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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 March 31, 2022
OR
| | | | | |
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 | o | | Accelerated filer | x | |
Non-accelerated filer | o | | Smaller reporting company | o | |
| | | Emerging growth company | o | |
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 May 5, 2022: 198,720,219
SURGALIGN HOLDINGS, INC.
FORM 10-Q For the Quarter Ended March 31, 2022
Index
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)
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
Assets | | | |
Current Assets: | | | |
Cash and cash equivalents | $ | 44,677 | | | $ | 51,287 | |
Accounts receivable - less allowances of $10,185 at March 31, 2022 and $9,272 at December 31, 2021 | 20,458 | | | 19,197 | |
Inventories - current | 22,980 | | | 26,204 | |
Prepaid and other current assets | 13,191 | | | 8,984 | |
Total current assets | 101,306 | | | 105,672 | |
Non-current inventories | 12,225 | | | 10,212 | |
Property and equipment - net | 900 | | | 945 | |
Other assets - net | 7,114 | | | 6,970 | |
Total assets | $ | 121,545 | | | $ | 123,799 | |
| | | |
Liabilities, Mezzanine Equity and Stockholders' Equity | | | |
Current Liabilities: | | | |
Accounts payable | $ | 12,089 | | | $ | 10,204 | |
Current portion of acquisition contingency - Holo | — | | | 25,585 | |
Accrued expenses | 15,813 | | | 17,769 | |
Accrued income taxes | 444 | | | 484 | |
Total current liabilities | 28,346 | | | 54,042 | |
Acquisition contingencies - Holo | 33,425 | | | 26,343 | |
Warrant liability | 10,678 | | | 12,013 | |
Notes payable - related party | 10,034 | | | 9,982 | |
Other long-term liabilities | 3,376 | | | 3,176 | |
Total liabilities | 85,859 | | | 105,556 | |
Commitments and contingencies (Note 17) | | | |
| | | |
Mezzanine equity | 10,006 | | | 10,006 | |
| | | |
Stockholders' equity: | | | |
Common stock, $.001 par value: 300,000,000 shares authorized; 198,734,928 and 146,640,069 shares issued and outstanding, as of March 31, 2022 and December 31, 2021, respectively | 199 | | | 147 | |
Additional paid-in capital | 602,853 | | | 585,375 | |
Accumulated other comprehensive loss | (1,929) | | | (1,820) | |
Accumulated deficit | (569,586) | | | (569,613) | |
Less treasury stock, 1,578,186 and 1,543,446 shares, as of March 31, 2022 and December 31, 2021, respectively, at cost | (5,857) | | | (5,852) | |
Total stockholders' equity | 25,680 | | | 8,237 | |
Total liabilities Mezzanine Equity and stockholders' equity | $ | 121,545 | | | $ | 123,799 | |
See notes to unaudited condensed consolidated financial statement.
SURGALIGN HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income / (Loss)
(Unaudited, in thousands, except share and per share data)
| | | | | | | | | | | | | | | |
| | | For the Three Months Ended March 31, |
| | | | | 2022 | | 2021 |
Revenues | | | | | $ | 20,605 | | | $ | 23,291 | |
Cost of goods sold | | | | | 6,410 | | | 6,238 | |
Gross profit | | | | | 14,195 | | | 17,053 | |
Operating Expenses: | | | | | | | |
General and administrative | | | | | 25,317 | | | 26,161 | |
Research and development | | | | | 4,447 | | | 2,875 | |
Gain on acquisition contingency | | | | | (8,503) | | | (51) | |
Asset impairment and abandonments | | | | | 939 | | | 2,176 | |
Transaction and integration expenses | | | | | 916 | | | 322 | |
Total operating expenses | | | | | 23,116 | | | 31,483 | |
| | | | | | | |
Operating loss | | | | | (8,921) | | | (14,430) | |
Other (income) expense - net: | | | | | | | |
Other (income) expense - net | | | | | 28 | | | (4) | |
Interest expense | | | | | 252 | | | — | |
Foreign exchange loss | | | | | 353 | | | 545 | |
Change in fair value of warrant liability | | | | | (9,743) | | | — | |
Total other (income) expense - net | | | | | (9,110) | | | 541 | |
Income (Loss) before income tax provision | | | | | 189 | | | (14,971) | |
Income tax provision | | | | | 162 | | | 219 | |
Net income (loss) from operations | | | | | 27 | | | (15,190) | |
Noncontrolling interests | | | | | | | |
| | | | | | | |
Net income applicable to noncontrolling interests | | | | | — | | | — | |
| | | | | | | |
Net income (loss) applicable to Surgalign Holdings, Inc. | | | | | 27 | | | (15,190) | |
| | | | | | | |
Other comprehensive income (loss) | | | | | | | |
Unrealized foreign currency translation gain | | | | | (109) | | | (71) | |
Total other comprehensive income (loss) | | | | | $ | 136 | | | $ | (15,119) | |
| | | | | | | |
Net income (loss) from operations per share - basic | | | | | $ | 0.00 | | | $ | (0.15) | |
| | | | | | | |
Net income (loss) per share applicable to Surgalign Holdings, Inc.- basic | | | | | $ | 0.00 | | | $ | (0.15) | |
Net income (loss) from operations per share - diluted | | | | | $ | 0.00 | | | $ | (0.15) | |
| | | | | | | |
Net income (loss) per share applicable to Surgalign Holdings, Inc. - diluted | | | | | $ | 0.00 | | | $ | (0.15) | |
Weighted average shares outstanding - basic | | | | | 172,009,259 | | | 98,109,900 | |
Weighted average shares outstanding - diluted | | | | | 177,328,099 | | | 98,109,900 | |
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 | $ | 147 | | | $ | 585,375 | | | $ | (1,820) | | | $ | (569,613) | | | $ | (5,852) | | | $ | 8,237 | | | $ | 10,006 | |
Net Income | — | | | — | | | — | | | 27 | | | — | | | 27 | | | — | |
Foreign currency translation adjustment | — | | | — | | | (109) | | | — | | | — | | | (109) | | | — | |
Share offering | 39 | | | 8,449 | | | — | | | — | | | — | | | 8,488 | | | — | |
Prefunded warrant execution | 4 | | | 1,745 | | | — | | | — | | | — | | | 1,749 | | | — | |
Equity instruments issued in connection with the Holo acquisition | 9 | | | 5,910 | | | — | | | — | | | — | | | 5,919 | | | — | |
Stock-based compensation | — | | | 1,374 | | | — | | | — | | | — | | | 1,374 | | | — | |
Purchase of treasury stock | — | | | — | | | — | | | — | | | (5) | | | (5) | | | — | |
Balance, March 31, 2022 | $ | 199 | | | $ | 602,853 | | | $ | (1,929) | | | $ | (569,586) | | | $ | (5,857) | | | $ | 25,680 | | | $ | 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 | $ | 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 offering | 29 | | | 36,455 | | | — | | | — | | | — | | | 36,484 | |
Balance, March 31, 2021 | $ | 110 | | | $ | 554,537 | | | $ | (2,345) | | | $ | (500,152) | | | $ | (5,766) | | | $ | 46,384 | |
See notes to unaudited condensed consolidated financial statements.
SURGALIGN HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited, in thousands)
| | | | | | | | | | | |
| For the Three Months Ended March 31, |
| 2022 | | 2021 |
Cash flows from operating activities: | | | |
Net income (loss) | $ | 27 | | | $ | (15,190) | |
Adjustments to reconcile net income (loss) to net cash used in operating activities: | | | |
Depreciation and amortization expense | 562 | | | 520 | |
Provision for bad debts and product returns | 913 | | | 1,978 | |
Investor fee | 916 | | | — | |
Change in fair value of warrant liability | (9,743) | | | — | |
Provision for inventory write-downs | 3,044 | | | 2,754 | |
| | | |
| | | |
| | | |
Stock-based compensation | 1,374 | | | 936 | |
Asset impairment and abandonments | 939 | | | 2,176 | |
Gain on acquisition contingency | (8,503) | | | (51) | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
Other | (3) | | | 58 | |
Change in assets and liabilities: | | | |
Accounts receivable | (2,235) | | | (4,280) | |
Inventories | (2,122) | | | (5,636) | |
Accounts payable | 1,771 | | | (238) | |
Accrued expenses | (17,492) | | | 9,659 | |
| | | |
Right-of-use asset and lease liability | (2) | | | — | |
Other operating assets and liabilities | 11,416 | | | (7,212) | |
Net cash used in operating activities | (19,138) | | | (14,526) | |
Cash flows from investing activities: | | | |
| | | |
| | | |
Purchases of property and equipment | (1,261) | | | (2,321) | |
| | | |
Patent and acquired intangible asset costs | (81) | | | (161) | |
Net cash used in provided by investing activities | (1,342) | | | (2,482) | |
Cash flows from financing activities: | | | |
Share offering proceeds including prefunded warrant exercised, net | 17,729 | | | 36,484 | |
Proceeds from exercise of common stock options | — | | | 23 | |
Payment of Holo Milestones - contingent consideration | (4,081) | | | — | |
| | | |
| | | |
| | | |
Payments for treasury stock | (5) | | | (110) | |
| | | |
| | | |
Net cash provided by financing activities | 13,643 | | | 36,397 | |
Effect of exchange rate changes on cash and cash equivalents | 227 | | | 412 | |
Net (decrease) increase in cash and cash equivalents | (6,610) | | | 19,801 | |
Cash and cash equivalents, beginning of period | 51,287 | | | 43,962 | |
Cash and cash equivalents, end of period | $ | 44,677 | | | $ | 63,763 | |
Supplemental cash flow disclosure: | | | |
Net income tax payments, net of refunds | 22 | | | 7 | |
Non-cash acquisition of property and equipment | 105 | | | 397 | |
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 surgery. We are developing an augmented reality (AR) and artificial intelligence (AI) technology platform called HOLO™ AI to enable digital spine surgery, which we believe is one of the most advanced AI technologies being applied to surgery. 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 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 HOLO AI 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 HOLO AI platform. We also 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. Accompanying the hardware portfolio are our 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 more than 50 countries worldwide. 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.
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 proprietary artificial intelligence ("AI") technology for autonomously segmenting and identifying neural structures in medical images and helping identify possible pathological states to advance our digital health strategy. INN is a private technology company that is developing technology that harnesses machine learning ("ML") and AI to 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, 6,820,792 shares of our common stock with a fair value of $4.9 million and issued unsecured promissory notes to the Sellers in an aggregate principal amount of $10.6 million with a fair value of $10.0 million. As part of the transaction and subject to certain contingencies, the Company must purchase up to 100% of the equity of INN in three 19.3% tranches for $19.3 million for each on the achievement of the 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 Prototype 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 anniversary of the closing date. These payments are considered future compensation.
COVID-19
The COVID-19 pandemic continues to materially impact our business and results of operations and financial condition. Although vaccines have 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 depends on future developments that are highly uncertain and cannot be accurately predicted. Many government agencies in conjunction with hospitals and healthcare systems have, to varying degrees, deferred, reduced, or suspended elective surgical procedures due to COVID-19. We have seen and may continue to see a significant reduction in procedural volumes as hospital systems and/or patients elect to defer spine surgery procedures.
Despite the impact COVID-19 has had on our business, we continued to invest in our digital health strategy, invest in our teams, improve operating processes through building strong foundations, and taking steps to position ourselves for long-term success by improving patient outcomes while maintaining adequate cash levels.
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 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 March 31, 2022, the company had cash and cash equivalent of $44.7 million and an accumulated deficit of $569.6 million. For the three months ended March 31, 2022, the company had an income from continuing operations of $0.0 million and net income applicable to Surgalign Holdings, Inc. of $0.0 million. 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 three months ended March 31, 2022. The Company expects net operating losses for the full year 2022.
On February 15, 2022, we issued and sold in an underwritten public offering 38,565,220 shares of common stock and 4,913,044 of pre-funded warrants to purchase common stock with gross proceeds of $20.0 million at an effective offering price of $0.46 and $0.4599 per share respectively. In addition, the Company issued warrants to purchase up to an aggregate of 32,608,698 shares of common stock at a strike price of $0.60 that are exercisable over the next five years. Also in connection with the offering, the Company issued placement agent warrants to purchase an aggregate of up 2,608,696 shares of common stock at a strike price of $0.575 per share that are exercisable over the next five years. Finally, the Company granted the underwriters the option for a period of 30 days from February 15, 2022 to purchase up to 6,521,736 additional shares of the Company's common stock at the public offering price of $0.4599 per share and/or warrants to purchase up to 4,891,302 shares of the Company's common stock at a public offering price of $0.0001 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 March 31, 2022. We received net proceeds of $17.7 million from the offering.
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 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 $40.5 million from the offering after deducting the underwriting discounts and commission of $4.0 million.
The Company is projecting it will continue to generate significant negative operating cash flows over the next 12-months and beyond. In management's evaluation of the going concern conclusion we considered the following: i) continued COVID-19 uncertainties and recent market volatility; ii) negative cash flows that are projected over the next 12-month period; iii) potential milestone payments related to the Holo Surgical Inc. ("Holo Surgical") and INN acquisitions should any of the milestones be achieved; iv) seller notes with a fair value amount of $10.0 million due to the seller of INN 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 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 be adversely impacted by potential worsening global economic and geopolitical conditions and the recent disruptions to, and volatility in, financial markets in the United States and worldwide. If cash resources are insufficient to satisfy the Company’s on-going cash requirements through 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 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 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 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 income/(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”) and Holo Surgical Inc. (“Holo Surgical”). The Company consolidates the accounts of Inteneural Networks, Inc. ("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, 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 potential material, impact to our consolidated financial statements.
Significant New Accounting Policies
Refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2021 as filed with the SEC on March 15, 2022 for discussion of the Company's significant accounting policies.
3.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 March 31, 2022 the only lease that has yet to commence is for our San Diego and Design Center, which is expected to open in the second half of 2022. 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. Short-term leases with an initial term of 12 months or less are not recorded on the consolidated balance sheet.
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 March 31, |
| | | | | 2022 | | 2021 |
Operating lease cost | | | | | $ | 125 | | | $ | 183 | |
Short-term operating lease cost | | | | | 221 | | | 37 | |
Total operating lease cost | | | | | $ | 346 | | | $ | 220 | |
Supplemental cash flow information related to operating leases was as follows:
| | | | | | | | | | | | | | | |
| | | For the Three Months Ended March 31, |
| | | | | 2022 | | 2021 |
Cash paid for amounts included in the measurement of lease liabilities | | | | | $ | 347 | | | $ | 244 | |
| | | | | | | |
Supplemental balance sheet information related to operating leases was as follows:
| | | | | | | | | | | | | | | | | |
| Balance Sheet Classification | | Balance at March 31, 2022 | | Balance at December 31, 2021 |
Assets: | | | | | |
Right-of-use assets | Other assets - net | | $ | 881 | | | $ | 876 | |
Liabilities: | | | | | |
Current | Accrued expenses | | $ | 346 | | | $ | 294 | |
Noncurrent | Other long-term liabilities | | 892 | | | 947 | |
Total operating lease liabilities | | | $ | 1,238 | | | $ | 1,241 | |
The weighted-average remaining lease terms and discount rates were as follows:
| | | | | | | | | | | |
| For the Three Months Ended March 31, |
| 2022 | | 2021 |
Weighted-average remaining lease term (years) | 5.9 | | 5.8 |
Weighted-average discount rate | 5.1 | % | | 4.9 | % |
As of March 31, 2022, maturities of operating lease liabilities were as follows:
| | | | | | | | |
| | Balance at March 31, 2022 |
2022 (remaining) | | $ | 353 | |
2023 | | 198 | |
2024 | | 172 | |
2025 | | 161 | |
2026 | | 159 | |
2027 and beyond | | 398 | |
Total future minimum lease payments | | 1,441 | |
Less imputed interest | | (203) | |
Total | | $ | 1,238 | |
4.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.
Disaggregation of Revenue
The Company’s entire revenue for the three months ended March 31, 2022 and 2021 was recognized at a point in time. The following table represents total revenue by geographical region for the three months ended March 31, 2022 and 2021, respectively:
| | | | | | | | | | | | | | | |
| | | For the Three Months Ended March 31, |
| | | | | 2022 | | 2021 |
Revenues: | | | | | | | |
Domestic | | | | | $ | 17,170 | | | $ | 19,849 | |
International | | | | | 3,435 | | | 3,442 | |
Total revenues from contracts with customers | | | | | $ | 20,605 | | | $ | 23,291 | |
5.Business Combinations
Inteneural Networks Inc.
On December 30, 2021, the Company entered into a Stock Purchase Agreement with Dearborn Capital Management LLC, and Neva, LLC, a Delaware limited liability company (collectively the sellers of INN), that are owned by Krzysztof Siemionow, MD, PhD (“Siemionow”), Pawel Lewicki, PhD ("Lewicki") respectively to acquire a 42% equity
interest in the issued and outstanding shares of INN for a non-exclusive right to use their proprietary technology. Lewicki is a former member of the Board of Directors (the “Board”).
INN is a medical high-tech company, specializing in AI and big data learning analysis of brain imaging. INN has a proprietary AI technology that autonomously segments and identifies neural structures in medical images and helps identify possible pathological states. This technology has future applications in neurosurgery as well as the potential to address a wide variety of potential disorders, including dementia, autism, tumors, aneurysm, stroke, and neurovascular structures using magnetic resonance imaging and computed tomography platforms. The Company believes the transaction has the following benefits: i) the integration of INN’s ML and AI technologies positions the Company as a leader in intelligent digital health; ii) bringing INN’s intercranial capabilities to the HOLOTM AI platform, the Company can expand the applicability of HOLOTM AI technology into significant segments beyond spine, in particular neurosurgery; iii) the synergies in the research and development and eventual commercial functions should provide for a particularly efficient integration of INN’s technology and talent; and iv) the transaction materially contributes to the Company's mission to improve patient's lives through better outcomes.
As consideration for the 42% ownership we paid $19.9 million which consisted of $5.0 million in cash, issuance to the Sellers of 6,820,792 shares of our common stock, par value of $0.001, which had a fair value of $4.9 million and issuance of unsecured promissory notes to the Sellers in fair value of the principal in the amount of $10.0 million. In exchange for 42% equity interest the Company is able to use the proprietary AI technology as a nonexclusive licensee. As part of the transaction, the Company must purchase up to 100% of the equity of INN if the three additional clinical, regulatory, and revenue milestones are met. With each additional closing, the Company will acquire an additional 19.3% equity within INN for an additional $19.3 million in cash payment for each milestone. These milestones have not been achieved as of March 31, 2022
Management has determined that the Company has obtained control through means other than voting rights as the Company is deemed to be the primary beneficiary and is the most closely associated decision maker under ASC 810, Consolidation. Based on this the Company has considered INN to be a VIE and was fully consolidated into the consolidated financial statements as of March 31, 2022. INN does not have any assets or liabilities as of March 31, 2022. Additionally, there was no income statement activity within INN for the three month period ended March 31, 2022.
The Company further determined that substantially all of the fair value of INN was concentrated in the acquired in-process research and development ("IPR&D") asset in accordance with ASC 805, Business Combination and therefore accounted for this as an asset acquisition. The total consideration of the asset acquisition was determined to be $72.3 million, which consisted of cash consideration of $5.0 million, $4.9 million of fair value of shares issued to the seller, $10.0 million of seller notes issued to the sellers, direct and incremental expenses of $0.4 million incurred for the INN acquisition, $10.3 million in forward contracts related to the three potential milestone payments and $41.7 million in noncontrolling interest related to the 58% equity interest not purchased. As the forward contracts are redeemable upon a future event, FDA approval and as the event is not probable under the accounting guidance, the forward contracts are not remeasured to fair value at March 31, 2022.
The total purchase price paid in the INN acquisition has been allocated to the net assets acquired based on the relative fair value as the completion of the acquisition, primarily including the IPR&D related to INN's development of their AI technology that autonomously segments neural structures and other intangible assets for assembled workforce. The neuro networks and segmentation has not yet reached technological feasibility and has no alternative use; thus, the purchased IPR&D was expensed immediately to the acquisition, resulting in a one-time charge of $72.1 million recognized in the asset acquisition expense line on the consolidated statement of comprehensive loss for the year ended December 31, 2021. Additionally, the intangible asset related to the assembled workforce, in the amount of $0.2 million was immediately impaired together with other intangible assets during the fourth quarter of 2021 due to the Company's negative projected cash flows.
The Company recorded noncontrolling interest of $52.0 million which is comprised of $41.7 million related to the investment in INN and $10.3 million related to the embedded forward contracts as of the transaction date. Management determined that because the IPR&D asset was immediately expensed as it did not have technological feasibility. As a result of the transaction, the company recorded a $72.1 million loss within the Consolidated Statements of Comprehensive Loss during the fourth quarter for the year ended December 31, 2021. This loss had a net impact of $30.2 million to Surgalign, and $41.9 million impact to INN.
Prompt Prototypes Acquisition
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 assets | | 78 | |
Property and equipment | | 528 | |
Operating lease liabilities | | (78) | |
Deferred tax liability | | (28) | |
Net assets acquired | | $ | 640 | |
Bargain purchase gain | | (90) | |
Total purchase price | | $ | 550 | |
Based on the preliminary purchase price, the fair value of the assets acquired and liabilities assumed exceeded the purchase price consideration resulting in a bargain purchase gain of $0.1 million and was recorded in "Other (income) expense – net" 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.
6.Stock-Based Compensation
The following tables summarize our stock option and stock grant awards by plan:
For the three months ended March 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Plan | | Stock Options | | Restricted Stock Awards | | Restricted Stock Units | | Total |
2021 Incentive Inducement Plan | | — | | | — | | | 2,340,316 | | | 2,340,316 | |
2021 Incentive Compensation Plan | | — | | | — | | | 24,899 | | | 24,899 | |
Total | | — | | | — | | | 2,365,215 | | | 2,365,215 | |
For the three months ended March 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Plan | | Stock Options | | Restricted Stock Awards | | Restricted Stock Units | | Total |
2018 Incentive Compensation Plan | | 173,683 | | | 78,084 | | | — | | | 251,767 | |
Total | | 173,683 | | | 78,084 | | | — | | | 251,767 | |
The Company recognized stock-based compensation as follows:
| | | | | | | | | | | | | | | |
| | | For the Three Months Ended March 31, |
| | | | | 2022 | | 2021 |
Stock-based compensation: | | | | | | | |
Costs of goods sold | | | | | $ | — | | | $ | 21 | |
General and administrative | | | | | 1,271 | | | 889 | |
Research and development | | | | | 103 | | | 26 | |
| | | | | | | |
Total | | | | | $ | 1,374 | | | $ | 936 | |
The expense in the table above represents stock-based compensation for outstanding awards, and related expenses for the Company's employee stock purchase program.
7.Net Income Per Common Share
A reconciliation of the number of shares of common stock used in the calculation of basic and diluted net income per common share is presented below:
| | | | | | | | | | | | | | | |
| | | For the Three Months Ended March 31, |
| | | | | 2022 | | 2021 |
Weighted average basic shares | | | | | 172,009,259 | | | 98,109,900 | |
Stock Options | | | | | — | | | — | |
Restricted Stock Units and Restricted Stock Awards | | | | | 5,318,840 | | | — | |
Weighted average diluted shares | | | | | 177,328,099 | | | 98,109,900 | |
For the three months ended March 31, 2021, the Company has recorded a net loss from operations. As a result, the Company has excluded all potential dilutive shares from the computation of the diluted net loss per common share to avoid the anti-dilutive effect.
The following table includes the number of potential dilutive shares that were excluded due to the anti-dilutive effect:
| | | | | | | | | | | | | | | |
| | | For the Three Months Ended March 31, |
| | | | | 2022 | | 2021 |
Stock Options | | | | | — | | | 781,144 | |
Restricted Stock Units and Restricted Stock Awards | | | | | — | | | 886,434 | |
Total | | | | | — | | | 1,667,578 | |
For the three months ended March 31, 2022 and 2021, the company excluded 3,541,328 and 4,264,055 of issued stock options in the computation of diluted net income per share and diluted net loss per share, respectively, because their exercise price exceeded the average market price during the respective periods. The Company’s outstanding warrants were also excluded from the computation of diluted net loss per common share as they were considered “out-of-the-money” as of March 31, 2022.
8.Inventories
The inventory balances as of March 31, 2022 and December 31, 2021 consist entirely of finished goods. The Company values its inventories at the lower of net realizable value or cost using first-in, first-out ("FIFO").
For the three months ended March 31, 2022 and 2021, the Company had inventory write-downs of $3.0 million and $2.8 million, respectively, relating primarily to excess quantities and obsolescence ("E&O") of inventories. The E&O write-downs are included in the cost of goods sold on the condensed consolidated statements of comprehensive income/(loss).
9.Prepaid and Other Current Assets
Prepaid and other current assets are as follows:
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
Income tax receivable | $ | 3,913 | | | $ | 4,116 | |
Leasehold improvement reimbursement | $ | 3,410 | | | $ | — | |
Prepaid expenses | $ | 2,952 | | | $ | 2,553 | |
Payroll tax receivable | $ | 1,695 | | | $ | — | |
Insurance recovery receivable | $ | — | | | $ | 1,500 | |
Other receivables | 1,221 | | | 815 | |
| $ | 13,191 | | | $ | 8,984 | |
10.Property and Equipment
The net book value of property and equipment after accumulated depreciation and all impairment is as follows:
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
Processing equipment | $ | 273 | | | $ | 346 | |
Surgical instruments | 449 | | | 489 | |
Office equipment, furniture and fixtures | 10 | | | 15 | |
Computer equipment and software | 163 | | | 44 | |
Construction in process | 5 | | | 51 | |
| $ | 900 | | | $ | 945 | |
For the three months ended March 31, 2022 and 2021, the Company recorded depreciation expense in connection with property and equipment of $0.5 million and $0.5 million, respectively. The Company uses the straight-line method of depreciation.
For the three months ended March 31, 2022 and 2021, the Company recorded asset impairment and abandonment charges of $0.9 million and $2.2 million, respectively. The fair value of property and equipment was measured utilizing an orderly liquidation value of each of the underlying assets.
For the three months ended March 31, 2022 and 2021, the Company capitalized a total of $0.0 million and $0.3 million of internal software expense related to the implementation of a new Enterprise Resource Planning ("ERP") system. The ERP system was implemented in January 2022 and related capitalized expenses were transferred from "Construction in process to "Computer equipment and software" to coincide with implementation.
Impairment of the ERP costs was $0.0 million and $0.3 million for the three months ended March 31, 2022 and 2021, respectively. The impairment charges were triggered by continued negative operating cash flows.
For the three-month periods ended March 31, 2022 and 2021, the Company expensed $0.6 million and $0.1 million, respectively, related to the ERP implementation. These non-capitalizable expenses are recorded in the “General, and administrative” line on the condensed consolidated statements of comprehensive income/(loss).
11.Warrants
On February 15, 2022, we issued and sold in an underwritten public offering 38,565,220 shares of common stock and 4,913,044 of pre-funded warrants to purchase common stock with gross proceeds of $20.0 million at an effective offering price of $0.46 and $0.4599 per share respectively. In addition, the Company issued warrants to purchase up to an aggregate of 32,608,698 shares of common stock at a strike price of $0.60 that are exercisable over the next five years. Also in connection with the offering, the Company issued placement agent warrants to purchase an aggregate of up to 2,608,696 shares of common stock at a strike price of $0.575 per share that are exercisable over the next five years. Finally, the Company granted the underwriters the option for a period of 30 days from February 15, 2022 to purchase up to 6,521,736 additional shares of our common stock at the public offering price of $0.4599 per share and/or warrants to purchase up to 4,891,302 shares of the Company's common stock at a public offering price of $0.0001 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 March 31, 2022. We received net proceeds of $17.7 million from the offering. The Company incurred issuance costs related to the offering of $2.3 million which has been allocated between the value of the warrant liability and the amounts recorded within the Statement of Shareholders Equity. Fees allocated to the warrant liabilities were $0.9 million and is reflected in the "Transaction and integration expenses" line in the condensed consolidated statement of income/(loss). The remaining $1.4 million is allocated to common shares and is reflected in "Additional Paid-In Capital" and "Common Stock" sections of the Company’s condensed consolidated balance sheets
On June 14, 2021, the Company issued and sold in a registered direct offering priced at-the-market an aggregate of 28,985,508 shares of its common stock and warrants exercisable for an aggregate of 28,985,508 shares of Company common stock, at a combined purchase price of $1.725 per share. The warrants have an exercise price equal to $1.725 per share, are exercisable immediately upon issuance and will expire three years from the issuance date. The net proceeds from the direct offering, after deducting investor and management fees, were $45.8 million. Upon any exercise of the offering warrants issued in the offering for cash, the Company agreed to pay the placement agent a total cash fee equal to 7.0% of the aggregate gross proceeds from the exercise of the offering warrants and a management fee equal to 1.0% of the aggregate gross proceeds from the exercise of the offering warrants. The Company, also in connection with the direct offering, issued the placement agent or its designees warrants to purchase an aggregate of up to 1,739,130 shares of its common stock. The placement agent warrants have substantially the same terms as the warrants described above, except that the placement agent warrants will have an exercise price of $2.15625 per share, and holders of the placement agent warrants are not entitled to receive cash dividends issued by the Company during such time as the placement agent warrant is outstanding.
The Company accounts for its warrants in accordance with ASC 815-40, “Derivatives and Hedging—Contracts in Entity’s Own Equity” (“ASC 815”), under which the warrants did not meet the criteria for equity classification and thus were recorded as liabilities. Since the warrants met the definition of a derivative in accordance with ASC 815, these warrants were measured at fair value at inception and will be remeasured at each reporting date in accordance with ASC 820, Fair Value Measurement, with changes in fair value recognized in in our condensed consolidated statements of comprehensive income in the period of change. The Company determined the fair value of its warrants based on the Black Scholes Option Pricing Model.
12.Fair Value Information
Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy defines a three-level valuation hierarchy for classification and disclosure of fair value measurements as follows:
Level 1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Acquisition Contingencies
Changes in the fair value of contingent consideration are recorded in the "Gain on acquisition contingency" line in the condensed consolidated statement of income/(loss). Significant changes in unobservable inputs, mainly the probability of success and projected cash flows, could result in material changes to the contingent consideration liability.
Inteneural Networks Inc.
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 proprietary AI technology for autonomously segmenting and identifying neural structures in medical images and helping identify possible pathological states to advance our digital health strategy. INN is a private technology company that is developing technology that harnesses machine learning ("ML") and AI to 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, 6,820,792 shares of our common stock with a fair value of $4.9 million and issued unsecured promissory notes to the Sellers in an aggregate principal amount of $10.6 million with a fair value of $10.0 million. As part of the transaction and subject to certain contingencies, the Company must purchase up to 100% of the equity of INN in three 19.3% tranches for $19.3 million for each of the achievement of the three additional clinical, regulatory, and revenue milestones.
Holo Surgical
On September 29, 2020, the Company entered into a Stock Purchase Agreement (the “Holo Purchase Agreement”), with Roboticine, Inc, a Delaware corporation (the “Seller”), Holo Surgical S.A., a Polish joint-stock company (“Holo S.A.”), Pawel Lewicki, PhD (“Lewicki”), and Krzysztof Siemionow, MD, PhD (“Siemionow”), which provides for the Company to acquire all of the issued and outstanding equity interests in Holo Surgical Inc., a Delaware corporation and a wholly owned subsidiary of the Seller (“Holo Surgical”). The Seller, Holo S.A., Lewicki and Siemionow are together referred to herein as the “Seller Group Members.” The Acquisition was closed on October 23, 2020.
As consideration for the Holo Surgical acquisition, the Company paid to the Seller $30.0 million in cash and issued to the Seller 6,250,000 shares of common stock, par value $0.001 of the Company (“Common Stock”). In addition, the Seller is entitled to receive contingent consideration from the Company valued in an aggregate amount of up to $83.0 million, to be paid through the issuance of Common Stock or the payment of cash, contingent upon and following the achievement of certain regulatory, commercial and utilization milestones by specified time periods occurring up to the sixth (6th) anniversary of the closing. The contingent consideration is evaluated quarterly, or more frequently, if circumstances dictate. Changes in the fair value of contingent consideration are recorded in the "Gain on acquisition contingency" line item in the condensed consolidated statements of comprehensive income/(loss). Significant changes in unobservable inputs, mainly the probability of success and cash flows projected, could result in material changes to the contingent consideration liabilities.
The Purchase Agreement provides that the Company will issue Common Stock to satisfy any contingent consideration payable to the Seller, until the total number of shares of Common Stock issued to the Seller pursuant to the Purchase Agreement (including the 6,250,000 shares of Common Stock issued at closing) is equal to 14,900,000 shares of Common Stock. Following the attainment of that limitation, the post-closing contingent payments would be payable in cash. The number of shares of Common Stock issued as contingent consideration with respect to the achievement of a post-closing milestone, if any, will be calculated based on the volume weighted average price of the Common Stock for the five (5) day trading period commencing on the opening of trading on the third trading day following the achievement of the applicable milestone. On January 12, 2022, the Company entered into a Second Amendment to the Stock Purchase Agreement with the sellers of Holo Surgical to amendment one of the regulatory milestones beyond December 31, 2021. This regulatory milestone was subsequently achieved on January 14, 2022 when the Company received 510(k) clearance for its HOLO Portal™ surgical guidance system. Upon achievement of this milestone the Company issued 8,650,000 in common stock at a value of $5.9 million, and also paid the sellers $4.1 million in cash for a total payment for achieving the milestone of $10.0 million pursuant to the terms of the agreement (the "Holo Milestone Payments").
The Company determined the fair value of the Holo Milestone Payments to be the present value of each future payment amount estimated using a probability weighted model, driven by the probability of success factor and expected payment date. The probability of success factor was used in the fair value calculation to reflect inherent regulatory, development and commercial risk of the Holo Milestone Payments. More specifically, the probability of expected achievement of the specific milestones, including risks associated with the uncertainty regarding the achievement and payment of milestones; obtaining regulatory approvals in the United States and Europe; the development of new features used with the product; the adaption of the new technology by surgeons; and the placement of the devices within the field. This fair value measurement is based on significant unobservable inputs in the market and thus represents a Level 3 measurement within the fair value hierarchy.
Inputs used in estimating the fair value of the contingent consideration for Holo Surgical as of March 31, 2022 and December 31, 2021, are summarized below:
| | | | | | | | | | | |
Fair Value at March 31, 2022 | Valuation Technique | Unobservable Inputs | Ranges |
$33,425 | Earn-Out Valuation | Probability of success factor | 0% - 95% |
| | Discount rates | 0.00% - 12.47% |
| | | | | | | | | | | |
Fair Value at December 31, 2021 | Valuation Technique | Unobservable Inputs | Ranges |
$51,928 | Earn-Out Valuation | Probability of success factor | 0% - 90% |
| | Discount rates | 0.06% - 11.60% |
The following table provides a reconciliation of contingent consideration measured at fair value using significant unobservable inputs (Level 3) as of March 31, 2022 and December 31, 2021:
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
Beginning balance as of January 1 | $ | 51,928 | | | $ | 56,515 | |
Gain on acquisition contingency | (8,503) | | | (4,587) | |
Milestone payments | (10,000) | | | — | |
Ending balance as of March 31 | $ | 33,425 | | | $ | 51,928 | |
Paradigm
On March 8, 2019, the Company acquired Paradigm, which included a contingent liability related to the revenue based earnout ("Paradigm Earnout") of $72.2 million. The fair value of the contingent liability was measured using Level 3 inputs. Unobservable inputs for the probability-weighted model included weighted average cost of capital and company specific projected revenue and costs. During 2019 management reduced the contingency consideration to $0.0 million due to a revision in the milestone inputs and recorded a gain of $72.2 million which was recognized during 2019. There are no amounts recorded as contingent consideration as of March 31, 2022 and December 31, 2021 as management has determined that the milestones will not be met. The last milestones will expire on December 31, 2022.
Property and Equipment, Intangibles and Other Assets
As of March 31, 2022, and December 31, 2021, respectively, property and equipment with a carrying amount of $1.7 million and $12.0 million were written down to their estimated fair value of $0.9 million and $0.9 million using Level 3 inputs. The Level 3 fair value was measured based on orderly liquidation value and is evaluated on a quarterly basis. Unobservable inputs for the orderly liquidation value included replacement costs, physical deterioration estimates and market sales data for comparable assets.
Definite-lived intangible and other assets subject to amortization were impaired and written down to their estimated fair values in 2022 and 2021. Fair value is measured as of the impairment date using Level 3 inputs. Definite-lived intangible assets and other assets’ fair value was measured based on the income approach and orderly liquidation value, respectively. Due to the Company’s forecasted cash flow being negative, any intangible assets acquired during the period were immediately impaired. Unobservable inputs for the orderly liquidation value included replacement costs, physical deterioration estimates and market sales data for comparable assets. Unobservable inputs for the income approach included forecasted cash flows generated from use of the definite-lived intangible assets.
As a result of impairments recognized, the following table summarizes the post impairment fair values of the corresponding assets subject to fair value measured using Level 3 inputs as of March 31, 2022 and December 31, 2021:
| | | | | | | | | | | |
Fair value | March 31, 2022 | | December 31, 2021 |
Property and equipment – net | $ | 900 | | | $ | 945 | |
Definite-lived intangible assets - net | — | | | |
Other assets – net | 7,114 | | | 6,970 | |
| $ | 8,014 | | | $ | 7,915 | |
Property and equipment was impaired and written down to their estimated fair values during the three months ended March 31, 2022 and 2021. Other intangible assets and other assets were impaired and written down to their
estimated fair values during the three months ended March 31, 2022. The following table summarizes the corresponding impairment charge during the three months ended March 31, 2022 and 2021:
| | | | | | | | | | | | | | | |
| | | For the Three Months Ended March 31, |
Impairment | | | | | 2022 | | 2021 |
Property and equipment – net | | | | | $ | 789 | | | $ | 1,778 | |
Definite-lived intangible assets - net | | | | | 101 | | | 161 | |
Other assets – net | | | | | 49 | | | 237 | |
| | | | | $ | 939 | | | $ | 2,176 | |
During the three months ended March 31, 2022 and 2021, the Company concluded, through its ASC 360 impairment testing of long-lived assets classified as held and used, that factors existed indicating that finite-lived intangible assets were impaired. The factors considered by management include a history of net losses and negative cash flows in each of those periods to be able to support the assets. The Company tested the carrying amounts of the property and equipment, definite lived intangibles, and other assets for impairment. As a result, we recorded an impairment charge of $0.9 million and $2.2 million for the three months ended March 31, 2022 and 2021 recorded within the "Asset impairment and abandonments" line item on the consolidated statement of comprehensive loss.
Warrant Liability
Warrants are accounted for as liabilities in accordance with ASC 815-40 and are presented within "Warrant liability" in the Company’s condensed consolidated balance sheets.
The following table presents information about the Company’s liabilities that are measured at fair value:
| | | | | | | | | | | | | | | | | |
| Level | | March 31, 2022 | | December 31, 2021 |
Warrant liability | 3 | | $ | 10,678 | | | $ | 12,013 | |
June 15, 2021 Warrants
The table presented below is a summary of changes in the fair value of the Company’s Level 3 valuation for the June 15, 2021 warrant liability for the three months ended March 31, 2022, there were no warrants issued as of March 31, 2021:
| | | | | |
| Warrant Liability |
December 31, 2021 | $ | 12,013 | |
Change in fair value of warrant liability | (7,600) | |
March 31, 2022 | $ | 4,413 | |
The warrant liability is revalued each reporting period with the change in fair value recorded in the accompanying condensed consolidated statements of comprehensive income/(loss) until the warrants are exercised or expire. The fair
value of the warrant liability is estimated using the Black-Scholes Option Pricing Model using the following valuation inputs:
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
Stock price | $ | 0.30 | | | 0.72 | |
Risk-free interest rate | 2.31 | % | | 0.84 | % |
Dividend yield | — | % | | — | % |
Volatility | 150 | % | | 130 | % |
February 15, 2022 Warrants
The table presented below is a summary of changes in the fair value of the Company’s Level 3 valuation for the February 15, 2022 warrant liability for the three months ended March 31, 2022, there were no warrants issued as of March 31, 2021:
| | | | | |
| Warrant Liability |
December 31, 2021 | $ | — | |
Fair value of warrants on date of issuance | 10,157 | |
Execution of prefunded warrants | (1,749) | |
Change in fair value of warrant liability | (2,143) | |
March 31, 2022 | $ | 6,265 | |
The warrant liability is revalued each reporting period with the change in fair value recorded in the accompanying condensed consolidated statements of comprehensive income/(loss) until the warrants are exercised or expire. The fair value of the warrant liability is estimated using the Black-Scholes Option Pricing Model using the following valuation inputs:
| | | | | |
| March 31, 2022 |
Stock price | $ | 0.30 | |
Risk-free interest rate | 2.42 | % |
Dividend yield | — | % |
Volatility | 80 | % |
13.Accrued Expenses
Accrued expenses are as follows:
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
Accrued compensation | $ | 4,405 | | | $ | 5,258 | |
Accrued distributor commissions | $ | 3,186 | | | $ | 2,957 | |
Accrued securities class action settlement | $ | — | | | $ | 1,500 | |
Other | 8,222 | | | 8,054 | |
Total accrued expenses | $ | 15,813 | | | $ | 17,769 | |
14.Other Long-term Liabilities
Other long-term liabilities are as follows:
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
Acquisition contingencies | $ | 33,425 | | | $ | 26,343 | |
Warrant Liability | 10,678 | | | 12,013 | |
Lease obligations | 892 | | | 947 | |
Other | 2,484 | | | 2,229 | |
Total other long-term liabilities | $ | 47,479 | | | $ | 41,532 | |
15.Income Taxes
The Company evaluates the need for deferred tax asset valuation allowances based on a more likely than not standard. The ability to realize deferred tax assets depends on the ability to generate sufficient taxable income within the carryback or carryforward periods provided for in the tax law for each applicable tax jurisdiction. The Company has evaluated all evidence, both positive and negative, and maintains a valuation allowance on deferred tax assets in the United States as well as most foreign jurisdictions as of March 31, 2022.
For the three months ended March 31, 2022 and 2021, the Company recorded income tax expense of $0.2 million and $0.2 million, respectively in continuing operations. The March 31, 2022 three-month income tax provision was primarily a result of federal tax notices received, non-U.S. income tax expense, and interest accrued on uncertain tax positions. The March 31, 2021 three-month income tax provision was primarily a result of federal interest associated with the timing of payments.
16.Debt
On December 30, 2021, the Company issued $10.6 million aggregate principal amount of unsecured seller notes (“Seller Notes”) recorded at $10.0 million and $10.0 million as of March 31, 2022 and December 31, 2021 respectively. All principal and accrued interest due and payable on the earlier of December 30, 2024, or the date upon which a change in control occurs. Interest is paid in kind and capitalized into the principal amount of the Seller Notes on each anniversary of the issuance date at a rate of 6.8% per year. For the three months ended March 31, 2022 management accrued $0.2 million in interest expense and accredited $0.1 million related to the seller notes for a total interest expense of $0.3 million. In the event of default, as defined in the agreement, any and all of the indebtedness may be immediately declared due and payable, and the interest would accrue at a 4.0% higher rate. There is no prepayment penalty or covenants related to the fixed rate notes. The Seller Notes were issued as deferred consideration in connection with the INN Purchase Agreement discussed at Note 1, Note 5, and Note 20.
Debt issuance costs were immaterial and were included within the overall costs of the acquisition of INN. The following table summarizes the debt recorded on the condensed consolidated balance sheet:
| | | | | | | | | | | |
| | Carrying Value (In thousands) |
| March 31, 2022 | December 31, 2021 |
Seller Notes-P. Lewicki | $ | 5,306 | | $ | 5,306 | |
Seller Notes-K. Siemionow | 5,306 | | 5,306 | |
Less: fair value adjustment | (578) | | (630) | |
Total Seller Notes - related party | 10,034 | | 9,982 | |
Current portion of seller notes | — | | — | |
Total long-term seller note, excluding current portion | $ | 10,034 | | $ | 9,982 | |
The fair value of the Seller Notes is $10.0 million at March 31, 2022 and December 31, 2021, respectively. The Company has determined that the Seller Notes is a level 2 financial instrument as there are other unobservable inputs.
As of March 31, 2022, the future maturities of long-term debt, excluding deferred financing costs, accrued interest and debt discount, were as follows:
| | | | | | | | |
2022 | | $ | — | |
2023 | | — | |
2024 | | 10,612 | |
2025 | | — | |
2026 | | — | |
Thereafter | | |