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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________________________
FORM 10-Q
_______________________________________________________
(Mark One)
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2021
OR
oTRANSITION 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)
_______________________________________________________
Delaware83-2540607
(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 classTrading SymbolName of exchange on which registered
common stock, $0.001 par valueSRGANasdaq 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 fileroAccelerated filerx
Non-accelerated fileroSmaller reporting companyo
  Emerging growth companyo
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 November 5, 2021: 139,200,855



SURGALIGN HOLDINGS, INC.
FORM 10-Q For the Quarter Ended September 30, 2021
Index
Page #



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,
2021
December 31,
2020
Assets
Current Assets:  
Cash and cash equivalents$68,360 $43,962 
Accounts receivable - less allowances of $10,438 at September 30, 2021 and $8,203 at December 31, 2020
20,652 27,095 
Inventories - current27,442 22,841 
Prepaid and other current assets19,625 10,284 
Total current assets136,079 104,182 
Non-current inventories9,591 7,856 
Property and equipment - net1,028 521 
Other assets - net10,045 10,145 
Total assets$156,743 $122,704 
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable$9,482 $13,418 
Current portion of acquisition contingency18,406 8,996 
Accrued expenses26,844 12,648 
Accrued income taxes504 11,761 
Total current liabilities55,236 46,823 
Acquisition contingencies34,556 47,519 
Warrant liability16,487  
Other long-term liabilities3,353 4,192 
Total liabilities109,632 98,534 
Commitments and contingencies (Note 18)
Stockholders' equity:
Common stock, $.001 par value: 300,000,000 shares authorized; 139,398,324 and 81,678,179 shares issued and outstanding, as of September 30, 2021 and December 31, 2020, respectively
139 81 
Additional paid-in capital579,054 517,123 
Accumulated other comprehensive loss(2,018)(2,416)
Accumulated deficit(524,250)(484,962)
Less treasury stock, 1,519,832 and 1,444,578 shares, as of September 30, 2021 and December 31, 2020, respectively, at cost
(5,814)(5,656)
Total stockholders' equity47,111 24,170 
Total liabilities and stockholders' equity$156,743 $122,704 
See notes to unaudited condensed consolidated financial statement.
1


SURGALIGN HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive (Loss) / Income
(Unaudited, in thousands, except share and per share data)
For the Three Months Ended
September 30,
For the Nine Months Ended
September 30,
2021202020212020
Revenues$20,545 $27,926 $68,670 $75,562 
Cost of goods sold6,811 11,892 20,278 30,585 
Gross profit13,734 16,034 48,392 44,977 
Operating Expenses:
Marketing, general and administrative27,564 27,684 79,264 96,842 
Research and development2,901 2,208 8,960 9,764 
Gain on acquisition contingency(1,266) (3,553)(130)
Asset impairment and abandonments5,411 9,356 9,794 12,117 
Transaction and integration expenses 3,411 2,510 5,826 
Total operating expenses34,610 42,659 96,975 124,419 
Other operating income, net(3,932) (3,932) 
Operating loss(16,944)(26,625)(44,651)(79,442)
Other (income) expense - net:
Other (income) expense - net(117)(21)(221)(92)
Foreign exchange loss (gain)471 (21)921 28 
Change in fair value of warrant liability(7,739) (10,262) 
Total other (income) expense - net(7,385)(42)(9,562)(64)
Loss before income tax (benefit)(9,559)(26,583)(35,089)(79,378)
Income tax (benefit)(1,304) (1,004)(3,492)
Net loss from continuing operations(8,255)(26,583)(34,085)(75,886)
Discontinued operations (Note 3)
Income (loss) from operations of discontinued operations (including gain on disposition of $210.9 million for the three and nine months ended September 30, 2020)
 191,801 (6,316)181,333 
Income tax provision (benefit)(349)42,534 (1,112)39,189 
Net income (loss) from discontinued operations349 149,267 (5,204)142,144 
Net (loss) income applicable to common shares(7,906)122,684 (39,289)66,258 
Other comprehensive (loss) income:
Unrealized foreign currency translation (gain) loss(362)108 (398)180 
Total other comprehensive (loss) income$(7,544)$122,576 $(38,891)$66,078 
Net loss from continuing operations per common share - basic$(0.06)$(0.36)$(0.29)$(1.04)
Net loss from continuing operations per common share - diluted$(0.06)$(0.36)$(0.29)$(1.04)
Net income (loss) from discontinued operations per common share - basic$ $2.04 $(0.04)$1.95 
Net income (loss) from discontinued operations per common share - diluted$ $2.04 $(0.04)$1.95 
Weighted average shares outstanding - basic138,317,858 73,212,662 117,135,533 72,933,038 
Weighted average shares outstanding - diluted138,317,858 73,212,662 117,135,533 72,933,038 
See notes to unaudited condensed consolidated financial statements.
2


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$81 $517,123 $(2,416)$(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 offering29 36,455 — —  36,484 
Balance, March 31, 2021$110 $554,537 $(2,345)$(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 offering29 45,813 — — — 45,842 
Warrant issuance— (24,798)— — — (24,798)
Equity instruments issued in connection with Prompt Prototypes, LLC— 221 — — — 221 
Purchase of treasury stock— — — — (23)(23)
Balance, June 30, 2021$139 $577,186 $(2,380)$(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
$139 $579,054 $(2,018)$(524,250)$(5,814)$47,111 
See notes to unaudited condensed consolidated financial statements.
3


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, 2020$75 $498,438 $(7,629)$(451,179)$(5,141)$34,564 
Net loss— — — (17,863)— (17,863)
Foreign currency translation adjustment— — (370)— — (370)
Exercise of common stock options— 20 — — — 20 
Stock-based compensation— 1,310 — — — 1,310 
Purchase of treasury stock— — — — (193)(193)
Amortization of preferred stock series A issuance costs— (44)— — — (44)
Balance, March 31, 2020$75 $499,724 $(7,999)$(469,042)$(5,334)$17,424 
Net loss— — — (38,564)— (38,564)
Foreign currency translation adjustment— — 298 — — 298 
Stock-based compensation— 1,023 — — — 1,023 
Purchase of treasury stock— — — — (19)(19)
Amortization of preferred stock series A issuance costs— (46)— — — (46)
Balance, June 30, 2020$75 $500,701 $(7,701)$(507,606)$(5,353)$(19,884)
Net income— — — 122,684 — 122,684 
Foreign currency translation adjustment— — (108)— — (108)
Foreign currency translation adjustment related to the impact of discontinued operations— — 5,190 — — 5,190 
Stock-based compensation— 3,217 — — — 3,217 
Purchase of treasury stock— — — — (206)(206)
Amortization of preferred stock series A issuance costs— (17)— — — (17)
Balance, September 30, 2020$75 $503,901 $(2,619)$(384,922)$(5,559)$110,876 
See notes to unaudited condensed consolidated financial statements.
4


SURGALIGN HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited, in thousands)
For the Nine Months Ended
September 30,
20212020
Cash flows from operating activities:
Net (loss) income$(39,289)$66,258 
Adjustments to reconcile net (loss) income to net cash used in operating activities:
Depreciation and amortization expense1,856 6,003 
Provision for bad debts and product returns2,404 2,015 
Change in fair value of warrant liability(10,262) 
Provision for inventory write-downs5,754 9,597 
Revenue recognized due to change in deferred revenue (2,618)
Deferred income tax benefit (932)
Income taxes payable(10,294) 
Stock-based compensation4,218 5,550 
Asset impairment and abandonments9,794 12,117 
Gain on acquisition contingency(3,553)(130)
Loss on extinguishment of debt 2,686 
Bargain purchase gain(90) 
Amortization of debt issuance costs 283 
Amortization of debt discount 2,479 
Derivative loss 12,641 
Loss (gain) on sale of OEM business (discontinued operations)6,316 (210,866)
Other(5)214 
Change in assets and liabilities:
Accounts receivable6,059 9,221 
Inventories(12,461)(7,236)
Accounts payable(3,868)1,695 
Accrued expenses23,040 20,694 
Deferred revenue 2,955 
Right-of-use asset and lease liability(2,814) 
Other operating assets and liabilities(18,416)(5,295)
Net cash used in operating activities(41,611)(72,669)
Cash flows from investing activities:
Payments for OEM working capital adjustment(5,430) 
Proceeds from sale of OEM business 437,097 
Purchases of property and equipment(10,834)(9,738)
Business acquisitions, net of cash acquired(328) 
Patent and acquired intangible asset costs(496)(419)
Net cash (used in) provided by investing activities(17,088)426,940 
Cash flows from financing activities:
Share offering proceeds, net82,326  
Proceeds from exercise of common stock options23 20 
Repayment of short-term obligations (76,912)
Proceeds from long-term obligations 89,892 
Payments of debt issuance costs (1,740)
Payments on long-term obligations (207,266)
Payments for treasury stock(158)(418)
Redemption of preferred stock (66,519)
Other 38 
Net cash provided by (used in) financing activities82,191 (262,905)
Effect of exchange rate changes on cash and cash equivalents906 (1,184)
Net increase (decrease) in cash and cash equivalents24,398 90,182 
Cash and cash equivalents, beginning of period43,962 5,608 
Cash and cash equivalents, end of period$68,360 $95,790 
Supplemental cash flow disclosure:
Cash paid for interest 4,488 
Net income tax payments, net of refunds11,710 4,986 
Non-cash acquisition of property and equipment150  
Non-cash common stock issuance - Prompt221  
See notes to unaudited condensed consolidated financial statements.
5


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”), (formerly known as RTI Surgical Holdings, Inc. (“RTI”)) is a global medical technology company focused on elevating the standard of care by driving the evolution of digital surgery. We have a broad portfolio of spinal hardware implants, including solutions for fusion procedures in the lumbar, thoracic, and cervical spine, motion preservation solutions for the lumbar spine, and a minimally invasive surgical implant system for fusion of the sacroiliac joint. We also have a portfolio of advanced and traditional orthobiologics, or biomaterials. In addition to our spinal hardware and biomaterials portfolios, we are developing an augmented reality and artificial intelligence digital surgery platform called HOLO™ to enable digital spine surgery, which we believe is one of the most advanced artificial intelligence technologies being applied to surgery. HOLO Portal™ surgical guidance, a component of our HOLO™ platform, is designed to automatically recognize, identify, and segment patient anatomy to autonomously assist the surgeon throughout the surgical procedure. This proprietary artificial intelligence-based platform system is an intelligent anatomical mapping technology designed to assist surgeons by allowing them to remain in safe anatomical zones, and to enhance surgical performance. We plan to leverage our digital surgery platform to improve patient outcomes and drive adoption of our spinal hardware implants and biomaterials products. We are developing a pipeline of new innovative technologies that we plan to integrate with our digital surgery platform. We currently market and sell products to hospitals, ambulatory surgery centers, and healthcare providers in the United States and in more than 40 countries worldwide. We are headquartered in Deerfield, Illinois, with commercial, innovation and design centers in San Diego, CA; Wurmlingen, Germany; and Warsaw, Poland.
OEM Disposition
On July 20, 2020, pursuant to the Equity Purchase Agreement, dated as of January 13, 2020 (as amended from time to time, the “OEM Purchase Agreement”), by and between the Company and Ardi Bidco Ltd. (the “Buyer”), the Company completed the sale of its former original equipment manufacturing business, and business related to processing donated human musculoskeletal and other tissue and bovine and porcine animal tissue in producing allograft and xenograft implants using BIOCLEANSE®, TUTOPLAST® and CANCELLE®SP sterilization processes (collectively, the “OEM Businesses”) to Buyer and its affiliates for a purchase price of $440.0 million of cash, subject to certain adjustments (the “Transactions”). More specifically, pursuant to the terms of the OEM Purchase Agreement, the Company sold to the Buyer and its affiliates all of the issued and outstanding shares of RTI OEM, LLC (which, prior to the Transactions, was converted to a corporation and changed its name to “RTI Surgical, Inc.”), RTI Surgical, LLC (which, prior to the Transactions, was converted to a corporation and changed its name to “Pioneer Surgical Technology, Inc.”), Tutogen Medical, Inc. and Tutogen Medical GmbH. The Transactions were previously described in the Proxy Statement filed by the Company with the SEC on June 18, 2020. Subsequent to the Transactions, the Company changed its name to Surgalign Holdings, Inc, operating through its primary subsidiary, Surgalign Spine Technologies, Inc. Where obvious and appropriate from the context, references herein to Surgalign or the Company refer to the Company excluding the disposed OEM Businesses.
Prior to the sale of the OEM Businesses, the Company operated two reportable segments: Spine and OEM. Subsequent to the sale of the OEM Businesses, the Company operates only one reportable segment. Refer to Note 3 for further discussion on Discontinued Operations.
COVID-19
The continued effects of the coronavirus (“COVID-19”) pandemic, as well as the corresponding governmental response and the Company’s management of the crisis has had a significant impact on the Company’s business. The consequences of the outbreak and impact on the global economy continues to evolve, and the full extent of the impact is uncertain with the existence of variant strains of COVID-19. The variant strains have and will continue to lead to a rise in infections resulting in the reinstatement of certain restrictions previously in place on a global scale.
Beginning in 2020, many hospitals and other medical facilities canceled elective surgeries, reduced and diverted staffing and diverted other resources to patients suffering from the infectious disease and limited hospital access for non-patients, including the Company’s direct and indirect sales representatives. Because of the COVID-19 pandemic, surgeons and their patients have been required, or are choosing, to defer procedures in which the Company’s products would be used, and many facilities that specialize in the procedures in which the Company’s products would be used have closed or reduced operating hours. The Company continue to see these measures taken through September 30, 2021 thus negatively
6


impacting the ability of the Company’s employees and distributors to effectively market and sell its products. In addition, even after the pandemic subsides and/or governmental orders no longer prohibit or recommend against performing such procedures, patients may continue to defer such procedures out of concern of being exposed to COVID-19.
The COVID-19 pandemic has also caused adverse effects on general commercial activity and the global economy, which led to an economic slowdown in 2020, and which has adversely affected the Company’s business, operating results or financial condition. The adverse effect of the pandemic on the broader economy has also negatively affected demand for procedures using the Company’s products, and could cause one or more of the Company’s distributors, customers, and suppliers to experience financial distress, cancel, postpone or delay orders, be unable to perform under a contract, file for bankruptcy protection, go out of business, or suffer disruptions in their business. This could impact the Company’s ability to provide products and otherwise operate its business, as well as increase its costs and expenses.
The COVID-19 pandemic has also led to and could continue to lead to severe disruption and volatility in the global capital markets, which could increase the Company’s cost of future capital and adversely affect its ability to access the capital markets in the future.
The Company cannot predict when its operations will fully return to pre-pandemic levels and will continue to carefully monitor the situation and the needs of the business.
The above and other continued disruptions to the Company’s business as a result of COVID-19 has resulted in a material adverse effect on its business, operating results and financial condition. Although vaccines have recently been made available, it remains uncertain when our business will return to normal operations. The full extent to which the COVID-19 pandemic will impact the Company’s business will depend on future developments that are highly uncertain and cannot be accurately predicted, including the possibility that new adverse information may emerge concerning COVID-19 and additional actions to contain it or treat its impact may be required.
Liquidity
As the global outbreak of COVID-19 continues to rapidly evolve, it could continue to materially and adversely affect our revenues, financial condition, profitability, and cash flows for an indeterminate period of time.
Going Concern
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared assuming the Company will continue as a going concern and in accordance with generally accepted accounting principles in the United States of America. The going concern basis of presentation assumes that we will continue in operation one year after the date these unaudited condensed consolidated financial statements are issued, and we will be able to realize our assets and discharge our liabilities and commitments in the normal course of business.
As of September 30, 2021, we had cash of $68.4 million and an accumulated deficit of $524.3 million. For the nine months ended September 30, 2021, we had a loss from continuing operations of $34.1 million. We have incurred losses from operations in the previous two fiscal years and did not generate positive cash flows from operations in fiscal year 2020 or for the nine months ended September 30, 2021.
On June 14, 2021, we issued and sold in a registered direct offering an aggregate of 28,985,508 shares of our common stock and investor warrants to purchase up to an aggregate of 28,985,508 million shares at a strike price of $1.725.The Company, also in connection with the direct offering, issued placement agent warrants to purchase an aggregate of up to 1,739,130 million shares of our common stock at a strike price of $2.15625 per share. We received net proceeds of $45.8 million from the offering after deducting investor fees of $4.2 million.
On February 1, 2021, we closed a public offering and sold a total 28,700,000 shares of our common stock at a price of $1.50 per share, less the underwriter discounts and commissions. We received net proceeds of $36.5 million from the offering after deducting the underwriting discounts and commission of $4.0 million.
The Company is projecting it will continue to generate significant negative operating cash flows over the next 12-months and beyond due, in part, to continued COVID-19 uncertainties, along with approximately $18.4 million of the total contingent consideration of $53.0 million expected to become due to the former owners of Holo Surgical contingent on two milestones expected to be achieved within the next 12 months. These payments will be paid through a combination of common stock and cash. The Company’s operating plan for the next 12-month period also includes continued investments in its product pipeline and funding of future operations through 2022, which will necessitate additional debt and/or equity
7


financing. The Company’s ability to raise additional capital may be adversely impacted by potential worsening global economic conditions and the recent disruptions to, and volatility in, financial markets in the United States, and worldwide, resulting from the ongoing COVID-19 pandemic. If cash resources are insufficient to satisfy the Company’s on-going cash requirements through the third fiscal quarter of 2022, the Company will be required to scale back operations, reduce research and development expenses, and postpone, as well as suspend capital expenditures, in order to preserve liquidity. No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing, or cause substantial dilution for our stockholders, in the case of equity financing.
In consideration of the inherent risks and uncertainties and the Company’s forecasted negative cash flows as described above, management has concluded that substantial doubt exists with respect to the Company’s ability to continue as a going concern within one year after the date the unaudited condensed consolidated financial statements are issued. Management continually evaluates plans to raise additional debt and/or equity financing and will attempt to curtail discretionary expenditures in the future, if necessary; however, in consideration of the risks and uncertainties mentioned, such plans cannot be considered probable of occurring at this time.
The recoverability of a major portion of the recorded asset amounts shown in the Company’s accompanying condensed consolidated balance sheets is dependent upon continued operations of the Company, which in turn is dependent upon the Company’s ability to meet its funding requirements on a continuous basis to maintain existing financing to succeed in its future operations. The Company’s unaudited condensed consolidated financial statements do not include any adjustment relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence.
2.Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring accruals, which the Company considers necessary for a fair presentation of the results of operations for the periods shown. The unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X, and, therefore, do not include all information and footnotes necessary for a fair presentation of the unaudited condensed consolidated financial position, results of operations, comprehensive loss and cash flows in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of our unaudited condensed consolidated financial statements in accordance with GAAP often requires us to make estimates and judgments that affect reported amounts. These estimates and judgments are based on historical experience and assumptions that we believe to be reasonable under the circumstances. Assumptions and judgments based on historical experience may provide reported results, which differ from actual results; however, these assumptions and judgments historically have not varied significantly from actual experience, and we therefore do not expect them to vary significantly in the future. All intercompany balances and transactions have been eliminated in consolidation. The results of operations for any interim period are not necessarily indicative of the results to be expected for the full year. The Company includes acquisition, disposal, integration and separation related costs, which are predominantly composed of legal, consulting, and advisor fee expenses, within the “Transaction and integration expense” line on the condensed consolidated statements of comprehensive income/(loss).
The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Surgalign Spine Technologies, Inc., Paradigm Spine, LLC (“Paradigm”), Pioneer Surgical Technology, Inc. (“Pioneer Surgical”), Zyga Technology, Inc. (“Zyga”), and Holo Surgical Inc. (“Holo Surgical”). The operating results of the disposed OEM Businesses have been reported as discontinued operations in the unaudited condensed consolidated financial statements in the prior comparative periods.
For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 filed with the Securities and Exchange Commission (“SEC”) on March 16, 2021, and as amended by our Annual Report (Amendment No. 1) on Form 10-K/A filed with the SEC on September 24, 2021.
Accounting Standards Issued But Not Yet Adopted
In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40). The guidance provides simplifications of the accounting for convertible instruments and reduces the number of accounting models for convertible debt instruments and convertible preferred stock. Limiting the accounting models results in fewer embedded conversion
8


features being separately recognized from the host contract as compared with current U.S. GAAP. The guidance is effective for public business entities for fiscal years beginning after December 15, 2021. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. The Company is currently evaluating this guidance to determine the impact on its disclosures.
Immaterial Restatement of Earnings Per Share (“EPS”)
During the first fiscal quarter of 2021, the Company identified errors in the calculation of its historical basic and diluted EPS. In the historical periods presented in the filing, the weighted average basic and diluted shares incorrectly included treasury stock, restricted stock awards, and restricted stock units. The weighted average shares used in the restated basic and diluted EPS from continuing operations and discontinued operations have been corrected.
Significant New Accounting Policies
Refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2020 as filed with the SEC on March 16, 2021 for discussion of the Company's significant accounting policies. During the three months ended September 30, 2021, the following accounting policy was adopted.
Other Operating Income
Included within "Other operating income, net" for the three and nine months ended September 30, 2021 is $3.9 million related to the settlement received by the Company from OEM related to inventory purchased during the year that was also paid for by the Company at the date of acquisition.

3. Discontinued Operations
In connection with the Transactions, on July 20, 2020, the Company completed the disposition of its OEM Businesses. Accordingly, the OEM Businesses are reported as discontinued operations in accordance with ASC 205-20, Discontinued Operations (“ASC 205-20”). The results of operations from the OEM Businesses are classified as discontinued operations in the condensed consolidated statements of comprehensive income/(loss). There were no assets or liabilities of the OEM Businesses as of September 30, 2021 or December 31, 2020 due to the transaction occurring on July 20, 2020. Applicable amounts in prior years have been recast to conform to this discontinued operations presentation.
9


The following table presents the financial results of the discontinued operations:
Three Months Ended
September 30,
Nine Months Ended
September 30,
2021202020212020
Major classes of line items constituting net income (loss) from discontinued operations
Revenues$ $6,877 $ $87,192 
Costs of processing and distribution 4,006  49,679 
Gross profit 2,871  37,513 
Expenses:
Marketing, general and administrative 2,329  12,889 
Severance and restructuring costs   604 
Transaction and integration expenses 11,811  23,598 
Total expenses 14,140  37,091 
Operating (loss) income (11,269) 422 
Other expense - net:
OEM working capital adjustment  6,316  
Interest expense 5,093  14,631 
Derivative loss   12,641 
Loss on extinguishment of debt 2,686  2,686 
Foreign exchange loss (gain) 17  (3)
Total other expense - net 7,796 6,316 29,955 
Loss from discontinued operations (19,065)(6,316)(29,533)
Gain on sale of net assets of discontinued operations 210,866  210,866 
 Income (loss) from discontinued operations before income tax provision (benefit) 191,801 (6,316)181,333 
Income tax provision (benefit)(349)42,534 (1,112)39,189 
Net income (loss) from discontinued operations$349 $149,267 $(5,204)$142,144 
In accordance with ASC 205-20, only expenses specifically identifiable and related to a business to be disposed may be presented in discontinued operations. As such, the marketing and general and administrative expenses in discontinued operations include corporate costs incurred directly to solely support the Company’s OEM Businesses.
Pursuant to the OEM Purchase Agreement, the Company and the Buyer have also entered into a Transition Services Agreement, through which the disposed OEM Businesses will provide to the Company transitional services related to IT support, customer and vendor management, procurement, and other services for periods ranging 3 to 12 months after the disposal. This contract was extended to the end of 2021.
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 $5.8 million of the disputed amount, which was finalized and paid during the second quarter of 2021. The final settlement was expensed under "Income (loss) from operations of discontinued operations" in our condensed consolidated statements of comprehensive income/(loss).
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Total operating and investing cash flows of discontinued operations for the nine months ended September 30, 2021 and 2020 is comprised of the following, which excludes the effect of income taxes:
Nine Months EndedNine Months Ended
September 30,
2021
September 30,
2020
Significant operating non-cash reconciliation items:
Depreciation and amortization$ $2,126 
Provision for bad debt and products returns$ $650 
Revenue recognized due to change in deferred revenue$ $(2,618)
Deferred income tax provision$ $(3,644)
Stock-based compensation$ $792 
Gain on sale of discontinued assets, net$ $(210,866)
Loss on extinguishment of debt$ $2,686 
Amortizations of debt issuance costs$ $283 
Amortizations of debt discount$ $2,479 
Significant investing items:
Payments for OEM working capital adjustment$(5,430)$ 
Purchases of property and equipment$ $(1,867)
Patent and acquired intangible asset costs$ $(419)
Proceeds from sale of OEM Business$ $437,097 
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. The Company’s leases have remaining lease terms of 1 to 8 years, some of which include options to extend or terminate the leases. The option to extend is only included in the lease term if the Company is reasonably certain of exercising that option. Operating lease right-of-use ("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.
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,
2021202020212020
Operating lease cost$179 $286 $557 $1,024 
Short-term operating lease cost112  261  
Total operating lease cost$291 $286 $818 $1,024 
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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,
2021202020212020
Cash paid for amounts included in the measurement of lease liabilities$311 $293 $887 $1,026 
ROU assets obtained in exchange for lease obligations  68  
Supplemental balance sheet information related to operating leases was as follows:
 Balance Sheet Classification
Balance at
September 30, 2021
Balance at
December 31, 2020
Assets:   
Right-of-use assetsOther assets - net$1,008 $1,425 
Liabilities: 
CurrentAccrued expenses$363 $650 
NoncurrentOther long-term liabilities1,018 1,200 
Total operating lease liabilities $1,381 $1,850 
The weighted-average remaining lease terms and discount rates were as follows:
For the Nine Months Ended
September 30,
20212020
Weighted-average remaining lease term (years)6.16.1
Weighted-average discount rate5.0 %5.0 %
As of September 30, 2021, maturities of operating lease liabilities were as follows:
Balance at
September 30,
2021
2021 (remaining)
$317 
2022378 
2023218 
2024173 
2025161 
2026 and beyond
557 
 Total future minimum lease payments1,804 
Less imputed interest(423)
Total$1,381 
5.Revenue from Contracts with Customers
The Company recognizes revenue upon transfer of control of promised products in an amount that reflects the consideration it expects to receive in exchange for those products. The Company typically transfers control at a point in time upon shipment or delivery of the implants for direct sales, or upon implantation for sales of consigned inventory. The customer is able to direct the use of and obtain substantially all of the benefits from the implant at the time the implant is shipped, delivered, or implanted, based on the terms of the contract.
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Disaggregation of Revenue
The Company’s entire revenue for the three and nine months ended September 30, 2021 and 2020 was recognized at a point in time. The following table represents total revenue by geographical region for the three and nine months ended September 30, 2021 and 2020, respectively:
 
For the Three Months Ended
September 30,
For the Nine Months Ended
September 30,
 2021202020212020
Revenues:
Domestic$17,306 $23,690 $57,880 $62,917 
International3,239 4,236 10,790 12,645 
Total revenues from contracts with customers$20,545 $27,926 $68,670 $75,562 
The Company’s performance obligations consist mainly of transferring control of implants identified in the contracts. Some of the Company’s contracts offer assurance-type warranties in connection with the sale of a product to a customer. Assurance-type warranties provide a customer with assurance that the related product will function as the parties intended because it complies with agreed-upon specifications. Such warranties do not represent a separate performance obligation and are not material to the unaudited condensed consolidated financial statements.
6.Business Combinations
On April 30, 2021, the Company, entered into an Asset Purchase Agreement (the “Agreement”) with Prompt Prototypes LLC (“Prompt”), a California limited liability company, and Peter Kopley, an individual residing in the State of California (the “Sellers”). The Company purchased the assets of Prompt to expand its research and development capabilities, and create the capacity to produce certain medical prototypes. Pursuant to the terms of the Agreement, the Company purchased specific assets and assumed certain liabilities of Prompt for a purchase price of $1.1 million. At the closing, the Company paid $0.3 million of cash and issued restricted shares with an aggregate fair market value of $0.2 million to the sellers. The remaining $0.6 million of the purchase price will be paid to Mr. Kopley, contingent on the continued employment with the Company, in the form of cash and restricted shares in two equal amounts on the 18th and 36th month anniversary of the closing date. These payments are considered future compensation.
The following table summarizes the fair value of the identifiable assets acquired and liabilities assumed from the acquisition of Prompt as of April 30, 2021 (in thousands):
 
Inventories$140 
Right-of-use assets78 
Property and equipment528 
Operating lease liabilities(78)
Deferred tax liability(28)
Net assets acquired$640 
Bargain purchase gain(90)
Total purchase price$550 
Based on the preliminary purchase price, the fair value of the assets acquired and liabilities assumed exceeded the purchase price consideration resulting in a bargain purchase gain of $0.1 million, and was recorded in "Other (income) expense – net" in our condensed consolidated statements of comprehensive income/(loss) during the second quarter ended June 30, 2021. The bargain purchase was primarily driven by the potential future compensation expense in lieu of an increased purchase price.
Holo Surgical Acquisition
On September 29, 2020, the Company entered into a Stock Purchase Agreement (the “Holo Purchase Agreement”), with Roboticine, Inc, a Delaware corporation (the “Seller”), Holo Surgical S.A., a Polish joint-stock company (“Holo S.A.”), Pawel Lewicki, PhD (“Lewicki”), and Krzysztof Siemionow, MD, PhD (“Siemionow”), which
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provides for the Company to acquire all of the issued and outstanding equity interests in Holo Surgical Inc., a Delaware corporation and a wholly owned subsidiary of the Seller (“Holo Surgical”). The Seller, Holo S.A., Lewicki and Siemionow are together referred to herein as the “Seller Group Members.” The Acquisition was closed on October 23, 2020.
As consideration for the Holo Surgical Acquisition, the Company paid to the Seller $30.0 million in cash and issued to the Seller 6,250,000 shares of common stock, par value $0.001 of the Company (“Common Stock”). In addition, the Seller is entitled to receive contingent consideration from the Company valued in an aggregate amount of up to $