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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 June 30, 2022
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 August 5, 2022: 6,746,501



SURGALIGN HOLDINGS, INC.
FORM 10-Q For the Quarter Ended June 30, 2022
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)
June 30,
2022
December 31,
2021
Assets
Current Assets:  
Cash and cash equivalents$29,344 $51,287 
Accounts receivable - less allowances of $8,941 at June 30, 2022 and $9,272 at December 31, 2021
20,502 19,197 
Inventories - current25,334 26,204 
Prepaid and other current assets11,622 9,984 
Total current assets86,802 106,672 
Non-current inventories11,734 10,212 
Property and equipment - net1,321 945 
Other assets - net5,840 5,970 
Total assets$105,697 $123,799 
Liabilities, Mezzanine Equity and Stockholders' Equity
Current Liabilities:
Accounts payable$10,557 $10,204 
Current portion of acquisition contingency - Holo9,042 25,585 
Accrued expenses17,214 17,769 
Accrued income taxes434 484 
Total current liabilities37,247 54,042 
Acquisition contingencies - Holo22,393 26,343 
Warrant liability1,554 12,013 
Notes payable - related party 10,087 9,982 
Other long-term liabilities3,575 3,176 
Total liabilities74,856 105,556 
Commitments and contingencies (Note 18)
Mezzanine equity10,006 10,006 
Stockholders' equity:
Common stock, $.001 par value: 300,000,000 shares authorized; 6,667,505 and 4,887,982 shares issued and outstanding, as of June 30, 2022 and December 31, 2021, respectively
7 5 
Additional paid-in capital604,252 585,517 
Accumulated other comprehensive loss(2,242)(1,820)
Accumulated deficit(575,274)(569,613)
Less treasury stock, 61,668 and 51,448 shares, as of June 30, 2022 and December 31, 2021, respectively, at cost
(5,908)(5,852)
Total stockholders' equity20,835 8,237 
Total liabilities, mezzanine equity and stockholders' equity$105,697 $123,799 
See notes to unaudited condensed consolidated financial statement.
1


SURGALIGN HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Loss
(Unaudited, in thousands, except share and per share data)
For the Three Months Ended
June 30,
For the Six Months Ended
June 30,
2022202120222021
Revenues$20,623 $24,834 $41,228 $48,125 
Cost of goods sold6,414 7,229 12,824 13,467 
Gross profit14,209 17,605 28,404 34,658 
Operating Expenses:
General and administrative24,289 25,541 49,606 51,701 
Research and development4,082 3,183 8,530 6,059 
Gain on acquisition contingency(1,990)(2,236)(10,493)(2,287)
Asset impairment and abandonments996 2,206 1,935 4,382 
Transaction and integration expenses222 2,188 1,138 2,510 
Total operating expenses27,599 30,882 50,716 62,365 
Operating loss(13,390)(13,277)(22,312)(27,707)
Other expense (income) - net
Other expense (income) - net 22 (101)49 (105)
Interest expense252  504  
Foreign exchange loss (gain) 1,056 (95)1,409 450 
Change in fair value of warrant liability(9,124)(2,523)(18,867)(2,523)
Total other (income) - net (7,794)(2,719)(16,905)(2,178)
(Loss) before income tax provision (5,596)(10,558)(5,407)(25,529)
Income tax provision92 81 254 300 
Net (loss) from operations (5,688)(10,639)(5,661)(25,829)
Discontinued Operations (Note 3)
(Loss) from operations of discontinued operations  (6,316) (6,316)
Income tax (benefit)  (763) (763)
Net (loss) from discontinued operations  (5,553) (5,553)
Net (loss) (5,688)(16,192)(5,661)(31,382)
Noncontrolling interests
Net income applicable to noncontrolling interests    
Net (loss) applicable to Surgalign Holdings, Inc. (5,688)(16,192)(5,661)(31,382)
Other comprehensive income (loss)
Unrealized foreign currency translation (gain) loss (313)35 (422)(36)
Total other comprehensive (loss) $(5,375)$(16,227)$(5,239)$(31,346)
Net (loss) from continuing operations per share applicable to Surgalign Holdings, Inc. - basic $(0.86)$(2.79)$(0.92)$(7.29)
Net (loss) from discontinued operations per share applicable to Surgalign Holdings, Inc. - basic $ $(1.46)$ $(1.57)
Net (loss) per share applicable to Surgalign Holdings, Inc. - basic $(0.86)$(4.25)$(0.92)$(8.86)
Net (loss) from continuing operations per share applicable to Surgalign Holdings, Inc. - diluted $(0.86)$(2.79)$(0.92)$(7.29)
Net (loss) from discontinued operations per share applicable to Surgalign Holdings, Inc. - diluted $ $(1.46)$ $(1.57)
Net (loss) per share applicable to Surgalign Holdings, Inc. - diluted $(0.86)$(4.25)$(0.92)$(8.86)
Weighted average shares outstanding - basic6,640,405 3,808,475 6,174,273 3,542,497 
Weighted average shares outstanding - diluted6,640,405 3,808,475 6,174,273 3,542,497 
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 Mezzanine Equity
Balance, January 1, 2022$5 $585,517 $(1,820)$(569,613)$(5,852)$8,237 $10,006 
Net income— — — 27 — 27 — 
Foreign currency translation adjustment— — (109)— — (109)— 
Share offering1 8,487 — — — 8,488 — 
Prefunded warrant execution— 1,749 — — — 1,749 — 
Equity instruments issued in connection with the Holo acquisition1 5,918 — — — 5,919 — 
Stock-based compensation— 1,374 — — — 1,374 — 
Purchase of treasury stock— — — — (5)(5)— 
Balance, March 31, 2022$7 $603,045 $(1,929)$(569,586)$(5,857)$25,680 $10,006 
Net loss— — — (5,688)— (5,688)— 
Foreign currency translation adjustment— — (313)— — (313)— 
Stock-based compensation— 971 — — — 971 — 
Purchase of stock in the ESPP Plan— 186 — — — 186 — 
Purchase of treasury stock— — — — (51)(51)— 
Other— 50 — — — 50 — 
Balance, June 30, 2022$7 $604,252 $(2,242)$(575,274)$(5,908)$20,835 $10,006 
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, 2021$3 $517,201 $(2,416)$(484,962)$(5,656)$24,170 
Net loss— — — (15,190)— (15,190)
Foreign currency translation adjustment— — 71 — — 71 
Exercise of common stock options— 23 — — — 23 
Stock-based compensation— 936 — — — 936 
Purchase of treasury stock— — — — (110)(110)
Share offering 1 36,483 — — — 36,484 
Balance, March 31, 2021$4 $554,643 $(2,345)$(500,152)$(5,766)$46,384 
Net loss— — — (16,192)— (16,192)
Foreign currency translation adjustment— — (35)— — (35)
Stock-based compensation— 1,413 — — — 1,413 
Share offering1 21,043 — — — 21,044 
Equity instruments issued in connection with Prompt Prototypes, LLC— 221 — — — 221 
Purchase of treasury stock— — — — (23)(23)
Balance, June 30, 2021$5 $577,320 $(2,380)$(516,344)$(5,789)$52,812 
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 Six Months Ended
June 30,
20222021
Cash flows from operating activities:
Net loss$(5,661)$(31,382)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization expense1,180 1,153 
Provision for bad debts and product returns700 2,439 
Investor fee916  
Change in fair value of warrant liability(18,867)(2,523)
Provision for inventory write-downs3,804 4,367 
Insurance proceeds related to operating activities (1,993)
Income taxes payable (13,326)
Stock-based compensation2,299 2,349 
Asset impairment and abandonments1,935 4,382 
Gain on acquisition contingency(10,493)(2,287)
Loss on sale of discontinued operations 6,316 
Bargain purchase gain (90)
Other(3)(33)
Change in assets and liabilities:
Accounts receivable(2,082)(3,777)
Inventories(4,767)(9,111)
Accounts payable446 (3,818)
Accrued expenses(7,025)23,605 
Right-of-use asset and lease liability223 (3,165)
Other operating assets and liabilities4,986 (19,253)
 Net cash used in operating activities (32,409)(46,147)
Cash flows from investing activities:
Payments for OEM working capital adjustment (5,430)
Purchases of property and equipment(3,034)(4,952)
Business acquisitions, net of cash acquired (330)
Patent and acquired intangible asset costs(184)(311)
 Net cash used in investing activities (3,218)(11,023)
Cash flows from financing activities:
Share offering proceeds including prefunded warrant exercised, net17,729 82,326 
Proceeds from exercise of common stock options 23 
Proceeds from Employee Stock Purchase Program (ESPP)186  
Payment of Holo Milestones - contingent consideration(4,081) 
Payments for treasury stock(56)(133)
 Net cash provided by financing activities13,778 82,216 
Effect of exchange rate changes on cash and cash equivalents(94)249 
 Net (decrease) increase in cash and cash equivalents (21,943)25,295 
Cash and cash equivalents, beginning of period51,287 43,962 
Cash and cash equivalents, end of period$29,344 $69,257 
Supplemental cash flow disclosure:
Net income tax payments, net of refunds1,548 15,481 
Non-cash acquisition of property and equipment189 629 
Non-cash common stock issuance - Prompt 221 
Non-cash common stock issuance - Holo Milestones contingent considerations5,919  
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”), is a global medical technology company focused on elevating the standard of care by driving the evolution of digital health. We have a broad portfolio of spinal hardware implants, including solutions for fusion procedures in the lumbar, thoracic, and cervical spine, motion preservation solutions for the lumbar spine, and a minimally invasive surgical implant system for fusion of the sacroiliac joint. We also have a portfolio of advanced and traditional orthobiologics, or biomaterials, products. We currently market and sell products to hospitals, ambulatory surgery centers, and healthcare providers in the United States and in 50 countries worldwide.

We are developing an artificial intelligence (“AI”) and augmented reality (AR) technology platform called HOLO™ AI, a powerful suite of AI software technology which connects the continuum of care from the pre-op and clinical stage through post-op care, and is designed to achieve better surgical outcomes, reduce complications, and improve patient satisfaction. We believe HOLO AI is one of the most advanced AI technologies with applications beyond the spine and operating room. Our HOLO Portal™ surgical guidance system, a component of our HOLO AI technology platform, is designed to automatically recognize, identify, and segment patient anatomy to autonomously assist the surgeon throughout the surgical procedure. This proprietary AI-based platform is an intelligent anatomical mapping technology designed to assist surgeons by allowing them to remain in safe anatomical zones, and to enhance surgical performance. We plan to leverage our HOLO AI platform to improve patient outcomes 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 are headquartered in Deerfield, Illinois, with commercial, innovation and design centers in San Diego, CA; Wurmlingen, Germany; Poznan, Poland; and Warsaw, Poland. The Company operates one reportable segment: Spine.
Reverse Stock Split
On May 10, 2022, the stockholders of the Company approved the proposal to authorize the Company’s Board of Directors (the “Board”) to amend the Company’s Amended and Restated Certificate of Incorporation to affect a reverse stock split of the Company’s common stock (the “Reverse Stock Split”). Following Board approval on May 11, 2022, the Reverse Stock Split became effective on May 16, 2022 at a 1-for-30 ratio. The Reverse Stock Split did not modify any rights or preferences of the shares of the Company’s common stock. Proportionate adjustments were made to the exercise prices and the number of shares underlying the Company’s outstanding equity awards, as applicable, and warrants, as well as to the number of shares issued and issuable under the Company’s equity incentive plans. The Reverse Stock Split did not affect the number of authorized shares of common stock or the par value of the common stock. Effective this quarter, all per share amounts, and references to common shares and common share amounts have been retroactively restated for all periods presented.
Acquisition of equity interest in INN
On December 30, 2021, we completed a Stock Purchase Agreement (“Purchase Agreement”) to acquire 42% of Inteneural Networks Inc. (“INN”) for a non-exclusive license to use INN's AI technology for autonomously segmenting and identifying neural structures in medical images and helping identify possible pathological states 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 $20.0 million which consisted of $5.0 million in cash, 227,359 shares of our common stock with a fair value of $4.9 million and issued unsecured promissory notes to the Sellers in an aggregate principal amount of $10.6 million with a fair value of $10.1 million on date of acquisition. 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 each when the Company achieves three additional clinical, regulatory, and revenue milestones.
Prompt Prototypes LLC Acquisition
On April 30, 2021, The Company, entered into an Asset Purchase Agreement with Prompt Prototypes LLC (“Prompt”), a California limited liability company, and Peter Kopley, an individual residing in the State of California (the “Sellers”). The Company purchased the assets of Prompt to expand its research and development capabilities and create the capacity to produce certain medical prototypes. Pursuant to the terms of the Agreement, the Company purchased specific assets and assumed certain liabilities of Prompt for a purchase price of $1.1 million. At the closing, the Company paid
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$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.
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.
COVID-19
The COVID-19 pandemic continues to impact our business 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 moving forward depends on future developments that are highly uncertain and cannot be accurately predicted. While market conditions have improved, many government agencies in conjunction with hospitals and healthcare systems continue to defer, reduce or suspend 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 and navigate the uncertainties of COVID-19.
Despite the impact COVID-19 has had on our business, we have continued to invest in our digital health strategy, invest in our teams, improve operating processes through building strong foundations, and taken steps to position ourselves for long-term success by improving patient outcomes while maintaining adequate cash levels.
Liquidity
As supply chain issues continue, COVID-19 evolves, and inflation persists, all factors may 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 June 30, 2022, the Company had cash and cash equivalent of $29.3 million and an accumulated deficit of $575.3 million. For the three and six months ended June 30, 2022, the company had a loss from continuing operations of $5.7 million and $5.7 million, and a net loss applicable to Surgalign Holdings, Inc. of $5.7 million and $5.7 million, respectively. The Company has incurred losses from operations in the previous two fiscal years and did not generate positive cash flows from operations in fiscal year 2021 or for the six months ended June 30, 2022. The Company expects net operating losses for the full year 2022 as it works to commercialize its HOLO Portal Surgical Guidance System and further develop its AI Platform and spinal device product lines.
On February 15, 2022, we issued and sold in an underwritten public offering 1,285,507 shares of common stock and 163,768 of pre-funded warrants to purchase common stock with gross proceeds of $20.0 million at an effective offering price of $13.8000 and $13.7970 per share respectively. In addition, the Company issued warrants to purchase up to an aggregate of 1,086,956 shares of common stock at a strike price of $18.0000 that are exercisable over the next five
7


years. Also in connection with the offering, the Company issued placement agent warrants to purchase an aggregate of up to 86,956 shares of common stock at a strike price of $17.2500 per share that are exercisable 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 217,391 additional shares of the Company’s common stock at the public offering price of $13.7970 per share and/or warrants to purchase up to 163,043 shares of the Company’s common stock at a public offering price of $0.0030 per warrant. The Underwriters did not exercise the option to purchase the common shares from the Company, but they did exercise the option to purchase the warrants which have not been converted to common shares as of June 30, 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 966,183 shares of our common stock and investor warrants to purchase up to an aggregate of 966,183 shares at a strike price of $51.7500. The Company, also in connection with the direct offering, issued placement agent warrants to purchase an aggregate of up to 57,971 shares of our common stock at a strike price of $64.6875 per share. We received net proceeds of $45.8 million from the offering after deducting investor fees of $4.2 million.
On February 1, 2021, we closed a public offering and sold a total 956,666 shares of our common stock at a price of $45.0000 per share, less the underwriter discounts and commissions. We received gross proceeds of $40.5 million from the offering after deducting the underwriting discounts and commission of $4.0 million.
The Company is projecting 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) supply chain and labor issues, continued COVID-19 uncertainties, inflation 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 $10.1 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
8


our condensed consolidated financial statements in accordance with GAAP often requires us to make estimates and judgments that affect reported amounts. These estimates and judgments are based on historical experience and assumptions that we believe to be reasonable under the circumstances. Assumptions and judgments based on historical experience may provide reported results, which differ from actual results; however, these assumptions and judgments historically have not varied significantly from actual experience, and we therefore do not expect them to vary significantly in the future. All intercompany balances and transactions have been eliminated in consolidation. The results of operations for any interim period are not necessarily indicative of the results to be expected for the full year. The Company includes acquisition, disposal, integration and separation related costs, which are predominantly composed of legal, consulting, and advisor fee expenses, within the “Transaction and integration expense” line on the condensed consolidated statements of comprehensive loss.
The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Surgalign Spine Technologies, Inc., Paradigm Spine, LLC (“Paradigm”), Pioneer Surgical Technology, Inc. (“Pioneer Surgical”), Holo Surgical Inc. (“Holo Surgical”), and Prompt Prototypes, LLC (“Prompt”). The operating results of the disposed OEM Businesses have been reported as discontinued operations in the condensed consolidated financial statements in the prior comparative periods. The Company consolidates the accounts of INN, a 42% owned subsidiary as control was achieved through means other than voting rights (variable interest entities or VIE) as the Company is deemed to be the primary beneficiary of INN.
For further information on the Company’s significant accounting policies, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 filed with the Securities and Exchange Commission (“SEC”) on March 15, 2022.
Accounting Standards Issued But Not Yet Adopted
To date, there have been no recent accounting pronouncements not yet effective that have a material, or potentially material, impact to our consolidated financial statements.
Significant New Accounting Policies
There are no new accounting policies effective that have a material impact on the financial statements.
Reclassification in the Condensed Consolidated Financial Statements
Certain reclassifications were made to the 2021 condensed consolidated financial statements to conform to classifications used in 2022. There was no impact on previously reported total assets, total liabilities, stockholder’s equity, revenues or expenses.
3. Discontinued Operations
In connection with the Transactions, on July 20, 2020, the Company completed the disposition of its OEM Businesses. Accordingly, the OEM Businesses are reported as discontinued operations in accordance with ASC 205-20, Discontinued Operations (“ASC 205-20”). The results of operations from the OEM Businesses are classified as discontinued operations in the condensed consolidated statements of comprehensive loss. There were no assets or liabilities of the OEM Businesses as of June 30, 2022 or December 31, 2021 due to the transaction occurring on July 20, 2020. Applicable amounts in prior years have been recast to conform to this discontinued operations presentation.
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The following table presents the financial results of the discontinued operations:
Three Months Ended
June 30,
Six Months Ended
June 30,
2022202120222021
Major classes of line items constituting net income (loss) from discontinued operations
Revenues$ $ $ $ 
Costs of processing and distribution    
Gross profit    
Expenses:
General and administrative    
Severance and restructuring costs    
Transaction and integration expenses    
Total expenses    
Operating (loss) income    
Other expense net:
OEM working capital adjustment 6,316  6,316 
Interest expense    
Derivative loss    
Loss on extinguishment of debt    
Foreign exchange loss (gain)    
Total other expense net
 6,316  6,316 
Loss from discontinued operations (6,316) (6,316)
Gain on sale of net assets of discontinued operations    
 Income (loss) from discontinued operations before income tax provision (benefit) (6,316) (6,316)
Income tax provision (benefit) (763) (763)
Net income (loss) from discontinued operations$ $(5,553)$ $(5,553)
In accordance with ASC 205-20, only expenses specifically identifiable and related to a business to be disposed may be presented in discontinued operations. As such, the general and administrative expenses in discontinued operations include corporate costs incurred directly to solely support the Company’s OEM Businesses.
The Company applied the “Intraperiod Tax Allocation” rules under ASC 740, Income Taxes (“ASC 740”), which requires the allocation of an entity’s total annual income tax provision among continuing operations and, in the Company’s case, discontinued operations.
On December 1, 2020, pursuant to the OEM Purchase Agreement, the Company received a notice from the Buyer indicating that a post-closing adjustment in an amount of up to $14.0 million may be owed in respect of the working capital adjustment paid at closing. On June 3, 2021, the firm engaged to resolve the dispute issued a binding, non-appealable resolution whereby it was determined the Company was liable for $5.8 million of the disputed amount, which was finalized and paid during the second quarter of 2021. The final settlement was expensed under “Income (loss) from operations of discontinued operations” in our condensed consolidated statements of comprehensive loss.
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Total operating and investing cash flows of discontinued operations for the six months ended June 30, 2022 and 2021 is comprised of the following, which excludes the effect of income taxes:
Six Months EndedSix Months Ended
June 30,
2022
June 30,
2021
Significant operating non-cash reconciliation items:
Depreciation and amortization$ $ 
Provision for bad debt and products returns$ $ 
Revenue recognized due to change in deferred revenue$ $ 
Deferred income tax provision$ $ 
Stock-based compensation$ $ 
Gain on sale of discontinued assets, net$ $ 
Loss on extinguishment of debt$ $ 
Amortizations of debt issuance costs$ $ 
Amortizations of debt discount$ $ 
Significant investing items:
Payments for OEM working capital adjustment$ $(5,430)
Purchases of property and equipment$ $ 
Patent and acquired intangible asset costs$ $ 
Proceeds from sale of OEM Business$ $ 
4.Leases
The Company’s leases are classified as operating leases that include office space, automobiles, and copiers. The Company does not have any finance leases and the Company’s operating leases do not have any residual value guarantees, restrictions, or covenants. As of June 30, 2022 the only lease that has yet to commence is for our San Diego Design Center, which is expected to open in the second half of 2022. Therefore, no lease obligation or right-of-use (“ROU”) asset has been recorded as of June 30, 2022. All other obligations associated with the lease are reflected as of June 30, 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 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
June 30,
For the Six Months Ended
June 30,
2022202120222021
Operating lease cost$119 $195 $244 $378 
Short-term operating lease cost221 112 442 149 
Total operating lease cost$340 $307 $686 $527 
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Supplemental cash flow information related to operating leases was as follows:
For the Three Months Ended
June 30,
For the Six Months Ended
June 30,
2022202120222021
Cash paid for amounts included in the measurement of lease liabilities$339 $332 $686 $576 
ROU assets obtained in exchange for lease obligations 80  80 
Supplemental balance sheet information related to operating leases was as follows:
 Balance Sheet Classification
Balance at
June 30, 2022
Balance at
December 31, 2021
Assets:   
Right-of-use assets
Other assets net
$768 $876 
Liabilities: 
CurrentAccrued expenses$283 $294 
NoncurrentOther long-term liabilities843 947 
Total operating lease liabilities $1,126 $1,241 
The weighted-average remaining lease terms and discount rates were as follows:
For the Six Months Ended
June 30,
20222021
Weighted-average remaining lease term (years)6.05.8
Weighted-average discount rate5.1 %5.0 %
As of June 30, 2022, maturities of operating lease liabilities were as follows:
Balance at
June 30,
2022
2022 (remaining)
$264 
2023212 
2024172 
2025160 
2026159 
2027 and beyond
358 
 Total future minimum lease payments1,325 
Less imputed interest(199)
Total$1,126 
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 six months ended June 30, 2022 and 2021 was recognized at a point in time. The following table represents total revenue by geographical region for the three and six months ended June 30, 2022 and 2021, respectively:
 
For the Three Months Ended
June 30,
For the Six Months Ended
June 30,
 2022202120222021
Revenues:
Domestic$17,215 $20,726 $34,299 $40,574 
International3,408 4,108 6,929 7,551 
Total revenues from contracts with customers$20,623 $24,834 $41,228 $48,125 
6.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 served as a 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 potential future applications in neurosurgery as well as 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 HOLO 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 $20.0 million which consisted of $5.0 million in cash, issuance to the Sellers of 227,359 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 $10.1 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 June 30, 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 condensed consolidated financial statements as of June 30, 2022. INN does not have any assets or liabilities as of June 30, 2022 and December 31, 2021. Additionally, there was no income statement activity within INN for the three and six months ended June 30, 2022 and 2021.
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, $10.1 million of seller notes issued to the sellers, direct and incremental expenses of $0.4 million incurred for the INN acquisition, $10.3