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Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.Yes ¨☐ No x
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 ☐¨
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operations and financial results. Therefore, we are reporting the historical results of the OEM Businesses including the results of operations and cash flows as discontinued operations, and related assets and liabilities were retrospectively reclassified as assets and liabilities of discontinued operations for all periods presented herein. Unless otherwise noted, applicable amounts in the prior year have been recast to conform to this discontinued operations presentation. See Note 5 of the Consolidated Financial Statements in Part IV, Item 15, “Exhibits and Financial Statement Schedules” of this Exhibit for additional information. Unless otherwise indicated, the following information relates to continuing operations. A more complete description of our business prior to the Transactions is included in Item 1. “Business”,“Business,” in Part I of the Annual Report on Form 10-K for the year ended December 31, 20192020 that was previously filed
Acquisition
On October 23, 2020 we completedMarch 16, 2021, and as amended by our Annual Report (Amendment No. 1) on Form 10-K/A filed with the acquisition of Holo Surgical Inc. (“Holo Surgical”) pursuant to the Stock Purchase Agreement, dated as ofSEC on September 29, 2020 (the “Holo Surgical Purchase Agreement”), by and among us, Roboticine, Inc. (the “Seller”) and the other parties signatory thereto. Holo Surgical is a private technology company that is developing ARAI digital surgery platform to enable digital spine surgery. As consideration for the transactions contemplated by the Holo Surgical Purchase Agreement, at closing, we paid to the Seller $30 million in cash and issued to the Seller 6,250,000 shares of our common stock with a fair value of $12.3 million. In addition, the Seller will be entitled to receive contingent consideration from us valued in an aggregate amount of $50.6 million as of October 23, 2020, which must be first paid in shares of our common stock (in an amount up to 8,650,000 shares) and then paid in cash thereafter, contingent upon and following the achievement of certain regulatory, commercial and utilization milestones by specified time periods occurring up to the sixth (6th) anniversary24, 2021.
COVID-19
The coronavirus (COVID-19)(“COVID-19”) pandemic, as well as the corresponding governmental response and the Company’s management of the crisis has had a significant negative effectsimpact on the majority of the U.S. economy and has adversely affected the entire spine market.Company’s business. The consequences of the outbreak and impact on the global economy continuescontinue to evolve, and the full extent of the impact is uncertain aswith the existence of variant strains of COVID-19. The variant strains have and will continue to lead to a rise in infections resulting in the datereinstatement of this filing. The outbreak has already had,certain restrictions previously in place on a global scale which includes closure of hospitals.
At times throughout 2020,extending through 2021, many hospitals and other medical facilities canceled elective surgeries, reduced and diverted staffing, and diverted other resources to patients suffering from COVID-19the infectious disease and limited hospital access for non-patients, including ourthe Company’s direct and indirect sales representatives. Because of the COVID-19 pandemic, surgeons and their patients have been required, or are choosing, to defer procedures in which ourthe Company’s products would be used, and many facilities that specialize in the procedures in which ourthe Company’s products would be used have closed or reduced operating hours. These circumstances haveThe Company continue to see these measures both domestically and internationally taken through December 31, 2021, thus negatively impactedimpacting the ability of ourthe Company’s employees and distributors to effectively market and sell ourits products. In addition, even after the pandemic subsides and/or governmental orders no longer prohibit or recommend against performing such procedures, patients may continue to defer such procedures out of concern of being exposed to COVID-19 or for other reasons.
COVID-19.
In response to the COVID-19 novel coronavirus pandemic and the resulting federal and local guidelines, we furloughed or reduced the hours of a majority of its U.S.-based employees during the second quarter of 2020. While our employees have since returned to work, we
depend on future developments that are highly uncertain and cannot be accurately predicted, including the possibility that new adverse information may emerge concerning COVID-19 and additional actions to contain it or treat its impact may be required.
Our
We project we$4.0 million.
The Company’s ability to raise additional capital may be adversely impacted by potential worsening global economic conditions and the recent disruptions to, and volatility in, financial markets in the United States and worldwide. 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.
Prior to the disposition of the OEM Businesses, the Company operated two reportable segments: Spine and OEM. Subsequent to the disposition, the
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•Leverage our digital surgery platform to improve patient outcomes
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•Develop and commercialize an increased cadence of innovative spine implants and biomaterials products. We plan to leverage our current strengths and invest in our research and development platform, in order to expand our product portfolio and develop next-generation, clinically validated products. To support these efforts, we plan to hire additional dedicated engineers and scientists with expertise in product design and development. We plan to continue to deepen our relationships with thought-leading surgeons to develop clinically validated procedures and products that deliver better patient outcomes. We also plan to create seamless integration between our products, procedures, and our digital surgery platform. |
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•Validate our innovative products with clinical evidence. We have a history of investing in clinical efficacy and outcomes studies to validate our products with peer-reviewed clinical evidence. There are more than 100 peer-reviewed clinical publications spanning our portfolio, including the Coflex® device, HPS® 2.0 fixation and TETRAfuse® 3D technology. We are investing in building a larger research and clinical affairs team that will bolster our clinical evidence. We plan to gather real-world clinical evidence on the safety and efficacy of our new innovative products. We plan to continue collaborating with our surgeon customers and key opinion leaders to share clinical data analyses through peer-reviewed scientific publications and conference presentations to the spine surgery and medical community. We believe such clinical data will bring increased awareness of our products and technologies and attract surgeon and patient interest. |
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•Grow our international business. We have strong commercial and research and development infrastructure outside the United States. We plan to focus our international commercial efforts on certain key markets that we believe represent a current annual market opportunity of $5.9 billion. We have a direct sales channel in several markets including Germany, which we believe provides us with a competitive advantage. We maintain a hybrid sales channel in other key markets throughout Europe and Asia where we plan to evaluate the potential for conversion to direct sales channels, in order to enhance our market penetration. To facilitate continued growth of our international business, we plan to introduce multiple new innovative products to our surgeon customers. |
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instrumentation.
HOLO
TM.Enabling Technologies
A relatively new
Our Products
strategy to improve patient outcomes. We have a broad portfolio of spine 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 broad portfolio of biomaterial products.
Most
ThoracoLumbar
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Motion Preservation Devices
(DBM)
Our flagship DBM is FibreX™ demineralized bone fibers, supplied by Origin Biologics.
ARAI Platform
Our ARAI platform is an advanced digital surgery guidance platform that combines 3D visualization, data analytics, and machine learning designed to improve patient outcomes, reduce operation time and decrease surgical complications. It is currently being developed and prepared for regulatory submission, and we believe it will be one of the most advanced artificial intelligence technologies being applied to surgery, designed to automatically identify and segment patient anatomy for autonomously assisting surgeons with spine surgery navigated guidance.
The ARAI platform is an intelligent anatomical mapping technology designed to assist surgeons by allowing them to remain in safe anatomical zones while enhancing surgical performance to facilitate improved patient outcomes. We plan to make an FDA 510(k) premarket submission in the first quarter of 2021 and submit a CE mark application in Europe in 2022.
The ARAI platform is designed for an ergonomic and comfortable augmented reality experience for the 3D visualization of internal anatomy without soft-tissue exposure. The platform leverages imaging technology to display and visualize the patient’s internal anatomy in real-time. The visualization of the virtual internal anatomy responds and adapts to the surgeon’s 3D perspective and is displayed directly onto the surgical field consistent with the surgeons’ training and workflow. The platform also leverages artificial intelligence-based algorithms to autonomously identify, label, segment, and analyze bony, soft tissue, solid organ, vascular, and nervous system anatomy without any human intervention. ARAI has been designed with a unique setup process of quickly establishing the synchronization between virtual images and the patient’s real anatomy, a process called registration. Many computer-assisted spine surgery and robotics systems have long setup requirements and registration times that can delay the surgical procedure, leading to inefficiencies cited as a major reason why surgeons have not yet widely adopted navigation and robotic technology. The machine-learning algorithms provide suggestions for optimal implant placement for automatic presurgical planning and aid the surgeon in executing a plan with intraoperative guidance including recommendations and alerts.
as the risk of a third party infringing on our patents, grows. While we attempt to ensure that our implants and methods do not infringe other parties’ patents and proprietary rights, our competitors or other third parties may assert that our implants, and the methods we employ, are covered by patents held by them. In addition, our competitors and other third parties may assert that future implants and methods we may employ infringe their patents. If third parties claim that we infringe upon, misappropriate, or otherwise violate their intellectual property rights, we may incur liabilities and costs and may have to redesign or discontinue selling the affected implant. Even if we were to prevail, any litigation could be costly and time-consuming and would divert the attention of our management and key personnel from our business operations. We are currently, change in intended use of one of our cleared devices; Medical Device Reporting regulations, which require that manufacturers report to FDA if their device may have caused or contributed to a death or serious injury, or has malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction of the device or a similar device were to recur; post-approval restrictions or conditions, including post-approval study commitments; post-market surveillance regulations, which apply when necessary to protect the public health or to provide additional safety and effectiveness data for the device; the FDA’s recall authority, whereby it can ask, or under certain conditions order, device manufacturers to recall from the market a product that is in violation of governing laws and regulations; regulations pertaining to voluntary recalls; and notices of corrections or removals. 2020 and again in October 2021. or hospitals, we are not a Covered Entity or Business Associate as defined by the HIPAA Privacy Rule, but we voluntarily incorporate applicable HIPAA standards in our corporate policies regarding handling of PHI we receive. We are also subject to the California Consumer Privacy Act. At the international level, the General Data Protection Regulation (EU 2016/679) (“GDPR”) applies to our processing of personal data of EU residents. This law regulates and protects the collection, use, processing, and disclosure of personal information, including by imposing privacy and security requirements and penalties for violations. We comply with this regulation for both general personal data as well as the higher sensitivity standards for health and financial data and are implementing the standards of this regulation as part of our corporate policy for processing personal data from all U.S. and international jurisdictions. •Organizational oversight by senior-level personnel responsible for the compliance functions within our company; •Written standards and procedures, including a Code of Conduct; •Methods for communicating compliance concerns, including anonymous reporting mechanisms; •Investigation and remediation measures to ensure prompt response to reported matters and timely corrective action; •Compliance education and training for employees and contracted business associates such as distributors; •Auditing and monitoring controls to promote compliance with applicable laws and assess program effectiveness; •Oversight of interactions with healthcare professionals to ensure compliance with healthcare fraud and abuse laws, including mandated reporting of transfers of value to healthcare professionals under the Affordable Care Act; •Oversight of corporate handling of personal data to ensure compliance with data protection legislation; •Disciplinary guidelines to enforce compliance and address violations; •Screening of employees and relevant contracted business associates; and medical technology company focused on elevating the standard of care through the evolution of digital health. financial condition. •Acceptance of our products by spine surgeons, patients, hospitals and third-party payers; •Demand and pricing of our products; •The mix of our products sold, because profit margins differ among our products; •Timing of new product offerings, acquisitions, licenses or other significant events by us or our competitors; •Our ability to grow and maintain a productive sales and marketing organization and distributor network; •Regulatory approvals and legislative changes affected the products we may offer or those of our competitors; •The effect of competing technological and market developments; •Levels of third-party reimbursement for our products; •Interruption in the manufacturing or distribution of our products; classification of liabilities that may result if we do not continue as a going concern. Therefore, you should not rely on our consolidated balance sheet as an indication of the amount of proceeds that would be available to satisfy claims of creditors, and potentially be available for distribution to stockholders, in the event of liquidation. In the future, we may become subject to additional litigation or governmental proceedings or investigations that could result in additional unanticipated legal costs regardless of the outcome of the litigation. If we are not successful in any such litigation, we may be required to pay substantial damages or settlement costs. arise. Security breaches, loss of data and other disruptions could compromise sensitive information related to our business, prevent us from accessing critical information or expose us to liability, which could adversely affect our business and our reputation. could have a material adverse effect on our business, financial condition, results of operations and prospects. In general, the reporting of product defects or voluntary recalls to the FDA or analogous regulatory bodies outside the United States, including the Cervalign® ACP System recall, which was reported to the FDA on January 22, 2021, could result in manufacturing audits, inspections and broader recalls or other disruptions to our and/or our suppliers’ businesses. This and future recalls, whether voluntary or required, could result in significant costs to us and significant adverse publicity, which could harm our ability to market our products in the future. We face intense competition, which could result in reduced acceptance and demand for our implants and technologies. returning to a legacy of innovation, quality, and clinical validation in the design and development of our products. Instrumental to this focus is creating an R&D organization centralized in San Diego, California. This new center of excellence will continue to be supported by our strong capabilities in Wurmlingen, Germany. We have new capabilities in Poland, acquired through the Holo Surgical acquisition,and INN transactions, that bring us expertise in augmented reality,AR, machine learning, and software development.development which will help us expand on our digital health strategy. We have also maintained our strategic partnership with RTI Surgical, subsequent to the disposition of our OEM Businesses, to support our spine implants and biomaterials businesses.Aligning with our recent acquisition of Holo Surgical and our commitment to leading in digital surgery, we will also focus on bringing the Holo Surgical technology to market. Future priorities for building out a world-class digital surgery platform include seamless integration with our hardware portfolio, the expansion into additional therapies, and the reimagination of procedural planning and workflow execution. This will position us to differentiate our company in the enabling technologies space and give surgeons access to better information, faster, to translate into enhanced treatments and patient care.In fall of 2020, we received regulatory clearance for a family of 3D printed titanium Interbody implants which we are planning to launch in the U.S. and international markets in early 2021. In 2019, we launched new implants and product enhancements in spine developed by our research and development teams. January 2018 marked the first clinical use of the Fortilink-TS and Fortilink-L product systems, which were followed by the full commercial launch of the Fortilink-TS system in May 2018. The Fortilink systems are the second and third in a family of devices to incorporate our TETRAfuse 3D Technology, the first 3D printed polymer-based implant material designed to participate in fusion. Additionally, in 2018 we introduced and launched ViBone Viable Bone Matrix for exclusive distribution in the United States. Early in 2020, we extended the TETRAfuse 3D Technology into the ALIF space with the release of the Fortilink-A interbody device. In November of 2020, we and Aziyo expanded our distribution agreement and announced the line extension of ViBone Moldable with handling improvements for better operating room experience. Enhancements were made to the Streamline OCT system, continuing to improve our features and options; performance improvements were made to our synthetic biomaterials line with the release of nanOss 3D Plus.acquisition,Acquisition, we acquired intellectual property and technologies that relate to digital surgery. As of December 31, 2020,2021, the intellectual property of the Holo Surgical business included, among other things, onetwo issued U.S. patent,patents, one granted European patent, elevenfifteen U.S. pending patent applications, and ten pending European patent applications. We do not know whether our current patent applications, or any future patent applications that we may file, will result in a patent being issued with the scope of the claims we seek, or at all, or whether any patents we may receive will be challenged or invalidated. The term of individual patents depends on the legal term for patents in the countries in which they are granted. In most countries, including the United States, the patent term is generally 20 years from the earliest claimed filing date of a nonprovisional patent application in the applicable country. The expected years of expiration for these patents and any patents that issue from such pending applications range from 2037 to 2040.2042. The ARAIHOLO™ platform is an autonomous anatomical mapping technology designed to assist surgeons and physicians to diagnose, treat, and manage patients with neurosurgical and orthopedic conditions. The ARAIHOLO™ platform is capable of advanced, real-time analytics, autonomous presurgical planning, and autonomous intraoperative guidance, potentially enhancing surgical performance with the goal of facilitating improved patient outcomes.and have been in the past, been, and may be in the future, be, involved in litigation relating to intellectual property. For more information regarding the risks related to intellectual property, please see the section titled “Risk Factors—Risks Related to Intellectual Property.”4050 countries globally. Our U.S. Commercial organization includes Professional Education, Corporate Accounts, and field-based Area Sales Directors and Regional Product Specialists supported by an extensive network of independent spine and biomaterial distributors. Our international sales organization consists of a direct sales force in several European countries and stocking distributors in the rest of the world.techniques.techniques including the HOLO Portal™ system. The successful use of our products and technologies depends, in part, on the training and skills of the surgeon performing the procedure. We are developing a state-of-the-art cadaver operating theater and training facility in our San Diego Innovation Center, to help drive adoption of our products.has been, and will continue to be,is partially dependent on our ability to differentiate, with clinically validated products and procedures, the quality of our products and reputation within the spine surgeon community. We have a strong commitment to conducting collaborative research with surgeons and we intend to continue working with surgeons and other healthcare professionals in clinical research to further advance our pipeline of novel, innovative technology, and product offerings.16%14% of our 20202021 global revenues. compete design of related instrumentation, efficacy of implants, service and relationships with the surgical community, depth of range of implants, scientific and clinical results, and pricing. Many of our competitors are substantially larger than we are, with much greater resources. In some cases, our customers compete with us in multiple product categories. process/manufacture, and market our allograft tissue implants and medical devices worldwide. Although some standardization exists, each country in which we do business has its own specific regulatory requirements.As of April 23, 2020,However, due to delays, implementation of the EU MDR has been delayed untilbegan on May 26, 2021. Manufacturers must have received Conformitè Europèene (“CE”) certification from a “notified body” to be able to sell products within the member states of the EU. Certification allows manufacturers to stamp the products of certified plants with a CE mark. Products covered by the EC directives that do not bear the CE mark cannot be sold or distributed within the EU. All products that we distribute in the EU have received CE certification. upcoming implementation of MDR. MDR may also include products, such as human tissue, not traditionally considered medical devices in the EU. Additionally, MDR, among other things, increases regulatory requirements for several medical device groupings applicable to our implants distributed in the EU, including strengthening notified body oversight for Class I reusable surgical instruments, and up-classifying spinal devices in contact with the spinal column. We received MDR certification in October 2020.•Organizational oversight by senior-level personnel responsible for the compliance functions within our company;Written standards and procedures, including a Code of Conduct;Methods for communicating compliance concerns, including anonymous reporting mechanisms;Investigation and remediation measures to ensure prompt response to reported matters and timely corrective action;Compliance education and training for employees and contracted business associates such as distributors;Auditing and monitoring controls to promote compliance with applicable laws and assess program effectiveness;Oversight of interactions with healthcare professionals to ensure compliance with healthcare fraud and abuse laws, including mandated reporting of transfers of value to healthcare professionals under the Affordable Care Act;Oversight of corporate handling of personal data to ensure compliance with data protection legislation;Disciplinary guidelines to enforce compliance and address violations;Screening of employees and relevant contracted business associates; andRisk assessments to identify areas of regulatory compliance risk.2020,2021, we had a total of 197231 employees of which 8170 were employed outside of the United States. None of our employees isare represented by a labor union, and we consider our employee relations to be good. We believe a strong employee culture and a commitment to improving patient lives by advancing the standard of spine care and our digital health initiatives will help foster a shared sense of engagement and purpose among our employees and provide us with a competitive advantage. Our culture and employees are driven by our five values: being relentless, gritty and tenacious; acting with speed; being customer-focused and patient-minded; leading with integrity; and being bold and acting courageously. We intend to attract and retain the best talent in the industry by offering competitive pay, annual incentivestand-alone spinal implant company.our increases in the fourth quarter.2019.2021. We make available, free of charge, on or through the investor relations portion of our website, our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after we file such material with, or furnish it to the Securities and Exchange Commission (“SEC”). These filings are also available on the SEC’s website at www.sec.gov. Also available on our website is our Corporate Governance Guidelines, our Code of Conduct, our Code of Ethics for Senior Financial Professionals, and the charters for our Audit Committee, Compensation Committee and Nominating and Governance Committee. Within the time period required by the SEC and Nasdaq, we will post any amendment to our Code of Ethics for our senior financial professionals and any waiver of our Code of Conduct applicable to our senior financial professionals, executive officers and directors.Item 1A.RISK FACTORSMany of our employees were furloughed at some point during 2020 and although our operations are beginning to increase towards normal levels, we continue to have many employees working remotely as a result of COVID-19 and the sale of the OEM Businesses.
We may not have sufficient cash flows from operating activities, cash on hand and available capital sources to finance capital expenditures and other working capital needs and to finance contingent consideration and forward contract arrangements when they become due.Ifessential employees who are unable to telework become ill or otherwise incapacitated,digital health solutions platform, including applications based on the HOLOTM AI technology, inventory, the investments in our operations may be adversely impacted.As a medical device supplier, we fall generally within a “critical essential infrastructure” sector,product pipeline, and other operating expenses. These expenditures will include costs associated with marketing and selling our products, obtaining certain regulatory approvals, and expanding our technology pipeline. In connection with prior acquisitions, we are considered exempt under most stay-at-home and shelter-in-place orders. Accordingly, our employees may continuerequired to work because of the importance of our operationsmake contingent consideration earnout payments to the health and well-beingsellers if certain metrics relating to the acquired businesses have been achieved. As of citizensDecember 31, 2021, we had accrued $51.9 million in the statescontingent consideration as liabilities that we owe in which we operate. Consistentconnection with these stay-at-home and shelter-in-place orders,our prior acquisitions. In addition we have implemented telework policies wherever possible for appropriate categories of “nonessential” employees. “Essential” employees that are unable$10.0 million related to telework continue to work at our facilities, and while we believeforward contracts that we may owe if certain milestones are met based on the INN acquisition. There is no assurance that we will have taken appropriate measuressufficient cash on hand or available capital to ensure the healthfinance our capital expenditures and well-being ofother working capital needs or fund contingent consideration payments when they become due, and failure to do so may result in a material adverse effect on our “essential” employees, there can be no assurances that our measures will be sufficient to protect our employees in our workplace or prevent them from being exposed to COVID-19 outside of our workplace. If a number of our essential employees become ill, incapacitated or are otherwise unable to continue working during the current or any future epidemic, our operations, business, financial condition, results of operations, and prospects may be adversely impacted.2019 and 2018,2019, we incurred net losses from continuing operations of $122.9 million, $194.2 million, and $248.8 million, and $49.6, respectively. As of December 31, 2020,2021, we had an accumulated deficit of $485.0$569.6 million. We have incurred significant net losses and have relied on our ability to fund our operations through revenues from the sale of our products the dispositionand through various forms of our OEM Businesses, and from various financings. A successful transition to sustained profitability is dependent upon achieving a level of revenues adequate to support our cost structure. This may not occur and, unless and until it does, we will continue to need to raise additional capital. We may seek additional funds from public and private equity or debt financings, borrowings under debt facilities or other sources to fund our projected operating requirements. However, we may not be able to obtain further financing on reasonable terms or at all. If we are unable to raise additional funds on a timely basis, or at all, our business, results of operations, financial condition and prospects will be materially adversely affected.•acceptance of our products by spine surgeons, patients, hospitals and third-party payers;demand and pricing of our products;the mix of our products sold, because profit margins differ among our products;timing of new product offerings, acquisitions, licenses or other significant events by us or our competitors;•our ability to grow and maintain a productive sales and marketing organization and distributor network;regulatory approvals and legislative changes affecting the products we may offer or those of our competitors;the effect of competing technological and market developments;levels of third-party reimbursement for our products;interruption in the manufacturing or distribution of our products;our ability to produce or obtain products of satisfactory quality or in sufficient quantities to meet demand; andchanges in our ability to obtain FDA, state and international approval or clearance for our products.2018,2021, December 31, 20192020 and December 31, 20202019, that there is substantial doubt about our ability to continue as a going concern. See Note 1 of the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2020.2021. A “going concern” opinion indicates that the financial statements have been prepared assuming we will continue as a going concern and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets, or the amounts andincome taxes to be paid related to the gain on sale associated with our sale of the OEM Businesses, (ii) contingent consideration amounts payable in common stock and cash in connection with the Holo Surgical acquisition (including approximately $9 million which is expected to come due if certain regulatory approvals in the United States are obtained in 2021), (iii)and INN acquisitions; (ii) additional payment obligations we may owe to our suppliers in respect of minimum purchase requirements under our supply contracts, (iv)contracts; (iii) uncertainties related to potential settlements from ongoing litigation and regulatory investigations,investigations; (iv) the unsecured promissory notes in an aggregate principal amount of approximately $10.6 million issued to the sellers in connection with the INN acquisition; and (v) uncertainties related to COVID-19, we have forecasted the need to raise additional capital in order to continue as a going concern. Our operating plan for the next 12-month period also includes continued investments in our product pipeline that will necessitate additional debt and/or equity financing in addition to the funding of future operations through 20212022 and beyond. Our ability to raise additional capital may be adversely impacted by potential worsening global economic conditions and the recent disruptions to, and volatility in, financial markets in the United States and worldwide resulting from the ongoing COVID-19 pandemic. Further, if there remains substantial doubt about our ability to continue as a going concern, investors or other financing sources may be unwilling to provide additional funding on commercially reasonable terms or at all, and no assurance can be given that future financing will be available or, if available, that it will be on terms that are satisfactory. Even if we are able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing, or cause substantial dilution for our stockholders, in the case of equity financing. If cash resources are insufficient to satisfy our ongoing cash requirements through 2021,2022, we may be required to scale back operations, reduce research and development expenses, and postpone, as well as suspend, capital expenditures, in order to preserve liquidity, or be forced to liquidate the Company, in which case it is likely that investors will lose all or a part of their investment.The SEC has subpoenaed certain documents and taken informal testimony from certain individualsWe are currently in connectiondiscussions with its investigation, and we are cooperating with the SEC in connection with its investigation. Investigations of this nature are inherently uncertain and their results cannot be predicted. Regardless of the outcome, the SEC Investigation has had and may continue to have an adverse impact on us because of legal costs, diversion of management resources, and other factors. The SEC Investigation could also result in reputational harm to us, which, among other things, may limit our ability to obtain new customers and enter into new agreements with our existing customers, or our ability to obtain financing, and have a material adverse effect on our current and future business, financial condition, results of operations and prospects. We have contacted the SEC regarding a potential settlement of the SEC Investigation and are awaiting a response.Investigation. It is uncertain at this time whether any settlement will be reached or the terms of any such settlement, which could include the payment of significant monetary amounts. If we are unable to reach a settlement with the SEC, or if the terms of such settlement involve significant monetary payments, our business, financial condition, results of operations and prospects, along with our reputation with customers and business partners, could be significantly adversely affected.There is currently ongoing stockholder litigation related to the Investigation and the SEC Investigation. A class action complaint was filed by Patricia Lowry, a purported stockholder of the Company, against us, and certain of our current and former officers, in the United States District Court for the Northern District of Illinois on March 23, 2020 asserting claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and demanding a jury trial (the “Class Action”). The court appointed a different stockholder as lead plaintiff and that stockholder filed an amended complaint on August 31, 2020. On October 15, 2020, we and the other named defendants moved to dismiss the amended complaint, to which the parties are in the process of filing responsive pleadings.Additionally, on June 5, 2020, a derivative stockholder lawsuit demanding a jury trial was filed by David Summers in the United States District Court for the Northern District of Illinois on behalf of the Company against certain of our current and former directors and officers. On June 12, 2020, a derivative stockholder lawsuit demanding a jury trial was filed by Niall Campbell in the United States District Court for the Northern District of Illinois on behalf of the Company against certain of our current and former directors and officers. On July 7, 2020, a third derivative stockholder lawsuit demanding a jury trial was filed by Dominick De Filippis in the United States District Court for the Northern District of Illinois on behalf of the Company against certain of our current and former directors and officers. These derivative actions were consolidated and have been stayed pending the outcome of the aforementioned motion to dismiss the Class Action.Based on the current information availableWhile we maintain insurance coverages that are intended to us, the impact that current or any future stockholder litigation may have on the Company cannot be reasonably estimated.The SEC Investigation and the restatementaddress certain aspects of our previously issued financial statements, the errors that resulted in such restatement, the material weaknesses that were identified in our internal control over financial reporting and the determination that our internal control over financial reporting and disclosure controls and procedures were not effective, could result in loss of investor confidence and additional litigation or governmental proceedings or investigations, any of which could cause an adverse effect on our business, results of operations, financial condition and prospects.In connection with the filing of our Form 10-K/A for the fiscal year ended December 31, 2018, we corrected certain historical errors related to the timing of our revenue recognition for certain contractual arrangements, primarily with OEM customers, including the accounting treatment, financial reporting and internal controls related to such arrangements. As a result, we have determined that revenue for certain invoices should have been recognized at a later date than when originally recognized. In response to binding purchase orders from certain OEM customers, goods were shipped and received by the customers before requested delivery dates and agreed-upon delivery windows. In many instances, the OEM customers requested or approved the early shipments, but on other occasions the goods were delivered early without obtaining the customers’ affirmative approval. Some of those unapproved shipments were shipped by employees in order to generate additional revenue and resulted in shipments being pulled from a future quarter into an earlier quarter. In addition, we have concluded that, in July 2017, an adjustment was improperly made to a product return provision in our former Direct Division business segment. The revenue for those shipments has been restated, as well as for other orders that shipped earlier than the purchase order due date in the system for which we could not locate evidence that the OEM customers had requested or approved the shipments. In addition, we have concluded that, in the periods from 2015 through the fourth quarter of 2018, certain adjustments were incorrectly or erroneously made via manual journal entries to accrual/reserve accounts, including, but not limited to, a July 2017 adjustment to a product return provision in our former Direct Division. Due to these determinations, we concluded that our previously issued consolidated financial statements for fiscal years ended December 31, 2016, 2017 and 2018, and selected financial data for the years ended December 31, 2014 and 2015, and each of our unaudited condensed consolidated financial statements and related disclosures for the quarterly and year-to-date periods during such years, as well as the first three quarters of 2019, should be restated, and we have subsequently restated them. As a result of these errors and restatement, we are subject to additional risks and uncertainties, including those related to existing and potential litigation, governmental proceedings and investigations and lossany litigation that may arise, such insurance may be insufficient to cover all losses or all types of investor confidence. Such existing and potential litigation, proceedings and investigations could result in significant legal costs regardless of the outcome. If we are not successful in any such litigation, proceeding or investigation, weclaims that may also be required to pay substantial damages or settlement costs.In connection with this restatement of our prior consolidated financial statements, we have also identified material weaknesses in our internal control over financial reporting, and management has concluded that our internal control over financial reporting and disclosure controls and procedures were not effective as of December 31, 2018, December 31, 2019 or as of December 31, 2020. Remediation efforts, which remain ongoing, place a significant burden on management and add increased pressure to our financial resources and processes. For further discussion of the material weakness, see Item 9A. Controls and Procedures in our Annual Report on Form 10-K for the year ended December 31, 2020.There can be no guarantee that we will be able to remediate our material weaknesses. If we are unable to successfully remediate our existing or any future material weaknesses or other deficiencies in our internal control over financial reporting or disclosure controls and procedures, investors may lose confidence in our financial reporting and the accuracy and timing of our financial reporting and disclosures and our reputation, business, financial condition, results of operations and prospects, market value of our securities and ability to access the capital markets through debt issuances could be adversely affected.recently notified us that they are issuing a voluntary recall of their Cervalign® ACP System, for which we are a distributor, and is in the process of conducting an internal quality review of the system’s locking mechanism. In connection with the voluntary recall, we are asking our customers and distributors to return any inventory of the Cervalign® ACP System they have in their possession. We incurred a charge of approximately $2.2 million in the fourth quarter of 2020 as a result of our write-off of Cervalign® ACP System inventory. We do not know if or when our former OEM Businesses will redesign or resumeThe design has been modified, manufacturing of the Cervalign ACP System or if or when we will resume distributing this product orhas produced quality replacements, and commercialization resumed in a substitute product, and a prolonged suspension of our distribution could adversely affect our business, financial condition, results of operations and prospects. Furthermore, whilecontrolled manner in September 2021.Our future success is dependent upon our ability to increase penetration in our existing markets.Our customer base includes healthcare providers, hospitals and other healthcare facilities and various original equipment manufacturers in the United States and throughout the rest of the world. Our success will depend upon our ability to increase our market penetration among these customers and to expand our market by developing and marketing new products and new applications for existing products. We recently announced our acquisition of Holo Surgical Inc. and its ARAI platform to enable digital spine surgery and our future success will partially depend on our ability to commercialize this offering. As we continue to scale our business and integrate recent acquisitions, we may find that certain of our products, certain customers or certain markets may require different commercial models, or sales personnel with different experience, than those we currently employ. In addition, we are reorganizing our commercial organization to align with our strategy going forward. Identifying, recruiting and training additional qualified personnel to meet these initiatives requires significant time, expense and attention, and may not be successful.We cannot assure investors that we will be able to further penetrate our existing market or that the market will be able to sustain our current and future product offerings. Any failure to increase penetration in our existing markets would adversely affect our ability to improve our operating results.Furthermore, we believe that acceptance and recommendations by influential surgeons will be important to the broad commercial success of our implants and technologies. If our implants and technologies are not broadly accepted in the marketplace, we may not remain competitive in the market.Additionally, technologies change rapidly in the industry in which we operate. For example, pharmaceutical advances could result in non-surgical treatments gaining more widespread acceptance as a viable alternative to spinal surgery. The emergence of new biological or synthetic materials to facilitate regeneration of damaged or diseased bone and to repair damaged tissue could increasingly minimize or delay the need for spinal surgery and provide other alternatives to our implants. Further, the increased acceptance of emerging technologies that do not require spinal surgery, such as artificial discs and nucleus replacement, would reduce demand for or slow the growth of sales of our products. We may not be able to respond effectively to technological changes and emerging industry standards, or to successfully identify, develop or support new technologies or enhancements to existing implants in a timely and cost-effective manner, if at all.
assurance that we are able to do so. Any difficulty in hiring or retaining needed personnel, or increased costs related thereto, could have a material adverse effect on our business, financial condition, results of operations and prospects.
Additionally,
INN purchase agreement.
Common Stock.
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•Failure to derive the expected benefits of the acquisitions; |
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•Difficulty and expense of integrating the operations, technology and personnel of an acquired business; |
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•Our inability to retain the management, key personnel and other employees of an acquired business; |
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•Our inability to maintain relationships with customers and key third parties, such as alliance partners; |
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•Exposure to legal claims for activities of an acquired business prior to the acquisition; |
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•The potential need to implement financial and other systems and add management resources; |
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•The potential for internal control deficiencies in the internal controls of acquired operations; |
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•Potential inexperience in a business area that is either new to us or more significant to us than prior to an acquisition; |
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•The diversion of our management’s attention from our core business; |
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previously engaged, which may be challenging to integrate with our core product lines and more difficult to develop and manage than we anticipated.
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•Holo Surgical and INN are pre-revenue, development stage companies with no commercial operations; |
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•Holo Surgical’s and INN’s potential future profitability is dependent upon the successful development and successful commercial introduction and acceptance of their offerings, which may not occur in the timeframe we expect or at all; |
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•Our ability to obtain the requisite regulatory approvals from the FDA, the European Commission or other foreign regulatory authorities for Holo Surgical’s and INN’s offerings for us to begin marketing or selling such offerings, or any material delays in receiving such regulatory approvals; |
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•Complying with regulatory requirements applicable to the Holo Surgical and INN businesses and their offerings that we were not previously subject to; |
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•Difficulties in educating the market on, and obtaining market acceptance of, the offerings of Holo and INN, which we believe involve new technology that has not been used previously by the market and must compete with more established treatments currently accepted as the standards of care; |
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•Potential future challenges to, or third-party claims in respect of, our intellectual property rights underlying Holo Surgical and INN; |
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A disruption in our relationship with our former OEM Businesses could have a material adverse impact on our business, financial condition, and results of operations.
Our former OEM Businesses will continue to manufacture certain metal, synthetic and tissue-based implants and associated instrumentation and process certain sterilized allograft implants for us pursuant to distribution agreements with Ardi Bidco Ltd. and certain of its affiliates. During portions of the term of such distribution agreements, the OEM Businesses will also provide certain supply chain services (including warehousing and drop-shipment services) and design and development services to us. The distribution agreements will have an initial term of five years with a possibility of renewal. Our former OEM Businesses in the past have experienced and continue to experience delays, as a result of employee turnover or otherwise, which have and may in the future cause us to experience delays in receiving supplies under the distribution agreements. Any disruption in supply or a significant change in our relationship with the OEM Businesses could have a material adverse impact on our business, financial condition and results of operations. While we believe that there are alternate sources of supply that can satisfy our commercial requirements, we cannot be certain that identifying and establishing relationships with such sources, if necessary, would not result in significant delay or material additional costs.
to which we are subject. Further, we cannot predict whether, in the future, the U.S. or foreign governments may impose new regulations that have a material adverse effect on our business, financial condition, results of operations and prospects.
manufacturing and control data and proposed labeling, to demonstrate to the FDA’s satisfaction the safety and effectiveness of the device for its intended use. The PMA process is more costly and uncertain than the 510(k) clearance process, and generally takes between one and three years, if not longer. In addition, any modification to a 510(k)-cleared device that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, design or manufacture, requires a new 510(k) clearance or, possibly, a PMA. Modifications to products that are approved through a PMA application generally need FDA approval. Similarly, some modifications made to products cleared through a 510(k) application may require a new 510(k) application. Our commercial distribution and marketing of any products or product modifications that we develop will be delayed until regulatory clearance or approval is obtained. The FDA can delay, limit, or deny clearance or approval of a device for many reasons, including:
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•Our inability to demonstrate to the satisfaction of the FDA or the applicable regulatory entity or notified body that our products are safe or effective for their intended uses; |
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•The disagreement of the FDA or the applicable foreign regulatory body with the design or implementation of our clinical trials or the interpretation of data from pre-clinical studies or clinical trials; |
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•Serious and unexpected adverse device effects experienced by participants in our clinical trials; |
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•The data from our pre-clinical studies and clinical trials may be insufficient to support clearance or approval, where required; |
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•Delay or prevent commercialization of products we develop; |
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•Require us to perform costly tests or studies; |
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•Diminish any competitive advantages that we might otherwise have obtained; and |
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For example, the California Consumer Privacy Act (“CCPA”), which became effective on January 1, 2020, establishes additional data privacy rights for California residents, including expanded rights to access and delete their personal information, opt out of certain personal information sharing and receive detailed information about how their personal information is used. The CCPA also provides for civil penalties for violations, as well as a private right of action for data breaches that is expected to increase data breach litigation. In addition, on November 3, 2020, California voters approved a new privacy law, the California Privacy Rights Act (“CPRA”), which significantly modifies the CCPA, including by expanding consumers’ rights with respect to certain personal information and creating a new state agency to oversee implementation and enforcement efforts. Many of the CPRA’s provisions will become effective on January 1, 2023. It remains unclear what, if any, further modifications will be made to this legislation or how it will be interpreted. Similar laws have been proposed in other states and at the federal level, and if passed, such laws may have potentially conflicting requirements that would make compliance challenging.
Recent legal developments in Europe have created compliance uncertainty regarding certain transfers of personal data from Europe to the United States. For example, the General Data Protection Regulation (EU 2016/679) (“GDPR”), which became effective in the European Union (the “EU”) on May 25, 2018, applies to our activities conducted from an establishment in the EU or related to products and services that we offer to EU customers. The GDPR created a range of new compliance obligations, which could cause us to change our business practices, and will significantly increase financial penalties for noncompliance. In addition, the European Commission in July 2016 and the Swiss Government in January 2017 approved the EU-U.S. and the Swiss-U.S. Privacy Shield frameworks, respectively, which are designed to allow U.S. companies that self-certify to the U.S. Department of Commerce and publicly commit to comply with the Privacy Shield requirements to freely import personal data from the EU and Switzerland. However, these frameworks face a number of legal challenges, and their validity remains subject to legal, regulatory and political developments in both the EU and the United States. For example, on July 16, 2020, the Court of Justice of the EU invalidated the EU-US Privacy Shield Framework. This has resulted in some uncertainty, and compliance obligations could cause us to incur costs or require us to change our business practices in a manner adverse to our business.
The Affordable Care Act has sought to link the violations of the Anti-Kickback Statute with violations of the False Claims Act, making it arguably easier for the government or for whistleblowers, acting in the name of the government, to sue medical manufactures under the False Claims Act.
Our success depends in part on our ability to operate without infringing on, misappropriating, or otherwise violating the intellectual property and proprietary rights of others, and if we are unable to do so we may be liable for damages.
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The future issuance or sale of shares of our common stock, or the perception that such issuances or sales could occur, may negatively impact our stock price and you may experience significant dilution, as a result of future issuances of our securities.
If securities analysts do not continue to publish research or reports about our business or if they publish negative evaluations of our stock, the price of our stock could decline.
The trading price for our common stock relies, in part, on the research and reports that industry or financial analysts publish about us or our business. If few analysts publish research or reports about us, the trading price of our stock would likely decrease. If one or more of the analysts covering our business downgrade their evaluations of our stock, the price of our stock could decline. If one or more of these analysts cease to cover our stock, we could lose visibility in the market for our stock, which, in turn, could cause our stock price to decline.
Further, pursuant to the Master Transaction Agreement, dated as of November 1, 2018, pursuant to which we acquired Paradigm, we will be obligated to pay some or all of the milestone payments thereunder that remain unpaid — whether or not we have achieved the milestones — upon a change in control of our company prior to December 31, 2022. In addition, under the Holo Surgical Purchase Agreement, any surviving entity or acquiror in a change of control transaction involving our company will be required to assume any outstanding milestone obligations thereunder. These milestone payments and obligations could likewise discourage or disincentivize a change of control of our company that our stockholders might deem advantageous.
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In Marquette, Michigan, we lease 2,755 square feet for general and administrative functions.
The Netherlands
On January 1, 2020, the Company exited the
We believe that we have sufficient spacefeet for product development, test, research, and facilities to meet our current and foreseeable future needs.
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Investigation.
formerly-owned formerly owned OEM Businesses, goods were shipped and received by the customers before requested delivery dates and agreed-upon delivery windows. In many instances the OEM customers requested or approved the early shipments, but the Company determined that on other occasions the goods were delivered early without obtaining the customers’ affirmative approval. Some of those unapproved shipments were shipped by employees in order to generate additional revenue and resulted in shipments being pulled from a future quarter into an earlier quarter. In addition, the Company concluded that in July 2017 an adjustment was improperly made to a product return provision in the former Direct Division. The revenue for those shipments was restated, as well as for other orders that shipped earlier than the purchase order due date in the system for which the Company could not locate evidence that the OEM customers had requested or approved the shipments. In addition, the Company concluded that in the periods from 2015 through the fourth quarter of 2018, certain adjustments were incorrectly or erroneously made via manual journal entries to accrual/reserve accounts, including a July 2017 adjustment to a product return provision in the Direct Division, among others. Accordingly, the Company restated its financial statements to correct these adjustments.
There is currently ongoing
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Period |
| Total Number of Shares Purchased(1) |
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| Average Price Paid per Share |
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| Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
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| Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs |
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January 1, 2020 to January 31, 2020 |
|
| 7,215 |
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| $ | 2.69 |
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|
| — |
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| — |
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February 1, 2020 to February 29, 2020 |
|
| 48,653 |
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| $ | 3.93 |
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| — |
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| — |
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March 1, 2020 to March 31, 2020 |
|
| 1,287 |
|
| $ | 2.10 |
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| — |
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| — |
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April 1, 2020 to April 30, 2020 |
|
| 7,385 |
|
| $ | 2.47 |
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|
| — |
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|
| — |
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May 1, 2020 to May 31, 2020 |
|
| 8,018 |
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| $ | 2.63 |
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| — |
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|
| — |
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June 1, 2020 to June 30, 2020 |
|
| — |
|
| $ | — |
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| — |
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| — |
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July 1, 2020 to July 31, 2020 |
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| 80,486 |
|
| $ | 3.17 |
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| — |
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| — |
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August 1, 2020 to August 31, 2020 |
|
| 1,194 |
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| $ | 2.67 |
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| — |
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| — |
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September 1, 2020 to September 30, 2020 |
|
| 797 |
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| $ | 1.92 |
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| — |
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| — |
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October 1, 2020 to October 31, 2020 |
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| — |
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| $ | — |
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| — |
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| — |
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November 1, 2020 to November 30, 2020 |
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| 4,319 |
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| $ | 2.26 |
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| — |
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| — |
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December 1, 2020 to December 31, 2020 |
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| — |
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| $ | — |
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| — |
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| — |
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Total |
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| 159,354 |
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| $ | 3.35 |
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| — |
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| — |
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| Period | Total Number of Shares Purchased(1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | ||||||||||||||||||||||
| January 1, 2021 to January 31, 2021 | 7,294 | $ | 2.19 | — | — | |||||||||||||||||||||
| February 1, 2021 to February 28, 2021 | 39,589 | $ | 2.51 | — | — | |||||||||||||||||||||
| March 1, 2021 to March 31, 2021 | — | $ | — | — | — | |||||||||||||||||||||
| April 1, 2021 to April 30, 2021 | 9,796 | $ | 2.05 | — | — | |||||||||||||||||||||
| May 1, 2021 to May 31, 2021 | — | $ | — | — | — | |||||||||||||||||||||
| June 1, 2021 to June 30, 2021 | 717 | $ | 1.39 | — | — | |||||||||||||||||||||
| July 1, 2021 to July 31, 2021 | 6,528 | $ | 1.27 | — | — | |||||||||||||||||||||
| August 1, 2021 to August 31, 2021 | 923 | $ | 1.09 | — | — | |||||||||||||||||||||
| September 1, 2021 to September 30, 2021 | 11,143 | $ | 1.43 | — | — | |||||||||||||||||||||
| October 1, 2021 to October 31, 2021 | 23,763 | $ | 1.03 | — | — | |||||||||||||||||||||
| November 1, 2021 to November 30, 2021 | 788 | $ | 1.11 | — | — | |||||||||||||||||||||
| December 1, 2021 to December 31, 2021 | 8,477 | $ | 0.72 | — | — | |||||||||||||||||||||
| Total | 109,018 | $ | 1.91 | — | — | |||||||||||||||||||||
Stock Performance Graph
Total Return Analysis |
| 2016 |
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| 2017 |
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| 2018 |
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| 2019 |
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| 2020 |
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Surgalign Holdings, Inc. |
| $ | 81.86 |
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| $ | 103.27 |
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| $ | 93.20 |
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| $ | 69.02 |
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| $ | 55.16 |
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NASDAQ Composite |
| $ | 108.87 |
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| $ | 141.13 |
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| $ | 137.12 |
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| $ | 187.44 |
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| $ | 271.64 |
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S&P 500 Health Care Equipment Index |
| $ | 106.48 |
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| $ | 139.38 |
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| $ | 162.02 |
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| $ | 209.52 |
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| $ | 246.47 |
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Item 6. SELECTED FINANCIAL DATA. Not applicable. 33 Item |
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The statement of operations data set forth below for the years ended December 31, 2020, 2019 and 2018, and selected balance sheet data as of December 31, 2020 and 2019 have been derived from our audited consolidated financial statements and accompanying notes. The consolidated financial statements as of December 31, 2020 and 2019 and for the three years ended December 31, 2020 are included elsewhere in this Form 10-K. The selected consolidated financial data for 2020, 2019, 2018 and 2017 set forth below has been recast for discontinued operations. The selected consolidated financial data set forth below should be read along with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements and accompanying notes included elsewhere in this document.
The statement of operations data set forth below for the year ended December 31, 2016, and the balance sheet data set forth as of December 31, 2016, have not been recast for discontinued operations, are unaudited and have been derived from our accounting records. There is sufficient information regarding the trend of income from continuing operations and the future cash flows in the presentation of the first four years, as well as throughout the financial statements where discontinued operations is presented, which would preclude the need to recast the 2016 financial statement data. Accordingly, such data set forth below is not comparable to the subsequent periods presented.
The selected financial data as of and for the years ended December 31, 2020, 2019 and 2018 reflect our adoption of Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (“Topic 606”). The selected financial data as of and for the years ended December 31, 2020 and 2019 also reflects our adoption of the FASB issued ASU 2016-02, Leases (“Topic 842”). Finally, the selected financial data as of and for the year ended December 31, 2020 reflects our adoption of the FASB issued ASU 2016-13, Financial Instruments — Credit Losses: Measurement of Credit Losses on Financial Instruments (“Topic326”). See Note 4, Leases, and Note 6, Revenue from Contracts with Customers.
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| Year Ended December 31, |
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| 2020 |
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| 2019 |
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| 2018 |
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| 2017 |
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| 2016 |
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| (In thousands, except share and per share data) |
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Statements of Operations Data: |
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Revenues |
| $ | 101,749 |
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| $ | 117,423 |
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| $ | 92,112 |
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| $ | 90,281 |
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| $ | 275,984 |
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Costs of goods sold |
|
| 44,002 |
|
|
| 32,777 |
|
|
| 33,593 |
|
|
| 36,441 |
|
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| 142,657 |
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Gross profit |
|
| 57,747 |
|
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| 84,646 |
|
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| 58,519 |
|
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| 53,840 |
|
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| 133,327 |
|
Expenses: |
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|
|
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Marketing, general and administrative |
|
| 124,390 |
|
|
| 135,396 |
|
|
| 98,152 |
|
|
| 90,790 |
|
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| 116,666 |
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Research and development |
|
| 11,947 |
|
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| 16,836 |
|
|
| 14,410 |
|
|
| 13,315 |
|
|
| 16,297 |
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Severance and restructuring costs |
|
| 34 |
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| — |
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| 773 |
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| 8,522 |
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| 1,039 |
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Loss (Gain) on acquisition contingency |
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| 4,753 |
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| (76,033 | ) |
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| — |
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| — |
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| — |
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Asset acquisition expenses |
|
| 94,999 |
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| — |
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| — |
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| — |
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| — |
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Strategic review costs |
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| — |
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| — |
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|
| — |
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| — |
|
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| 1,150 |
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Executive transition costs |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,818 |
|
|
| 4,404 |
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Contested proxy expenses |
|
| — |
|
|
| — |
|
|
| — |
|
|
| - |
|
|
| 2,680 |
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Asset impairment and abandonments |
|
| 14,773 |
|
|
| 97,341 |
|
|
| 5,070 |
|
|
| 442 |
|
|
| 5,241 |
|
Goodwill impairment |
|
| — |
|
|
| 140,003 |
|
|
| — |
|
|
| — |
|
|
| 1,107 |
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Transaction and integration expenses |
|
| 4,872 |
|
|
| 13,999 |
|
|
| 4,928 |
|
|
| 630 |
|
|
| — |
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Total operating expenses |
|
| 255,768 |
|
|
| 327,542 |
|
|
| 123,333 |
|
|
| 116,517 |
|
|
| 148,584 |
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Operating loss |
|
| (198,021 | ) |
|
| (242,896 | ) |
|
| (64,814 | ) |
|
| (62,677 | ) |
|
| (15,257 | ) |
Other (expense) income: |
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Interest expense |
|
| (31 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,655 | ) |
Interest income |
|
| 92 |
|
|
| 161 |
|
|
| 35 |
|
|
| 8 |
|
|
| 8 |
|
Foreign exchange gain (loss) |
|
| 279 |
|
|
| (122 | ) |
|
| (29 | ) |
|
| 38 |
|
|
| (129 | ) |
Total other income (expense) - net |
|
| 340 |
|
|
| 39 |
|
|
| 6 |
|
|
| 46 |
|
|
| (1,776 | ) |
Loss before income tax (provision) benefit |
|
| (197,681 | ) |
|
| (242,857 | ) |
|
| (64,808 | ) |
|
| (62,631 | ) |
|
| (17,033 | ) |
Income tax benefit (provision) |
|
| 3,486 |
|
|
| (5,921 | ) |
|
| 15,159 |
|
|
| 18,227 |
|
|
| 3,228 |
|
Net loss from continuing operations |
|
| (194,195 | ) |
|
| (248,778 | ) |
|
| (49,649 | ) |
|
| (44,404 | ) |
|
| (13,805 | ) |
Discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations |
|
| 179,934 |
|
|
| 48,452 |
|
|
| 57,417 |
|
|
| 88,886 |
|
|
| — |
|
Income tax provision |
|
| (19,522 | ) |
|
| (11,316 | ) |
|
| (10,891 | ) |
|
| (37,576 | ) |
|
| — |
|
Net income from discontinued operations |
|
| 160,412 |
|
|
| 37,136 |
|
|
| 46,526 |
|
|
| 51,310 |
|
|
| — |
|
Net (loss) income |
|
| (33,783 | ) |
|
| (211,642 | ) |
|
| (3,123 | ) |
|
| 6,906 |
|
|
| (13,805 | ) |
Convertible preferred dividend |
|
| - |
|
|
| — |
|
|
| (2,120 | ) |
|
| (3,723 | ) |
|
| (3,508 | ) |
Net (loss) income applicable to common shares |
| $ | (33,783 | ) |
| $ | (211,642 | ) |
| $ | (5,243 | ) |
| $ | 3,183 |
|
| $ | (17,313 | ) |
Net loss from continuing operations per common share - basic |
| $ | (2.61 | ) |
| $ | (3.55 | ) |
| $ | (0.85 | ) |
| $ | (0.83 | ) |
| $ | (0.30 | ) |
Net income from discontinued operations per common share - basic |
| $ | 2.16 |
|
| $ | 0.53 |
|
| $ | 0.76 |
|
| $ | 0.89 |
|
| $ | — |
|
Net (loss) income per common share - basic |
| $ | (0.45 | ) |
| $ | (3.02 | ) |
| $ | (0.09 | ) |
| $ | 0.06 |
|
| $ | (0.30 | ) |
Net loss from continuing operations per common share - diluted |
| $ | (2.61 | ) |
| $ | (3.55 | ) |
| $ | (0.85 | ) |
| $ | (0.81 | ) |
| $ | (0.30 | ) |
Net income from discontinued operations per common share - diluted |
| $ | 2.16 |
|
| $ | 0.53 |
|
| $ | 0.76 |
|
| $ | 0.86 |
|
| $ | — |
|
Net (loss) income per common share - diluted |
| $ | (0.45 | ) |
| $ | (3.02 | ) |
| $ | (0.09 | ) |
| $ | 0.05 |
|
| $ | (0.30 | ) |
Weighted average shares outstanding - basic |
|
| 74,403,155 |
|
|
| 70,150,492 |
|
|
| 61,031,265 |
|
|
| 57,678,360 |
|
|
| 58,236,745 |
|
Weighted average shares outstanding - diluted |
|
| 74,403,155 |
|
|
| 70,150,492 |
|
|
| 61,031,265 |
|
|
| 59,078,141 |
|
|
| 58,236,745 |
|
|
| As of December 31, |
| |||||||||||||||||
|
| 2020 |
|
| 2019 |
|
| 2018 |
|
| 2017 |
|
| 2016 |
| |||||
Balance Sheet for Continued Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 43,962 |
|
| $ | 5,608 |
|
| $ | 10,949 |
|
| $ | 22,381 |
|
| $ | 13,849 |
|
Working capital |
|
| 57,359 |
|
|
| 31,673 |
|
|
| 31,422 |
|
|
| 51,997 |
|
|
| 120,615 |
|
Total assets |
|
| 122,704 |
|
|
| 70,276 |
|
|
| 98,490 |
|
|
| 99,308 |
|
|
| 367,955 |
|
Long-term Debt |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 77,267 |
|
Redeemable preferred stock |
|
| — |
|
|
| 66,410 |
|
|
| 66,226 |
|
|
| 63,923 |
|
|
| 60,016 |
|
Total stockholders' equity |
|
| 24,170 |
|
|
| 34,564 |
|
|
| 181,531 |
|
|
| 181,517 |
|
|
| 164,060 |
|
|
|
You should read the following discussion of our financial condition and results of operations together with those financial statements and the notes to those statements included elsewhere in this filing. This discussion contains forward lookingforward-looking statements based on our current expectations, assumptions, estimates and projections about us and our industry. Our actual results could differ materially from those anticipated in these forward lookingforward-looking statements. We undertake no obligation to update publicly any forward lookingforward-looking statements for any reason, even if new information becomes available or other events occur in the future.
Our product portfolio of spinal hardware implants and biomaterials products address an estimated $12.7$13.6 billion global spine market. We estimate that our current portfolio addresses nearly 87% of all surgeries utilizing spinal hardware implants and approximately 70% of the biomaterials used in spine-related uses. Our portfolio of spinal hardware implants consists of a broad line of solutions for spinal fusion in minimally invasive surgery (“MIS”), deformity, and degenerative procedures; motion preservation solutions indicated for use in one-one or two-level disease; and an implant system designed to relieve sacroiliac joint pain. Our biomaterials products consist of a broad range of advanced and traditional bone graft substitutes that are designed to improve bone fusion rates following spinal surgery.
To complement our spinal hardware and biomaterials portfolios, we are developing a proprietary digital surgery platform called ARAI, which is a freestanding surgical guidance system that combines 3D visualization, data analytics, and machine learning, without interrupting the current surgical workflow. We believe it is one of the most advanced artificial intelligence technologies being applied to
surgery, designed to automatically segment, identify, and recognize patient anatomy to autonomously assist the surgeon throughout the procedure. ARAI has been designed to address the limitations of current computer-assisted spine surgery and spine robotics systems that lack 3D visualization, patient anatomy recognition, and data analytics and that may have long setup requirements and lengthy registration times that can add significant amounts of time to the overall procedure.
ARAI combines (i) advanced augmented reality to provide the surgeon with an “X-ray vision”-like 3D overlay rendering of the patient’s anatomy, (ii) automated image processing and modular spine level identification and segmentation so the system knows the patient’s anatomy to enhance navigation, (iii) autonomous planning software and implant selection, and (iv) artificial intelligence and predictive analytics to provide autonomous guidance for preoperative and intraoperative surgeon decision-making. ARAI’s artificial intelligence has the ability to recognize the difference between patient anatomy, such as a nerve root and a blood vessel, and help identify anatomy within complex areas of the spine, where it is easy to miscount levels. ARAI has been designed with a unique setup process of quickly establishing the synchronization between virtual images and the patient’s real anatomy, a process called registration. Many other computer-assisted spine surgery and robotics systems have long setup requirements and registration times that can result in surgery delays, leading to inefficiencies that are cited as a major reason why surgeons have not yet widely adopted navigation and robotic technology. ARAI has been designed to provide surgeons with real-time perioperative information such as alerts and suggestions to ensure the correct operative plan is being followed, decrease surgical complications, reduce surgical times, and improve patient outcomes. We plan to make an FDA 510(k) premarket submission for our ARAI platform in the first quarter of 2021 and submit a CE mark application in Europe in 2022.
We plan to develop and commercialize several next-generation features for the ARAI platform, including smart instrumentation, integration with robotic platforms, patient-specific 3D printed implants, and diagnostic and predictive analytics. These surgical devices will be designed with tracking technology intended to allow real-time 3D visualization and positioning of the instruments in the surgical field and autonomous safety features to aid in surgical precision and help avoid potential damage to surrounding tissue and neurological structures. We are designing ARAI to be integrated with existing robotic platforms to make them “smart” by identifying relevant anatomy. In addition, we are designing the ARAI platform with a software application to enable patient-specific implants with exact dimensions, shape, and contour based on a patient’s specific bone density and height. We are also developing a novel diagnostic and predictive analytics capability using machine learning that leverages a large volume of patient data with known outcomes to allow for autonomous identification of spinal pathology.
We have aligned our core business principles with a focused business strategy of digital health that we believe will advance and scale our business with the ultimate goal of delivering on our promise to provide better patient outcomes. To support this effort, we have assembled a spine-industrydigital health experienced executive leadership team to execute against our growth strategy, which includes leveraging our digital surgery platform to improve patient outcomes and drive adoption of our spinal hardware implants and biomaterials products, developing and commercializing an increased cadence of innovative spinal hardware implants and biomaterials products, validating our innovative products with clinical evidence, growing our international business, and strategically pursuing acquisition, license, and distribution opportunities.
Sale of OEM Businesses, Retirement of Debt and Redemption of Preferred Stock
On July 20, 2020, pursuant to the OEM Purchase Agreement, by and between us and Ardi Bidco Ltd. (the “Buyer”), the Company sold the OEM Businesses to Buyer and its affiliates for a purchase price of $440 million of cash, subject to certain adjustments. In connection therewith on July 20, 2020, we (i) paid in full our $80 million revolving credit facility under that certain Credit Agreement dated as of June 5, 2018 (the “2018 Credit Agreement”), by and among Surgalign Spine Technologies, Inc. (formerly known as RTI Surgical, Inc. (“Legacy RTI”)), as a borrower, Pioneer Surgical Technology, Inc. (“Pioneer Surgical”), our wholly-owned subsidiary, as a borrower, the other loan parties thereto as guarantors (together, with Legacy RTI and Pioneer Surgical, the “JPM Loan Parties”), JPMorgan Chase Bank, N.A. (“JPM”), as lender (together with the various financial institutions as in the future may become parties thereto, the “JPM Lenders”) and as administrative agent for the JPM Lenders, as amended, (ii) terminated the 2018 Credit Agreement, (iii) paid in full our $100 million term loan and $30 million incremental term loan commitment under that certain Second Lien Credit Agreement, dated as of March 8, 2019 (the “2019 Credit Agreement”), by and among Surgalign Spine Technologies, Inc., as borrower, the lenders party thereto from time to time and Ares Capital Corporation (“Ares”), as administrative agent for the other lenders party thereto (the “Ares Lenders”), as amended and (iv) terminated the 2019 Credit Agreement.
On July 17, 2020, we received a notification from WSHP Biologics Holdings, LLC, an affiliate of Water Street Healthcare Partners (“WHSP”), seeking redemption on or before September 14, 2020 of all of the outstanding shares of the Series A Preferred Stock, all of which are held by WSHP. On July 24, 2020, we redeemed the Series A Preferred Stock for approximately $67 million, a Certificate
of Retirement was filed with the Delaware Secretary of State retiring the Series A Preferred Stock, and the WSHP representatives on the Company’s Board of Directors, Curtis M. Selquist and Chris Sweeney resigned from the Board of Directors.
On December 1, 2020, pursuant to the OEM Purchase Agreement, we received a notice from the Buyer indicating that a post-closing adjustment in an amount of up to $14 million may be owed in respect of the working capital adjustment paid at closing. We disagree with Buyer’s proposed post-closing adjustment and are disputing the adjustment in accordance with the terms of the OEM Purchase Agreement.
The OEM Businesses met the criteria within ASC 205-20 to be reported as discontinued operations because the Transactions were a strategic shift in business that had a major effect on our operations and financial results. Therefore, we are reporting the historical results of the OEM Businesses including the results of operations and cash flows as discontinued operations, and related assets and liabilities were retrospectively reclassified as assets and liabilities of discontinued operations for all periods presented herein. Unless otherwise noted, applicable amounts in the prior year have been recast to conform to this discontinued operations presentation.
Acquisition
On October 23, 2020 we completed the acquisition of Holo Surgical Inc. (“Holo Surgical”) pursuant to the Stock Purchase Agreement, dated as of September 29, 2020 (the “Holo Purchase Agreement”), by and among us, Roboticine, Inc. (the “Seller”) and the other parties signatory thereto. Holo Surgical is a private technology company currently developing the ARAI platform, a differentiated digital spine surgery technology. As consideration for the transactions contemplated by the Holo Surgical Purchase Agreement, at closing, we paid to the Seller $30 million in cash and issued to the Seller 6,250,000 shares of our common stock with a fair value of $12.3 million. In addition, the Seller will be entitled to receive contingent consideration from us valued in an aggregate amount of $50.6 million as of October 23, 2020, which must be first paid in shares of our common stock (in an amount up to 8,650,000 shares) and then paid in cash thereafter, 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 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. In connection with the contingent consideration, we have agreed not to take certain actions that could affect the ability to achieve the milestones related to the contingent consideration.
Acquisitions
On January 1, 2020, we adopted ASU 2016-13, Financial Instruments — Credit Losses(Topic326): Measurement of Credit Losses on Financial Instruments (“the CECL standards”). The adoption did not have material impact on our condensed consolidated financial statements.
Excess and Obsolete Inventory Valuation. Our calculation of the amount of inventory that is excess, obsolete, or will expire prior to sale has two components: 1) a demand or consumption based component that compares projected sales, expected consumption and historical sales to inventory quantities on hand; and 2) for expiring inventory we assesses the risk related to inventory that is near expiration by analyzing historical expiration trends to project inventory that will expire prior to being sold. Our demand baseddemand-based consumption model assumes that inventory will be sold on a first-in-first-out basis. Our metal inventory does not expire and can be re-sterilized and sold; however, we assess quantities on hand, historical sales, projected sales, projected consumption, the number of forecasted years, safety stock and those products we have determined to sunset when calculating the estimate.
Before 2020, we maintained allowances for doubtful accounts based on our review and assessment of payment history and our estimate of the ability of each customer to make payments on amounts invoiced. If the financial condition of any of our customers were to deteriorate, additional allowances might be required. From time to time we must adjust our estimates. Changes in estimates of the collection risk related to accounts receivable can result in decreases and increases to current period net income.
Goodwill. Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) 350, Goodwill and Other Intangible Assets, requires companies to test goodwill for impairment on an annual basis at the reporting unit level (or an interim basis if an event occurs that might reduce the fair value of a reporting unit below its carrying value). We have one reporting unit and the annual impairment test is performed at each year-end unless indicators of impairment are present and require more frequent testing. Goodwill is tested for impairment by comparing the fair value of the reporting unit to its carrying amount, including goodwill.
The income approach employs a discounted cash flow model that considers: (1) assumptions that marketplace participants would use in their estimates of fair value, including the cash flow period, terminal values based on a terminal growth rate and the discount rate; (2) current period actual results; and (3) projected results for future periods that have been prepared and approved by our senior management.
The market approach employs market multiples from guideline public companies operating in our industry. Estimates of fair value are derived by applying multiples based on revenue and earnings before interest, taxes, depreciation and amortization (“EBITDA”) adjusted for size and performance metrics relative to peer companies. A control premium was included in determining the fair value under this approach.
The cost approach considers the replacement cost adjusted for certain factors. Certain balance sheet items were adjusted to fair value before being utilized in estimating the value of the reporting units under the cost approach, including inventory, property and equipment, right of use assets, and other intangible assets.
All three approaches used in the analysis have a degree of uncertainty. Potential events or changes in circumstances which could impact the key assumptions used in our goodwill impairment evaluation are as follows:
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|
|
|
|
|
The valuation of goodwill requires management to use significant judgments and estimates including, but not limited to, projected future revenue and cash flows, along with risk-adjusted weighted average cost of capital. Changes in assumptions or market conditions could result in a change in estimated future cash flows and the likelihood of materially different reported results.
Goodwill represents the excess of purchase price over fair value of tangible net assets of acquired businesses at the acquisition date, after amounts allocated to other identifiable intangible assets. Factors that contribute to the recognition of goodwill include securing synergies that are specific to our business, not available to other market participants, and are expected to increase revenues and profits; acquisition of a talented workforce; cost savings opportunities; the strategic benefit of expanding our presence in core and adjacent markets; and diversifying our product portfolio. As of December 31, 2020, there is not any goodwill recorded on the balance sheet.
Other Intangible Assets. Other intangible assets, which constitutes finite lives assets, generally consist of patents, acquired exclusivity rights, licensing rights, distribution agreements, and procurement contracts. Patents are amortized on the straight-line method over the shorter of the remaining protection period or estimated useful lives of between 8 and 16 years. Tradenames, procurement contracts, customer lists, acquired exclusivity rights, and distribution agreements are amortized over estimated useful lives of between 5 to 25 years. For the years ended December 31, 2020, 2019 and 2018, the amortization expense for intangible assets is $0.9 million, $10.7 million and $3.6 million, respectively.
Revenue Recognition. 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, respectively based on the terms of the contract.
Stock-Based Compensation Plans. We accountThe Company accounts for our stock-based compensation plansits warrants in accordance with FASB ASC 718, Accounting815-40, “Derivatives and Hedging—Contracts in Entity’s Own Equity” (“ASC 815”), under which the warrants did not meet the criteria for Stock Compensation (“FASBequity
its warrants based on the Black Scholes Option Pricing Model.
|
| Year Ended December 31, |
| Year Ended December 31, | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
| 2020 |
|
| 2019 |
|
| 2018 |
| 2021 | 2020 | 2019 | |||||||||||||||||||||||||||||||||||||||||||||||
|
| (Dollars in thousands) |
| (Dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Statement of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Statement of Operations Data: | ||||||||||||||||||||||||||||||||||
Revenues |
| $ | 101,749 |
|
|
| 100.0 | % |
| $ | 117,423 |
|
|
| 100.0 | % |
| $ | 92,112 |
|
|
| 100.0 | % | Revenues | $ | 90,500 | 100.0 | % | $ | 101,749 | 100.0 | % | $ | 117,423 | 100.0 | % | ||||||||||||||||||||||
Costs of goods sold |
|
| 44,002 |
|
|
| 43.2 |
|
|
| 32,777 |
|
|
| 27.9 |
|
|
| 33,593 |
|
|
| 36.5 |
| Costs of goods sold | 29,775 | 32.9 | 44,002 | 43.2 | 32,777 | 27.9 | ||||||||||||||||||||||||||||
Gross profit |
|
| 57,747 |
|
|
| 56.8 |
|
|
| 84,646 |
|
|
| 72.1 |
|
|
| 58,519 |
|
|
| 63.5 |
| Gross profit | 60,725 | 67.1 | 57,747 | 56.8 | 84,646 | 72.1 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||
Marketing, general and administrative |
|
| 124,390 |
|
|
| 122.3 |
|
|
| 135,396 |
|
|
| 115.3 |
|
|
| 98,152 |
|
|
| 106.6 |
| |||||||||||||||||||||||||||||||||||
| Operating Expenses: | Operating Expenses: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| General and administrative | General and administrative | 104,668 | 115.7 | 124,424 | 122.3 | 135,396 | 115.3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Research and development |
|
| 11,947 |
|
|
| 11.7 |
|
|
| 16,836 |
|
|
| 14.3 |
|
|
| 14,410 |
|
|
| 15.6 |
| Research and development | 13,888 | 15.3 | 11,947 | 11.7 | 16,836 | 14.3 | ||||||||||||||||||||||||||||
Severance and restructuring costs |
|
| 34 |
|
|
| 0.0 |
|
|
| — |
|
|
| — |
|
|
| 773 |
|
|
| 0.8 |
| |||||||||||||||||||||||||||||||||||
Loss (Gain) on acquisition contingency |
|
| 4,753 |
|
|
| 4.7 |
|
|
| (76,033 | ) |
|
| (64.8 | ) |
|
| — |
|
|
| — |
| Loss (Gain) on acquisition contingency | (4,587) | (5.1) | 4,753 | 4.7 | (76,033) | (64.8) | ||||||||||||||||||||||||||||
Asset acquisition expenses |
|
| 94,999 |
|
|
| 93.4 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
| Asset acquisition expenses | 72,087 | 79.7 | 94,999 | 93.4 | — | — | ||||||||||||||||||||||||||||
Asset impairment and abandonments |
|
| 14,773 |
|
|
| 14.5 |
|
|
| 97,341 |
|
|
| 82.9 |
|
|
| 5,070 |
|
|
| 5.5 |
| Asset impairment and abandonments | 12,195 | 13.5 | 14,773 | 14.5 | 97,341 | 82.9 | ||||||||||||||||||||||||||||
Goodwill impairment |
|
| — |
|
|
| — |
|
|
| 140,003 |
|
|
| 119.2 |
|
|
| — |
|
|
| — |
| Goodwill impairment | — | — | — | — | 140,003 | 119.2 | ||||||||||||||||||||||||||||
Transaction and integration expenses |
|
| 4,872 |
|
|
| 4.8 |
|
|
| 13,999 |
|
|
| 11.9 |
|
|
| 4,928 |
|
|
| 5.4 |
| Transaction and integration expenses | 3,689 | 4.1 | 4,872 | 4.8 | 13,999 | 11.9 | ||||||||||||||||||||||||||||
Total operating expenses |
|
| 255,768 |
|
|
| 251.4 |
|
|
| 327,542 |
|
|
| 278.9 |
|
|
| 123,333 |
|
|
| 133.9 |
| Total operating expenses | 201,940 | 223.1 | 255,768 | 251.4 | 327,542 | 278.8 | ||||||||||||||||||||||||||||
| Other operating income, net | Other operating income, net | (3,932) | (4.3) | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Operating loss |
|
| (198,021 | ) |
|
| (194.6 | ) |
|
| (242,896 | ) |
|
| (206.9 | ) |
|
| (64,814 | ) |
|
| (70.4 | ) | Operating loss | (137,283) | (151.7) | (198,021) | (194.6) | (242,896) | (206.7) | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||
Other (expense) income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||
Interest expense |
|
| (31 | ) |
|
| (0.0 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
| |||||||||||||||||||||||||||||||||||
Interest income |
|
| 92 |
|
|
| 0.1 |
|
|
| 161 |
|
|
| 0.1 |
|
|
| 35 |
|
|
| 0.0 |
| |||||||||||||||||||||||||||||||||||
Foreign exchange gain (loss) |
|
| 279 |
|
|
| 0.3 |
|
|
| (122 | ) |
|
| (0.1 | ) |
|
| (29 | ) |
|
| (0.0 | ) | |||||||||||||||||||||||||||||||||||
Total other income - net |
|
| 340 |
|
|
| 0.3 |
|
|
| 39 |
|
|
| 0.0 |
|
|
| 6 |
|
|
| 0.0 |
| |||||||||||||||||||||||||||||||||||
Loss from continuing operations before income tax benefit (provision) |
|
| (197,681 | ) |
|
| (194.3 | ) |
|
| (242,857 | ) |
|
| (206.8 | ) |
|
| (64,808 | ) |
|
| (70.4 | ) | |||||||||||||||||||||||||||||||||||
Income tax benefit (provision) |
|
| 3,486 |
|
|
| 3.4 |
|
|
| (5,921 | ) |
|
| (5.0 | ) |
|
| 15,159 |
|
|
| 16.5 |
| |||||||||||||||||||||||||||||||||||
| Other (income) expense - net: | Other (income) expense - net: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other (income) expense - net | Other (income) expense - net | (202) | (0.2) | (61) | 0.1 | (161) | 0.1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign exchange loss (gain) | Foreign exchange loss (gain) | 1,447 | 1.6 | (279) | 0.3 | 122 | (0.1) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Change in fair value of warrant liability | Change in fair value of warrant liability | (14,736) | (16.3) | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total other (income) expense - net | Total other (income) expense - net | (13,491) | (14.9) | (340) | 0.4 | (39) | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Loss before income tax (benefit) provision | Loss before income tax (benefit) provision | (123,792) | (136.8) | (197,681) | (194.3) | (242,857) | (206.8) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Income tax (benefit) provision | Income tax (benefit) provision | (886) | (1.0) | (3,486) | 3.4 | 5,921 | (5.0) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Net loss from continuing operations |
|
| (194,195 | ) |
|
| (190.9 | ) |
|
| (248,778 | ) |
|
| (211.9 | ) |
|
| (49,649 | ) |
|
| (53.9 | ) | Net loss from continuing operations | (122,906) | (135.8) | (194,195) | (190.9) | (248,778) | (211.9) | ||||||||||||||||||||||||||||
Discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Discontinued operations | ||||||||||||||||||||||||||||||||||
Income from operations of discontinued operations |
|
| 179,934 |
|
|
| 176.8 |
|
|
| 48,452 |
|
|
| 41.3 |
|
|
| 57,417 |
|
|
| 62.3 |
| Income from operations of discontinued operations | (6,316) | (7.0) | 179,934 | 176.8 | 48,452 | 41.3 | ||||||||||||||||||||||||||||
Income tax provision |
|
| (19,522 | ) |
|
| (19.2 | ) |
|
| (11,316 | ) |
|
| (9.6 | ) |
|
| (10,891 | ) |
|
| (11.8 | ) | |||||||||||||||||||||||||||||||||||
| Income tax provision (benefit) provision | Income tax provision (benefit) provision | (2,674) | (3.0) | 19,522 | (19.2) | 11,316 | (9.6) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income from discontinued operations |
|
| 160,412 |
|
|
| 157.7 |
|
|
| 37,136 |
|
|
| 31.6 |
|
|
| 46,526 |
|
|
| 50.5 |
| Net income from discontinued operations | (3,642) | (4.0) | 160,412 | 157.6 | 37,136 | 31.7 | ||||||||||||||||||||||||||||
Net loss |
|
| (33,783 | ) |
|
| (33.2 | ) |
|
| (211,642 | ) |
|
| (180.2 | ) |
|
| (3,123 | ) |
|
| (3.4 | ) | Net loss | (126,548) | (139.8) | (33,783) | (33.3) | (211,642) | (180.2) | ||||||||||||||||||||||||||||
Convertible preferred dividend |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2,120 | ) |
|
| (2.3 | ) | |||||||||||||||||||||||||||||||||||
Net loss applicable to common shares |
| $ | (33,783 | ) |
|
| (33.2 | ) |
| $ | (211,642 | ) |
|
| (180.2 | ) |
| $ | (5,243 | ) |
|
| (5.7 | ) | |||||||||||||||||||||||||||||||||||
| Net income attributable to noncontrolling interests | Net income attributable to noncontrolling interests | 41,897 | 46.3 | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net (loss) income applicable to Surgalign Holdings, Inc. | Net (loss) income applicable to Surgalign Holdings, Inc. | $ | (84,651) | (93.5) | $ | (33,783) | (33.3) | $ | (211,642) | (180.2) | |||||||||||||||||||||||||||||||||||||||||||||||||
|
| For the Year Ended December 31, |
|
| Percent Change |
| ||||||||||||||
|
| 2020 |
|
| 2019 |
|
| 2018 |
|
| 2020/2019 |
|
| 2019/2018 |
| |||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
| $ | 85,612 |
|
| $ | 97,703 |
|
| $ | 78,580 |
|
|
| (12.4 | )% |
|
| 24.3 | % |
International |
|
| 16,137 |
|
|
| 19,720 |
|
|
| 13,532 |
|
|
| (18.2 | )% |
|
| 45.7 | % |
Total revenues |
| $ | 101,749 |
|
| $ | 117,423 |
|
| $ | 92,112 |
|
|
| (13.3 | )% |
|
| 27.5 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Year Ended December 31, | Percent Change | ||||||||||||||||||||||||||||
| 2021 | 2020 | 2019 | 2021/2020 | 2020/2019 | |||||||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||||||||
| Domestic | $ | 77,927 | $ | 85,612 | $ | 97,703 | (9.0) | % | (12.4) | % | |||||||||||||||||||
| International | 12,573 | 16,137 | 19,720 | (22.1) | % | (18.2) | % | ||||||||||||||||||||||
| Total revenues | $ | 90,500 | $ | 101,749 | $ | 117,423 | (11.1) | % | (13.3) | % | |||||||||||||||||||
December 31, 2020, compared to $29.2 million, or 24.9% of revenue, for the year ended December 31, 2019. The increase in costs of goods was primarily due to product mix, specifically hardware products.
Marketing, General and Administrative Expenses. Marketing, generalGeneral and administrative expenses decreased $11.0 million, or 8.1%, to $124.4 million for the year ended December 31, 2020, compared to $135.4 million for the year ended December 31, 2019. The decrease in marketing, general and administrative expenses is primarily the result of $8.3 million of reduced spending on commission marketing and distribution related to the decline in revenue.
Asset Impairment and Abandonments. Asset impairment and abandonments of $14.8 million for the year ended December 31, 2020, was primarily the result of the impairment of the property and equipment. Asset impairment and abandonments was $97.3 million for the year ended December 31, 2019, related to the impairment of our long-lived and other intangible assets. During 2019, we concluded, through the ASC 350 valuation testing, that factors existed at year-end indicating that long-lived assets in the Spine segment of legacy RTI were indicating impairment. As a result, for the year
2019 Compared to 2018
Revenues. Our total revenues increased $25.3 million, or 27.5%, to $117.4 million for the year ended December 31, 2019, compared to $92.1 million for the year ended December 31, 2018 primarily as a result of increased distributions of our coflex® Interlaminar Stabilization® implants, partially offset by the abandonment of the map3®implant. Excluding our coflex® Interlaminar Stabilization® implants, our spine implants revenues decreased $5.0 million, or 5.4%, to $87.1 million for the year ended December 31, 2019 compared to $92.1 million for the year ended December 31, 2018.
Costs of Goods Sold. Costs of goods sold decreased $0.8 million, or 2.4%, to $32.8 million, or 27.9% of revenue, for the year ended December 31, 2019, from $33.6 million, or 36.5% of revenue, for the year ended December 31, 2018. Adjusted for the impact of purchase accounting step-up of $3.2 million and $0.6 million for the years ended December 31, 2019 and 2018, respectively, and an inventory write-off of $6.6 million related to the abandonment of our map3®implant for the year ended December 31, 2018, cost of processing and distribution increased $3.2 million, or 12.1%, to $29.6 million, or 25.2% of revenue, for the year ended December 31, 2019, compared to $26.4 million, or 28.7% of revenue, for the year ended December 30, 2018. The increase in costs of goods sold was primarily due to the increased cost of processing and distribution associated with the inclusion of the sale of our coflex® Interlaminar Stabilization® implants as a result of the acquisition of Paradigm in 2019.
Marketing, General and Administrative Expenses. Marketing, general and administrative expenses increased $37.2 million, or 37.9%, to $135.4 million for the year ended December 31, 2019, compared to $98.2 million for the year ended December 31, 2018. Marketing, general and administrative expenses increased as a percentage of revenues from 106.6% for the year ended December 31, 2018 to 115.3% for the year ended December 31, 2019. The increase was primarily due to the Paradigm acquisition resulting in incremental headcount, marketing and administrative related expenses and increased legal cost related to patent litigation, all totaling $36.2 million.
Research and Development Expenses. Research and development expenses increased $2.4 million, or 16.8%, to $16.8 million for the year ended December 31, 2019, compared to $14.4 million for the year ended December 31, 2018. Research and development expenses decreased as a percentage of revenues from 15.6% for the year ended December 31, 2018, to 14.3% for the year ended December 31, 2019. The increase in research and development was in support of our strategic initiative to accelerate growth resulting in increased investment in new product development and clinical studies.
Gain on Acquisition Contingency. Gain on acquisition contingency was $76.0 million for the year ended December 31, 2019. The gain on acquisition contingency was the result of an adjustment to our estimate of obligation for future milestone payments on the Paradigm and Zyga acquisitions. There was no gain on acquisition contingency for the year ended December 31, 2018.
Asset Impairment and Abandonments. Asset impairment and abandonments was $97.3 million for the year ended December 31, 2019, related to the impairment of long-lived and other intangible assets compared to $5.1 million for the year ended December 31, 2018, primarily related to the abandonment of the map3®implant. During 2019, the Company concluded, through the ASC 350, Intangibles - Goodwill and other (“ASC 350”) valuation testing, that factors existed at year-end indicating that long-lived assets were indicating impairment. As a result, for the year ended December 31, 2019, we recorded impairment charges to other intangible assets totaling $85.1 million, to property and equipment totaling $11.7 million, and to right-of-use assets totaling $0.2 million. In addition, for the year ended December 31, 2019, another $0.3 million in other intangible assets were disposed of separately from the ASC 350 valuation testing.
Goodwill Impairment. Goodwill impairment was $140.0 million for the year ended December 31, 2019, which was recorded as a result of the change in segment structure. There was no goodwill impairment for the year ended December 31, 2018.
Transaction and Integration Expenses. Transaction and integration expenses related to the purchase of Paradigm including $0.9 million of severance expense and $5.9 million in other business development costs resulted in $14.0 million of expenses for the year ended December 31, 2019, compared to $4.9 million of expenses related to the purchase of Paradigm and Zyga for the year ended December 31, 2018.
Total Other Income, net. Total other income, net, which includes interest expense, interest income, loss on extinguishment of debt and foreign exchange loss increased $0.1 million, to $0.1 million for the year ended December 31, 2019, compared to less than $0.1 million for the year ended December 31, 2018. The increase in total other income, net is primarily due to interest income partially offset by an increase in foreign exchange loss as a result of increases in interest income and activity related to the purchase of Paradigm in 2019 compared to no activity in the prior year.
Income Tax (Provision) Benefit. Income tax provision for the year ended December 31, 2019 was $5.9 million compared to an income tax benefit of $15.2 million for the year ended December 31, 2018. Our effective tax rate for the year ended December 31, 2019 and 2018 was (2.4)% and 23.4% respectively. Our effective tax rate for the year ended December 31, 2019, was primarily impacted by a non-deductible goodwill impairment and valuation allowances established offset by non-taxable gain on acquisition contingency.
Net income from Discontinued Operations. Net income from discontinued operations for the year ended December 31, 2019 was $37.1 million, net of $11.3 million of income taxes. Net income from discontinued operations for the year ended December 31, 2018 was $46.5 million, net of $10.9 million of income taxes. The decrease in net income from discontinued operations is the result of an increase in interest expense to $12.6 million for the year ended December 31, 2019 from $2.8 million for the year ended December 31, 2018.
|
| For the Year Ended December 31, |
| For the Year Ended December 31, | |||||||||||||||||||||||||
|
| 2020 |
|
| 2019 |
|
| 2018 |
| 2021 | 2020 | 2019 | |||||||||||||||||
|
|
|
|
|
| (In thousands) |
|
|
|
|
| (In thousands) | |||||||||||||||||
Net loss from continuing operations, as reported |
| $ | (194,195 | ) |
| $ | (248,778 | ) |
| $ | (49,649 | ) | Net loss from continuing operations, as reported | $ | (122,906) | $ | (194,195) | $ | (248,778) | ||||||||||
| Change in fair value of warrant liability | Change in fair value of warrant liability | (14,736) | — | — | |||||||||||||||||||||||||
| Bargain purchase gain | Bargain purchase gain | (90) | — | — | |||||||||||||||||||||||||
| Other operating income | Other operating income | (3,932) | — | — | |||||||||||||||||||||||||
| Supplier prepayment write-off | Supplier prepayment write-off | 3,000 | — | — | |||||||||||||||||||||||||
Severance and restructuring costs |
|
| 34 |
|
|
| — |
|
|
| 773 |
| Severance and restructuring costs | 208 | 34 | — | |||||||||||||
Loss (gain) on acquisition contingency |
|
| 4,753 |
|
|
| (76,033 | ) |
|
| — |
| Loss (gain) on acquisition contingency | (4,587) | 4,753 | (76,033) | |||||||||||||
Asset acquisition expenses |
|
| 94,999 |
|
|
| — |
|
|
| — |
| Asset acquisition expenses | 72,087 | 94,999 | — | |||||||||||||
Asset impairment and abandonments |
|
| 14,773 |
|
|
| 97,341 |
|
|
| 5,070 |
| Asset impairment and abandonments | 12,195 | 14,773 | 97,341 | |||||||||||||
Goodwill impairment |
|
| — |
|
|
| 140,003 |
|
|
| — |
| Goodwill impairment | — | — | 140,003 | |||||||||||||
Inventory purchase price adjustment |
|
| 3,409 |
|
|
| 3,225 |
|
|
| 594 |
| Inventory purchase price adjustment | 2,036 | 3,409 | 3,225 | |||||||||||||
Inventory write-off |
|
| 9,367 |
|
|
| 361 |
|
|
| 7,582 |
| Inventory write-off | — | 9,367 | 361 | |||||||||||||
Transaction and integration expenses |
|
| 4,872 |
|
|
| 13,999 |
|
|
| 4,928 |
| Transaction and integration expenses | 3,689 | 4,872 | 13,999 | |||||||||||||
Restatement and investigation related costs |
|
| 13,152 |
|
|
| — |
|
|
| — |
| Restatement and investigation related costs | — | 13,152 | — | |||||||||||||
Net change in valuation allowance |
|
| 25,565 |
|
|
| 48,637 |
|
|
| (2,113 | ) | |||||||||||||||||
Tax effect on new tax legislation |
|
| (3,464 | ) |
|
| — |
|
|
| (650 | ) | Tax effect on new tax legislation | — | (3,464) | — | |||||||||||||
Tax effect on other adjustments |
|
| (11,519 | ) |
|
| (27,017 | ) |
|
| (3,769 | ) | Tax effect on other adjustments | (28) | (11,519) | (27,017) | |||||||||||||
Non-GAAP net loss applicable to common shares, adjusted |
| $ | (38,254 | ) |
| $ | (48,262 | ) |
| $ | (37,234 | ) | Non-GAAP net loss applicable to common shares, adjusted | $ | (53,064) | $ | (63,819) | $ | (96,899) | ||||||||||
| For the Year Ended December 31, | |||||||||||||||||||||||||||||
|
| For the Year Ended December 31, |
| 2021 | 2020 | 2019 | |||||||||||||||||||||||
|
| 2020 |
|
| 2019 |
|
| 2018 |
| (In thousands) | |||||||||||||||||||
Revenues |
| $ | 101,749 |
|
| $ | 117,423 |
|
| $ | 92,112 |
| Revenues | $ | 90,500 | $ | 101,749 | $ | 117,423 | ||||||||||
Costs of goods sold |
|
| 44,002 |
|
|
| 32,777 |
|
|
| 33,593 |
| Costs of goods sold | 29,775 | 44,002 | 32,777 | |||||||||||||
Gross profit, as reported |
|
| 57,747 |
|
|
| 84,646 |
|
|
| 58,519 |
| Gross profit, as reported | 60,725 | 57,747 | 84,646 | |||||||||||||
Inventory write-off |
|
| 9,367 |
|
|
| 361 |
|
|
| 7,582 |
| Inventory write-off | — | 9,367 | 361 | |||||||||||||
| Supplier prepayment write-off | Supplier prepayment write-off | 3,000 | — | — | |||||||||||||||||||||||||
Inventory purchase price adjustment |
|
| 3,409 |
|
|
| 3,225 |
|
|
| 594 |
| Inventory purchase price adjustment | 2,036 | 3,409 | 3,225 | |||||||||||||
Non-GAAP gross profit, adjusted |
| $ | 70,523 |
|
| $ | 88,232 |
|
| $ | 66,695 |
| Non-GAAP gross profit, adjusted | $ | 65,761 | $ | 70,523 | $ | 88,232 | ||||||||||
2021, 2020, and 2019 Loss /(Gain) on acquisition contingency – The 2021 gain on acquisition contingency relates to an adjustment to our estimate of obligation for future milestone payments on the Holo Surgical Acquisition. The loss on acquisition contingency for 2020 relates to an adjustment to our estimate of the obligation for future milestone payments on the Holo acquisition;Surgical Acquisition; while the gain on acquisition contingency in 2019 relates to an adjustment to our estimate of the obligation for future milestone payments onof the Paradigm and Zyga acquisition.
2020, 2019 and 2018 Asset impairment and abandonments – These costs relate to asset impairment and abandonment of our property and equipment, lower distributions and ultimate discontinuation of our map3®map3 implant and certain long-term assets at our U.S. facilities.
2019
2020, 2019 and 2018 Transaction and integration expenses – These costs relate to transactionissuance costs for the registered direct offering and integration expenses due toprofessional fees associated with the acquisition of INN, Holo Surgical, Prompt Prototypes, LLC, purchase of Paradigm and Zyga as well as the disposal of OEM Businesses in 2020.
2020 and 2018 Tax effect on new tax legislation – This adjustment represents charges relating to the Tax Legislation which was enacted on December 22, 2017.
| Contractual Obligations Due by Period | |||||||||||||||||||||||||||||
| Total | Less than 1 Year | 1-3 Years | 4-5 Years | More than 5 Years | |||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||
| Operating lease obligations (1) | 66,718 | 1,406 | 8,986 | 11,205 | 45,121 | ||||||||||||||||||||||||
| Purchase obligations (2) | 62,729 | 32,208 | 29,473 | 1,048 | — | ||||||||||||||||||||||||
| Milestone payments (3) | 62,180 | 25,585 | 36,595 | — | — | ||||||||||||||||||||||||
| Total | $ | 191,627 | $ | 59,199 | $ | 75,054 | $ | 12,253 | $ | 45,121 | |||||||||||||||||||
Refer to Note 24 for further discussion on the settlement related to the Lowry Action.
Our
As of December 31, 29,000,000 shares of our common stock and investor warrants to purchase up to an aggregate of 29.0 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 1.7 million shares of our common stock at a strike price of $2.15625 per share. We received net proceeds of $45.8 million from the offering after deducting investor fees of $4.2 million. The Company’s ability to raise additional capital may be adversely impacted by potential worsening global economic conditions and the recent disruptions to, and volatility in, financial markets in the United States and worldwide. 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. Contractual Obligations Due by Period Total Less than 1 Year 2-3 Years 4-5 Years More than 5 Years (In thousands) Operating lease obligations 2,130 684 554 335 557 Purchase obligations (1) 163,130 40,230 70,208 33,822 18,870 Acquisition contingencies 56,515 8,996 40,538 6,981 - Total $ 221,775 $ 49,910 $ 111,300 $ 41,138 $ 19,427 Impact of Inflation 2021, all of our indebtedness is based on a fixed rate interest rate. deficiencies. The remedial measures 2021. weakness. • The Company control environment was remediated. We defined a risk assessment methodology and conducted a risk assessment, which includes the risk of The risk assessment conclusions were reviewed by the Audit Committee. On July 20, 2020, we sold our OEM Businesses and changed our sales model. As a result, we eliminated certain risk in our revenue recognition related to early shipments that recognition for direct sales shipments and enhanced Delivery Order validation procedures for consignment sales related to surgical procedures. Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. File No. Date Filed 2.1 8-K12B 001-38832 3/11/2019 2.2† 8-K 001-38832 1/15/2020 2.3† 8-K 001-38832 3/9/2020 2.4† 8-K 001-38832 4/29/2020 2.5† 8-K 001-38832 7/9/2020 2.6† 8-K 001-38832 9/29/2020 2.7† 8-K 001-38832 10/23/2020 8-K12B 001-38832 3/11/2019 3.2 8-K 001-38832 7/20/2019 10-Q 001-38832 3.4 8-K 001-38832 7/20/2020 3.5 8-K 001-38832 7/24/2020 S-1/A 1/18/2019 DEF 14A 000-31271 7/19/2013 S-8 333-203861 5/5/2015 S-8 333-203861 5/5/2015 S-8 333-203861 5/5/2015 S-8 333-203861 5/5/2015 10-Q 000-31271 5/4/2018 10-Q 000-31271 5/4/2018 10-Q 000-31271 5/4/2018 10-Q 000-31271 5/4/2018 10-Q 000-38832 8/12/2020 10-Q 000-38832 8/12/2020 10-Q 000-38832 8/12/2020 10-Q 000-38832 8/12/2020 10-Q 000-38832 8/12/2020 Employment Agreement between the Company and W. Scott Durall dated May 29, 23.1* 31.2* 32.1* 32.2* 101.INS Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document. 101.SCH Inline XBRL Taxonomy Extension Schema Document 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document 104 Cover Page Interactive Data File (embedded within the Inline XBRL document) ‡ Indicates a management contract or any compensatory plan, contract, or arrangement. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Consolidated Financial Statements of Surgalign Holdings, Inc. and Subsidiaries financial statements concern opinion audit matters cash payment. We identified the •We tested the design and operating effectiveness of the controls over the Company’s acquisition and valuation process, including review of the appropriate accounting literature, valuation model, significant assumptions used, and the completeness and accuracy of the underlying data used; •With the assistance of our valuation specialists, we assessed the weighted-average cost of capital including the risk-free rate of return and discount rate applied as well as the internal rate of return for the purchase price allocation valuation assumptions of the acquired intellectual property and non-controlling interest in INN by testing management’s process within an acceptable tolerance range; •With the assistance of our valuation specialists, we evaluated the discounted cash flow valuation method used to fair value the acquired intangible asset for reasonableness by testing management’s process within an acceptable tolerance range. The valuation model involved significant valuation assumptions including a discount rate, weighted average cost of capital and weighted average return on asset acquired; /s/ financial reporting statements. opinion financial reporting We believe that our audits provide a reasonable basis for our opinion. December 31, 2020 2019 Assets Current Assets: Cash and cash equivalents $ 43,962 $ 5,608 Accounts receivable - less allowances of $8,203 at December 31, 2020 and $4,803 at December 31, 2019 27,095 23,216 Inventories - current 22,841 24,574 Prepaid and other current assets 10,284 4,034 Current assets of discontinued operations — 138,382 Total current assets 104,182 195,814 Non-current inventories 7,856 6,637 Property and equipment - net 521 789 Deferred tax assets - net — — Other assets - net 10,145 5,418 Non-current assets of discontinued operations — 135,851 Total assets $ 122,704 $ 344,509 Liabilities and Stockholders' Equity Current Liabilities: Accounts payable $ 13,418 $ 10,236 Accrued expenses 21,644 15,099 Accrued income taxes 11,761 424 Current liabilities of discontinued operations — 214,629 Total current liabilities 46,823 240,388 Acquisition contingencies 47,519 1,130 Other long-term liabilities 4,192 1,732 Non-current liabilities of discontinued operations — 285 Total liabilities 98,534 243,535 Commitments and contingencies (Note 24) Preferred stock Series A, $.001 par value: 5,000,000 shares authorized; 50,000 shares issued and outstanding as of 12/31/2019 $ — $ 66,410 Stockholders' equity: Common stock, $.001 par value: 150,000,000 shares authorized; 81,678,179 and 75,213,515 shares issued and outstanding, as of December 31, 2020 and 2019, respectively 81 75 Additional paid-in capital 517,123 498,438 Accumulated other comprehensive loss (2,416 ) (7,629 ) Accumulated deficit (484,962 ) (451,179 ) Less treasury stock, 1,444,578 and 1,285,224 shares, as of December 31, 2020 and 2019, respectively, at cost (5,656 ) (5,141 ) Total stockholders' equity 24,170 34,564 Total liabilities and stockholders' equity $ 122,704 $ 344,509 Year Ended December 31, 2020 2019 2018 Revenues $ 101,749 $ 117,423 $ 92,112 Costs of goods sold 44,002 32,777 33,593 Gross profit 57,747 84,646 58,519 Expenses: Marketing, general and administrative 124,390 135,396 98,152 Research and development 11,947 16,836 14,410 Severance and restructuring costs 34 — 773 Loss (gain) on acquisition contingency 4,753 (76,033 ) — Asset acquisition expenses 94,999 — — Asset impairment and abandonments 14,773 97,341 5,070 Goodwill impairment — 140,003 — Transaction and integration expenses 4,872 13,999 4,928 Total operating expenses 255,768 327,542 123,333 Operating loss (198,021 ) (242,896 ) (64,814 ) Other (expense) income: Interest expense (31 ) — — Interest income 92 161 35 Foreign exchange gain (loss) 279 (122 ) (29 ) Total other income - net 340 39 6 Loss before income tax benefit (provision) (197,681 ) (242,857 ) (64,808 ) Income tax benefit (provision) 3,486 (5,921 ) 15,159 Net loss from continuing operations (194,195 ) (248,778 ) (49,649 ) Discontinued operations (Note 5) Income from operations of discontinued operations 179,934 48,452 57,417 Income tax provision (19,522 ) (11,316 ) (10,891 ) Net income from discontinued operations 160,412 37,136 46,526 Net loss (33,783 ) (211,642 ) (3,123 ) Convertible preferred dividend — — (2,120 ) Net loss applicable to common shares $ (33,783 ) $ (211,642 ) $ (5,243 ) Other comprehensive loss (income): Unrealized foreign currency translation loss (income) 23 (351 ) (941 ) Comprehensive loss $ (33,760 ) $ (211,993 ) $ (6,184 ) Net loss from continuing operations per common share - basic $ (2.61 ) $ (3.55 ) $ (0.85 ) Net income from discontinued operations per common share - basic $ 2.16 $ 0.53 $ 0.76 Net loss per common share - basic $ (0.45 ) $ (3.02 ) $ (0.09 ) Net loss from continuing operations per common share - diluted $ (2.61 ) $ (3.55 ) $ (0.85 ) Net income from discontinued operations per common share - diluted $ 2.16 $ 0.53 $ 0.76 Net loss per common share - diluted $ (0.45 ) $ (3.02 ) $ (0.09 ) Weighted average shares outstanding - basic 74,403,155 70,150,492 61,031,265 Weighted average shares outstanding - diluted 74,403,155 70,150,492 61,031,265 Accumulated Additional Other Common Paid-in Comprehensive Accumulated Treasury Stock Capital Loss Deficit Stock Total Balance, January 1, 2018 $ 63 $ 429,459 $ (6,329 ) $ (237,286 ) $ (4,390 ) $ 181,517 Accumulated effect of adoption of the revenue recognition standard — — — 872 — 872 Net loss — — — (3,123 ) — (3,123 ) Foreign currency translation adjustment — — (941 ) — — (941 ) Exercise of common stock options 1 1,242 — — — 1,243 Stock-based compensation — 4,745 — — — 4,745 Purchase of treasury stock — — — — (479 ) (479 ) Amortization of preferred stock — (183 ) — — — (183 ) Preferred stock Series A dividend — (2,120 ) — — — (2,120 ) Balance, December 31, 2018 64 433,143 (7,270 ) (239,537 ) (4,869 ) 181,531 Net loss — — — (211,642 ) — (211,642 ) Foreign currency translation adjustment — — (359 ) — — (359 ) Exercise of common stock options — 395 — — — 395 Equity instruments issued in connection with Paradigm Spine acquisition - net of fees 11 60,719 — — — 60,730 Stock-based compensation — 4,367 — — — 4,367 Purchase of treasury stock — — — — (272 ) (272 ) Amortization of preferred stock — (186 ) — — — (186 ) Balance, December 31, 2019 75 498,438 (7,629 ) (451,179 ) (5,141 ) 34,564 Net loss — — — (33,783 ) — (33,783 ) Foreign currency translation adjustment — — 23 — — 23 Foreign currency translation adjustment related to the impact of discontinued operations — — 5,190 — — 5,190 Vesting of Restricted Stock Awards — 22 — — — 22 Equity instruments issued in connection with the Holo acquisition 6 12,244 — — — 12,250 Stock-based compensation — 6,528 — — — 6,528 Purchase of treasury stock — — — — (515 ) (515 ) Amortization of preferred stock — (109 ) — — — (109 ) Balance, December 31, 2020 $ 81 $ 517,123 $ (2,416 ) $ (484,962 ) $ (5,656 ) $ 24,170 Year Ended December 31, 2020 2019 2018 Cash flows from operating activities: Net loss $ (33,783 ) $ (211,642 ) $ (3,123 ) Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Depreciation and amortization expense 6,581 22,675 14,579 Provision for bad debts and product returns 4,286 2,937 1,721 Inventory write-down 17,691 8,493 15,122 Revenue recognized due to change in deferred revenue (2,618 ) (4,906 ) (4,958 ) Deferred income tax provision (1,807 ) 17,066 (4,692 ) Stock-based compensation 6,528 4,367 4,745 Asset impairment and abandonments 14,773 97,341 5,070 Goodwill impairment — 140,003 — Holo acquisition 94,999 — — Cardiothoracic closure business divestiture contingency consideration — — (3,000 ) Loss (Gain) on acquisition contingency 4,753 (76,033 ) — Paid in kind interest expense — 4,408 — Loss on extinguishment of debt 2,686 — — Amortization of debt issuance costs 283 — — Amortization of debt discount 2,479 — — Derivative loss 12,641 — — Gain on sale of OEM Businesses (209,800 ) — — Other 279 1,673 1,330 Change in assets and liabilities: Accounts receivable 4,444 (9,013 ) (10,829 ) Inventories (12,607 ) (14,219 ) (11,957 ) Accounts payable 5,306 (974 ) 8,035 Accrued expenses 3,731 4,489 (827 ) Contract liability 2,956 2,000 2,000 Other operating assets and liabilities (11,839 ) 1,879 4,036 Net cash (used in) provided by operating activities (88,038 ) (9,456 ) 17,252 Cash flows from investing activities: Purchases of property and equipment (10,115 ) (14,426 ) (11,042 ) Patent and acquired intangible asset costs (3,923 ) (2,007 ) (3,695 ) Proceeds from sale of OEM business 437,097 — - Acquisition of Zyga Technology — — (21,000 ) Acquisition of Paradigm Spine — (99,692 ) — Acquisition of Holo Surgical (32,117 ) — — Cardiothoracic closure business divestiture — — 3,000 Net cash provided by (used in) investing activities 390,942 (116,125 ) (32,737 ) Cash flows from financing activities: Proceeds from exercise of common stock options 22 395 2,356 Repayment of short-term obligations (76,912 ) — — Proceeds from long-term obligations 89,892 121,500 74,425 Payments of debt issuance costs (1,740 ) (826 ) — Payments on long-term obligations (207,266 ) (500 ) (71,171 ) Payments for treasury stock (515 ) (273 ) (478 ) Redemption of preferred stock (66,519 ) — — Other financing activities — — (1,039 ) Net cash (used in) provided by financing activities (263,038 ) 120,296 4,093 Effect of exchange rate changes on cash and cash equivalents (1,512 ) (56 ) (40 ) Net increase (decrease) in cash and cash equivalents 38,354 (5,341 ) (11,432 ) Cash and cash equivalents, beginning of period 5,608 10,949 22,381 Cash and cash equivalents, end of period $ 43,962 $ 5,608 $ 10,949 Supplemental cash flow disclosure: Cash paid for interest $ 14,964 $ 7,121 $ 3,047 Cash paid for income taxes, net of refunds 7,103 (1,994 ) (6,403 ) Non-cash acquisition of property and equipment 750 1,468 1,217 Change in accrual for dividend payable — — 2,120 Notes to Consolidated Financial Statements 2019 Note 5 for further discussion on Discontinued Operations. COVID-19. 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. $4.0 million. Fair Value of Financial Instruments—The estimated fair value of financial instruments disclosed in the consolidated financial statements has been determined by using available market information and appropriate valuation methodologies. The carrying value of all current assets and current liabilities approximates fair value because of their short-term nature. 7 to 10 years Office equipment, furniture and fixtures 5 to 7 years Computer equipment and software 3 to 7 years Surgical instruments 1 year Long-Lived Assets—The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. Recoverability is measured by a comparison of the carrying amount to the net undiscounted cash flows expected to be generated by the asset. An impairment loss would be recorded for the excess of net carrying value over the fair value of the asset impaired. The fair value is estimated based on expected discounted future cash flows. The results of impairment tests are subject to management’s estimates and assumptions of projected cash flows and operating results. Changes in assumptions or market conditions could result in a change in estimated future cash flows and the likelihood of materially different reported results. Because the Company’s forecasted cash flow is negative, Long-lived assets, including property and equipment and intangible assets subject to amortization were impaired and written down to their estimated fair values in Stock-Based Compensation Plans—The Company accounts for its stock-based compensation plans in accordance with ASC 718, Accounting for Stock Compensation (“ASC 718”). the awards. The Company’s leases are classified as operating leases and includes 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. Short-term leases with an initial term of 12 months or less are not recorded on the consolidated balance sheet. For the Year Ended For the Year Ended December 31, 2020 December 31, 2019 Operating lease cost $ 1,179 $ 1,108 Short-term operating lease cost — 36 Total operating lease cost $ 1,179 $ 1,144 For the Year Ended For the Year Ended December 31, 2020 December 31, 2019 Cash paid for amounts included in the measurement of lease liabilities $ 1,313 $ 1,007 ROU assets obtained in exchange for lease obligations 242 103 Balance at Balance at Balance Sheet Classification December 31, 2020 December 31, 2019 Assets: Right-of-use assets Other assets - net $ 1,425 $ 1,903 Liabilities: Current Accrued expenses $ 650 $ 967 Noncurrent Other long-term liabilities 1,200 1,487 Total operating lease liabilities $ 1,850 $ 2,454 Balance at Maturity of Operating Lease Liabilities December 31, 2020 2021 $ 684 2022 337 2023 217 2024 173 2025 162 2026 and beyond 557 Total future minimum lease payments 2,130 Less imputed interest (280 ) Total $ 1,850 As of December 31, 2019 Carrying amounts of the major classes of assets included in discontinued operations: Accounts receivable - net $ 36,072 Inventories 99,575 Prepaid and other current assets 2,735 Total current assets 138,382 Property and equipment - net 69,102 Goodwill 55,384 Other intangible assets - net 10,492 Other assets - net 873 Total noncurrent assets 135,851 Total assets of discontinued operations $ 274,233 Carrying amounts of the major classes of liabilities included in discontinued operations: Accounts payable $ 19,890 Accrued expenses 17,814 Current portion of deferred revenue 2,748 Current portion of long-term obligations 174,177 Total current liabilities 214,629 Other long-term liabilities 285 Total liabilities of discontinued operations $ 214,914 In accordance with the terms and conditions in the OEM Purchase Agreement and approved by respective lenders, on July 20, 2020, the Company (i) paid in full its Year Ended December 31, Year Ended December 31, Year Ended December 31, 2020 2019 2018 Major classes of line items constituting net income from discontinued operations: Revenues $ 87,192 $ 190,961 $ 188,250 Costs of goods sold 49,678 104,482 107,126 Gross profit 37,514 86,479 81,124 Expenses: Marketing, general and administrative 12,889 22,279 21,572 Severance and restructuring costs 604 - 2,035 Transaction and integration expenses 23,598 3,160 15 Cardiothoracic closure business divestiture contingency consideration - - (3,000 ) Total operating expenses 37,091 25,439 20,622 Operating income 423 61,040 60,502 Other expense (income): Interest expense 14,965 12,571 2,771 Loss on extinguishment of debt 2,686 - 309 Derivative loss 12,641 - - Foreign exchange (gain) loss (3 ) 17 5 Total other expense - net 30,289 12,588 3,085 (Loss) income from discontinued operations (29,866 ) 48,452 57,417 Gain on sale of net assets of discontinued operations 209,800 - - Income from discontinued operations before income tax provision 179,934 48,452 57,417 Income tax provision (19,522 ) (11,316 ) (10,891 ) Net income on discontinued operations $ 160,412 $ 37,136 $ 46,526 Total operating and investing cash flows of discontinued operations for the years ended December 31, 2021, 2020, Year Ended December 31, Year Ended December 31, Year Ended December 31, 2020 2019 2018 Significant operating non-cash reconciliation items: Depreciation and amortization $ 2,125 $ 4,466 $ 5,120 Provision for bad debts and product returns $ 456 $ 101 $ 857 Provision for inventory write-downs $ — $ 6,340 $ 7,142 Revenue recognized due to change in deferred revenue $ (2,618 ) $ (4,906 ) $ (4,958 ) Deferred income tax (benefit) provision $ (1,609 ) $ (3,989 ) $ 3,682 Stock-based compensation $ 792 $ 540 $ 374 Gain on sale of discontinued assets, net $ (209,800 ) $ — $ — Paid in kind interest expense $ — $ 4,408 $ — Cardiothoracic closure business divestiture contingency consideration $ — $ — $ (3,000 ) Loss on extinguishment of debt $ 2,686 $ — $ — Amortizations of debt issuance costs $ 283 $ — $ — Amortizations of debt discount $ 2,479 $ — $ — Significant investing items: Purchases of property and equipment $ (1,867 ) $ (6,866 ) $ (6,200 ) Patent and acquired intangible asset costs $ (419 ) $ (578 ) $ (1,028 ) Proceeds from sale of OEM Businesses $ 437,097 $ — $ — Proceeds from cardiothoracic closure business divestiture $ — $ — $ 3,000 Year Ended Year Ended Year Ended December 31, 2020 December 31, 2019 December 31, 2018 Revenues: Domestic $ 85,612 $ 97,703 $ 78,580 International 16,137 19,720 13,532 Total revenues from contracts with customers $ 101,749 $ 117,423 $ 92,112 Acquisition $7.0 million. $0.0 million. Cash proceeds from second lien credit agreement $ 100,000 Fair market value of securities issued 60,730 Fair market value of contingent earnout 72,177 Total purchase price $ 232,907 In the first quarter of 2019, the Company completed its valuations and purchase price allocation. The table below represents the final allocation of the total purchase price to Paradigm’s tangible and intangible assets and liabilities fair values as of March 8, 2019. Balance at March 8, 2019 Cash $ 307 Accounts receivable 5,220 Inventories 17,647 Other current assets 934 Property, plant and equipment 379 Other non-current assets 1,079 Current liabilities (6,169 ) Lease liabilities (1,079 ) Net tangible assets acquired 18,318 Other intangible assets 79,000 Goodwill 135,589 Total net assets acquired $ 232,907 $10.5 million. •Paradigm will strengthen the Company’s spine portfolio with the addition of the Coflex® Interlaminar Stabilization® device. The Coflex® device is a differentiated and minimally invasive motion preserving stabilization implant that is FDA PMA-approved for the treatment of moderate to severe lumbar spinal stenosis (“LSS”) in conjunction with decompression. goodwill, which was subsequently impaired in 2019. For the Year Ended December 31, 2019 2018 Revenues $ 37,374 $ 40,810 Net loss applicable to common shares (16,547 ) (42,550 ) Stock-Based Compensation Cash proceeds from revolving credit facility $ 18,000 Cash from RTI Surgical 3,000 Total purchase price $ 21,000 Inventories $ 1,099 Accounts receivable 573 Other current assets 53 Property, plant and equipment 151 Other assets 26 Deferred tax assets 4,715 Current liabilities (947 ) Acquisition contingencies (4,986 ) Net tangible assets acquired 684 Other intangible assets 6,760 Goodwill 13,556 Total net assets acquired $ 21,000 For the Year Ended December 31, 2018 Revenues $ 4,809 Net loss applicable to common shares (2,640 ) The Company’s policy is to grant stock options at an exercise price equal to 100% of the market value of a share of common stock at closing on the date of the grant. The Company’s stock options generally have five Weighted Weighted Average Average Remaining Aggregate Number of Exercise Contractual Intrinsic Options Price Life (Years) Value (in thousands, except for share and per share information) Outstanding at January 1, 2020 4,536,461 $ 3.75 Granted 2,161,277 3.12 Exercised (5,000 ) 4.02 Forfeited or expired (1,713,558 ) 4.32 Outstanding at December 31, 2020 4,979,180 $ 3.28 5.30 $ 142 Vested or expected to vest at December 31, 2020 4,979,180 $ 3.28 5.30 $ 142 Exercisable at December 31, 2020 2,806,401 $ 3.45 2.28 $ 6 Available for grant at December 31, 2020 842,608 For the Year Ended December 31, 2020 2019 2018 (in thousands, except for per share information) Weighted average fair value of stock options granted $ 1.21 $ 1.56 $ 2.05 Aggregate intrinsic value of stock options exercised $ 3 $ 161 $ 349 Year Ended December 31, 2020 2019 2018 Expected term (years) 6.50 6.50 6.50 Risk free interest rate 0.62 % 2.54 % 2.75 % Volatility factor 41.62 % 37.73 % 43.74 % Dividend yield - - - The value of restricted stock awards that do not have market conditions is determined by the market value of the Company’s common stock at the date of grant. In Weighted Average Number of Grant Date Shares Fair Value Unvested at January 1, 2020 1,227,858 $ 4.34 Granted 1,894,543 3.47 Vested (919,330 ) 4.40 Forfeited (305,875 ) 4.19 Unvested at December 31, 2020 1,897,196 $ 3.47 Weighted Average Number of Grant Date Shares Fair Value Unvested at January 1, 2020 184,582 $ 7.41 Granted — — Vested (85,503 ) 7.41 Forfeited (9,144 ) 7.41 Unvested at December 31, 2020 89,935 $ 7.41 For the Year Ended December 31, 2020 2019 2018 Stock-based compensation: Costs of goods sold $ 169 $ 144 $ 132 Marketing, general and administrative 3,980 3,623 4,179 Research and development 72 60 60 Transaction and integration expenses 1,515 - - Total $ 5,736 $ 3,827 $ 4,371 The vesting of the Stock Options is cumulative. Officer The Company values its inventories at the lower of net realizable value or cost using first-in, first-out (FIFO). For the Year Ended December 31, 2020 2019 Income tax receivable $ 4,836 $ 2,785 Prepaid expenses 1,543 996 Other receivable 3,795 113 Other 110 140 $ 10,284 $ 4,034 For the Year Ended December 31, 2020 2019 Processing equipment $ 35 $ 110 Surgical instruments 440 541 Office equipment, furniture and fixtures 34 122 Computer equipment and software 12 16 $ 521 $ 789 "Asset impairment and abandonments" line on the consolidated statements of comprehensive loss. The impairment charges were triggered by continued negative operating cash flows. The net capitalized costs of $0.1 million is considered "Construction in process" as the Company was still within the application and development stage of the project as of December 31, 2021. These amounts are included within "Property and equipment - net" on the Consolidated Balance Sheet as of December 31, 2021. For the Year Ended December 31, 2019 Balance at January 1 $ 4,414 Goodwill additions related to acquisitions 135,589 Goodwill impairment (140,003 ) Balance at December 31 $ — For the Year Ended December 31, 2020 2019 2018 Weighted average basic and dilutive shares 74,403,155 70,150,492 61,031,265 For the years ended December 31, 2021, 2020 For the Year Ended December 31, 2020 2019 2018 Stock Option (1) 271,351 345,154 1,154,396 RSU and RSA 1,099,018 821,888 344,273 Convertible Series A Preferred Stock 8,400,512 15,152,761 15,152,761 Total 9,770,881 16,319,803 16,651,430 (1) The number of potential dilutive shares does not include out-of-the-money stock options as their exercise prices were above the average stock price during the period. 2020, are summarized below: loss for the year ended December 31. 2019. There are no amounts recorded as contingent consideration as of December 31, 2021 or 2020. 2021. For the Year Ended December 31, 2020 Impairment Fair Value Property and equipment - net $ 11,707 $ - Other intangible assets - net 2,621 - Other assets - net 445 $ 14,773 $ — For the Year Ended December 31, 2019 Impairment Fair Value Property and equipment - net $ 11,655 $ - Other intangible assets - net 85,096 - Other assets - net 201 - $ 96,952 $ — respective year: For the Year Ended December 31, 2020 2019 Accrued compensation $ 2,268 $ 2,911 Accrued severance and restructuring costs — 136 Accrued distributor commissions 4,113 4,325 Accrued business development expenses — 2,555 Accrued leases 650 967 Accrued acquisition contingency -- Holo 8,996 — Other 5,617 4,205 $ 21,644 $ 15,099 For the Year Ended December 31, 2019 Ares Term loan $ 104,406 JPM facility 71,000 Less unamortized debt issuance costs (1,229 ) Total 174,177 Less current portion 174,177 Long-term portion $ 0 Year Ended December 31, 2020 2019 2018 Pre-tax income: Domestic (U.S., state and local) $ (191,455 ) $ (242,896 ) $ (64,808 ) Foreign (6,226 ) 39 - Total pre-tax income (197,681 ) (242,857 ) (64,808 ) For the Year Ended December 31, 2020 2019 2018 Current: Federal $ 3,671 $ 312 $ 398 State - (89 ) (40 ) International 13 (138 ) - Total current 3,684 85 358 Deferred: Federal 99 (2,456 ) 11,232 State - (169 ) (419 ) International (297 ) (3,381 ) 3,988 Total deferred (198 ) (6,006 ) 14,801 Total income tax benefit (provision) $ 3,486 $ (5,921 ) $ 15,159 The Company’s deferred tax assets and liabilities consists of the following components: For the Year Ended For the Year Ended December 31, 2020 December 31, 2019 Deferred Income Tax Deferred Income Tax Assets Liabilities Assets Liabilities Accounts receivable $ 1,993 $ - $ 1,184 - Accrued liabilities 1,326 - 3,418 - Deferred compensation 1,281 - 1,526 - Fixed assets and intangibles 22,235 - 16,119 - Inventory 8,475 - 10,165 - Net operating losses 9,891 - 9,342 - Revenue - (129 ) - (59 ) Tax credits - - 6,372 - Lease Liability 446 - 695 - Right of Use Asset - (344 ) - (544 ) Other - (48 ) - (103 ) Valuation allowance (45,126 ) - (48,115 ) - Total $ 521 $ (521 ) $ 706 $ (706 ) On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was enacted. As a result of the enactment of the CARES Act, net operating losses (“NOL’s”) can now be carried back for five years, which resulted in the Company recognizing a benefit during tax year 2020 of $3.5 million. As of December 31, 2021, the Company has U.S. research and development credit carryforwards of approximately $0.3 million which will expire in the year 2041. For the Year Ended December 31, 2020 2019 2018 Opening balance $ 1,088 $ 1,088 $ 1,591 Additions based on tax positions related to the current year 1,903 - - Additions for tax positions of prior years - - - Reductions for tax positions of prior years - - (415 ) Reductions for expiration of statute of limitations - - (88 ) $ 2,991 $ 1,088 $ 1,088 consolidated balance sheets. jurisdictions. The tax years that are open to examination are U.S. federal periods from For the Year Ended December 31, 2020 2019 2018 Statutory federal rate 21.00 % 21.00 % 21.00 % State income taxes—net of federal tax benefit (0.07 %) (0.56 %) 2.34 % Foreign rate differential 0.90 % 0.00 % (3.59 %) Acquisition expenses (9.87 %) 0.00 % (0.83 %) Loss (Gain) on acquisition contingency (0.50 %) 6.58 % 0.00 % Goodwill impairment and disposal 0.00 % (11.88 %) 0.00 % Life insurance 0.00 % 0.00 % (0.11 %) Tax attributes 0.28 % 0.04 % 0.99 % Tax legislation 0.95 % 0.00 % 1.05 % Valuation allowances (10.57 %) (16.98 %) 3.26 % Uncertain tax positions 0.00 % 0.00 % 0.78 % Other reconciling items, net (0.36 %) (0.63 %) (1.48 %) Effective tax rate 1.76 % (2.43 %) 23.41 % Preferred Stock Preferred Stock Liquidation Value Issuance Costs Net Total Balance at January 1, 2018 $ 64,399 $ (476 ) $ 63,923 Accrued dividend 2,120 - 2,120 Amortization of preferred stock issuance costs - 183 183 Balance at December 31, 2018 66,519 (293 ) 66,226 Amortization of preferred stock issuance costs - 184 184 Balance at December 31, 2019 66,519 (109 ) 66,410 Amortization of preferred stock issuance costs - 109 109 Redemption of preferred stock (66,519 ) - (66,519 ) Balance at December 31, 2020 $ — $ — $ — On July 17, 2020, the Company received a notification from WSHP seeking redemption on or before September 14, 2020, of all of the outstanding shares of the Company’s Series A Convertible Preferred Stock (“Series A Preferred Stock”), all of which are held by WSHP. On July 24, 2020, the Company redeemed the Series A Preferred Stock for approximately Accrued severance and restructuring charges at January 1, 2018 $ 2,886 Severance and restructuring expenses accrued in 2018 773 Severance and restructuring cash payments (2,751 ) Accrued severance and restructuring charges at December 31, 2018 908 Severance and restructuring expenses accrued in 2019 626 Severance and restructuring cash payments (1,398 ) Accrued severance and restructuring charges at December 31, 2019 136 Severance and restructuring expenses accrued in 2020 — Severance and restructuring cash payments (136 ) Accrued severance and restructuring charges at December 31, 2020 $ — Acquisition of 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 Holo. Upon achievement of this milestone the Company issued 8,650,000 shares 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. These payments were made in 2022. See Note 7 for further information of the Holo Surgical Acquisition. •Year 1 (July 2020 - June 2021): $24,201 •Year 2 (July 2021 - June 2022): $25,767 Coloplast — RTI Surgical, Inc., as a predecessor to theCompany, is presently named as co-defendant along with other companies in a small percentage of the transvaginal surgical mesh (“TSM”) mass tort claims being brought in various state and federal courts. The TSM litigation otherwise manufacture for distribution in the U.S. any implants that were the subject of these FDA Public Health Notifications. The Company denies any allegations against it and intends to continue to vigorously defend itself. Krzysztof Siemionow, MD, PhD is the Company's Chief Medical Officer. Year Ended December 31, 2020 First Second Third Forth Quarter Quarter Quarter Quarter Quarter Ended: Revenues $ 27,102 $ 20,534 $ 27,926 $ 26,187 Gross profit 17,878 11,065 16,034 12,770 Loss from continuing operations (24,540 ) (24,946 ) (26,653 ) (118,056 ) Income (loss) from discontinued operations 6,677 (13,618 ) 149,338 18,015 Net (loss) income (17,863 ) (38,564 ) 122,685 (100,041 ) Net loss from continuing operations per common share - basic $ (0.34 ) $ (0.34 ) $ (0.36 ) $ (1.51 ) Net loss from continuing operations per common share - diluted $ (0.34 ) $ (0.34 ) $ (0.36 ) $ (1.51 ) Net income (loss) from discontinued operations per common share - basic $ 0.09 $ (0.19 ) $ 2.04 $ 0.23 Net income (loss) from discontinued operations per common share - diluted $ 0.09 $ (0.19 ) $ 2.04 $ 0.23 Net (loss) income per common share - basic $ (0.25 ) $ (0.53 ) $ 1.68 $ (1.28 ) Net (loss) income per common share - diluted $ (0.25 ) $ (0.53 ) $ 1.68 $ (1.28 ) Year Ended December 31, 2019 First Second Third Forth Quarter Quarter Quarter Quarter Quarter Ended: Revenues $ 24,400 $ 32,747 $ 28,702 $ 31,574 Gross profit 16,915 23,128 21,095 23,508 Loss from continuing operations (18,212 ) (14,003 ) (16,972 ) (199,591 ) Income from discontinued operations 8,861 14,191 11,834 2,250 Net (loss) income (9,351 ) 188 (5,138 ) (197,341 ) Net loss from continuing operations per common share - basic $ (0.29 ) $ (0.19 ) $ (0.23 ) $ (2.76 ) Net loss from continuing operations per common share - diluted $ (0.29 ) $ (0.16 ) $ (0.23 ) $ (2.76 ) Net income from discontinued operations per common share - basic $ 0.14 $ 0.19 $ 0.16 $ 0.04 Net income from discontinued operations per common share - diluted $ 0.14 $ 0.16 $ 0.16 $ 0.04 Net (loss) income per common share - basic $ (0.15 ) $ 0.00 $ (0.07 ) $ (2.72 ) Net (loss) income per common share - diluted $ (0.15 ) $ 0.00 $ (0.07 ) $ (2.72 ) offering On 2019 Balance at Charged to Deductions, Balance at Beginning of Costs and Write-offs, or End of Description Period Expenses Payments Period For the year ended December 31, 2020: Allowance for doubtful accounts $ 4,803 $ 3,584 $ 184 $ 8,203 Allowance for product returns 106 246 247 105 Deferred tax asset valuation allowance 48,115 (2,638 ) 351 45,126 For the year ended December 31, 2019: Allowance for doubtful accounts 1,865 2,541 (397 ) 4,803 Allowance for product returns 478 — 372 106 Deferred tax asset valuation allowance 3,093 45,022 — 48,115 For the year ended December 31, 2018: Allowance for doubtful accounts 1,185 827 147 1,865 Allowance for product returns 441 37 — 478 Deferred tax asset valuation allowance 1,529 2,368 804 3,093 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. March SURGALIGN HOLDINGS, INC. /s/ Terry M. Rich Terry M. Rich President and Chief Executive Officer /s/ Terry M. Rich March Vice President and Chief Accounting Officer March Christopher Thunander March 2020, we2021, the Company had cash of $44.0$51.3 million and an accumulated deficit of $485.0$569.6 million. For the year ended December 31, 2020, we2021, the Company had a loss from continuing operations of $194.2$122.9 million and a net loss applicable to Surgalign Holdings, Inc. of $84.7 million. We haveThe 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 nor in 2020.$40,467,000$40.5 million from the offering after deducting the underwriting discounts and commission of $2,583,000.We project we$4.0 million.considerationmanagement's evaluation of the going concern we considered the following i) continued COVID-19 uncertainties,uncertainties; ii) negative cash flows that are projected over the next 12-month period,period; iii) the income taxes to be paid related to the gain on sale associated with the OEM Businesses, iv) uncertainty regarding potential settlements related to ongoing litigation and regulatory investigations,investigations; and v)iv) approximately $9$25.6 million of the total contingent consideration of $50.6$51.9 million are expected to become due to the former owners of Holo Surgical if regulatory approvalcertain milestones are met over the next 12 months which would be paid in cash; v) total payments of $10.3 million at fair value for INN related milestones are expected to be paid in cash when milestones are achieved in the US is obtainedfuture; and vi) seller notes in 2021, which would paid through combinationthe amount of common stock$10.0 million a fair value due to the seller of INN on December 31, 2024; and cash; we have forecasted the need to raise additional capital in order to continue as a going concern.vii) various supplier minimum purchase agreements. 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 debt and/or equity financing infinancing. In addition to these efforts the funding ofCompany will need continued capital and cash flows to fund the future operations through 20212022 and beyond.is planningcontinually 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.2020 Compared to 2019Our working capital at December 31, 2020 increased $25.7 million to $57.4 million from $31.7 million at December 31, 2019, primarily as a result of the proceeds from the sale of the OEM Businesses. As of December 31, 2020, we had $44.0 million of cash and cash equivalents. For the year ended December 31, 2020, the Company used approximately $88.0 million of cash in its operations, primarily related to the sale of the OEM Businesses working capital accounts.At December 31, 2020, we had 98 days of revenues outstanding in trade accounts receivable, an increase of 26 days compared to December 31, 2019. The increase is primarily driven by the increase in the aging due to slower paying customers and the economic situation in 2020 as a result of Covid 19 pandemic.At December 31, 2020, excluding the purchase accounting step-up of Paradigm inventory, we had 218 days of inventory on hand, a decrease of 40 days compared to December 31, 2019. The decrease is primarily driven by the continued refinement within the E&O reserve due to the strategic shift within the business. We believe that our inventory levels will be adequate to support our on-going operations for the next twelve months.We had $44.0 million of cash and cash equivalents at December 31, 2020. At December 31, 2020, our foreign subsidiaries held $2.5 million in cash. We intend to indefinitely reinvest the earnings of our foreign subsidiaries. If we were to repatriate indefinitely reinvested foreign funds, we would not be subject to additional U.S. federal income tax, however, we would be required to accrue and pay any applicable withholding tax and U.S. state income tax liabilities. We do not believe that this policy of indefinitely reinvesting the earnings of our foreign subsidiaries will have a material adverse effect on the business as a whole.Certain Commitments.As noted above, on July 20, 2020, pursuant to the OEM Purchase Agreement by and between the Company and the Buyer, the Company sold the OEM Businesses to Buyer and its affiliates for a purchase price of $440 million of cash, subject to certain adjustments.On March 8, 2019, pursuant to the Master Transaction Agreement, the Company acquired Paradigm in a cash and stock transaction valued at up to $300.0 million, consisting of $150.0 million on March 8, 2019, plus potential future milestone payments. Established in 2005, Paradigm’s primary product is the coflex® Interlaminar Stabilization® device, a differentiated and minimally invasive motion preserving stabilization implant that is FDA premarket approved for the treatment of moderate to severe lumbar spinal stenosis in conjunction with decompression.Under the terms of the agreement, the Company paid $100.0 million in cash and issued 10,729,614 shares of the Company’s common stock. The shares of Company common stock issued on March 8, 2019, were valued based on the volume weighted average closing trading price for the five trading days prior to the date of execution of the definitive agreement, representing $50.0 million of value. In addition, the Company may be required to pay up to an additional $150.0 million in a combination of cash and Company common stock based on a revenue earnout consideration. Further, pursuant to the Master Transaction Agreement, we will be obligated to pay some or all of the milestone payments thereunder that remain unpaid – whether or not we have achieved the milestones – upon a change in control of our company prior to December 31, 2022. Based on a probability weighted model, the Company estimates a contingent liability related to the revenue based earnout of zero.On January 4, 2018, the Company acquired Zyga, a leading spine-focused medical device company that develops and produces innovative minimally invasive devices to treat underserved conditions of the lumbar spine. Zyga’s primary product is the SImmetry® Sacroiliac Joint Fusion System. Under the terms of the merger agreement dated January 4, 2018, the Company acquired Zyga for $21.0 million in consideration paid at closing (consisting of borrowings of $18.0 million on its revolving credit facility and $3.0 million cash on hand), $1.1 million contingent upon the successful achievement of a clinical milestone, and a revenue based earnout consideration of up to an additional $35.0 million. As of December 31, 2020, the Company determined that Zyga was not expected to meet the clinical milestone to earn the contingent consideration.The following table provides a summary of our operating lease obligations and other significant obligations as of December 31, 2020.(1) These amounts consist of contractual obligations for capital expenditures and open purchase orders.Item 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.We are subject to market risk from exposure to changes in interest rates based upon our financing, investing and cash management activities. 2020, we did not have any outstanding indebtedness.20202021, outstanding intercompany balances, a 1% change in currency rates would have had a de-minimis impact on our results of operations. We do not expect changes in exchange rates to have a material adverse effect on our income or our cash flows in 2021. However, we can give no assurance that exchange rates will not significantly change in the future.Item 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.Item 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.Item 9A.CONTROLS AND PROCEDURES.FinancialAccounting Officer (“CAO”), which are required in accordance with Rule 13a-15 of the Exchange Act. This “Controls and Procedures” section includes information concerning the controls and controls evaluation referred to in the certifications.20192020, Form 10-K filed June 8, 2020, and as previously disclosed in RTI’s Current Report on Form 8-K filed with the SEC on March 16, 2020,2021, and amended through a 10-K/A on September 24, 2021, management identified multiple material weaknesses that were pervasive throughout the Audit Committeeorganization. The specific details of the Board of RTI, with the assistance of independent legal and forensic accounting advisors, conducted an internal investigation of matters relating to the Company’s revenue recognition practices for certain contractual arrangements, primarily with OEM customers, including the accounting treatment, financial reporting and internal controls related to such arrangements (the “Investigation”). The Investigation also examined transactions to understand the practices related to manual journal entries for accrual and reserve accounts. The Investigation was precipitated by an investigation by the SEC initially related to the periods 2014 through 2016. The SEC investigation is ongoing,material weaknesses and the Company is cooperating withidentified deficiencies can be reviewed within those findings. In 2021, management embarked on a Company-wide initiative to remediate the SEC in its investigation.On April 7, 2020, the Audit Committee of the Board concluded that the Company would restate its previously issued audited financial statements for fiscal years ended December 31, 2018, 2017 and 2016, and selected financial data for the years ended December 31, 2015 and 2014, and the unaudited financial statements for the quarterly periods within these years commencing with the first quarter of 2016, as well as the unaudited financial statements for the quarterly periods within the 2019 fiscal year. The Company filed the restated financial statements on June 8, 2020.Based on the results of the Investigation, the Company has concluded that revenue for certain invoices should have been recognized at a later date than when originally recognized. In response to binding purchase orders from certain OEM customers, goods were shipped and received by the customers before requested delivery dates and agreed-upon delivery windows. In many instances the OEM customers requested or approved the early shipments, but the Company determined that on other occasions the goods were delivered early without obtaining the customers’ affirmative approval. Some of those unapproved shipments were shipped by employees in order to generate additional revenue and resulted in shipments being pulled from a future quarter into an earlier quarter. In addition, the Company has concluded that in July 2017 an adjustment was improperly made to a product return provision in the Direct Division. The revenue for those shipments was restated, as well as for other orders that shipped earlier than the purchase order due date in the system for which the Company could not locate evidence that the OEM customers had requested or approved the shipments. In addition, the Company concluded that in the periods from 2015 through the fourth quarter of 2018, certain adjustmentswere incorrectly or erroneously made via manual journal entries to accrual/reserve accounts, including an adjustment to a product return provision in the Direct Division, among others. Accordingly, the Company restated its financial statements to correct these errors.Furthermore, other errors that were unrelated to the SEC investigation were identified and corrected in the restated financial statements. Additional errors were made in connection with the recording of the acquisition of Paradigm Spine, LLC in 2019 were corrected in the restated financial statements.On July 20, 2020, the Company sold its OEM Businesses. The sale of the OEM Businesses resulted in certain employees with extensive legacy knowledge of the Company becoming employees of the OEM Businesses. The sale of the OEM Businesses created accounting and reporting requirements that demanded a significant amount of accounting and finance resources. To address the accounting and reporting requirements, the Company engaged third-party consultants to assist in the accounting and reporting requirements; however, we did not maintain an effective control environment. In addition, substantially all of the Company’s legacy information technology systems used for financial reporting were sold as part of the OEM Businesses sale. The Company entered into a transition services agreement (TSA) for up to 18-months while the Company implements new information technology systems and transitions off of the legacy systems. The OEM Businesses are now owned by a private company and do not have a service auditor’s report. Due to the timing of the sale of the OEM Businesses, personnel resource constraints, and the Company’s material weaknesses over controls associated with service organization, the Company did not design or implement procedures to test controls subject to the TSA. undertaken, or to be undertaken by our management team and theirour advisors, and the conclusions that our management team reached in its evaluationson the design and operating effectiveness of the effectiveness of our disclosure controls and procedures andcontrol environment as it related to internal control over financial reporting as of December 31, 2020,2021, are described below in detail.CFO,CAO, we evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as amended, as of December 31, 2020.2021. Based on this evaluation of our disclosure controls and procedures, our CEO and CFOCAO have concluded that our disclosure controls and procedures were not effective as of December 31, 2020 because of certain material weaknesses in our internal control over financial reporting, as further described below.CFOCAO that our disclosure controls and procedures as of December 31, 20202021, were not effective, and notwithstanding the material weaknesses in our internal control over financial reporting described below, management believes that the consolidated financial statements and related financial information included in this Annual Report on Form 10-K as of December 31, 2021, fairly present in all material respects our financial condition, results of operations and cash flows as of the dates presented, and for the periods ended on such dates, in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”).CFO,CAO, we have conducted an evaluation of the design and operating effectiveness of our internal control over financial reporting based on the COSO framework. Based on evaluation under these criteria, management determined, based upon the existence of the material weaknesses described below, that we did not maintainmaintained effective internal control over financial reporting as of December 31, 2020.2021.Control EnvironmentWe have identified deficienciesprinciples associated with the control environment of the COSO framework. Specifically, these control deficiencies constitute material weaknesses, either individually or in the aggregate, relating to: (i) appropriate organizational structure, reporting lines,December 31, 2020, Form 10-K filed March 16, 2021, and authority and responsibilities in pursuit of objectives; (ii) our commitment to attract, develop, and retain competent individuals; and (iii) holding individuals accountable for their internal control related responsibilities. As disclosed in the consolidated financial statements included in Item 8. Financial Statements and Supplementary Data, these material weaknesses contributed to accounting errors.Weamended through a 10K/A on September 24, 2021, management determined that we did not maintain an effective control environment to enable the identification and mitigation of risks of material accounting errors as a result of the contributing factors to material weaknesses in the control environment, including:•The tone from executive management was insufficient to create the proper environment for effective internal control over financial reporting and to ensure that: (i) there were adequate processes for oversight; (ii) there was accountability for the performance of internal control over financial reporting responsibilities; (iii) personnel with key positions had the appropriate training to carry out their responsibilities; and (iv) corrective activities were appropriately applied, prioritized, and implemented in a timely manner.•The Company did not maintain a sufficient complement of management, accounting, financial reporting, sales, and operations personnel who had appropriate levels of knowledge, experience, and training in accounting and internal control matters commensurate with the nature, growth and complexity of our business. The lack of sufficient appropriately skilled and trained personnel contributed to our failure to: (i) adequately identify potential risks; (ii) include in the scope of our internal controls framework certain systems relevant to financial reporting and the preparation of our consolidated financial statements; (iii) design and implement certain risk-mitigating internal controls; and (iv) consistently operate certain of our internal controls.•Our oversight processes and procedures that guide individuals in applying internal control over financial reporting were not adequate in preventing or detecting material accounting errors, or omissions due to inadequate information and, in certain instances, management override of internal controls, including recording improper accounting entries, recording accounting entries that were inconsistent with information known by management at the time, and not communicating relevant information within our organization.The control environment material weaknesses contributed to other material weaknesses within our system of internal controls over financial reporting in each of the other COSO Components.Risk AssessmentWe did not design and implement an effective risk assessment based on the criteria established in the COSO framework. We have identified deficiencies in the principles associated with the risk assessment component of the COSO framework. Specifically, these control deficiencies constitute material weaknesses, either individually or in the aggregate, relating to: (i) identifying, assessing, and communicating appropriate objectives; (ii) identifying and analyzing risks to achieve these objectives; (iii) considering the potential for fraud in assessing risks; and (iv) identifying and assessing changes in the business that could impact our system of internal controls, including assessing the controls of service organizations which we rely on to support our control environment and the accounting and finance resources necessary to support the Company strategic business activities.The Company’s formal SOX compliance program did not have sufficient scope and focus on the key financial reporting risks, which was a contributing factor to material weaknesses in the risk assessment.Control ActivitiesWe did not design and implement effective control activities based on the criteria established in the COSO framework. We have identified deficiencies in the principles associated with the control activities component of the COSO framework. Specifically, these control deficiencies constitute material weaknesses, either individually or in the aggregate, relating to: (i) selecting and developing control activities and information technology that contribute to the mitigation of risks and support achievement of objectives; and (ii) deploying control activities through policies that establish what is expected and procedures that put policies into action.The following were contributing factors to the material weaknesses in control activities:•Lack of consistently established controls to segregate the function of recording and approving journal entries, as well as preparation and review of reconciliations with appropriate supporting documentation.•Inconsistent documentation and retention of support for the review and approval of manual journal entries.•Inconsistent documentation and application of accounting policies and/or practice for determining the sales returns reserve and certain accrual accounts.•Insufficient resources with appropriate competency within the accounting and financial reporting department to review the accounting for non-recurring complex purchase accounting, contingent payment and segment reporting transactions.•Insufficient design and operation of certain control activities to respond to potential risk of material misstatements in the area of revenue recognition. In particular: (i) no controls requiring customer approval for early shipments outside of agreed upon shipping terms; (ii) no controls requiring centralized retention of proof of customer approval or request related to shipping outside of agreed terms; (iii) no formal process for offering or approving discounts to customers for early shipments; and (iv) no formal controls to ensure appropriate cut-off of direct revenue to customers at period ends in line with shipping terms.Deficiencies in control activities contributed to material accounting errors being identified and corrected in our 2019 and prior year financial statement restatements. These design deficiencies in control activities contributed to the potential for there to have been material accounting errors in substantially all financial statement account balances and disclosures.Information and CommunicationWe did not consistently generate or provide adequate quality supporting information and communication based on the criteria established in the COSO framework. We have identified deficiencies in the principles associated with the information and communication component of the COSO framework. Specifically, these control deficiencies constitute material weaknesses, either individually or in the aggregate, relating to: (i) obtaining, generating, and using relevant quality information to support the function of internal control; and (ii) communicating accurate information internally and externally, including providing information pursuant to objectives, responsibilities, and functions of internal control.The following were contributing factors to the material weaknesses in information and communication:•Ineffective processes in place to identify and maintain the information required to support the functioning of internal controls over financial reporting.•Inconsistent retention of documentation or analysis to provide underlying support and calculations related to reserve and accrual adjustments when recorded.•Insufficient processes in place to communicate required information to enable personnel to understand internal control responsibilities.Monitoring ActivitiesWe did not design and implement effective monitoring activities based on the criteria established in the COSO framework. We have identified deficiencies in the principles associated with the monitoring component of the COSO framework. Specifically, these control deficiencies constitute material weaknesses, either individually or in the aggregate, relating to: (i) selecting, developing, and performing ongoing evaluation to ascertain whether the components of internal controls are present and functioning, including the controls of service organizations that support our control environment; and (ii) evaluating and communicating internal control deficiencies in a timely manner to those parties responsible for taking corrective action.The following were contributing factors to the material weaknesses in monitoring activities:•Management did not properly evaluate the design, implementation, and operating effectiveness of certain internal control activities, limiting its ability to detect and communicate deficiencies.•Internal audit activities were insufficient to keep pace with the size and complexity of our business structure and organization, which limited our ability to effectively monitor internal controls.•The Company did not have sufficient talent and resources with sufficient expertise to evaluate the risks and controls.•The Company did not have sufficient oversight and supervision of the internal control evaluation process.Deloitte & Touche LLP, our independent registered public accounting firm, has audited the effectiveness of our internal control over financial reporting as of December 31, 2020. Deloitte & Touche LLP’s opinion appears in Item 82020, as described within item 9A of this Form 10-K.Remediation Plan and StatusOurthat report. During 2021, our management isteam committed to remediating identified control deficiencies, (including both those that rise to the level of a material weakness and those that do not), fostering continuous improvement in our internal controls, and enhancing our overall internal controls environment.Our management believes We believe that these remediation actions when fully implemented, will remediatehave remediated the material weaknesses we have identifiedweaknesses. The controls that were implemented and strengthen our internal control over financial reporting. Our remediation efforts are ongoing and additionalremediation initiatives may be necessary. We will continue our initiatives to implement and document the strengthening of existing, and development of new policies, procedures, and internal controls.Remediation of the identified material weaknesses and strengthening our internal control environment will require a substantial effort throughout 2021. We will test the ongoing operating effectiveness of the new and existing controlsenhanced in future periods. The material weaknesses cannot be considered completely remediated until the applicable controls2021 have operated for a sufficient period of time, and management has concluded, through testing, that these controls are designed and operating effectively.While we believe We have highlighted the steps taken to date and those planned for implementation will remediate the ineffectiveness of our internal control over financial reporting, we have notactivities that were completed all remediation efforts identified herein. Accordingly, as we continue to monitor the effectiveness of our internal control over financial reportingduring 2021 that assisted in the areas affected byremediating the material weaknesses described above, we have and will continue to perform additional procedures prescribed by management, including the use of manual mitigating control procedures and employing any additional tools and resources deemed necessary, to ensure that our consolidated financial statements are fairly stated in all material respects. The following remediation activities highlight our commitment to remediating our identified material weaknesses:Our management has and will continue to take steps to ensure that previously identified control deficiencies will behave been remediated through the implementation of uniform accounting and internal control policies and procedures with the proper oversight to promote compliance with GAAP and regulatory requirements. SomeAs of December 31, the following changes related to control activities have been implemented:we have already implemented include:the compliance officer and legal department update and review on a periodic, as needed, basis along with the Employee Handbook.A comprehensive disciplinary plan was implemented for all employees found to have engaged in misconduct, including termination, removal of the individuals from certain accounting and finance functions, written warnings, and appropriate training depending on the severity of the misconduct;• engaged an experienced compliance professional and increased its compliance efforts to upgrade and enhance the Company’s compliance program in accordance with the Federal Sentencing Guidelines;•The Company engaged a third party to assist with the redesign of the Sarbanes-Oxley program inclusive of Entity Level Controls.•The Company has enhanced its compliance policies and procedures, including training on the ability and means of anonymous reporting. It requires employees to annually certify their understanding of the Code of Conduct, which the compliance officer and legal department update and review on a periodic, as needed, basis along with the Employee Handbook;•The Company has conducted Ethics training with the Executive management team and finance personnel and will continue doing so annually;•Periodic compliance reports are made to the Nominating and Governance Committee of the Board of Directors; and•Business functions such as Financial Planning & Analysis (FP&A), financial reporting, accounting, and finance have been restructured and realigned. Through this realignment, the Company has hired key finance roles including a Director of Financial Reporting, Director of Financial Accounting and engaged external resources to provide additional capacity, functional capabilities, and cross-training.Management will continue doing so annually.evaluatethe Nominating and hire additional resources within ourGovernance Committee of the Board of Directors.financial reportingfinance have been restructured and internal controls functions withrealigned. Through this realignment, the appropriate experience, certifications, education, and training forCompany has hired key financial reportingfinance and accounting positions.leadership positions, as well as other supporting accounting staff, seniors, and managers, and engaged external resources to provide additional capacity, functional capabilities, and cross-training.will reducehave reduced the risk of a material misstatement resulting fromand as such management has concluded that the material weaknesses described above. However, it will require a period of timeweakness related to determine the operating effectiveness of any newly implemented internal controls over financial reporting. has implemented a process to reevaluate and revise the Sarbanes-Oxley compliance program (“SOX Program”) to make improvements to our SOX Program governance, risk assessment processes, testing methodologies, and corrective action mechanisms.fraud, to enhance overall compliance.fraud. We will continue to enhance our risk assessment procedures and conduct a comprehensive risk assessment. We have begun enhancingenhanced our procedures to identify changes to the business that impact the risk assessment and processes to update the risk assessment timely. The results of this effort are expected to enablehave enabled us to effectively identify, develop, and implement controls and procedures to address risks.have made progress in redesigningredesigned existing and implementingimplemented new internal control activities. We are formalizingformalized our accounting policies and procedures and communicated them to the team to enhance corporate oversight over our process-level controls and structures to ensure that there is the appropriate assignment of authority, responsibility, and accountability to enable the remediation of our material weaknesses. have redesigned key controls to strengthen controls over the review and approval of journal entries and account reconciliations. Specifically;
Specifically, we updated and reinforced our policies and procedures regarding obtaining adequate supporting documentation in connection with the review and approval of journal entries and account reconciliations to ensure the validity, accuracy, and completeness of recorded amounts. We formalized an approval hierarchy to improve segregation of duties related to journal entry processing and completion and review of account reconciliations.•We are reinforcing existing policies and procedures regarding obtaining adequate supporting documentation in connection with the review and approval of journal entries and account reconciliations in order to ensure the validity, accuracy, and completeness of recorded amounts.
We improved our management of segregation of duties by implementing a system-based control to restrict individuals that enter a journal entries from approving the entries for posting to the general ledger.•We are formalizing documentation of accounting and reporting policies and procedures and will conduct in-depth training on such policies and procedures.
We have enhanced our accounting oversight competency by hiring key leadership positions as well as accounting and finance personnel to provide additional capacity, functional capabilities, and cross-training. Where applicable, subject matter resources are engaged to assist with transactions and to provide guidance.•We have enhanced our accounting oversight competency by hiring a Director of Financial Reporting and Director of Financial Accounting and formalized an approval hierarchy to improve segregation of duties related to journal entry processing and completion and review of account reconciliations.
We have instituted cross-functional business reviews of financial results and non-routine transactions. Additionally, controls have been enhanced around non-routine events and accounting treatments requiring additional layers of review and approval.•We have applied a system-based control to consistently across the company to ensure an individual that has entered a journal entry cannot approve the entry for posting to the general ledger to ensure enhanced segregation of duties.•We have instituted cross-functional business reviews of financial results and non-routine transactions.waswere unique to the OEM Businesses and where control deficiencies existed. We implemented new internal controls to address the control deficiencies prior to the sale of OEM and have strengthened existing internal controls over revenue recognition for the remaining business, including formalizing a control to conduct a month end review of items billed but not shipped to ensure appropriate cut-off for revenue recognition.responsibilities (e.g., formalowners. We have established a training programsprotocol to provide training annually for all control owners and corporate communications). Additionally, we are implementingas needed when new internal controlsteam members either join or change roles within the company.strengtheningretention requirements were communicated to strengthen existing controls regardingprocesses around the documentation and retention of underlying support to ensure consistent application of accounting policies and procedures.Monitoring ActivitiesIn additionitems noted302 certification.we continuepart of the SOX program to evaluate, remediate,support their effective design and improve our internal control over financial reporting, executiveoperation throughout the year.may elect to implement additional measures to monitor and address control deficiencies or may determinehas concluded that the remediation efforts described above require modification. material weakness over information and communication was remediated.has made certain improvements and will continue to make other improvements to monitormonitoring and assessassessing the control environment and the above-mentioned efforts to remediate the underlying causes of the identified material weaknesses, including through the following:•We have increased internal audit, finance, and accounting staffing levels and expertise. In 2020 we outsourced our internal audit function to assist in improving the SOX program.
We increased internal audit, finance, and accounting staff levels and expertise. In 2020 and 2021, we outsourced our internal audit function to assist in improving the SOX 404 program. The Internal Audit engagement includes assessment of key risks to the organization and processes, detailed testing of newly implemented controls, and other activities related to monitoring our overall remediation efforts.•We have instituted cross-functional business reviews of financial results and non-routine transactions.
Internal Control status is communicated to process and control owners including identification of deficiencies and recommendations for corrective actions. Process and control owners are responsible for remediation of deficiencies identified. .•We will increase the scope of the Internal Audit engagement to assist with the ongoing evaluation of our Enterprise Risk Management process, detail testing of newly implemented controls and other activities related to monitoring our overall remediation efforts.
We instituted cross-functional business reviews of financial results and non-routine transactions through our monthly and quarterly business review process.•We are developing effective communication plans relating to, among other things, identification of deficiencies and recommendations for corrective actions. These plans will apply to all parties responsible for remediation.
Entity level controls were enhanced related to the above activities, and documentation was retained and tested as part of the SOX 404 program to support their effective design and operation throughout the year.Material weaknesses identified Over Financial Reportingour internal control over financial reporting discovered in fiscal year 2020 existed asINN. The acquisition of December 31, 2018. Management has takenthe INN business and the fourth quarter remediation activities since the time the material weaknesses were identified; however, the remediated controls were not in place for a sufficient period of time to be tested for their design and operational effectiveness. As such, there were nodescribed above are changes in our internal control over financial reporting except as noted below, (as defined in Rules 13a-15(f) and 15d-15(f) underduring the Exchange Act)quarter ended December 31, 2021, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting as ofreporting.2020.
2021, there were no other changes in Surgalign’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that have materially affected or are reasonably likely to materially affect Surgalign’s internal control over financial reporting.•In conjunction with the disposition of the OEM Businesses on July 20, 2020, the Company entered into a transition service agreement (TSA) with the Buyer for a limited period of time. Under the terms of the TSA, the OEM Businesses will continue to service the Company’s SAP IT infrastructure and execute certain key controls.•During 2019, the Company identified a material weakness related to acquired company Paradigm’s third-party logistics provider (3PL). Management had previously excluded Paradigm from its assessment of internal control over financial reporting as of December 31, 2019 because it was acquired by the Company in a purchase business combination during 2019. During our control assessment, we identified that the 3PL provider did not have a service auditors report over the design and operating effectiveness of controls operating at the 3PL upon which we relied. Upon further investigation, we identified deficiencies in all layers of general information technology controls. In addition, we identified a lack of segregation of duties. As a result, we identified material weaknesses in the design of controls over revenue and inventory at the 3PL. During the fourth quarter of 2020, the Company consolidated 3PL providers into an existing Surgalign 3PL relationship for which the 3PL has a service auditors report over the processes on which the Company relies.Item 9B.OTHER INFORMATION.2020.2021. The information required by Part III (Items 10, 11, 12, 13 and 14) is incorporated by reference to the disclosure in that Proxy Statement. The Company’s next Annual Meeting of Stockholders is currently scheduled to be held on May 4, 2021.Item 10.Item 11.EXECUTIVE COMPENSATION.Item 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.Item 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.Item 14.PRINCIPAL ACCOUNTING FEES AND SERVICES.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.(1) Financial Statements:6463 to 67,66, all of which are incorporated herein by reference.2019 and 20182019 is included in the Consolidated Financial Statements of Surgalign Holdings, Inc. on page 101.104. All other financial statement schedules are omitted because they are inapplicable, not required or the information is indicated elsewhere in the consolidated financial statements or the notes thereto.lIncorporated by Reference ExhibitNo.Description DescriptionForm Form 3.18-K 001-38832 1/18/2022 2.9† 8-K 001-38832 1/5/2022 3.1 3.3Incorporated by Reference Description Form File No. Date Filed 3.3 11/16/2020 4.110-Q 001-38832 11/16/2020 4.1 333-228694333-22869410.1‡10-Q(Q2 2004)000-312718/6/200410.2‡10-K (2004)000-312713/16/200510.3‡Incentive Stock Option Grant AgreementWarrant. (under 2004 Plan)10-K (2004)000-312713/16/200510.4‡DEF 14A000-312713/19/201010.5‡8-K 001-38832 2/15/2022 4.7* 10.610.7lIncorporated by ReferenceExhibitNo.DescriptionFormFile No.Date Filed10.8‡10.910.1010-Q000-312715/4/201610.11‡10-Q000-3127111/3/201710.12‡10-Q000-3127111/3/201710.13‡10-Q000-3127111/3/201710.14‡10.1510.1610.1710.18S-8 333-255852 5/7/2021 S-8 333-255852 5/7/2021 S-8 333-255853 5/7/2021 10-Q 001-38832 8/6/2021 10-Q 001-38832 8/6/2021
10.19
10.2010-Q
(Q1 2017)000-31271 5/3/2017
10.21
10.22
10.23‡*Incorporated by Reference Description Form File No. Date Filed 10-K 000-38832 3/16/2021 10.2810-Q(Q1 2017)000-312715/3/201710.29‡*20202020.10-K 000-38832 3/16/2021 21.1*8-K 001-38832 1/5/2022 21.1* 31.1*31.1*
______________†† Certain information in this exhibit identified by brackets has been omitted pursuant to Item 601(b)(10) of Regulation S-K because it (i) is not material and (ii) would cause competitive harm to SurgalginSurgalign Holdings, Inc. if publicly disclosed. Surgalign Holdings, Inc. hereby undertakes to furnish, supplementally, copies of any omitted information upon request by the Securities and Exchange Commission.* Filed herewith. *Filed herewith.6465666768-100101To the stockholders and of and ShareholdersFinancial Statements(formerly known as RTI Surgical Holdings, Inc.) and subsidiaries (the “Company”) as of December 31, 2020 and 2019,2021, the related consolidated statements of comprehensive loss, stockholders’ equity, and cash flows for each of the three years in the periodyear ended December 31, 2020,2021, and the related notes and thefinancial statement schedule listed in the Index atincluded under Item 1515(a) (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019,2021, and the results of its operations and its cash flows for each of the three years in the periodyear ended December 31, 2020,2021, in conformity with accounting principles generally accepted in the United States of America. also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB)(“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2020,2021, based on criteria established in the 2013 Internal Control — Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)(“COSO”), and our report dated March 16, 2021,15, 2022 expressed an adverse opinion on the Company’s internal control over financial reporting because of material weaknesses.Change in Accounting PrincipleAs discussed in Note 3 to the financial statements, the Company has changed its method of accounting for leases effective January 1, 2019, due to adoption of Financial Accounting Standards Board Accounting Standards Codification 842, unqualified opinion.Leases, using the optional transition method.Concernhas suffered recurring losses from operations, recurring negative operatingincurred a net loss of $122.9 million during the year ended December 31, 2021, and as of that date, the Company had cash flows,of $51.3 million and is projecting it will continue to generate significant negative operating cash flows over the next 12-months and beyond.an accumulated deficit of $569.6 million. These conditions, along with other matters as set forth in Note 1, raise substantial doubt about itsthe Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.OpinionAudit Matterscurrent-periodcurrent period audit of the financial statements that were communicated or required to be communicated to the audit committee and thatthat: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.Inventories — Excess QuantitiesObsolescence — Refer tovaluation of the asset acquisition of Inteneural Networks, Inc.2 and Note 117 to the consolidated financial statements,Critical Audit Matter DescriptionInventories the Company entered into a Stock Purchase Agreement to acquire a 42% interest in the issued and outstanding equity interests of Inteneural Networks, Inc. (“INN”) and the license to use their proprietary technology. The owners of INN are comprised of finished goods made of human tissue and metal and synthetic materials and are valued atrelated parties to the lower of cost or market. The Company’s human tissue-based implants haveCompany as a limited shelf-life with expiration dates. Inventory is evaluated for obsolescence and excess quantities by analyzing inventory levels, historical loss trends, expected product lives, product at risk of expiration, sales levels by product and projections of future sales demand. The Company’s calculationmember of the amountBoard of inventory that is excess, obsolete, or will expire prior to sale has two components: 1) a demand or consumption based component that compares projected sales, expected consumptionDirectors and historical sales to inventory quantities on hand; and 2) for inventory that expires,the Company’s Chief Medical Officer. As part of the transaction, the Company assesses historical trendswill purchase up to project inventory that will expire prior to being sold. The Company’s demand-based model assumes that inventory will be sold on a first-in-first-out basis. The Company’s metal inventory does not expire100% of the equity of INN in stages through three additional closings upon the achievement of certain clinical, regulatory and can be resterilized and sold; however,revenue milestones. With each additional closing, the Company assesses quantities on hand, historical sales, projected sales, projected consumption, the number of forecasted years, safety stock and those products management has determined to sunset when calculating the excess and obsolescence estimate.Given the significant judgments associated with evaluating excess quantities and obsolescence of inventories, auditing the reasonableness of management’s estimates and assumptions surrounding quantities that arewill acquire an additional 19.3% equity within INN for an additional $19.3 million in excess of expected consumption involved especially subjective judgment and an increased effort.How the Critical Audit Matter Was Addressed in the AuditOur audit procedures related to the Company’s valuation of excess quantities and obsolescence of inventories included the following, among others:•We tested the mathematical accuracy of the Company’s demand based excess and obsolete calculation.•We tested the accuracy and completeness of underlying data used in the demand based excess and obsolete calculation, including:ohistorical unit sales;ohistoric write-downs and write-offs;ounit volumes on hand; andothe weighted average remaining shelf-life.•We assessed the reasonableness of the assumptions used in the demand based excess and obsolete calculation by obtaining an understanding of management’s rationale supporting the assumptions, assessing the sensitivity of the assumptions to the recorded results, and evaluating whether the underlying conditions and operations of the Company supported the assumptions.•We made inquiries of the Company’s employees outside of the accounting department and evaluated other areas of the audit to identify business, product, or industry changes that may impact the inputs in the inventory valuation calculation and corroborated these inquiries with analysis of recent sales trends.Discontinued Operations — Refer to Note 1 and Note 5 to the financial statementsCritical Audit Matter DescriptionOn July 20, 2020, the Company sold its Original Equipment Manufacture business and operations related to processing donated human musculoskeletal and other tissue (collectively, the “OEM Businesses”) for $440 million. The Company has determined the OEM Businesses sale should be reported as discontinued operations in accordance with Accounting Standard Codification (“ASC”) 205-20, Discontinued Operations (“ASC 205-20”). Therefore, the related assets and liabilities of the OEM Businesses are classified as assets and liabilities of discontinued operations in the December 31, 2019 consolidated balance sheet. Additionally, the operations of the OEM Businesses are reported as operations from discontinued operations in the consolidated statements of comprehensive loss for all periods presented.determinationaccounting for and the valuation of the results from discontinued operationsinvestment in INN as a critical audit matter.givenare that (1) the transaction requires the appropriate application of complex accounting authoritative guidance from the FASB’s Accounting Standards Codification (“ASC”), (2) significant judgments madejudgment is used by management to apply ASC 205-20,when determining assumptions used in the naturefair value measurement of the transactions and the level of integration and interdependencies between the OEM Businesses and the continuing operations of the Company. Additionally,acquired intangible asset, (3) there was a high degree of complexity in identifying and segregating the assets, liabilities, and results of operations for the discontinued businesses and in evaluating the adjustments between businesses held for sale and businesses held for use. Auditing these judgments requiredis a high degree of auditor judgment and an increased extentsubjectivity in performing procedures and evaluating management’s significant accounting and valuation assumptions and (4) the audit effort involved the use of effort, including the need to involve our tax specialists.professionals with specialized skill and knowledge.How the Critical Audit Matter Was Addressed in the AuditCompany’s discontinued operations balance sheetaccounting for and statementsthe valuation of comprehensive loss presentationthe asset acquisition of INN included the following, among others:•We tested the classification of revenue and expenses classified as discontinued operations, and the resulting adjustments made to the statements of comprehensive loss.We assessed the Company’s segregation of assets and liabilities that are classified as held for sale by inspecting the Company’s accounting data and related adjustments.We compared the selling price for the OEM Businesses to the carrying value of the businesses.We involved federal and state income tax professionals with specialized skills and knowledge, who assisted in assessing the tax related adjustments and testing the tax components as a result of the disposition. — Refer to97 and Note 1614 to the financial statements,Critical Audit Matter DescriptionOn October 23, 2020, the Company completed the acquisition ofacquired Holo Surgical Inc. (“Holo Surgical Acquisition”). Asin 2020 with $83.0 million (valued at $50.6 million at acquisition) of the consideration for the Holo Surgical Acquisition the Company paid $30 million in cash and issued common stock with a fair value of $12.3 million. In addition, the seller will be entitled to receive contingent consideration of up to $83 millionbeing contingent upon the achievement of certain regulatory, developmentcommercial and utilization milestones by specified time periods occurring up to the sixth (6th) anniversary of the closing. The Company is required to recordmilestones. We identified the fair value of the acquisition related contingent consideration at each reporting period, which hadliability as a value of $50.6 million on the acquisition date, and $56.5 million as of December 31, 2020. critical audit mattersignificant management estimate that involves determining the probability and the timing of achieving each of the milestones and the selection of an appropriate discount rate. We have determinedcritical audit matter are that the probability of achieving each of the milestones requires significant management judgment. The significant judgment involved in determining the probability of achieving each of the milestones has a significant impact on the fair value of contingent consideration recorded. Accordingly, the audit procedures to evaluate the reasonableness of management’s judgments related to the milestone probabilities required a high degree of auditor judgment and increased extent of effort, including the need to involve a professionalspecialists with extensive experience with obtaining certain regulatory approvals for similar technologies.technologies. As a result, we identifiedtechnologies;as a critical audit matter. Howand other valuation assumptions, including credit risk and risk-free rate, we involved our valuation specialists to evaluate the Critical Audit Matter Was Addressedassumptions and methodologies used in valuing the AuditOur audit procedures related to the Company’s milestone probabilities included the following, among others:•acquisition contingent liabilities.We made inquiries of management who are responsible for obtaining regulatory approvals and development of the technology to understand how the probabilities were established. •As part of our inquiries of management, we discussed the risks and uncertainties related to each of the milestones and how these factors were considered in establishment of the probability for each milestone.•We corroborated our inquiries of management in relation to key assertions that factored into the assessment of each of the milestone probabilities.•We tested the milestone probabilities, including the involvement of a professional in our firm with extensive experience with obtaining certain regulatory approvals for similar technologies.•With the assistance of this professional we evaluated the reasonableness of the probabilities for each of the milestones. •We considered the impact of changes in the regulatory environment, as well as COVID-19, in relation to management’s milestone probability assessment.•We evaluated the reasonableness of management’s assertions in relation to the milestone probabilities by inspecting the following:othe Company’s historical experience with obtaining certain regulatory approvals;othe Company’s communications with the U.S. Food and Drug Administration, which is responsible for approval of the regulatory application;oexternal communications made by management to analysts, including analyst reports; andoindustry articles.Impact on Financial Statements of Material Weaknesses in Internal Control Over Reporting - Refer to Management’s Report on Internal Control Over Financial ReportingCritical Audit Matter DescriptionAs discussed in Management’s Report on Internal Control Over Financial Reporting, the Company identified material weaknesses in each component of the Internal Control – Integrated Framework (2013) issued by COSO. These material weaknesses contribute to the potential for there to have been material accounting errors in substantially all financial statement account balances and disclosures, and result in a critical audit matter that required us to increase the extent of our audit effort, including the need to modify the nature, timing, and extent of our audit procedures.How the Critical Audit Matter Was Addressed in the AuditAs a result of the material weaknesses, in performing our audit procedures we lowered the threshold for investigating differences between recorded amounts and independent expectations developed by us that we would have otherwise used, and increased the number of selections we would have otherwise made if the Company’s controls were designed and operating effectively.DELOITTE & TOUCHEGRANT THORNTON LLPTampa, FloridaMarch 16, 20211998.2021.To the stockholders and of and ShareholdersInternal Controlinternal control over Financial Reporting(formerly known as RTI Surgical Holdings, Inc.) and subsidiaries (the “Company”) as of December 31, 2020,2021, based on criteria established in the 2013 Internal Control — Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)(“COSO”). In our opinion, because of the effect of the material weaknesses identified below on the achievement of the objectives of the control criteria, the Company has not maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020,2021, based on criteria established in the 2013 Internal Control — Control—Integrated Framework (2013) issued by COSO. also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB)(“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2020, of the Company2021, and our report dated March 16, 2021,15, 2022 expressed an unqualified opinion on those financial statements and included an explanatory paragraph regarding substantial doubt about the Company’s ability to continue as a going concern.OpinionLimitationslimitations of Internal Controlinternal control over Financial ReportingMaterial WeaknessesAweaknessrespects, the financial position of the Company as of December 31, 2020, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.deficiency,going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.a combinationfraud. Our audits included performing procedures to assess the risks of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements, will not be preventedwhether due to error or detectedfraud, and performing procedures that respond to those risks. Such procedures included examining, on a timely basis. The following material weaknesses have been identifiedtest basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included in management’s assessment:•The Company did not maintain an effective control environment based on the criteria established in the COSO framework and identified deficiencies in the principles associated with the control environment of the COSO framework. Specifically, control deficiencies constituted material weaknesses, either individually or in the aggregate, relating to: (i) appropriate organizational structure, reporting lines, and authority and responsibilities in pursuit of objectives; (ii) the Company’s commitment to attract, develop, and retain competent individuals; and (iii) holding individuals accountable for their internalcontrol related responsibilities. The control environment material weaknesses contributed to other material weaknesses within the Company’s system of internal control over financial reporting in each of the other COSO components.•The Company did not design and implement an effective risk assessment based on the criteria established in the COSO framework and identified deficiencies in the principles associated with the risk assessment component of the COSO framework. Specifically, control deficiencies constituted material weaknesses, either individually or in the aggregate, relating to: (i) identifying, assessing, and communicating appropriate objectives; (ii) identifying and analyzing risks to achieve these objectives; (iii) considering the potential for fraud in assessing risks; and (iv) identifying and assessing changes in the business that could impact the Company’s system of internal controls, including assessing the controls of service organizations which the Company relies on to support the control environment and the accounting and finance resources necessary to support the Company’s strategic business activities.•The Company did not design and implement effective control activities based on the criteria established in the COSO framework and identified deficiencies in the principles associated with the control activities component of the COSO framework. Specifically, control deficiencies constituted material weaknesses, either individually or in the aggregate, relating to: (i) selecting and developing control activities and information technology that contribute to the mitigation of risks and support achievement of objectives; and (ii) deploying control activities through policies that establish what is expected and procedures that put policies into action.•The Company did not consistently generate or provide adequate quality supporting information and communication based on the criteria established in the COSO framework and identified deficiencies in the principles associated with the information and communication component of the COSO framework. Specifically, control deficiencies constituted material weaknesses, either individually or in the aggregate, relating to: (i) obtaining, generating, and using relevant quality information to support the function of internal control; and (ii) communicating accurate information internally and externally, including providing information pursuant to objectives, responsibilities, and functions of internal control.•The Company did not design and implement effective monitoring activities based on the criteria established in the COSO framework and identified deficiencies in the principles associated with the monitoring component of the COSO framework. Specifically, control deficiencies constituted material weaknesses, either individually or in the aggregate, relating to: (i) selecting, developing, and performing ongoing evaluation to ascertain whether the components of internal controls are present and functioning, including the controls of service organizations that support the Company’s control environment; and (ii) evaluating and communicating internal control deficiencies in a timely manner to those parties responsible for taking corrective action.These material weaknesses were considered in determining the nature, timing,accounting principles used and extent of audit tests applied in our auditsignificant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements as of and for the year ended December 31, 2020, of the Company, and this report does not affect our report on such financial statements.December 31, 2021 2020 Assets Current Assets: Cash and cash equivalents $ 51,287 $ 43,962 Accounts receivable - less allowances of $9,272 at December 31, 2021 and $8,203 at December 31, 2020 Accounts receivable - less allowances of $9,272 at December 31, 2021 and $8,203 at December 31, 2020 19,197 27,095 Inventories - current 26,204 22,841 Prepaid and other current assets 8,984 10,284 Total current assets $ 105,672 $ 104,182 Non-current inventories 10,212 7,856 Property and equipment - net 945 521 Other assets - net 6,970 10,145 Total assets $ 123,799 $ 122,704 Liabilities, Mezzanine Equity and Stockholders' Equity Liabilities, Mezzanine Equity and Stockholders' Equity Current Liabilities: Accounts payable $ 10,204 $ 13,418 Current portion of accrued acquisition contingency - Holo Current portion of accrued acquisition contingency - Holo 25,585 8,996 Accrued expenses 17,769 12,648 Accrued income taxes 484 11,761 Total current liabilities 54,042 46,823 Acquisition contingencies - Holo Acquisition contingencies - Holo 26,343 47,519 Warrant liability Warrant liability 12,013 — Notes payable - related party Notes payable - related party 9,982 — Other long-term liabilities 3,176 4,192 Total liabilities 105,556 98,534 Commitments and contingencies (Note 23) Commitments and contingencies (Note 23) 0 0 Mezzanine equity Mezzanine equity 10,006 — Stockholders' equity: Common stock, $.001 par value: 300,000,000 shares authorized; 146,640,069 and 81,678,179 shares issued and outstanding, as of December 31, 2021 and 2020, respectively Common stock, $.001 par value: 300,000,000 shares authorized; 146,640,069 and 81,678,179 shares issued and outstanding, as of December 31, 2021 and 2020, respectively 147 81 Additional paid-in capital 585,375 517,123 Accumulated other comprehensive loss (1,820) (2,416) Accumulated deficit (569,613) (484,962) Less treasury stock, 1,543,446 and 1,444,578 shares, as of December 31, 2021 and 2020, respectively, at cost Less treasury stock, 1,543,446 and 1,444,578 shares, as of December 31, 2021 and 2020, respectively, at cost (5,852) (5,656) Total stockholders' equity 8,237 24,170 Total liabilities, mezzanine equity and stockholders' equity Total liabilities, mezzanine equity and stockholders' equity $ 123,799 $ 122,704 Year Ended December 31, 2021 2020 2019 Revenues $ 90,500 $ 101,749 $ 117,423 Costs of goods sold 29,775 44,002 32,777 Gross profit 60,725 57,747 84,646 Operating Expenses: General and administrative 104,668 124,424 135,396 Research and development 13,888 11,947 16,836 Loss (gain) on acquisition contingency (4,587) 4,753 (76,033) Asset acquisition expenses 72,087 94,999 — Asset impairment and abandonments 12,195 14,773 97,341 Goodwill impairment — — 140,003 Transaction and integration expenses 3,689 4,872 13,999 Total operating expenses 201,940 255,768 327,542 Other operating income, net (3,932) — — Operating loss (137,283) (198,021) (242,896) Other (income) expense - net Other (income) expense - net (202) (61) (161) Foreign exchange loss (gain) 1,447 (279) 122 Change in fair value of warrant liability (14,736) — — Total other (income) expense - net (13,491) (340) (39) Loss before income tax (benefit) provision (123,792) (197,681) (242,857) Income tax (benefit) provision (886) (3,486) 5,921 Net loss from continuing operations (122,906) (194,195) (248,778) Discontinued operations (Note 5) (Loss) Income from operations of discontinued operations (6,316) 179,934 48,452 Income tax (benefit) provision (2,674) 19,522 11,316 Net (loss) income from discontinued operations (3,642) 160,412 37,136 Net loss (126,548) (33,783) (211,642) Net loss applicable to noncontrolling interests $ 41,897 — — Net (loss) applicable to Surgalign Holdings, Inc. $ (84,651) $ (33,783) $ (211,642) Other comprehensive (loss) income: Unrealized foreign currency translation loss (gain) (596) (23) 351 Total other comprehensive loss $ (84,055) $ (33,760) $ (211,993) Net loss from continuing operations per share applicable to Surgalign Holdings, Inc. - basic $ (1.00) $ (2.61) $ (3.55) Net income from discontinued operations per share applicable to Surgalign Holdings, Inc. - basic (0.03) 2.16 0.53 Net loss per share applicable to Surgalign Holdings, Inc.- basic (0.69) (0.45) (3.02) Net loss from continuing operations per share applicable to Surgalign Holdings, Inc. - diluted $ (1.00) $ (2.61) $ (3.55) Net income from discontinued operations per share applicable to Surgalign Holdings, Inc. - diluted (0.03) 2.16 0.53 Net loss per share applicable to Surgalign Holdings, Inc. - diluted (0.69) (0.45) (3.02) Weighted average shares outstanding - basic 122,592,569 74,403,155 70,150,492 Weighted average shares outstanding - diluted 122,592,569 74,403,155 70,150,492 Common
StockAdditional
Paid-in
CapitalAccumulated
Other
Comprehensive
LossAccumulated
DeficitTreasury
StockTotal Stockholders' Equity Mezzanine Equity Balance, January 1, 2019 Balance, January 1, 2019 $ 64 $ 433,143 $ (7,270) $ (239,537) $ (4,869) $ 181,531 $ — Net loss — — — (211,642) — (211,642) — Foreign currency translation adjustment — — (359) — — (359) — Exercise of common stock options — 395 — — — 395 — Equity instruments issued in connection with Paradigm Spine acquisition - net of fees 11 60,719 — — — 60,730 — Stock-based compensation — 4,367 — — — 4,367 — Purchase of treasury stock — — — — (272) (272) — Amortization of preferred stock — (186) — — — (186) — Balance, December 31, 2019 75 498,438 (7,629) (451,179) (5,141) 34,564 — Net loss — — — (33,783) — (33,783) — Foreign currency translation adjustment — — 23 — — 23 — Foreign currency translation adjustment related to the impact of discontinued operations — — 5,190 — — 5,190 — Vesting of Restricted Stock Awards — 22 — — — 22 — Equity instruments issued in connection with the Holo acquisition 6 12,244 — — — 12,250 — Stock-based compensation — 6,528 — — — 6,528 — Purchase of treasury stock — — — — (515) (515) — Amortization of preferred stock — (109) — — — (109) — Balance, December 31, 2020 81 517,123 (2,416) (484,962) (5,656) 24,170 — Net (loss) income Net (loss) income — — — (84,651) — (84,651) (41,897) Foreign currency translation adjustment Foreign currency translation adjustment — — 596 — — 596 — Exercise of common stock options Exercise of common stock options — 23 — — — 23 — Stock-based compensation Stock-based compensation — 5,212 — — — 5,212 — Purchase of treasury stock Purchase of treasury stock — — — — (196) (196) — Share offering Share offering 58 82,268 — — — 82,326 — Warrant issuance costs Warrant issuance costs — (24,798) — — — (24,798) — Equity instruments issued in connection with Prompt Prototypes, LLC Equity instruments issued in connection with Prompt Prototypes, LLC — 221 — — — 221 — Equity instruments issued in connection with the INN acquisition Equity instruments issued in connection with the INN acquisition 7 4,920 — — — 4,927 — Purchase of noncontrolling interest Purchase of noncontrolling interest — — — — — — 51,903 Purchases of stock in the ESPP plan Purchases of stock in the ESPP plan 1 406 — — — 407 — Balance, December 31, 2021 Balance, December 31, 2021 $ 147 $ 585,375 $ (1,820) $ (569,613) $ (5,852) $ 8,237 $ 10,006 Year Ended December 31, 2021 2020 2019 Cash flows from operating activities: Net loss $ (126,548) $ (33,783) $ (211,642) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization expense 2,479 6,581 22,675 Provision for bad debts and product returns 2,064 4,286 2,937 Change in fair value of warrant liability (14,736) — — Provision for inventory write-downs 9,096 17,691 8,493 Investor Fee 2,119 — — Revenue recognized due to change in deferred revenue — (2,618) (4,906) Deferred income tax provision (171) (1,807) 17,066 Stock-based compensation 5,212 6,528 4,367 Asset impairment and abandonments 12,195 14,773 97,341 Goodwill impairment — — 140,003 Asset acquisition expenses 72,087 94,999 — Loss (Gain) on acquisition contingency (4,587) 4,753 (76,033) Paid in kind interest expense — — 4,408 Loss on extinguishment of debt — 2,686 — Bargain purchase gain (90) — — Amortization of debt issuance costs — 283 — Amortization of debt discount — 2,479 — Derivative loss — 12,641 — Loss (gain) on sale of OEM business (discontinued operations) 6,316 (209,800) — Other 24 279 1,673 Change in assets and liabilities: Accounts receivable 5,701 4,444 (9,013) Inventories (15,480) (12,607) (14,219) Accounts payable (3,112) 5,306 (974) Accrued expenses and income taxes payable 10,542 3,731 4,489 Right-of-use asset and lease liability (2,542) — — Contract liability — 2,956 2,000 Other operating assets and liabilities (12,361) (11,839) 1,879 Net cash used in operating activities (51,792) (88,038) (9,456) Cash flows from investing activities: Payments for OEM working capital adjustment (5,430) — — Purchases of property and equipment (13,423) (10,115) (14,426) Acquisition of INN (5,000) — — Patent and acquired intangible asset costs (649) (3,923) (2,007) Proceeds from sale of OEM business — 437,097 — Acquisition of Prompt Prototype, net of cash acquired (330) — — Acquisition of Paradigm Spine — — (99,692) Acquisition of Holo Surgical — (32,117) — Net cash provided by (used in) investing activities (24,832) 390,942 (116,125) Cash flows from financing activities: Share offering proceeds, net 82,326 — — Proceeds from exercise of common stock options 23 22 395 Proceeds from Employee Stock Purchase Program (ESPP) 407 — — Repayment of short-term obligations — (76,912) — Proceeds from long-term obligations — 89,892 121,500 Payments of debt issuance costs — (1,740) (826) Payments on long-term obligations — (207,266) (500) Payments for treasury stock (196) (515) (273) Redemption of preferred stock — (66,519) — Net cash provided by (used in) financing activities 82,560 (263,038) 120,296 Effect of exchange rate changes on cash and cash equivalents 1,389 (1,512) (56) Net increase (decrease) in cash and cash equivalents 7,325 38,354 (5,341) Cash and cash equivalents, beginning of period 43,962 5,608 10,949 Cash and cash equivalents, end of period $ 51,287 $ 43,962 $ 5,608 Supplemental cash flow disclosure: Cash paid for interest $ — $ 14,964 $ 7,121 Cash paid for income taxes, net of refunds 7,990 7,103 (1,994) Non-cash acquisition of property and equipment 195 750 1,468 Non-cash common stock issuance - Prompt 221 — — Non-cash acquisition of INN 14,909 — — Consolidated Statements of Cash Flows(In thousands, except share data)See notes to consolidated financial statements.SURALIGN HOLDINGS, INC. AND SUBSIDIARIES2019 and 2018advancingelevating the sciencestandard of spine care by delivering innovative solutions, includingthrough the applicationevolution of digital health. Uniquely aligned and resourced to advance the standard of care, the company is building technologies physicians and other health providers will look to drivefor what is truly possible for their patients. Surgalign is focused on developing solutions that predictably deliver superior clinical and economic outcomes. On January 14, 2022, we received FDA 510(k) clearance for HOLO Portal™, a surgical guidance system utilizingaugmented reality ("AR") and artificial intelligence ("AI") to intraoperatively assist spine surgery. HOLO Portal™ technology combines image-based guidance with AR, automated spine segmentation, and automated surgical planning utilizing proprietary AI software. Intraoperative 3D digital imaging is autonomously processed by the system to create a patient-specific plan that is presented to the surgeon using an AR display.We are developing additional applications utilizing HOLO™ AI technology for use in multiple clinical specialties across the continuum of patient outcomes.care. The Company hasfirst example of this is with the acquisition of an equity interest in Inteneural Networks, Inc. ("INN") which uses proprietary AI technology to autonomously segment and identify neural structures in medical images. We believe HOLO™ AI, our portfolio of neural network technologies, is one of the most advanced artificial intelligence technologies being applied to surgery.The CompanyWe also hashave a biomaterials portfolio of advanced and traditional orthobiologics, or biomaterials. In addition to its spinal hardwareorthobiologics.biomaterials portfolios, the Company is developing an Augmented Reality and Artificial Intelligence digital surgery platform called ARAITM (referred to “ARAI”) to enable digital spine surgery, which the Company believes is one of the most advanced artificial intelligence technologies being applied to surgery. ARAI is designed to automatically segment, identify, and recognize patient anatomy to autonomously assist the surgeon throughout the surgical procedure. This proprietary artificial intelligence-based platform system is an intelligent anatomical mapping technology designed to assist surgeons by allowing them to remain in safe anatomical zones, and to enhance surgical performance. The Company plans to leverage its digital surgery platform to improve patient outcomes and drive adoption of its spinal hardware implants and biomaterials products. The Company is developing a pipeline of new innovative technologies that it plans to integrate with its digital surgery platform. The Company currently markets and sellssell products to hospitals, ambulatory surgery centers, and healthcare providers in the United States and in more than 4050 countries worldwide. The Company isWe are headquartered in Deerfield, Illinois, with commercial, innovation and design centers in San Diego, CA; Marquette, MI;California; Wurmlingen, Germany; and Warsaw, Poland.BIOCLEANSE®BIOCLEANSE®, TUTOPLAST®TUTOPLAST®and CANCELLE®CANCELLE®SP sterilization processes (collectively, the “OEM Businesses”) to Buyer and its affiliates for a purchase price of $440$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 (United States), 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 as Surgalign Spine Technologies. Where obvious and appropriate from the context, references herein to Surgalign or the Company refer to the Company including the disposed OEM Businesses.$80,000$80.0 million revolving credit facility under that certain Credit Agreement dated as of June 5, 2018, by and among Surgalign Spine Technologies, Inc. (formerly known as RTI Surgical, Inc.), as borrower, Pioneer Surgical Technology, Inc., our wholly-owned subsidiary, as a borrower, the other loan parties thereto as guarantors, JPMorgan Chase Bank, N.A., as lender and as administrative agent for the JPM Lenders, as amended (the “2018 Credit Agreement”), (ii) terminated the 2018 Credit Agreement, (iii) paid in full its $100,000$100.0 million term loan and $30,000$30.0 million incremental term loan commitment under that certain Second Lien Credit Agreement, dated as of March 8, 2019, by and among Surgalign Spine Technologies, Inc., as borrower, the lenders party thereto from time to time and Ares Capital Corporation, as administrative agent for the other lenders party thereto, as amended (the “2019 Credit Agreement”) and (iv) terminated the 2019 Credit Agreement.Priorthe sale of the OEM Businesses, the Company operated 2 reportable segments: Spine and OEM. Subsequent to the sale of the OEM Businesses, the Company operates only 1 reportable segment.$66,519,$66.5 million, a Certificate of Retirement was filed with the Delaware Secretary of State retiring the Series A Preferred Stock, and the WSHP representatives on the Company’s Board of Directors, Curtis M. Selquist and Chris Sweeney resigned from the Board of Directors.Holo AcquisitionOn October 23, 2020, the Company completed the acquisition of Holo Surgical Inc. (“Holo Surgical”) pursuant to the Stock Purchase Agreement dated as of September 29, 2020 (the “Holo Surgical Purchase Agreement”), by and among the Company, Roboticine, Inc. (the “Seller”) and the other parties signatory thereto. Holo Surgical is a privately-held technology company that is developing ARAI, to enable digital spine surgery. As consideration for the transactions contemplated by the Holo Surgical Purchase Agreement, at closing, the Company paid to the Seller $30,000 in cash and issued to the Seller 6,250,000 shares of its common stock with a fair value of $12,250. In addition, the Seller will be entitled to receive contingent consideration from the Company valued in an aggregate amount of $50,632 as of October 23, 2020, which must be first paid in sharesCompany’s common stock (in an amount up to 8,650,000 shares) and then paid in cash thereafter, 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 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.COVID-19The coronavirus (COVID-19)(“COVID-19”) pandemic, as well as the corresponding governmental response and the Company’s management of the crisis has had a significant impact on the Company’s business. The consequences of the outbreak and impact on the global economy continuescontinue to evolve, and the full extent of the impact is uncertain aswith the existence of variant strains of COVID-19. The variant strains have and will continue to lead to a rise in infections resulting in the datereinstatement of this filing. The outbreak has already broughtcertain restrictions previously in place on a significant disruption to the operations of the Company.At times throughoutglobal scale.arehave been required, or are choosing, to defer procedures in which the Company’s products would be used, and many facilities that specialize in the procedures in which the Company’s products would be used have closed or reduced operating hours. These circumstances haveThe Company continue to see these measures taken through year end and impact from Omicron negatively impactedimpacting the ability of the Company’s employees and distributors to effectively market and sell its products. In addition, even after the pandemic has subsidedsubsides and/or governmental orders no longer prohibit or recommend against performing such procedures, patients may continue to defer such procedures out of concern of being exposed to coronavirus for other reasons.has led to an economic slowdown or recession,in 2020, and which has adversely affected the Company’s business, operating results, or financial condition. The adverse effect of the pandemic on the broader economy has also negatively affected demand for procedures using the Company’s products, and could cause one or more of the Company’s distributors, customers, and suppliers to experience financial distress, cancel, postpone, or delay orders, be unable to perform under a contract, file for bankruptcy protection, go out of business, or suffer disruptions in their business. This could impact the Company’s ability to provide products and otherwise operate its business, as well as increase its costs and expenses.In response to the COVID-19 novel coronavirus pandemic and the resulting federal and local guidelines, the Company furloughed or reduced the hours of a majority of its U.S.-based employees in Q2 2020. While the employees have since returned to work, the2020,2021, the Company had cash of $43,962$51.3 million and an accumulated deficit of $484,962.$569.6 million. For the year ended December 31, 2020,2021, the Company had a loss from continuing operations of $194,195.$122.9 million and a net loss applicable to Surgalign Holdings, Inc. of $84.7 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 nor in 2020.$40,467$40.5 million from the offering after deducting the underwriting discounts and commission of $2,583.considerationmanagement's evaluation of the going concern conclusion we considered the following i) continued COVID-19 uncertainties,uncertainties; ii) negative cash flows that are projected over the next 12-month period,period; iii) the income taxes to be paid related to the gain on sale associated with the OEM Businesses, iv) uncertainty regarding potential settlements related to ongoing litigation and regulatory investigations,investigations; and v) iv) approximately $8,993$25.6 million of the total contingent consideration of $50,632$51.9 million are expected to become due to the former owners of Holo Surgical if regulatory approval incertain milestones are met over the US is obtained in 2021,next 12 months which would be paid through combinationin cash; v) total payments of common stock$10.3 million at fair value for INN related milestones are expected to be paid in cash when milestones are achieved in the future and; vi) seller notes in the amount of $10.0 million a fair value due to the seller of INN on December 31, 2024; and cash; the Company has forecasted the need to raise additional capital in order to continue as a going concern.vii) various supplier minimum purchase agreements. 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 debt and/or equity financing infinancing. In addition to these efforts the funding ofCompany will need continued capital and cash flows to fund the future operations through 20212022 and beyond. The Company’s ability to raise additional capital may be adversely impacted by potential worsening global economic conditions and the recent disruptions to, and volatility in, financial markets in the United States and worldwide resulting from the ongoing COVID-19 pandemic.worldwide. If cash resources are insufficient to satisfy the Company’s on-going cash requirements through 2021,2022, 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.is planningcontinually 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.20202021 and 2019,2020, the Company had 0no cash equivalents.Since the adoption of the ASU 2016-13, Financial Instruments — Credit Losses(Topic326): Measurement of Credit Losses on Financial Instruments (the “CECL standards”) on January 1, 2020, theThe Company maintains the allowance for estimated losses resulting from the inability of its customers to make required payments. The allowance represents the current estimate of lifetime expected credit losses over the remaining duration of existing accounts receivable considering current market conditions and supportable forecasts when appropriate. The estimate is a result of the Company’s ongoing evaluation of collectability, customer creditworthiness, historical levels of credit losses, and future expectations. Write-off activity and recoveries for the years were not material.Before 2020, the Company maintained allowances for doubtful accounts based on the Company’s review and assessment of payment history and its estimate of the ability of each customer to make payments on amounts invoiced. If the financial condition of any of its customers were to deteriorate, additional allowances might be required. From time to time the Company must adjust its estimates. Changes in estimates of the collection risk related to accounts receivable can result in decreases and increases to current period net loss.the lower of cost or market,net realizable value, with cost determined using the first-in, first-out method. Non-current inventory represents those the Company anticipates will not be sold within the next year. Non-current inventory is estimated by comparing historical and projected sales trends and inventory quantities on hand. Inventory is evaluated for obsolescence and excess quantities by analyzing inventory levels, historical loss trends, expected product lives, product at risk of expiration, sales levels by product and projections of future sales demand.a demand or consumption based component that compares projected sales, expected consumption and historical sales to inventory quantities on hand; and 2) for expiring inventory wemanagement assesses the risk related to inventory that is near expiration by analyzing historical expiration trends to project inventory that will expire prior to being sold. The Company’s demand based consumption model assumes that inventory will be sold on a first-in-first-out basis. The Company’s metal inventory does not expire and can be re-sterilized and sold; however, the Company assesses quantities on hand, historical sales, projected sales, projected consumption, the number of forecasted years, safety stock and those products we have determined to sunset when calculating the estimate.sellinggeneral and marketingadministrative expenses in the accompanying consolidated statements of comprehensive loss.Processing equipment 20202021 and 2019.2020.Goodwill— Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 350, Goodwill and Other Intangible Assets (“ASC 350”) requires companies to test goodwill for impairment on an annual basis at the reporting unit level (or an interim basis if an event occurs that might reduce the fair value of a reporting unit below its carrying value). The Company has 1 reporting unit and the annual impairment test was performed at each year-end unless indicators of impairment are present and require more frequent testing. Goodwill is tested for impairment annually by comparing the fair value of the reporting unit to its carrying amount, including goodwill.The income approach employs a discounted cash flow model that considers: 1) assumptions that marketplace participants would use in their estimates of fair value, including the cash flow period, terminal values based on a terminal growth rate and the discount rate; 2) current period actual results; and 3) projected results for future periods that have been prepared and approved by senior management of the Company.The market approach employs market multiples from guideline public companies operating in our industry. Estimates of fair value are derived by applying multiples based on revenue and earnings before interest, taxes, depreciation and amortization (“EBITDA”) adjusted for size and performance metrics relative to peer companies. The cost approach considers the replacement cost adjusted for certain factors. Certain balance sheet items were adjusted to fair value before being utilized in estimating the value of the reporting unit under the cost approach, including inventory, property and equipment, right of use assets, and other intangible assets.All three approaches used in the analysis have a degree of uncertainty. Potential events or changes in circumstances which could impact the key assumptions used in our goodwill impairment evaluation are as follows:•Change in peer group or performance of peer group companies•Change in the Company’s markets and estimates of future operating performance•Change in the Company’s estimated market cost of capital•Change in implied control premiums related to acquisitions in the medical device industry Goodwill represents the excess of purchase price over fair value of tangible net assets of acquired businesses at the acquisition date, after amounts allocated to other identifiable intangible assets. Factors that contribute to the recognition of goodwill include securing synergies that are specific to our business, not available to other market participants, and are expected to increase revenues and profits; acquisition of a talented workforce; cost savings opportunities; the strategic benefit of expanding our presence in core and adjacent markets; and diversifying our product portfolio.Other Intangible Assets —Other intangible assets, which constitutes finite lives assets, generally consist of patents, acquired exclusivity rights, licensing rights, distribution agreements, and procurement contracts. Patents are amortized on the straight-line method over the shorter of the remaining protection period or estimated useful lives of between 8 and 16 years. Tradenames,Trade names, procurement contracts, customer lists, acquired exclusivity rights, and distribution agreements are amortized over estimated useful lives of between 5 to 25 years. For the years ended December 31, 2021, 2020 2019 and 2018,2019, the amortization expense is $889, $10,671$0.0 million, $0.9 million and $3,555,$10.7 million , respectively.productsimplants 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, respectively based on the terms of the contract.condensed consolidated financial statements.employeerestricted stock awards, restricted stock units, stock options and restricted stock. the employee stock purchase plan ("ESPP") purchase rights (i.e., equity-classified awards).under ASC 718 and expenses the related compensation cost using the straight-line method over the vesting period.ESPP purchase rights. The fair value of stock options and awards is determined on the grant date, and the fair value of the ESPP purchase rights is determined on the offering date using assumptions for the expected term, expected volatility, dividend yield, and the risk freerisk-free interest rate. The details of those assumptions, is as follows:of the option and historic data related to exercise and post-vesting cancellationexpiration history experienced by the Company. The Company uses the simplified method for estimating the expected term used to determine the fair value of options under ASC 718. The expected term is determined separately for options issued to the Company’s directors and to employees. The term assumption for ESPP purchase is primarily based on the offering period.isfor both stock options and ESPP purchase rights are primarily based on the historic volatility of the Company’s common stock.modelmodels for stock options and ESPP purchase rights includes a 00% expected dividend yield assumption, as the Company has not historically paid, nor does it anticipate paying dividends on its common stock.risk freerisk-free interest rate approximates recent U.S. Treasury note auction results with a similar life to that of the option.option or ESPP purchase right. The Company’s model does not include a discount for post-vesting restrictions, as the Company has not issued awards with such restrictions.period expensecompensation cost recognized for stock options is then determined based on the valuationgrant date fair value of the options and at that timethe number of options granted, net of an estimated forfeiture rate is used to reduce the expense recorded.rate. The Company’s estimate of pre-vesting forfeitures is primarily based on the recent historical experience of the Company and is adjusted to reflect actual forfeitures asforfeitures. The compensation cost recognized for restricted stock awards, restricted stock units, and ESPP purchase rights is determined based on the options vest. The Company uses a Monte Carlo simulation model to estimate thegrant date fair value of restricted stock awards that contain a market condition.97 for further discussion related to the Holo Surgical Acquisition.64,044, and 107,10964,044 shares of its common stock for $515, $272,$0.2 million, $0.5 million, and $479$0.3 million for the years ended December 31, 2021, 2020, and 2019, and 2018, respectively.a.If all necessary conditions have been satisfied by the end of the period (the events have occurred), those shares shall be included as of the beginning of the period in which the conditions were satisfied (or as of the date of the contingent stock agreement, if later).b.If all necessary conditions have not been satisfied by the end of the period, the number of contingently issuable shares included in diluted EPS shall be based on the number of shares, if any, that would be issuable if the end of the reporting period were the end of the contingency period (for example, the number of shares that would be issuable based on current period earnings or period-endmarket price) and if the result would be dilutive. Those contingently issuablea.If all necessary conditions have been satisfied by the end of the period (the events have occurred), those shares shall be included in the denominator of diluted EPS as of the beginning of the period in which the conditions were satisfied (or as of the date of the contingent stock agreement, if later).Reference Rate Reform — In MarchAugust 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”), which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by the discontinuation of the London Interbank Offered Rate (LIBOR) and other interbankoffered rates. This guidance is effective beginning on March 12, 2020 through December 31, 2022. The Company adopted ASU 2020-04 and it did not have an impact on its consolidated financial statements.Income Taxes — In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”)2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40). ASU 2019-12 was issued to reduce the complexity of accounting for income taxes for those entities that fall within the scopeThe guidance provides simplifications of the accounting standard.for convertible instruments and reduces the number of accounting models for convertible debt instruments and convertible preferred stock. Limiting the accounting models results in fewer embedded conversionfeatures being separately recognized from the host contract as compared with current U.S. GAAP. The guidance is to be applied using a prospective method, excluding amendments related to franchise taxes, which should be applied on either a retrospective basiseffective for all periods presented or a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. ASU 2019-12 is effectivepublic business entities for fiscal years beginning after December 15, 2020, with early2021. Early adoption permitted. The Company early adopted ASU 2019-12 on January 1, 2020, and there wasis permitted, but no material impact on the Company’s consolidated financial statements.Financial Instruments — In May 2019, the FASB issued ASU No. 2019-05 Financial Instruments — Credit Losses (Topic 326) which provides relief to certain entities adopting ASU 2016-13 (discussed below). The amendments accomplish those objectives by providing entities with an option to irrevocably elect the fair value option in Subtopic 825-10, applied on an instrument-by-instrument basis for eligible instruments, that are within the scope of Subtopic 326-20, upon adoption of Topic 326. The fair value option election does not apply to held-to-maturity debt securities. ASU 2019-05 has the same transition as ASU 2016-13 and is effective for periods beginning after December 15, 2019, with adoption permitted after this update. The Company adopted ASU 2019-05 on January 1, 2020 and it did not have an impact on the consolidated financial statements.In April 2019, the FASB issued ASU No. 2019-04 Codification Improvements to Topic 326, Financial Instruments — Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, which provides updates and clarifications to three previously-issued ASUs: 2016-01 Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities; 2016-13 Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, described further above and which the Company has not yet adopted; and 2017-12 Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which the Company early adopted effective January 1, 2018. The updates related to ASU 2016-13 have the same transition as ASU 2016-13 and are effective for periods beginning after December 15, 2019, with adoption permitted after the issuance of ASU 2019-04. The updates related to ASU 2017-12 are effective for the Company on January 1, 2020. The updates related to ASU 2016-01 are effective forearlier than fiscal years beginning after December 15, 2019. The Company adopted ASU 2017-12 on2020. As of January 1, 2020 and it did not have an impact on the consolidated financial statements.In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13), which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (CECL) methodology. The CECL model utilizes a lifetime expected credit loss measurement objective for the recognition of credit losses for loans and other receivables at the time the financial asset is originated or acquired. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. This model replaces multiple existing impairment models previously used under U.S. generally accepted accounting principles, which generally require that a loss be incurred before it is recognized. The new standard also applies to financial assets arising from revenue transactions such as contract assets and accounts receivables. On January 1, 2020,2022, the Company adopted ASU 2016-13. The adoption2020-06 and it did not have a material impact on the Company’s consolidated financial statements.Credit losses for trade receivables is determined based on historical information, current information and reasonable and supportable forecasts. The Company has concluded that the adoption of the standard was not material as the composition of the trade receivables at the reporting date is consistent with that used in developing the historical credit-loss percentages. Further, the risk characteristics of the Company’s customer and composition of the portfolio have not changed significantly over time.Fair Value Measurement — In August 2018, the FASB issued Accounting Standards Update (“ASU”) 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement.” This ASU modifies the disclosure requirements on fair value measurements by removing, modifying, or adding certain disclosures. ASU 2018-13 is effective for the Company beginning January 1, 2020 (with early adoption permitted). Certain disclosures in ASU 2018-13 are required to be applied on a retrospective basis and others on a prospective basis. The Company adopted ASU 2018-13 and it did not have an impact on the consolidated financial statements.4. LeasesThe Company does not have any leases that have not yet commenced asAs of December 31, 2020. 2021 the only lease that has yet to commence is for our San Diego Research and Design Center, which is expected to open in 2022.The majority of our leases have remaining lease terms of 1 to 98 years, some of which include options to extend or terminate the leases. The option to extend or terminate is only included in the lease term if the Company is reasonably certain of exercising that option. Operating lease ROU assets are presented
2021
2020Operating lease cost $ 706 $ 1,179 $ 1,108 Short-term operating lease cost 335 — 36 Total operating lease cost $ 1,041 $ 1,179 $ 1,144
2021
2020Cash paid for amounts included in the measurement of lease liabilities $ 1,237 $ 1,313 ROU assets obtained in exchange for lease obligations 57 242 Balance Sheet Classification
2021
2020Assets: Right-of-use assets Other assets - net $ 876 $ 1,425 Liabilities: Current Accrued expenses $ 294 $ 650 Noncurrent Other long-term liabilities 947 1,200 Total operating lease liabilities $ 1,241 $ 1,850
2021
2020Weighted-average remaining lease term (years) 6.3 5.5 Weighted-average discount rate 5.09 % 4.92 % 2020, the weighted-average remaining lease term was 5.5 years. The rate implicit on the Company’s leases are not readily determinable nor is it available to the Company from its lessors. Thus, the Company estimates its incremental borrowing rate based on information available at lease commencement in order to discount lease payments to present value. The weighted-average discount rate of the Company’s operating leases was 4.92%, as of December 31, 2020. Based on the income approach, including consideration of present value of market-based rent payments for the applicable properties of the Spine segment leases, the Company recorded a write down of $201 related to a right of use assets in 2019.As of December 31, 2020,2021, maturities of operating lease liabilities were as follows:Maturity of Operating Lease Liabilities
20212022 $ 374 2023 217 2024 173 2025 161 2026 2026 159 2027 and beyond 2027 and beyond 398 Total future minimum lease payments 1,482 Less imputed interest (241) Total $ 1,241 related assets and liabilities of the OEM Businesses are classified as assets and liabilities of discontinued operations in the consolidated balance sheets and the results of operations from the OEM Businesses are classified as discontinued operations in the consolidated statements of comprehensive loss.income/(loss). There were no assets or liabilities of the OEM Business as of year(s) ended December 31, 2021 or December 31, 2020, due to the transaction occurring on July 20, 2020. Applicable amounts in prior years have been recast to conform to this discontinued operations presentation.The following table presents the assets and liabilities of the discontinued operations as of December 31, 2019:The current portion of the long-term obligations relates to the 2018 Credit Agreement and 2019 Credit Agreement.$80,000$80.0 million revolving credit facility under the 2018 Credit Agreement,Agreement; (ii) terminated the 2018 Credit Agreement,Agreement; (iii) paid in full its $100,000$100.0 million term loan and $30,000$30.0 million incremental term loan commitment under the 2019 CreditAgreement, Agreement; and (iv) terminated the 2019 Credit Agreement. The related obligations as of December 31, 2019, and 2018, as well as the related interest expense and debt issuance costs for the years ended December 31, 2021, 2020 2019 and 20182019 related to these loans have been included in the discontinued operations.2021 2020 2019 Major classes of line items constituting net income from discontinued operations: Revenues $ — $ 87,192 $ 190,961 Costs of goods sold — 49,678 104,482 Gross profit — 37,514 86,479 Expenses: General and administrative General and administrative — 12,889 22,279 Severance and restructuring costs — 604 — Transaction and integration expenses — 23,598 3,160 Total operating expenses — 37,091 25,439 Operating income — 423 61,040 Other expense (income): OEM working capital adjustment OEM working capital adjustment 6,316 — — Interest expense — 14,965 12,571 Loss on extinguishment of debt — 2,686 — Derivative loss — 12,641 — Foreign exchange (gain) loss — (3) 17 Total other expense - net 6,316 30,289 12,588 (Loss) income from discontinued operations (6,316) (29,866) 48,452 Gain on sale of net assets of discontinued operations — 209,800 — (Loss) Income from discontinued operations before income tax provision (Loss) Income from discontinued operations before income tax provision (6,316) 179,934 48,452 Income tax (benefit) provision Income tax (benefit) provision (2,674) 19,522 11,316 Net (loss) income on discontinued operations Net (loss) income on discontinued operations $ (3,642) $ 160,412 $ 37,136 marketing and general and administrative expenses in discontinued operations include corporate costs incurred directly to solely support the Company’s OEM Businesses.Pursuant to the OEM Purchase Agreement, the Company and the Buyer have also entered into a Transition Services Agreement, through which the disposed OEM Businesses will provide to the Company transitional services related to IT support, customer and vendor management, procurement and other services for periods ranging from 3 to 12 months after the disposal.$14$14.0 million may be owed in respect of the working capital adjustment paid at closing. TheOn June 3, 2021, the firm engaged to resolve the dispute issued a binding, non-appealable resolution whereby it was determined the Company disagrees with Buyer’s proposed post-closing adjustment and is disputing the adjustment in accordance with the termswas liable for $5.8 million of the OEM Purchase Agreement. The Company updated the working capital adjustment for $1,376disputed amount, which was agreed withfinalized and paid during the Buyer as partsecond quarter of the adjustment report and recorded the amount2021. The final settlement was expensed under "Income (loss) from operations of discontinued operations" in Q4, 2020 in the discontinued operations. our consolidated statements of comprehensive income/(loss).2019 and 20182019 are comprised of the following, which exclude the effect of income taxes:2021 2020 2019 Significant operating non-cash reconciliation items: Depreciation and amortization $ — $ 2,125 $ 4,466 Provision for bad debts and product returns $ — $ 456 $ 101 Provision for inventory write-downs $ — $ — $ 6,340 Revenue recognized due to change in deferred revenue $ — $ (2,618) $ (4,906) Deferred income tax (benefit) provision $ — $ (1,609) $ (3,989) Stock-based compensation $ — $ 792 $ 540 Gain on sale of discontinued assets, net $ — $ (209,800) $ — Paid in kind interest expense $ — $ — $ 4,408 Loss on extinguishment of debt $ — $ 2,686 $ — Amortizations of debt issuance costs $ — $ 283 $ — Amortizations of debt discount $ — $ 2,479 $ — Significant investing items: Payments for OEM working capital adjustment $ (5,430) $ — $ — Purchases of property and equipment $ — $ (1,867) $ (6,866) Patent and acquired intangible asset costs $ — $ (419) $ (578) Proceeds from sale of OEM Businesses $ — $ 437,097 $ — 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, respectively based on the terms of the contract. 2019 and 2018,2019, were recognized at a point in time. The following table represents total revenue by geographical region for the years ended December 31, 2021, 2020 2019 and 2018:2019:Revenues: Domestic $ 77,927 $ 85,612 $ 97,703 International 12,573 16,137 19,720 Total revenues from contracts with customers $ 90,500 $ 101,749 $ 117,423 The Company’s performance obligations consist mainlytransferring control of implants identifiedINN), that are owned by Krzysztof Siemionow, MD, PhD (“Siemionow”), Pawel Lewicki, PhD ("Lewicki") respectively to acquire a 42% equity interest in the contracts. Someissued and outstanding shares of INN for a non-exclusive right to use their proprietary technology. Lewicki is a member of the Company’s contracts offer assurance-type warrantiesBoard of Directors (the “Board”) and Siemionow is the Company's Chief Medical Officer.connection withAI 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 salepotential 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 productleader incustomer. Assurance-type warranties provideparticularly 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.customer with assurancefair 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 3 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.related product will functionCompany has obtained control through means other than voting rights as the parties intended because it complies with agreed-upon specifications. Such warranties do not representCompany 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 separate performance obligationVIE and are not material tohas fully consolidated INN into the consolidated financial statements.statements as of December 31, 2021. INN does not have any assets or liabilities as of December 31, 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, $10.0 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 3 potential milestone payments and $41.7 million in noncontrolling interest related to the 58% equity interest not purchased.7.Balance at April 30, 2021 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 LLCone1 fully paid and non-assessable share of Company common stock , par value $0.001 per share; (ii) each share of Series A convertible preferred stock, par value $0.001 per share, of Legacy RTI issued and outstanding immediately prior to the Transaction (other than shares held by Legacy RTI as treasury shares or by the Company or Merger Sub immediately prior to the Transaction, which were automatically cancelled and ceased to exist) was converted automatically into one1 fully paid and non-assessable share of Series A convertible preferred stock, par value $0.001 per share, of the Company; and (iii) each stock option and restricted stock award granted by Legacy RTI was converted into a stock option or restricted stock award, as applicable, of the Company with respect to an equivalent number of shares of the Company common stock on the same terms and conditions as were applicable prior to the closing.$100,000$100.0 million (the “Cash Consideration Amount”) in cash and 10,729,614 shares of Company common stock (the “Stock Consideration Amount”). The Cash Consideration Amount was adjusted by Paradigm’s working capital of $7,000.$50,000$50.0 million of shares of Company common stock to be valued based upon the Legacy RTI Price and an additional $100,000$100.0 million of cash and/or Company common stock to be valued at the time of issuance, in each case, if certain revenue targets are achieved between closing, March 8, 2019, and December 31, 2022. The first two milestones were not met as ofestimates the fair value of the contingent liability at acquisition datehas no remaining obligation related to thethem. The third revenue based earnout of $72,177 utilizing a Monte-Carlo simulation model. A Monte-Carlo simulationmilestone is an analytical method used to estimate fair value by performing a large number of simulations or trial runs and thereby determining a value based on the possible outcomes. Accounted for as a liability to be revalued at each reporting period the fair value of the contingent liability was measured using Level 3 inputs, which includes weighted average cost of capital and projected revenues and costs. Transaction and integration related costs, specific to Paradigm, were approximately $15,537,The estimated contingent liability as of which approximately $4,143 was incurred during 2018, $11,394 (which includes integration costs of business development expenses of $462 and severance expense of $896) was incurred for the year ended December 31, 2019 and2021, related to this milestone is reflected separately in the accompanying consolidated statements of comprehensive gain (loss). Cash proceeds from second lien credit agreement $ 100,000 Fair market value of securities issued 60,730 Fair market value of contingent earnout 72,177 Total purchase price $ 232,907 Balance at March 8,
2019Cash $ 307 Accounts receivable 5,220 Inventories 17,647 Other current assets 934 Property, plant and equipment 379 Other non-current assets 1,079 Current liabilities (6,169) Lease liabilities (1,079) Net tangible assets acquired 18,318 Other intangible assets 79,000 Goodwill 135,589 Total net assets acquired $ 232,907 $7,122$7.1 million and non-current inventory of $10,525. •Paradigm will strengthen the Company’s spine portfolio with the addition of the coflex® Interlaminar Stabilization® device. Coflex is a differentiated and minimally invasive motion preserving stabilization implant that is FDA PMA-approved for the treatment of moderate to severe lumbar spinal stenosis (“LSS”) in conjunction with decompression.Coflex allows the Company to provide surgeons who treat patients with moderate to severe LSS with a PMA-approved device supported by more than 12 years of clinical data.$135,589$135.6 million of goodwill.2019 Revenues $ 37,374 Net loss applicable to common shares (16,547) Acquisition of Zyga Technology, Inc.On January 4, 2018, the Company acquired Zyga Technology, Inc. (“Zyga”), a spine-focused medical device company that develops and produces innovative minimally invasive devices to treat underserved conditions of the lumbar spine. Zyga’s primary product is the SImmetry® Sacroiliac Joint Fusion System. Under the terms of the merger agreement dated January 4, 2018, the Company acquired Zyga for $21,000 in consideration paid at closing (consisting of borrowings of $18,000 on the Company’s revolving credit facility and $3,000 cash on hand), $1,100 contingent upon the successful achievement of a clinical milestone, and a revenue based earnout consideration of up to $35,000. Based on a probability weighted model, the Company estimates a contingent liability related to the clinical milestone and revenue based earnout of $4,986. Acquisition related costs were approximately $1,430, of which approximately $630 was incurred in 2017 and $800 was incurred for the three months ended March 31, 2018 and is reflected separately in the accompanying Consolidated Statements of Comprehensive (Loss) Gain. As of December 31, 2020, the Company determined that Zyga was not expected to meet the clinical milestone to earn the contingent consideration, and therefore, reduced the liability for the contingent consideration to 0.accounted4 active stock-based compensation plans: the 2021 Incentive Compensation Plan, the 2021 Inducement Plan, the 2021 Employee Stock Purchase Plan ("ESPP"), and the 2018 Incentive Compensation Plan. The Company accounts for its stock-based compensation plans in accordance with ASC 718. The Company grants stock-based awards to its employees, including officers and directors, comprised of restricted stock, restricted stock units, stock options and ESPP purchase rights.acquisitionCompany’s stockholders approved and adopted the 2021 Incentive Compensation Plan (the "Incentive Plan"). The Incentive Plan permits the grant of Zyga under ASC 805. Zyga’s results of operations are included in the consolidated financial statements beginning after January 4, 2018, the acquisition date. Including acquisition contingencies, the total consideration for the Zyga acquisition was $25,986.The purchase price was financed as follows:In the fourth quarter of 2018, the Company completed its valuationstock options, stock appreciation rights, restricted stock, restricted stock units and performance shares to our officers, directors, employees, and consultants of the purchase price allocation.Company. The table below represents the final allocation of the total considerationplan allows for up to Zyga’s tangible and intangible assets and liabilities fair values as of January 4, 2018.Total net assets acquired as of January 4, 2018, are all part of the Company’s only operating segment and reporting unit. Fair values are based on management’s estimates and assumptions including variations of the income approach, the cost approach and the market approach. Other intangible assets include patents of $6,500 with a useful life of 13 years, trademarks of $80 with a useful life of 1 year and selling and marketing relationships of $180 with a useful life of 7 years.The Company believes that the acquisition of Zyga has offered and continues to offer the potential for substantial strategic and financial benefits. The transaction further advances our strategic transformation focused on reducing complexity, driving operational excellence and accelerating growth. The Company believes the acquisition will enhance stockholder value through, among other things, enabling the Company to capitalize on the following strategic advantages and opportunities:•Zyga’s innovative minimally invasive treatment should accentuate our spine portfolio and opens significant opportunities to accelerate our Spine-focused expansion strategy.•Zyga should leverage the core competencies of our Spine franchise by pursuing niche differentiated products, to gain scale and customer retention and support portfolio pull-through.These potential benefits resulted in the Company paying a premium for Zyga resulting in the recognition of $13,556 of goodwill assigned to the Company’s only operating segment and reporting unit. For tax purposes, none of the goodwill is deductible.The following unaudited pro forma information shows the results of the Zyga’s operations as though the acquisition had occurred as of the beginning of the prior comparable period, January 1, 2018. The pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the actual results of operations had the acquisition taken place as of the beginning of the periods presented, or the results that may occur in the future.9. Holo Surgical AcquisitionOn 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 Acquisition, the Company paid to the Seller $30,000 in cash and issue to the Seller 6,250,0005,842,608 shares of common stock par value $0.001to be issued with respect to awards granted.(“Common Stock”). In addition, followingby providing a material inducement for the closing, the Seller will be entitledbest available individuals to receive contingent consideration fromjoin the Company valuedand its subsidiaries as employees by affording such individuals an opportunity to acquire a proprietary interest in an aggregate amountthe Company. The Inducement Plan permits the grant of stock appreciation rights, restricted stock, restricted stock units and performance shares to our officers, directors, employees, and consultants of the Company. The plan allows for up to $83 million,4,500,000 shares of common stock to be paid throughissued with respect to awards granted.issuanceCompany’s stockholders approved and adopted the 2018 Incentive Compensation Plan (the “2018 Plan”). The 2018 Plan provides for the grant of Common Stock orincentive and non-qualified stock options, restricted stock, and restricted stock units to key employees, including officers and directors of the payment of cash, contingent upon and following the achievement of certain regulatory, commercial and utilization milestones by specified time periods occurringCompany. The 2018 Plan allows for up to 5,726,035 shares of common stock to be issued with respect to awards granted.sixth (6th) anniversaryESPP, which became effective July 1, 2021. Under our ESPP, employees can purchase shares of our common stock based equal to no less than 1% of the closing.employee's compensation, up to a maximum of 15%, subject to certain limits. The Purchase Agreement provides that the Company will issue Common Stock to satisfy any contingent consideration payable to the Seller, until the total numberoffering period is every six-month period beginning January 1st and July 1st 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)each year. The ESPP offers a six-month look-back feature. The purchase price per share is equal to 14,900,000 sharesthe lower of Common Stock (or otherwise, to the extent a lower number, the maximum number of shares of Common Stock that would not require obtaining stockholder approval under the applicable rules of the Nasdaq Stock Market). 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. The Purchase Agreement also includes certain covenants and obligations of the Company with respect to the operation of the business of Holo Surgical that apply during the period in which the milestones may be achieved.The Company determined that substantially all85% of the fair market value was concentrated inof our common stock on the acquired in-process researchoffering date or the purchase date. ESPP purchases are settled with common stock from the ESPP’s previously authorized and development (“IPR&D”) asset in accordance withavailable pool of shares. During 2021, 667,399 shares wereguidanceESPP for $0.4 million. A total of ASC 805, Business Combinations. As such, the acquisition was accounted for as an asset acquisition. The total consideration of the asset acquisition was determined to be $94,999, which consisted of a cash consideration of $30,000, $12,250 of the 6,250,0005,000,000 million shares of Common Stock issued tocommon stock have been authorized for issuance under the Seller, directESPP, and incremental costs of $2,117 incurredthere were 4,332,601 million shares available for issuance under the Holo Acquisition, and an estimated fair value of $50,632 related to the contingent consideration. The Company has determined that the contingent consideration was part of the consideration of the asset acquisition and shall be accounted for as a liability at fair value on the acquisition date of October 23, 2020 in accordance with ASC 480, Distinguishing Liabilities from Equity. Subsequently, the liability shall be marked to market at the end of each reporting period with any change recognized in current earnings. The fair value of the liability was $56,515ESPP as of December 31, 2020 with $8,996 classified as current liabilities within2021.accrued expenses while $47,519 as other long-term liabilities. The change in the fair value of the liability of $5,883 since October 23, 2020 was recognized in the loss (gain) on acquisition contingency line of the consolidated statements of comprehensive loss.The total purchase price paid in the Holo Acquisition has been allocated to the net assets acquired based on their relative fair value as of the completion of the acquisition, primarily including the IPR&D related to Holo Surgical’s development of ARAI and other intangible asset for assembled workforce. The ARAI has not yet reached technological feasibility and has no alternative future use; thus, the purchased IPR&D was expensed immediately subsequent to the acquisition, result in a one-time charge of $94,541 recognized in the asset acquisition expenses line of the consolidated statements of comprehensive loss for the yearyears ended December 31, 2020. Additionally,2021, 2020, and 2019, the intangible assetCompany recognized stock-based compensation related to the assembled workforce was immediately impaired together with other intangible assets in Q4 2020 due to the Company’s negative projected cash flow. The related expense of $458equity-classified awards as also included in the asset acquisition expenses. follows: For the Year Ended December 31, 2021 2020 2019 Stock-based compensation: Costs of goods sold $ 21 $ 169 $ 144 General and administrative 4,839 3,980 3,623 Research and development 352 72 60 Transaction and integration expenses — 1,515 — Total $ 5,212 $ 5,736 $ 3,827 10. Stock-Based Compensation to-to ten-year contractual terms and vest over a one to five-year-to-five year period from the date of grant.Number of
OptionsWeighted
Average
Exercise
PriceWeighted
Average
Remaining
Contractual
Life (Years)Aggregate
Intrinsic
Value(in thousands, except for share and per share information) Outstanding at January 1, 2021 4,979,180 $ 3.28 5.30 $ 142 Granted 776,564 1.82 Exercised (1,007) 2.69 Forfeited or expired (423,517) 3.29 Outstanding at December 31, 2021 5,331,220 $ 3.08 4.43 $ — Vested or expected to vest at December 31, 2021 5,331,220 $ 3.08 4.43 $ — Exercisable at December 31, 2021 3,487,657 $ 3.37 2.15 $ — Available for grant at December 31, 2021 5,777,619 For the Year Ended December 31, 2021 2020 2019 (in thousands, except for per share information) Weighted average fair value of stock options granted $ 0.93 $ 1.21 $ 1.56 Aggregate intrinsic value of stock options exercised $ — $ 3.20 $ 161.00 Year Ended December 31, 2021 2020 2019 Expected term (years) 6.35 6.50 6.50 Risk free interest rate 0.72 % 0.62 % 2.54 % Volatility factor 49.97 % 41.62 % 37.73 % Dividend yield — — — Year Ended December 31, 2021 2020 2019 Expected term (years) 0.50 0.00 0.00 Risk free interest rate 0.05 % — — Volatility factor 84.32 % — — Dividend yield — % — — oneone-year to three-year periods.2018 Incentive Compensation PlanOn April 30, 2018, the Company’s stockholders approved and adopted the 2018 Incentive Compensation Plan (the “2018 Plan”). The 2018 Plan provides for the grant of incentive and nonqualified stock options, restricted stock, and restricted stock units to key employees, including officers and directors of the Company. The 2018 Plan allows for up to 5,726,035 shares of common stock to be issued with respect to awards granted.Stock OptionsAs of December 31, 2020, there was $2,613 of total unrecognized stock-based compensation expense related to nonvested stock options. That expense is expected to be recognized over a weighted-average period of 3 years.Stock options outstanding, exercisable and available for grant at December 31, 2020, are summarized as follows:The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value of stock options for which the fair market value of the underlying common stock exceeded the respective stock option exercise price. Estimated forfeitures are based on the Company’s historical forfeiture activity. Stock-based compensation expense recognized for all stock option grants is net of estimated forfeitures and is recognized over the awards’ respective requisite service periods.Other information concerning stock options are as follows:The aggregate intrinsic value of stock options exercised in a period represents the pre-tax cumulative difference, for the stock options exercised during the period, between the fair market value of the underlying common stock and the stock option exercise prices.The following weighted-average assumptions were used to determine the fair value of options under FASB ASC 718:Restricted Stock Awards2020,2021, restricted stock awards in the amount of 1,453,459147,719 shares and 441,0840 shares of restricted stock were granted to employees and non-employee directors, respectively. As of December 31, 2020,2021, there was $4,290$1.4 million of total unrecognized stock-based compensation related to unvested restricted stock awards. That21.44 years. The following table summarizes information about unvested restricted stock awards as of December 31, 2020:2021: Number of
SharesWeighted
Average
Grant Date
Fair ValueUnvested at January 1, 2021 Unvested at January 1, 2021 1,897,196 $ 3.47 Granted 147,719 2.06 Vested (1,037,528) 3.68 Forfeited (353,133) 3.35 Unvested at December 31, 2021 Unvested at December 31, 2021 654,254 $ 2.89 In 2020, 0 restricted stock units were granted. As of December 31, 2020,2021, there was $236$5.5 million of total unrecognized stock-based compensation expense related to unvested restricted stock units. That expense is expected to be recognized on a straight-line basis over a weighted-average period of 1 year.1.92 years. The following table summarizes information about unvested restricted stock units as of December 31, 2020:2021: Number of
SharesWeighted
Average
Grant Date
Fair ValueUnvested at January 1, 2021 Unvested at January 1, 2021 89,935 $ 7.41 Granted 5,541,313 1.64 Vested (30,783) 1.73 Forfeited (800,102) 2.18 Unvested at December 31, 2021 Unvested at December 31, 2021 4,800,363 $ 1.66 For the years ended December 31, 2020, and 2018, the Company recognized stock-based compensationissued an inducement grant to its President of Global Spine, now CEO of the Company, Mr. Terry Rich. This grant was in the form of: (1) a restricted stock award agreement (the “Restricted Stock Agreement”); and (2) a stock option agreement. This inducement grant was made under the RTI Surgical Holdings, Inc., Terry Rich Reserve Compensation Plan.follows:of the grant date. The exercise price for the Stock Options is $2.09. On the first anniversary of the grant date, 62,799 vested The remaining shares vest on the last day of each calendar quarter at a rate of 15,700 sharesInducement Grantper calendar quarter commencing on the fifteen month following the grant date and continuing for two years after.Officerwill expireexpired on January 26, 2022. The stock options will vest based on the Company’s attainment of three average stock price benchmarks. The first 650,000 shares will vest if the Company’s average publicly traded stock price is over $6.00 for a sixty-consecutive calendar day period. The next 650,000 shares will vest if the Company’s average publicly traded stock price is over $7.00 for a sixty-consecutive calendar day period. The final 650,000 shares will vest if the Company’s average publicly traded stock price is over $8.00 for a sixty-consecutive calendar day period. The vesting of the stock options is cumulative.Chief Financial and Administrative OfficerOn September 18, 2017, the Company issued an inducement grant to its Chief Financial and Administrative Officer, Mr. Jonathon Singer. This grant was in the form of: (1) a restricted stock award agreement (the “Restricted Stock Agreement”); and (2) a stock option agreement. This inducement grant was made under the RTI Surgical, Inc. 2015 Incentive Compensation Plan, which was filed2022 with the SEC on May 5, 2015.Under the Restricted Stock Agreement, the Company granted Mr. Singer 109,890 shares of restricted stock. All of the shares granted to Mr. Singer under the Restricted Stock Agreement have fully vested.Under the Option Agreement, the Company granted Mr. Singer the option to purchase 306,900 shares of common stock, as of the grant date. The exercise price for the stock options is $4.55 per share. The stock options will expire on September 18, 2027. The stock options will vest based the Company’s attainment of three average stock price benchmarks. The first 102,300 shares will vest if the Company’s average publicly traded stock price is over $7.00 per share for a sixty-consecutive calendar day period. The next 102,300 shares will vest if the Company’s average publicly traded stock price is over $8.00 per share for a sixty-consecutive calendar day period. The final 102,300 shares will vest if the Company’s average publicly traded stock price is over $9.00 per share for a sixty-consecutive calendar day period. The vesting of the stock options is cumulative.President, Global SpineOn November 29, 2019, the Company issued an inducement grant to its President of Global Spine, Mr. Terry Rich. This grant was in the form of: (1) a restricted stock award agreement (the “Restricted Stock Agreement”); and (2) a stock option agreement. This inducement grant was made under the RTI Surgical Holdings, Inc., Terry Rich Reserve Compensation Plan.Under the Restricted Stock Agreement, the Company granted Mr. Rich 125,598 shares of restricted stock. On the first anniversary of the Grant Date, 41,866 shares will vest. The remaining shares will vest on the last day of each calendar quarter at a rate of 10,467 shares per calendar quarter commencing on the fifteenth month following the Grant Date and continuing for two years year after. Vesting of these shares may accelerate upon the occurrence of certain conditions.Under the Option Agreement, the Company granted Mr. Rich the option to purchase 188,397 shares of common stock (the “Stock Options”), as of the grant date. The exercise price for the Stock Options is $2.09. On the first anniversary of the grant date, 62,799 will vest. The remaining shares will vest on the last day of each calendar quarter at a rate of 15,700 shares per calendar quarter commencing on the fifteenth month following the grant date and continuing for two years after. The vesting of the Stock Options is cumulative.11.20202021 and 20192020, consist entirely of finished goods.2019, and 2018,2019, the Company recognized costs related to inventory write-downs of $17,691, $2,153$9.1 million, $17.7 million, and $7,983,$2.2 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.was going to recallrecalled the Cervalign ACP System (“Cervalign”). The Company gotreceived the official notice in January 2021 and started a process to recallrecalled all of the inventory currentlywhich was held at the distributors. The Company is workingworked with the former OEM BusinessesBusiness to address the issue related toand has relaunched the recall through product design and alterations.as of the end of 2021. The Company fully reserved the entire Cervalign inventory as of December 31, 2020, resulting in a charge of $2,165$2.2 million in 2020.$513$0.5 million of the E&O inventory write-down was related to the valuation of the Paradigm acquisition-related inventory. Among the costs of E&O inventory write-down in 2018, an amount of $1,023 was related to related to the rationalization of our international distribution infrastructure and $6,559 related to lower distributions of the Company’s map3® implant.12.2021 2020 Insurance Recovery Receivable Insurance Recovery Receivable $ 1,500 $ — Income tax receivable 4,116 4,836 Prepaid expenses 2,553 1,543 Other Receivable Other Receivable 815 3,905 Total Prepaid and Other Current Assets Total Prepaid and Other Current Assets $ 8,984 $ 10,284 Other receivable as of December 31, 2020 included fees and expenses of $3,208 related to the Company’s public offering in January 2021, which will be recorded as a reduction of Additional paid-in-capital upon the receipt of the proceeds from the offering. The Company received the net proceeds on February 1, 2021. See Note 29 for further discussion.13.2021 2020 Processing equipment $ 346 $ 35 Surgical instruments 489 440 Office equipment, furniture and fixtures 15 34 Computer equipment and software 44 12 Construction in process Construction in process $ 51 — Total Property and equipment Total Property and equipment $ 945 $ 521 2019, and 2018,2019, the Company had depreciation expense in connection with property and equipment of $3,567, $7,670,$2.5 million, $3.6 million, and $5,904,$7.7 million, respectively. For the year ended December 31, 2020,2021, the Company recorded asset impairment and abandonment charges of $11,707 based$11.0 million for property and equipment. Refer to Note 14 for further information on impairment. The Company uses the straight-line method of depreciation.indicatorsanalysis the company impaired $4.4 million of these costs as of December 31, 2021. This impairment is recorded within the Spine asset group.endedend December 31, 2019,2021, the company expensed $0.1 million for ERP implementation which were not capitalized as these costs were incurred prior to the application and development stage of the project. These non-capitalizable expenses are recorded in the “General and administrative” line on the consolidated statements of comprehensive loss.asset impairmentat fair value of $10.0 million as it was issued in conjunction with the acquisition of the equity interest in INN. All principal and abandonment chargesaccrued interest due and payable on the earlier of $11,856 consistingDecember 30, 2024, or the date upon which a change in control occurs. Interest is paid in kind and capitalized into the principal amount of $11,655the Seller Notes on each anniversary of the issuance date at a rate of 6.8% per year. 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% higherpropertythe fixed rate notes. The Seller Notes were issued as deferred consideration in connection with the INN Purchase Agreement discussed at note 1, note 7 and equipmentnote 26. $201 of right-of-use lease assets. The organizational change in 2019 resulted in the creation of a new Spine asset group. Prior to the fourth quarter of 2019, the Spine asset group did not exist as the related assets were included in another asset group as it had interdependencies amongwithin the utilizationoverall costs of the assetswithin the group,and therefore, thereacquisition of INN. Related costs were no discrete cash flows. The newly formed Spine asset group could not support the carrying amountexpensed under "Asset acquisition expenses" in our consolidated statements of theproperty and equipment and the right of use asset, because the Spine asset group no longer had the benefit of shared resources and cashflows generated by the former asset group with which it was previously included.comprehensive income/(loss). The fair value of property and equipment was measured utilizing an orderly liquidation value of each of the underlying assets. The right-of-use lease assets were measured utilizing a version of the income approach that considers the present value of the market based rent payments for the applicable properties.For the year endedSeller Notes is $10.0 million at December 31, 2018, the Company recorded asset impairment and abandonment charges2021.Carrying Value (In thousands) Seller Notes-P. Lewicki $ 5,306 Seller Notes-K. Siemionow 5,306 Less: fair value adjustment (630) Total Seller Notes - related party 9,982 Current portion of seller notes — Total long-term seller note, excluding current portion $ 9,982 $1,797, relating to lower distributions of our map3® implant.14. GoodwillThe Company fully impaired its goodwill in 2019. The change in the carrying amount of goodwill for the year ended December 31, 2019, is2021, the future maturities of long-term debt, excluding deferred financing costs, accrued interest and debt discount, were as follows:Goodwill acquired in 2019 results from the acquisition of Paradigm. On March 8, 2019, we acquired Paradigm for a purchase price of approximately $232,907 and recorded goodwill of approximately $135,589.The valuation of goodwill requires management to use significant judgments and estimates including, but not limited to, projected future revenue and cash flows, along with risk-adjusted weighted average cost of capital. Changes in assumptions or market conditions could result in a change in estimated future cash flows and the likelihood of materially different reported results.Paradigm was acquired prior to the Company’s disposition of its OEM Businesses when the Company was structured differently. Paradigm was initially included in the Company’s single reporting unit. In the fourth quarter of 2019, the Company reorganized its operations which resulted in the Company dividing its single operating segment and reporting unit into 2 operating segments and reporting units: Spine and OEM. With the change in reporting units, the Company performed a relative fair value valuation calculation to allocate the Company’s historical goodwill (existing prior to the Paradigm acquisition) between the 2 reporting units. The goodwill arising from the Paradigm acquisition was specifically allocated to the Spine reporting unit. The Company concluded specific allocation of the Paradigm goodwill to the Spine reporting unit was most appropriate since Paradigm was recently acquired and the benefits of the acquired goodwill were never realized by the single reporting unit as Paradigm was not integrated. Based on this change in reporting units, the Company conducted an impairment test before and after the change, and it was concluded that the fair value of the single reporting unit exceeded the carrying value under the previous reporting unit structure. For the impairment test performed immediately subsequent to the change in reporting units on the OEM reporting unit, it was concluded the fair value of goodwill was substantially in excess of its carrying value. For the Spine reporting unit test, it was concluded the carrying value was in excess of the fair value of goodwill. Based on several factors, the Company weighted the income approach at 75% and the market approach at 25% in determining the fair value of the OEM reporting unit and utilized the cost approach for the Spine reporting unit for the purpose of the impairment test. The test resulted in the fair value of the OEM reporting unit exceeding the carrying value by approximately 54%, and the fair value of the Spine reporting unit could not support the allocated goodwill. As a result, for the year ended December 31, 2019, the Company recorded an impairment charge of all the goodwill in the Spine reporting unit totaling $140,003.15.2022 $ — 2023 — 2024 10,612 2025 — 2026 — Thereafter — Total $ 10,612 For the Year Ended December 31, 2021 2020 2019 Weighted average basic and dilutive shares 122,592,569 74,403,155 70,150,492 2019 and 2018,2019, the Company sufferedrecorded a net loss from its continuing operations. As a result, the Company has excluded all potential dilutive shares from the computation of the diluted net loss per share to avoid the anti-dilutive effect.For the Year Ended December 31, 2021 2020 2019 — 271,351 345,154 RSU and RSA 3,202,888 1,099,018 821,888 Convertible Series A Preferred Stock — 8,400,512 15,152,761 Total 3,202,888 9,770,881 16,319,803 On October 23, 2020, the Company completed the acquisition of Holo and became obligated for a contingent consideration in an aggregate amount of $50,632, which must be first paid in shares of the Company’s common stock (in an amount up to 8,650,000 shares) and then paid in cash thereafter, 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.stock issuedshare 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 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. Asthey were considered “out-of-the-money” as of December 31, 2020, none of the contingent events have occurred. See Note 9 for further discussion of the Holo Acquisition.16.2021.previously explained in Note 9 above. A portionof December 31, 2021) of the consideration isbeing contingent upon the achievement of certain regulatory, commercial and utilization milestones (the “milestone payment”"Holo Milestone Payment").each milestone paymentthe Holo Milestone Payments to be the present value of theeach future payment amount estimated using a probability weighted model. Aprobability-weighted model, driven by the probability of success factor ranging from 60% to 90%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 contingent payments. The discount rate applied ranged from 0.11% to 16.86%.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. The fair value of the milestone payments is based on several factors, such as: the probability of expected achievement of the specific milestones, including risks associated with uncertainty regarding achievement and payment of milestones; obtaining regulatory approvalsthe United States and Europe; development of new features used with the product; adaption of the new technology by surgeons; and placement of the devices within the field. The fair value of the contingent liability was $50,632 on the acquisition date of October 23, 2020, with $8,993 classified as current liability and $41,639 as long-term liabilities. As of December 31, 2020,estimating the fair value of the contingent liability was $56,515 with $8,996 classified current liability included within the accrued expenses lineconsideration for Holo Surgical as of December 31, 2021 and $47,519 as long-term liability included within other long-term liabilities.Ranges $51,928 Earn-Out Valuation Probability of success factor 0% - 90% Discount rates 0.06% - 11.60% Ranges $56,515 Earn-Out Valuation Probability of success factor 60% - 90% Discount rates 0.11% - 16.86% above. The Company estimateswhich included a contingent liability related to the revenue based earnout ("Paradigm Earnout") of $72,177.$72.2 million. The fair value of the contingent liability was measured using Level 3 inputs. Unobservable inputs for the probability weightedprobability-weighted model included weighted average cost of capital (unobservable) and company specific projected revenue and costs (unobservable). As of December 31, 2020, Management determinedcosts. During 2019 management reduced the revenue basedearnout would be $0, ascontingency consideration to $0.0 million due to a revision in the probability weighted model has been updated based on the current updated forecast for the performance of the Paradigm product portfolio. Beginning in Q4 2019, in conjunction with Spine Leadership change, management reassessed the Paradigm strategy relating to roll-out of the commercial operating model, impact of physician reimbursementmilestone inputs and progression of third-party insurance reimbursement and its related impact on the long-term outlook for the business. These items resulted in revisions of our projections and a reduction of the fair value of the earnout liability. As a result,recorded a gain of $72,177$72.2 million which was recognized and is included in gain on acquisition contingency in the consolidated statement of comprehensive loss., the Company acquired Zyga as further explained in Note 8 above. TheTechnology, Inc. ("Zyga"). As of December 31, 2019, based on a probability-weighted model. the Company estimated a contingent liability related to the clinical and revenue milestone and revenue-based earnout("Zyga Milestone Payments") of $4,986.$1.1 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. As of December 31, 2020, the Company determined that Zyga was not expected to meet the clinical milestone to earn the contingent consideration. As such, the liability for the milestone paymentZyga Milestone Payment was reduced to 0zero and an additional gain of $1.0 million was recognized and is included in gain on acquisition contingency in the consolidated statement of comprehensive loss as of December 31, 2020, and the liability continues to be zero as of December 31, 2020.contingent consideration is evaluated quarterly, or more frequently, if circumstances dictate. Changes in the fair valuefollowing table provides a reconciliation of contingent consideration are recorded in consolidated statements of income. Significant changes inmeasured at fair value using significant unobservable inputs mainly(Level 3) for the probabilityyears ended December 31, 2021 and 2020, (in thousands):2021 2020 Beginning balance as of January 1 $ 56,515 $ 1,130 Contingent consideration – Holo Milestone Payments — 50,632 (Gain) loss - Holo & Zyga (4,587) 4,883 Other — (130) Ending balance as of December 31 $ 51,928 $ 56,515 successDecember 31, 2021 and cash flows projected, could result in material changes to the contingent consideration liabilities. Embedded derivatives identified within the Ares incremental term loan entered into, assessed2020, respectively, property and adjustedequipment with a carrying amount of $12.0 million and $12.2 million were written down to their estimated fair value during the second quarter of 2020. Fair value is measured as of the debt issuance date$0.9 million and $0.5 million using Level 3 inputs. For the issuance, the derivative levelThe Level 3 fair value was measured based on orderly liquidation value and is evaluated on a probability-weighted discounted cash flow approach.quarterly basis. Unobservable inputs for the orderly liquidation value included the probability of a shareholder approval (unobservable), a recovery scenario should shareholder approval not occur (unobservable),replacement costs, physical deterioration estimates and an estimated discount rate based on market sales data offor comparable debt (observable). In 2020, the related derivative loss was $12,641 which was included in the discontinued operations.Long-lived assets, including propertyassets.equipment and intangibleother assets subject to amortization were impaired and written down to their estimated fair values in 20202021 and 2019.2020. Fair value is measured as of the impairment date using Level 3 inputs. The long-lived asset level 3 fair value was measured base on orderly liquidation value for the PropertyDefinite-lived intangible assets and equipment and Other assets. Other intangible assetsother assets’ fair value was measured based on the income approach.approach and orderly liquidation value, respectively. Because the Company’s forecasted cash flow isbeing negative, any intangible assets acquired during the year werewas immediately impaired. Unobservable inputs for the orderly liquidation value included replacement costs, (unobservable), physical deterioration estimates (unobservable) and market sales data for comparable assets and unobservableassets. Unobservable inputs for the income approach included forecasted cash flows generated from use of the definite-lived intangible assets (unobservable).Theassets.tables summarize impairments of long-lived assets andtable summarizes the related post impairment fair values of the corresponding assets subject to fair value measured using Level 3 inputs for the years ended December 31, 2021 and 2020, and 2019:In 2020, because the Company’s forecasted cash flow is negative, any intangible assets acquiredcorresponding impairment charge during the year were immediately impaired.Impairment Fair Value Property and equipment - net $ 11,018 $ 945 Definite-lived intangible assets - net 782 — Other assets - net 395 6,970 Total $ 12,195 $ 7,915 Impairment Fair Value Property and equipment - net $ 11,707 $ 521 Definite-lived intangible assets - net 2,621 — Other assets - net 445 10,145 Total $ 14,773 $ 10,666 theits ASC 360 Property, Plantimpairment testing of long-lived assets classified as held and Equipment valuation testing,used, that factors existed indicating that finite-lived intangible assets were impaired. The factors includedconsidered by management include a change madehistory of net losses and negative cash flows in each of those periods to the internal organization of the Company in the fourth quarter of 2019. The organizational change resulted in the creation of a new Spine asset group. Priorbe able to the fourth quarter of 2019, the Spine asset group did not exist as the related assets were included in another asset group as it hadinterdependencies among the utilization of the assets within the group, and therefore, there were no discrete cash flows. The asset group representing the Spine asset group could not support the carrying amount of the finite-lived intangible assets, because the Spine asset group no longer has the benefit of shared resources and cashflows generated by the former asset group that it was previously included in. Thus, theassets. The Company tested the carrying amountamounts of the property and equipment, definite lived intangible assets, in the Spine asset groupand other assets for impairment on December 31, 2019.impairment. As a result, we recorded an impairment charge of $12.2 million, $14.8 million, and $97.3 million for the years ended December 31, 2021, 2020, and 2019 recorded within the Asset impairment and abandonments line item on the consolidated statement of comprehensive loss.December 31, 2021 December 31, 2020 Stock price $ 0.72 $ — Risk-free interest rate 0.84 % — % Dividend yield — % — % Volatility 130 % — % 2019,2021:Warrant Liability Balance - January 1, 2021 $ — Fair value of warrants on date of issuance 26,749 Change in fair value (14,736) Balance - December 31, 2021 $ 12,013 recordedissued and sold an impairment chargeaggregate of 28,985,508 shares of its common stock, each share with a warrant exercisable for allshares of the finite-lived intangible assets within Spine asset group, totaling $85,096.17.Company's common stock, at a combined purchase price of $1.725 per share and warrant in a registered direct offering. 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 warrants, the Company will pay the placement agent a cash fee equal to 7.0% of the aggregate gross proceeds from the exercise of the warrants and a management fee equal to 1.0% of the aggregate gross proceeds from the exercise of the 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 warrants are outstanding.2021 2020 Accrued compensation $ 5,258 $ 2,268 Accrued securities class action settlement 1,500 — Accrued distributor commissions 2,957 4,113 Other 8,054 6,267�� Total accrued expenses $ 17,769 $ 12,648 18. Short and Long-Term ObligationsAs discussed in Note 5, on July 20, 2020, the Company (i) paid in full its $80,000 revolving credit facility under the 2018 Credit Agreement, (ii) terminated the 2018 Credit Agreement, (iii) paid in full its $100,000 term loan and $30,000 incremental term loan commitment under the 2019 Credit Agreement, and (iv) terminated the 2019 Credit Agreement. The related obligationsof December 31, 2019 and 2018, as well as the related interest expense and debt issuance costs for the years ended December 31, 2020, 2019 and 2018 related to these loans have been included in the discontinued operations.Below is a summary of the short and long-term obligations that were included in discontinued operations as of December 31, 2019:For the Year Ended December 31, 2021 2020 Acquisition contingencies $ 26,343 $ 47,519 Warrant Liability 12,013 — Lease obligations 947 1,200 Other 2,229 2,992 Total other long-term liabilities $ 41,532 $ 51,711 19.incomeloss consists of the following components:Year Ended December 31, 2021 2020 2019 Pre-tax loss: Domestic (U.S., state and local) $ (114,731) $ (191,455) $ (242,896) Foreign (loss) income (9,061) (6,226) 39 Total pre-tax loss (123,792) (197,681) (242,857) For the Year Ended December 31, 2021 2020 2019 Current: Federal $ 426 $ (3,671) $ (312) State (1,325) — 89 International 184 (13) 138 Total current (715) (3,684) (85) Deferred: Federal (25) (99) 2,456 State (4) — 169 International (142) 297 3,381 Total deferred (171) 198 6,006 Total income tax (benefit) provision $ (886) $ (3,486) $ 5,921 On December 22, 2017, the US government enacted the Tax Cuts and Jobs Act of 2017 (the “Tax Legislation”). The Tax Legislation makes broad and complex changes to the U. S. tax code including, but not limited to the following:•Reduction of the U.S. federal corporate tax rate from 35% to 21%•Requiring a transition tax on certain unrepatriated earnings of foreign subsidiariesAssets Liabilities Assets Liabilities Accounts receivable $ 2,376 $ — $ 1,993 — Accrued liabilities 990 — 1,326 — Deferred compensation 1,876 — 1,281 — Fixed assets and intangibles 22,096 — 22,235 — Inventory 7,066 — 8,475 — Net operating losses 29,917 — 9,891 — Revenue — — — (129) Tax credits 265 — — — Lease Liability 318 — 446 — Right of Use Asset — (224) — (344) Other 408 — — (48) Valuation allowance (65,007) — (45,126) — Total $ 305 $ (224) $ 521 $ (521) •Bonus depreciation that will allow for full expensing of qualified property•Elimination of the corporate alternative minimum tax•The repeal of the domestic production activity deduction•Limitations on the deductibility of certain executive compensation•Limitations on net operating losses generated after December 31, 2017In addition, beginning in 2018, the Tax Legislation includes a global intangible low-taxed income (“GILTI”) provision, which, requires a tax on foreign earnings in excess of a deemed return on tangible assets of foreign subsidiaries. The Company has elected an accounting policy to account for GILTI as a period cost if incurred, rather than recognizing deferred taxes for temporary basis differences expected to reverse as a result of GILTI. On December 22, 2017, the SEC staff issued SAB 118, which provides guidance on accounting for the tax effects of the Tax Legislation. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Legislation enactment date for companies to complete the accounting under ASC 740. In 2018, the Company completed its accounting for the tax effects of the Tax Legislation and recorded a tax benefit of $650.$3,464.$94,999,$95.0 million, including an estimated fair value of $50,632$50.6 million related to the contingent consideration. The fair value of the liability was $56,515$56.5 million as of December 31, 2020, with a $5,883$5.9 million change in fair value since October 23, 2020 recognized in the loss (gain) on acquisition contingency line.line on the consolidated statements of comprehensive income/(loss). The Company treated the transaction as a non-taxable acquisition of stock for tax purposes and has reversed these acquisition costs and the revaluation of contingent consideration when calculating tax expense. (See Note 9 “Holo Surgical Acquisition”7 "Business Combinations and Acquisitions" for additional information).2020,2021, the Company has U.S. federal net operating loss carryforwards of $9,081 that$81.9 million, of which, $9.1 million will expire in years 2037 through 2038.2038, and approximately $72.8 million will carryforward indefinitely. As of December 31, 2020,2021, the Company has U.S. state net operating loss carryforwards of approximately $36,545,$85.9 million, of which, approximately $24,820$74.0 million will expire in the years 20222023 through 2039,2040, and approximately $11,726$11.9 million will carryforward indefinitely. As of December 31, 2020,2021, the Company has non-U.S. net operating loss carryforwards of approximately $26,228,$29.5 million, of which approximately $20,275$16.5 million will expire in years 20212022 through 2027, and approximately $5,953$13.0 million will carryforward indefinitely. has recordedmaintains a valuation allowance of $65.0 million on deferred tax assets in the United States as well as most foreign jurisdictions as of December 31, 2021. The Company maintained a full valuation allowance in the amountposition of $45,126$45.1 million as of December 31, 2020, which is consistent with the $48,115 valuation allowance position recorded as of December 31, 2019. In making this determination, numerous factors were considered including the going-concern evaluation.2020.For the Year Ended December 31, 2021 2020 2019 Opening balance $ 2,991 $ 1,088 $ 1,088 Additions based on tax positions related to the current year — 1,903 — Additions for tax positions of prior years 542 — — Reductions for tax positions of prior years (1,451) — — Reductions for expiration of statute of limitations — — — $ 2,082 $ 2,991 $ 1,088 possiblypossible that the unrecognized tax benefits will not significantly increase or decrease during the next twelve months. The unrecognized tax benefits of $2,991$2.1 million as of December 31, 2020 was included in the2021 are presented with other long-term liability line; whileliabilities on the unrecognized tax benefit of $1,088 as of December 31, 2019 and December 31, 2018 was included as an offset to the deferred tax asset. 20182019 through 2020, and accrued as of December 31, 2020 were inconsequential.During the year ended December 31, 2018, the Internal Revenue Service (the “IRS”) completed its examination of the Company’s 2015 U. S. federal income tax return. No material adjustments were recorded to the Company’s consolidated financial statements as a result of the examination. 2020,2021, we have had no ongoing audits in the U.S. or any foreign20172018 to current and state taxes 2016from 2017 to current. The Company's U.S. and foreign tax attribute carryforwards remain open to examination.For the Year Ended December 31, 2021 2020 2019 Statutory federal rate 21.00 % 21.00 % 21.00 % State income taxes—net of federal tax benefit 0.00 % (0.07) % (0.56) % Foreign rate differential 1.33 % 0.90 % 0.00 % Acquisition expenses (5.21) % (9.87) % 0.00 % Loss (Gain) on acquisition contingency 0.78 % (0.50) % 6.58 % Goodwill impairment and disposal 0.00 % 0.00 % (11.88) % Change in fair value of the warrant liability Change in fair value of the warrant liability 2.50 % 0.00 % 0.00 % Noncontrolling interest Noncontrolling interest (7.11 %) 0.00 % 0.00 % Tax attributes (0.22) % 0.28 % 0.04 % Tax legislation 0.19 % 0.95 % 0.00 % Valuation allowances (12.61) % (10.57) % (16.98) % Uncertain tax positions 0.95 % 0.00 % 0.00 % Other reconciling items, net (0.89) % (0.36) % (0.63) % Effective tax rate 0.71 % 1.76 % (2.43) % 2019 and 2018,2019, the Company had no individually significant other reconciling items. The other reconciling items line includes non-significant officer compensation and stock-based compensation for all years presented.20. Balance at January 1, 2019 Balance at January 1, 2019 $ 66,519 $ (293) $ 66,226 Amortization of preferred stock issuance costs — 184 184 Balance at December 31, 2019 66,519 (109) 66,410 Amortization of preferred stock issuance costs — 109 109 Redemption of preferred stock (66,519) — (66,519) Balance at December 31, 2020 — — — Amortization of preferred stock issuance costs Amortization of preferred stock issuance costs — — — Redemption of preferred stock Redemption of preferred stock — — — Balance at December 31, 2021 Balance at December 31, 2021 $ — $ — $ — $50,000$50.0 million of convertible preferred equity to Water Street$1,290.$1.3 million. The preferred stock accrues dividends at a rate of 6% per annum. To the extent dividends are not paid in cash in any quarter, the dividends which have accrued on each outstanding share of preferred stock during such three-month period will accumulate until paid in cash or converted to common stock.The preferred stock will be convertible at the election of the holders into shares of the Company’s common stock at an initial conversion price of $4.39 per share which would result in a conversion ratio of approximately 228 shares of common stock for each share of preferred stock. The preferred stock is convertible at the election of the Company five years after its issuance or at any time if the Company’s common stock closes at or above $7.98 per share for at least 20 consecutive trading days.The Company may, upon 30 days’ notice, redeem the preferred stock, in whole or in part, five years after its issuance at the initial liquidation preference of $1,000 per share of the preferred stock plus an amount per share equal to accrued but unpaid dividends(collectively, the “Liquidation Value”). The holders of the preferred stock may require the Company to redeem their preferred stock, in whole or in part, at the Liquidation Value seven years after its issuance or upon the occurrence of a change of control.On August 1, 2018, the Company and WSHP Biologics Holdings, LLC, a related party, entered into an Amended and Restated Certificate of Designation of Series A Convertible Preferred Stock of RTI Surgical, Inc. (the “Amended and Restated Certificate of Designation”). Pursuant to the Amended and Restated Certificate of Designation: (1) dividends on the Series A Preferred Stock will not accrue after July 16, 2018 (in the event of a default by the Company, dividends will begin accruing and will continue to accrue until the default is cured); (2) the Company may not force a redemption of the Series A Preferred Stock prior to July 16, 2020; and (3) the holders of the Series A Preferred Stock may not convert the Series A Preferred Stock into common stock prior to July 16, 2021 (with certain exceptions). The Company evaluated and concluded on a qualitative basis that the amendment qualifies as modification accounting to the preferred shares, which did not result in a change in the valuation of the shares.$66,519$66.5 million and Certificate of Retirement was filed with the Delaware Secretary of State retiring the Series A Preferred Stock.21.20,19, the Company issued 50,000 shares of Series A Preferred Stock in 2013 and, subsequently, redeemed all shares outstanding were redeemed on July 24, 2020. As of December 31, 2020,2021, the Company did not have any Preferred Stock outstanding.150,000,000300,000,000 shares of common stock authorized. The common stock’s voting, dividend, and liquidation rights presently are subject to or qualified by the rights of the holders of any outstanding shares of preferred stock. Holders of common stock are entitled to one1 vote for each share held at all stockholder meetings. Shares of common stock do not have redemption rights. The Company is, and may in the future become, party to agreements and instruments that restrict or prevent the payment of dividends on our capital stock. .22.The Company recordedrestructuring costs related to the reduction of our organizational structure which resulted in $773 of expenses for the year ended December 31, 2018. The total severance and restructuring costs were paid in full in 2018.healthcare expenses. Severance and restructuring payments were made over periods ranging from one month to twelve months and did not have a material impact on cash flows of the Company in any quarterly period.As part of the acquisition of Paradigm, management implemented a plan which resulted in $896 of severance expenses for the year ended December 31, 2019. Paradigm severance expenses were offset by previous severance accrual activity and are included in transaction and integration expenses within the consolidated statements of comprehensive loss, totaling $626 for the year ended December 31, 2019. The total severance and restructuring costs were paid in full in of 2019. Severance and restructuring payments were made over periods ranging from one month to twelve months and did not have a material impact on cash flows of the Company in any quarterly period.17.16.Accrued severance and restructuring charges at January 1, 2019 $ 908 Severance and restructuring expenses accrued in 2019 626 Severance and restructuring cash payments (1,398) Accrued severance and restructuring charges at December 31, 2019 136 Severance and restructuring expenses accrued in 2020 — Severance and restructuring cash payments (136) Accrued severance and restructuring charges at December 31, 2020 — Severance and restructuring expenses accrued in 2021 208 Severance and restructuring cash payments (208) Accrued severance and restructuring charges at December 31, 2021 $ — 23.2019 and 2018,2019, the amounts expensed under the plan were $1,381, $2,908$0.7 million, $1.4 million, and $2,556,$2.9 million, respectively.24. $300,000,$300.0 million, consisting of $150,000$150.0 million on March 8, 2019, plus potential future milestone payments. Established in 2005, Paradigm’s primary product is the coflex®Coflex® Interlaminar Stabilization®Stabilization® device, a differentiated and minimally invasive motion preserving stabilization implant that is FDA premarket approved for the treatment of moderate to severe lumbar spinal stenosis in conjunction with decompression.$100,000$100.0 million in cash and issued 10,729,614 shares of the Company’s common stock. The shares of Company common stock issued on March 8, 2019, were valued based on the volume weighted average closing trading price for the five trading days prior to the date of execution of the definitive agreement, representing $50,000$50.0 million of value. In addition, under the terms of the agreement, the Company may have beenbe required to pay up to an additional $150,000$150.0 million in a combination of cash and Company common stock based on acertain revenue earnout consideration. consideration which have achievement dates of December 31, 2020, 2021 and 2022. The first potential earnout paymentand second revenue milestones were not achieved as of $20,000,000 was based on revenues achieved during any twelve-month period ending on December 31, 2020. As the revenue milestone was not achieved, there was no consideration due with respect to the first earnout period2021, and the Company has no further liability with respect thereto. Based The third revenue earnout milestone has an achievement date of December 31, 2022. The Company bases the potential payment on a probability weighted model, the Company estimates a contingent liability related to the third revenue based earnout of 0 zero utilizing a Monte-Carlo simulation model. A Monte-Carlo simulationWithin the Master Transaction Agreement, there is an analytical method used to estimate fair value by performing a large number of simulations or trial runs and thereby determiningclause that upon a value based on the possible outcomes. Accounted for as a liability to be revalued at each reporting period, the fair valuechange in control of the contingent liabilityorganization, the Company would owe any outstanding milestone payments to Paradigm, regardless if the milestone was measured using Level 3 inputs, which includes weighted average costprobable of capital and projected revenues and costs.achievement.SImmetry®SImmetry® Sacroiliac Joint Fusion System. Under the terms of the merger agreement dated January 4, 2018, the Company acquired Zyga for $21,000$21.0 million in consideration paid at closing (consisting of borrowings of $18,000$18.0 million on its revolving credit facility and $3,000$3.0 million cash on hand), $1,100$1.0 million contingent upon the successful achievement of a clinical milestone, and a revenue based earnout consideration of up to an additional $35,000.$35.0 million. As of December 31, 2020,2021, the Company determined that Zyga was not expected to meet the clinical milestone to earn the contingent consideration. consideration and therefore has not recorded a liability related to this contingency. There are no further obligations related to the Zyga acquisition as of December 31, 2021.Aziyo– On August 1, 2018, the Company and Aziyo Biologics, Inc. entered into a Distribution Agreement which was subsequently amended on December 3, 2018, and November 15, 2020 (the “Distribution Agreement”). Pursuant to the Distribution Agreement, the Company has exclusive distribution rights to certain biologic implants manufactured by Aziyo and marketed under the ViBone trade name (“ViBone”). The Distribution Agreement provides for minimum purchases of ViBone implants on an annual basis through calendar 2025. If the minimum purchase obligations for a particular year are not fulfilled, the Distribution Agreement provides various options for the Company to satisfy such obligations (“Shortfall Obligations”) in subsequent years, including a combination of payments and/or providing purchase orders for the amount the shortfall in a given year. If a purchase order is submitted, it does not have to be satisfied over the following year (i.e., the Company can satisfy the orders over multiple years and until the minimum is achieved). For calendar years 2022 and beyond, if the Company does not satisfy the Shortfall Obligations using one of the methods specified in the Distribution Agreement, the Company can continue to market the ViBone implants on a non-exclusive basis. In January 2021,2022, the Company issued a purchase order to Aziyo for $12,361$14.2 million relating to the 20202021 Shortfall Obligation. The total purchase commitment as of December 31, 2021, is $21.8 million.HoloInteneural Networks Inc. (INN) – As discussedpart of the INN acquisition, the Company has the ability to acquire the remaining 58% equity interest in Note 9, pursuantINN based on the achievement of 3 separate regulatory and revenue based milestones. When each of the milestones are achieved the Company will be obligated to pay $19.3 million for an additional 19.3% equity interest within INN. The total future commitment of the termsremaining three milestones is $57.9 million. As of December 31, 2021 the value of the future commitments were $10.0 million, and recorded within the mezzanine section of the balance sheet.Purchase Agreement, Surgical Acquisition, the Seller willCompany may be entitledrequired to receivepay up to $83.0 million in contingent consideration from the Company valued in an aggregate amount of up to $83 million, to be paid through the issuance of Common Stock or the payment of cash, contingent upon and following the achievement ofif certain regulatory, commercialdevelopment, and utilizationrevenue based milestones by specified time periods occurring up to the sixth (6th) anniversary of the closing. The Holo 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 (or otherwise, to the extent a lower number, the maximum number of shares of Common Stock that would not require obtaining stockholder approval under the applicable rules of the Nasdaq Stock Market). 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 theare achieved. There are 8 different milestones which have 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. The Purchase Agreement also includes certain covenants and obligations of the Company with respect to the operation of the business of Holo Surgical that apply during the period in which the milestones may be achieved. Based on a probability weighted model, the Company estimated a total contingent liability of $50,632 with $8,993 classified as current liabilities and $41,639 as long-term liabilities on the acquisition date ofdates through October 23, 2020. The2026. These contingent considerations have a fair value $51.9 million as of the liability was subsequently changed to $56,515 on December 31, 20202021, with $8,996$25.6 million classified as current liabilities within "Accrued expenses," while $26.3 million is included as "Other long-term liabilities" in the accrued expenses while $47,519 as other long-term liabilities.accompanying consolidated balance sheets. The change in the fair value of the liability of $5,883$4.6 million since October 23,December 31, 2020, waslossgain on acquisition contingency line of the consolidated statements of comprehensive loss.three3 manufacturing and distribution agreements with affiliates of Montague Private Equity: (i) a Manufacture and Distribution Agreement (the “Hardware MDA”) with Pioneer Surgical Technology, Inc. (“Pioneer”) pursuant to which Pioneer will manufacture certain hardware implants for the Company; (ii) a Processing and Distribution Agreement with RTI Surgical, Inc. (“RTI”), an affiliate of Pioneer, pursuant to which RTI would process certain biologic implants for the Company (the “PDA”); and (ii) a Manufacture and Distribution Agreement (NanOss)("NanOss") pursuant to which Pioneer would manufacture certain synthetic implants for the Company (the “NanOss MDA”), and together with the Hardware MDA and the PDA, the(the “OEM Distribution Agreements”). The OEM Distribution Agreements contain aggregate minimum purchase obligations for each of the first three years of the agreements as follows:•Year 1: $24,201Year 2: $25,767Year 3: $27,158$150,$0.2 million, or $600$0.6 million in the aggregate. All minimum purchase agreements were achieved in 2021. In addition management previously prepaid 2024 royalties to OPM. Based on current sales performance management determined those royalties would not be paid and wrote off a portion of the prepayment in the amount of $3.0 million which was recorded within cost of goods sold on the consolidated statements of comprehensive loss/(gain). Although the contract extends through 2025, there are 0no minimum purchase obligations beyond 2021.25.The Landlord will make improvements over the next 12 months, after which occupancy is expected to be delivered to the Company.20202021, will have a material adverse impact on its financial position or results of operations. The Company’s accounting policy is to accrue for legal costs as they are incurred.OEM Purchase Agreement Working Capital Dispute — On December 1, 2020, pursuant to the OEM Purchase Agreement, we received a notice from the Buyer indicating that a post-closing adjustment in an amount of up to $14 million may be owed in respect of the working capital adjustment paid at closing. We disagree with Buyer’s proposed post-closing adjustment and are disputing the adjustment in accordance with the terms of the OEM Purchase Agreement. The Company updated the working capital adjustment for $1,376 which was agreed with the Buyer as part of the adjustment report and recorded the amount in Q4, 2020 in the discontinued operations.has as its catalystrelates to various Public Health Notifications issued by the FDA with respect to the placement of certain TSM implants that were the subject of 510k510(k) regulatory clearance prior to their distribution. The Company does not process or,; and (2) tissue plus non-Coloplast synthetic mesh (“Tissue-Non-Coloplast Claims”) (the Tissue Only Claims and the Tissue-Non-Coloplast Claims being collectively referred to as “Indemnified Claims”). As of December 31, 2020,2021, there are a cumulative total of 1,157 Indemnified Claims for which the Company Parties are providing defense and indemnification. In connection with the Transactions,transactions, liabilities related to these claims wereremained a liability retained by the Company. The defense and indemnification of these cases are covered under the Company’s insurance policy subject to a reservation of rights by the insurer.five5 of its patents by the Company’s predecessor RTI Surgical, Inc. The suit requests damages, enhanced damages, reimbursement of costs and expenses, reasonable attorney fees, and an injunction. The asserted patents are expired. On April 7, 2019, the Court granted the Company’s request to stay the lawsuit pending the U.S. Patent Trial and Appeal Board’s (PTAB)(“PTAB”) decision whether to institute review of the patentability of LifeNet’s patents. On August 12, 2019 the PTAB instituted review of three LifeNet patents, and on September 3, 2019, the PTAB instituted review of the remaining two. On August 4, 2020 and August 26, 2020, the PTAB issued final written decisions finding that certain claims were shown to be unpatentable and others not. Neither party appealed the PTAB’s decisions with respect to the three LifeNet patents on which the PTAB instituted review on August 12, 2019. With respect to the remaining two LifeNet patents, Surgalign filed Notices of Appeal with the Federal Circuit on October 27, 2020, and LifeNet filed a Notice of Cross-appeal on November 9, 2020. The briefings related to these appeals were filed in the March through July timeframe and oral argument were heard on November 5, 2021. In connection with the Transactions,sale of the Company’s OEM Business, liabilities related to these claims remained a liability retained by the Company. The Company continues to believe the suit is without merit and will vigorously defend its position. Based on the current information available to the Company, the impact that current or any future litigation may have on the Company cannot be reasonably estimated.There is currently ongoing stockholder litigation related to theThe Company’s Investigation (as defined below). resulted in stockholder litigation. A class action complaint was filed by Patricia Lowry, a purported shareholder of the Company, against the Company, and certain current and former officers of the Company, in the United States District Court for the Northern District of Illinois (the “Court”) on March 23, 2020, asserting claims under Sections 10(b) and 20(a) the Securities Exchange Act of 1934 (the “Exchange Act”) and demanding a jury trial (“Lowry(the “Lowry Action”). The court appointed a different shareholder as Lead Plaintiff and she filed an amended complaint on August 31, 2020. On October 15, 2020, the Company and the other-namedother named defendantscomplaintcomplaint. In April 2021, the court denied the defendants’ motions to dismiss. On June 30, 2021, the parties to the Lowry Action conducted a mediation session, after which negotiations among the parties continued into July. On July 27, 2021, a binding term sheet settling the Lowry Action was entered into whereby the defendants will pay $10.5 million (inclusive of attorneys’ fees and those motions areadministrative costs) in exchange for the dismissal with prejudice of all claims against the defendants in connection with the Lowry Action (the “Lowry Settlement”). On September 22, 2021, the court granted preliminary approval to the Lowry Settlement, and the settlement amount was paid by the Company’s insurers under its Directors' and Officers’ insurance policies in October 2021 in the amount of $10.5 million. The $10.5 million loss contingency and corresponding insurance recovery was recorded within the "General and administrative" expense line on the consolidated statements of comprehensive income/(loss) as of December 31, 2021. No amounts were outstanding at December 31, 2021. The Court entered an order approving the settlement on January 26, 2022. The matter is now ripe for review.concluded.(“Summers (the “Summers Action”) against certain current and former directors and officers of the Company (as well as the Company as a nominal defendant), in the United States District Court for the Northern District of Illinois asserting statutory claims under Sections 10(b), 14(a), and 20(a) of the Exchange Act, as well as common law claims for breach of fiduciary duty, unjust enrichment and corporate waste. Thereafter, two similar shareholder derivative lawsuits asserting many of the same claims were filed in the same court against the same current and former directors and officers of the Company (as well as the Company as a nominal defendant), as well as a books and records demand under Section 220 of the Delaware General Corporate Law (the “Books and Records Demand”). The three3 derivative lawsuits have been consolidated into the first-filed Summers Action.Action (together with the Books and Records Demand, the “Derivative Actions”). On September 6, 2020, the Courtcourt entered an order staying the Summers Action pending resolution of the motions to dismiss in the Lowry Action. On September 30, 2021, the court granted preliminary approval of a proposed settlement of the Derivative Actions (the “Derivative Actions Settlement”). Pursuant to the Derivative Actions Settlement, the Company has agreed to adopt or revise certain corporate governance policies and procedures, and the Company’s insurers agreed to pay $1.5 million to plaintiffs’ counsel. Based on this a corresponding receivable and liability of $1.5 million was recorded within "Prepaid and other current assets," and "Accrued expenses" on the consolidated balance sheets as of December 31, 2021. On January 24, 2022, the court gave final approval to the Derivative Actions Settlement. The matter is now concluded.Lowry Action.26.U.S. Securities and Exchange CommissionSEC initially related to the periods 2014 through 2016 (the “SEC Investigation”). The SEC Investigation is ongoing, and the Company is cooperating with the SEC. The Company has contactedis in discussions with the SEC regarding a potential settlementsettlement. We have determined a reasonable estimate of this liability and have recorded that estimate in Accrued Expenses on the consolidated balance sheets as of December 31, 2021. In addition, on April 30, 2021, the Company and one of its executive officers each received a subpoena from the SEC Investigationrequesting documents in an investigation relating to trading in the Company’s securities in late 2019 and is awaiting a response. Based on the current information available toearly 2020. On October 18, 2021, the Company and the financial or other impact of the SEC Investigation cannot be reasonably determined.Environmental Protection Agency—On January 28, 2020, RTI, as predecessor to the Company,executive officer each received an Opportunity to Show Causea termination letter from the United States Environmental Protection Agency (“EPA”). The letter alleged potential violations of hazardous waste regulations atSEC advising them that the Company’s Alachua, Florida facilities based on a November 20, 2019 inspection conducted by EPA,SEC had concluded its investigation as to them and offeredthat the Company the opportunityStaff did not intend to meet with EPA to explain why EPA should not takerecommend any formal enforcement action. The Company held a virtual meeting with EPA on May 19, 2020 to respond to EPA’s allegations. During subsequent discussions, EPA indicated that it intended to impose a penalty on the Company related to the allegations in the letter. The Company subsequently recorded a liability for the amount the EPA communicated it intended to impose on the Company related to the allegations in the letter. Subsequently, the Company provided additional information demonstrating its compliance with State and Federal requirements related to hazardous waste management. In January 2021, the EPA notified the Company that it would not be bringing an enforcement action againstby the Company at this time. As a result of this notice, the Company reversed the accrued liability relating to this matter, resulting in no impact on the Company’s consolidated statement of comprehensive loss for the year ended December 31, 2020. SEC.27.grantergreater than 5 percent beneficial owner of the Company’s common stock; or iii) immediate family member of any of the foregoing. The Company did not enter into anyfollowing are the Company's related party transactions in 2018 and 2019. In 2020, the Company has entered into the following related party transactions:$30,000$30.0 million in cash and issued to Seller 6,250,000 shares of its common stock with a fair value of $12,250.$12.3 million. In addition, the Seller will be entitled to receive contingent consideration from the Company valued at $50,632$51.9 million as of October 23, 2020,December 31, 2021, which must be first paid in shares of our common stock (in an amount up to 8,650,000 shares) and then paid in cash thereafter, 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 Date. On January 12, 2022 the Company entered into a Second Amendment to the Stock Purchase Agreement with the sellers of Holo Surgical to amend 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 Holo. 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. Dr. Pawel Lewicki, a member of the Company’s board of directors, indirectly owns approximately 57.5% of the outstanding ownership interests in the Seller. Dr. Lewicki was appointed to the Company’s board of directors on November 23, 2020.will be entitled to an annual consulting fee of $275 per year during the termresigned as Chairman of the Board and as a member of the Board of Directors of the Company. Due to his resignation, Mr. Simpson's Consulting Agreement, payable in 12 equal monthly installments, andagreement with the Company agreed to enter into a restricted stock award agreement, pursuant to which the Company will grantwas terminated. Total cash compensation paid to Mr. Simpson a restricted stock award equal to $825. The restricted stock grant shall vest in three equal amounts on the first, second and third anniversaries of the grant date. These amounts are in lieu of any amounts Mr. Simpson would otherwise receive as a director.28. Quarterly Results of Operations (Unaudited)The following tables sets forth the quarterly results of operationsfor his services for the years ended December 31, 2021 and December 31, 2020 were approximately $0.3 million and 2019:29.EventsEvents..Offering1, 2021, the Company closed a15, 2022, we issued and sold in an underwritten public offering and sold a total 28,700,00043,478,264 shares of its common stock (or pre-funded warrants to purchase common stock in lieu thereof) and warrants to purchase up to an aggregate of 32,608,698 shares of common stock at a combined effective public offering price of $1.50$0.46 per share lessof common stock (or pre-funded warrant) and invest warrants to purchase up to an aggregate of 32,608,698 at a strike price of $0.60 and exercisable over the underwriter discounts and commissions.next five years. The Company, also in connection with the offering, 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. We received net proceeds of $40,467$17.8 million from the offering after deducting the underwriting discountsinvestor and commissionother filing fees of $2,583. The shares of the common stock purchased in the offering (other than stock purchased by directors$2.2 million.executive officers of the Company) are not subject to lock-up restrictions.FDA ClearanceThe total fees and expenses in connection of the offering, excluding underwriting discounts and commissions, were approximately $3,208.The Company has also agreed to reimburse the underwriters for certain expenses incurred by them in connection with the offering, including up to $25 relating to the clearance of this offering with the Financial Industry Regulatory Authority. Some of these fees and expenses were recorded in Other Receivable in the consolidated balance sheet as of December 31, 2020 and shall be reclassified as a reduction of equity in the first quarter of 2021.San Diego LeaseMarchJanuary 12, 2021,2022, the Company entered into a Lease (the “Lease”)Second Amendment to the Stock Purchase Agreement with SNH Medical Office Properties Trust, a Maryland real estate investment trust (the “Landlord”),the sellers of Holo Surgical to house the Company’s offices, lab and innovation space (the “Building”) in San Diego, California. The initial termamend one of the Leaseregulatory 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 PortalTM surgical guidance system for use within lumbar spine procedures. The HOLO PortalTM system is twelve (12) years, with one (1) extension optionthe world’s first AI-driven AR guidance system for spine and the first clinical application of Surgalign’s HOLOTM AI digital health platform. 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 periodtotal payment for achieving the milestone of seven (7) years.Under$10.0 million pursuant to the terms of the Lease, the Company will lease an aggregate of approximately 94,457 rentable square feet building located at 3030 Science Park Road, San Diego, California (the “Premises”). The Landlord will make improvements over the next 12 months, after which occupancy is expected to be delivered to the Company.Aggregate payments towards base rent for the Premises over the term of the lease will be approximately $64.6 million, including 13-months of rent abatement. The Company will recognize the lease assets and liabilities when the Landlord makes the underlying asset available to the Company. Concurrent with the Company’s execution of the Lease, as a security deposit, the Company delivered to the Landlord a payment in the amount of $2.5 million.2019 and 2018thousandsthousands)Description Balance at
Beginning of
PeriodCharged to
Costs and
ExpensesDeductions,
Write-offs, or
PaymentsBalance at
End of
PeriodFor the year ended December 31, 2021: Allowance for doubtful accounts $ 8,203 $ 1,722 $ 653 $ 9,272 Allowance for product returns 105 — — 105 Deferred tax asset valuation allowance 45,126 20,459 578 65,007 For the year ended December 31, 2020: Allowance for doubtful accounts 4,803 3,584 $ 184 $ 8,203 Allowance for product returns 106 246 247 105 Deferred tax asset valuation allowance 48,115 (2,638) 351 45,126 For the year ended December 31, 2019: Allowance for doubtful accounts 1,865 2,541 (397) 4,803 Allowance for product returns 478 — 372 106 Deferred tax asset valuation allowance 3,093 45,022 — 48,115 )SIGNATURES16, 2021By: By:Signature Title Date SignatureTitleDateTerry M. Rich16, 2021/s/ JonathonTerry M. SingerJonathon M. SingerChief Financial and Operating Officer(Principal Financial Officer)March 16, 2021/s/ Ryan M. BartolucciRyan M. Bartolucci (Principal Accounting
(Principal Financial Officer)16, 2021/s/ Stuart F. SimpsonStuart F. SimpsonChairmanChair of the Board of Directors16, 2021/s/ Pawel LewickiPawel LewickiDirectorMarch 16, 2021/s/ Jeffrey C. LightcapJeffrey C. LightcapDirectorMarch 16, 2021/s/ /s/ Thomas A. McEachinDirector March 15, 2022 Thomas A. McEachin DirectorMarch 16, 2021/s/ /s/ Mark D. Stolper Director March 15, 2022 Mark D. Stolper DirectorMarch 16, 2021/s/ /s/ Paul G. Thomas Director March 15, 2022 Paul G. Thomas DirectorMarch 16, 2021/s/ /s/ Nicholas J. Valeriani Director March 15, 2022 Nicholas J. Valeriani DirectorMarch 16, 2021/s/ Shirley A. WeisShirley A. WeisDirectorMarch 16, 2021102