SURGALIGN HOLDINGS, INC. [SRGA] Filings

10-Q 1 srga-20220930.htm 10-Q srga-20220930

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_______________________________________________________

FORM 10-Q

_______________________________________________________

(Mark One)


x			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2022


o			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from________ to ________

Commission file number 001-38832

_______________________________________________________

SURGALIGN HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

_______________________________________________________


Delaware						83-2540607
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

520 Lake Cook Road, Suite 315, Deerfield, Illinois						60015
(Address of principal executive offices)						(Zip Code)

Registrant’s telephone number, including area code: (224) 303-4651

_______________________________________________________

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol

Name of exchange on which registered

common stock, $0.001 par value

SRGA

Nasdaq Global Select Market

_______________________________________________________

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that registrant was required to submit such files.) Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes o No x

Shares of common stock, $0.001 par value, outstanding on October 31, 2022: 6,754,360

SURGALIGN HOLDINGS, INC.

FORM 10-Q For the Quarter Ended September 30, 2022

Index


		Page #

Part I Financial Information

Item 1	Unaudited Condensed Consolidated Financial Statements	1

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29

Item 3	Quantitative and Qualitative Disclosures About Market Risk	42

Item 4	Controls and Procedures	42

Part II Other Information

Item 1	Legal Proceedings	44

Item 1A	Risk Factors	45

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	47

Item 3	Defaults Upon Senior Securities	47

Item 4	Mine Safety Disclosures	47

Item 5	Other Information	47

Item 6	Exhibits	48

Signatures		50

Part IFinancial Information

Item 1.Unaudited Condensed Consolidated Financial Statements

SURGALIGN HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Unaudited, in thousands, except share data)


	September 30, 2022		December 31, 2021
Assets
Current Assets:
Cash and cash equivalents	$	13,845	$	51,287
Accounts receivable - less allowances of $9,273 at September 30, 2022 and $9,272 at December 31, 2021	18,938		19,197
Inventories - current	22,737		26,204
Prepaid and other current assets	11,129		9,984
Total current assets	66,649		106,672
Non-current inventories	15,582		10,212
Property and equipment - net	1,782		945
Other assets - net	4,030		5,970
Total assets	$	88,043	$	123,799

Liabilities, Mezzanine Equity and Stockholders' Equity
Current Liabilities:
Accounts payable	$	13,062	$	10,204
Current portion of acquisition contingency - Holo	9,189		25,585
Accrued expenses	11,835		17,769
Accrued income taxes	604		484
Total current liabilities	34,690		54,042
Acquisition contingencies - Holo	15,555		26,343
Warrant liability	1,504		12,013
Notes payable - related party	10,139		9,982
Other long-term liabilities	3,769		3,176
Total liabilities	65,657		105,556
Commitments and contingencies (Note 18)

Mezzanine equity	10,006		10,006

Stockholders' equity:
Common stock, $.001 par value: 300,000,000 shares authorized; 6,750,337 and 4,887,982 shares issued and outstanding, as of September 30, 2022 and December 31, 2021, respectively	7		5
Additional paid-in capital	605,457		585,517
Accumulated other comprehensive loss	(2,062)		(1,820)
Accumulated deficit	(585,107)		(569,613)
Less treasury stock, 63,571 and 51,448 shares, as of September 30, 2022 and December 31, 2021, respectively, at cost	(5,915)		(5,852)
Total stockholders' equity	12,380		8,237
Total liabilities, mezzanine equity and stockholders' equity	$	88,043	$	123,799

See notes to unaudited condensed consolidated financial statements.

SURGALIGN HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Loss

(Unaudited, in thousands, except share and per share data)


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2022		2021		2022		2021
Revenues	$	20,178	$	20,545	$	61,406	$	68,670
Cost of goods sold	5,486		6,811		18,310		20,278
Gross profit	14,692		13,734		43,096		48,392
Operating Expenses:
General and administrative	23,855		27,564		73,461		79,264
Research and development	3,872		2,901		12,402		8,960
Gain on acquisition contingency	(6,691)		(1,266)		(17,184)		(3,553)
Asset impairment and abandonments	2,335		5,411		4,270		9,794
Transaction and integration expenses	214		—		1,352		2,510
Total operating expenses	23,585		34,610		74,301		96,975
Other operating income, net	(898)		(3,932)		(898)		(3,932)
Operating loss	(7,995)		(16,944)		(30,307)		(44,651)
Other expense (income) - net
Other expense (income) - net	330		(117)		379		(221)
Interest expense	252		—		756		—
Foreign exchange loss	1,268		471		2,677		921
Change in fair value of warrant liability	(50)		(7,739)		(18,917)		(10,262)
Total other expense (income) - net	1,800		(7,385)		(15,105)		(9,562)
(Loss) before income tax provision	(9,795)		(9,559)		(15,202)		(35,089)
Income tax provision (benefit)	38		(1,304)		292		(1,004)
Net loss from operations	(9,833)		(8,255)		(15,494)		(34,085)
Discontinued Operations (Note 3)
Loss from operations of discontinued operations	—		—		—		(6,316)
Income tax (benefit)	—		(349)		—		(1,112)
Net income (loss) from discontinued operations	—		349		—		(5,204)
Net (loss)	(9,833)		(7,906)		(15,494)		(39,289)
Noncontrolling interests
Net income applicable to noncontrolling interests	—		—		—		—
Net loss applicable to Surgalign Holdings, Inc.	(9,833)		(7,906)		(15,494)		(39,289)

Other comprehensive income (loss)
Unrealized foreign currency translation loss (gain)	180		(362)		(242)		(398)
Total other comprehensive loss	$	(10,013)	$	(7,544)	$	(15,252)	$	(38,891)

Net loss from continuing operations per share applicable to Surgalign Holdings, Inc. - basic	$	(1.46)	$	(1.79)	$	(2.44)	$	(8.73)
Net income (loss) from discontinued operations per share applicable to Surgalign Holdings, Inc. - basic	$	—	$	0.08	$	—	$	(1.33)
Net loss per share applicable to Surgalign Holdings, Inc. - basic	$	(1.46)	$	(1.71)	$	(2.44)	$	(10.06)
Net loss from continuing operations per share applicable to Surgalign Holdings, Inc. - diluted	$	(1.46)	$	(1.79)	$	(2.44)	$	(8.73)
Net income (loss) from discontinued operations per share applicable to Surgalign Holdings, Inc. - diluted	$	—	$	0.08	$	—	$	(1.33)
Net loss per share applicable to Surgalign Holdings, Inc. - diluted	$	(1.46)	$	(1.71)	$	(2.44)	$	(10.06)
Weighted average shares outstanding - basic	6,739,234		4,610,596		6,356,655		3,904,509
Weighted average shares outstanding - diluted	6,739,234		4,610,596		6,356,655		3,904,509

See notes to unaudited condensed consolidated financial statements.

SURGALIGN HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statement of Stockholders' Equity

(Unaudited, in thousands)


	Common Stock		Additional Paid-In Capital		Accumulated Other Comprehensive Loss		Accumulated Deficit		Treasury Stock		Total		Mezzanine Equity
Balance, January 1, 2022	$	5	$	585,517	$	(1,820)	$	(569,613)	$	(5,852)	$	8,237	$	10,006
Net income	—		—		—		27		—		27		—
Foreign currency translation adjustment	—		—		(109)		—		—		(109)		—
Share offering	1		8,487		—		—		—		8,488		—
Prefunded warrant execution	—		1,749		—		—		—		1,749		—
Equity instruments issued in connection with the Holo acquisition	1		5,918		—		—		—		5,919		—
Stock-based compensation	—		1,374		—		—		—		1,374		—
Purchase of treasury stock	—		—		—		—		(5)		(5)		—
Balance, March 31, 2022	$	7	$	603,045	$	(1,929)	$	(569,586)	$	(5,857)	$	25,680	$	10,006
Net loss	—		—		—		(5,688)		—		(5,688)		—
Foreign currency translation adjustment	—		—		(313)		—		—		(313)		—
Stock-based compensation	—		971		—		—		—		971		—
Purchase of stock in the ESPP Plan	—		186		—		—		—		186		—
Purchase of treasury stock	—		—		—		—		(51)		(51)		—
Other	—		50		—		—		—		50		—
Balance, June 30, 2022	$	7	$	604,252	$	(2,242)	$	(575,274)	$	(5,908)	$	20,835	$	10,006
Net loss	—		—		—		(9,833)		—		(9,833)		—
Foreign currency translation adjustment	—		—		180		—		—		180		—
Stock-based compensation	—		1,212		—		—		—		1,212		—
Purchase of treasury stock	—		—		—		—		(7)		(7)		—
Other	—		(7)		—		—		—		(7)		—
Balance, September 30, 2022	$	7	$	605,457	$	(2,062)	$	(585,107)	$	(5,915)	$	12,380	$	10,006

See notes to unaudited condensed consolidated financial statements.

SURGALIGN HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statement of Stockholders' Equity

(Unaudited, in thousands)


	Common Stock		Additional Paid-In Capital		Accumulated Other Comprehensive Loss		Accumulated Deficit		Treasury Stock		Total
Balance, January 1, 2021	$	3	$	517,201	$	(2,416)	$	(484,962)	$	(5,656)	$	24,170
Net loss	—		—		—		(15,190)		—		(15,190)
Foreign currency translation adjustment	—		—		71		—		—		71
Exercise of common stock options	—		23		—		—		—		23
Stock-based compensation	—		936		—		—		—		936
Purchase of treasury stock	—		—		—		—		(110)		(110)
Share offering	1		36,483		—		—		—		36,484
Balance, March 31, 2021	$	4	$	554,643	$	(2,345)	$	(500,152)	$	(5,766)	$	46,384
Net loss	—		—		—		(16,192)		—		(16,192)
Foreign currency translation adjustment	—		—		(35)		—		—		(35)
Stock-based compensation	—		1,413		—		—		—		1,413
Share offering	1		21,043		—		—		—		21,044
Equity instruments issued in connection with Prompt Prototypes, LLC	—		221		—		—		—		221
Purchase of treasury stock	—		—		—		—		(23)		(23)
Balance, June 30, 2021	$	5	$	577,320	$	(2,380)	$	(516,344)	$	(5,789)	$	52,812
Net loss	—		—		—		(7,906)		—		(7,906)
Foreign currency translation adjustment	—		—		362		—		—		362
Employee stock purchase plan ("ESPP") expense	—		113		—		—		—		113
Stock-based compensation	—		1,755		—		—		—		1,755
Purchase of treasury stock	—		—		—		—		(25)		(25)
Balance, September 30, 2021	$	5	$	579,188	$	(2,018)	$	(524,250)	$	(5,814)	$	47,111

See notes to unaudited condensed consolidated financial statements.

SURGALIGN HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited, in thousands)


	For the Nine Months Ended September 30,
	2022		2021
Cash flows from operating activities:
Net loss	$	(15,494)	$	(39,289)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization expense	1,732		1,856
Provision for bad debts and product returns	899		2,404
Investor fee	916		—
Change in fair value of warrant liability	(18,917)		(10,262)
Provision for inventory write-downs	4,133		5,754

Income taxes payable	—		(10,294)
Stock-based compensation	3,512		4,218
Asset impairment and abandonments	4,270		9,794
Gain on acquisition contingency	(17,184)		(3,553)
Loss on sale of discontinued operations	—		6,316
Bargain purchase gain	—		(90)
Other	(3)		(5)
Change in assets and liabilities:
Accounts receivable	(693)		6,059
Inventories	(6,368)		(12,461)
Accounts payable	2,928		(3,868)
Accrued expenses	(12,161)		23,040
Right-of-use asset and lease liability	422		(2,814)
Other operating assets and liabilities	6,220		(18,416)
Net cash used in operating activities	(45,788)		(41,611)
Cash flows from investing activities:
Payments for OEM working capital adjustment	—		(5,430)
Purchases of property and equipment	(5,190)		(10,834)
Business acquisitions, net of cash acquired	—		(328)
Patent and acquired intangible asset costs	(350)		(496)
Net cash used in investing activities	(5,540)		(17,088)
Cash flows from financing activities:
Share offering proceeds including prefunded warrant exercised, net	17,729		82,326
Proceeds from exercise of common stock options	—		23
Proceeds from Employee Stock Purchase Program (ESPP)	186		—
Payment of Holo Milestones - contingent consideration	(4,081)		—



Payments for treasury stock	(63)		(158)


Net cash provided by financing activities	13,771		82,191
Effect of exchange rate changes on cash and cash equivalents	115		906
Net (decrease) increase in cash and cash equivalents	(37,442)		24,398
Cash and cash equivalents, beginning of period	51,287		43,962
Cash and cash equivalents, end of period	$	13,845	$	68,360
Supplemental cash flow disclosure:
Net income tax payments, net of refunds	1,566		11,710
Non-cash acquisition of property and equipment	282		150
Non-cash common stock issuance - Prompt	—		221
Non-cash common stock issuance - Holo Milestones contingent considerations	5,919		—

See notes to unaudited condensed consolidated financial statements

SURGALIGN HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data or otherwise noted)

1.Business

Surgalign Holdings, Inc. (the “Company”), is a global medical technology company focused on elevating the standard of care by driving the evolution of digital health. We have a broad portfolio of spinal hardware implants, including solutions for fusion procedures in the lumbar, thoracic, and cervical spine, motion preservation solutions for the lumbar spine, and a minimally invasive surgical implant system for fusion of the sacroiliac joint. We also have a portfolio of advanced and traditional orthobiologics, or biomaterials, products. We currently market and sell products to hospitals, ambulatory surgery centers, and healthcare providers in the United States and in approximately 50 countries worldwide.

We are also developing an artificial intelligence (“AI”) and augmented reality (“AR”) technology platform called HOLO™ AI, a powerful suite of AI software technology which strives to connect the continuum of care from the pre-op and clinical stage through post-op care. HOLO™ AI is being designed with the goals to achieve better surgical outcomes, reduce complications, and improve patient satisfaction. We believe HOLO™ AI is one of the most advanced AI technologies with applications beyond the spine and operating room. Our HOLO Portal™ surgical guidance system, a component of our HOLO™ AI technology platform, is designed to automatically recognize, identify, and segment patient anatomy to autonomously assist the surgeon throughout the surgical procedure. This proprietary AI-based platform is an intelligent anatomical mapping technology designed to assist surgeons by allowing them to remain in safe anatomical zones, and to enhance surgical performance. We plan to leverage our HOLO™ AI platform to improve patient outcomes as well as increase the adoption of our spinal hardware implants and biomaterials products. We have launched several new products and are in the process of developing a pipeline of new innovative technologies that we plan to integrate with our HOLO AI platform in the future.

We are headquartered in Deerfield, Illinois, with commercial, innovation and design centers in San Diego, CA; Wurmlingen, Germany; Poznan, Poland; and Warsaw, Poland. The Company operates one reportable segment: Spine.

Reverse Stock Split

On May 10, 2022, the stockholders of the Company approved the proposal to authorize the Company’s Board of Directors (the “Board”) to amend the Company’s Amended and Restated Certificate of Incorporation to affect a reverse stock split of the Company’s common stock (the “Reverse Stock Split”). Following Board approval on May 11, 2022, the Reverse Stock Split became effective on May 16, 2022 at a 1-for-30 ratio. The Reverse Stock Split did not modify any rights or preferences of the shares of the Company’s common stock. Proportionate adjustments were made to the exercise prices and the number of shares underlying the Company’s outstanding equity awards, as applicable, and warrants, as well as to the number of shares issued and issuable under the Company’s equity incentive plans. The Reverse Stock Split did not affect the number of authorized shares of common stock or the par value of the common stock. All per share amounts, and references to common shares and common share amounts have been retroactively restated for all periods presented herein.

Acquisition of equity interest in INN

On December 30, 2021, we completed a Stock Purchase Agreement (“Purchase Agreement”) to acquire 42% of Inteneural Networks Inc. (“INN”) for a non-exclusive license to use INN's AI technology for autonomously segmenting and identifying neural structures in medical images and helping identify possible pathological states in order to advance our digital health strategy. INN is a private technology company that is developing new ways to harness machine learning (“ML”) and AI with the goal of autonomously and accurately identify and segment neural structures in medical images and integrate specific reference information regarding possible pathological states to physicians caring for patients. As consideration for the 42% stake in INN, we paid total consideration of $19.9 million which consisted of $5.0 million in cash, 227,359 shares of our common stock with a fair value of $4.9 million and issued two unsecured promissory notes to the Sellers in an aggregate principal amount of $10.6 million with a fair value of $10.0 million on the date of acquisition. As part of the transaction and subject to certain contingencies, the Company will purchase up to 100% of the equity of INN in three 19.3% tranches for $19.3 million each when the Company achieves three additional clinical, regulatory, and revenue milestones.

Prompt Prototypes LLC Acquisition

On April 30, 2021, The Company, entered into an Asset Purchase Agreement with Prompt Prototypes LLC (“Prompt”), a California limited liability company, and Peter Kopley, an individual residing in the State of California (the “Sellers”). The Company purchased the assets of Prompt to expand its research and development capabilities and create the

capacity to produce certain medical prototypes. Pursuant to the terms of the Agreement, the Company purchased specific assets and assumed certain liabilities of Prompt for a purchase price of $1.1 million. At the closing, the Company paid $0.3 million of cash and issued restricted shares with an aggregate fair market value of $0.2 million to the Seller. The remaining $0.6 million of the purchase price will be paid contingent on Mr. Kopley’s continued employment with the Company, in the form of cash and restricted shares in two equal amounts on the 18th and 36th month anniversaries of the closing date. These payments are considered future compensation.

OEM Disposition

On July 20, 2020, pursuant to the Equity Purchase Agreement dated as of January 13, 2020 (as amended from time to time, the “OEM Purchase Agreement”), by and between the Company and Ardi Bidco Ltd. (the “Buyer”), the Company completed the sale of its former original equipment manufacturing business, and business related to processing donated human musculoskeletal and other tissue and bovine and porcine animal tissue in producing allograft and xenograft implants using BioCleanse®, Tutoplast® and Cancelle®SP sterilization processes (collectively, the “OEM Businesses”) to Buyer and its affiliates for a purchase price of $440.0 million in cash, subject to certain adjustments (the “Transactions”). More specifically, pursuant to the terms of the OEM Purchase Agreement, the Company sold to the Buyer and its affiliates all of the issued and outstanding shares of RTI OEM, LLC (which, prior to the Transactions, was converted to a corporation and changed its name to “RTI Surgical, Inc.”), RTI Surgical, LLC (which, prior to the Transactions, was converted to a corporation and changed its name to “Pioneer Surgical Technology, Inc.”), Tutogen Medical, Inc. and Tutogen Medical GmbH. The Transactions were previously described in the Proxy Statement filed by the Company with the SEC on June 18, 2020. Subsequent to the Transactions, the Company changed its name to Surgalign Holdings, Inc., operating through its primary subsidiary, Surgalign Spine Technologies, Inc. See Note 3 for further information over discontinued operations. Where obvious and appropriate from the context, references herein to Surgalign or the Company refer to the Company excluding the disposed OEM Businesses.

COVID-19

The COVID-19 pandemic has impacted our business results of operations and financial condition and it remains uncertain when our business will return to normal operations. The full extent to which the COVID-19 pandemic has impacted the Company’s business depends on future developments that are highly uncertain and cannot be accurately predicted at this time. While market conditions have improved throughout the country and on a global scale, many government agencies in conjunction with hospitals and healthcare systems continue to defer, reduce or suspend elective surgical procedures. Additionally, the COVID-19 pandemic has adversely impacted hospitals’ staffing and administrative functions, resulting in select contractual delays. We may continue to see delays on this front and both delays and reductions in procedural volumes as hospital systems and/or patients elect to defer spine surgery procedures.

Notwithstanding COVID-19, we continue to invest in our digital health strategy, invest in our teams, improve operating processes through building strong foundations, and are taking steps to position ourselves for long-term success by improving patient outcomes.

Liquidity

On September 30, 2022, we had approximately $13.8 million in cash and $24.9 million in trade accounts payable and accrued expense liabilities, all of which are current. We plan to use our existing cash to fund our general corporate needs. We plan to implement a corporate wide review of our organizational structure, processes and costs, along with continued product rationalization initiatives, efforts of which are currently underway. We believe these actions will result in a significant reduction in operating expenses, significantly decrease our current operating cash flow, and lead to a lower cost basis to operate in 2023. However, based on the Company’s current cash flow forecast the current net working capital available will not be sufficient to meet the Company’s anticipated cash needs beyond the early part of the first quarter of 2023. Additionally, there is no assurance that Surgalign will be successful in implementing these initiatives. Surgalign is seeking to raise additional capital from fundraising efforts currently underway to supplement its cash on hand to fund operations through the end of the first quarter of 2023 and potentially long-term, depending on the financing options available to the company. There can be no assurance that Surgalign will be able to successfully obtain debt or equity financing in a timely manner or on acceptable terms, if at all. Absent receipt of additional third party financing based on our current cash flow forecast, the Company will not have adequate capital resources to meet its current obligations as they become due past the early part of the first quarter of 2023, which would require the Company to pursue other strategic alternatives such as further corporate realignment, the potential liquidation of certain assets, a sale of the Company or potential merger with another entity, the potential for a bankruptcy filing and/or result in the Company ceasing operations.

Going Concern

The accompanying condensed consolidated financial statements of the Company have been prepared assuming the Company will continue as a going concern and in accordance with generally accepted accounting principles in the United States of America. The going concern basis of presentation assumes that we will continue in operation one year after the date these financial statements are issued, and we will be able to realize our assets and discharge our liabilities and commitments in the normal course of business.

As of September 30, 2022, the Company had cash and cash equivalent of $13.8 million and an accumulated deficit of $585.1 million. For the three and nine months ended September 30, 2022, the Company had a loss from continuing operations of $9.8 million and $15.5 million, and a net loss applicable to Surgalign Holdings, Inc. of $9.8 million and $15.5 million, respectively. The Company has incurred losses from operations in the previous two fiscal years and did not generate positive cash flows from operations in fiscal year 2021 or for the nine months ended September 30, 2022. The Company expects net operating losses for the full year 2022 and 2023 as it works to commercialize its HOLO Portal™ surgical guidance system and further develop its HOLO™ AI platform and spinal device product lines.

On February 15, 2022, we issued and sold in an underwritten public offering 1,285,507 shares of common stock and 163,768 of pre-funded warrants to purchase common stock with gross proceeds of $20.0 million at an effective offering price of $13.8000 and $13.7970 per share respectively. In addition, the Company issued warrants to purchase up to an aggregate of 1,086,956 shares of common stock at a strike price of $18.0000 that are exercisable through February 15, 2027. Also in connection with the offering, the Company issued placement agent warrants to purchase an aggregate of up to 86,956 shares of common stock at a strike price of $17.2500 per share that are exercisable through February 15, 2027. Finally, the Company granted the underwriters the option for a period of 30 days from February 15, 2022 to purchase up to 217,391 additional shares of the Company’s common stock at the public offering price of $13.7970 per share and/or warrants to purchase up to 163,043 shares of the Company’s common stock at a public offering price of $0.0030 per warrant. The Underwriters did not exercise the option to purchase the common shares from the Company, but they did exercise the option to purchase the warrants which have not been converted to common shares as of September 30, 2022. We received net proceeds of $17.7 million from the offering after deducting investor fees of $2.3 million.

On June 14, 2021, we issued and sold in a registered direct offering an aggregate of 966,183 shares of our common stock and investor warrants to purchase up to an aggregate of 966,183 shares of common stock with gross proceeds of $50.0 million at a strike price of $51.7500. The Company, also in connection with the direct offering, issued placement agent warrants to purchase an aggregate of up to 57,971 shares of our common stock at a strike price of $64.6875 per share that are exercisable through June 14, 2024. We received net proceeds of $45.8 million from the offering after deducting investor fees of $4.2 million.

On February 1, 2021, we closed a public offering and sold a total 956,666 shares of our common stock at a price of $45.0000 per share, less the underwriter discounts and commissions. We received gross proceeds of $40.5 million from the offering after deducting the underwriting discounts and commission of $4.0 million.

The Company is projecting that it will continue to generate 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) supply chain and labor issues, potential of a COVID-19 resurgence, inflation, and recent market volatility; ii) negative cash flows that are projected over the next 12-month period; iii) probability of payment of potential milestone payments related to the Holo Surgical Inc. (“Holo Surgical”) and INN acquisitions should any of the milestones be achieved; iv) INN seller notes with an aggregate amount of $10.6 million due on December 31, 2024; and v) various supplier minimum requirements. The Company’s operating plan for the next 12-month period also includes continued investments in its product pipeline that require additional financings, including digital health, hardware, and biologics.

We are currently seeking additional funding through the issuance of equity, debt or other financial instruments. The Company remains in discussions with various parties but has not yet been able to finalize terms or reach a binding agreement. Depending on the outcome of financing initiatives, the Company may look to sell certain assets, close down certain parts of its business, or pursue other strategic alternatives. Absent receipt of additional third party financing, based on our current cash flow forecast, the Company will not have adequate capital resources to meet its current obligations as they become due past the early part of the first quarter of 2023. The Company’s ability to meet its current obligations as they become due over the next twelve months and to be able to continue with its operations will depend on obtaining additional resources. No assurance can be given that any of these actions will be completed. If the Company is unable to secure additional financing and implement its planned corporate realignment programs designed to significantly reduce expenses, the Company may be required to seek protection under applicable bankruptcy laws and/or liquidate or reorganize its assets, which could cause us to be delisted from the NASDAQ, further limiting our ability to obtain 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 condensed consolidated financial statements are issued. Management continually evaluates plans to raise additional debt and/or equity financing and will continue to attempt to curtail discretionary expenditures in the future; however, in consideration of the risks and uncertainties mentioned, such plans cannot be considered probable of occurring at this time.

The recoverability of a major portion of the recorded asset amounts shown in the Company’s accompanying condensed consolidated balance sheets is dependent upon continued operations of the Company, which in turn is dependent upon the Company’s ability to meet its funding requirements on a continuous basis to maintain existing financing to succeed in its future operations. The Company’s condensed consolidated financial statements do not include any adjustments 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.

2.Basis of Presentation

The accompanying condensed consolidated financial statements include all adjustments, consisting of normal recurring accruals, which the Company considers necessary for a fair presentation of the results of operations for the periods shown. The condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X, and therefore, do not include all information and footnotes necessary for a fair presentation of the condensed consolidated financial position, results of operations, comprehensive loss and cash flows in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of our condensed consolidated financial statements in accordance with GAAP often requires us to make estimates and judgments that affect reported amounts. These estimates and judgments are based on historical experience and assumptions that we believe to be reasonable under the circumstances. Assumptions and judgments based on historical experience may provide reported results, which differ from actual results; however, these assumptions and judgments historically have not varied significantly from actual experience, and we therefore do not expect them to vary significantly in the future. All intercompany balances and transactions have been eliminated in consolidation. The results of operations for any interim period are not necessarily indicative of the results to be expected for the full year. The Company includes acquisition, disposal, integration and separation related costs, which are predominantly composed of legal, consulting, and advisor fee expenses, within the “Transaction and integration expense” line on the condensed consolidated statements of comprehensive loss.

The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Surgalign Spine Technologies, Inc., Paradigm Spine, LLC (“Paradigm”), Pioneer Surgical Technology, Inc. (“Pioneer Surgical”), Holo Surgical Inc. (“Holo Surgical”), and Prompt Prototypes, LLC (“Prompt”). The operating results of the disposed OEM Businesses have been reported as discontinued operations in the condensed consolidated financial statements in the prior comparative periods. The Company consolidates the accounts of INN, a 42% owned subsidiary, as control was achieved through means other than voting rights (“variable interest entities” or “VIE”) as the Company is deemed to be the primary beneficiary of INN.

For further information on the Company’s significant accounting policies, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, filed with the Securities and Exchange Commission (“SEC”) on March 15, 2022.

Accounting Standards Issued But Not Yet Adopted

To date, there have been no recent accounting pronouncements not yet effective that have a material, or potentially material, impact to our consolidated financial statements.

Significant New Accounting Policies

There are no new accounting policies effective for this reporting period that have a material impact on the financial statements.

Reclassification in the Condensed Consolidated Financial Statements

Certain reclassifications were made to the 2021 condensed consolidated financial statements to conform to classifications used in 2022. There was no impact on previously reported total assets, total liabilities, stockholder’s equity, revenues or expenses.

3. Discontinued Operations

In connection with the Transactions, on July 20, 2020, the Company completed the disposition of its OEM Businesses. Accordingly, the OEM Businesses are reported as discontinued operations in accordance with ASC 205-20, Discontinued Operations (“ASC 205-20”). The results of operations from the OEM Businesses are classified as discontinued operations in the condensed consolidated statements of comprehensive loss. There were no assets or liabilities of the OEM Businesses as of September 30, 2022 or December 31, 2021 due to the transaction occurring on July 20, 2020. Applicable amounts in prior years have been recast to conform to this discontinued operations presentation.

The following table presents the financial results of the discontinued operations:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Major classes of line items constituting net income (loss) from discontinued operations
Revenues	$	—	$	—	$	—	$	—
Costs of processing and distribution	—		—		—		—
Gross profit	—		—		—		—
Expenses:
General and administrative	—		—		—		—
Severance and restructuring costs	—		—		—		—
Transaction and integration expenses	—		—		—		—
Total expenses	—		—		—		—
Operating (loss) income	—		—		—		—
Other expense – net:
OEM working capital adjustment	—		—		—		6,316
Interest expense	—		—		—		—
Derivative loss	—		—		—		—
Loss on extinguishment of debt	—		—		—		—
Foreign exchange loss (gain)	—		—		—		—
Total other expense – net	—		—		—		6,316
Loss from discontinued operations	—		—		—		(6,316)
Gain on sale of net assets of discontinued operations	—		—		—		—
Loss from discontinued operations before income tax provision (benefit)	—		—		—		(6,316)
Income tax provision (benefit)	—		(349)		—		(1,112)
Net income (loss) from discontinued operations	$	—	$	349	$	—	$	(5,204)

In accordance with ASC 205-20, only expenses specifically identifiable and related to a business to be disposed may be presented in discontinued operations. As such, the general and administrative expenses in discontinued operations include corporate costs incurred directly to solely support the Company’s OEM Businesses.

The Company applied the “Intraperiod Tax Allocation” rules under ASC 740, Income Taxes (“ASC 740”), which requires the allocation of an entity’s total annual income tax provision among continuing operations and, in the Company’s case, discontinued operations.

On December 1, 2020, pursuant to the OEM Purchase Agreement, the Company received a notice from the Buyer indicating that a post-closing adjustment in an amount of up to $14.0 million may be owed in respect of the working capital adjustment paid at closing. On June 3, 2021, the firm engaged to resolve the dispute issued a binding, non-appealable resolution whereby it was determined the Company was liable for $5.8 million of the disputed amount, which was finalized and paid during the second quarter of 2021. The final settlement was expensed under “Loss from operations of discontinued operations” in our condensed consolidated statements of comprehensive loss.

Total operating and investing cash flows of discontinued operations for the nine months ended September 30, 2022 and 2021 is comprised of the following, which excludes the effect of income taxes:


	Nine Months Ended		Nine Months Ended
	September 30, 2022		September 30, 2021
Significant operating non-cash reconciliation items:
Depreciation and amortization	$	—	$	—
Provision for bad debt and products returns	$	—	$	—
Revenue recognized due to change in deferred revenue	$	—	$	—
Deferred income tax provision	$	—	$	—
Stock-based compensation	$	—	$	—
Gain on sale of discontinued assets, net	$	—	$	—
Loss on extinguishment of debt	$	—	$	—
Amortizations of debt issuance costs	$	—	$	—
Amortizations of debt discount	$	—	$	—
Significant investing items:
Payments for OEM working capital adjustment	$	—	$	(5,430)
Purchases of property and equipment	$	—	$	—
Patent and acquired intangible asset costs	$	—	$	—
Proceeds from sale of OEM Business	$	—	$	—

4.Leases

The Company’s leases are classified as operating leases that include office space, automobiles, and copiers. The Company does not have any finance leases and the Company’s operating leases do not have any residual value guarantees, restrictions, or covenants. As of September 30, 2022 the only lease that has yet to commence is for our San Diego Design Center, which is expected to open in early 2023. Therefore, no lease obligation or right-of-use (“ROU”) asset has been recorded as of September 30, 2022. All other obligations associated with the lease are reflected as of September 30, 2022. The Company’s leases have remaining lease terms of 1 to 7 years, some of which include options to extend or terminate the leases. The option to extend is only included in the lease term if the Company is reasonably certain of exercising that option. Operating lease ROU assets are presented within “Other assets-net” on the condensed consolidated balance sheets. The current portion of operating lease liabilities are presented within “Accrued expenses,” and the non-current portion of operating lease liabilities are presented within “Other long-term liabilities” on the condensed consolidated balance sheets. The Company’s lease agreements do not provide a readily determinable implicit rate nor is it available to the Company from its lessors. Instead, the Company estimates its incremental borrowing rate based on information available at lease commencement in order to discount lease payments to present value. Short-term leases with an initial term of 12 months or less are not recorded on the consolidated balance sheets.

A subset of the Company’s automobile and copier leases contain variable payments. The variable lease payments for such automobile leases are based on actual mileage incurred at the standard contractual rate. The variable lease payments for such copier leases are based on actual copies incurred at the standard contractual rate. The variable lease costs for all leases are immaterial.

The components of operating lease expense were as follows:


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2022		2021		2022		2021
Operating lease cost	$	108	$	179	$	352	$	557
Short-term operating lease cost	224		112		666		261
Total operating lease cost	$	332	$	291	$	1,018	$	818

Supplemental cash flow information related to operating leases was as follows:


	For the Three Months Ended September 30,			For the Nine Months Ended September 30,
	2022		2021	2022	2021
Cash paid for amounts included in the measurement of lease liabilities	$	334	$

SURGALIGN HOLDINGS, INC. [SRGA] Filings
10-Q	[2022-11-02]
10-Q	[2022-08-09]
10-Q	[2022-05-10]
10-K	[2022-03-15]
10-Q	[2021-11-09]
10-Q	[2021-08-06]
10-Q	[2021-05-10]
10-K	[2021-03-16]
S-1	[2020-12-30]
10-Q	[2020-11-16]
10-Q	[2020-08-12]
10-Q	[2020-06-29]
10-K	[2020-06-08]
10-Q	[2019-11-07]
10-Q	[2019-08-05]
10-Q	[2019-05-07]