of the bone healing process. We offer a broad DBM portfolio, which includes putty, strip, and boat configurations for various surgical applications to provide a natural scaffold for bone ingrowth and osteoinductive potential to facilitate fusion. Our flagship DBM is FibreX™ demineralized bone fibers, supplied by Origin Biologics.
Synthetic Bone Growth Substitutes
Our synthetic bone growth substitutes portfolio, includes the nanOss® family of products, which provide osteoconductive nano-structured HA and an orbital implant. Processed corticalengineered extracellular matrix bioscaffold collagen carrier to provide a natural bone growth solution.
Research and cancellous bone materialDevelopment
Since the launch of Surgalign in July 2020, we have focused on innovation, quality, and clinical validation in the design and development of our products. Instrumental to this focus is
usedcreating an R&D organization centralized in
a wide varietySan Diego, California. This new center of
applicationsexcellence will continue to be supported by our capabilities in
spine, orthopedic and dental surgeries.The CANCELLE® SP DBM Sterilization Process
DBM-based pastes and putties are sterilizedWurmlingen, Germany. We have new capabilities in Poland, acquired through the CANCELLE® SP process,Holo Surgical and INN transactions, that bring us expertise in AR, machine learning, and software development which is designed to preserve protein activity. In their final form, the DBM implants serve as bone void fillers in many applications, including spinal, general orthopedic, joint reconstruction and dental surgeries.
CANCELLE® SP is a proprietary process that sterilizes DBM pastes and putties while simultaneously allowing them to maintain their osteoinductive (“OI”) potential, which is verified by 100% lot testing after sterilization. The determination of OI potential is made by lot release animal studies or testing for certain protein markers. These tests are not necessarily predictive of human clinical results. Through a combination of oxidative treatments and acid or alcohol washes, debris is removed and pathogens are inactivated. Cleansing rinses remove residual chemicals, maintaining biocompatibility and preserving the utility of the graft. The CANCELLE® SP irradiation dose is delivered terminally for most pastes and putties to achieve device-level sterility (“SAL 10-6”).
Tissue Recovery
Tissue recovery is the actual removal of tissue from a donor after legal authorization has been obtained. Authorization is obtained by the tissue recovery group.will help us expand on our digital health strategy. We contracthave also maintained our strategic partnership with independent FDA registered tissue recovery groups that specialize in this activity. Tissue recovery personnel aseptically recover tissue within 24 hours following a donor’s death, using surgical instruments and sterile techniques similar to those used in hospitals for routine surgery. Recovered tissue is placed on wet or dry ice, then transported by the donor recovery agencyRTI Surgical, subsequent to the tissue processor or possibly a research institution.
Under U.S. law, human tissue cannot be boughtdisposition of our OEM Businesses, to support our spine implants and sold. However, the law permits the recoverybiomaterials businesses.
Aligning Holo Surgical with our recent acquisition of reasonable payments for the provision of certain services, such as those involvedequity in recovering, processing and storing tissue and related to the advancement of tissue processing technologies; all types of activities in whichINN, we are involved.
Donor recovery groups recovercommitted to leading in digital health and expanding our scope outside the operating room and in additional clinical specialties. Our priorities include refinement and expansion of indications of our HOLO Portal™ system, and the development of a varietycloud platform to allow use of tissue types from donors including the fibula, femur, tibia, humerus, ilium, pericardium, fascia lata, dermis, costal cartilage, sclera, tendonsHOLO™ AI technology in preoperative and ligaments.postoperative settings. This will enable us to leverage HOLO™ AI technology to automate certain use cases in diagnostics, preoperative planning, patient specific implants, and postoperative assessment, with an ultimate goal of predictive patient outcomes.
Our short-term product development efforts will focus on initiatives to enhance our interbody cage offerings, fill focused gaps in our biomaterials portfolio and develop a new flagship posterior fixation system. We believe that
our established relationships with recovery organizations are sufficient to meet our ongoing operation demands. These contracted tissue recovery organizations are responsible for obtaining appropriate authorization and conducting federally-mandated donor screening, such as a donor risk assessment interview with the next of kin. Each donor is evaluated against current acceptance criteria prior to donor tissue being sent to our processing facility. Upon receipt of the tissue, we conductpre-processing donor screening to determine donor medical suitability for transplantation.Pre-processing screening performed by us includes laboratory testing and a donor medical eligibility assessment. With respect to laboratory testing, we perform an extensive panel of serological and microbiological tests using Clinical Laboratory Improvements Amendment (“CLIA”) approved laboratories and FDA test kits. These results are subject to stringent criteria in order to release the donor tissue to the processing stage.We have relationships with tissue donor recovery agencies across the United States. We also have relationships outside the United States. We believe additional recovery group relationships would be available if needed and consequently that the loss of any one of our sources of donor tissue would not have a material impact on our operating results.
We continue to develop new xenograft tissue implants. Implants processed from xenograft tissue are regulated by the FDA as devices and require approval or licenses from the FDA prior to marketing in the United States. The sources of our bovine animal tissues are regulated closed herds. We believe that our established relationships with our sources of xenograft animal tissues are sufficient to meet our demands for our ongoing operations. We believe the continued development of our xenograft implantsdoing so will help us meet unmet demand for certain allografts and also allow us to develop new biological implants that cannot currently be made due to structural limitations of human tissue.
Research and Development
Our strategy has been to develop new implants, technologies and surgical techniques within our current markets, and to develop additional technologies for other markets to address unmet clinical needs.better compete at the procedural level. We have done this by building on our core technology platforms: TETRAfuse® 3-D, BIOCLEANSE®, TUTOPLAST®, CANCELLE® SP, precision machining, assembled grafts, tissue-mediated osteoinduction and our metal and synthetics design and production expertise. We have worked andwill also continue to work on developing differentiated technologies and investing in generating the necessary clinical data to drive demand and support appropriate reimbursement. We operate a dedicated research team working on advanced technologies, and have embedded development/technical teams who work with the business/marketing teams focused on expanding the scope and scale of existing competencies such as tissue machining and sterilization, and metal and synthetics manufacturing to meet specific surgical needs.
In 2019, we launched 6 new implants and product enhancements in spine, sports, and general orthopedics developed by our research and development teams. January 2018 marked the first clinical use of theFortilink-TS andFortilink-L product systems, which were followed by the full commercial launch of theFortilink-TS system in May 2018. The Fortilink systems are the second and third in a family of devices to incorporate our TETRAfuse 3D Technology. Additionally, 2018 began the manufacture and initial commercial use of the Thorecon sternal closure system in association with our partner A&E. Enhancements were made to Streamline OCT system, continuing the history of continuously improved features and options; performance improvements were made to our synthetic biologic line with the release of nanOss 3D Plus.
Our business depends upon the significant
know-how and proprietary technology we have
developed.developed and curated. To protect this
know-how and proprietary technology, we rely on a combination of trade secret laws, patents, licenses, trademarks, and confidentiality agreements. The
intended effect of these intellectual property rights is to define zones of exclusive use of the covered intellectual property. The duration of patent rights generally is 20 years from the date of filing of priority application, while trademarks, once registered,
are essentially perpetual.generally have a term of 10 years but can be renewed so long as the trademarks continue to be used. Our trademarks and service marks provide
usour company and our
implantsproducts with a certain
amountdegree of brand recognition in our markets. However, we do not consider any single patent, trademark or service mark material to our business strategy, financial condition, or results of operations.
WeFurther, we have also entered into exclusive and
non-exclusive licenses relating to a wide array of third-party technologies.
In addition, we rely on our substantial body ofknow-how, including proprietary tissue recovery techniques and processes, research and development, tissue processing and quality assurance.Our proprietary BIOCLEANSE®, TUTOPLAST® and CANCELLE® SP sterilization processes are covered by one or more U.S. and/or foreign patents, patent applications or trade secrets. Other U.S. and foreign holdings include, without limitation, patents, patent applications orand trade secrets relating to or covering certain precision machined allograft intervertebral spacers and other spinal implants; matrix compositions including various bone graft substitutes; membrane tissue implants; and ligament, tendon or meniscus reconstruction and repair with certain precision shaped and/or assembled bone and soft tissue implants, synthetic bone graft substitutes; interbody fusion and motion implants; spinal and orthopedic plates; spinal rods, cables and screws and spinal fixation systems and related instrumentation.
As part of the Holo Surgical Acquisition, we acquired intellectual property and technologies that relate to digital surgery. As of December 31, 2021, the intellectual property of the Holo Surgical business included, among other things, two issued U.S. patents, one granted European patent, fifteen U.S. pending patent applications, and ten pending European patent applications. We do not know whether our current patent applications, or any future patent applications that we may file, will result in a patent being issued with the scope of the claims we seek, or at all, or whether any patents we may receive will be challenged or invalidated. The term of individual patents depends on the legal term for patents in the countries in which they are granted. In most countries, including the United States, the patent term is generally 20 years from the earliest claimed filing date of a nonprovisional patent application in the applicable country. The expected years of expiration for these patents and any patents that issue from such pending applications range from 2037 to 2042. The HOLO™ platform is an autonomous anatomical mapping technology designed to assist surgeons and physicians to diagnose, treat, and manage patients with neurosurgical and orthopedic conditions. The HOLO™ platform is capable of advanced, real-time analytics, autonomous presurgical planning, and autonomous intraoperative guidance, potentially enhancing surgical performance with the goal of facilitating improved patient outcomes.
Further, as part of the acquisition of the equity interest in INN, we received a non-exclusive, royalty-free license to INN intellectual property and technologies. INN’s proprietary artificial intelligence technology and intercranial capabilities complement our HOLOTM platform technology.
The medical device industry is characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement. As the number of entrants into our market increases, the risk of an infringement claim against us, as well as the risk of a third party infringing on our patents, grows. While we attempt to ensure that our implants and methods do not infringe other parties’ patents and proprietary rights, our competitors
or other third parties may assert that our implants, and the methods we employ, are covered by patents held by them. In addition, our competitors
and other third parties may assert that future implants and methods we may employ infringe their patents. If third parties claim that we infringe upon,
misappropriate, or otherwise violate their intellectual property rights, we may incur liabilities and costs and may have to redesign or discontinue selling the affected implant. Even if we were to prevail, any litigation could be costly and time-consuming and would divert the attention of our management and key personnel from our business operations. We
are currently, have
been in the past,
been, and may
be in the future,
be, involved in litigation relating to
our intellectual property.
For more information regarding the risks related to intellectual property, please see the section titled “Risk Factors—Risks Related to Intellectual Property.”
Sales and Distribution
We currently market and sell our products in the United States and in more than 50 countries globally. Our U.S. Commercial organization includes Professional Education, Corporate Accounts, and field-based Area Sales Directors and Regional Product Specialists supported by an extensive network of independent spine and biomaterial distributors. Our international sales organization consists of a direct sales force in several European countries and stocking distributors in the rest of the world.
We anticipate adding additional independent distributors and plan to invest in additional marketing and surgeon education & training to support this expansion. We believe the expansion of our U.S. and international sales efforts will provide us with significant opportunity for future growth as we launch our digital technology platform, expand our product portfolio, and seek to penetrate existing and new markets.
In January 2022 we started to hire for our capital sales team which will be solely focused on sales and placement of the HOLO Portal™ system with our strategy partners.
Surgeon Education and Training
We devote significant resources to educate surgeons on the proper use of our technologies and techniques including the HOLO Portal™ system. The successful use of our products and technologies depends, in part, on the training and skills of the surgeon performing the procedure. We are developing a state-of-the-art cadaver operating theater and training facility in our San Diego Innovation Center, to help drive adoption of our products.
We believe our success is partially dependent on our ability to differentiate, with clinically validated products and procedures, the quality of our products and reputation within the spine surgeon community. We have a strong commitment to conducting collaborative research with surgeons and we intend to continue working with surgeons and other healthcare professionals in clinical research to further advance our pipeline of novel, innovative technology, and product offerings.
International Operation
Internationally, we market and distribute our implants through a direct distribution organization and a network of independent distributors. International revenues accounted for approximately 14% of our 2021 global revenues.
Our international business is based in Wurmlingen, Germany. With our presence in the region, we can rely on the large local network of spine manufacturers and the wider “Medical Valley Community” of spine and medical device experts and talent. Our international warehousing and logistics have been outsourced to a qualified third-party logistics provider based in the Netherlands that has scalable biomaterials and hardware capabilities and operations. We received MDR certification in the EU in October 2020, which will provide us opportunities for future expansion.
A significant addition to our international presence is the acquisition of Holo Surgical and INN personnel in Poland which will allow us to harness new capabilities in digital surgery with artificial intelligence and predictive analytics.
Competition in the medical implant industry is intense and subject to rapid technological change and evolving industry requirements and standards. Companies within the industry compete
based on
the basis of design of related instrumentation, efficacy of implants,
service and relationships with the surgical community, depth of range of implants, scientific and clinical results, and pricing. Many of our competitors are substantially larger than we are, with much greater resources. In some cases, our customers compete with us in
certainmultiple product categories.
Our principal competitors in the conventional allograft market include the Musculoskeletal Transplant Foundation (“MTF”), AlloSource Inc., Community Tissue Services (“CTS”), LifeLink Tissue Bank (“LifeLink”), JRF Ortho (“JRF”), LifeCell, Inc., a subsidiary of Allergan PLC and LifeNet Health, Inc. (“LifeNet”). Among our competitors in precision machined allograft are MTF, LifeNet and AlloSource. Other companies who process and distribute allograft pastes include Medtronic, AlloSource, Integra, Wright Medical Inc. and MTF. Companies who process and distribute xenograft tissue include Baxter, Inc., LifeCell, Cook Surgical, Becton Dickenson, Integra MTF, and Medtronic.
We consider our principal competitors in the
metalspine implant and
syntheticbiomaterials, and digital health markets to include Medtronic,
Stryker, Zimmer,
plc. DePuy Synthes
Globus Medical Group, Inc., NuVasive, Inc.,
Alphatec HoldingsStryker Corporation, Global Medical, Inc.,
Spinal Elements Inc., Xtant MedicalAlphatec Holdings Inc., SeaSpine Holdings Corporation, and Orthofix
International NV.Medical Inc.
Government Regulation and Corporate Compliance
Government regulation plays a significant role in the processing/manufacturingdesign and distribution of allograft tissue implants and medical devices. We procure, where applicable process/manufacture, and market our allograft tissue implants and medical devices worldwide. Although some standardization exists, each country in which we do business has its own specific regulatory requirements.
These requirements are dynamic in nature and, as such, are continually changing. New regulations may be promulgated at any time and with limited notice. While we believe that we are in material compliance with all existing pertinent international and domestic laws and regulations, there can be no assurance that changes in governmental administrations and regulations, or their interpretation or application, will not adversely affect our operations. Failure to comply with applicable requirements could result in fines, injunctions, civil penalties, recall or seizure of products, suspension of production, inability to market current products, criminal prosecution, and/or refusal of the government to authorize the marketing of new products.
In the United States, most of our
We currently market and distribute allograft implants
that are
regulated by the FDA solely under Title 21 of the Code of Federal Regulations (“CFR”), Parts 1270 and 1271, “Current Good Tissue Practice for Human Cell, Tissue, and Cellular and Tissue-Based Products” (“cGTPs”). Xenograft tissues and some of our allograft-containing implants are regulated as medical devices and subject to FDA 21 CFR, Part 820 Current Good Manufacturing Practices (“cGMPs”) for Medical Devices and related statutesprocessed from
the FDA. In addition, our U.S. operation is subject to certain state and local regulations, as well as compliance to the standards of the tissue bank industry’s accrediting organization, the American Association of Tissue Banks (“AATB”).In Germany, allografts are classified as drugs and the German government regulates such implants in accordance with German Drug Law. On April 7, 2004, the European Commission issued a human tissue, directivewhich are processed by third-party suppliers who are responsible for satisfying local regulatory requirements and who ship the implants directly to regulate allografts within the European Union (“EU”). Our Neunkirchen facility is presently licensed by the German Health Authorities and in compliance with applicable international laws and regulations, allowing us to market our human and animal tissue implants globally.
The FDA and international regulatory bodies conduct periodic compliance inspections of both our U.S. and our German processing facilities. All operations are registered with the FDA Center for Devices and Radiological Health (the “CDRH”) for device manufacturing locations and the Center for Biologics Evaluation and Research (the “CBER”) for human tissue recovery, processing and distribution locations and are certified to ISO 13485:2003 and transitioning to ISO 13485:2016. The Alachua facility is also accredited by the AATB and is licensed in the states of Florida, New York, California, Maryland, Delaware and Illinois. The Neunkirchen facility is registered with the German Health Authority as a pharmaceutical and medical device manufacturer and is subject to German Drug Law.customers. We believe that worldwide regulation of allografts and xenografts is likely to intensify as the international regulatory community focuses on the growing demand for these implants and the attendant safety and efficacy issues of citizen recipients.
We currently market and distribute allografts that are subject to the FDA’s “Human Tissue Intended for Transplantation” and “Human Cells, Tissues, and Cellular and Tissue-Based Products” regulations. Under these regulations, we are required to perform donor screening and infectious disease testing and to document this screening and testing for each donor from whom we process tissue, and to process tissues in compliance with cGTP. The FDA has authority under the rules to inspect human tissue processing facilities, and to detain, recall, or destroy tissues for which appropriate documentation and evidence of compliance is not available. We are not required to obtainpre-market approval or clearance from the FDA for allografts that meet the regulation’s definition of “human tissue.”
The FDA may regulate certain allografts as medical devices, drugs, or biologics, which would require that we obtain approval or product licensure from the FDA. This would occur in those cases where the allograft is deemed to have been “more than minimally manipulated or indicated fornon-homologous use.” In general, “homologous use” occurs when tissue is used for the same basic function that it fulfilled in the donor. The definitional criteria for making these determinations appear in the FDA’s rules. If the FDA decides that certain of our current or future allografts are more than minimally manipulated or indicated fornon-homologous use, it would require licensure, approval or clearances of those allografts. Allografts requiring suchpre-market review are subject to pervasive and continuing regulation by the FDA. We would be required to list these allografts as a drug, as a medical device, or as a biologic, and to manufacture them in specifically registered or licensed facilities in accordance with cGMPs. We would also be subject to post-marketing surveillance and reporting requirements. In addition, our manufacturing facilities and processes would be subject to periodic inspection to assess compliance with cGMPs. Our labeling and promotional activities would be subject to scrutiny by the FDA and, in certain instances, by the Federal Trade Commission. The export of drugs, devices, and biologics is also subject to more intensive regulation than is the case for human tissue implants.
Our research, development, and clinical programs, as well as our manufacturingmarketing and marketingcommercial operations, are subject to extensive regulation in the United States and other countries. Most notably, all of our implants distributed in the United States are subject to the federal Food, Drug, and Cosmetic Act and the Public Health Services Act as implemented and enforced by the FDA. The regulations that cover our implants and facilities vary widely based on implant type and classification both in the United States, and from country to country. The amount of time required to obtain approvals or clearances from regulatory authorities also differs from country to country.
Unless an exemption applies,
eachmost of the medical
devicedevices that we
wish to commercially distribute in the United States
will beare covered by premarket notification (“510(k)”) clearance from the FDA. The FDA classifies medical devices into one of three classes. Devices deemed to pose lower risks are placed in either Class I or
II, with the Class II devices typically requiring the manufacturer to submit to the FDA a premarket notification requesting permission to commercially distribute the device. This process is generally known as 510(k) clearance. Some low risk devices are exempted from this requirement. Devices deemed by the FDA to pose the greatest risks, such as life-sustaining, life-supporting or implantable devices, or devices deemed not substantially equivalent to a previously cleared 510(k) device, are placed in Class III, requiring approval through the lengthy premarket approval application (“PMA”) process.II. Manufacturers of most Class II medical devices are required to obtain 510(k) clearance prior to marketing their devices. To obtain 510(k) clearance, a company must submit a premarket notification demonstrating that the proposed device is “substantially equivalent” in intended use and in technological and performance characteristics to another legally marketed 510(k)-cleared “predicate device.” By regulation, the FDA’s performance goals are to clear or deny a 510(k) premarket notification within 90 FDA review days of submission of the application. As a practical matter, clearance may take longer. The FDA may require further information, including clinical data, to make a determination regarding substantial equivalence. After a device receives 510(k) clearance, any modification that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, requires a new 510(k) clearance or could require a
lengthy premarket approval application (“PMA”) process. Devices deemed by the FDA to pose the greatest risks, such as life-sustaining, life-supporting or implantable devices, or devices deemed not substantially equivalent to a previously cleared 510(k) device, are placed in Class III, requiring approval through the PMA
approval.process.
Class III medical devices are required to undergo the PMA approval process in which the manufacturer must establish the safety and effectiveness of the device to the FDA’s satisfaction. A PMA application must provide extensive preclinical and clinical trial data as well as information about the device and its components regarding, among other things, device design, manufacturing, and labeling. Also, during the review period, an advisory panel of experts from outside the FDA may be convened to review and evaluate the application and provide recommendations to the FDA as to the approvability of the device. In addition, the FDA will typically conduct a preapproval inspection of the manufacturing facility to ensure compliance with the FDA’s Quality System Regulations (21 CFR Part 820) (“QSR”). FDA reviews of PMA applications generally can take between one and three years, or longer. We have one FDA PMA approved device: The Coflex
® Interlaminar Stabilization device. The Coflex® device is currently the only FDA PMA-approved implant for the treatment of moderate to severe lumbar spinal stenosis in conjunction with decompression. The medical devices that we develop, manufacture, distribute, and market are subject to rigorous regulation by the FDA and numerous other federal, state, and foreign governmental authorities. The process of obtaining FDA clearance and other regulatory approvals to develop and market a medical device, particularly from the FDA, can be costly and time-consuming, and there can be no assurance that such approvals will be granted on a timely basis, if at all. While we believe that we have obtained, or will be able to obtain, all necessary clearances and approvals for the manufacture and sale of our implants and that they are, or will be, in material compliance with applicable FDA and other material regulatory requirements, there can be no assurance that we will be able to continue such compliance. After an implant is placed on the market, numerous regulatory requirements continue to apply. Those regulatory requirements may include, as applicable: product listing and establishment registration; QSRs, which requires manufacturers, including third-party manufacturers, to follow stringent design, testing, control, documentation and other quality assurance procedures during all aspects of the manufacturing process; labeling regulations (including unique device identification (“UDI”) requirements), and FDA prohibitions against the promotion of products for uncleared, unapproved, oroff-label uses or indications; clearance of
product modifications that could significantly affect safety or efficacy or that would constitute a major change in intended use of one of our cleared devices; Medical Device Reporting regulations, which require that manufacturers report to FDA if their device may have caused or contributed to a death or serious injury, or has malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction of the device or a similar device were to recur; post-approval restrictions or conditions, including post-approval study commitments; post-market surveillance regulations, which apply when necessary to protect the public health or to provide additional safety and effectiveness data for the device; the FDA’s recall authority, whereby it can ask, or under certain conditions order, device manufacturers to recall from the market a product that is in violation of governing laws and regulations; regulations pertaining to voluntary recalls; and notices of corrections or removals.
We and certain of our suppliers also are subject to announced and unannounced inspections by the FDA to determine our compliance with FDA’s QSR and other regulations. If the FDA were to find that we or certain of our suppliers have failed to comply with applicable regulations, the agency could institute a wide variety of enforcement actions, ranging from a public Warning Letter to more severe sanctions, such as: fines and civil penalties against us, our officers, our employees or our suppliers; unanticipated expenditures to address or defend such actions; delays in clearing or approving, or refusal to clear or approve, our products; withdrawal or suspension of approval of our products or those of our third-party suppliers by the FDA or other regulatory bodies; product recall or seizure; interruption of production; operating restrictions; injunctions; and criminal prosecution. Moreover, governmental authorities outside the United States have become increasingly stringent in their regulation of medical devices, and our products may become subject to more rigorous regulation bynon-U.S. governmental authorities in the future. U.S. ornon-U.S. government regulations may be imposed in the future that may have a material adverse effect on our business and operations. The EU has nationally transposed regulations based on the European Commission (“EC”) Medical Device Directives (“MDD”) for the control of medical devices with which manufacturers must comply. New medical device regulationMedical Device Regulations (“MDR”) replacedwere slated to replace the medical device directives effective May 26, 2020. The2020, in the EU. However, due to delays, implementation of the EU MDR manufacturing plantsbegan on May 26, 2021. Manufacturers must have received Conformitè Europèene (“CE”) certification from a “notified body” in order to be able to sell products within the member states of the EU. Certification allows manufacturers to stamp the products of certified plants with a CE mark. Products covered by the EC directives that do not bear the CE mark cannot be sold or distributed within the EU. We have received certification for all currently existing manufacturing facilities andAll products that we distribute in the EU.
Effective May 26, 2020, the EU’s new MDR (“EU MDR”) replaced the current medical device directives. have received CE certification.
All medical devices currently distributed in the EU under
the medical device directivesMDD are likely
impacted. Theimpacted by the implementation of MDR. MDR may also include products, such as human tissue, not traditionally considered medical devices in the EU. Additionally,
the MDR, among other things, increases regulatory requirements for several medical device groupings applicable to our implants distributed in the EU, including strengthening notified body oversight for Class I reusable surgical instruments, and
up-classifying spinal devices in contact with the spinal column.
As of April 23,We received MDR certification in October 2020
implementation of the EU MDR has been delayed until May 26,and again in October 2021.
Our products may be reimbursed by third-party payers, such as government programs, including Medicare, Medicaid, and Tricare or private insurance plans and healthcare networks. Third-party payers may deny reimbursement if they determine that a device provided to a patient or used in a procedure does not meet applicable payment criteria or if the policy holder’s healthcare insurance benefits are limited. Also, third-party payers may challenge the medical necessity and prices paid for our products and services.
The False Claims Act, Anti-Kickback Statute, Foreign Corrupt Practices Act, and United Kingdom Bribery Act of 2010, as well as state and international anti-bribery and anti-corruption legislation, regulate the conduct of medical device companies’ interactions with the healthcare industry. Among other things, these laws and others generally: (1) prohibit the provision of anything of value in exchange for the referral of patients for, or the purchase, order, or recommendation of, any item or service reimbursed by a federal healthcare program, (including Medicare and Medicaid); (2) require that claims for payment submitted to federal healthcare programs be truthful; and (3) prohibit inappropriate payment to foreign officials for the purpose of obtaining or retaining business.
RTI maintainsWe maintain a
Compliance Programcompliance program that incorporates the seven fundamental elements as set forth by the Office of the Inspector General within the U.S. Department of Health and Human Services. This facilitates
RTI’sour compliance with requirements regarding the prohibition of inappropriate transfers of value in exchange for referrals or obtaining or retaining foreign business engagements, prohibition regarding the submission of inappropriate claims for reimbursement to federal healthcare programs, as well as generally ensuring ethical interactions with the healthcare industry both domestically and internationally.
Under Section 6002 of The Patient Protection and Affordable Care Act of 2010 (known as the Physician Payment Sunshine Act) and similar state and international transparency reporting legislation, RTI iswe are required to collect and report data regarding payments or other transfers of value to physicians, teaching hospitals, and other persons in the healthcare industry. RTI’s Compliance ProgramOur compliance program ensures all such payments and transfers of value are appropriate per the requirements of
applicable anti-bribery or anti-corruption legislation and that all required data is reported to relevant
U.S. and International governmental entities as called for by applicable transparency reporting legislation.
In addition, U.S. federal, state, and international laws protect the confidentiality of certain health and other personal information, in particular individually identifiable information such as medical records and other protected health information (“PHI”), and restrict the use and disclosure of that protectedsuch information. RTI compliesIn administering our employee health plan, we comply with the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) due to its status. In our dealing with customers such as health care providers or hospitals, we are not a covered entity related toCovered Entity or Business Associate as defined by the provision of a health plan for its employees. RTI is not otherwise regulated by HIPAA Privacy Rule, but we voluntarily incorporates manyincorporate applicable HIPAA standards in itsour corporate policies regarding handling of health data it receives.PHI we receive. We are also subject to the California Consumer Privacy Act. At the international level, the General Data Protection Regulation (EU 2016/679) (“GDPR”) applies to RTI’sour processing of personal data of residents of the EU.EU residents. This law regulates and protects processing of all personal data by regulatingthe collection, use, processing, and disclosure as well asof personal information, including by imposing privacy and security requirements and imposes penalties for violations. RTI compliesWe comply with this regulation for both general personal data as well as the higher sensitivity standards for health and financial data and isare implementing the standards of this regulation as part of our corporate policy for processing of personal data from all jurisdictions.
During the third quarter of 2018, we decided to stop procurement, manufacturingU.S. and distributing the map3® implants. This activity was completed in the fourth quarter of 2018. The map3® product is now off the market.
international jurisdictions.
We have a comprehensive compliance program. It is a fundamental policy of our company to conduct business in accordance with the highest ethical and legal standards. Our corporate compliance and ethics program is designed to promote legal compliance and ethical business practices throughout our domestic and international businesses.
Our compliance program is designed to substantially meet
the U.S. Sentencing
Commission GuidelinesCommission’s guidelines for effective organizational compliance and ethics programs and to
preventdetect and
detectprevent violations of applicable federal, state, and local
laws.laws and regulations. Our compliance program is
additionally responsible forglobal in nature; designed and operationalized to ensure compliance with relevant international laws and
implementation of corporate programs to ensure compliance with multi-jurisdictional legislation,
on similar topics, i.e.including, but not limited to: OFAC, FCPA, UK Bribery Act, Modern Slavery, HIPAA and GDPR.
Key elements of our compliance program include:
•Organizational oversight by senior-level personnel responsible for the compliance functions within our company;
•Written standards and procedures, including a Code of Conduct;
•Methods for communicating compliance concerns, including anonymous reporting mechanisms;
•Investigation and remediation measures to ensure prompt response to reported matters and timely corrective action;
•Compliance education and training for employees and contracted business associates such as distributors;
•Auditing and monitoring controls to promote compliance with applicable laws and assess program effectiveness;
•Oversight of interactions with healthcare professionals to ensure compliance with healthcare fraud &and abuse laws, including mandated reporting of transfers of value to healthcare professionals under the Affordable Care Act;
•Oversight of corporate handling of personal data to ensure compliance with data protection legislation;
•Disciplinary guidelines to enforce compliance and address violations;
•Screening of employees and relevant contracted business associates; and
•Risk assessments to identify areas of regulatory compliance risk.
Environmental
Our allografts and xenografts, as well as the chemicals used in processing natural tissues and also in the manufacturing of metal and synthetic implants, are handled and disposed of in accordance with country-specific, federal, provincial, regional, state and/or local regulations, as applicable. We contract with independent third parties to perform all gamma irradiation of our surgical implants. In view of the engagement of a third party to perform irradiation services, the requirements for compliance with radiation hazardous waste do not apply, and therefore we do not anticipate that having any material adverse effect upon our capital expenditures, results of operations or financial condition. However, we are responsible for assuring that the service is being performed in accordance with applicable regulations.
As of December 31, 2019,2021, we had a total of 935231 employees of which 19070 were employed outside of the United States. Management believes its relations with itsNone of our employees are represented by a labor union, and we consider our employee relations to be good. We believe a strong employee culture and a commitment to improving patient lives by advancing the standard of spine care and our digital health initiatives will help foster a shared sense of engagement and purpose among our employees and provide us with a competitive advantage. Our culture and employees are driven by our five values: being relentless, gritty and tenacious; acting with speed; being customer-focused and patient-minded; leading with integrity; and being bold and acting courageously. We intend to attract and retain the best talent in the industry by offering competitive pay, annual incentive
awards, equity opportunities, health, wellness and retirement benefits, and a work environment that enables our employees to fully utilize their potential and deliver long-term stockholder value. We also believe having a diverse workforce, including diversity of personal characteristics and experience, is important for us to succeed as we transform our legacy business into Surgalign: a leading medical technology company focused on elevating the standard of care through the evolution of digital health.
Our business is generally not seasonal in nature; however, the number of orthopedic implant surgeries and elective procedures generally declines during the summer
months.months and increases in the fourth quarter.
Our Internet address is
www.rtix.com.www.surgalign.com. Information included on our website is not incorporated by reference
herein or in our
Annual Report on Form
10-K. 10-K for the year ended December 31, 2021. We make available, free of charge, on or through the investor relations portion of our website, our annual reports on Form
10-K, quarterly reports on Form
10-Q and current reports on Form
8-K and amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after we file such material with, or furnish it to the
SEC.Securities and Exchange Commission (“SEC”). These filings are also available on the SEC’s website at www.sec.gov. Also available on our website is our Corporate Governance Guidelines, our Code of Conduct, our Code of Ethics for Senior Financial Professionals, and the charters for our Audit Committee, Compensation Committee and Nominating and Governance Committee. Within the time period required by the SEC and Nasdaq, we will post any amendment to our Code of Ethics for our senior financial professionals and any waiver of our Code of Conduct applicable to our senior financial professionals, executive officers and directors.
Item 1A. RISK FACTORS
Risks Related to the Business
An investment in our common stock involves a high degree of risk. You should consider each of the risks and uncertainties described in this section and all of the other information in this document before deciding to invest in our common stock. Any of the risk factors we describe below could severely harm our business, financial condition, and results of operations. The market price of our common stock could decline if any of these risks or uncertainties develops into actual events, and you may lose all or part of your investment.
COVID-19 has had and may continue to have a material, adverse impact on us.
A novel strain of coronavirus, COVID-19, has spread
globally, including to
multiple countries, including the United States,
Germany, and
several European countries, including GermanyPoland where we have significant operations. The COVID-19 pandemic has
and continues to directly and indirectly materially and adversely
impacted the Company’saffected our business, financial condition,
results of operations and
operating results.prospects. The extent to which these adverse impacts will continue will depend on numerous evolving factors that are highly uncertain, rapidly changing and cannot be predicted with precision or certainty at this time.
Across our operations, although most governmental restrictions on certain medical procedures have been lifted, the pandemic has adversely impacted our business activities, as healthcare resources are still being prioritized for the treatment and management of the outbreak in some cases. Consequently, there are delays in delivering certain elective and non-emergent procedures and significant volatility or reductions in demand for such procedures may continue. The
spread of COVID-19
has caused manypandemic poses the risk that hospitals and other healthcare providers
may be prevented from conducting business activities for an indefinite period of time, including due to
refocus their care on the surgespread of the
COVID-19 casesdisease or due to shutdowns that have been and
to postpone elective and non-emergent procedures, restrict access to these facilities, and in some cases re-allocate scarce resources to their critically ill patients. These efforts have impacted and couldmay continue to
impact our business activities, including our product sales, as many of our products are used in connection with elective surgeries.be requested or mandated by governmental authorities. Further, disruptions in the manufacture
and/or distribution of our products or in our supply chain may occur as a result of the pandemic or pandemic-related events that result in staffing shortages, production slowdowns, stoppages, or disruptions in delivery systems, any of which could materially and adversely affect our ability to manufacture and/or distribute our products, or to obtain the raw materials and supplies necessary to manufacture and/or distribute our products, in a timely manner, or at all.
Many of our employees have been furloughed and although our operations are beginning to increase towards normal levels, we continue to have many employees working remotely.
COVID-19 has had an adverse effect on the overall productivity of our workforce, and we may be required to continue to take extraordinary measures to ensure the safety of our employees and those of our business partners. In
addition, our employees may be required to take time off for extended periods of time due to illness, or as a result of government-imposed changes to daily
routines, including school closures. Additionally, these measures are hindering our ability to recruit, vet and hire personnel for key positions.routines. It is unknown how long these disruptions could continue.
As the global outbreak of COVID-19 continues to rapidly evolve, it could continue to
both materially and adversely affect our revenues,
cash flows, business, financial condition,
profitability,results of operations and
cash flowsprospects for an indeterminate period of time.
WeNotwithstanding recent developments with respect to vaccines for COVID-19, we are unable to accurately predict the full impact that the ongoing
COVID-19 pandemic will have due to numerous factors that are not within our control, including
theits duration and
severity of the pandemic. Stay-at-home/severity. Stay-at-home and shelter-in-place orders, business closures, travel restrictions, supply chain disruptions, employee illness or quarantines, and other extended periods of interruption to our business have resulted and could continue to result in disruptions to our
operations, whichoperations. These interruptions have had and could continue to have adverse impacts on the growth of our business, have
caused and could continue to cause us to cease or delay operations, and could prevent our customers from receiving shipments or processing payments.
Some experts expect a second, more severe phaseAny worsening of the
COVID-19 pandemic
in the Fall of 2020 and Winter of 2021. Such a severe second phase wouldcould result in additional material adverse impacts
upon the Company.Ifon our essential employees who are unablebusiness, financial condition, results of operations and prospects.
We may not have sufficient cash flows from operating activities, cash on hand and available capital sources to teleworkfinance capital expenditures and other working capital needs and to finance contingent consideration and forward contract arrangements when they become ill or otherwise incapacitated, ourdue.
Our business operations
may be adversely impacted.generally require significant upfront capital expenditures. As a medical device manufacturer,of December 31, 2021, we fall generally within a “critical essential infrastructure” sector,had capital resources consisting of cash and we are considered exempt under most stay at home/shelter in place orders. Accordingly, our employees maycash equivalents of $51.3 million. We will continue to work because ofexpend substantial cash resources for the importanceforeseeable future, for, among other things, the development of our operations to thedigital health and well-being of citizens in the states in which we operate. Consistent with these stay at home/shelter in place orders, we have implemented telework policies wherever possible for appropriate categories of “nonessential” employees. “Essential” employees that are unable to telework continue to work at our facilities, and we have implemented appropriate safety measures,solutions platform, including social distancing, face covering, temperature checking and increased sanitation standards. We are following guidance from the Center for Disease Control and the Occupational Safety and Health Administration regarding suspension of nonessential travel, self-isolation recommendations for employees returning from certain geographic areas, confirmed reports of any COVID-19 diagnosis among our employees, and the return of such employees to our workplace. Pursuant to updated guidance from the Equal Employment Opportunity Commission, we are engaging in limited and appropriate inquiries of employees regarding potential COVID-19 exposure,applications based on the direct threat that such exposure may presentHOLOTM AI technology, inventory, the investments in our product pipeline, and other operating expenses. These expenditures will include costs associated with marketing and selling our products, obtaining certain regulatory approvals, and expanding our technology pipeline. In connection with prior acquisitions, we are required to our workforce. We continue to address other unique situations that arise among its workforce duemake contingent consideration earnout payments to the COVID-19 pandemic on a case-by-case basis. Whilesellers if certain metrics relating to the acquired businesses have been achieved. As of December 31, 2021, we believehad accrued $51.9 million in contingent consideration as liabilities that we owe in connection with our prior acquisitions. In addition we have taken appropriate measures$10.0 million related to ensureforward contracts that we may owe if certain milestones are met based on the healthINN acquisition. There is no assurance that we will have sufficient cash on hand or available capital to finance our capital expenditures and wellbeing of our “essential” employees, there can be no assurances that our measures will be sufficientother working capital needs or fund contingent consideration payments when they become due, and failure to protect our employeesdo so may result in our workplace or that they may otherwise be exposed to COVID-19 outside of our workplace. If a number of our essential employees become ill, incapacitated or are otherwise unable to continue working during the current or any future epidemic, our operations may be adversely impacted.
We are involved in an ongoing government investigation by the SEC, the results of which may have a material adverse effect on our business, operations, and financial condition.
We have a history of net losses, we expect to continue to incur net losses in the near future, and we may not achieve or maintain profitability.
We have a history of net losses from our continuing operations. For the years ended December 31, 2021, 2020 and 2019, we incurred net losses from continuing operations of $122.9 million, $194.2 million, and $248.8 million, respectively. As of December 31, 2021, we had an accumulated deficit of $569.6 million. We have incurred significant net losses and have relied on our ability to fund our operations through revenues from the sale of our products and through various forms of financings. A successful transition to sustained profitability is dependent upon achieving a level of revenues adequate to support our cost structure. This may not occur and, unless and until it does, we will continue to need to raise additional capital. We may seek additional funds from public and private equity or debt financings, borrowings under debt facilities or other sources to fund our projected operating requirements. However, we may not be able to obtain further financing on reasonable terms or at all. If we are unable to raise additional funds on a timely basis, or at all, our business, results of operations, financial condition and
business.prospects will be materially adversely affected.
Our operating results have fluctuated significantly in the past and may fluctuate significantly in the future, which makes our future operating results difficult to predict and could cause our operating results to fall below expectations.
Our quarterly and annual operating results have fluctuated significantly in the past and may fluctuate significantly in the future, which makes it difficult for us to predict our future operating results. These fluctuations may occur due to a variety of factors, many of which are outside of our control, including, but not limited to:
•Acceptance of our products by spine surgeons, patients, hospitals and third-party payers;
•Demand and pricing of our products;
•The Audit Committeemix of our products sold, because profit margins differ among our products;
•Timing of new product offerings, acquisitions, licenses or other significant events by us or our competitors;
•Our ability to grow and maintain a productive sales and marketing organization and distributor network;
•Regulatory approvals and legislative changes affected the Board, withproducts we may offer or those of our competitors;
•The effect of competing technological and market developments;
•Levels of third-party reimbursement for our products;
•Interruption in the assistancemanufacturing or distribution of independent legalour products;
•Our ability to produce or obtain products of satisfactory quality or in sufficient quantities to meet demand; and forensic accounting advisors, conducted an internal investigation of matters relating to the Company’s revenue recognition practices for certain contractual arrangements, primarily with OEM customers, 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. The Investigation was precipitated by an investigation that the SEC is currently conducting of current and prior period matters relating to RTI’s revenue recognition practices (the “SEC Investigation”). The SEC has subpoenaed certain documents
•Changes in connection with its investigation. We are cooperating with the SEC in connection with its investigation. Investigations of this nature are inherently uncertain and their results cannot be predicted. Regardless of the outcome, the SEC Investigation can have an adverse impact on us because of legal costs, diversion of management resources, and other factors. The SEC Investigation could also result in reputational harm to RTI, which, among other things, may limit the Company’sour ability to obtain new customersFDA, state and enter into new agreements withinternational approval or clearance for our existing customersproducts.
The effect of one of the factors discussed above, or the cumulative effects of a combination of factors, could result in large fluctuations and
haveunpredictability in our quarterly and annual operating results. As a
material adverse effectresult, comparing our operating results on
RTI’s current anda period-to-period basis may not be meaningful. Investors should not rely on our past results as an indication of our future
business.performance.
Our auditors have issued a “going concern” audit opinion.
As discussed in Note 1 of the Consolidated Financial Statements in Part II, Item 8, “Financial Statements
Our current and Supplementary Data”, ourformer independent auditors have indicated in their report on our financial statements for the yearyears ended December 31, 2021, December 31, 2020 and December 31, 2019, that there is substantial doubt about our ability to continue as a going concern. See Note 1 of the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2021. A “going concern” opinion indicates that the financial statements have been prepared assuming we will continue as a going concern and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets, or the amounts and classification of liabilities that may result if we do not continue as a going concern. Therefore, you should not rely on our consolidated balance sheet as an indication of the amount of proceeds that would be available to satisfy claims of creditors, and potentially be available for distribution to stockholders, in the event of liquidation.
The SEC InvestigationFurther, we are projecting that we will continue to generate significant negative operating cash flows over the next 12 months and beyond. In consideration of these projected negative cash flows, as well as, (i) contingent consideration amounts payable in cash in connection with the Holo Surgical and INN acquisitions; (ii) additional payment obligations we may owe to our suppliers in respect of minimum purchase requirements under our supply contracts; (iii) uncertainties related to potential settlements from ongoing litigation and regulatory investigations; (iv) the unsecured promissory notes in an aggregate principal amount of approximately $10.6 million issued to the sellers in connection with the INN acquisition; and (v) uncertainties related to COVID-19, we have forecasted the need to raise additional capital in order to continue as a going concern. Our operating plan for the next 12-month period also includes continued investments in our product pipeline that will necessitate additional debt and/or equity financing in addition to the funding of future operations through 2022 and beyond. Our ability to raise additional capital may be adversely impacted by potential worsening global economic conditions and the restatementrecent disruptions to, and volatility in, financial markets in the United States and worldwide resulting from the ongoing COVID-19 pandemic. Further, if there remains substantial doubt about our ability to continue as a going concern, investors or other financing sources may be unwilling to provide additional funding on commercially reasonable terms or at all, and no assurance can be given that future financing will be available or, if available, that it will be on terms that are satisfactory. Even if we are 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 previously issued financial statements,stockholders, in the errorscase of equity financing. If cash resources are insufficient to satisfy our ongoing cash requirements through 2022, we may be required to scale back operations, reduce research and development expenses, and postpone, as well as suspend, capital expenditures, in order to preserve liquidity, or be forced to liquidate the Company, in which case it is likely that resultedinvestors will lose all or a part of their investment.
We are involved in such restatement,an ongoing government investigation by the material weakness that was identified in our internal control over financial reporting andSEC, the determination that our internal control over financial reporting and disclosure controls and procedures were not effective, could result in loss of investor confidence, and additional litigation or governmental proceedings or investigations, anyresults of which could cause anmay have a material adverse effect on our business, resultsfinancial condition and business.
The Audit Committee of
operations and financial condition.In connectionour Board of Directors (“Board”), with the filingassistance of RTI’s Form 10-K/A for fiscal year end December 31, 2018, we corrected certain historical errors relatedindependent legal and forensic accounting advisors, conducted an internal investigation of matters relating to the timing of our revenue recognition practices for certain contractual arrangements, primarily with OEM customers, including the accounting treatment, financial reporting and
internal controls related to such
arrangements. As a result, we have determined that revenue for certain invoices should have been recognized at a later date than when originally recognized. In responsearrangements (the “Investigation”). The Investigation also examined transactions to
binding purchase orders from certain OEM customers, goods were shipped and received byunderstand the
customers before requested delivery dates and agreed-upon delivery windows. In many instances, the OEM customers requested or approved the early shipments, but on other occasions the goods were delivered early without obtaining the customers’ affirmative approval. Some of those unapproved shipments were shipped by employees in orderpractices related to
generate additional revenue and resulted in shipments being pulled from a future quarter into an earlier quarter. In addition, the Company has concluded that, in July 2017, an adjustment was improperly made to a product return provision in the Direct Division. The revenue for those shipments is being restated, as well as for other orders that shipped earlier than the purchase order due date in the system for which the Company could not locate evidence that the OEM customers had requested or approved the shipments. In addition, the Company has concluded that, in the periods from 2015 through the fourth quarter of 2018, certain adjustments were incorrectly or erroneously made via manual journal entries
for accrual and reserve accounts. The Investigation was precipitated by an investigation that the SEC is currently conducting of prior period matters relating to
accrual/reserve accounts, includingour revenue recognition practices (the “SEC Investigation”). We are currently in discussions with the SEC regarding a
July 2017 adjustment to a product return provision in the Direct Division, among others. Due to these determinations, we concluded that our previously issued consolidated financial statements for fiscal years ended December 31, 2016, 2017 and 2018, and selected financial data for the years ended December 31, 2014 and 2015, and each of our unaudited condensed consolidated financial statements and related disclosures for the quarterly and year-to-date periods during such years, as well as the first three quarters of 2019, should be restated.In connection with this restatement of our prior consolidated financial statements, we have also identified material weaknesses in our internal control over financial reporting, and management has concluded that our internal control over financial reporting and disclosure controls and procedures were not effective as of December 31, 2018. For further discussionpotential settlement of the material weaknesses, please see “Item 9A. Controls and Procedures”. Remediation efforts place aSEC Investigation. It is uncertain at this time whether any settlement will be reached or the terms of any such settlement, which could include the payment of significant burden on management and add increased pressure to our financial resources and processes.
monetary amounts. If we are unable to successfully remediate our existingreach a settlement with the SEC, or any future material weaknesses or other deficiencies in our internal control over financial reporting or disclosure controls and procedures, investors may lose confidence in our financial reporting andif the accuracy and timingterms of our financial reporting and disclosures andsuch settlement involve significant monetary payments, our business, reputation,financial condition, results of operations financial condition, market value ofand prospects, along with our debt securities,reputation with customers and ability to access the capital markets through debt issuancesbusiness partners, could be significantly adversely affected.
We depend heavily upon sources
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
human tissue, and any failure to obtain tissue from these sources in a timely manner will interfere with our ability to process and distribute allografts.The supplythe outcome of human tissue has at times limited our growth, and may not be sufficient to meet our future needs. In addition, due to seasonal changes in mortality rates, some scarce tissues that we currently use for allografts are at times in particularly short supply. Other factors, some of which are unpredictable, such as negative publicity and regulatory actions in the industry in which we operate (and which may not involve us) also could unexpectedly reduce the available supply of tissue.
We rely on donor recovery groups for their human tissue supplies and we have relationships with tissue donor recovery groups across the country. We also have relationships outside the United States. Donor recovery groups are part of relatively complex relationships. They provide support to donor families, are regulated by the FDA and applicable foreign equivalents, and are often affiliated with hospitals, universities or organ procurement organizations. Our relationships with donor recovery groups, which are critical to our supply of tissue, could be affected by relationships recovery groups have with other organizations. Any negative impact arising from potential regulatory and disease transmission issues facing the industry, as well as the negative publicity that these issues could create, could adversely affect our ability to negotiate contracts with recovery groups.
We cannot be sure that the supply of human tissue will continue to be available at current levels or will be sufficient to meet our needs.litigation. If we are not able to obtain tissue from current sources sufficient to meet our needs,successful in any such litigation, we may not be ablerequired to locate additional replacement sourcespay substantial damages or settlement costs. While we maintain insurance coverages that are intended to address certain aspects of tissue on commercially reasonable terms, if at all. Any interruption of our business caused by the need to locate additional sources of tissue could significantly impact our revenues. We expectsuch proceedings and any litigation that our revenues from allografts would decline in proportion to any decline in tissue supply.
We depend on various third-party suppliers and, in some cases, a single third-party supplier for key raw materials and component parts, apart from human tissue, used in our tissue processing and manufacturing processes, and the loss of any of these third-party suppliers, or their inability to supply us with adequate raw materials, could harm our business.
We use a number of raw materials in addition to human tissue, including titanium, titanium alloys, stainless steel, PEEK, PEKK, and animal tissue. We rely from time to time on a number of suppliers and, in some cases, on a single source vendor. Our dependence on single third-party suppliers, or even a limited number of third-party suppliers in certain instances, creates several risks, including limited control over pricing, availability, quality and delivery schedules. In addition, any supply interruption or cancellation in a limited or sole sourced component or raw material could materially harm our ability to manufacture our products until a new source of supply, if any, could be found. Wemay arise, such insurance may be unableinsufficient to find a sufficient alternative supply channel in a reasonable time periodcover all losses or on commercially reasonable terms, if at all which would have an adverse effect on our business, financial condition and resultstypes of operations. In addition, a change in manufactures will require qualification of the new supplier to ensure they comply with our quality standards. Delays in qualifying a new supplier orre-qualifying an existing supplier could have an adverse effect on our business, financial condition and results of operations.
claims that may arise.
Consolidation in the healthcare industry could lead to demands for price concessions or to the exclusion of some suppliers from certain of our markets, which could have an adverse effect on our business, financial condition,
or results of
operations.operations and prospects.
Numerous initiatives and reforms initiated by legislators, regulators, and third-party payers to curb rising healthcare costs, in addition to other economic factors, have resulted in a consolidation trend in the healthcare industry to create new companies with greater market power, including hospitals. As the healthcare industry consolidates, competition to provide products and services to industry participants has become, and will likely continue to become, more intense. This in turn has resulted, and will likely continue to result in, greater pricing pressures and the exclusion of certain suppliers from various market segments as group purchasing organizations, independent delivery networks, and large single accounts continue to use their market power to consolidate purchasing decisions for some of our existing and prospective customers. We expect the market demand, government regulation, and third-party reimbursement policies, among other potential factors, will continue to change the worldwide healthcare industry, resulting in further business consolidations and alliances among our customers and prospective customers, which may reduce competition among our existing and prospective customers, exert further downward pressure on the prices of our implants and may adversely impact our business, financial condition, results of operations and prospects.
Security breaches, loss of data and other disruptions could compromise sensitive information related to our business, prevent us from accessing critical information or expose us to liability, which could adversely affect our business and our reputation.
In the ordinary course of our business, we collect and store sensitive data, including patient health information, personally identifiable information about our employees, intellectual property, and proprietary business information. We manage and maintain our applications and data utilizing on-site and off-site systems. These applications and data encompass a wide variety of business-critical information including research and development information, commercial information and business and financial information.
The secure processing, storage, maintenance, and transmission of this critical information is vital to our operations and business strategy, and we devote significant resources to protecting such information. Although we take measures to protect sensitive information from unauthorized access or disclosure, our information technology and infrastructure may be vulnerable to attacks by hackers, viruses, breaches, or interruptions due to employee error or malfeasance, terrorist attacks, hurricanes, fire, flood, other natural disasters, power loss, computer systems failure, data network failure, internet failure, or lapses in compliance with privacy and security mandates. Any such virus, breach or interruption could compromise our networks and the information stored there could be accessed by unauthorized parties, publicly disclosed, lost, or stolen. We have measures in place that are designed to detect and respond to such security incidents and breaches of privacy and security mandates, but these measures may not adequately protect us from any risks. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, government enforcement actions and regulatory penalties. Unauthorized access, loss or dissemination could also interrupt our operations, including our ability to receive and ship orders from customers, bill our customers, provide customer support services, conduct research and development activities, process and prepare company financial information, manage various general and administrative aspects of our business, and damage our reputation, any of which could adversely affect our business.
If we fail to maintain existing strategic relationships or are unable to identify distributors of our implants, our revenues may decrease.
We currently derive a significant amount of our revenues through distributors. Variations in the timing and volume of orders by our distributors, particularly those who distribute a significant amount of our implants, may have a material effect upon our revenues. Further, if our relationships with our distributors are terminated or impaired for any reason and we are unable to replace these relationships with other means of distribution, we could suffer a material decrease in revenues.
We may need, or decide it is otherwise advantageous to us, to obtain the assistance of additional distributors to market and distribute our new implants and technologies, as well as to market and distribute our existing implants and technologies, to existing or new markets or geographical areas. We may not be able to find additional distributors who will agree to and are able to successfully market and distribute our implants and technologies on commercially reasonable terms, if at all. If we are unable to establish additional distribution relationships on favorable terms, our revenues may decline. In addition, our distributors may choose to favor the products of our competitors over ours and give preference to them.
Also, our financial results are dependent upon the service efforts of our distributors. If our distributors are unsuccessful in adequately servicing our products, our sales could significantly decrease and our business, financial condition, results of operations and prospects may be adversely impacted.
Supply chain disruptions could adversely impact our operations and financial condition.
Global supply chains have been disrupted, as a result of the COVID-19 pandemic and other factors. Accordingly, the availability of raw materials and components used in the manufacture of our products may be adversely impacted. Additionally, even when we and our suppliers are able to source such materials and components, they may cost more and may only be available on a delayed basis. Higher materials and component costs could adversely affect our margins if we are unable to pass such costs along to customers in the form of price increases. Delays in receipt of materials and components could also interrupt our production and cause us to go into back order on certain of our products, further exacerbating the effect of the global supply chain disruption.
If we, our suppliers, or parties who manufacture our products fail to maintain the high quality standards that implants require, if we are unable to procure processing capacity as required, or if the parties who manufacture our products experience disruptions in their ability to procure materials to manufacture our products, our commercial opportunity will be reduced or eliminated.
Implants require careful calibration and precise, high-quality processing and manufacturing, and we rely on a small number of suppliers for the manufacturing of our implants. Achieving precision and quality control requires skill and diligence by our suppliers. If we or our suppliers fail to achieve and maintain these high standards, or fail to avoid processing and manufacturing errors, we could be forced to recall, withdraw, or suspend distribution of our implants; our implants and technologies could fail quality assurance and performance tests; production and deliveries of our implants could be delayed or cancelled, and our processing and manufacturing costs could increase. For example, our former OEM Businesses notified us that they are issuing a voluntary recall of their Cervalign® ACP System, for which we are a distributor, and is in the process of conducting an internal quality review of the system’s locking mechanism. In connection with the voluntary recall, we are asking our customers and distributors to return any inventory of the Cervalign® ACP System they have in their possession. We incurred a charge of approximately $2.2 million in the fourth quarter of 2020 as a result of our write-off of Cervalign® ACP System inventory. The design has been modified, manufacturing has produced quality replacements, and commercialization resumed in a controlled manner in September 2021.
Although we are not aware of any injuries caused by the defect in this product, there can be no assurance that we will not receive claims with respect to any such injuries in the future for which we may have liability and which could have a material adverse effect on our business, financial condition, results of operations and prospects. In general, the reporting of product defects or voluntary recalls to the FDA or analogous regulatory bodies outside the United States, including the Cervalign® ACP System recall, which was reported to the FDA on January 22, 2021, could result in manufacturing audits, inspections and broader recalls or other disruptions to our and/or our suppliers’ businesses. This and future recalls, whether voluntary or required, could result in significant costs to us and significant adverse publicity, which could harm our ability to market our products in the future.
In addition, since we rely on a small number of parties to manufacture our products, any interruption or cancellation in a limited or sole sourced component or raw material for such parties could materially harm their ability to
manufacture our products until a new source of supply, if any, could be found, which would have an adverse effect on our business, financial condition, and results of operations.
Our health insurance and prescription drug coverage, along Additionally, a change in parties who manufacture our products will require qualification of the new party to ensure they comply with our self-insurance reserves,quality standards. Delays in qualifying a new party could have an adverse effect on our business, financial condition, results of operations and prospects.
Our success depends on the continued acceptance of our surgical implants and technologies by the medical community, and rapid technological changes could result in reduced demand for our implants and products.
New implants, technologies or enhancements to our existing implants may never achieve broad market acceptance, which can be affected by numerous factors, including lack of clinical acceptance of implants and technologies; introduction of competitive treatment options that render implants and technologies too expensive or obsolete; lack of availability of third-party reimbursement; and difficulty training surgeons in the use of implants and technologies.
Market acceptance will also depend on our ability to demonstrate that our existing and new implants and technologies are an attractive alternative to existing treatment options. Our ability to do so will depend on surgeons’ evaluations of the clinical safety, efficacy, ease of use, reliability and cost-effectiveness of these treatment options and technologies.
If we are unable to achieve the improvements in our implants necessary for their successful commercialization, the demand for our implants will suffer.
We face intense competition, which could result in reduced acceptance and demand for our implants and technologies.
The medical technology industry is intensely competitive. We compete with companies in the United States and internationally that engage in the development and production of medical technologies and processes including biotechnology, orthopedic, pharmaceutical, biomaterial and other companies; academic and scientific institutions; and public and private research organizations.
Many of our competitors have much greater financial, technical, research, marketing, distribution, service, and other resources than we do. Moreover, our competitors may offer a broader array of medical devices, surgical instruments and technologies and have greater name recognition in the marketplace. Our competitors also include several development-stage companies, that may develop or market technologies that are more effective or commercially attractive than our technologies, or that may render our technologies obsolete.
We or our competitors may be exposed to product or professional liability claims which could cause us to be liable for damages or cause investors to think we will be liable for similar claims in the future.
Our business of designing and marketing medical devices and surgical instruments exposes us to potential product liability risks that are inherent in such activities. In the ordinary course of business, we are the subject of product liability lawsuits alleging that component failures, manufacturing flaws, design defects or inadequate disclosure of product-related risks or product-related information resulted in an unsafe condition or injury to patients.
Our product and professional liability insurance may not
coverbe adequate for potential claims if we are not successful in our defenses. Moreover, insurance covering our business may not always be available in the future
on commercially reasonable terms, if at all. If our insurance proves to be inadequate to pay a damage award, we may not have sufficient funds to do so, which would harm our financial condition and liquidity. In addition, successful product liability claims made against one of our competitors could cause claims to be made against us or expose us to a perception that we are vulnerable to similar claims.
We currently self-insure Claims against us, regardless of their merit or potential outcome, may also hurt our ability to obtain surgeon acceptance of our implants or to expand our business.
A disruption in our relationship with our former OEM Businesses could have a material adverse impact on our business, financial condition, and results of operations.
Our former OEM Businesses will continue to manufacture certain metal, synthetic and tissue-based implants and associated instrumentation and process certain sterilized allograft implants for us pursuant to distribution agreements with Ardi Bidco Ltd. and certain of its affiliates. During portions of the term of such distribution agreements, the OEM Businesses will also provide certain supply chain services (including warehousing and drop-shipment services) and design and development services to us. The distribution agreements have an initial term of five years with a possibility of renewal. Our former OEM Businesses in the past have experienced and continue to experience delays, as a result of employee
turnover or otherwise, which have and may in the future cause us to experience delays in receiving supplies under the distribution agreements. Any disruption in supply or a significant change in our U.S. employees’ medicalrelationship with the OEM Businesses could have a material adverse impact on our business, financial condition, and prescription drug insurance coverage. Weresults of operations. While we believe that there are responsiblealternate sources of supply that can satisfy our commercial requirements, we cannot be certain that identifying and establishing relationships with such sources, if necessary, would not result in significant delay or material additional costs.
If we are not successful in expanding our distribution activities into international markets, we will not be able to pursue one of our strategies for
losses up to certain retention limits on both aper-claim and aggregate basis.For policies underincreasing revenues.
Our international distribution strategies vary by market, as well as within each country in which we are responsible for losses, we record a liability that represents our estimated cost of claims incurred and unpaid as of the balance sheet date.operate. Our estimated liability is not discounted and is based oninternational operations will be subject to a number of assumptionsrisks which may vary from the risks we face in the United States, including the need to obtain regulatory approvals in additional foreign countries before we can offer our implants and factors, including historical trendstechnologies for use; the potential burdens of complying with a variety of foreign laws; longer distribution-to-collection cycles, as well as difficulty in collecting accounts receivable; dependence on local distributors; limited protection of intellectual property rights; fluctuations in the values of foreign currencies; and political and economic conditions,instability.
Adverse litigation judgments or settlements resulting from legal proceedings in which we may be involved could expose us to monetary damages or limit our ability to operate our business.
We were recently involved in stockholder class action and is closely monitoredderivative litigation, as well as intellectual property litigation, and adjusted when warranted by changing circumstances. Fluctuating healthcare costs, severity of claims, increasesmay in the employee population,future become involved in other class actions, derivative actions, private actions, collective actions, investigations, and deviationsvarious other legal proceedings by stockholders, customers, employees, suppliers, competitors, government agencies, or others. The results of any such litigation, investigations, and other legal proceedings are inherently unpredictable and expensive. Although some of the costs and expenses of such claims may be covered by insurance, any claims against us, whether meritorious or not, could be time consuming, result in costly litigation, damage our reputation, require significant amounts of management time, and divert significant resources. If any of these legal proceedings were to be determined adversely to us, or we were to enter into a settlement arrangement, we could be exposed to monetary damages or limits on our ability to operate our business, which could have an adverse effect on our business, financial condition, results of operations and prospects.
We are dependent on our key management and technical personnel for continued success.
Our senior management team is concentrated in a small number of key members, and our future success depends to a meaningful extent on the services of our executive officers and other key team members, including members of our scientific staff. Generally, our executive officers and employees can terminate their employment relationship at any time. The loss of any directors or key employees or our inability to attract or retain other qualified personnel could materially harm our business, financial condition, results of operations and prospects.
Competition for qualified leadership and scientific personnel in our industry is intense, and we compete for leadership and scientific personnel with other companies that have greater financial and other resources than we do. Our future success will depend in large part on our ability to attract, retain and motivate highly qualified leadership and scientific personnel, and there can be no assurance that we are able to do so. Any difficulty in hiring or retaining needed personnel, or increased costs related thereto, could have a material adverse effect on our business, financial condition, results of operations and prospects.
We are dependent on the services of our Chief Medical Officer, Kris Siemionow, for the Company’s growth strategy in digital health to further the Company’s growth strategy in digital surgery. The Company acquired Holo Surgical and equity interests in INN from our expectations could affectentities directly or indirectly owned by Mr. Siemionow and/or Paul Lewicki, a director of the accuracy of estimates based on historical experience. If actual claims are greater in number and/or severity comparedCompany, pursuant to what was estimated or medical costs increase beyond what was expected, our accrued liabilities might not be sufficientwhich we made covenants to Mr. Siemionow and Mr. Lewicki. For example, (i) we may be required to recordpay contingent consideration to Mr. Siemionow and Mr. Lewicki as a result of achievement of certain milestones under the Holo Surgical purchase agreement; (ii) we may be required to pay consideration to entities wholly owned by Mr. Siemionow and Mr. Lewicki in satisfaction of the contingent obligation to purchase additional expense. Unanticipated changesequity interests in INN as a result of achievement of certain milestones under the INN purchase agreement; (iii) we are required to maintain a research and development team in Poland until October 23, 2023 subject to the terms and conditions as set forth in the Holo Surgical purchase agreement; and (iv) we cannot materially decrease the number of employees and independent
contractors providing services to INN and cannot otherwise materially reduce support for INN’s product development, approval, marketing and sales, as further described in the INN purchase agreement.
Any acquisitions, strategic investments, divestures, mergers, or joint ventures we make may produce materially different amountsrequire the issuance of a significant amount of equity or debt securities and may not be scientifically or commercially successful.
As part of our business strategy, we may make acquisitions to obtain additional businesses, product and/or process technologies, capabilities, and personnel. If we make one or more significant acquisitions in which the consideration includes securities, we may be required to issue a substantial amount of equity, debt, warrants, convertible instruments, or other similar securities. Such an issuance could dilute your investment in our Common Stock or increase our interest expense and other expenses. In addition, we may be required to amend our certificate of incorporation to increase our authorized capital stock in order to fully satisfy all such contingent consideration share payments, to the extent they become payable. Any such charter amendment would permit us to issue additional shares for future acquisitions or other purposes, which may lead to further dilution of your investment in our Common Stock.
Our long-term strategy may include identifying and acquiring, investing in, or merging with suitable candidates on acceptable terms, divesting of certain business lines or activities, or entering into joint ventures. In particular, over time we may acquire, make investments in, or merge with providers of product offerings that complement our business or may terminate such activities. Mergers, acquisitions, and divestitures include a number of risks and present financial, managerial, and operational challenges, including but not limited to:
•Failure to derive the expected benefits of the acquisitions;
•Difficulty and expense of integrating the operations, technology and personnel of an acquired business;
•Our inability to retain the management, key personnel and other employees of an acquired business;
•Our inability to maintain relationships with customers and key third parties, such as alliance partners;
•Exposure to legal claims for activities of an acquired business prior to the acquisition;
•The potential need to implement financial and other systems and add management resources;
•The potential for internal control deficiencies in the internal controls of acquired operations;
•Potential inexperience in a business area that is either new to us or more significant to us than thatprior to an acquisition;
•The diversion of our management’s attention from our core business;
•The potential impairment of goodwill and write-off of in-process research and development costs, adversely affecting our reported underresults of operations; and
•Increased costs to integrate or, in the case of a divestiture or joint venture, separate the technology, personnel, customer base and business practices of the acquired or divested business or assets.
Any one of these
programs,risks could prevent an acquisition, strategic investment, divesture, merger or joint venture from being scientifically or commercially successful, which could
adverselyhave a material impact
on our
operating results.results of operations, and financial condition.
We operatemay fail to realize the potential benefits of our Holo Surgical Acquisition and our acquisition of equity interests in INN, which could negatively affect our business, financial condition, results of operations and prospects.
We completed our acquisition of Holo Surgical in October 2020. Holo Surgical is in the process of developing an AI-based digital surgery platform designed to enable digital spine surgery. Additionally, we recently completed an acquisition of 42% of the equity interests in INN in December 2021. INN is in the process of developing proprietary AI technology for autonomously segmenting and identifying neural structures in medical images. As a highly regulated industry. An inabilityresult, the Holo Surgical and INN acquisitions provide us with an entry into the digital surgical products market, a business line in which we have not previously engaged, which may be challenging to meet currentintegrate with our core product lines and more difficult to develop and manage than we anticipated.
We cannot provide assurance that these acquisitions will result in long-term benefits to us or our stockholders, or that we will be able to effectively integrate and manage the Holo Surgical and INN businesses. Our ability to successfully integrate, and realize the potential benefits of, our acquisition of Holo Surgical and INN is subject to a number of uncertainties and risks, including:
•Holo Surgical and INN are pre-revenue, development stage companies with no commercial operations;
•Holo Surgical’s and INN’s potential future profitability is dependent upon the successful development and successful commercial introduction and acceptance of their offerings, which may not occur in the timeframe we expect or at all;
•Our ability to obtain the requisite regulatory approvals from the FDA, the European Commission or other foreign regulatory authorities for Holo Surgical’s and INN’s offerings for us to begin marketing or selling such offerings, or any material delays in receiving such regulatory approvals;
•Complying with regulatory requirements applicable to the Holo Surgical and INN businesses and their offerings that we were not previously subject to;
•Difficulties in educating the market on, and obtaining market acceptance of, the offerings of Holo and INN, which we believe involve new technology that has not been used previously by the market and must compete with more established treatments currently accepted as the standards of care;
•Potential future challenges to, or third-party claims in respect of, our intellectual property rights underlying Holo Surgical and INN;
•Difficulties assimilating and retaining key personnel of the Holo Surgical and INN businesses, including any personnel directly involved in the development of Holo Surgical and INN’s offerings;
•Difficulties in combining or integrating Holo Surgical’s or INN’s business into the Company’s existing business, with such integration becoming more costly or time consuming than we originally anticipated;
•Discovery of liabilities of Holo Surgical and INN that are broader in scope and magnitude or are more difficult to manage than originally anticipated or were not previously identified; and
•Inability or failure to successfully integrate financial reporting and information technology systems.
If we are not able to successfully integrate, develop and manage Holo Surgical and INN and their operations, or if we experience delays or other challenges with executing our strategy for Holo Surgical and INN’s offerings or combining the businesses, the anticipated benefits of the acquisitions may not be realized fully or at all or may take longer to realize than expected and our business, financial condition, results of operations and prospects may be negatively impacted. In addition, the integration processes could result in higher-than-expected costs, diversion of management attention and disruption of either company’s ongoing businesses, any of which may adversely affect our business, financial condition, results of operations and prospects.
Risks Related to Government Regulation
We and certain of our suppliers may be subject to extensive government regulation that increases our costs and could limit our ability to market or sell our products.
The medical devices we market are subject to rigorous regulation by the U.S. Food and Drug Administration (“FDA”) and numerous other federal, state, and foreign governmental authorities. These authorities regulate the development, approval, classification, testing, manufacturing, labeling, marketing, and sale of medical devices. Likewise, our use and disclosure of certain categories of health information may be subject to federal and state laws, implemented and enforced by governmental authorities that protect health information privacy and security. See “Business – Government Regulation” herein for a summary of certain regulations to which we are subject. Further, we cannot predict whether, in the future, the U.S. or foreign governments may impose new regulations that have a material adverse effect on our business, financial condition, results of operations and prospects.
The approval or clearance by governmental authorities, including the FDA in the United States, is generally required before any medical devices may be marketed in the United States or foreign jurisdictions,other countries. The process of obtaining FDA clearance and approvals to develop and market a medical device can be costly, time-consuming, and subject to the risk that such clearances or any deficiencies withapprovals will not be granted on a timely basis, if at all.
In addition, we may be subject to compliance actions, penalties, or injunctions if we are determined to be promoting the use of our
manufacturingproducts for unapproved or
quality systemsoff-label uses, or if the FDA challenges one or more of our determinations that a product modification did not require new approval or clearance by the FDA. Device manufacturers are permitted to promote products solely for the uses and
processes identified by regulatory agencies, could disrupt our business, subject us to regulatory action and costly litigation, damage our reputation for high quality production, cause a loss of confidenceindications set forth in the
Companyapproved product labeling. A number of enforcement actions have been taken against manufacturers that promote products for “off-label” uses, including actions alleging that federal health care program reimbursement of products promoted for “off-label” uses are false and
our implantsfraudulent claims to the government. The failure to comply with “off-label” promotion restrictions can result in significant administrative obligations and
negatively impact our financial positioncosts, and
operating results.The FDA and several states have statutory authority to regulate allograft processing, including our BIOCLEANSE®, TUTOPLAST® and CANCELLE® SP processes, and allograft-based materials. We must register our facilities, whether located in the United States potential penalties from, and/or elsewhere,agreements with, the FDA as well as regulators outside the United States,federal government.
We and certain of our implants must be made in a manner consistent with current good tissue practices (“cGTP”) or similar standards in each jurisdiction in which we manufacture. In addition,suppliers also are subject to announced and unannounced inspections by the FDA and other agencies perform periodic auditsinternational notified bodies to ensure thatdetermine our facilities remain in compliance with all appropriate regulations, including primarily the quality system regulationsFDA’s Quality System Regulations (21 CFR Part 820) (“QSRs”) and medical device reportingother regulations. Following an inspection, an agency may issue a notice listing conditions that are believed to violate cGTP or other regulations (such as an FDA report on Form 483, Notice of Observations), or a warning letter for violations of “regulatory significance” that may result in enforcement action if not promptly and adequately corrected.
Since 2009, the FDA has significantly increased its oversight of companies’ subject to its regulations, including medical device companies, by hiring new investigators and stepping up inspections of manufacturing facilities. In recent years, the FDA has also significantly increased the number of warning and untitled letters issued to companies. If the FDA were to concludefind that we are not in complianceor certain of our suppliers have failed to comply with applicable lawsregulations, the agency could institute a wide variety of enforcement actions, ranging from a public warning letter to more severe sanctions such as: fines and civil penalties against us, our officers, our employees or regulations,our suppliers; unanticipated expenditures to address or that anydefend such actions; delays in clearing or approving, or refusal to clear or approve, our products; withdrawal or suspension of approval of our implants are ineffectiveproducts or pose an unreasonable health risk,those of our third-party suppliers by the FDA could ban such implants, detainor
other regulatory bodies; product recall or seize adulterated or misbranded implants, order a recall,seizure; interruption of production; operating restrictions; injunctions; and criminal prosecution. The FDA also has the authority to request repair, replacement, or refund of such implants, refuse to grant pending premarket approval applicationsthe cost of any medical device manufactured or require certificatesdistributed by us. Any of foreign governments for exports and/the foregoing actions could have a material adverse effect on our development of new laboratory tests or require us to notify health professionalsbusiness strategy and others thaton our business, financial condition, results of operations, and cash flows.
Moreover, governmental authorities outside the
implants present unreasonable risksUnited States have become increasingly stringent in their regulation of
substantial harm to the public health. The FDA may also impose operating restrictions, enjoin and restrain certain violations of applicable law pertaining to medical devices, and
assess civil or criminal penalties against our
officers, employees or us. The FDA may also recommend prosecution to the U.S. Department of Justice (“DOJ”). Any adverse regulatory action, depending on its magnitude, may restrict us from effectively marketing and selling our implants. Any inability to meet current or future regulatory requirements in the United States or foreign jurisdictions, or any deficiencies with our manufacturing or quality systems and processes identified by regulatory agencies would likely disrupt our business, subject us to regulatory action and costly litigation, damage our reputation for high quality production, cause a loss of confidence in the Company and our implants and negatively impact our financial position and operating results.If any of our allografts fall under the FDA’s definitions of “more than minimally manipulated or indicated fornon-homologous use,” we would be required to obtain medical device approval or clearance or biologics licenses, which could require clinical testing and could result in disapproval of our license applications and restricted distribution of any of our allografts whichproducts may become subject topre-market approval. The more rigorous regulation by non-U.S. governmental authorities in the future. U.S. or non-U.S. government regulations may be imposed in the future that may have a material adverse effect on our business, financial condition, and results of operations.
If we fail to obtain, or experience significant delays in obtaining, FDA clearances or approvals for our future products or modifications to our products, our ability to commercially distribute and market our products could require post-market testing and surveillancesuffer.
Our products are subject to
monitor the effects of such allografts, could restrict the commercial applications of these allografts, and could conduct periodic inspections of our facilities and our suppliers. Delays encountered duringextensive regulation by the FDA
approval process could shortenand numerous other federal, state, and foreign governmental authorities. In particular, the
patent protection period during which we have the exclusive right to commercialize such technologies or could allow others to come to market before us with similar technologies.cGTP covers all stages of allograft processing, from procurement of tissue toFDA permits commercial distribution of final allografts. In addition, these regulationsmost new medical devices only after the devices have received clearance under Section 510(k) of the Federal Food, Drug and Cosmetic Act (“510(k)”) or are the subject of an approved premarket approval application (“PMA”). The process of obtaining FDA clearance and approvals to develop and market a significant effect upon recovery agencies which supply us with tissuemedical device can be costly, time-consuming, and have increased the cost of recovery activities. These increases have translated into increased costs for us, because we are expected to reimburse the recovery agencies based on their cost of recovery.
In additionsubject to the FDA, several state agencies regulate tissue banking. Regulations issued by Florida, New York, California and Maryland are particularly relevant to our business. Most states dorisk that such clearances or approvals will not currently have tissue banking regulations, but it is possible that others may make allegations against us or against donor recovery groups or tissue banks, including those with which we have relationships, aboutnon-compliance with applicable FDA regulations or other relevant statutes and regulations. Allegations like these could cause regulators or other authorities to take investigative or other action, or could cause negative publicity for our business and the industry in which we operate.
be granted on a timely basis, if at all.
Most of our
metal, synthetic,hardware and
xenograftbiologic products,
as well as products under development by Holo and
a few allograft products,INN fall into an FDA classification that requires the submission of a 510(k)
. application. This process requires us to demonstrate that the device to be marketed is at least as safe and effective as
that is, substantially equivalent to, a legally marketed device. We must submit information that supports our substantial equivalency
claims. Beforeclaims, and before we can market the new device, we must receive an order from the FDA finding substantial equivalence and clearing the new device for commercial distribution in the United States.
We are also subject
The 510(k) process generally takes three to periodic inspectionnine months, but can take significantly longer, especially if the FDA requires a clinical trial to support the 510(k) application. Currently, we do not know whether the FDA will require clinical data in support of any 510(k) applications that we intend to submit for other products in our pipeline. In addition, the FDA continues to re-examine its 510(k) clearance process for medical devices and published several draft guidance documents that could change that process. Any changes that make the process more restrictive could increase the time it takes for us to obtain clearances or could make the 510(k) process unavailable for certain of our products.
A PMA must be submitted to the FDA if the device cannot be cleared through the 510(k) process or is not exempt from premarket review by the FDA for compliance with its QSR, among other FDA requirements, such as restrictions on advertisingFDA. A PMA must be supported by extensive data, including results of preclinical studies and promotion. Ourclinical trials, manufacturing operations, and those of our third-party manufacturers, are requiredcontrol data and proposed labeling, to comply with the QSR, which addresses a company’s responsibility for product design, testing and manufacturing quality assurance and the maintenance of records and documentation. The QSR requires that each manufacturer establish a quality system by which the manufacturer monitors the manufacturing process and maintains records that show compliance with FDA regulations and the manufacturer’s written specifications and procedures relating to the devices. QSR compliance is necessary to receive and maintain FDA clearance or approval to market new and existing products. The FDA makes announced and unannounced periodic andon-going inspections of medical device manufacturers to determine compliance with the QSR. If in connection with these inspections the FDA believes the manufacturer has failed to comply with applicable regulations and/or procedures, it may issue inspectional observations on Form 483 that would necessitate prompt corrective action. If FDA inspectional observations are not addressed and/or corrective action is not taken in a timely manner anddemonstrate to the FDA’s satisfaction the FDA may issue a warning letter (which would similarly necessitate prompt corrective action) and/or proceed directly to other formssafety and effectiveness of enforcement action, including the imposition of operating restrictions, including a ceasing of operations, ondevice for its intended use. The PMA process is more costly and uncertain than the 510(k) clearance process, and generally takes between one or more facilities, enjoining and restraining certain violations of applicable law pertaining to medical devices and assessing civil or criminal penalties against our officers, employees or us.three years, if not longer. The FDA could also issuecan delay, limit, or deny clearance or approval of a warning letterdevice for many reasons, including:
•Our inability to demonstrate to the satisfaction of the FDA or a consent decree. the applicable regulatory entity or notified body that our products are safe or effective for their intended uses;
•The disagreement of the FDA or the applicable foreign regulatory body with the design or implementation of our clinical trials or the interpretation of data from pre-clinical studies or clinical trials;
•Serious and unexpected adverse device effects experienced by participants in our clinical trials;
•The data from our pre-clinical studies and clinical trials may be insufficient to support clearance or approval, where required;
•Our inability to demonstrate that the clinical and other benefits of the device outweigh the risks; or the manufacturing process or facilities we use may not meet applicable requirements. Delays in obtaining regulatory clearances and approvals may:
•Delay or prevent commercialization of products we develop;
•Require us to perform costly tests or studies;
•Diminish any competitive advantages that we might otherwise have obtained; and
•Reduce our ability to collect revenue.
The FDA may also recommend prosecutionrequire clinical data in support of any future 510(k) applications or PMAs that we intend to the DOJ. Any adverse regulatory action, depending on its magnitude, may restrict us from effectively manufacturing, marketing and sellingsubmit for products in our pipeline. We have limited experience in performing clinical trials that might be required for a 510(k) clearance or PMA approval. If any of our products andrequire clinical trials, the commercialization of such products could be delayed which could have a material adverse effect on our business, financial condition, and results of operations.operations and prospects.
The FDA, in cooperation with U.S. Customs and Border Protection (“CBP”), administers controls over the import of medical devices into the United States. The CBP imposes its own regulatory requirements on the importsafety of our products including inspectionis not yet supported by long-term clinical data and possible sanctions for noncompliance. We are alsomay therefore prove to be less safe and effective than initially thought.
The ability to obtain a 510(k) clearance is generally based on the FDA’s agreement that a new product is substantially equivalent to certain already marketed products. Because most 510(k)-cleared products were not the subject
of pre-market clinical trials, spine surgeons may be slow to
foreign trade controls administered by certain U.S. government agencies, including the Bureau of Industry and Security within the Commerce Department and the Office of Foreign Assets Control within the Treasury Department. There are also requirements of state, local and foreign governments that we must comply with in the manufacture and marketing ofadopt our
products. In many of the foreign countries in which we market our510(k)-cleared products, we
may not have the comparative data that our competitors have or are
subject to local regulations affecting, among other things, designgenerating, and
product standards, packaging requirements and labeling requirements. Many of the regulations applicable to our devices and products in these countries are similar to those of the FDA. The member countries of the EU have adopted the European Medical Device Directive, which creates a single set of medical device regulations for products marketed in all member countries. Compliance with the Medical Device Directive and certification to a quality system (e.g., ISO 13485 certification) enable the manufacturer to place a CE mark on its products. To obtain authorization to affix the CE mark to a product, a recognized organization that has been designated by the member country to assess the conformity of certain products (a “European Notified Body”) must assess a manufacturer’s quality system and the product’s conformity to the requirements of the Medical Device Directive. We are subject to inspection by European notified bodies for compliance with these requirements. In addition, many countries, such as Germany, have very specific additional regulatory requirements for quality assurance and manufacturing with which we must comply.Effective May 26, 2020, the MDR replaced the current medical device directives. All medical devices currently distributed in the EU under the medical device directives are likely impacted. The MDR may also include products, such as human tissue, not traditionally considered medical devices in the EU. Additionally, the MDR, among other things, increases regulatory requirements for several medical device groupings applicable to the Company’s implants distributed in the EU, including strengthening notified body oversight for Class I reusable surgical instruments, andup-classifying spinal devices in contact with the spinal column. Additionalpre-clinical testing or clinical studies may be required to meet new MDR requirements. As notified bodies are preparing for certification under the MDR, a trend has been observed among industry participants that the notified bodies are becoming more rigorous and conservative in their interpretation and application of currently existing directives, resulting in observations requiring corrective actions, particularly with respect to clinical evaluation reports, that cause industry members, including the Company, to incur additional costs. Further, with the implementation of the MDR the demand for notified body services is anticipated to increase while the number of eligible entities qualified as notified bodies is anticipated to decrease, thereby creating for the foreseeable future an imbalance in supply and demand that is anticipated to increase the cost of notified body services. Meeting the requirements of the MDR will likely cause us to incur additional costs and/or require us to discontinue distributing certain products in the EU and other countries outside the EU that rely on the CE mark for distribution into such countries. If we are unable to timely meet the requirements of the new MDR we may be prohibited from distributingsubject to greater regulatory and product liability risks. With the passage of the American Recovery and Reinvestment Act of 2009, funds have been appropriated for the U.S. Department of Health and Human Services’ Healthcare Research and Quality to conduct comparative effectiveness research to determine the effectiveness of different drugs, medical devices, and procedures in treating certain conditions and diseases. Some of our affected products inor procedures performed with our products could become the EUsubject of such research. It is unknown what effect, if any, this research may have on our business. Further, future research or experience may indicate that treatment with our products does not improve patient outcomes or improves patient outcomes less than we initially expected. Such results would reduce demand for our products, and other countries that rely on the CE mark, whichthis could cause us to lose revenue. Further, notified bodies arewithdraw our products from the market. Moreover, if future research or experience indicate that our products cause unexpected or serious complications or other unforeseen negative effects, we could be subject to new certification. If the Company’s notified body is notre-certified, or if they are certified forsignificant legal liability, significant negative publicity, damage to our reputation and a narrower rangedramatic reduction in sales of product types, the Company mayour products, all of which would have to engage a new or additional notified body which could cause a delay in meeting the new MDR requirements. Individually or cumulatively, these changes associated with the MDR could cause us to incur costs or require us to changematerial adverse effect on our business, practices in a manner adverse to our business. Asfinancial condition, results of April 23, 2020, implementation of the EU MDR has been delayed until May 26, 2021.
operations and prospects.
Our business is subject to complex and evolving U.S. and international laws and regulation regarding privacy and data protection. Many of these laws and regulations are subject to change and uncertain interpretation and could result in claims, changes to our business practices, penalties, increased cost of operations, or
declines in user growth or engagement, or otherwise harm our business.
Regulatory authorities around the world
have enacted laws and regulations or are considering a number of legislative and regulatory proposals, concerning data protection. The interpretation and application of consumer and data protection laws in the United States,
EUEuropean Union (the “EU”) and elsewhere are often uncertain and subject to change. It is possible that these laws may be interpreted and applied in a manner that is inconsistent with our data practices.
These legislativeFailure to comply with any of these laws and
regulatory proposals, if adopted, and such interpretationsregulations could
in addition to the possibility of fines, result in
an order requiring that we changeenforcement action against us, including fines, public censure, claims for damages by affected individuals, damage to our
data practices,reputation and loss of goodwill, any of which could have
ana material adverse effect on our business,
and results of
operations. Complying with these various laws could cause us to incur substantial costs or require us to change our business practices in a manner adverse to our business.operations, and financial condition.
Recent legal developments in Europe have created compliance uncertainty regarding certain transfers of personal data from Europe to the United States. For example, the GDPR,General Data Protection Regulation (EU 2016/679) (“GDPR”), which became effective in the EUEuropean Union (the “EU”) on May 25, 2018, applies to our activities conducted from an establishment in the EU or related to products and services that we offer to EU customers. The GDPR will createcreated a range of new compliance obligations, which could cause us to change our business practices, and will significantly increase financial penalties for noncompliance.
In addition, the ECEuropean Commission in July 2016 and the Swiss Government in January 2017 approved theEU-U.S. and theSwiss-U.S. Privacy Shield frameworks, respectively, which are designed to allow U.S. companies that self-certify to the U.S. Department of Commerce and publicly commit to comply with the Privacy Shield requirements to freely import personal data from the EU and Switzerland. However, these frameworks face a number of legal challenges, and their validity remains subject to legal, regulatory and political developments in both the EU and the United States. For example, on July 16, 2020, the Court of Justice of the EU invalidated the EU-US Privacy Shield Framework. This has resulted in some uncertainty, and compliance obligations could cause us to incur costs or require us to change our business practices in a manner adverse to our business.
A majority of all of our allograft processing facilities are currently conducted in locations that may be at risk of damage from hurricanes, fire, or other natural disasters. If a natural disaster strikes our administrative headquarters or any of our other processing or manufacturing facilities, our operations may be interrupted and we may be unable to process or manufacture certain products for a substantial amount of time.
A majority of all of our allograft processing facilitiesare located in Alachua, Florida, in an area with historical occurrences of hurricane damage and wild fires. We have taken precautions to safeguard our facilities, including obtaining property, casualty and business interruption insurance. We have also developed an information technology disaster recovery plan. However, any future natural disaster at this or our other locations could cause substantial delays in our operations, damage or destroy our facilities, equipment or inventory, and cause us to incur additional expenses. A disaster could seriously harm our business, financial condition and results of operations. Our facilities would be difficult to replace and would require substantial lead time to repair or replace. The insurance we maintain may not be adequate to cover our losses in any particular case and may not continue to be available to us on acceptable terms, or at all.
If we fail to maintain existing strategic relationships or are unable to identify distributors of our implants, revenues may decrease.
We currently derive a significant amount of our revenues through distributors such as Zimmer, Medtronic and Synthes. In addition, our spine distributors provide nearly all of the instrumentation, surgeon training, distribution assistance and marketing materials for the lines of spinal implants that we produce and they distribute.
Variations in the timing and volume of orders by our distributors, particularly those who distribute a significant amount of our implants, may have a material effect upon our revenues. If our relationships with our distributors are terminated or reduced for any reason and we are unable to replace these relationships with other means of distribution, we could suffer a material decrease in revenues.
We may need, or decide it is otherwise advantageous to us, to obtain the assistance of additional distributors to market and distribute our new implants and technologies, as well as to market and distribute our existing implants and technologies, to new markets or geographical areas. We may not be able to find additional distributors who will agree to and are able to successfully market and distribute our implants and technologies on commercially reasonable terms, if at all. If we are unable to establish additional distribution relationships on favorable terms, our revenues may decline.
Also, our financial results are dependent upon the service efforts of our distributors. If our distributors are unsuccessful in adequately servicing our products, our sales could significantly decrease.
If third-party payers fail to provide appropriate levels of reimbursement for the use of our implants,
our revenues could be adversely affected.
The impact of U.S. healthcare reform legislation on our business remains uncertain. In 2010, federal legislation to reform the U.S. healthcare system was enacted into law. The impact of thisfar-reaching legislation, including Medicare provisions purportedly aimed at improving quality and decreasing costs, comparative effectiveness research, an independent payment advisory board, and pilot programs to evaluate alternative payment methodologies, could meaningfully change the way healthcare is designed and delivered. It is possible that aspects of currently enacted legislation may change or be struck down by the courts. The extent of any such changes and the impact on our business is uncertain. We therefore cannot predict what other healthcare programs and regulations will be ultimately implemented at the federal or state level, or the effect of any future legislation, court rulings or regulation in the United States. Amendments to, or rescissions of, existing laws and regulations, or the implementation of new ones, could meaningfully change the way healthcare is designed and delivered. Any change that lowers reimbursement for an implant, our services,
or our other technologies, or that reduces medical procedure volumes, would likely adversely impact our business, financial condition, and results of operations.
If we fail to maintain the high processing standards that implants require or if we are unable to develop processing capacity as required, our commercial opportunity will be reduced or eliminated.
Implants require careful calibration and precise, high-quality processing and/or manufacturing. Achieving precision and quality control requires skill and diligence by our personnel. If we fail to achieve and maintain these high standards, including avoiding processing and manufacturing errors, and, depending on the nature of the complaint, design defects or component failures; we could be forced to recall, withdraw or suspend distribution of our implants; our implants and technologies could fail quality assurance and performance tests; production and deliveries of our implants could be delayed or cancelled and our processing and/or manufacturing costs could increase.
Further, to be successful, we will need to manage our human tissue processing capacity related to tissue recovery and demand for our allografts. It may be difficult for us to match our processing capacity to demand due to problems related to the amount of suitable tissue, quality control and assurance, tissue availability, adequacy of control policies and procedures and lack of skilled personnel. If we are unable to process and produce our implants on a timely basis, at acceptable quality and costs, and in sufficient quantities, or if we experience unanticipated technological problems or delays in processing, it may reduce revenues, increase our cost per allograft processed or both.
The allograft industry is subject to additional local, state, federal and international government regulations and any increased regulations of our activities could significantly increase the cost of doing business, thereby reducing profitability.
Some aspects of our business are subject to additional local, state, federal or international regulation. Changes in the laws or new interpretations of existing laws could negatively affect our business, revenues or prospects, and increase the costs associated with conducting our business. In particular, the procurement and transplantation of allograft tissue is subject to federal regulation under the National Organ Transplant Act (“NOTA”), a criminal statute that prohibits the purchase and sale of human organs, including bone and other tissue. NOTA permits the payment of reasonable fees associated with the transportation, processing, preservation, quality control and storage of human tissue. If NOTA were amended or interpreted in a way that made us unable to include some of these costs in the amounts we charge our customers, it could reduce our revenues and therefore negatively impact our business. It is possible that more restrictive interpretations or expansions of NOTA could be adopted which could require us to change one or more aspects of our business, at a substantial cost, in order to continue to comply with this statute.
A variety of additional local, state, federal and international government laws and regulations govern our business, including those relating to the storage, handling, generation, manufacture and disposal of medical wastes from the processing of tissue and collaborations with health care professionals. If we fail to conduct our business in compliance with these laws and regulations, we could be subject to significant liabilities for which our insurance may not be adequate. Moreover, such insurance may not always be available in the future on commercially reasonable terms, if at all. If our insurance proves to be inadequate to pay a damage award, we may not have sufficient funds to do so, which would harm our financial condition and liquidity.
Our success depends on the continued acceptance of our surgical implants and technologies by the medical community.
New allograft, xenograft, metal or synthetic implants, technologies or enhancements to our existing implants may never achieve broad market acceptance, which can be affected by numerous factors, including lack of clinical acceptance of implants and technologies; introduction of competitive treatment options which render implants and technologies too expensive or obsolete; lack of availability of third-party reimbursement; and difficulty training surgeons in the use of tissue implants and technologies.
Market acceptance will also depend on our ability to demonstrate that our existing and new implants and technologies are an attractive alternative to existing treatment options. Our ability to do so will depend on surgeons’ evaluations of the clinical safety, efficacy, ease of use, reliability and cost-effectiveness of these treatment options and technologies. For example, we believe that some in the medical community have lingering concerns over the risk of disease transmission through the use of allografts.
Furthermore, we believe that even if the medical community generally accepts our implants and technologies, acceptance and recommendations by influential surgeons will be important to the broad commercial success of our implants and technologies. If our implants and technologies are not broadly accepted in the marketplace, we may not remain competitive in the market.
Rapid technological changes could result in reduced demand for our implants and products.
Technologies change rapidly in the industry in which we operate. For example, steady improvements have been made in synthetic human tissue substitutes which compete with our tissue implants. Unlike allografts, synthetic tissue technologies are not dependent on the availability of tissue. If one of our competitors successfully introduces synthetic technologies using recombinant technologies, which stimulate the growth of tissue surrounding an implant, it could result in a decline in demand for tissue implants. We may not be able to respond effectively to technological changes and emerging industry standards, or to successfully identify, develop or support new technologies or enhancements to existing implants in a timely and cost-effective manner, if at all. If we are unable to achieve the improvements in our implants necessary for their successful commercialization, the demand for our implants will suffer.
We face intense competition, which could result in reduced acceptance and demand for our implants and technologies.
The medical technology/biotechnology industry is intensely competitive. We compete with companies in the United States and internationally that engage in the development and production of medical technologies and processes including biotechnology, orthopedic, pharmaceutical, biomaterial and other companies; academic and scientific institutions; and public and private research organizations.
Many of our competitors have much greater financial, technical, research, marketing, distribution, service and other resources than we do. Moreover, our competitors may offer a broader array of tissue repair treatment products, medical devices, surgical instruments and technologies or may have greater name recognition in the marketplace. We compete with a number of companies with significantly greater resources and brand recognition than ours. Our competitors, including several development stage companies, may develop or market technologies that are more effective or commercially attractive than our technologies, or that may render our technologies obsolete. For example, the development of a synthetic tissue implant that permits remodeling of bones could reduce the demand for allograft and xenograft-based implants and technologies.
If we do not manage the medical release of donor tissue into processing in an effective and efficient manner, it could adversely affect profitability.
Many factors affect the level and timing of donor medical releases, including the effectiveness of donor screening performed by donor recovery groups, the timely receipt, recording and review of required medical documentation, and employee loss and turnover in our medical records department. We can provide no assurance that releases will occur at levels which maximize our processing efficiency and minimize our cost per allograft processed.
Negative publicity concerning methods of human tissue recovery and screening of donor tissue in the industry in which we operate may reduce demand for our allografts and impact the supply of available donor tissue.
Media reports or other negative publicity concerning both methods of tissue recovery from donors and actual or potential disease transmission from donated tissue may limit widespread acceptance of our allografts, whether directed to allografts generally or our allografts specifically. Unfavorable reports of improper or illegal tissue recovery practices by any participant in the industry, both in the United States and internationally, as well as incidents of improperly processed tissue leading to transmission of disease, may broadly affect the rate of future tissue donation and market acceptance of allograft technologies.
Potential patients may not be able to distinguish our allografts, technologies and the tissue recovery and the processing procedures from those of our competitors or others engaged in tissue recovery. In addition, families of potential donors may become reluctant to agree to donate tissue tofor-profit tissue processors.
If our patents and the other means we use to protect our intellectual property prove to be inadequate, our competitors could exploit our intellectual property to compete more effectively against us.
The law of patents and trade secrets is constantly evolving and often involves complex legal and factual questions. The U.S. government may deny or significantly reduce the coverage we seek for our patent applications before or after a patent is issued. We cannot be sure that any particular patent for which we apply will be issued, that the scope of the patent protection will be comprehensive enough to provide adequate protection from competing technologies, that interference, derivation, reexamination, post-grant review or inter parties review proceedings regarding any of our patent applications will not be filed, or that we will achieve any other competitive advantage from a patent. In addition, it is possible that one or more of our patents will be held invalid or reduced in scope of claims if challenged or that others will claim rights in or ownership of our patents and other proprietary rights. If any of these events occur, our competitors may be able to use our intellectual property to compete more effectively against us.
Because patent applications remain secret until published (typically 18 months after first filing) and the publication of discoveries in the scientific or patent literature often lag behind actual discoveries, we cannot be certain that our patent application was the first application filed disclosing or potentially covering a particular invention. If another party’s rights to an invention are superior to ours, we may not be able to obtain a license to use that party’s invention on commercially reasonable terms, if at all. In addition, our competitors, many of which have greater resources than ours, could obtain patents that will prevent, limit or interfere with our ability to make use of our inventions either in the United States or in international markets. Further, the laws of some foreign countries do not always protect our intellectual property rights to the same extent as the laws of the United States. Litigation or regulatory proceedings in the United States or foreign countries also may be necessary to enforce our patent or other intellectual property rights or to determine the scope and validity of the proprietary rights of our competitors. These proceedings may prove unsuccessful and may also be costly, result in development delays, and divert the attention of our management.
We rely upon unpatented proprietary techniques and processes in tissue recovery, research and development, tissue processing, manufacturing and quality assurance. It is possible that others will independently develop technology similar to our technology or otherwise gain access to or disclose our proprietary technologies. We may not be able to meaningfully protect our rights in these proprietary technologies, which would reduce our ability to compete.
Our success depends in part on our ability to operate without infringing on or misappropriating the proprietary rights of others, and if we are unable to do so we may be liable for damages.
We cannot be certain that U.S. or foreign patents or patent applications of other companies do not exist or will not be issued that would prevent us from commercializing our allografts, xenografts, medical devices, surgical instruments and other technologies. Third parties may sue us for infringing or misappropriating their patent or other intellectual property rights. Intellectual property litigation is costly. If we do not prevail in litigation, in addition to any damages we might have to pay, we could be required to cease the infringing activity or obtain a license requiring us to make royalty payments. It is possible that a required license may not be available to us on commercially acceptable terms, if at all. In addition, a required license may benon-exclusive, and therefore our competitors may have access to the same technology licensed to us. If we fail to obtain a required license or are unable to design around another company’s patent, we may be unable to make use of some of the affected technologies or distribute the affected allografts, xenografts or surgical implants, which would reduce our revenues.
The defense costs and settlements for patent infringement lawsuits are not covered by insurance. Patent infringement lawsuits can take years to settle. If we are not successful in our defenses or are not successful in obtaining dismissals of any such lawsuit, legal fees or settlement costs could have a material adverse effect on our results of operations and financial position.
We or our competitors may be exposed to product or professional liability claims which could cause us to be liable for damages or cause investors to think we will be liable for similar claims in the future.
The development, manufacture, and distribution of implants, medical devices, surgical instruments, and other technologies for surgical and medical treatment entails an inherent risk of product or professional liability claims, and substantial product or professional liability claims may be asserted against us. We are party to a number of legal proceedings relating to professional liability. The prevailing view among the states throughout the United States is that providing allografts is a service and not the sale of a product. As such, allografts are not typically subject to product liability causes of action. However, the law of a particular state could change in response to legislative changes or by judicial interpretation in a state where such issue has either not been previously addressed or prior precedent is overturned or subject to different interpretations by a court of higher precedential authority. In addition, due to the international scope of our activities we are subject to the laws of foreign jurisdictions which may treat allografts as products in those jurisdictions.
The implantation of donated human tissue implants creates the potential for transmission of communicable diseases. Although we comply with federal, state and foreign regulations and guidelines intended to prevent communicable disease transmission, and our tissue suppliers are also required to comply with such regulations, there can be no assurances that: (i) our tissue suppliers will comply with such regulations intended to prevent communicable disease transmissions; (ii) even if such compliance is achieved, that our implants have not been or will not be associated with transmission of disease; or (iii) a patient otherwise infected with disease would not erroneously assert a claim that the use of our implants resulted in disease transmission.
Our business of designing, manufacturing and marketing metal, synthetic, and xenograft medical devices and surgical instruments exposes us to potential product liability risks that are inherent in such activities. In the ordinary course of business, we are the subject of product liability lawsuits alleging that component failures, manufacturing flaws, design defects or inadequate disclosure of product-related risks or product-related information resulted in an unsafe condition or injury to patients.
We currently have $30 million of product and professional liability insurance to cover claims. This amount of insurance may not be adequate for potential claims if we are not successful in our defenses. Moreover, insurance covering our business may not always be available in the future on commercially reasonable terms, if at all. If our insurance proves to be inadequate to pay a damage award, we may not have sufficient funds to do so, which would harm our financial condition and liquidity. In addition, successful product liability claims made against one of our competitors could cause claims to be made against us or expose us to a perception that we are vulnerable to similar claims. Claims against us, regardless of their merit or potential outcome, may also hurt our ability to obtain surgeon acceptance of our implants or to expand our business.
We are subject to federal, state, and foreign laws and regulations, including fraud and abuse laws, as well as anti-bribery laws, and could face substantial penalties if we fail to fully comply with such regulations and laws.
Our relationship with foreign and domestic government entities and healthcare professionals, such as physicians, hospitals, and those to whom and through whom we may market our implants and technologies, are subject to scrutiny under various federal, state, and territorial laws in the United States and other jurisdictions in which we conduct business. These include, for example, anti-kickback laws, physician self-referral laws, false claims laws, criminal health care fraud laws, and anti-bribery laws (e.g., the United States Foreign Corrupt Practices
Act)Act and the United Kingdom Bribery Act of 2010). Violations of these laws are punishable by criminal and/or civil sanctions, including, in some instances, fines, imprisonment and, within the United States, exclusion from participation in government healthcare programs, including Medicare, Medicaid and Veterans Administration health programs. These laws are administered by, among others, the
DOJ,Department of Justice, the Office of Inspector General of the Department of Health and Human Services, state attorneys general, and their respective counterparts in the applicable foreign jurisdictions in which we conduct business. Many of these agencies have increased their enforcement activities with respect to medical device manufacturers in recent years.
If we are not successful in expanding our distribution activities into international markets, we will not be able to pursue one of our strategies for increasing revenues.
Our international distribution strategies vary by market, as well as within each country in which we operate. For example, we distribute only a portion of our line of allograft and xenograft implants within each foreign country where we operate. Our international operations will be subject to a number of risks which may vary from the risks we face in the United States, including the need to obtain regulatory approvals in additional foreign countries before we can offer our implants and technologies for use; the potential burdens of complying with a variety of foreign laws; longerdistribution-to-collection cycles, as well as difficulty in collecting accounts receivable; dependence on local distributors; limited protection of intellectual property rights; fluctuations in the values of foreign currencies; and political and economic instability.
Security breaches, loss of data and other disruptions could compromise sensitive information related to our business, prevent us from accessing critical information or expose us to liability, which could adversely affect our business and our reputation.
In the ordinary course of our business, we collect and store sensitive data, including patient health information, personally identifiable information about our employees, intellectual property, and proprietary business information. We manage and maintain our applications and data utilizingon-site andoff-site systems. These applications and data encompass a wide variety of business-critical information including research and development information, commercial information and business and financial information.
The secure processing, storage, maintenance and transmission of this critical information is vital to our operations and business strategy, and we devote significant resources to protecting such information. Although we take measures to protect sensitive information from unauthorized access or disclosure, our information technology and infrastructure may be vulnerable to attacks by hackers, viruses, breaches or interruptions due to employee error or malfeasance, terrorist attacks, hurricanes, fire, flood, other natural disasters, power loss, computer systems failure, data network failure, internet failure, or lapses in compliance with privacy and security mandates. Any such virus, breach or interruption could compromise our networks and the information stored there could be accessed by unauthorized parties, publicly disclosed, lost or stolen. We have measures in place that are designed to detect and respond to such security incidents and breaches of privacy and security mandates. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, government enforcement actions and regulatory penalties. Unauthorized access, loss or dissemination could also interrupt our operations, including our ability to receive and ship orders from customers, bill our customers, provide customer support services, conduct research and development activities, process and prepare company financial information, manage various general and administrative aspects of our business and damage our reputation, any of which could adversely affect our business.
Adverse litigation judgments or settlements resulting from legal proceedings in which we may be involved could expose us to monetary damages or limit our ability to operate our business.
We are currently involved in stockholder litigation and have in the past and may in the future become involved in other class actions, derivative actions, private actions, collective actions, investigations, and various other legal proceedings by stockholders, customers, employees, suppliers, competitors, government agencies, or others. The results of any such litigation, investigations, and other legal proceedings are inherently unpredictable and expensive. Any claims against us, whether meritorious or not, could be time consuming, result in costly litigation, damage our reputation, require significant amounts of management time, and divert significant resources. If any of these legal proceedings were to be determined adversely to us, or we were to enter into a settlement arrangement, we could be exposed to monetary damages or limits on our ability to operate our business, which could have an adverse effect on our business, financial condition, and operating results.
We may be subject to suit under a state or federal whistleblower statute.
Those who engage in business with the federal government, directly or indirectly, may be sued under a federal whistleblower statute designed to combat fraud and abuse in the healthcare industry. These lawsuits, known as qui tam suits, are authorized under certain circumstances by the False Claims Act and can involve significant monetary damages and award bounties to private plaintiffs who successfully bring these suits. If any of these lawsuits were to be brought against us, such suits combined with increased operating costs and substantial uninsured liabilities could have a material adverse effect on our financial condition and
results of operations.
The Affordable Care Act has sought to link the violations of the Anti-Kickback Statute with violations of the False Claims Act, making it arguably easier for the government or for whistleblowers, acting in the name of the government, to sue medical manufactures under the False Claims Act.
In addition to federal whistleblower laws, various states in which we operate also have separate whistleblower laws to which we may be subject.
Our business
Risks Related to Intellectual Property
If our patents and the other means we use to protect our intellectual property prove to be inadequate, our competitors and other parties could
be negatively affected as a result of actions of activist stockholders,exploit our intellectual property or develop and
such activism could impact the trading value of our securities.Respondingcommercialize products and technologies similar or identical to actions by activist stockholders can be costlyours and time-consuming, disrupting our operations and diverting the attention of management and our employees. Such activities could interfere with our ability to execute our strategic plan. In addition, a proxy contest for the election of directors at our annual meeting would likely require us to incur significant legal fees and proxy solicitation expenses and require significant time and attention by management and our Board of Directors. The perceived uncertainties as to our future direction also could affect the market price and volatility of our securities.
The tax treatment of corporations could be subject to potential legislative, administrative or judicial changes or interpretations.
The present federal income tax treatment of corporationssuccessfully commercialize any products may be modified by legislative, administrative or judicial changes or interpretations at any time. For example, on December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Legislation”) was enacted. The Tax Legislation significantly revises the U.S. corporate income tax code.
We are unable to predict whether future modifications will be made to the U.S. corporate income tax code. Any such future changes could materially adversely affect us.
We are dependent on our key management and technical personnel for continued success.
affected.
Our
senior management team is concentrated in a small number of key members, and our future success depends
to a meaningful extent on the services of our executive officers and other key team members, including members of our scientific staff. Generally, our executive officers and employees can terminate their employment relationship at any time. The loss of any key employees or our inability to attract or retain other qualified personnel could materially harm our business and prospects.Competition for qualified leadership and scientific personnel in our industry is intense, and we compete for leadership and scientific personnel with other companies that have greater financial and other resources than we do. Our future success will depend in large part on our ability to attract, retain,obtain and motivate highly qualified leadershipmaintain patent and scientific personnel,other intellectual property with respect to our products. The law of patents and there cantrade secrets is constantly evolving and often involves complex legal and factual questions. The U.S. government or applicable bodies in other jurisdictions may deny or significantly reduce the coverage we seek for our patent applications before or after a patent is issued. We cannot be no assurancesure that any particular patent for which we apply will be issued, that the scope of the patent protection will be comprehensive enough to provide adequate protection from competing technologies, that interference, derivation, reexamination, post-grant review, inter parties review or other proceedings regarding any of our patent applications will not be filed, or that we arewill achieve any other competitive advantage from a patent. In addition, it is possible that one or more of our patents will be held invalid or reduced in scope of claims if challenged or that others will claim rights in or ownership of our patents and other proprietary rights. If any of these events occur, our competitors and other parties may be able to use our intellectual property to compete more effectively against us.
The patent prosecution process is expensive, time-consuming, and complex, and we may not be able to file, prosecute, maintain, enforce, or license all necessary or desirable patent applications at a reasonable cost or in a timely manner. It is also possible that we will fail to identify patentable aspects of our research and development output in time to obtain patent protection. Because patent applications remain secret until published (typically 18 months after first filing) and the publication of discoveries in the scientific or patent literature often lag behind actual discoveries, we cannot be certain that our patent application was the first application filed disclosing or potentially covering a particular invention. If another party’s rights to an invention are superior to ours, we may not be able to obtain a license to use that party’s
invention on commercially reasonable terms, if at all. In addition, our competitors, many of which have greater resources than us, could obtain patents that will prevent, limit, or interfere with our ability to make use of our inventions either in the United States or in international markets. Further, the laws of some foreign countries do
so.not always protect our intellectual property rights to the same extent as the laws of the United States. Litigation or regulatory proceedings in the United States or foreign countries also may be necessary to defend and enforce our patent or other intellectual property rights or to determine the scope and validity of the proprietary rights of our competitors. These proceedings may prove unsuccessful and result in our patents being found invalid or unenforceable, in whole or in part, and may also be costly, result in development delays, and divert the attention of our management. Any
difficulty in hiring or retaining needed personnel, or increased costs related thereto,of the foregoing could have a material adverse effect on our
business, results of operations and financial
condition.Additionally,position.
If we are unable to protect the successful implementationconfidentiality of our growth strategypost-OEM Closingtrade secrets, our business and competitive position would be harmed.
We rely on unpatented proprietary techniques, processes, trade secrets and know-how, which can be difficult to protect. It is possible that others will dependindependently develop technology similar to our technology or otherwise gain access to or disclose our proprietary technologies. We may not be able to meaningfully protect our rights in large part upon the ability and experience of members of our senior management and other personnel. Our performance will be dependent onthese proprietary technologies, which would reduce our ability to identify, hire, train, motivatecompete.
We seek to protect these trade secrets and retain qualified managementother proprietary technology, in part, by entering into non-disclosure and personnelconfidentiality agreements with experience inparties who have access to them, such as our employees, collaborators, service providers, contract manufacturers, consultants, advisors, and other third parties. We also enter into confidentiality and invention or patent assignment agreements with our employees and consultants. We cannot guarantee that we have entered into such agreements with each party that may have or have had access to our trade secrets or proprietary technology and processes. Despite these efforts, any of these parties may breach the medical technology industry. We may be unable to attractagreements and retain such personnel on acceptable terms, or at all. If we lose the service of qualified management or other personnel or are unable to attractdisclose our proprietary information, including our trade secrets, and retain the necessary members of senior management or personnelpost-OEM Closing, we may not be able to successfully execute on our business strategy, which could have an adverse effect on our business. Further, in response to theCOVID-19 novel coronavirus pandemicobtain adequate remedies for such breaches. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive, and time-consuming, and the resulting federaloutcome is unpredictable. In addition, some courts inside and local guidelines, RTI furloughedoutside the United States are less willing or reduced the hours of over 500 of its U.S.-based employees, beginning on April 6, 2020. Although our operations are beginningunwilling to increase towards normal levels, we continue to have many employees working remotely. RTI cannot predict when it will be able to resume normal operations and will continue to carefully monitor the situation.
Water Street may exercise significant influence over us, including through its ability to elect up to two membersprotect trade secrets. If any of our Board of Directors.
We issued 50,000 shares of Series A convertible preferred stock (“Preferred Stock”)trade secrets were to WSHP Biologics Holdings, LLC, an affiliate of Water Street Healthcare Partners (“WSHP”),be lawfully obtained or independently developed by a leading healthcare-focused private equity firm (“Water Street”), in connection with the closing of the Pioneer acquisition. As holders of this Preferred Stock, Water Street is entitled to vote on anas-converted basis, up to a maximum number ofas-converted shares, upon all matters upon which holders of our common stock have the right to vote. The shares of Preferred Stock owned by Water Street currently represent approximately 18% of the voting rights in respect of our share capital on anas-converted basis; accordingly, Water Street has the ability to significantly influence the outcome of any matter submitted for the vote of our stockholders (also, Water Street is not prohibited from buying shares of our common stock). In addition, the dividends which have accrued on each outstanding share of Preferred Stock are added to the liquidation value with respect to such share of Preferred Stock. On August 1, 2018,competitor or other third party, we amended and restated the Certificate of Designation of Series A Convertible Preferred Stock (the “Amended and Restated Certificate of Designation”). Pursuant to the terms of the Amended and Restated Certificate of Designation, dividends on our Preferred Stock ceased accruing as of July 16, 2018. We did not pay dividends on the Preferred Stock from the fourth quarter of 2013 through June 16, 2018. Consequently, we have accrued $16.5 million in preferred dividends payable as of December 31, 2019.
In connection with the Paradigm transaction, on March 8, 2019, the Company adopted a certificate of designation (the “Certificate of Designation”) containing provisions identical to the Amended and Restated Certificate of Designation in effect immediately prior to the transaction except with respect to the name of the Company, which was changed to “RTI Surgical Holdings, Inc.”, pursuant to the Company’s Amended and Restated Certificate of Incorporation.
Water Street may have interests that diverge from, or even conflict with, those of our other stockholders. In addition, our Amended and Restated Certificate of Incorporation and Investor Rights Agreement with Water Street provide that Water Street’s consent is required before we may take certain actions for so long as Water Street and its permitted transferees beneficially own in the aggregate at least 10% of our issued share capital.
In addition, our Amended and Restated Certificate of Incorporation and our Investor Rights Agreement with Water Street provide that Water Street has the right to designate and nominate, respectively, directors to our Board such that the percentage of the members of our Board so designated or nominated is approximately equal to Water Street’s percentage equity ownership interest in the Company. The maximum number of directors that Water Street is able to designate or nominate is two, with at least one of such directors to serve on each of our Board committees. If Water Street’s ownership of our share capital on anas-converted basis falls below 5% (calculated on a fully diluted basis, assuming conversion of the Preferred Stock at the then-existing conversion price), Water Street would have no further director designationright to prevent them from using that technology or nomination rights under our Amended and Restated Certificate of Incorporation or the Investor Rights Agreement.
In addition, the ownership position and the governance rights of Water Street could discourage a third party from proposing a change of control or other strategic transactioninformation to compete with us.
Our ability to pay dividends and to make distributions may be limited or prohibited by the terms of our indebtedness or Preferred Stock.
We are, and may in the future become, party to agreements and instruments that restrict or prevent the payment of dividends on our capital stock. In June 2018, we entered into a Credit Agreement dated as of June 5, 2018 (the “2018 Credit Agreement”), among Legacy RTI, as a borrower, Pioneer, our wholly-owned subsidiary, as a borrower, the other loan parties thereto as guarantors (together, with Legacy RTI and Pioneer, 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. Under the terms Any of the 2018 Credit Agreement, we are restricted from paying dividends on our common stock without the prior written consent of the administrative agent. We are also restricted from paying dividends or making distributions on our common stock without the prior written consent of the holders of a majority of the Preferred Stock pursuant to the terms of the Certificate of Designation, so long as any shares of the Preferred Stock remain outstanding. In addition, under the terms of the 2018 Credit Agreement, distributions to holders of our Preferred Stock are permitted only to the extent that we can satisfy certain financial covenant tests (based on the ratio of our total indebtedness to consolidated EBITDA) and meet other requirements.
The 2018 Credit Agreement and the 2019 Credit Agreement contain financial and operating restrictions that may limit our access to credit. If we fail to comply with financial or other covenants in the 2018 Credit Agreement and the 2019 Credit Agreement, we may be required to repay indebtedness to our existing lenders, which may harm our liquidity.
Provisions in the 2018 Credit Agreement and the 2019 Credit Agreement (defined below) impose restrictions on our ability to, among other things:
make strategic acquisitions;
make dispositions of property;
enter into transactions with affiliates;
pay dividends and make distributions;
The 2018 Credit Agreement and the 2019 Credit Agreement also contain financial covenants that require us to maintain compliance with specified financial ratios and maintain a specified amount of cash on hand.
We may not be able to comply with the financial covenants in the future. In the absence of a waiver from our lenders, any failure by us to comply with these covenants in the future may result in the declaration of an event of default, which could prevent us from borrowing under the 2018 Credit Agreement and the 2019 Credit Agreement. In addition to preventing additional borrowings under the 2018 Credit Agreement and the 2019 Credit Agreement, an event of default, if not cured or waived, may result in the acceleration of the maturity of indebtedness outstanding, if any, under the agreement, which would require us to pay all amounts outstanding. If an event of default occurs, we may not be able to cure it within any applicable cure period, if at all. If the maturity of our indebtedness is accelerated, we then may not have sufficient funds available for repayment or the ability to borrow or obtain sufficient funds to replace the accelerated indebtedness on terms acceptable to us, or at all.
We have incurred a significant amount of secured debt, and expect to incur a significant amount of additional debt in the future.
The 2018 Credit Agreement provides for a revolving credit facility in the aggregate principal amount of up to $100 million (the “2018 Facility”). We and Pioneer will be able to, at our option, and subject to customary conditions and JPM Lender approval, request an increase to the 2018 Facility by up to $50 million. A total of $50 million currently is outstanding on the 2018 Facility due to the Company’s pay off of its previous Third Amended and Restated Loan Agreement, dated as of August 3, 2017, with TD Bank, N.A. and First Tennessee Bank National Association.
The 2018 Facility is guaranteed by our domestic subsidiaries and is secured by: (i) substantially all of our assets and the assets of Pioneer; (ii) substantially all of the assets of each of our domestic subsidiaries; and (iii) 65% of the stock of our foreign subsidiaries. Borrowings made under the 2018 Credit Agreement will bear interest at a rate per annum equal to the monthly REVLIBOR30 Rate (“CBFR Loans”) plus an adjustable margin of up to 2.00% (the “CBFR Rate”). We may elect to convert the interest rate for the initial borrowings to a rate per annum equal to the adjusted London Interbank Offered Rate (“LIBOR”) (“Eurodollar Loans”) plus an adjustable margin of up to 2.00% (the “Eurodollar Rate”). For all subsequent borrowings, we may elect to apply either the CBFR Rate or Eurodollar Rate. The applicable margin is subject to adjustment after the end of each fiscal quarter, based upon our average quarterly availability. The maturity date of the 2018 Facility is June 5, 2023. The Company may make optional prepayments on the 2018 Facility without penalty.
Refer to Item 8, Note 18 for additional information regarding amendments to our credit agreements.
Our level of indebtedness may limit our ability to react to changes in the economy or our industry and prevent us from meeting our obligations under the agreements relating to our indebtedness.
Any acquisitions, strategic investments, divestures, mergers or joint ventures we make may require the issuance of a significant amount of equity or debt securities and may not be scientifically or commercially successful.
As part of our business strategy, we intend to make certain acquisitions to obtain additional businesses, product and/or process technologies, capabilities and personnel. If we make one or more significant acquisitions in which the consideration includes securities, we may be required to issue a substantial amount of equity, debt, warrants, convertible instruments or other similar securities. Such an issuance could dilute your investment in our common stock or increase our interest expense and other expenses.
Our long-term strategy may include identifying and acquiring, investing in or merging with suitable candidates on acceptable terms, divesting of certain business lines or activities or entering into joint ventures. In particular, over time, we may acquire, make investments in, or merge with providers of product offerings that complement our business or may terminate such activities. Mergers, acquisitions and divestitures include a number of risks and present financial, managerial and operational challenges, including but not limited to:
Further, acquisitions involve a number of operational risks, such as:
difficulty and expense of assimilating the operations, technology and personnel of the acquired business;
our inability to retain the management, key personnel and other employees of the acquired business;
our inability to maintain the acquired company’s relationship with customers and key third parties, such as alliance partners;
exposure to legal claims for activities of the acquired business prior to the acquisition;
the potential need to implement financial and other systems and add management resources;
the potential for internal control deficiencies in the internal controls of the acquired operations;
potential inexperience in a business area that is either new to us or more significant to us than prior to the acquisition;
the diversion of our management’s attention from our core business;
the potential impairment of goodwill andwrite-off ofin-process research and development costs, adversely affecting our reported results of operations; and
increased costs to integrate or, in the case of a divestiture or joint venture, separate the technology, personnel, customer base and business practices of the acquired or divested business or assets.
Any one of these risks could prevent an acquisition, strategic investment, divesture, merger or joint venture from being scientifically or commercially successful, whichforegoing could have a material impactadverse effect on our results of operations and financial condition.
The pendencyposition.
Our success depends in part on our ability to operate without infringing on, misappropriating, or otherwise violating the intellectual property and proprietary rights of others, and if we are unable to do so we may be liable for damages.
We cannot be certain that U.S. or foreign patents or patent applications of other companies do not exist or will not be issued that would prevent us from commercializing our medical devices, surgical instruments, and other technologies. Third parties have sued us, and in the future may sue us, for infringing, misappropriating or otherwise violating their patent or other intellectual property rights, regardless of the Contemplated Transactionsmerit of such claims. Intellectual property litigation is costly. Even if we believe third-party intellectual property claims are without merit, there is no assurance that a court would find in our favor on questions of infringement, validity, enforceability, or priority. If we do not prevail in litigation, we could be found liable for significant monetary damages, including treble damages and attorneys’ fees if we are found to have willfully infringed a patent or other intellectual property right. We could also be required to cease the infringing activity or obtain a license requiring us to make royalty and other payments. It is possible that a required license may adversely affectnot be available to us on commercially acceptable terms, if at all. In addition, a required license may be non-exclusive, and therefore our competitors may have access to the business, financial conditionsame technology licensed to us, and it could require us to make substantial licensing, royalty, and other payments. If we fail to obtain a required license or are unable to design around another company’s patent, we may be unable to make use of some of the affected technologies or distribute the affected surgical implants, which would reduce our revenues.
The defense costs and settlements for patent infringement lawsuits are not covered by insurance. Patent infringement lawsuits can take years to settle. Even if resolved in our favor, litigation or other legal proceedings relating to intellectual property claims may cause us to incur significant expenses and could distract our management and other personnel from their normal responsibilities. In addition, there could be public announcements of the results of
operations of RTI.Uncertainty about the effect of the Contemplated Transactions on employees, customers, suppliers, third-party distributorshearings, motions, or other interim proceedings or developments, and other parties, mayif securities analysts or investors perceive these results to be negative, it could have an adverse effect on each of the business, financial condition and results of operations of RTI, regardless of whether the Contemplated Transactions are completed, and may have ana substantial adverse effect on the business, financial condition and resultsprice of operationsour common stock. If we are not successful in our defenses or are not successful in obtaining dismissals of RTI if the Contemplated Transactions are completed. These risks include the following, all of whichany such lawsuit, we could be exacerbated by a delay in the completionrequired to pay substantial legal fees or settlement costs. Any of the Contemplated Transactions:
the impairment of RTI’s ability to attract, retain and motivate current and prospective employees, including key personnel;
the diversion of significant time and resources of RTI’s management;
difficulties maintaining relationships with RTI’s customers, suppliers, third-party distributors and other business partners;
delays or deferments of certain business decisions by RTI’s customers, suppliers, third-party distributors and other business partners;
RTI’s inability to pursue alternative business opportunities or make appropriate changes to the Business because of requirements in the OEM Purchase Agreement that it conduct the Business in all material respects in the ordinary course of business consistent with past practice and not engage in certain activities prior to the completion of the Contemplated Transactions;
any litigation concerning the Contemplated Transactions and related costs; and
the incurrence of significant costs, expenses and fees for professional services and other transaction costs in connection with the Contemplated Transactions.
A disruption in the relationship with the OEM Business after the OEM Closingforegoing could have a material adverse impacteffect on RTI’s businessour results of operations and operating results.
Followingfinancial position.
We may be subject to claims that our employees, consultants, or advisors have wrongfully used or disclosed alleged trade secrets of their current or former employers or claims asserting ownership of what we regard as our own intellectual property.
Many of our employees, consultants, and advisors are currently or were previously employed at universities or other biotechnology companies, including our competitors or potential competitors. Although we try to ensure that our employees, consultants, and advisors do not use the OEM Closing,proprietary information or know-how of others in their work for us, we may be subject to claims that we or these individuals have used or disclosed intellectual property, including trade secrets or other proprietary information, of any such individual’s current or former employer. Litigation may be necessary to defend against these claims. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management.
In addition, while it is our policy to require our employees and contractors who may be involved in the
OEM Business will manufacture certain metalconception or development of intellectual property to execute agreements assigning such intellectual property to us, we may be unsuccessful in executing such an agreement with each party who, in fact, conceives or develops intellectual property that we regard as our own. The assignment of intellectual property rights may not be self-executing, or the assignment agreements may be breached, and
synthetic implants and associated instrumentation and process certain sterilized allograft and xenograft implants for RTI pursuantwe may be forced to
bring claims against third parties, or defend claims that they may bring against us, to determine the
Distribution Agreements with one or more Group Companies. During portionsownership of what we regard as our intellectual property. Any of the
term of the Distribution Agreements, the OEM Business will also provide certain supply chain services (including warehousing and drop-shipment services) and design and development services to RTI. The Distribution Agreements will have an initial term of five years with a possibility of renewal. Any disruption in supply or a significant change in RTI’s relationship with the OEM business after the OEM Closingforegoing could have a material adverse
impacteffect on
RTI’s business and operating results. While the Company believes that there are alternate sources of supply that can satisfy its commercial requirements, it cannot be certain that identifying and establishing relationships with such sources, if necessary, would not result in significant delay or material additional costs.Failure to consummate the Contemplated Transactions within the expected timeframe or at all could have a material adverse impact on the business, financial condition andour results of operations and financial position.
Risks Related to Our Common Stock
We received a written notice from Nasdaq that we have failed to comply with certain listing requirements of
RTI.Therethe Nasdaq Stock Market, which could result in our Common Stock being delisted from the Nasdaq Stock Market.
On December 23, 2021, we received a deficiency letter from the Nasdaq Listing Qualifications Department (the “Staff”) of The Nasdaq Stock Market LLC (“Nasdaq”) notifying the Company that, for the last 30 consecutive business days, the closing bid price for our Common Stock has been below the minimum $1.00 per share required for continued listing on The Nasdaq Global Select Market pursuant to Nasdaq Listing Rule 5450(a)(1) (the “Minimum Bid Price Requirement”). In accordance with Nasdaq Listing Rule 5810(c)(3)(A), the Company has been given 180 calendar days, or until June 21, 2022, to regain compliance with the Minimum Bid Price Requirement. If at any time before June 21, 2022, the bid price of our Common Stock closes at $1.00 per share or more for a minimum of 10 consecutive business days, the Staff will provide written confirmation that the Company has achieved compliance. If the Company does not regain compliance with the Minimum Bid Price Requirement by June 21, 2022, the Company may be afforded a second 180 calendar day period to regain compliance. To qualify, the Company would be required to transfer to The Nasdaq Capital Market and meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for The Nasdaq Capital Market, except for the Minimum Bid Price Requirement. In addition, the Company would be required to notify Nasdaq of its intent to cure the deficiency during the second compliance period. If the Company does not regain compliance with the Minimum Bid Price Requirement by the end of the compliance period (or the second compliance period, if applicable), our Common Stock will become subject to delisting.
We intend to monitor the closing bid price of our Common Stock and will likely be required to seek approval from our stockholders to affect a reverse stock split of the issued and outstanding shares of our Common Stock. However, there can be no assurance that the Contemplated Transactionsreverse stock split would be approved by our stockholders. Further, there can be no assurance that the market price per new share of our Common Stock after the reverse stock split will occur withinremain unchanged or increase in proportion to the expected timeframereduction in the number of old shares of our Common Stock outstanding before the reverse stock split. Even if the reverse stock split is approved by our stockholders, there can be no assurance that the Company will be able to regain compliance with the Minimum Bid Price Requirement or will otherwise be in compliance with other Nasdaq Listing Rules.
If we are delisted from Nasdaq, our Common Stock may be eligible for trading on an over-the-counter market. If we are not able to obtain a listing on another stock exchange or quotation service for our Common Stock, it may be extremely difficult or impossible for stockholders to sell their shares of Common Stock. Moreover, if we are delisted from Nasdaq, but obtain a substitute listing for our Common Stock, it will likely be on a market with less liquidity, and therefore experience potentially more price volatility than experienced on Nasdaq. Stockholders may not be able to sell their shares of Common Stock on any such substitute market in the quantities, at the times, or at
all. Consummationthe prices that could potentially be available on a more liquid trading market. As a result of
these factors, if our Common Stock is delisted from Nasdaq, the
Contemplated Transactions are subject to specified conditions, including:the accuracyvalue and liquidity of the representationsour Common Stock, Warrants and warrantiesPre-Funded Warrants would likely be significantly adversely
affected. A delisting of the parties and compliance by the parties with their respective obligations under the OEM Purchase Agreement, in each case subject to certain materiality qualifiers;
the receipt of RTI stockholder approval;
the absence of any law or order in effect that prevents, makes unlawful or prohibits the consummation of the Contemplated Transactions; and
the absence of any material adverse effect on the OEM Group Companies, taken as a whole, or the OEM Business, in each case subject to certain exceptions, since December 31, 2018.
We cannot provide any assurances that these conditions will be satisfied in a timely manner or at all or that the Contemplated Transactions will occur. In addition, the OEM Purchase Agreement contains certain termination rights.
The OEM Purchase Agreement limitsour Common Stock from Nasdaq could also adversely affect our ability to pursue alternativesobtain financing for our operations and/or result in a loss of confidence by investors, employees and/or business partners.
If we implement a reverse stock split, liquidity of our Common Stock, Warrants, Pre-Funded Warrants and
Underwriter Warrants may be adversely affected.
We will likely be required to
the Contemplated Transactions.The OEM Purchase Agreement contains provisions that make it more difficult for usseek approval from our stockholders to sell our assets or engage in another type of acquisition transaction withaffect a party other than the buyer. These provisions include anon-solicitation provision, which generally prohibits our solicitation of third-party proposals relating to the acquisition of more than 20% of the consolidated assets of the Company or 20% of any classreverse stock split of the issued and outstanding equity securitiesshares of our Common Stock in order to regain compliance with the Nasdaq Minimum Bid Requirement. However, there can be no assurance that the reverse stock split would be approved by our stockholders. Further, there can be no assurance that the market price per new share of our Common Stock after the reverse stock split will remain unchanged or increase in proportion to the reduction in the number of old shares of our Common Stock outstanding before the reverse stock split. The liquidity of the Company (an “Acquisition Proposal”) (providedshares of our Common Stock, Warrants, Pre-Funded Warrants and Underwriter Warrants may be affected adversely by any reverse stock split given the reduced number of shares of our Common Stock that any third-party inquiries, offers or proposals relating solely towill be outstanding following the reverse stock split, especially if the market price of our spine business shallCommon Stock does not be considered an Acquisition Proposal) and restricts our ability to furnishnon-public information to, or participate in any discussions or negotiations with, any third party with respect to any Acquisition Proposal, subject to certain limited exceptions. In addition, the buyer has an opportunity to modify the termsincrease as a result of the Contemplated Transactions in response toreverse stock split.
Following any competing acquisition proposals beforereverse stock split, the resulting market price of our BoardCommon Stock may not attract new investors and may not satisfy the investing requirements of Directors may withdraw or change its recommendation with respect to the Contemplated Transactions. Upon the termination of the OEM Purchase Agreement to pursue an alternative transaction, including in connection with a “superior proposal”,those investors. Although we will be required to pay $14.7 million as a termination fee. These provisions could discourage a potential third-party acquirer from considering or proposing an acquisition transaction, even if such potential third-party acquirer would be prepared to paybelieve that a higher market price than what wouldof our Common Stock may help generate greater or broader investor interest, there can be received inno assurance that the Contemplated Transactions, or propose to acquire our entire company. These provisions might alsoreverse stock split will result in a potential third-party acquirer proposingshare price that will attract new investors, including institutional investors. In addition, there can be no assurance that the market price of our Common Stock will satisfy the investing requirements of those investors. As a result, the trading liquidity of our Common Stock may not necessarily improve.
Our stock price has been, and could continue to pay a lowerbe, volatile.
There has been significant volatility in the market price than it might otherwise have proposedand trading volume of equity securities, which may be unrelated to pay becausethe financial performance of the added expensecompanies issuing the securities. These broad market fluctuations could negatively affect the market price of our stock. The market price and volume of our common stock could fluctuate, and in the termination fee that may become payable. Ifpast has fluctuated, more than the OEM Purchase Agreement is terminated and we determinestock market in general. During the 12 months ended January 31, 2022, the market price of our common stock has ranged from a high of $3.27 per share to seek another purchaser, wea low of $0.62 per share. You may not be able to negotiateresell your shares at or above the price you paid for them due to fluctuations in the market price of our stock.
The future issuance or sale of shares of our common stock, or the perception that such issuances or sales could occur, may negatively impact our stock price and you may experience significant dilution, as a transactionresult of future issuances of our securities.
The sale or availability for sale of substantial amounts of our common stock, or the perception that such sales could occur, could adversely impact its price. Our amended and restated articles of incorporation authorize us to issue 300,000,000 shares of our common stock. As of December 31, 2021, there were 146,640,069 shares of our common stock outstanding. Accordingly, a substantial number of shares of our common stock are outstanding and available for sale in the market. In addition, we may be obligated to issue additional shares of our common stock upon the exercise of outstanding options, in connection with another partyemployee benefit plans (including any equity incentive plans) and in connection with contingent payments under acquisition agreements to which we are a party.
In the future, we may decide to raise capital through offerings of our common stock, additional securities convertible into or exchangeable for common stock, or rights to acquire these securities or our common stock. The issuance of additional shares of our common stock or additional securities convertible into or exchangeable for our common stock could result in dilution of existing stockholders’ equity interests in us. Issuances of substantial amounts of our common stock, or the perception that such issuances could occur, may adversely affect prevailing market prices for our common stock, and we cannot predict the effect this dilution may have on terms at least comparable tothe price of our common stock.
Certain provisions in our charter and bylaws and under Delaware law, and the terms of certain milestone obligations to which we are subject, may inhibit potential acquisition bids for our company and prevent changes in our management, which may adversely affect the Contemplated Transactions.price of our common stock.
The amountOur amended and restated certificate of incorporation and amended and restated bylaws contain provisions that could discourage, delay, or prevent a change of control of our company or changes in management that our stockholders might deem advantageous, including transactions in which stockholders might otherwise receive a premium for their shares. As a result of these provisions, the price investors may be willing to pay for shares of our common stock may be limited. Moreover, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our
current management by making it more difficult for stockholders to replace members of our board of directors. Because our Board is responsible for appointing the members of our management team, these provisions could in turn affect any attempt by our stockholders to replace current members of our management team. These provisions include the ability of our Board to issue and set the terms of preferred stock, an absence of cumulative voting rights, advance notice procedures and the ability of our Board to amend our amended and restated bylaws without obtaining stockholder approval.
In addition, we are subject to Section 203 of the
net proceeds that RTI will receiveDelaware General Corporation Law, which prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is
subject to uncertainties.Pursuantapproved in a prescribed manner.
Further, pursuant to the
OEM PurchaseMaster Transaction Agreement,
the amountdated as of
net proceeds that RTI will receive from the Buyer is subjectNovember 1, 2018, pursuant to
uncertainties by virtue of the purchase price adjustments set forth in the OEM Purchase Agreement. The Buyer will pay or cause to be paid to RTI, in exchange for the issued and outstanding equity in the OEM Group Companies, an aggregate base purchase price equal to $440 million. The base purchase pricewhich we acquired Paradigm, we will be
subjectobligated to
an adjustment based on the amount of cash and cash equivalents of the OEM Group Companies at the OEM Closing, certain capital expenditures made prior to the OEM Closing, outstanding indebtedness and unpaid transaction expenses of the OEM Group Companies at the OEM Closing, and RTI’s working capital for the OEM Group Companies.Our stockholders may not receive any of the proceeds of the Contemplated Transactions.
The proceeds from the Contemplated Transactions will be paid directly to RTI and not our stockholders. Our Board of Directors will evaluate different alternatives for the use of the proceeds from the Contemplated Transactions. RTI intends to use substantiallypay some or all of the proceeds to repay indebtedness and capitalize RTI for continued investment in its global spine portfolio. The Board doesmilestone payments thereunder that remain unpaid — whether or not currently expect to declare a special dividend of any such proceeds to our stockholders, but such a dividend may be paid inwe have achieved the future. If the Contemplated Transactions are consummated, the purchase price for the OEM Business will be paid directly to RTI. Our management will have discretion in the application of the net proceeds from the Contemplated Transactions. Although our Board will evaluate various alternatives regarding the use of the proceeds from the Contemplated Transactions, it has made no decision with respect to the specific use of proceeds other than as described above and has not committed to making any such decision by a particular date.
WSHP is the record owner of 50,000 shares of RTI’s preferred stock, which is 100% of the issued and outstanding preferred stock. Pursuant to the terms of the Certificate of Designation, WSHP is entitled to certain liquidation, redemption and conversion rightsmilestones — upon a change in control of RTI. The Sale may constituteour company prior to December 31, 2022. In addition, under the sale of substantially all of the assets of RTI, which would resultHolo Surgical Purchase Agreement, any surviving entity or acquiror in a change of control pursuant to the Certificate of Designation. As a result, there is a risk that the Sale will trigger such liquidation, redemption and conversion rights and WSHP may exercise these rights. WSHP has not informed RTI whether it would exercise any of these liquidation, redemption or conversion rights, if they are triggered as a result of the Contemplated Transactions. If WSHP were to opt to exercise its liquidation, redemption or conversion rights, and the Company determines that they have been triggered, then approximately $67 million of the proceeds from the Contemplated Transactions would be utilized for that purpose.
We have incurred and will continue to incur significant expenses in connection with the Contemplated Transactions, regardless of whether the Contemplated Transactions are completed.
We have incurred and will continue to incur significant expenses related to the Contemplated Transactions. These expenses include, but are not limited to, financial advisory and opinion fees and expenses, legal fees, accounting fees and expenses, certain employee expenses, consulting fees, filing fees, printing expenses and other related fees and expenses. Many of these expensestransaction involving our company will be payable by us regardless of whether the Contemplated Transactions are completed.
Failurerequired to complete the Contemplated Transactionsassume any outstanding milestone obligations thereunder. These milestone payments and obligations could cause RTI’s stock price to decline.
The failure to complete the Contemplated Transactions may create doubt as to the value of the OEM Business and about RTI’s ability to effectively implement its current business strategies and/likewise discourage or a strategic transaction, which may result in a decline in RTI’s stock price.
The Sale may trigger the liquidation, redemption and conversion rights of WSHP, an affiliate of Water Street, and WSHP may exercise those rights.
WSHP is the record owner of 50,000 shares of Preferred Stock, which is 100% of the issued and outstanding Preferred Stock. WSHP has agreed to vote “FOR” the approval of the Contemplated Transactions. Pursuant to the terms of the Certificate of Designation, WSHP is entitled to the following liquidation, redemption and conversion rights upon a change in control of RTI:
| • | | Liquidation. The occurrence of a change of control of RTI is deemed a liquidation, dissolution and winding up of RTI and the holders of Preferred Stock are entitled to receive from RTI the liquidation preference with respect to the shares of Preferred Stock upon such occurrence. The “liquidation preference” is an amount in cash equal to the greater of: (i) the sum of $50 million ($1,000 for each share of Preferred Stock), plus all accrued and accumulated, but unpaid dividends on the shares of Preferred Stock (approximately $16.5 million as of December 31, 2019); and (ii) the amount WSHP would be entitled to receive upon a liquidation of RTI after a conversion of the shares of Preferred Stock issuable upon conversion (at the current ratio of approximately 228 shares of common stock).
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| • | | Redemption. Beginning immediately prior to a change of control of RTI, WSHP may, at any time, request redemption of all or any portion of the shares of Preferred Stock. While the redemption price changes over time, RTI would currently be required to redeem the shares of Preferred Stock for an amount equal to the sum of $50 million ($1,000 for each share of Preferred Stock), plus all accrued and accumulated, but unpaid dividends on the shares of Preferred Stock (approximately $16.5 million as of December 31, 2019).
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| • | | Conversion. Immediately prior to a change of control of RTI, the shares of Preferred Stock may be converted in full or in part, at any time, by WSHP into a number of shares of common stock of RTI equal to the quotient determined by dividing (i) $50 million, plus all accrued and accumulated, but unpaid dividends on the shares of the Preferred Stock (approximately $16.5 million as of December 31, 2019) by (ii) the conversion price then in effect. Immediately prior to the Closing, the conversion price of the Preferred Stock is expected to be $4.39 per share.
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The Sale may constitute the sale of substantially all of the assets of RTI, which would result indisincentivize a change of control pursuant toof our company that our stockholders might deem advantageous.
Item 1B. UNRESOLVED STAFF COMMENTS.
None.
Item 2. PROPERTIES.
The Company leases property in the
Certificate of Designation. As a result, there is a risk that the Sale will trigger such liquidation, redemptionfollowing domestic and
conversion rightsinternational locations which we believe provide sufficient space and
WSHP may exercise these rights. The Sale may constitute the sale of substantially all of the assets of RTI, which would result in a change of control pursuant to the Certificate of Designation. As a result, there is a risk that the Sale will trigger such liquidation, redemption and conversion rights and WSHP may exercise these rights. WSHP has not informed the Company whether it would exercise any of these liquidation, redemption or conversion rights, if they are triggered as a result of the Contemplated Transactions. If WSHP were to opt to exercise its liquidation, redemption or conversion rights, then part of the proceeds from the Contemplated Transactions would be utilized for that purpose.Item 1B. | UNRESOLVED STAFF COMMENTS.
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None.
United States
Our U.S. natural tissue processing facilities are located in Alachua, Florida, near metropolitan Gainesville, including four buildings on approximately 21 acres of property that we own.
Processing, Manufacturing and Laboratory Facilities
In Alachua, Florida, we own a 65,500 square foot processing facility and lease an 8,000 square foot facility for the processing of natural tissues utilizing our BioCleanse®, TUTOPLAST® and CANCELLE® SP sterilization processes. In addition, we also own a 42,000 square foot logistics and technology center. These facilities are pledged under the 2018 Credit Agreement.
In Marquette, Michigan, we own a 106,000 square foot facility for manufacturing metal and synthetic implants and instruments that also houses laboratory facilities. This facility is primarily used for our OEM business and is pledged under the 2018 Credit Agreement.
In Greenville, North Carolina, we lease a 15,500 square foot facility for manufacturing synthetic implants. This facility is primarily used for our OEM business.
Our processing and manufacturing facilities meet the cGMPs requirements and allows us to meet the requirements of anFDA-approved medical device manufacturer.
Administrative, Distributionour current and Marketing Offices
foreseeable future needs.
United States
The Company is headquartered in Deerfield, Illinois, in a leased space of
6,0207,058 square feet for general and administrative functions.
In
Alachua, Florida, we own two buildings totaling 71,000 square feet which house administrative, distribution, product development and marketing functions.In Minnetonka, Minnesota,San Diego, California we lease 11,419two locations totaling 18,256 square feet for generalour innovation and administrativedesign functions and other corporate functions. This facility is primarily used for our Spine business.
International
Germany
In Neunkirchen, Germany we own six buildings totaling approximately 60,000 square feet on approximately two acres of land, including 11,000 square feet of area for processing natural tissues utilizing the TUTOPLAST sterilization process. This facility is primarily used for our OEM business.
In Wurmlingen, Germany we lease 13,000 square feet for marketing, distribution, product development and general and administrative functions. This facility is primarily used
Poland
In Warsaw, Poland we lease 2,000 square feet for
our Spine business.The Netherlands
On January 1, 2020, the Company exited theresearch and development, product development and general and administrative functions. In Poznan, Poland we lease of the sales300 square feet for product development, test, research, and distribution office in Houten consisting of approximately 10,000 square feet.
We believe that we have sufficient space and facilities to meet our current and foreseeable future needs.
Item 3. | LEGAL PROCEEDINGS.
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development functions.
Item 3. LEGAL PROCEEDINGS.
The Company is, from time to time, involved in litigation relating to claims arising out of its operations in the ordinary course of business. The Company believes that none of the claims that were outstanding as of December 31,
20192021, will have a material adverse impact on its financial position or results of operations. Please see Note
23,24, Legal
Actions and
Note 25, Regulatory Actions, to the consolidated financial statements contained in Part II, Item 8 of this Form 10-K for additional
information.As described in the Explanatory Note to this Form10-K,information regarding certain legal proceedings.
SEC and asRelated Audit Committee Investigation
As previously disclosed in RTI’sthe Company’s Current Report on Form8-K filed with the SEC on March 16, 2020, the Audit Committee of the Board, of RTI, 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 OEM customers, including the accounting treatment, financial reporting and internal controls related to such arrangements (the “Investigation”). The Investigative proceduresInvestigation also examined transactions to understand the practices related to manual journal entries for accrual and reserve accounts. The Investigation was precipitated by an investigation by the SEC initially related to the periods 2014 through 2016.2016 (the “SEC Investigation”). The SEC investigationInvestigation is ongoing, and the Company is cooperating with the SEC. We are in discussions with the Staff regarding a potential settlement of the SEC Investigation.
The Audit Committee completed its Investigation in
its investigation.the second quarter of 2020. On April 7, 2020, the Audit Committee of the Board concluded that the Company willwould restate its previously issued audited financial statements for thefiscal years ended December 31, 2018, 2017 and 2016, and selected financial data for thefiscal years ended December 31, 2015 and 2014, and the unaudited financial statements for the quarterly periods within these years commencing with the first quarter of 2016.
2016, as well as the unaudited financial statements for the quarterly periods within the 2019 fiscal year. The Company filed the restated financial statements on June 8, 2020.
Based on the results of the Investigation, the Company has concluded that revenue for certain invoices should have been recognized at a later date than when originally recognized. In response to binding purchase orders from certain customers of the formerly owned OEM customers,Businesses, goods were shipped and received by the customers before requested delivery dates and agreed-upon delivery windows. In many instances the OEM customers requested or approved the early shipments, but the Company has determined that on other occasions the goods were delivered early without obtaining the customers’ affirmative approval.Someapproval. Some of those unapproved shipments were shipped by employees in order to generate additional revenue and resulted in shipments being pulled from a future quarter into an earlier quarter.Inquarter. In addition, the Company has concluded that in July 2017 an adjustment was improperly made to a product return provision in the former Direct Division. The revenue for those shipments is beingwas restated, as well as for other orders that shipped earlier than the purchase order due date in the system for which the Company could not locate evidence that the OEM customers had requested or approved the shipments. In addition, the Company has concluded that in the periods from 2015 through the fourth quarter of 2018, certain adjustments were incorrectly or erroneously made via manual journal entries to accrual/reserve accounts, including a July 2017 adjustment to a product return provision in the Direct Division, among others. Accordingly, the Company has restated its financial statements to correct these adjustments.
There is currently ongoingThe Company’s Investigation resulted in stockholder litigation related to the Company’s Investigation.litigation. 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. Atrial (“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 and those motions are now ripe for review.
Three derivative lawsuit waslawsuits were also filed by David Summers 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 (“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 (the "Court") 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 were consolidated into the first-filed Summers Action, and on September 6, 2020, the Court entered an order staying the Summers Action pending resolution of the motions to dismiss in the Lowry Action.
In June
5, 2020 demanding2021, the parties to the Lowry Action conducted a
jury trial.Item 4. | MINE SAFETY DISCLOSURES.
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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 agreed to 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. In September 2021, the Court separately granted preliminary approval of the proposed settlements (the “Settlements”) of the Lowry Action and the Summers Action. On January 24, 2022, the Court granted final approval of the settlement of the Summers Action. On January 26, 2022, the Court granted final approval of the settlement of the Lowry Action. As part of the Settlements, the Court awarded attorney’s fees and expenses to plaintiffs’ counsel in the Summers Action, which was paid by the Company’s insurers. These matters are now fully resolved.
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.
Item 4. MINE SAFETY DISCLOSURES.
Not applicable.
PART II
Item 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
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Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information and Holders
Our common stock is quoted on the Nasdaq Stock Market under the symbol
“RTIX.“SRGA.”
As of
May 19, 2020,March 11, 2022, we had
74,564,450306 stockholders of record of our common stock. We believe that the number of beneficial owners is substantially greater than the number of record holders because a large portion of our common stock is held of record through brokerage firms in “street name.” The closing sale price of our common stock on
May 19, 2020March 11, 2022, was
$2.31$0.32 per share.
The following table presents information with respect to our repurchases of our common stock during the year ended December 31,
2019. | | | | | | | | | | | | | | | | |
Period | | Total
Number
of Shares
Purchased
(1) | | | Average
Price Paid
per Share | | | Total
Number
of Shares
Purchased
as Part of
Publicly
Announced
Plans or
Programs | | | Approximate
Dollar Value
of Shares that
May Yet Be
Purchased
Under the
Plans or
Programs | |
January 1, 2019 to January 31, 2019 | | | 9,192 | | | $ | 4.10 | | | | — | | | | — | |
February 1, 2019 to February 28, 2019 | | | 2,571 | | | $ | 4.98 | | | | — | | | | — | |
March 1, 2019 to March 31, 2019 | | | 17,258 | | | $ | 4.98 | | | | — | | | | — | |
April 1, 2019 to April 30, 2019 | | | 847 | | | $ | 4.98 | | | | — | | | | — | |
May 1, 2019 to May 31, 2019 | | | 6,901 | | | $ | 4.90 | | | | — | | | | — | |
June 1, 2019 to June 30, 2019 | | | — | | | | — | | | | — | | | | — | |
July 1, 2019 to July 31, 2019 | | | 5,737 | | | $ | 4.05 | | | | — | | | | — | |
August 1, 2019 to August 31, 2019 | | | 2,075 | | | $ | 4.18 | | | | — | | | | — | |
September 1, 2019 to September 30, 2019 | | | — | | | | — | | | | — | | | | — | |
October 1, 2019 to October 31, 2019 | | | 7,325 | | | $ | 2.78 | | | | — | | | | — | |
November 1, 2019 to November 30, 2019 | | | 2,215 | | | $ | 1.90 | | | | — | | | | — | |
December 1, 2019 to December 31, 2019 | | | 9,923 | | | $ | 4.52 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
Total | | | 64,044 | | | $ | 4.31 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
| (1) | The purchases reflectamounts that are attributable to shares surrendered to us by employees to satisfy, in connection with the vesting of restricted stock awards, their tax withholdings obligations.
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2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Period | | Total
Number
of Shares
Purchased(1) | | Average
Price
Paid
per
Share | | Total
Number of
Shares
Purchased
as Part of
Publicly
Announced
Plans or
Programs | | Approximate
Dollar Value
of Shares that
May Yet Be
Purchased
Under
the Plans or
Programs |
| January 1, 2021 to January 31, 2021 | | 7,294 | | | $ | 2.19 | | | — | | | — | |
| February 1, 2021 to February 28, 2021 | | 39,589 | | | $ | 2.51 | | | — | | | — | |
| March 1, 2021 to March 31, 2021 | | — | | | $ | — | | | — | | | — | |
| April 1, 2021 to April 30, 2021 | | 9,796 | | | $ | 2.05 | | | — | | | — | |
| May 1, 2021 to May 31, 2021 | | — | | | $ | — | | | — | | | — | |
| June 1, 2021 to June 30, 2021 | | 717 | | | $ | 1.39 | | | — | | | — | |
| July 1, 2021 to July 31, 2021 | | 6,528 | | | $ | 1.27 | | | — | | | — | |
| August 1, 2021 to August 31, 2021 | | 923 | | | $ | 1.09 | | | — | | | — | |
| September 1, 2021 to September 30, 2021 | | 11,143 | | | $ | 1.43 | | | — | | | — | |
| October 1, 2021 to October 31, 2021 | | 23,763 | | | $ | 1.03 | | | — | | | — | |
| November 1, 2021 to November 30, 2021 | | 788 | | | $ | 1.11 | | | — | | | — | |
| December 1, 2021 to December 31, 2021 | | 8,477 | | | $ | 0.72 | | | — | | | — | |
| Total | | 109,018 | | | $ | 1.91 | | | — | | | — | |
(1) The purchases reflect amounts that are attributable to shares surrendered to us by employees to satisfy, in connection with the vesting of restricted stock awards, their tax with holdings obligations.
The SEC requires us to present a chart comparing the cumulative total stockholder return on our common stock with the cumulative total stockholder return of: (1) a broad equity market index; and (2) a published industry orline-of-business index. We selected the Standard & Poor’s 500 Health Care Equipment Index based on our good faith determination that this index fairly represents the companies which compete in the same industry orline-of-business as we do. The chart below compares our common stock with the Nasdaq Composite Index and the Standard & Poor’s 500 Health Care Equipment Index and assumes an investment of $100.00 on December 31, 20142016, in each of the common stock, the
stocks comprising the Nasdaq Composite Index and the stocks comprising the Standard & Poor’s 500 Health Care Equipment Index.
| | | | | | | | | | | | | | | | | | | | | | | | |
Total Return Analysis | | 2014 | | | 2015 | | | 2016 | | | 2017 | | | 2018 | | | 2019 | |
RTI Surgical, Inc. | | $ | 100.00 | | | $ | 76.35 | | | $ | 62.50 | | | $ | 78.85 | | | $ | 71.15 | | | $ | 52.69 | |
NASDAQ Composite | | | 100.00 | | | | 106.96 | | | | 116.45 | | | | 150.96 | | | | 146.67 | | | | 200.49 | |
S&P 500 Health Care Equipment Index | | | 100.00 | | | | 105.97 | | | | 112.85 | | | | 147.71 | | | | 171.70 | | | | 222.04 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total Return Analysis | | 2017 | | 2018 | | 2019 | | 2020 | | 2021 | | Surgalign Holdings, Inc. | | $ | 126.15 | | | $ | 113.85 | | | $ | 84.31 | | | $ | 67.38 | | | $ | 22.04 | | | NASDAQ Composite | | $ | 129.64 | | | $ | 125.96 | | | $ | 172.18 | | | $ | 249.51 | | | $ | 304.85 | | | S&P 500 Health Care Equipment Index | | $ | 130.90 | | | $ | 152.15 | | | $ | 196.77 | | | $ | 231.46 | | | $ | 276.26 | |
Item 6. SELECTED FINANCIAL DATA. Not applicable.
Item 6. | SELECTED FINANCIAL DATA.
|
The statement of operations data set forth below for the years ended December 31, 2019, 2018 and 2017, and selected balance sheet data as of December 31, 2019 and 2018 have been derived from our audited consolidated financial statements and accompanying notes. The consolidated financial statements as of December 31, 2019 and 2018 and for the three years ended December 31, 2019, 2018 and 2017 are included elsewhere in this Form10-K. The selected consolidated financial data set forth below should be read along with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which includes accounting changes and business combinations, and our consolidated financial statements and accompanying notes included elsewhere in this Form 10-K.
The statement of operations data set forth below for the year ended December 31, 2016 , and the balance sheet data set forth as of December 31, 2017 and 2016 have been derived from our audited consolidated financial statements and accompanying notes which are not included elsewhere in this Form10-K.
The selected financial data as of and for the years ended December 31, 2019 and 2018 reflect our adoption of Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)2014-09,Revenue from Contracts with Customers (Topic 606). The selected financial data as of and for the year ended December 31, 2019 also reflects our adoption of the FASB issued ASU 2016-02,Leases (Topic 842). We have not adjusted the selected financial data for any other period or as of any other date presented. See Note 4, Leases, and Note 6, Revenue from Contracts with Customers.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2019 | | | 2018 | | | 2017 | | | 2016 | | | 2015 | |
| | | (In thousands, except share and per share data) | |
Statements of Operations Data: | | | | | | | | | | | | | | | | | | | | |
Revenues | | $ | 308,384 | | | $ | 280,362 | | | $ | 280,349 | | | $ | 275,984 | | | $ | 283,131 | |
Costs of processing and distribution | | | 137,259 | | | | 140,719 | | | | 137,277 | | | | 142,657 | | | | 133,460 | |
| | | | | | | | | | | | | | | | | | | | |
Gross profit | | | 171,125 | | | | 139,643 | | | | 143,072 | | | | 133,327 | | | | 149,671 | |
| | | | | | | | | | | | | | | | | | | | |
Expenses: | | | | | | | | | | | | | | | | | | | | |
Marketing, general and administrative | | | 157,675 | | | | 119,724 | | | | 115,009 | | | | 116,666 | | | | 107,550 | |
Research and development | | | 16,836 | | | | 14,410 | | | | 13,315 | | | | 16,297 | | | | 15,065 | |
Severance and restructuring costs | | | — | | | | 2,808 | | | | 12,016 | | | | 1,039 | | | | 995 | |
Gain on acquisition contingency | | | (76,033 | ) | | | — | | | | — | | | | — | | | | — | |
Strategic review costs | | | — | | | | — | | | | — | | | | 1,150 | | | | — | |
Executive transition costs | | | — | | | | — | | | | 2,818 | | | | 4,404 | | | | — | |
Contested proxy expenses | | | — | | | | — | | | | — | | | | 2,680 | | | | — | |
Asset impairment and abandonments | | | 97,341 | | | | 5,070 | | | | 4,034 | | | | 5,241 | | | | 814 | |
Litigation settlement and settlement charges | | | — | | | | — | | | | — | | | | — | | | | 804 | |
Goodwill impairment | | | 140,003 | | | | — | | | | — | | | | 1,107 | | | | — | |
Acquisition and integration expenses | | | 17,159 | | | | 4,943 | | | | 630 | | | | — | | | | — | |
Cardiothoracic closure business divestiture contingency consideration | | | — | | | | (3,000 | ) | | | — | | | | — | | | | — | |
Gain on cardiothoracic closure business divestiture | | | — | | | | — | | | | (34,090 | ) | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Total operating expenses | | | 352,981 | | | | 143,955 | | | | 113,732 | | | | 148,584 | | | | 125,228 | |
| | | | | | | | | | | | | | | | | | | | |
Operating (loss) income | | | (181,856 | ) | | | (4,312 | ) | | | 29,340 | | | | (15,257 | ) | | | 24,443 | |
| | | | | | | | | | | | | | | | | | | | |
Other (expense) income: | | | | | | | | | | | | | | | | | | | | |
Interest expense | | | (12,571 | ) | | | (2,771 | ) | | | (3,180 | ) | | | (1,655 | ) | | | (1,492 | ) |
Interest income | | | 161 | | | | 35 | | | | 8 | | | | 8 | | | | 3 | |
Loss on extinguishment of debt | | | — | | | | (309 | ) | | | — | | | | — | | | | — | |
Foreign exchange (loss) gain | | | (139 | ) | | | (34 | ) | | | 87 | | | | (129 | ) | | | 78 | |
| | | | | | | | | | | | | | | | | | | | |
Total other expense - net | | | (12,549 | ) | | | (3,079 | ) | | | (3,085 | ) | | | (1,776 | ) | | | (1,411 | ) |
| | | | | | | | | | | | | | | | | | | | |
(Loss) income before income tax (provision) benefit | | | (194,405 | ) | | | (7,391 | ) | | | 26,255 | | | | (17,033 | ) | | | 23,032 | |
Income tax benefit (provision) | | | (17,237 | ) | | | 4,268 | | | | (19,349 | ) | | | 3,228 | | | | (8,499 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net (loss) income | | | (211,642 | ) | | | (3,123 | ) | | | 6,906 | | | | (13,805 | ) | | | 14,533 | |
| | | | | | | | | | | | | | | | | | | | |
Convertible preferred dividend | | | 0 | | | | (2,120 | ) | | | (3,723 | ) | | | (3,508 | ) | | | (3,305 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net (loss) income applicable to common shares | | $ | (211,642 | ) | | $ | (5,243 | ) | | $ | 3,183 | | | $ | (17,313 | ) | | $ | 11,228 | |
| | | | | | | | | | | | | | | | | | | | |
Net (loss) income per common share - basic | | $ | (2.91 | ) | | $ | (0.08 | ) | | $ | 0.05 | | | $ | (0.30 | ) | | $ | 0.19 | |
| | | | | | | | | | | | | | | | | | | | |
Net (loss) income per common share - diluted | | $ | (2.91 | ) | | $ | (0.08 | ) | | $ | 0.05 | | | $ | (0.30 | ) | | $ | 0.19 | |
| | | | | | | | | | | | | | | | | | | | |
Weighted average shares outstanding - basic | | | 72,824,308 | | | | 63,521,703 | | | | 59,684,289 | | | | 58,236,745 | | | | 57,611,231 | |
| | | | | | | | | | | | | | | | | | | | |
Weighted average shares outstanding - diluted | | | 72,824,308 | | | | 63,521,703 | | | | 60,599,952 | | | | 58,236,745 | | | | 58,590,494 | |
| | | | | | | | | | | | | | | | | | | | |
| |
| | | As of December 31, | |
| | | 2019 | | | 2018 | | | 2017 | | | 2016 | | | 2015 | |
Balance Sheet Data: | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 5,608 | | | $ | 10,949 | | | $ | 22,381 | | | $ | 13,849 | | | $ | 12,614 | |
Working capital | | | (44,574 | ) | | | 118,120 | | | | 133,071 | | | | 120,615 | | | | 130,353 | |
Total assets | | | 344,509 | | | | 360,185 | | | | 345,764 | | | | 367,955 | | | | 379,844 | |
Long-term obligations - less current portion | | | — | | | | 49,073 | | | | 42,076 | | | | 77,267 | | | | 73,631 | |
Redeemable preferred stock | | | 66,410 | | | | 66,226 | | | | 63,923 | | | | 60,016 | | | | 56,323 | |
Total stockholders’ equity | | | 34,564 | | | | 181,530 | | | | 181,516 | | | | 164,060 | | | | 179,908 | |
Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
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You should read the following discussion of our financial condition and results of operations together with those financial statements and the notes to those statements included elsewhere in this filing. This discussion contains forward lookingforward-looking statements based on our current expectations, assumptions, estimates and projections about us and our industry. Our actual results could differ materially from those anticipated in these forward-looking statements. We undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.
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 biomaterials portfolio of advanced and traditional orthobiologics. In addition to our spinal hardware and biomaterials portfolios, on January 14, 2022, we received FDA 510(k) clearance for HOLO Portal™, a surgical guidance system utilizing AR and AI to intraoperatively assist spine surgery. HOLO Portal™ technology combines image-based guidance with AR, automated spine segmentation, and automated surgical planning utilizing proprietary AI software. Intraoperative 3D digital imaging is autonomously processed by the system to create a patient-specific plan that is presented to the surgeon using an AR display.We are developing additional applications utilizing HOLO™ AI technology for use in multiple clinical specialties across the continuum of patient care. We believe HOLO™ AI, our portfolio of neural network technologies, is one of the most advanced artificial intelligence technologies being applied to surgery.
Patented HOLO Portal™ software includes several convolutional neural networks to segment and group patient anatomy based on intraoperative CT scans. This results in a patient-specific 3D model that is automatically labeled with anatomic structures for use during surgery.
HOLO Portal™ software suggests screw trajectories and measures pedicle sizes from the patient-specific 3D model. The system then suggests the appropriate screw size based on a surgeon-defined pedicle fill ratio. The resulting surgical plan is designed to maximize construct stability and eliminate time spent manually planning trajectories and measuring screw sizes.
Once the segmentation and screw plan is generated, HOLO Portal™ software displays the surgical plan intraoperatively through the interactive AR display and provides a 3D guidance overlay on the patient’s anatomy. 3D trajectory and targeting are superimposed on surgical instruments in real time within the surgical field. This innovative design may reduce the surgeon’s cognitive load by providing intuitive guidance that allows the surgeon to keep focus on the surgical field. We believe that HOLO Portal™ technology may help surgeons achieve better surgical outcomes, reduce complications, and improve patient satisfaction.
Our hardware product portfolio of spinal 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, 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 globalminimally invasive surgical implant companysystem that designs, develops, manufactureshas been clinically demonstrated to produce high rates of sacroiliac joint fusion and distributes biologic, metalstatistically 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 implants.bone growth substitutes that have a balance of osteoinductive and osteoconductive properties to enhance bone fusion rates following spinal surgery. We market ViBone® and ViBone® Moldable, two next-generation viable cellular allograft bone matrix products intended to provide surgeons with improved results for bone repair. ViBone® and ViBone® Moldable are processed using a proprietary method optimized to protect and preserve the health of native bone cells to potentially enhance new bone formation and are designed to perform and handle in a manner similar to an autograft. ViBone® and ViBone® Moldable contain cancellous bone particles as well as demineralized cortical bone particles and fibers, delivering osteoinductive, osteoconductive, and osteogenic properties. Our implants are usedDBM 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 orthopedic, spine, sports medicine, plasticbone 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.
We have aligned our core business principles with a focused business strategy of digital health 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 digital health experienced executive leadership team to execute against our growth strategy, which includes leveraging our digital surgery traumaplatform to improve patient outcomes and other surgical procedures to repair and promote the natural healingdrive adoption of human bone and other human tissues and improve surgical outcomes. We manufacture metal and syntheticour spinal hardware implants and processes donated human musculoskeletalbiomaterials products, developing and other tissuecommercializing an increased cadence of innovative spinal hardware implants and bovinebiomaterials products, validating our innovative products with clinical evidence, growing our international business, and porcine animal tissue in producing allograftstrategically pursuing acquisition, license, and xenograft implants usingdistribution opportunities.
We currently market and sell our
proprietary BIOCLEANSE®, TUTOPLAST® and CANCELLE® SP sterilization processes. We process tissue at our facilities in Alachua, Florida and Neunkirchen, Germany and manufacture metal and synthetic implants in Marquette, Michigan and Greenville, North Carolina, respectively, and we have a distribution and research center in Wurmlingen, Germany. We are accredited in the United States by the American Association of Tissue Banks and we are a member of AdvaMed. Our implants are distributed directlyproducts to hospitals,
and free-standingambulatory surgery centers,
throughoutand healthcare providers in the United States and in
overmore than 50 countries
worldwide with the supportworldwide. Our U.S. sales organization consists of
both ourarea sales directors and
third-party representatives as well as through larger purchasing companies.Domestic distributions and services accounted for 90%regional product specialists who oversee a network of total revenues in 2019. Most of our implants are distributed directly to healthcare providers, hospitals and other healthcare facilities through a direct distribution force and through various OEM relationships.
International distributions and services accounted for 10% of total revenues in 2019. Our implants are distributed in over 50 countries through a direct distribution force in Germany and through stocking distributors in the rest of the world outside of Germany and the United States.
In 2019, we continued to implement a focused strategy to expand ourindependent spine and OEM operationsorthobiologics 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 create long-term, profitable growth for the Company. The core components of our strategy were:
| • | | Reduce Complexity. We worked to reduce complexity in our organization by divestingnon-core assets and investing in core competencies.
|
| • | | Drive Operational Excellence. We worked to optimize material cost and drive operational efficiency to reduce other direct costs by pursuing world class manufacturing.
|
| • | | Accelerate Growth. We invested in innovative, niche high growth product categories leveraging core competency in the spine market; utilizing core technologies to expand OEM relationships and drive organic growth; and building relevant scale in our spinal portfolio to improve our importance to the consolidating healthcare market driven increasingly by integrated delivery networks and group purchasing organizations.
|
In line with our strategy, on March 8, 2019, we acquired Paradigm, a leader in motion preservationorthobiologics distributors, andnon-fusion spinal implant technology. Paradigm’s primary product is the coflex® Interlaminar Stabilization® device. Under the terms of the master transaction agreement dated March 8, 2019, we acquired Paradigm for $150.0 million in consideration paid at closing consisting of new debt financing of $100.0 million stocking distributors.
Acquisitions
See Note 7 - Business Combinations and
$50.0 million of issued securities. In addition to the cash consideration amount and the stock consideration amount, we may be required to make further cash payments or issue additional shares of our common stock to Paradigm in an amount up to $50.0 million of shares of our common stock and an additional $100.0 million of cash and/or our common stock, in each case, if certain revenue targets are achieved between closing and December 31, 2022.We believe this is a significant step toward focusing our business and advancing our efforts to generate predictable and sustainable operating results through disciplined execution and building scale to extend distribution of our products in those areas that offer the greatest opportunities to benefit our patients and stockholders.
We continue to maintain our commitment to research and development and the introduction of new strategically targeted allograft, xenograft, metal and synthetic implants as well as focused clinical efforts to support their acceptance in the marketplace. In addition, we consider strategic acquisitions from time to time for new implants and technologies intended to augment our existing implant offerings, as well as strategic dispositions from time to time in response to market trends or industry developments.
Acquisitions On January 13, 2020, we entered into the OEM Purchase Agreement with Ardi Bidco, an affiliate of Montagu, in connection with the proposed sale of the OEM Business, for a purchase price of $440.0 million, subject to certain adjustments. More specifically, pursuant to the terms of the OEM Purchase Agreement, we will sell all of the issued and outstanding shares of the OEM Group Companies.
The OEM Purchase Agreement contemplates that, prior to the OEM Closing, we will undergo the Reorganization.
The Contemplated Transactions are subject to customary closing conditions, including, among other things: the approval of the Contemplated Transactions by the Company’s stockholders. The parties currently expect to close the Contemplated Transactions in the third quarter of 2020.
Following consummation of the Contemplated Transactions, RTI will focus exclusively on the design, development and distribution of spinal implants to the global market.
Restatement and Revision of Previously Issued Financials
As previously discussed in the Explanatory Note of this Form10-K and as further discussed in Note 30 of the Consolidated Financial Statements in Part II, Item 8, “Financial Statements and Supplementary Data,” we have restated previously issued unaudited financial statements for the quarters ended March 31, 2019, June 30, 2019, and September 30, 2019, to correct certain errors.
As discussed in more detail throughoutabove in Part I, Item 1, “Business” of this Form 10-K, the coronavirus (COVID-19)("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’sadversely affected our business. The consequences of the outbreak and impact on the economy continuescontinue to evolve and the full extent of the impact is uncertain as of the date of this filing. The outbreak has already broughthad, and continues to have, a material adverse effect on our business, operating results and financial condition and has significantly disrupted our operations.
Supplier Quality Issues
The Company has experienced various quality issues in its global supply chain, during the course of 2021. 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
disruptiontime and resources to
address these issues and prevent similar ones from occurring in the
future. While the Company believes that these quality issues have been addressed there is the potential for such issues to arise in the future. These quality issues have adversely affected the Company’s results of operations
offor the
Company.year(s) ended December 31, 2021.
Critical Accounting Policies
The preparation of our financial statements in accordance with accounting principles generally accepted in the United States (“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.
Due to the COVID-19 pandemic, there has been uncertainty and disruption in the global economy and financial markets. Our estimates or judgments as of March 15, 2022 may change as new events occur and additional information is obtained. Accordingly, actual results could differ materially from our estimates or judgements made under different assumptions or conditions.
The accounting policies which we believe are “critical,” or require the most use of estimates and judgment, relate to the following items presented in our financial statements: (1)
TissueExcess and Obsolete Inventory Valuation; (2) Accounts Receivable Allowances; (3) Long-Lived Assets; (4)
Intangible Assets and Goodwill; (5) Revenue Recognition;
(5) Warrant Valuation; (6)
Stock-Based Compensation Plans;Income Taxes; (7) Contingent Consideration Valuation and
(7) Income Taxes.Due to the COVID-19 pandemic, there has been uncertainty(8) Non-controlling interest.
Excess and disruption in the global economy and financial markets. Obsolete Inventory Valuation. Our estimates or judgments ascalculation of the dateamount of issuance of this Form 10-K may change as new events occurinventory that is excess, obsolete, or will expire prior to sale has two components: 1) a consumption based component that compares historical sales to inventory quantities on hand; and additional information2) for expiring inventory we assesses the risk related to inventory that is obtained. Accordingly, actual results could differ materially from our estimates or judgements made under different assumptions or conditions.Tissue Inventory Valuation.GAAP requiresnear expiration by analyzing historical expiration trends to project inventory that will expire prior to being sold. Our demand-based consumption model assumes that inventory will be stated atsold on a first-in-first-out basis. Our metal inventory does not expire and can be re-sterilized and sold; however, we assess quantities on hand, historical sales, projected sales, projected consumption, the lowernumber of cost or market value. Dueforecasted years, safety stock and those products we have determined to various reasons, some tissue within our inventory will never become available for distribution. Therefore, we must make estimates of future distribution from existing inventory in order towrite-off inventory which will not be distributed and which therefore has reduced or no market value.
Our management reviews available information regarding processing costs, inventory distribution rates, industry supply and demand, medical releases and processed tissue rejections, in order to determine write-offs of cost above market value. For a variety of reasons, we may from time to time be required to adjust our assumptions as processes change and as we gain better information. Although we continue to refinesunset when calculating the information on which we base our estimates, we cannot be sure that our estimates are accurate indicators of future events. Accordingly, future adjustments may result from refining these estimates. Such adjustments may be significant.
estimate.
Accounts Receivable Allowances.We maintain allowancesthe allowance for doubtful accounts based on our review and assessment of payment history and our estimate ofestimated losses resulting from the ability of each customer to make payments on amounts invoiced. If the financial condition of anyinability of our customers were to deteriorate, additional allowances might be required. From time to time we must adjust our estimates. Changes in estimatesmake required payments. The allowance represents the current estimate of lifetime expected credit losses over the collection risk related toremaining duration of existing accounts receivable canconsidering current market conditions and supportable forecasts when appropriate. The estimate is a result in decreasesof our ongoing evaluation of collectability, customer creditworthiness, historical levels of credit losses, and increases to current period net income.future expectations. Write-off activity and recoveries for the years were not material.
Long-Lived Assets.We periodically evaluate the period of depreciation or amortization forreview our long-lived assets to determine whether current circumstances warrant revised estimates of useful lives. We review our property, plant and equipment for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. Recoverability is measured by a comparison of the carrying amount to the net undiscounted cash flows expected to be generated by the asset group. An impairment loss would be recorded for the excess of net carrying value over the fair value of the asset impaired. The fair value is estimated based on expected discounted future cash flows or other methods such as orderly liquidation value. The results of impairment tests are subject to management’s estimates and assumptions of projected cash flows and operating results. Changes in assumptions or market conditions could result in a change in estimated future cash flows and the likelihood of materially different reported results. Past estimates by management of the fair values and useful lives ofBecause our forecasted cash flow is negative, long-lived assets, and investments have periodically been impacted byone-time events.During the fourth quarter of 2019, we incurred an asset impairment of $11.9 million consisting of $11.7 million related toincluding property plant and equipment and $0.2 million of right-of-use lease assets. The property, plant and equipment was measured utilizing an orderly liquidation value of each of the underlying assets. The right-of-use lease assets were measured utilizing a version of the income approach that considers the present value of the market-based rent payments for the applicable properties. The impairment resulted from a change made to the internal organization of the Company in the fourth quarter of 2019 as discussed in Item 8, Note 5. The organizational change resulted in the creation of a new Spine asset group. Prior to the fourth quarter of 2019, the Spine asset group did not exist as the related assets were included in another asset group as it had interdependencies among the utilization of the assets within the group, and therefore, there were no discrete cash flows. The newly formed Spine asset group could not support the carrying amount of the property, plant and equipment and the right of use asset, because the Spine asset group no longer has the benefit of shared resources and cashflows generated by the former asset group that it was previously included in.
During the second quarter of 2018, we incurred an asset impairment of $4.5 million related to the abandonment of our map3® implants as a result of us phasing out and ceasing distributions effective October 31, 2018. During the fourth quarter of 2017, we ceased certain long-term projects resulting in asset abandonments of long-term assets at our U.S. facility of $3.5 million.
Intangible assets generally consist of finite-lived intangible assets including patents, tradenames, procurement contracts, customer lists, distribution agreementssubject to amortization were impaired and acquired exclusivity rights. Patents are amortized on the straight-line method over the shorterwritten down to their estimated fair values in 2021 and 2020.
Revenue Recognition. The Company recognizes revenue upon transfer of the remaining protection period or estimated useful livescontrol of between 8 and 16 years. Tradenames, procurement contracts, customer lists, acquired exclusivity rights and distribution agreements are amortized over estimated useful lives of between 5 to 25 years. As of December 31, 2019, the Company concluded, through the ASC 360 valuation testing, that factors existed indicating that finite-lived intangible assetspromised products in the Spine asset group were impaired. Thus, we tested the $85.1 million carryingan amount of the intangible assets in the Spine asset group, for impairment on December 31, 2019. As a result, for the year ended December 31, 2019, we recorded an impairment charge for all of the finite-lived intangible assets within the Spine asset group, totaling $85.1 million. The method used to determine the fair value of the Spine asset group was based on a net asset value approach (ie a cost approach).Intangible Assets and Goodwill. Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) 350,Goodwill and Other Intangible Assets, requires companies to test goodwill for impairment on an annual basis at the reporting unit level (or an interim basis if an event occurs that might reduce the fair value of a reporting unit below its carrying value). The annual impairment test is performed at each year-end unless indicators of impairment are present and require more frequent testing. In December 2019, we changed our reporting structure, as we adopted new segment reporting, which we concluded resulted in two reporting units, Global Spine (“Spine”) and Global OEM (“OEM”). Refer to Item 8, Note 5 for further discussion regarding segment changes in 2019. With the change in reporting units we performed an impairment test prior to the change, on our previous one reporting unit, and then performed an impairment test immediately after the change on the two reporting units which also coincides with our annual impairment test date of December 31, 2019.
Goodwill is tested for impairment by comparing the fair value of the reporting unit to its carrying amount, including goodwill. Prior to 2019, in concluding as to fair value of the reporting unit for purposes of testing goodwill, an income approach and a market approach were utilized. The conclusion from these two approaches were weighted equally and then adjusted to incorporate a control premium or acquisition premium that reflects the additional amount a buyer is willingconsideration it expects to payreceive in exchange for elements of control and for a premium that reflects the buyer’s perception of its ability to add value through synergies. In 2019, since the cash flows were negative over the forecast period for the Spine reporting unit, a cost approach was used to determine the fair value of the Spine reporting unit. For the OEM reporting unit, we weighted the income approach 75% and the market approach 25%. We have chosen the weightings because the income approach more fully captures the company specific factors that would not be directly captured in the market approach, as there are no pure publicly traded comparable companies.
The income approach employs a discounted cash flow model that considers: (1) assumptions that marketplace participants would use in their estimates of fair value, including the cash flow period, terminal values based on a terminal growth rate and the discount rate; (2) current period actual results; and (3) projected results for future periods that have been prepared and approved by our senior management.
The market approach employs market multiples from guideline public companies operating in our industry. Estimates of fair value are derived by applying multiples based on revenue and earnings before interest, taxes, depreciation and amortization (“EBITDA”) adjusted for size and performance metrics relative to peer companies. A control premium was included in determining the fair value under this approach.
The cost approach considers the replacement cost adjusted for certain factors. Certain balance sheet items were adjusted to fair value before being utilized in estimating the value of the reporting units under the cost approach, including inventory, property, plant and equipment, right of use assets, and other intangible assets.
All three approaches used in the analysis have a degree of uncertainty. Potential events or changes in circumstances which could impact the key assumptions used in our goodwill impairment evaluation are as follows:
Change in peer group or performance of peer group companies;
Change in the company’s markets and estimates of future operating performance;
Change in the company’s estimated market cost of capital; and
Change in implied control premiums related to acquisitions in the medical device industry.
The valuation of goodwill requires management to use significant judgments and estimates including, but not limited to, projected future revenue and cash flows, along with risk-adjusted weighted average cost of capital. Changes in assumptions or market conditions could result in a change in estimated future cash flows and the likelihood of materially different reported results.
On March 8, 2019, we acquired Paradigm for a purchase price of approximately $232.9 million and recorded goodwill of approximately $135.6 million. Paradigm was initially included in the Company’s single reporting unit. With the change in reporting units, we performed a relative fair value valuation calculation to allocate the Company’s historical goodwill (existing prior to the Paradigm acquisition) between the two reporting units. The goodwill arising from the Paradigm acquisition was specifically allocated to the Spine reporting unit.those products. The Company concluded specific allocation was most appropriate since Paradigm was recently acquired and the benefits of the acquired goodwill were never realized by the rest of the reporting unit as Paradigm was not integrated. Based on this change in reporting units, we conducted an impairment test before and after the change, and it was concluded that the fair value of our reporting unit exceeded the carrying value under the previous reporting unit structure. On the impairment test performed immediately subsequent to the change in reporting units, on the OEM reporting unit test, it was concluded the fair value of goodwill is substantially in excess of its carrying value; on the Spine reporting unit test, it was concluded the carrying value was in excess of the fair value of goodwill. Based on several factors, we weighted the income approach at 75% and the market approach at 25% in determining the fair value of our OEM reporting unit and utilized the cost approach for the Spine reporting unit for the purpose of the impairment test. The test resulted in the fair value of the OEM reporting unit exceeding the carrying value by approximately 54%, and the fair value of the Spine reporting unit could not support the allocated goodwill. As a result, for the year ended December 31, 2019, we recorded an impairment charge of all the goodwill in the Spine reporting unit totaling $140.0 million.
Revenue Recognition. We recognize revenue upon shipping, or receipt by our customers of our products and implants, depending on our distribution agreements with our customers or distributors. Our performance obligations consist mainly of transferring control of implants identified in our contracts. We typically transfertransfers control at a point in time upon shipment or delivery of the implants for direct sales, or upon implantation for sales of consigned inventory. OurThe 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, respectively based on the terms of the contract. For
The Company’s performance obligations
related to our contracts with exclusively built inventory clauses, we typically satisfy our performance obligations evenly over the contract term as inventory is built. Such exclusively manufactured inventory has no alternative use and we have an enforceable right to payment for performance to date. We use the input method to measure the manufacturing activities completed to date, which depicts the progress of our performance obligationconsist mainly of transferring control of
exclusively built inventory. Forimplants identified in the
contracts with upfront and annual exclusivity fees, revenue related to those feescontracts. The Company’s transaction price is
recognized overgenerally fixed. Any discounts or rebates are estimated at the inception of the contract
term followingand recognized as a
consistent method of measuring progress towards satisfactionreduction of the
revenue. 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. We use the methodobligation and
measure of progress that best depicts the transfer of controlare not material to the
customer of the goods or services to date relative to the remaining goods or services promised under the contract.We permit returns of tissueconsolidated financial statements.
Warrant Valuation. 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 termswarrants did not meet the criteria for equity
classification and thus were recorded as liabilities. Since the warrants met the definition of
contractual agreements with customers if the tissue is returned in a
timely manner, in unopened packaging and from the normal channels of distribution. We provide allowances for returns based upon analysis of our historical patterns of returns, matched against the fees from which they originated. Historical returns have been within the amounts we reserved.Stock-Based Compensation Plans. We account for our stock-based compensation plansderivative in accordance with FASB ASC 718, Accounting for Stock Compensation (“FASB ASC 718”). FASB ASC 718 requires the measurement and recognition of compensation expense for all stock-based awards made to employees and directors, including employee stock options and restricted stock. Under the provisions of FASB ASC 718, stock-based compensation cost is815, these warrants were measured at the grant date, based on the calculated fair value ofat 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 award, and is recognized as an expense on a straight-line basis over the requisite service period of the entire award (generally the vesting period of the award). We value restricted stock awards using the intrinsic value method, which is based on the fair market value price on the grant date. We use a Monte Carlo simulation model to estimatechange. The Company determined the fair value of restricted stock awards that contain a market condition.
its warrants based on the Black Scholes Option Pricing Model.
Income Taxes. We use the asset and liability method of accounting for income taxes. Deferred income taxes are recorded to reflect the tax consequences on future years for differences between the tax basis of assets and liabilities and their financial reporting amounts at eachyear-end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to amounts which are more likely than not to be realized. Contingent Consideration Valuation. We account for the contingent consideration related to the Holo Acquisition as a liability in accordance with the guidance of ASC 480, Distinguishing Liabilities from Equity, because the contingent consideration represents a conditional obligation that has a fixed monetary value known at inception and we may settle by issuing a variable number of our equity shares. The liability is recorded at its fair value at inception and shall be marked to market subsequently at the end of each reporting period, with any change recognized in the current earnings.
Noncontrolling Interest. The Company's consolidated noncontrolling interest is comprised of INN. The Company evaluated whether noncontrolling interest is subject to redemption features outside of the Company's control. We classified noncontrolling interest that is currently redeemable for cash or probable of being redeemable for cash in the future in the mezzanine section of the consolidated balance sheet. Currently, the noncontrolling interest is not redeemable. It is only redeemable upon the occurrence of FDA approval and therefore will not be remeasured at each reporting period until approval is obtained.
Accounting Standard Update Considerations
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 conversionfeatures 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 adopted ASU 2020-06 and it did not have an impact on the consolidated financial statements.
Off Balance-Sheet Arrangements
As of December 31,
2019,2021, we had no
off-balance-sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation
S-K.Regulatory Approvals in 2019
Americas
| • | | US 510(k) clearance of CervAlignTM Anterior Cervical Plate System
|
US 510(k) clearance of Streamline MIS Spinal Fixation System
US 510(k) clearances of Fortilink® Interbody Fusion Device (IBF) with TETRAfuse® 3D Technology
US Puros Customized Block Allograft Market Extension
Canada Puros Customized Block Allograft Market Extension
El Salvador Puros Allograft Registration (Bone)
Peru Puros Allograft Registration (Dermis & Pericardium)
Europe, Middle East, Africa
Israel Puros Allograft Registration
Greece CopiOs Particulate and Membrane registration
Spain Puros Allograft Market Extension (Dowel & Blocks)
France Puros Allograft Registration
Europe Tutobone CE line extension
Asia-Pacific
Singapore Licenses for various allograft products
Malaysia Coflex registration
TaiwanCoflex-F+ registration
The following tables set forth, in both dollars and as a percentage of revenues, the results of our operations for the years indicated:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2019 | | | 2018 | | | 2017 | |
| | | (Dollars in thousands) | |
Statement of Operations Data: | | | | | | | | | | | | | | | | | | | | | | | | |
Revenues | | $ | 308,384 | | | | 100.0 | % | | $ | 280,362 | | | | 100.0 | % | | $ | 280,349 | | | | 100.0 | % |
Costs of processing and distribution | | | 137,259 | | | | 44.5 | | | | 140,719 | | | | 50.2 | | | | 137,277 | | | | 49.0 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Gross profit | | | 171,125 | | | | 55.5 | | | | 139,643 | | | | 49.8 | | | | 143,072 | | | | 51.0 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Expenses: | | | | | | | | | | | | | | | | | | | | | | | | |
Marketing, general and administrative | | | 157,675 | | | | 51.1 | | | | 119,724 | | | | 42.7 | | | | 115,009 | | | | 41.0 | |
Research and development | | | 16,836 | | | | 5.5 | | | | 14,410 | | | | 5.1 | | | | 13,315 | | | | 4.7 | |
Severance and restructuring costs | | | — | | | | — | | | | 2,808 | | | | 1.0 | | | | 12,016 | | | | 4.3 | |
Gain on acquisition contingency | | | (76,033 | ) | | | (24.7 | ) | | | — | | | | — | | | | — | | | | — | |
Executive transition costs | | | — | | | | — | | | | — | | | | — | | | | 2,818 | | | | 1.0 | |
Asset impairment and abandonments | | | 97,341 | | | | 31.6 | | | | 5,070 | | | | 1.8 | | | | 4,034 | | | | 1.4 | |
Goodwill impairment | | | 140,003 | | | | 45.4 | | | | — | | | | — | | | | — | | | | — | |
Acquisition and integration expenses | | | 17,159 | | | | 5.6 | | | | 4,943 | | | | 1.8 | | | | 630 | | | | 0.2 | |
Cardiothoracic closure business divestiture contingency consideration | | | — | | | | — | | | | (3,000 | ) | | | (1.1 | ) | | | — | | | | — | |
Gain on cardiothoracic closure business divestiture | | | — | | | | — | | | | — | | | | — | | | | (34,090 | ) | | | (12.2 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total operating expenses | | | 352,981 | | | | 114.5 | | | | 143,955 | | | | 51.3 | | | | 113,732 | | | | 40.6 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Operating (loss) income | | | (181,856 | ) | | | (59.0 | ) | | | (4,312 | ) | | | (1.5 | ) | | | 29,340 | | | | 10.4 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Other (expense) income: | | | | | | | | | | | | | | | | | | | | | | | | |
Interest expense | | | (12,571 | ) | | | (4.1 | ) | | | (2,771 | ) | | | (1.0 | ) | | | (3,180 | ) | | | (1.1 | ) |
Interest income | | | 161 | | | | 0.1 | | | | 35 | | | | 0.0 | | | | 8 | | | | 0.0 | |
Loss on extinguishment of debt | | | — | | | | — | | | | (309 | ) | | | (0.1 | ) | | | — | | | | — | |
Foreign exchange (loss) gain | | | (139 | ) | | | (0.0 | ) | | | (34 | ) | | | (0.0 | ) | | | 87 | | | | 0.0 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total other expense - net | | | (12,549 | ) | | | (4.0 | ) | | | (3,079 | ) | | | (1.1 | ) | | | (3,085 | ) | | | (1.1 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
(Loss) income before income tax (provision) benefit | | | (194,405 | ) | | | (63.0 | ) | | | (7,391 | ) | | | (2.6 | ) | | | 26,255 | | | | 9.4 | |
Income tax benefit (provision) | | | (17,237 | ) | | | (5.6 | ) | | | 4,268 | | | | 1.5 | | | | (19,349 | ) | | | (6.9 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net (loss) income | | | (211,642 | ) | | | (68.6 | ) | | | (3,123 | ) | | | (1.1 | ) | | | 6,906 | | | | 2.5 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Convertible preferred dividend | | | — | | | | — | | | | (2,120 | ) | | | (0.8 | ) | | | (3,723 | ) | | | (1.3 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net (loss) income applicable to common shares | | $ | (211,642 | ) | | | (68.6 | %) | | $ | (5,243 | ) | | | (1.9 | %) | | $ | 3,183 | | | | 1.2 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | For the Year Ended December 31, | | | Percent Change | |
| | | 2019 | | | 2018 | | | 2017 | | | 2019/2018 | | | 2018/2017 | |
Spine | | $ | 118,987 | | | $ | 94,436 | | | $ | 92,712 | | | | 26.0 | % | | | 1.9 | % |
OEM | | | 189,397 | | | | 185,926 | | | | 187,637 | | | | 1.9 | % | | | (0.9 | )% |
| | | | | | | | | | | | | | | | | | | | |
Total Revenues | | $ | 308,384 | | | $ | 280,362 | | | $ | 280,349 | | | | 10.0 | % | | | 0.0 | % |
| | | | | | | | | | | | | | | | | | | | |
2019
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| (Dollars in thousands) |
| Statement of Operations Data: | | | | | | | | | | | |
| Revenues | $ | 90,500 | | | 100.0 | % | | $ | 101,749 | | | 100.0 | % | | $ | 117,423 | | | 100.0 | % |
| Costs of goods sold | 29,775 | | | 32.9 | | | 44,002 | | | 43.2 | | | 32,777 | | | 27.9 | |
| Gross profit | 60,725 | | | 67.1 | | | 57,747 | | | 56.8 | | | 84,646 | | | 72.1 | |
| | | | | | | | | | | |
| Operating Expenses: | | | | | | | | | | | |
| General and administrative | 104,668 | | | 115.7 | | | 124,424 | | | 122.3 | | | 135,396 | | | 115.3 | |
| Research and development | 13,888 | | | 15.3 | | | 11,947 | | | 11.7 | | | 16,836 | | | 14.3 | |
| Loss (Gain) on acquisition contingency | (4,587) | | | (5.1) | | | 4,753 | | | 4.7 | | | (76,033) | | | (64.8) | |
| Asset acquisition expenses | 72,087 | | | 79.7 | | | 94,999 | | | 93.4 | | | — | | | — | |
| Asset impairment and abandonments | 12,195 | | | 13.5 | | | 14,773 | | | 14.5 | | | 97,341 | | | 82.9 | |
| Goodwill impairment | — | | | — | | | — | | | — | | | 140,003 | | | 119.2 | |
| Transaction and integration expenses | 3,689 | | | 4.1 | | | 4,872 | | | 4.8 | | | 13,999 | | | 11.9 | |
| Total operating expenses | 201,940 | | | 223.1 | | | 255,768 | | | 251.4 | | | 327,542 | | | 278.8 | |
| Other operating income, net | (3,932) | | | (4.3) | | | — | | | — | | | — | | | — | |
| Operating loss | (137,283) | | | (151.7) | | | (198,021) | | | (194.6) | | | (242,896) | | | (206.7) | |
| | | | | | | | | | | |
| Other (income) expense - net: | | | | | | | | | | | |
| Other (income) expense - net | (202) | | | (0.2) | | | (61) | | | 0.1 | | | (161) | | | 0.1 | |
| Foreign exchange loss (gain) | 1,447 | | | 1.6 | | | (279) | | | 0.3 | | | 122 | | | (0.1) | |
| Change in fair value of warrant liability | (14,736) | | | (16.3) | | | — | | | — | | | — | | | — | |
| Total other (income) expense - net | (13,491) | | | (14.9) | | | (340) | | | 0.4 | | | (39) | | | — | |
| Loss before income tax (benefit) provision | (123,792) | | | (136.8) | | | (197,681) | | | (194.3) | | | (242,857) | | | (206.8) | |
| Income tax (benefit) provision | (886) | | | (1.0) | | | (3,486) | | | 3.4 | | | 5,921 | | | (5.0) | |
| Net loss from continuing operations | (122,906) | | | (135.8) | | | (194,195) | | | (190.9) | | | (248,778) | | | (211.9) | |
| Discontinued operations | | | | | | | | | | | |
| Income from operations of discontinued operations | (6,316) | | | (7.0) | | | 179,934 | | | 176.8 | | | 48,452 | | | 41.3 | |
| Income tax provision (benefit) provision | (2,674) | | | (3.0) | | | 19,522 | | | (19.2) | | | 11,316 | | | (9.6) | |
| Net income from discontinued operations | (3,642) | | | (4.0) | | | 160,412 | | | 157.6 | | | 37,136 | | | 31.7 | |
| Net loss | (126,548) | | | (139.8) | | | (33,783) | | | (33.3) | | | (211,642) | | | (180.2) | |
| Net income attributable to noncontrolling interests | 41,897 | | | 46.3 | | | — | | | — | | | — | | | — | |
| Net (loss) income applicable to Surgalign Holdings, Inc. | $ | (84,651) | | | (93.5) | | | $ | (33,783) | | | (33.3) | | | $ | (211,642) | | | (180.2) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Year Ended December 31, | | Percent Change |
| 2021 | | 2020 | | 2019 | | 2021/2020 | | 2020/2019 |
| Revenues: | | | | | | | | | |
| Domestic | $ | 77,927 | | | $ | 85,612 | | | $ | 97,703 | | | (9.0) | % | | (12.4) | % |
| International | 12,573 | | | 16,137 | | | 19,720 | | | (22.1) | % | | (18.2) | % |
| Total revenues | $ | 90,500 | | | $ | 101,749 | | | $ | 117,423 | | | (11.1) | % | | (13.3) | % |
2021 Compared to
2018Total 2020
Revenues.Our total revenues increased $28.0decreased $11.2 million, or 10.0%11.1%, to $308.4$90.5 million for the year ended December 31, 2021, compared to $101.7 million for the year ended December 31, 2020 due to continued decreased demand during the year as a result of the reduction in elective surgical procedures, the fact that the Cervalign® plate was not on the market for the majority of the year and continued headwind with CoFlex reimbursement.
Costs of Goods Sold. Costs of goods sold decreased $14.2 million, or 32.3%, to $29.8 million for the year ended December 31, 2021, from $44.0 million for the year ended December 31, 2020. The decline in cost of goods sold is driven by a decline in sales (as discussed above) and product mix changes within the hardware business. The decline was offset by a $3.0 million charge due to our inability to realize a supplier prepaid royalty, and continued refinement of our excess and obsolete reserve through product rationalization.
General and Administrative Expenses. General and administrative expenses decreased $19.8 million, or 15.9%, to $104.7 million for the year ended December 31, 2021, compared to $124.4 million for the year ended December 31, 2020. The decrease in general and administrative costs is driven by reduction in spending through the simplification of the distribution and administrative infrastructure, and reduction in spending.
Research and Development Expenses. Research and development expenses increased $1.9 million, or 16.2%, to $13.9 million for the year ended December 31, 2021, compared to $11.9 million for the year ended December 31, 2020. The increase is the result of continued spend on new hardware product development along with continued R&D in the development of our digital health products, including FDA submissions and approvals.
Loss (Gain) on Acquisition Contingency. Gain on acquisition contingency of $4.6 million for the year ended December 31, 2021, represented the change in our estimate of obligation for future milestone payments for the Holo Surgical Acquisition. The change from period to period is a result of the change in assumptions that drive the estimate.
Asset Acquisition Expenses. Asset acquisition expenses decreased $22.9 million, or 24.1%, to $72.1 million for the year ended December 31, 2021, compared to $95.0 million for the year ended December 31, 2020. The expense in 2021 is related to the purchase of 42% equity interest in INN, while the expense in 2020 was related to the purchase price of Holo Surgical.
Asset Impairment and Abandonments – Asset impairment and abandonments expenses decreased $2.6 million or 17.5% to $12.2 million for the year ended December 31, 2021, compared to $14.8 million for the year ended December 31, 2020. The decrease was primarily driven by the decrease in instrument purchases during the course of 2021 off set by the impairment of system implementation costs which are ultimately impaired in the quarter they were purchased.
Transaction and Integration Expenses – Transaction and integration expenses decreased $1.2 million or 24.3% to $3.7 million for the year ended December 31, 2021, compared to $4.9 million for the year ended December 31, 2020. The decrease was caused by less acquisition activity throughout 2021 and the sale of the OEM business in 2020. Additionally in 2021 there was $2.1 million of expenses incurred related to the June 2021 financing.
Other Operating Income - Net – Other operating income, net was $3.9 million for the year ended December 31, 2021, related to the Company's inventory settlement with OEM which occurred in 2021.
Total Net Other Income. Total net other income, which includes interest expense, interest income, foreign exchange loss, and change in fair value of warrant liability, increased to $13.5 million for the year ended December 31, 2021, from $0.3 million for the year ended December 31, 2020. The increase was caused by a decrease in the fair value of our warrant liability of $14.7 million during the year ended December 31, 2021, caused by the decline in our stock price over the course of 2021.
Income Tax Benefit (Provision). Income tax benefit for the year ended December 31, 2021, was $0.9 million compared to an income tax benefit of $3.5 million for the year ended December 31, 2020. Our effective tax rate for the year ended December 31, 2021 and 2020, was 0.71% and 1.76% respectively. Our effective tax rate for the year ended December 31, 2021, was primarily impacted by the non-deductible acquisition expenses and the change in fair value of the warrant liability, mainly offset by a valuation allowance, and the net change in uncertain tax positions. Our effective tax rate for the year ended December 31, 2020, was primarily impacted by the non-deductible acquisition expenses and tax attributes, mainly offset by a valuation allowance, and the tax benefit recognized as a result of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) enacted by the United States Congress on March 27, 2020.
Discontinued Operations – Net loss from discontinued operations for the year ended December 31, 2021, was $3.6 million due to the settlement of the OEM purchase agreement working capital dispute (See Note 5), compared to $160.4 million net income for the year ended December 31, 2020, which is when we sold the OEM business.
Net income attributable to noncontrolling interest – Net income from noncontrolling interest as of December 31, 2021, was $41.9 million due to the acquisition of INN and the related expensing of the IPR&D asset as it did not have technological feasibility and not yet approved by the FDA.
2020 Compared to 2019
Revenues. Our total revenues decreased $15.7 million, or 13.3%, to $101.7 million for the year ended December 31, 2020, compared to $117.4 million for the year ended December 31, 2019 compareddue to $280.4decreased demand during the year as a result of the reduction in elective surgical procedures primarily related to COVID-19 impacting our business.
Costs of Goods Sold. Costs of goods sold increased $11.2 million, or 34.2%, to $44.0 million for the year ended December 31, 2018 due to increased demand2020, from certain OEM distributors, primarily in our acellular dermal matrix implants and our coflex® Interlaminar Stabilization® implants, acquired through the acquisition of Paradigm, partially offset by the abandonment of the map3® implant. Excluding our coflex® Interlaminar Stabilization® implants, totaling $30.3$32.8 million our total revenues decreased $2.3 million, or 0.8%, to $278.1 million for the year ended December 31, 2019 compared to $280.4 million for the year ended December 31, 2018, primarily due to the abandonment of map3® implants.
Spine Segment.Revenues from spinal implants increased $24.6 million, or 26.0%, to $119.0 million for the year ended December 31, 2019, compared to $94.4 million for the year ended December 31, 2018. Spine revenues increased primarily as a result of increased distributions of our coflex® Interlaminar Stabilization® implants, partially offset by the abandonment of the map3® implant. Excluding our coflex® Interlaminar Stabilization® implants, our spine implants decreased $5.7 million, or 6.0%, to $88.7 million for the year ended December 31, 2019 compared to $94.4 million for the year ended December 31, 2018.
OEM Segment.Revenues from OEM which includes sports allografts increased $3.5 million, or 1.9%, to $189.4 million for the year ended December 31, 2019, compared to $185.9 million for the year ended December 31, 2018. OEM revenues increased primarily due to increased demand from certain OEM distributors, primarily in our acellular dermal matrix implants and as a result of higher distributions of our Cortiva® implant.
Costs of Processing and Distribution. Costs of processing and distribution decreased $3.4 million, or 2.4%, to $137.3 million for the year ended December 31, 2019, from $140.7 million for the year ended December 31, 2018. Adjusted for the impact of purchase accountingstep-up of $3.2 million and $0.6 million for the years ended December 31, 2019 and 2018, respectively, and an inventorywrite-off of $6.6 million related to the abandonment of our map3® implant and $1.0 million as a result ofwriting-off certain obsolete quantities primarily of bone graft substitute inventory due to the rationalization of our international distribution infrastructure for the year ended December 31, 2018, cost of processing and distribution increased $1.6 million, or 1.2%, to $134.1 million, or 43.5% of revenue, for the year ended December 31, 2019, compared to $132.5 million, or 47.3% of revenue, for the year ended December 30, 2018. The decrease in costs of processing and distribution was primarily due to the reduction in cost from our strategic initiative to optimize material cost and drive operational efficiency.
Marketing, General and Administrative Expenses. Marketing, general and administrative expenses increased $37.9 million, or 31.7%, to $157.7 million for the year ended December 31, 2019, compared to $119.7 million for the year ended December 31, 2018. Marketing, general and administrative expenses increased as a percentage of revenues from 42.7% for the year ended December 31, 2018 to 51.1% for the year ended December 31, 2019. The increase was primarily due to the Paradigm acquisition resulting in incremental headcount and marketing and administrative related expenses and increased legal cost related to patent litigation, all totaling $36.2 million.
Research and Development Expenses.Research and development expenses increased $2.4 million, or 16.7%, to $16.8 million for the year ended December 31, 2019, compared to $14.4 million for the year ended December 31, 2018. Research and development expenses increased as a percentage of revenues from 5.1% for the year ended December 31, 2018, to 5.5% for the year ended December 31, 2019. The increase in researchcosts of goods was primarily due to product mix, specifically hardware products.
General and development was in support of our strategic initiativeAdministrative Expenses. General and administrative expenses decreased $11.0 million, or 8.1%, to accelerate growth resulting in increased investment in new product development and clinical studies.Gain on Acquisition Contingency.Gain on acquisition contingency was $76.0$124.4 million for the year ended December 31, 2020, compared to $135.4 million for the year ended December 31, 2019. The decrease in general and administrative expenses is primarily the result of $8.3 million of reduced spending on commission and distribution related to the decline in revenue.
Research and Development Expenses. Research and development expenses decreased $4.9 million, or 29.0%, to $11.9 million for the year ended December 31, 2020, compared to $16.8 million for the year ended December 31, 2019. The decrease in research and development expenses is the result of reduced spending on new product development, specifically external consultant and advisor expenses, due to our focus on the sale of the OEM Businesses during the third quarter of 2020, as well as the furlough of a portion of our research and development team during the second quarter of 2020.
Loss (Gain) on Acquisition Contingency. Loss on acquisition contingency of $4.8 million for the year ended December 31, 2020, represented the change in our estimate of obligation for future milestone payments to Holo Surgical for the asset acquisition closed on October 23, 2020, offset by gain on acquisition contingency of $1.1 million due to change of estimate in contingent considerations for Paradigm and Zyga. The gain on acquisition contingency of $76 million for the year ended December 31, 2019, was the result of an adjustment to our estimate of obligation for future milestone payments on the Paradigm and Zyga acquisitions. There
Asset Acquisition Expenses. Asset acquisition expenses of $95.0 million were related to the Holo Surgical Acquisition. The total purchase price of Holo Surgical asset of $95 million was allocated to the net assets acquired based on their relative fair value as of the completion of the acquisition, primarily including the IPR&D related to Holo Surgical’s development of the HOLO™ platform and other intangible asset for assembled workforce. The HOLO™ platform has not yet reached technological feasibility and has no gain on acquisition contingencyalternative future use; thus, the entire purchased IPR&D of $94.5 million was expensed immediately subsequent to the acquisition. Additionally, the intangible asset related to the assembled workforce of $0.5 million was immediately impaired together with other intangible assets in Q4 2020 due to the Company’s negative projected cash flow.
Asset Impairment and Abandonments. Asset impairment and abandonments of $14.8 million for the year ended December 31, 2018.Asset Impairment2020, was primarily the result of the impairment of the property and Abandonments.equipment.
Asset impairment and abandonments was $97.3 million for the year ended December 31, 2019, related to the impairment of our long-lived and other intangible assets of our Spine segment compared to $5.1 million for the year ended December 31, 2018, primarily related to the abandonment of the map3® implant.assets. During 2019, the Companywe concluded, through the ASC 350 valuation testing, that factors existed at year-end indicating that long-lived assets in the Spine segment of legacy RTI were indicating impairment. As a result, for the year
ended December 31, 2019, we recorded impairment charges to other intangible assets totaling $85.1 million, to property
plant and equipment, totaling $11.7 million, and to right-of-use assets totaling $0.2 million. In addition, for the year ended December 31, 2019, another $0.3 million in other intangible assets were disposed separately from the ASC 350 valuation testing.
Goodwill Impairment.Goodwill impairment was $140.0 million for the year ended December 31, 2019, which was recorded in our Spine segment as a result of the change in segment structure. There was no goodwill impairment for the year ended December 31, 2018.Acquisition2020.
Transaction and Integration Expenses. AcquisitionTransaction and integration expenses related to the purchase of Paradigm including $0.9$4.9 million of severance expense and $5.9 million in other business development costs resulted in $17.2 million of expenses for the year ended December 31, 2019, compared to $4.92020, primarily consisted of $2.4 million of expenses related to the purchase of Paradigm and Zyga$1.5 million of expenses associated with the acceleration of stock compensation expense related to the OEM employees, compared to $14.0 million of Paradigm acquisition costs for the year ended December 31, 2018.2019.
Total Net Other Expense.Income. Total net other expense,income, which includes interest expense, interest income, loss on extinguishment of debt and foreign exchange loss increased $9.4 million, or 303.2%, to $12.5$0.3 million for the year ended December 31, 2019, compared to $3.1 million2020, from $39 thousand for the year ended December 31, 2018.2019. The increase in total net other expense is primarily due to higher interest expense as a result of new debt financing due tochange in the purchase of Paradigm.foreign exchange gain and loss.
Income Tax Benefit (Provision) Benefit.. Income tax provisionbenefit for the year ended December 31, 20192020, was $17.2$3.5 million compared to an income tax benefitprovision of $4.3$5.9 million for the year ended December 31, 2018.2019. Our effective tax rate for the year ended December 31, 2020 and 2019, was 1.76% and 2018(2.43%) respectively. Our effective tax rate for the year ended December 31, 2020, was (8.9)%primarily impacted by the non-deductible acquisition expenses, mainly offset by a valuation allowance, and 57.7% respectively.the tax benefit recognized as a result of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). Our effective tax rate for the year ended December 31, 2019, was primarily impacted by a non-deductiblethe gain recognized on acquisition contingency and goodwill impairment, and valuation allowances established offset by non-taxablethe establishment of a full valuation allowance in the U.S. and foreign jurisdictions.
Discontinued Operations. Net income from discontinued operations for the year ended December 31, 2020, was $160.4 million, including a gain on acquisition contingency.sale of the OEM Businesses of $209.8 million, transaction expenses of $23.6 million, and income taxes of $19.5 million. Net income from discontinued operations for the year ended December 31, 2019, was $37.1 million, net of $11.3 million of income tax benefit.
Non-GAAP Financial Measures
We utilize certain financial measures that are not calculated based on GAAP. Certain of these financial measures are considered
“non-GAAP” “non-GAAP” financial measures within the meaning of Item 10 of Regulation
S-K promulgated by the SEC. We believe that
non-GAAP financial measures provide an additional way of viewing aspects of our operations that, when viewed with the GAAP results, provide a more complete understanding of our results of operations and the factors and trends
affectingaffected 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 consolidated financial statements presented on a GAAP basis, we disclosenon-GAAP net income applicable to common shares andnon-GAAP gross profit adjusted for certain amounts. The calculation of the tax effect on the adjustments between GAAP net loss applicable to common shares andnon-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 calculatingnon-GAAP net income applicable to common shares. Reconciliations of
each of these
non-GAAP financial measures to the most directly comparable GAAP measures are included in the reconciliations below:
| | | | | | | | | | | | |
| | | For the Year Ended December 31, | |
| | | 2019 | | | 2018 | | | 2017 | |
| | | | | | (in thousands) | | | | |
Net (loss) income applicable to common shares, as reported | | $ | (211,642 | ) | | $ | (5,243 | ) | | $ | 3,183 | |
Severance and restructuring costs | | | — | | | | 2,808 | | | | 12,016 | |
Executive transition costs | | | — | | | | — | | | | 2,818 | |
Gain on acquisition contingency | | | (76,033 | ) | | | — | | | | — | |
Asset impairment and abandonments | | | 97,341 | | | | 5,070 | | | | 4,034 | |
Goodwill impairment | | | 140,003 | | | | — | | | | — | |
Inventory purchase price adjustment | | | 3,225 | | | | 594 | | | | — | |
Loss on extinguishment of debt | | | — | | | | 309 | | | | — | |
Inventory write-off | | | 361 | | | | 7,582 | | | | — | |
Acquisition and integration expenses | | | 17,159 | | | | 4,943 | | | | 630 | |
Cardiothoracic closure business divestiture contingency consideration | | | — | | | | (3,000 | ) | | | — | |
Gain on cardiothoracic closure business divestiture | | | — | | | | — | | | | (34,090 | ) |
Net change in valuation allowance | | | 48,415 | | | | (1,620 | ) | | | — | |
Tax effect on new tax legislation | | | — | | | | (650 | ) | | | 2,187 | |
Tax effect on other adjustments | | | (30,204 | ) | | | (4,180 | ) | | | 13,117 | |
| | | | | | | | | | | | |
Non-GAAP net (loss) income applicable to common shares, adjusted | | $ | (11,375 | ) | | $ | 6,613 | | | $ | 3,895 | |
| | | | | | | | | | | | |
| | | | For the Year Ended December 31, | | | For the Year Ended December 31, |
| | | 2019 | | | 2018 | | | 2017 | | | 2021 | | 2020 | | 2019 |
Gross profit, as reported | | $ | 171,125 | | | $ | 139,643 | | | $ | 143,072 | | |
| | | (In thousands) |
| Net loss from continuing operations, as reported | | Net loss from continuing operations, as reported | $ | (122,906) | | | $ | (194,195) | | | $ | (248,778) | |
| Change in fair value of warrant liability | | Change in fair value of warrant liability | (14,736) | | | — | | | — | |
| Bargain purchase gain | | Bargain purchase gain | (90) | | | — | | | — | |
| Other operating income | | Other operating income | (3,932) | | | — | | | — | |
| Supplier prepayment write-off | | Supplier prepayment write-off | 3,000 | | | — | | | — | |
| Severance and restructuring costs | | Severance and restructuring costs | 208 | | | 34 | | | — | |
| Loss (gain) on acquisition contingency | | Loss (gain) on acquisition contingency | (4,587) | | | 4,753 | | | (76,033) | |
| Asset acquisition expenses | | Asset acquisition expenses | 72,087 | | | 94,999 | | | — | |
| Asset impairment and abandonments | | Asset impairment and abandonments | 12,195 | | | 14,773 | | | 97,341 | |
| Goodwill impairment | | Goodwill impairment | — | | | — | | | 140,003 | |
| Inventory purchase price adjustment | | Inventory purchase price adjustment | 2,036 | | | 3,409 | | | 3,225 | |
Inventory write-off | | | 361 | | | | 7,582 | | | | — | | Inventory write-off | — | | | 9,367 | | | 361 | |
Inventory purchase price adjustment | | | 3,225 | | | | 594 | | | | — | | |
| | | | | | | | | | |
Non-GAAP gross profit, adjusted | | $ | 174,711 | | | $ | 147,819 | | | $ | 143,072 | | |
| | | | | | | | | | |
| Transaction and integration expenses | | Transaction and integration expenses | 3,689 | | | 4,872 | | | 13,999 | |
| Restatement and investigation related costs | | Restatement and investigation related costs | — | | | 13,152 | | | — | |
| Tax effect on new tax legislation | | Tax effect on new tax legislation | — | | | (3,464) | | | — | |
| Tax effect on other adjustments | | Tax effect on other adjustments | (28) | | | (11,519) | | | (27,017) | |
| Non-GAAP net loss applicable to common shares, adjusted | | Non-GAAP net loss applicable to common shares, adjusted | $ | (53,064) | | | $ | (63,819) | | | $ | (96,899) | |
