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

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 ☒ No ☐

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

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

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

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

Shares of common stock, $0.001 par value, outstanding on ~~July 29,~~October 31, 2020: ~~75,954,373~~81,396,449

	June 30,			December 31,			September 30,			December 31,
	2020			2019			2020			2019
Assets
Current Assets:
Cash and cash equivalents	$	2,229		$	5,608		$	95,790		$	5,608
Accounts receivable - less allowances of $5,717 at June 30, 2020 and $5,098 at December 31, 2019		46,865			59,288
Accounts receivable - less allowances of $6,638 at September 30, 2020 and $4,795 at December 31, 2019								24,485			23,216
Inventories - net		122,596			124,149			28,195			24,574
Prepaid and other current assets		9,493			6,769			4,278			4,034
Current assets of discontinued operations								-			138,382
Total current assets		181,183			195,814			152,748			195,814
Non-current inventories - net		5,194			6,637			4,872			6,637
Property, plant and equipment - net		70,131			69,890			617			789
Deferred tax assets - net		3,300			-
Goodwill		55,384			55,384
Other intangible assets - net		10,614			10,492
Other assets - net		6,007			6,292			10,107			5,418
Noncurrent assets of discontinued operations								-			135,851
Total assets	$	331,813		$	344,509		$	168,344		$	344,509

Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable	$	37,490		$	30,126		$	10,760		$	11,116
Accrued expenses		29,920			33,337			13,720			15,099
Derivative liability		23,020			-
Current portion of deferred revenue		3,328			2,748
Current portion of long-term obligations		189,121			174,177
Accrued income taxes								29,106			424
Current liabilities of discontinued operations								-			213,749
Total current liabilities		282,879			240,388			53,586			240,388
Deferred tax liability								2,559			-
Other long-term liabilities		2,316			3,147			1,323			2,862
Noncurrent liabilities of discontinued operations								-			285
Total liabilities		285,195			243,535			57,468			243,535
Commitments and contingencies (Note 22)
Commitments and contingencies (Note 19)
Preferred stock Series A, $.001 par value: 5,000,000 shares authorized; 50,000 shares issued and outstanding		66,502			66,410			-			66,410
Stockholders' equity:
Common stock, $.001 par value: 150,000,000 shares authorized; 75,954,373 and 75,213,515 shares issued and outstanding, respectively		75			75
Common stock, $.001 par value: 150,000,000 shares authorized; 75,146,449 and 75,213,515 shares issued and outstanding, respectively								75			75
Additional paid-in capital		500,701			498,438			503,901			498,438
Accumulated other comprehensive loss		(7,701	)		(7,629	)		(2,619	)		(7,629	)
Accumulated deficit		(507,606	)		(451,179	)		(384,922	)		(451,179	)
Less treasury stock, 1,353,026 and 1,285,224 shares, respectively, at cost		(5,353	)		(5,141	)
Less treasury stock, 1,429,141 and 1,285,224 shares, respectively, at cost								(5,559	)		(5,141	)
Total stockholders' equity		(19,884	)		34,564			110,876			34,564
Total liabilities and stockholders' equity	$	331,813		$	344,509		$	168,344		$	344,509

	For the Three Months Ended						For the Six Months Ended						For the Three Months Ended						For the Nine Months Ended
	June 30,						June 30,						September 30,						September 30,
	2020			2019			2020			2019			2020			2019			2020			2019
Revenues	$	54,225		$	81,554		$	127,951		$	151,575		$	27,926		$	28,702		$	75,562		$	85,849
Costs of processing and distribution		31,093			35,430			64,366			67,564
Cost of goods sold														11,892			7,607			30,336			24,711
Gross profit		23,132			46,124			63,585			84,011			16,034			21,095			45,226			61,138
Expenses:
Marketing, general and administrative		37,066			41,108			79,719			73,224			27,754			34,247			97,095			95,454
Research and development		3,274			3,868			7,556			8,204			2,208			4,271			9,764			12,475
Severance and restructuring costs		604			—			604			—
Gain on acquisition contingency		(130	)		(1,590	)		(130	)		(1,590	)		-			—			(130	)		(1,590	)
Asset impairment and abandonments		882			—			2,761			15			9,356			4			12,117			15
Transaction and integration expenses		4,923			1,953			14,203			10,910			3,411			3,089			5,826			13,999
Total operating expenses		46,619			45,339			104,713			90,763			42,729			41,611			124,672			120,353
Operating income (loss)		(23,487	)		785			(41,128	)		(6,752	)
Operating loss														(26,695	)		(20,516	)		(79,446	)		(59,215	)
Other (expense) income:
Interest expense		(5,972	)		(3,635	)		(9,537	)		(5,239	)
Interest income		21			26			71			157			21			4			92			161
Derivative loss		(12,641	)		—			(12,641	)		—
Foreign exchange loss		217			(19	)		(29	)		(50	)
Foreign exchange gain (loss)														21			(51	)		(28	)		(88	)
Total other expense - net		(18,375	)		(3,628	)		(22,136	)		(5,132	)		42			(47	)		64			73
Loss before income tax benefit (expense)		(41,862	)		(2,843	)		(63,264	)		(11,884	)
Income tax benefit (expense)		3,298			3,031			6,837			2,721
Net loss		(38,564	)		188			(56,427	)		(9,163	)
Loss before income tax benefit														(26,653	)		(20,563	)		(79,382	)		(59,142	)
Income tax benefit														—			3,591			3,492			9,955
Net loss from continuing operations														(26,653	)		(16,972	)		(75,890	)		(49,187	)
Discontinued operations (Note 4)
Income from operations of discontinued operations (including gain on disposition of $210,866 for the three and nine months ended 9/30/2020)														191,871			13,292			181,337			39,987
Income tax provision														(42,534	)		(1,458	)		(39,189	)		(5,101	)
Net income on discontinued operations														149,337			11,834			142,148			34,886
Net income (loss) applicable to common shares		(38,564	)		188			(56,427	)		(9,163	)		122,684			(5,138	)		66,258			(14,301	)
Other comprehensive (loss) gain:
Unrealized foreign currency translation loss		298			395			(72	)		2
Comprehensive loss	$	(38,266	)	$	583		$	(56,499	)	$	(9,161	)
Net loss per common share - basic	$	(0.51	)	$	-		$	(0.74	)	$	(0.13	)
Net loss per common share - diluted	$	(0.51	)	$	-		$	(0.74	)	$	(0.13	)

Other comprehensive gain (loss):
Unrealized foreign currency translation gain (loss)														(108	)		(1,122	)		(180	)		(1,120	)
Comprehensive income (loss)													$	122,576		$	(6,260	)	$	66,078		$	(15,421	)

Net loss from continuing operations per common share - basic													$	(0.36	)	$	(0.23	)	$	(1.04	)	$	(0.71	)
Net loss from continuing operations per common share - diluted													$	(0.36	)	$	(0.23	)	$	(1.04	)	$	(0.71	)
Net income from discontinued operations per common share - basic													$	2.04		$	0.16		$	1.95		$	0.50
Net income from discontinued operations per common share - diluted													$	2.04		$	0.16		$	1.95		$	0.50
Weighted average shares outstanding - basic		75,814,668			75,144,488			75,995,324			70,409,839			73,212,662			72,472,591			72,933,038			69,340,006
Weighted average shares outstanding - diluted		75,814,668			91,120,956			75,995,324			70,409,839			73,212,662			72,472,591			72,933,038			69,340,006

See notes to unaudited condensed consolidated financial statements.													See notes to unaudited condensed consolidated financial statements.

	Common Stock		Additional Paid-In Capital			Accumulated Other Comprehensive Loss			Accumulated Deficit			Treasury Stock			Total			Common Stock		Additional Paid-In Capital			Accumulated Other Comprehensive Loss			Accumulated Deficit			Treasury Stock			Total
Balance, January 1, 2020	$	75	$	498,438		$	(7,629	)	$	(451,179	)	$	(5,141	)	$	34,564		$	75	$	498,438		$	(7,629	)	$	(451,179	)	$	(5,141	)	$	34,564
Net loss		—		—			—			(17,863	)		—			(17,863	)		—		—			—			(17,863	)		—			(17,863	)
Foreign currency translation adjustment		—		—			(370	)		—			—			(370	)		—		—			(370	)		—			—			(370	)
Exercise of common stock options		—		20			—			—			—			20			—		20			—			—			—			20
Stock-based compensation		—		1,310			—			—			—			1,310			—		1,310			—			—			—			1,310
Purchase of treasury stock		—		—			—			—			(193	)		(193	)		—		—			—			—			(193	)		(193	)
Amortization of preferred stock series A issuance costs		—		(44	)		—			—			—			(44	)		—		(44	)		—			—			—			(44	)
Balance, March 31, 2020	$	75	$	499,724		$	(7,999	)	$	(469,042	)	$	(5,334	)	$	17,424		$	75	$	499,724		$	(7,999	)	$	(469,042	)	$	(5,334	)	$	17,424
Net loss		—		—			—			(38,564	)		—			(38,564	)		—		—			—			(38,564	)		—			(38,564	)
Foreign currency translation adjustment		—		—			298			—			—			298			—		—			298			—			—			298
Exercise of common stock options		—		—			—			—			—			—
Stock-based compensation		—		1,023			—			—			—			1,023			—		1,023			—			—			—			1,023
Purchase of treasury stock		—		—			—			—			(19	)		(19	)		—		—			—			—			(19	)		(19	)
Amortization of preferred stock series A issuance costs		—		(46	)		—			—			—			(46	)		—		(46	)		—			—			—			(46	)
Balance, June 30, 2020	$	75	$	500,701		$	(7,701	)	$	(507,606	)	$	(5,353	)	$	(19,884	)	$	75	$	500,701		$	(7,701	)	$	(507,606	)	$	(5,353	)	$	(19,884	)
		-		-			-			-			-			-

	Common Stock		Additional Paid-In Capital			Accumulated Other Comprehensive Loss			Accumulated Deficit			Treasury Stock			Total
Balance, January 1, 2019	$	64	$	433,143		$	(7,270	)	$	(239,537	)	$	(4,869	)	$	181,531
Net loss		—		—			—			(9,351	)		—			(9,351	)
Net income																			—		—			—			122,684			—			122,684
Foreign currency translation adjustment		—		—			(393	)		—			—			(393	)		—		—			(108	)		—			—			(108	)
Exercise of common stock options		—		284			—			—			—			284
Equity instruments issued in connection with Paradigm Spine acquisition - net of fees		11		60,719			—			—			—			60,730
Foreign currency translation adjustment related to the impact of discontinued operations																			—		—			5,190			—			—			5,190
Stock-based compensation		—		1,163			—			—			—			1,163			—		3,217			—			—			—			3,217
Purchase of treasury stock		—		—			—			—			(130	)		(130	)		—		—			—			—			(206	)		(206	)
Amortization of preferred stock series A issuance costs		—		(46	)		—			—			—			(46	)		—		(17	)		—			—			—			(17	)
Balance, March 31, 2019	$	75	$	495,263		$	(7,663	)	$	(248,888	)	$	(4,999	)	$	233,788
Net income		—		—			—			188			—			188
Foreign currency translation adjustment		—		—			395			—			—			395
Exercise of common stock options		—		111			—			—			—			111
Stock-based compensation		—		1,267			—			—			—			1,267
Purchase of treasury stock		—		—			—			—			(42	)		(42	)
Amortization of preferred stock series A issuance costs		—		(45	)		—			—			—			(45	)
Balance, June 30, 2019	$	75	$	496,596		$	(7,268	)	$	(248,700	)	$	(5,041	)	$	235,662

See notes to unaudited condensed consolidated financial statements.
Balance, September 30, 2020																		$	75	$	503,901		$	(2,619	)	$	(384,922	)	$	(5,559	)	$	110,876

	Common Stock		Additional Paid-In Capital			Accumulated Other Comprehensive Loss			Accumulated Deficit			Treasury Stock			Total
Balance, January 1, 2019	$	64	$	433,143		$	(7,270	)	$	(239,537	)	$	(4,869	)	$	181,531
Net loss		—		—			—			(9,351	)		—			(9,351	)
Foreign currency translation adjustment		—		—			(393	)		—			—			(393	)
Exercise of common stock options		—		284			—			—			—			284
Equity instruments issued in connection with Paradigm Spine acquisition - net of fees		11		60,719			—			—			—			60,730
Stock-based compensation		—		1,163			—			—			—			1,163
Purchase of treasury stock		—		—			—			—			(130	)		(130	)
Amortization of preferred stock series A issuance costs		—		(46	)		—			—			—			(46	)
Balance, March 31, 2019	$	75	$	495,263		$	(7,663	)	$	(248,888	)	$	(4,999	)	$	233,788
Net income		—		—			—			188			—			188
Foreign currency translation adjustment		—		—			395			—			—			395
Exercise of common stock options		—		111			—			—			—			111
Stock-based compensation		—		1,267			—			—			—			1,267
Purchase of treasury stock		—		—			—			—			(42	)		(42	)
Amortization of preferred stock series A issuance costs		—		(45	)		—			—			—			(45	)
Balance, June 30, 2019	$	75	$	496,596		$	(7,268	)	$	(248,700	)	$	(5,041	)	$	235,662
Net loss		—		—			—			(5,138	)		—			(5,138	)
Foreign currency translation adjustment		—		—			(1,122	)		—			—			(1,122	)
Stock-based compensation		—		969			—			—			—			969
Purchase of treasury stock		—		—			—			—			(32	)		(32	)
Amortization of preferred stock series A issuance costs		—		(47	)		—			—			—			(47	)
Balance, September 30, 2019	$	75	$	497,518		$	(8,390	)	$	(253,838	)	$	(5,073	)	$	230,292

	For the Six Months Ended						For the Nine Months Ended
	June 30,						September 30,
	2020			2019			2020			2019
Cash flows from operating activities:
Net loss	$	(56,427	)	$	(9,163	)
Net income (loss)							$	66,258		$	(14,301	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization expense		4,687			10,308			6,003			16,342
Provision for bad debts and product returns		1,436			899			2,015			1,050
Provision for inventory write-downs		1,947			3,274			9,597			5,482
Amortization of deferred revenue		(2,375	)		(2,585	)
Revenue recognized due to change in deferred revenue								(2,618	)		(3,772	)
Deferred income tax benefit		(3,614	)		(2,969	)		(932	)		(4,588	)
Stock-based compensation		2,344			2,430			5,550			3,399
Asset impairment and abandonments		2,761			—			12,117			—
Gain on acquisition contingency		(130	)		(1,590	)		(130	)		(1,590	)
Paid in kind interest expense		3,434			1,473			—			2,948
Loss on extinguishment of debt								2,686			—
Amortization of debt issuance costs		283			361			283			361
Amortization of debt discount		2,479			—			2,479			—
Derivative loss		12,641			—			12,641			—
Gain on sale of OEM business								(210,866	)		—
Other		131			516			214			708
Change in assets and liabilities:
Accounts receivable		10,950			(3,141	)		9,221			(4,522	)
Inventories		1,062			(2,658	)		(7,236	)		(7,609	)
Accounts payable		7,459			(9,751	)		1,695			(12,684	)
Accrued expenses		(4,420	)		(2,583	)		20,694			3,998
Deferred revenue		2,955			2,000			2,955			2,000
Other operating assets and liabilities		(2,192	)		240			(5,295	)		274
Net cash used in operating activities		(14,589	)		(12,939	)		(72,669	)		(12,504	)
Cash flows from investing activities:
Purchases of property, plant and equipment		(7,315	)		(6,912	)		(9,738	)		(10,882	)
Patent and acquired intangible asset costs		(419	)		(1,126	)		(419	)		(1,786	)
Proceeds from sale of OEM business								437,097			—
Acquisition of Paradigm Spine		—			(99,921	)		—			(99,692	)
Net cash used in investing activities		(7,734	)		(107,959	)
Net cash provided by (used in) investing activities								426,940			(112,360	)
Cash flows from financing activities:
Proceeds from exercise of common stock options		20			395			20			395
Repayment of short-term obligations								(76,912	)
Proceeds from long-term obligations		72,829			115,000			89,892			118,000
Payments of debt issuance costs		(1,740	)		(729	)		(1,740	)		(729	)
Payments on long-term obligations		(51,962	)		—			(207,266	)		(500	)
Payments for treasury stock		(212	)		(172	)		(418	)		(204	)
Net cash provided by financing activities		18,935			114,494
Redemption of preferred stock								(66,519	)		—
Other								38			—
Net cash (used in) provided by financing activities								(262,905	)		116,962
Effect of exchange rate changes on cash and cash equivalents		9			(27	)		(1,184	)		(96	)
Net decrease in cash and cash equivalents		(3,379	)		(6,431	)		90,182			(7,998	)
Cash and cash equivalents, beginning of period		5,608			10,949			5,608			10,949
Cash and cash equivalents, end of period	$	2,229		$	4,518		$	95,790		$	2,951
Supplemental cash flow disclosure:
Cash paid for interest	$	4,082		$	2,732		$	4,488		$	4,941
Income tax refunds, net of payments		(1,962	)		1,982
Net income tax payments (refunds)								4,986			(1,982	)
Non-cash acquisition of property, plant and equipment		342			456			—			817
Non-cash embedded derivative associated with Ares		10,379			-
Non-cash acquisition of Paradigm Spine		—			60,730			—			60,730
Non-cash common stock issuance		—			60,730			—			60,730

Surgalign Holdings Inc. and ~~Subsidiaries.~~Subsidiaries (“Surgalign” or the “Company”), (formerly known as RTI Surgical Holdings, Inc. and Subsidiaries (“RTI”) ~~(“Surgalign” or the “Company”)~~, is a global medical technology company advancing the science of spine care, focused on delivering innovative solutions that drive superior clinical and economic outcomes. The ~~company~~Company is building off a legacy of high quality and differentiated products and continues to invest in clinically validated innovation to deliver better surgical outcomes and improve patient’s lives. Surgalign markets products throughout the United States and in more than 50 countries worldwide through an expanding network of top independent distributors. Surgalign, a member of AdvaMed (“Advanced Medical Technology Association”), is headquartered in Deerfield, ~~Illinois, and as of the date of filing of this Form 10-Q, has~~IL, with commercial, innovation and design centers in San Diego, ~~California,~~CA, Marquette MI and Wurmlingen, Germany.

On July 20, 2020, pursuant to the Equity Purchase Agreement and subsequent amendments entered into in 2020 (the “Purchase Agreement”), RTI ~~completed~~sold its original equipment manufacturing business and business related to processing donated human musculoskeletal and other tissue and bovine and porcine animal tissue (collectively, the ~~disposition~~“OEM Businesses”) to Ardi Bidco Ltd. (the “Buyer”) and its affiliates for a purchase price of $440 million of cash, subject to certain adjustments (the “Transactions”). More specifically, pursuant to the terms of the ~~original equipment manufacturer (“OEM”~~Purchase Agreement, RTI 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 U.S. Securities and Exchange Commission (the “SEC”) ~~business, refere~~on June 18, 2020. Subsequent to ~~subsequent event for further discussion in FN 25, and~~the Transactions, RTI was renamed to Surgalign Holdings, ~~Inc.~~Inc, operating as Surgalign Spine Technologies. References in this Form 10-Q to Surgalign or the Company refer to the Company ~~as of June 30, 2020, prior to the disposition of the OEM business, unless otherwise noted or~~including, where obvious from the ~~context.~~context, the disposed OEM Businesses. “Legacy RTI” refers to the Company prior to the acquisition of Paradigm Spine on March 8, 2019. ~~In conjunction with~~

Prior to the sale of the OEM ~~business~~Businesses, the Company ~~repaid~~operated 2 reportable segments: Spine and ~~terminated all outstanding debt held on~~OEM. Subsequent to the ~~books as~~sale of ~~June 30, 2020.~~the OEM Businesses, the Company operates reportable 1 segment.

On Sept 29, 2020, the Company entered into a Stock Purchase Agreement to acquire Holo Surgical Inc., a privately-held technology company that is developing an Augmented Reality and Artificial Intelligence digital surgery platform (‘ARAI^™’), to enable digital spine surgery. Total consideration for the transaction is valued at up to $125 million, consisting of consideration valued at $42 million payable at closing in cash and shares of the Company’s common stock, plus potential future milestone payments that will be paid over a six-year period when and if certain regulatory and revenue milestones are achieved (see note 23).

~~Many~~At times throughout 2020, many hospitals and other medical facilities ~~have~~ canceled elective surgeries, reduced and diverted staffing and diverted other resources to patients suffering from the infectious disease and limited hospital access for non-patients, including our direct and indirect sales representatives. Because of the COVID-19 pandemic, surgeons and their patients are required, or are choosing, to defer procedures in which our products would be used, and many facilities that specialize in the procedures in which our products would be used have closed or reduced operating hours. These circumstances have negatively impacted the ability of our employees and distributors to effectively market and sell our products. In addition, even after the pandemic has subsided 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 or for other reasons.

The COVID-19 pandemic has also caused adverse effects on general commercial activity and the global economy, which has led to an economic slowdown or recession, and which has adversely affected our business, operating results or financial condition. The adverse effect of the pandemic on the broader economy has also negatively affected demand for procedures using our products, and could cause one or more of our 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 our ability to provide products and otherwise operate our business, as well as increase our costs and expenses.

The COVID-19 pandemic has also led to and could continue to lead to severe disruption and volatility in the global capital markets, which could increase our cost of future capital and adversely affect our ability to access the capital markets in the future.

The above and other continued disruptions to our business as a result of COVID-19 has resulted in a material adverse effect on our business, operating results and financial condition. The full extent to which the COVID-19 pandemic will impact our business will depend on future developments that are highly uncertain and cannot be accurately predicted, including the possibility that new adverse information may emerge concerning COVID-19 and additional actions to contain it or treat its impact may be required.

In response to the COVID-19 novel coronavirus pandemic and the resulting federal and local guidelines, ~~beginning April 6, 2020,~~ the Company furloughed or reduced the hours of ~~over 500~~a majority of its U.S.-based ~~employees. While many of those~~ employees in Q2 2020, but they have since returned to work, the Company cannot predict when it will be able to fully resume normal operations and will continue to carefully monitor the situation and the needs of the business. In addition, most current employees have taken base salary reductions until business conditions improve.work.

The accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring accruals, which the Company considers necessary for a fair presentation of the results of operations for the periods shown. The condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X, and, therefore, do not include all information and footnotes necessary for a fair presentation of condensed consolidated financial position, results of operations, comprehensive loss and cash flows in conformity with accounting principles generally accepted in the United States of America (“GAAP”). All intercompany balances and transactions have been eliminated in consolidation. The results of operations for any interim period are not necessarily indicative of the results to be expected for the full year. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. As noted in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, certain ~~June~~September 30, 2019 balances have been restated. The Company includes acquisition, disposal, integration and separation related costs, which are predominantly composed of legal, consulting, advisor fee expenses, within the ~~Transaction~~“Transaction and integration ~~expense~~expense” line on the condensed consolidated comprehensive loss.

The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Surgalign, Inc., Paradigm Spine, LLC (“Paradigm”), Pioneer Surgical Technology, Inc. (“Pioneer Surgical”), ~~Tutogen Medical, Inc. (“TMI”),~~ and Zyga Technology, Inc. (“Zyga”). ~~Prior to the completion~~The financial positions and operating results of the ~~acquisition of Paradigm,~~disposed OEM Businesses have been reported as Discontinued Operations in the condensed consolidated financial statements ~~were that~~in the current as well as prior comparative periods.

The Company identified errors in the calculation of its historical basic and ~~subsidiaries (“Legacy RTI”). Subsequent to~~diluted EPS. In the ~~acquisition of Paradigm, Surgalign Holdings, Inc.~~historical periods presented in the filing, the weighted average basic and ~~Subsidiaries is~~diluted shares incorrectly included treasury stock, restricted stock awards, and restricted stock units. The weighted average shares used in the ~~successor reporting company.~~restated basic and diluted EPS from continuing operations and discontinued operation has been corrected.

Derivative Instruments – The Company reviews debt agreements for embedded features. If these features are not clearly and closely related to the debt host, they meet the definition of a derivative and require bifurcation from the host contract. All derivative instruments, including embedded derivatives are recorded on the balance sheet at their respective fair values. The Company will adjust the carrying value of the derivative liability to fair value at each subsequent reporting date. The changes in the fair value of the derivatives are recorded in the period they occur.

On July 17, 2020, the Company received a notification from WSHP Biologics Holdings, LLC (“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 $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.

As the global outbreak of COVID-19 continues to rapidly evolve, it could continue to materially and adversely affect our revenues, financial condition, profitability, and cash flows for an indeterminate period of time.

In connection with the Transactions on July 20, 2020, the Company (i) paid in full its $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 a 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 $100.0 million term loan and $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. Additionally, the Company redeemed all of the outstanding shares of Series A Convertible Preferred Stock.

As discussed in Note 21, the Securities and Exchange Commission (“SEC”) has an active investigation that remains ongoing. The Company continues to cooperate with the SEC in relation to the investigation. Based on current information available to the Company, the impact associated with SEC investigation and shareholder litigation may have on the Company cannot be reasonably estimated.

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

The coronavirus (COVID-19) pandemic, as well as the corresponding governmental response and the Company’s management of the crisis has had a significant impact on the Company’s business. The consequences of the outbreak and impact on the economy continues to evolve and the full extent of the impact is uncertain as of the date of this filing. The outbreak has already brought a significant disruption to the operations of the Company. The continued disruptions to our business as a result of COVID-19 has resulted in a material adverse effect on our business, operating results and financial condition. The full extent to which the COVID-19 pandemic will impact our business will depend on future developments that are highly uncertain and cannot be accurately predicted, including the possibility that new adverse information may emerge concerning COVID-19 and additional actions to contain it or treat its impact may be required.

As of ~~June~~September 30, 2020, we had cash of ~~$2.2 million, a working capital deficiency of $101.7 million~~$95,790 and an accumulated deficit of ~~$507.6 million. We~~$384,922. For the nine-months ended September 30, 2020, we had a loss from continuing operations of ~~$41.1 million and a net loss of $56.4 million for the six months ended June 30, 2020.~~$75,890. We have ~~suffered~~incurred losses from operations in the previous two fiscal years and did not generate positive cash flows from operations in fiscal year ~~2019. Management~~2019 or for the nine-months ended September 30, 2020. The Company closed on the sale of the OEM business to Ardi Bidco, Ltd., on July 20, 2020 and upon the close of the sale, the Company repaid all of its debt obligations in full. Additionally, all preferred stock was also redeemed by Water Street Healthcare Partners, resulting in cash payment of $66,519 during the third quarter of 2020.

During the third quarter of 2020, the Company had announced that it had acquired Holosurgical, Inc. (“Holosurgical”). The acquisition closed on October 23, 2020 (see Note 22, Subsequent Events). Under the terms of the acquisition agreement, Surgalign paid $30 million in cash and issued 6.25 million shares of Surgalign common stock valued at approximately $12 million. In addition, further contingent consideration valued at up to $83 million may be payable in common stock and cash upon achievement of certain regulatory, developmental, and commercial milestones. The first milestone achievement to Holosurgical relating to regulatory approval could occur as early as the second half of 2021.

The Company is projecting ~~that~~ it will continue to generate ~~losses from operations into the future.~~

~~As the global outbreak of COVID-19 continues to rapidly evolve, it could continue to materially and adversely affect our revenues, financial condition, profitability, and~~significant negative operating cash flows ~~for an indeterminate~~over the next 12-months and beyond. In consideration of i) COVID-19 uncertainties, ii) negative cash flows that are projected over the next 12-month period, ~~of time.~~

~~On July 20, 2020, RTI completed~~iii) the ~~disposition of its OEM business~~. Upon the close of the transaction, the Company fully repaid all of its outstanding indebtedness, including its revolving line of credit with JP Morgan Chase Bank and both its term loan and incremental term loan commitment with Ares Capital Corporation. Additionally, the Company redeemed all of the outstanding shares of Series A Convertible Preferred Stock. Management believes that after payment ofincome taxes to be paid related to the ~~transaction that it will have approximately $53 million of available cash.~~

~~As discussed in Note 24, the Securities and Exchange Commission (“SEC”) has an active investigation that remains ongoing. The Company continues to cooperate~~gain on sale associated with the ~~SEC~~OEM business, and iv) approx. $10 million in ~~relation~~contingent consideration amounts which are expected to ~~its investigation. Additionally, as disclosed in Note 23, there is currently ongoing shareholder litigation. Based on current information available~~become due to the ~~Company,~~former owners of Holosurgical if regulatory approval in the ~~impact associated with SEC investigation~~US is obtained in 2021, which would paid through combination of common stock and ~~shareholder litigation may have on~~cash; the Company ~~cannot be reasonably estimated.~~

~~Although there is uncertainty relate~~has forecasted the need to raise additional capital in order to continue as a going concern. The Company’s operating plan for the next 12-month period also includes continued investments in its product pipeline which will necessitate additional debt and/or equity financing in addition to the ~~matters noted above, based on current information available, management believes it will have sufficient~~funding of future operations through 2021 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. If cash ~~and liquidity, such that it is not probable~~resources are insufficient to satisfy the Company’s on-going cash requirements through 2021, the Company will be ~~unable~~required to scale back operations, reduce research and development expenses, and postpone, as well as suspend capital expenditures, in order to preserve liquidity. No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing, or cause substantial dilution for our stockholders, in the case of equity financing.

In consideration of the inherent risks and uncertainties that exist in relation to both elective surgeries, as well as in relation to worsening of global economic conditions resulting from ongoing COVID-19 pandemic, along with the cash paid to acquire Holosurgical and potential contingent consideration milestone payments, a portion of which are expected to be paid in common stock and/or cash which may become due in 2021; management has concluded that substantial doubt exists with respect to the Company’s ability to continue as a going concern within one year after the date the financial statements are issued. Management is planning to raise additional debt and/or equity financing and will attempt to curtail discretionary expenditures in the future, if necessary, however, in consideration of the risks and uncertainties mentioned, such plans cannot be considered probable of occurring at this time.

The recoverability of a major portion of the recorded asset amounts shown in the Company’s accompanying consolidated balance sheets is dependent upon continued operations of the Company, which in turn is dependent upon the Company’s ability to meet its ~~obligations during~~funding requirements on a continuous basis, to maintain existing financing and to succeed in its future operations. The Company’s financial statements do not include any adjustment relating to the ~~next year.~~recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence.

In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”). ASU 2019-12 was issued to reduce the complexity of accounting for income taxes for those entities that fall within the scope of the accounting standard. The guidance is to be applied using a prospective method, excluding amendments related to franchise taxes, which should be applied on either a retrospective basis 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 effective for fiscal years beginning after December 15, 2020, with early adoption permitted. The Company early adopted ASU 2019-12 on January 1, 2020, and there was no material impact on the Company’s condensed consolidated financial statements.

In March 2020, the Financial Accounting Standards Board (“FASB”) issued ~~Accounting Standard Update~~ ~~(“ASU”)~~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 interbank offered 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 condensed consolidated financial statements.

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 and it did not have an impact on the condensed 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 for fiscal years beginning after December 15, 2019. The Company adopted ASU 2017-12 and it did not have an impact on the condensed consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses (Topic326): 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 the 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, the Company adopted ASU 2016-13. The adoption did not have a material impact on the Company’s condensed 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.

In August 2018, the FASB issued ~~Accounting Standards Update (“ASU”)~~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 after December 31, 2019. 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 condensed consolidated financial statements.

In connection with the Transactions, on July 20, 2020, RTI completed the disposition of its OEM Businesses. Accordingly, the OEM Business is reported as discontinued operations in accordance with Accounting Standard Codification (“ASC”) 205-20 - Discontinued Operations (“ASC 205-20”). The ~~Company’s leases~~related assets and liabilities of the OEM Businesses are classified as ~~operating leases~~assets and ~~includes office space, automobiles, and copiers. The Company does not have any finance leases~~liabilities of discontinued operations as of December 31, 2019 in the Condensed Consolidated Balance Sheets and the ~~Company’s operating leases do not have any residual value guarantees, restrictions or covenants. The Company does not have any leases that have not yet commenced~~results of operations from the OEM Businesses and gain on the sale of OEM Businesses are reported as ~~of June 30, 2020. The Company’s leases have remaining lease terms of 1 to 9 years, some of which include options to extend or terminate the leases. The option to extend is only included~~discontinued operations in the ~~lease term if~~Condensed Consolidated Statements of Comprehensive Income (Loss) for the ~~Company is reasonably certain~~three and nine months ended September 30, 2020 and 2019. Applicable amounts in the prior year have been recast to conform to this discontinued operations presentation.

The following tables shows the assets and liabilities of ~~exercising that option. Operating lease ROU assets are presented within other assets-net on~~ the ~~condensed consolidated balance sheet.~~ discontinued operations:

The current portion of ~~operating lease liabilities are~~the long-term obligations relates to the 2018 Credit Agreement and 2019 Credit Agreement.

In accordance with the terms and conditions in the Purchase Agreement and approved by respective lenders, on July 20, 2020, the Company (i) paid in full its $80.0 million revolving credit facility under the 2018 Credit Agreement, (ii) terminated the 2018 Credit Agreement, (iii) paid in full its $100.0 million term loan and $30.0 million incremental term loan commitment under the 2019 Credit Agreement, and (iv) terminated the 2019 Credit Agreement. The related long-term obligations as of December 31, 2019 as well as the related interest expense and debt issuance costs related to these loans have been included in the discontinued operations.

The following tables shows the financial results of the discontinued operations:

	Three Months Ended September 30,			Three Months Ended September 30,			Nine Months Ended September 30,			Nine Months Ended September 30,
	2020			2019			2020			2019
Major classes of line items constituting net income from discontinued operations
Revenues	$	6,877		$	48,039		$	87,192		$	142,467
Costs of processing and distribution		4,006			25,910			49,928			76,370
Gross profit		2,871			22,129			37,264			66,097
Expenses:
Marketing, general and administrative		2,259			4,972			12,636			16,993
Severance and restructuring costs		-			-			604			-
Transaction and integration expenses		11,811			120			23,598			120
Total expenses		14,070			5,092			36,838			17,113
Operating (loss) income		(11,199	)		17,037			426			48,984
Other expense (income):
Interest expense		5,094			3,718			14,632			8,957
Loss on extinguishment of debt		2,686			-			2,686			-
Derivative loss		-			-			12,641			-
Foreign exchange (gain) loss		17			27			(3	)		40
Total other expense - net		7,797			3,745			29,956			8,997
(Loss) income from discontinued operations		(18,996	)		13,292			(29,530	)		39,987
Gain on sale of net assets of discontinued operations		210,866			-			210,866			-
Income from discontinued operations before income tax provision		191,871			13,292			181,337			39,987
Income tax provision		(42,534	)		(1,458	)		(39,189	)		(5,101	)
Net Income from discontinued operations	$	149,337		$	11,834		$	142,148		$	34,886

In accordance with ASC 205-20, only expenses specifically identifiable and related to a business to be disposed may be presented ~~within accrued~~in discontinued operations. As such, the marketing and general and administrative expenses ~~and the non-current portion of operating lease liabilities are presented within other long-term liabilities on the condensed consolidated balance sheet.~~

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

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

~~Supplemental balance sheet information related to operating leases was as follows:~~

~~As of June 30, 2020,~~ the ~~weighted-average remaining lease term was 4.7 years. The Company’s lease agreements do not~~Purchase Agreement, RTI and the Buyer have also entered into a Transition Services Agreement, through which the disposed OEM Businesses will provide ~~a readily determinable implicit rate nor is it available~~ to the Company transitional services related to IT support, customer and vendor management, and procurement etc. for periods ranging from ~~its lessors. Instead,~~3 to 12 months after the disposal. Since the transitional services are related to the Company’s continuing operations, the related expenses are reported as the operating expenses of the continuing operations.

The Company ~~estimates its incremental borrowing rate based~~applied the “Intraperiod Tax Allocation” rules under ASC 740, which requires the allocation of an entity’s total annual income tax provision among continuing operations and, in the Company’s case, discontinued operations. Included in the $1.6 million income tax expense for fiscal year 2019 is $0.6 million tax expense related to the gain on ~~information available at lease commencement in order to discount lease payments to present value.~~the Divestiture. The ~~weighted-average discount rate~~taxes on the gain were calculated using various state statutory tax rates and are partially offset by the utilization of historical state and federal net operating losses.

Proceeds from the sale of the Company’s ~~operating leases was 4.8%, as~~OEM Business have been presented in the Consolidated Statements of ~~June~~Cash Flows under investing activities for the nine months ended September 30, 2020.

AsTotal operating and investing cash flows of ~~June~~discontinued operations for the nine months ended September 30, 2020 ~~maturities~~and 2019 are comprised of ~~operating lease liabilities were as follows:~~the following, which exclude the effect of income taxes:

The Company has determined its operating segments in accordance with FASB issued Accounting Standards Codification (“ASC 280”) - Segment Reporting. Prior to the consummation of the Transaction, the overall strategy of the Company is to manage our business in two operating segments, Global Spine (“Spine”) and Global OEM (“OEM”). The Spine segment focuses on sales, distribution and conducting research and development activities focused on the global spine market and the OEM segment focuses on the design, development and manufacturing of biologics and hardware medical technology. The value drivers of the Spine segment include growth through innovation and acquisition while the value drivers of the OEM segment focus on predetermined and relatively predictable execution. The Company is now organized into two distinct groupings, Spine and OEM, which are also our operating and reportable segments. As the adoption of the new structure was done in the fourth quarter of 2019, the comparative periods for the three and six months ended June 30, 2019 has been restated to conform to the new segment presentation.

The Spine and OEM reportable segments reflect the way the Company was managed prior to the Transaction, and for which separate financial information is available and evaluated regularly by the Company’s chief operating decision maker (“CODM”) in deciding how to allocate resources and assess performance. The Company’s Chief Executive Officer is the CODM.

The segment revenues and segment net income (loss) for the three and six months ended June 30, 2020 and 2019 are included in the table below. All revenues are earned from external customers. The Company does not disclose total assets by Spine and OEM as the CODM does not receive or review with regularity assets on a Spine or OEM basis. Additionally, the Company does not disclose long-lived assets by geographic location as no country outside of the United States holds 10 percent or more of our consolidated Property, Plant and Equipment.

For the Three Months Ended

For the Six Months Ended

June 30,

June 30,

2020

2019

2020

2019

Revenues:

Spine

$
20,519

$
32,747

$
47,628

$
57,124

OEM

33,706

48,807

80,323

94,451

Total

$
54,225

$
81,554

$
127,951

$
151,575

Depreciation and amortization:

Spine

$
194

$
2,979

$
285

$
5,379

OEM

2,254

2,929

4,402

4,929

Total

$
2,448

$
5,908

$
4,687

$
10,308

Operating income (loss)

Spine

$
(5,265
)

$
(6,296
)

$
(15,673
)

$
(10,790
)
OEM

(4,729
)

7,444

2,633

13,373

Unallocated corporate costs

—

Asset impairment and abandonments

882

-

2,761

15

Gain on acquisition contingency

(130
)

(1,590
)

(130
)

(1,590
)
Restatement and related costs

7,818

-

11,254

-

Transaction and integration expenses

4,923

1,953

14,203

10,910

Total unallocated corporate costs

13,493

363

28,088

9,335

Operating (loss) income

$
(23,487
)

$
785

$
(41,128
)

$
(6,752
)
Interest expense

(5,972
)

(3,635
)

(9,537
)

(5,239
)
Interest income

21

26

71

157

Derivative loss

(12,641
)

-

(12,641
)

-

Foreign exchange loss

217

(19
)

(29
)

(50
)
Loss before income tax benefit (expense)

$
(41,862
)

$
(2,843
)

$
(63,264
)

$
(11,884
)

~~The following table presents percentage of total revenues derived from the Company’s largest distributors all of which are OEM customers:~~

Certain corporate costs have been allocated solely to the Spine reportable segment, including certain executive compensation costs and certain corporate costs including board of directors fees and board of directors stock-based compensation, public company expenses, legal fees, corporate compliance and communications costs, and business development expenses. These costs were not allocated to the OEM reportable segment because the basis for the changes to the internal organization of the Company was in contemplation of the pending sale of the OEM business, and these costs are expected to remain with the Spine reportable segment. Such presentation appropriately reflects that manner in which the CODM evaluates the ongoing performance and allocates resources of the Company.

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 ~~organized into 2 business lines, which are also our operating~~able to direct the use of, and ~~reportable segments: Spine and OEM.~~ 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.

The ~~following table presents revenues from these 2 segments~~Company’s entire revenue for the three and ~~six~~nine months ended ~~June~~September 30, 2020 and ~~2019:~~

~~The following table presents revenues~~2019 were recognized at a point in ~~time and over time for the three and six months ended June 30, 2020 and 2019:~~time. The following table represents total revenue by region:

The Company’s performance obligations consist mainly of transferring control of implants identified in the contracts. The Company’s transaction price is generally fixed. Any discounts or rebates are estimated at the inception of the contract and recognized as a reduction of the revenue. Some of the Company’s contracts offer assurance-type warranties in connection with the sale of a product to a customer. Assurance-type warranties provide a customer with assurance that the related product will function as the parties intended because it complies with agreed-upon specifications. Such warranties do not represent a separate performance obligation and are not material to the condensed consolidated financial statements.

The opening and closing balances of the Company’s accounts receivable, contract asset and current and long-term contract liability for the three and six months ended June 30, 2020 and 2019 are as follows:

~~As of June 30, 2020 and December 31, 2019, $6,060 and $10,633 of unbilled receivables in connection with our exclusively built inventory contracts are included in accounts receivable.~~

On March 8, 2019, pursuant to the Master Transaction Agreement (the “Master Transaction Agreement”), dated as of November 1, 2018, by and among Legacy RTI, PS Spine Holdco, LLC, a Delaware limited liability company (“PS Spine”), the Company, and Bears Merger Sub, Inc., a Delaware corporation and direct wholly owned subsidiary of the Company (“Merger Sub”), the Company acquired all of the outstanding equity interests of Paradigm, through a transaction in which: (i) PS Spine contributed all of the issued and outstanding equity interests in Paradigm to the Company (the “Contribution”); (ii) Merger Sub merged with and into Legacy RTI (the “Merger”), with Legacy RTI surviving as a wholly owned direct subsidiary of the Company; and (iii) the Company was renamed “RTI Surgical Holdings, Inc.” (collectively, the “Paradigm Transaction”). Legacy RTI retained its existing name “RTI Surgical, Inc.”

Pursuant to the Master Transaction Agreement: (i) each share of common stock, par value $0.001 per share, of Legacy RTI issued and outstanding immediately prior to the Paradigm Transaction (other than shares held by Legacy RTI as treasury shares or by the Company or Merger Sub immediately prior to the Paradigm Transaction, which were automatically cancelled and ceased to exist) was converted automatically into one 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 Paradigm Transaction (other than shares held by Legacy RTI as treasury shares or by the Company or Merger Sub immediately prior to the Paradigm Transaction, which were automatically cancelled and ceased to exist) was converted automatically into one 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.

The consideration for the Contribution was $100,000 (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 lower by Paradigm’s working capital of $7,000.

In addition to the Cash Consideration Amount and the Stock Consideration Amount, the Company may be required to make further cash payments or issue additional shares of Company common stock to PS Spine in an amount up to $50,000 of shares of Company common stock to be valued based upon the Legacy RTI Price and an additional $100,000 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 Company originally estimated the fair value of the contingent liability related to the revenue-based earnout of $72,177 utilizing a Monte-Carlo simulation model as of March 8, 2019. A Monte-Carlo simulation 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. Acquisition and integration related costs, specific to Paradigm, were approximately $15,537, (which includes business development expenses of $462 and severance expense of $896).

The Company has accounted for the acquisition of Paradigm under FASB ~~(“ASC”)~~ASC 805, Business Combinations. Paradigm’s results of operations are included in the condensed consolidated financial statements beginning after March 8, 2019, the acquisition date.

In the first quarter of 2019, the Company completed its valuations and purchase price allocations. The table below represents the final allocation of the total purchase price to ~~Paradigm’s~~Paradigm’s tangible and intangible assets and liabilities fair values as of March 8, ~~2019.~~2019.

As of March 8, 2019, the inventory fair value was composed of current inventory of $7,122 and non-current inventory of $10,525.

Total net assets acquired as of March 8, 2019, were all part of the Company’s only operating segment at that time. Fair values are based on management’s estimates and assumptions including variations of the income approach, the cost approach and the market approach.

The Company believes that the acquisition of Paradigm, a spine focused business, offers the potential for substantial strategic and financial benefits. The transaction further advances the Company’s 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:

These potential benefits resulted in the Company paying a premium for Paradigm resulting in the recognition of $135,589 of goodwill assigned to the Company’s only operating segment and reporting unit at the time of the Paradigm acquisition.

13The acquired goodwill was subsequently impaired. See Note 12 – Goodwill for details. Additionally, the acquired inventories were partially written down. See Note 9 – Inventories for details.

The following unaudited pro forma information shows the results of the Paradigm’s operations as though the acquisition had occurred as of the beginning of the prior comparable period, January 1, 2019, (in thousands):

	For the Six Months Ended			For the Nine Months Ended
	June 30,			September 30,
	2019			2019
Revenues	$	18,900		$	27,251
Net loss applicable to common shares		(14,397	)		(12,705	)

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.

~~The Company’s policy is to generally grant~~In the first nine months of 2020, the Company granted 1,561,069 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 to~~ ~~ten-year~~ ~~contractual terms~~ and ~~vest over a one to~~ ~~five-year~~1,690,597 ~~period from the date of grant. The Company’s general policy is to grant~~ restricted stock awards ~~at a fair value equal to 100% of the market value of a share of common stock at closing on the date of the grant. The Company’s restricted stock awards generally vest over one to~~ ~~three-year~~ ~~periods.~~

under its 2018 Incentive Compensation ~~Plan –~~ Plan.On 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 and restricted stock to key employees, including officers and directors of the Company and consultants and advisors. The 2018 Plan allows for up to 5,726,035 shares of common stock to be issued with respect to awards granted.

As of June 30, 2020, there was $2,252 of total unrecognized stock-based compensation related to unvested stock options. The expense related to these stock options is expected to be recognized over a weighted-average period of 3.34 years.

~~The following tables summarizes information about stock options outstanding, exercisable and available for grant as of June 30, 2020:~~

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. Compensation expense recognized for all option grants is net of estimated forfeitures and is recognized over the awards’ respective requisite service periods.

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.

As of June 30, 2020, there was $3,857 of total unrecognized stock-based compensation related to unvested restricted stock awards. That expense is expected to be recognized on a straight-line basis over a weighted-average period of 1.62 years. The following table summarizes information about unvested restricted stock awards as of June 30, 2020:

As of June 30, 2020, there was $583 of total unrecognized stock-based compensation related to unvested restricted stock units. That expense is expected to be recognized on a straight-line basis over a weighted-average period of 1.5 years. The following table summarizes information about unvested restricted stock units as of June 30, 2020:

For the three and ~~six~~nine months ended ~~June~~September 30, 2020 and 2019, the Company recognized stock-based compensation as follows:

	For the Three Month Ended				For the Six Months Ended				For the Three Month Ended				For the Nine Months Ended
	June 30,				June 30,				September 30,				September 30,
	2020		2019		2020		2019		2020		2019		2020		2019
Stock-based compensation:
Costs of processing and distribution	$	36	$	36	$	72	$	72	$	33	$	36	$	105	$	108
Marketing, general and administrative		983		1,216		2,242		2,328	$	1,112	$	774	$	3,103	$	2,845
Research and development		15		15		30		30	$	5	$	15	$	35	$	45
Transaction and integration expenses									$	1,515		—	$	1,515		—
Total	$	1,034	$	1,267	$	2,344	$	2,430	$	2,665	$	825	$	4,758	$	2,998

For the nine months ended September 30, 2020 and 2019, the Company incurred $792 and $401 of stock-based compensation expense related to the disposed OEM Businesses. For the three months ended September 30, 2020 and 2019, the Company incurred $552 and $144 of stock-based compensation expense related to the disposed OEM Businesses. These expenses have been presented in the results from discontinued operations.

A reconciliation of the number of shares of common stock used in the calculation of basic and diluted net income per common share is presented below:

	For the Three Month Ended				For the Six Months Ended				For the Three Month Ended				For the Nine Months Ended
	June 30,				June 30,				September 30,				September 30,
	2020		2019		2020		2019		2020		2019		2020		2019
Basic shares		75,814,668		75,144,488		75,995,324		70,409,839		73,212,662		72,472,591		72,933,038		69,340,006
Effect of dilutive securities:
Stock options		—		823,707		—		—		0		0		0		0
RSA and RSU										0
Preferred stock Series A		—		15,152,761		—		—		0		0		0		0
Diluted shares		75,814,668		91,120,956		75,995,324		70,409,839		73,212,662		72,472,591		72,933,038		69,340,006

For the three and nine months ended September 30, 2020 and 2019, the Company has suffered a net loss from its continuing operations. As a result, the Company has excluded all potential dilutive shares from the computation of the diluted EPS to avoid the anti-dilutive effect.

The following table includes the number of potential dilutive shares that were excluded due to the anti-dilutive effect:

For the three months ended ~~June 30, 2020 approximately 4,819,238 and for the six months ended June~~September 30, 2020 and 2019, ~~approximately 4,838,639~~5,305,329 and ~~1,429,442,~~2,315,856 of issued stock options were not included in the computation of diluted EPS because their exercise price exceeded the average market price during the period. For the nine months ended September 30, 2020 and 2019, 4,963,654 and 1,653,991, respectively, of issued stock options were not included in the computation of diluted ~~net loss per common share because they were anti-dilutive~~EPS because their exercise price exceeded the average market ~~price. For~~price during the three months ended June 30, 2019, options to purchase 823,707 shares of common stock were included in the computation of diluted loss per share because dilutive shares are factored into this calculation when net income is reported.period.

~~For the three months ended June 30, 2020~~ ~~and six months ended June 30, 2020 and 2019~~, 50,000 shares of convertible preferred stock or 15,152,761of converted common stock and accrued but unpaid dividends were anti-dilutive on an as if-converted basis and were not included in the computation of diluted net loss per common share. For the three months ended June 30, 2019, 50,000 shares of convertible preferred stock or 15,152,761of converted common stock and accrued but unpaid dividends were dilutive on an as if-converted basis and were included in the computation of diluted net income per common share.

The inventory balance as of ~~completion are as follows:~~September 30, 2020 and December 31, 2019 contains entirely finished goods.

For the three months ended ~~June~~September 30, 2020 and 2019, the Company had inventory write-downs of ~~$1,430~~$5,624 and ~~$1,744,~~$1,361 , respectively, and for the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019 the Company had inventory write-downs of ~~$1,947~~$9,597 and ~~$3,274,~~$4,027, respectively, ~~relating~~ primarily due to ~~product obsolescence. As of June 30, 2020, the long-term portion of inventory relates to finished goods.~~ excess product.

	June 30,		December 31,		September 30,		December 31,
	2020		2019		2020		2019
Income tax receivable	$	3,963	$	2,803	$	5	$	2,785
Prepaid expenses		4,642		1,865		2,356		996
Other		888		2,101		1,917		253
	$	9,493	$	6,769	$	4,278	$	4,034

~~Property,~~The net book value of property, plant and equipment ~~are~~is as ~~follows:~~follows:

For the three months ended ~~June~~September 30, 2020 and 2019, the Company had depreciation expense in connection with property, plant and equipment of ~~$1,880~~$758 and ~~$2,800,~~$1,378, respectively, and for the ~~six~~nine months ended months ended ~~June~~September 30, 2020 and 2019, the Company had depreciation expense ~~in connection with property, plant~~of $1,074 and ~~equipment of $3,646 and $5,539,~~$3,201 , respectively. For the three and ~~six~~nine months ended ~~June~~September 30, 2020, the Company recorded asset impairment and abandonment charges of ~~$882~~$9,210 and ~~$2,761,~~$11,971, respectively related to property, plant and equipment in the Spine ~~segment.~~asset group. The Spine asset group could not support the newly capitalized carrying amount of the property, plant and equipment, because the Spine asset group has projected negative cash flows over the useful life of the long-lived assets in the asset group. The fair value of property and equipment was measured utilizing an orderly liquidation value of each of the underlying assets.

The change in the carrying amount of goodwill for the ~~six~~nine months ended ~~June~~September 30, 2020, is as follows:

	June 30,		December 31,			September 30,		December 31,
	2020		2019			2020		2019
Balance at January 1	$	55,384	$	59,798		$	-	$	4,414
Goodwill acquired related to Paradigm acquisition		—		135,589			—		135,589
Goodwill impairment		—		(140,003	)
Goodwill impairment from continuing operations							—		(140,003	)
Balance at end of period	$	55,384	$	55,384		$	-	$	-

On March 8, 2019, we acquired Paradigm for a purchase price of approximately $232,907 and recorded goodwill of approximately $135,589. The goodwill arising from the Paradigm acquisition was specifically allocated to the Spine reporting unit. For the impairment test performed in 2019, it was concluded the fair value of goodwill is substantially in excess of our carrying value. For the Spine reporting unit test for the year ended December 31, 2019, it was concluded the carrying value was in excess of the fair value of goodwill and we recorded an impairment charge of all the goodwill in the Spine reporting unit totaling $140,003.

For the three months ended June 30, 2020 and 2019, the Company had amortization expense of other intangible assets of $568 and $995, respectively and for the six months ended June 30, 2020 and 2019, the Company had amortization expense of other intangible assets of $1,041 and $1,952, respectively.

~~At June 30, 2020, management’s estimates of future amortization expense for the next five years are as follows:~~

Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy defines a three-level valuation hierarchy for classification and disclosure of fair value measurements as follows:

Level 1 – Quoted prices in active markets for identical assets or liabilities.

Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Embedded derivatives identified within the Ares incremental term loan entered into, assessed and adjusted to their estimated fair value during the second quarter of 2020. Fair value is measured as of the debt issuance date using Level 3 inputs. For the issuance, the derivative level 3 fair value was measured based on a probability-weighted discounted cash flow approach. Unobservable inputs included the probability of a shareholder approval (unobservable), a recovery scenario should shareholder approval not occur (unobservable), and an estimated discount rate based on market data of comparable debt (observable).

Long-lived assets, including property and equipment subject to amortization were impaired and written down to their estimated fair values during the first quarter of 2020. Fair value is measured as of the impairment date using Level 3 inputs. For the 2020 impairments, the long-lived asset level 3 fair value was measured base on orderly liquidation value for the Property, plant and equipment. Unobservable inputs for the orderly liquidation value included replacement costs (unobservable), physical deterioration estimates (unobservable) and market sales data for comparable assets and unobservable inputs for the income approach included forecasted cash flows generated from use of the intangible assets (unobservable).

The following table summarizes impairments of long-lived assets and the related post impairment fair values of the corresponding assets for the three and ~~six~~nine months ended ~~June~~September 30, 2020.

On June 5, 2018, the Company, along with its wholly-owned subsidiary, Pioneer Surgical, entered into that certain Credit Agreement (the “2018 Credit Agreement”), as borrowers, with 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. The 2018 Credit Agreement provides for a revolving credit facility in the aggregate principal amount of up to $100,000 (the “JPM Facility”) (subsequently reduced to $75,000, and later increased to $80,000, in each case, as described below). The Company and Pioneer Surgical will be able to, at their option, request an increase to the JPM Facility in an amount not to exceed $50,000, subject to customary conditions and the approval of JPM and the JPM Lenders providing such increased amount.

The JPM Facility is guaranteed by the Company’s domestic subsidiaries and is secured by: (i) substantially all of the assets of the Company and Pioneer Surgical; (ii) substantially all of the assets of each of the Company’s domestic subsidiaries; and (iii) 65% of the stock of the Company’s foreign subsidiaries.

The Company may elect to apply either the CBFR or Eurodollar rate to any borrowing. The CBFR loans will bear interest at a rate per annum equal to the monthly REVLIBOR30 Rate plus the Adjusted LIBO Rate. The Company may elect to convert the interest rate for the Eurodollars Loans to a rate per annum equal to the adjusted LIBOR Rate plus the JPM Eurodollar Rate. The applicable margin was subject to adjustment after the end of each fiscal quarter, based upon the Company’s average quarterly availability (subsequently modified by the Fourth Amendment to the 2018 Credit Agreement (as defined below)). The maturity date of the JPM Facility is June 5, 2023 (subsequently modified by the Fourth Amendment to the 2018 Credit Agreement (as defined below)). The Company may make optional prepayments on the JPM Facility without penalty. The Company paid certain customary closing costs and bank fees upon entering into the 2018 Credit Agreement.

The Company is subject to certain affirmative and negative covenants, including (but not limited to), covenants limiting the Company’s ability to: incur certain additional indebtedness; create certain liens; enter into sale and leaseback transactions; and consolidate or merge with, or convey, transfer or lease all or substantially all of its assets to another person. The Company is required to maintain a minimum fixed charge coverage ratio of at least 1.00:1.00 (the “JPM Required Minimum Fixed Charge Coverage Ratio”) on each JPM Calculation Date (as defined below) during either of the following periods (each, a “JPM Covenant Testing Period”): (i) a period beginning on a date that a default has occurred and is continuing under the loan documents entered into by the Company in conjunction with the 2018 Credit Agreement through the first date on which no default has occurred and is continuing; or (ii) a period beginning on a date that availability under the JPM Facility is less than the specified covenant testing threshold and continuing until availability under the JPM Facility is greater than or equal to the specified covenant testing threshold for thirty (30) consecutive days. The JPM Required Minimum Fixed Charge Coverage Ratio is measured on the last day of each calendar month during the JPM Covenant Testing Period (each a “JPM Calculation Date”), and is calculated using the minimum fixed charge coverage ratio for the twelve (12) consecutive months ending on each JPM Calculation Date. The amounts owed under the 2018 Credit Agreement may be accelerated upon the occurrence of certain events of default customary for facilities for similarly rated borrowers.

On March 8, 2019, the Company entered into a First Amendment to Credit Agreement and Joinder Agreement dated as of March 8, 2019 (the “2019 First Amendment”), among the Company, Legacy RTI, as a borrower, Pioneer Surgical, as a borrower, the other loan parties thereto as guarantors, JP Morgan Chase Bank, N.A., as lender (together with the various financial institutions as in the future may become parties thereto) and as administrative agent for the JPM Lenders. The 2019 First Amendment amended the 2018 Credit Agreement by: (i) reducing the aggregate revolving commitments available to Legacy RTI and Pioneer Surgical from $100,000 to $75,000; (ii) joining the Company and Paradigm, and its domestic subsidiaries as guarantors as loan parties to the 2018 Credit Agreement; (iii) permitting the Ares Term Loan (as defined below); and (iv) making certain other changes to the 2018 Credit Agreement consistent with the foregoing including pro rata reductions to certain thresholds that were based on the aggregate commitments under the 2018 Credit Agreement.

The Company entered into a Second Amendment to Credit Agreement dated as of December 9, 2019 (the “2019 Second Amendment”). The 2019 Second Amendment amended the 2018 Credit Agreement by increasing the aggregate revolving commitments available to Legacy RTI and Pioneer Surgical from $75,000 to $80,000.

On April 9, 2020, Legacy RTI entered into a Consent and Third Amendment to Credit Agreement and Joinder Agreement (the “Third Amendment to the 2018 Credit Agreement”), by and among the JPM Loan Parties and the JPM Lenders. The Third Amendment to the 2018 Credit Agreement amended the 2018 Credit Agreement by: (i) extending the deadline for delivery of certain annual audited financial statements of the Company from March 30, 2020 to April 30, 2020, (ii) modifying certain interest rates contained therein to contain a 1.00% floor, (iii) requiring the Company and each other Loan Party to close all of its deposit accounts and securities accounts at Wells Fargo Bank, N.A. or any affiliates thereof on or before June 19, 2020, and (iv) making certain other changes to the 2018 Credit Agreement consistent with the foregoing.

On April 27, 2020, Legacy RTI entered into a Fourth Amendment to Credit Agreement (the “Fourth Amendment to the 2018 Credit Agreement”), by and among the JPM Loan Parties, JPM and the JPM Lenders. The Fourth Amendment to the 2018 Credit Agreement amends the 2018 Agreement to: (i) provide for a $8,000 block on availability under the 2018 Credit Agreement until the earlier of: (a) the date upon which at least $25,000 of the Second Amendment Incremental Term Loan Commitments (as defined below) have been funded to Legacy RTI in accordance with the 2019 Credit Agreement and evidence of such funding, in form and substance satisfactory to JPM, shall have been received by JPM.; and (b) the date upon which (1) no default or event of default exists under the 2018 Credit Agreement; and (2) Ares notifies Legacy RTI that, for any reason, Second Amendment Incremental Term Loan Commitments have been terminated in accordance with the terms of the 2019 Credit Agreement and evidence of such termination, in form and substance satisfactory to JPMorgan Chase Bank, N.A., shall have been delivered to JPM; (ii) amend the applicable rate with respect to any loan to 2.75% per annum; and (iii) amend the maturity date to the earlier to occur of: (a) June 5, 2023, or any earlier date on which the commitments are reduced to zero or otherwise terminated pursuant to the terms of the 2018 Credit Agreement; and (b) the date that is 30 days prior to the maturity date of the Second Amendment Incremental Term Loan Commitments (as defined below), as the same may be extended from time to time pursuant to the terms of the 2019 Credit Agreement and such extension is agreed to by the JPM Lenders.

At June 30, 2020, the interest rate applicable to CBFR loans and Eurodollars under the JPM Facility was 3.75%. As of June 30, 2020, there was $64,096 outstanding on the JPM Facility and total remaining available credit on the JPM Facility was $7,404. The Company’s ability to access the JPM Facility is subject to and can be limited by the Company’s compliance with the Company’s financial and other covenants.

On March 8, 2019, Legacy RTI entered into a Second Lien Credit Agreement dated as of March 8, 2019 (the “2019 Credit Agreement”), among Legacy RTI, as a borrower, the other loan parties thereto as guarantors (together with Legacy RTI, the “Ares Loan Parties”), Ares Capital Corporation (“Ares”), as lender (together with the various financial institutions as in the future may become parties thereto, the “Ares Lenders”) and as administrative agent for the Ares Lenders. The 2019 Credit Agreement provides for a term loan in the principal amount of up to $100,000 (the “Ares Term Loan”) (subsequently increased to $130,000 as described below). The Ares Term Loan was advanced in a single borrowing on March 8, 2019 (other than any increase thereto as described below).

The Ares Term Loan is guaranteed by the Company and each of the Company’s domestic subsidiaries and is secured by: (i) substantially all of the assets of Legacy RTI; (ii) substantially all of the assets of the Company; (iii) substantially all of the assets of the Company’s domestic subsidiaries; and (iv) 65% of the stock of the Company’s foreign subsidiaries.

On March 3, 2020, the Company entered into a First Amendment to Second Lien Credit Agreement, dated March 3, 2020 (the “2020 First Amendment”), by and among the Ares Loan Parties and the Ares Lenders. The 2020 First Amendment amended the 2019 Credit Agreement: (a) amending the definition of “EBITDA” contained therein; (b) modifying the Leverage Ratio covenant contained therein; and (c) making certain other changes to the 2019 Credit Agreement consistent with the foregoing. These amendments will allow the Company to, among other things, support the investment being made to separate the OEM and Spine businesses in anticipation of the sale of the Company’s OEM business.

On April 27, 2020, the Company entered into a Second Amendment to Second Lien Credit Agreement (the “Second Amendment to the 2019 Credit Agreement”), by and among the Ares Loan Parties and the Ares Lenders. The Second Amendment to the 2019 Credit Agreement amended the 2019 Credit Agreement to: (i) establish an incremental term loan commitment; (ii) provide for certain incremental term loans in an aggregate principal amount not to exceed $30,000 (the “Second Amendment Incremental Loan Commitments”); (iii) provide for a portion of the Second Amendment Incremental Loan Commitments up to $13,500 be available on a delayed-draw basis at any time after the effective date of the Ares Amendment and on or prior to August 31, 2020, subject to certain conditions; iv) increase the Base Rate applicable margin with respect to all Term Loans (other than the Second Amendment Incremental Term Loans) to 12.5% effective on September 1, 2020; and (v)make certain other changes to the 2019 Credit Agreement consistent with the foregoing. Pursuant to the terms of the Second Amendment to the 2019 Credit Agreement, Legacy RTI agreed pay to Ares, for the ratable benefit of each incremental term lender, a fee in an amount equal to 5.0% of the principal amount of the incremental term loan commitments provided by such lender on the effective date of the Ares Amendment. The maturity of the loans advanced under the Second Amendment Incremental Term Commitments (the “Second Amendment Incremental Term Loans”) have a maturity date of April 27, 2021. The Second Amendment Incremental Term Loans must be repaid in their entirety, at which time a takeout fee ranging from $11,250 to $25,500 shall be due and payable (the “Takeout Fee”). The Takeout Fee is inclusive of all interest accruing due and payable with respect to the Second Amendment Incremental Term Loans. The interest rate on the Second Amendment Incremental Term Loans is 12.50% and, commencing on September 1, 2020 and on the first day of each of the next four calendar months thereafter, the interest in respect of the Second Amendment Incremental Term Loans shall increase on each such date, on a cumulative basis, by an additional 1.00% per annum (such that, after the fifth such increase, the Base Rate with respect to the Second Amendment Incremental Term Loans shall equal 17.50% per annum).

The Ares Term Loan will bear interest at a rate per annum equal to, at the option of Legacy RTI: (i) the monthly Base Rate plus an adjustable margin of up to 7.50% (the “Base Rate”); or (ii) the LIBOR plus an adjustable margin of up to 8.50% (the “Ares Eurodollar Rate”) (as the Base Rate and the Ares Eurodollar Rate were subsequently modified as described below). Subject to customary notices, Legacy RTI may elect to convert the Ares Term Loan from Base Rate to Ares Eurodollar Rate or from Ares Eurodollar Rate to Base Rate. The applicable margin is subject to adjustment after the end of each fiscal quarter, based upon the Ares Loan Parties’ Leverage Ratio (as subsequently modified as described below). At any time during the period commencing on March 8, 2019 and ending on March 8, 2021, if the Ares Loan Parties’ Leverage Ratio is greater than 4.50:1.00, Legacy RTI shall have the option (the “PIK Option”) to elect to pay 50% of the interest that will accrue in the subsequent quarterly period in kind by capitalizing it and adding such amount to the principal balance of the Ares Term Loan. If Legacy RTI exercises the PIK Option, the adjustable margin applicable to the Ares Term Loan shall be increased by 0.75%.

The maturity date of the Ares Term Loan is December 5, 2023. Legacy RTI may make optional prepayments on the Ares Term Loan, provided that any such optional prepayments made on or prior to March 8, 2022, shall be subject to a make whole premium or a prepayment price, as the case may be. Legacy RTI is required to make mandatory prepayments of the Ares Term Loan based on excess cash flow and the Ares Loan Parties’ Leverage Ratio, upon the incurrence of certain indebtedness not otherwise permitted under the 2019 Credit Agreement, upon consummation of certain dispositions, and upon the receipt of certain proceeds of casualty events. Legacy RTI was required to pay certain customary closing costs and bank fees upon entering into the 2019 Credit Agreement.

Legacy RTI is subject to certain affirmative and negative covenants, including (but not limited to), covenants limiting Legacy RTI’s ability to: incur certain additional indebtedness; create certain liens; enter into sale and leaseback transactions; and consolidate or merge with, or convey, transfer or lease all or substantially all of its assets to another person. During any JPM Covenant Testing Period Legacy RTI is required to maintain a minimum fixed charge coverage ratio of at least 0.91:1.00 (the “Ares Required Minimum Fixed Charge Coverage Ratio”). The Ares Required Minimum Fixed Charge Coverage Ratio is measured on each JPM Calculation Date, and is calculated using the minimum fixed charge coverage ratio for the twelve (12) consecutive months ending on each JPM Calculation Date. The Ares Loan Parties are required to maintain an initial Leverage Ratio of 9.00:1.00, which ratio steps down each fiscal quarter of Legacy RTI resulting in a requirement that the Ares Loan Parties maintain a total net leverage ratio of 3.50:1.00 for the fiscal quarter ending June 30, 2021 (as subsequently modified as described below), and each fiscal quarter ending thereafter.

~~The amounts owed under the 2019 Credit Agreement may be accelerated upon the occurrence of certain events of default customary for facilities for similarly rated borrowers.~~

~~For the six months ended June 30, 2020 and 2019, interest expense associated with the amortization of debt issuance costs was~~ $283 and $361, respectively. Included in the six months ended June 30, 2019, was $219 of accelerated amortization of debt issuance costs associated with the modification of the 2018 Credit Agreement. For the six months ended June 30, 2019, the Company incurred total debt issuance cost of $826.

~~As of June 30, 2020, the Company had approximately $2,229 of cash and cash equivalents and $7,404 of availability under the 2018 Credit Agreement.~~

The 2019 Credit Agreement contains a debt to EBITDA covenant, which requires the Company to maintain a 5.75:1 Leverage Ratio for each quarter ending in 2020, including the fiscal quarter ended March 31, 2020. The 2019 Credit Agreement provides that the Leverage Ratio reduces to 5.25:1 for the quarters ending March 31, 2021 and June 30, 2021, with a final reduction to 3.50:1 for each quarter ending thereafter. Our Leverage Ratio as of March 31, 2020 is approximately 5.98:1.

On April 9, 2020 and on May 8, 2020, the Company received waivers and consent agreements with respect to certain financial statement delivery requirements extending the due dates for delivering the required financial statements under the credit facilities. Further, Pursuant to two Consent Agreements, dated June 1, 2020, one with respect to the JPM Credit Facility and one for the Ares Term Loan, each of JPM, the JPM Lenders, Ares and the Ares Lenders, respectively, agreed to extend the deadline for the delivery of the fiscal year end 2019 financial statements to June 8, 2020. Further, each of JPM, the JPM Lenders, Ares and the Ares Lenders also agreed to waive the requirement with respect to the going concern qualification.

In connection with any repayment or prepayment of principal of the Second Amendment Incremental Loan Commitments (whether voluntary, mandatory, at maturity, by acceleration or otherwise), the Company is obligated to pay the Takeout Fee to the lender. The maximum potential Takeout Fee of $25.5 million will be recorded as initial debt discount and accrued over the expected life of the Second Amendment Incremental Loan Commitments until maturity using the effective interest method.

The Second Amendment Incremental Loan Commitments also contain a provision that allows the lender to accelerate the maturity of the debt upon the receipt of any proceeds from the incurrence of certain indebtedness, disposition of assets in excess of $2,500,000, or a casualty event. The Company will treat this provision as an embedded derivative feature that requires bifurcation and separate accounting from the debt host pursuant to ASC 815. The initial fair value of the embedded derivative of $10.4 million was recorded as a derivative liability that is presented as additional discount on the Second Amendment Incremental Loan Commitments being amortized over the term of the Second Amendment Incremental Loan Commitments using the effective interest method. The derivative liability will be marked to fair value over the term of the Second Amendment Incremental Loan Commitments at each reporting period. As of June 30, 2020, the value of the derivative liability had increased from $10.4 million to $23 million. The Company recorded the increase in fair value of $12.6 million through Other (expense) income in the Statement of Comprehensive Loss.

	June 30,		December 31,		September 30,		December 31,
	2020		2019		2020		2019
Lease obligations						1,121		1,487
Acquisition contingencies	$		$	1,130		—		1,130
Lease obligations		1,440		1,547
Other		876		470		202		245
	$	2,316	$	3,147	$	1,323	$	2,862

Acquisition contingencies represent the Company’s fair value estimate of the Zyga acquisition clinical and revenue milestones of $1,130 at December 31, 2019. As of ~~June~~September 30, 2020, there was a $130 reduction in the contingent liability estimate of the Zyga acquisition revenue earnout, as the probability weighted model has been updated based on the current updated forecast for the performance of the Zyga product portfolio. The clinical milestone of $1,000 has been reclassified to current as it is now expected that it will be paid in Q2 of 2021.

The Company evaluates the need for deferred tax asset valuation allowances based on a more likely than not standard. The ability to realize deferred tax assets depends on the ability to generate sufficient taxable income within the carryback or carryforward periods provided for in the tax law for each applicable tax jurisdiction. The Company has evaluated all evidence, both positive and negative, and determined that its domestic deferred tax assets are not more likely than not to be realized. ~~Accordingly, the Company has recorded valuation allowances in the amount of $62,975 and $51,508 at June 30, 2020 and December 31, 2019, respectively.~~ In making this determination, numerous factors were considered including the cumulative recent loss position in the US.

During the second quarter. the Company ~~considers~~considered the removal of the going concern evaluation and the Company’s foreign operations three-year cumulative income position to be objectively verifiable evidence which ~~supports~~supported the Company’s ability to utilize its foreign deferred tax assets. As a result, the valuation allowances against its foreign subsidiaries’ deferred tax assets ~~has been~~was released in the second quarter, resulting in a tax benefit of approximately ~~$3.4M. The Company expects its~~$3.4 million. This tax benefit is related to foreign ~~deferred tax assets of $3,300, net~~operation that was part of the ~~valuation allowance at June 30,~~OEM Businesses; therefore, the associated tax benefit is included in discontinued operations.

On July 20, 2020, RTI completed the disposition of ~~$ 62,975,~~its OEM Businesses and has recognized tax expense of $42.4 million within discontinued operations as of the third quarter. Discontinued operations tax expense primarily relates to ~~be realized through~~ the ~~generation~~tax gain on sale of ~~future taxable income~~the OEM business, partially offset by the Company’s ability to utilize tax attributes and recognition of the ~~reversal~~benefit for year-to-date U.S. losses from continuing operations pursuant to the Company’s adoption of ~~existing taxable temporary differences.~~ASU 2019-12. (See Note 4 “Discontinued Operations” for additional information).

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was enacted by the United States Congress. As a result of the enactment of the CARES Act, net operating losses (“NOL’s”) can now be carried back for five years, ~~and~~which resulted in the Company recognizing a benefit during the first quarter of approximately $3.5 ~~million of related to a tax receivable. Our effective tax rate was 7.9 percent and 10.8 percent for the quarter and six months ended June 30, 2020, respectively.~~million.

The effective tax rate from continuing operations is primarily impacted ~~both for quarter and year-to-date by valuation allowances in the U.S., which reduce the tax benefit associated with pretax losses. The impact of the U.S valuation allowances is offset in part~~ by the CARES Act ~~and foreign valuation allowance release benefits~~tax benefit referenced above. The ~~June~~September 30, 2019 continuing operations effective tax rate was primarily a result of pretax ~~earnings~~losses at statutory rates.

On June 12, 2013, the Company and WSHP Biologics Holdings, LLC (“WSHP”), an affiliate of Water Street Healthcare Partners, ~~a leading~~ healthcare-focused private equity firm (“Water Street”), entered into an investment agreement. Pursuant to the terms of the investment agreement, the Company issued $50,000 of convertible preferred equity to Water Street in a private placement which closed on July 16, 2013, with preferred stock issuance costs of $1,290. The preferred stock accrued dividends at a rate of 6% per annum. To the extent dividends ~~are~~were 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~~accumulated until paid in cash or converted to common stock.

On August 1, 2018, the Company and Water Street, 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~~did 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);~~2018; (2) the Company ~~may~~could 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~~could not convert the Series A Preferred Stock into common stock prior to July 16, 2021 (with certain exceptions). ~~The~~

On July 17, 2020, the Company ~~evaluated and concluded~~received a notification from WSHP seeking redemption on ~~a qualitative basis the amendment qualifies as modification accounting to the preferred shares, which did not result in a change in the valuation~~or before September 14, 2020 of all of the ~~shares.~~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 $67 million and Certificate of Retirement was filed with the Delaware Secretary of State retiring the Series A Preferred Stock.

	Preferred Stock Liquidation		Preferred Stock Issuance			Net		Preferred Stock Liquidation			Preferred Stock Issuance			Net
	Value		Costs			Total		Value			Costs			Total
Balance at January 1, 2020	$	66,519	$	(109	)	$	66,410	$	66,519		$	(109	)	$	66,410
Amortization of preferred stock issuance costs		—		46			46		—			46			46
Balance at March 31, 2020		66,519		(63	)		66,456		66,519			(63	)		66,456
Amortization of preferred stock issuance costs		—		46			46		—			46			46
Balance at June 30, 2020	$	66,519	$	(17	)	$	66,502	$	66,519		$	(17	)	$	66,502
Amortization of preferred stock issuance costs									—			17			17
Redemption of preferred stock									(66,519	)					(66,519	)
Balance at September 30, 2020								$	-		$	-		$	-


	Preferred Stock Liquidation		Preferred Stock Issuance			Net		Preferred Stock Liquidation			Preferred Stock Issuance			Net
	Value		Costs			Total		Value			Costs			Total
Balance at January 1, 2019	$	66,519	$	(293	)	$	66,226	$	66,519		$	(293	)	$	66,226
Amortization of preferred stock issuance costs		—		46			46		—			46			46
Balance at March 31, 2019		66,519		(247	)		66,272		66,519			(247	)		66,272
Amortization of preferred stock issuance costs		—		46			46		—			46			46
Balance at June 30, 2019	$	66,519	$	(201	)	$	66,318	$	66,519		$	(201	)	$	66,318
Amortization of preferred stock issuance costs									—			46			46
Balance at September 30, 2019								$	66,519		$	(155	)	$	66,364

As part of the acquisition of Paradigm in 2019, management implemented a plan for which remaining outstanding balances at December 31, 2019 were fully paid out during the first quarter of 2020. During the second quarter of 2020, management implemented a plan as part of the sale of OEM which resulted in $604 of severance and restructuring expense for the ~~six~~nine months ended ~~June~~September 30, 2020 included in severance and restructuring costs within the Condensed Consolidated Statements of Comprehensive Gain (Loss). The severance plan is the transition of certain executives as a result of the sale of the OEM business and is composed of payroll expense all within the ~~Spine segment, which cumulatively the plan will be $604.~~continuing operations. The total severance and restructuring costs ~~are expected to be~~were paid in full by the ~~fourth~~third quarter of 2020. Severance and restructuring payments are made over periods ranging from one month to six months and are not expected to have a material impact on cash flows of the Company in any quarterly period.

The following table includes a roll-forward of severance and restructuring costs included in accrued expenses, see Note ~~16.~~

Accrued severance and restructuring costs at January 1, 2020	$	136		$	136
Severance and restructuring costs accrued in 2020		604			604
Subtotal severance and restructuring costs		740			740
Severance and restructuring related cash payments		(136	)		(740	)
Accrued severance and restructuring charges at June 30, 2020	$	604
Accrued severance and restructuring charges at September 30, 2020				$	0

~~Sale of OEM Business –~~On July 20, 2020, pursuant to the previously announced Equity Purchase Agreement, dated as of January 13, 2020, as amended by that certain First Amendment to Equity Purchase Agreement dated as of March 6, 2020, that certain Second Amendment to Equity Purchase Agreement, dated as of April 27, 2020 and that certain Third Amendment to Equity Purchase Agreement, dated as of July 8, 2020 (as amended, the “Purchase Agreement”), by and between the Company and Ardi Bidco Ltd. (the “Buyer”), an entity owned and controlled by Montagu Private Equity LLP, and each of the agreements ancillary to the Purchase Agreement, the transactions contemplated by the Purchase Agreement (the “Transactions”) were consummated. As a result of the Transactions, among other things, the Company’s original equipment manufacturing business and the Company’s business related to processing donated human musculoskeletal and other tissue and bovine and porcine animal tissue in producing allograft and xenograft implants using BIOCLEANSE^®~~, TUTOPLAST~~^® ~~and CANCELLE~~^® SP sterilization processes were sold to the Buyer and its affiliates for a purchase price of $440 million of cash, subject to certain adjustments primarily relating to working capital delivered at closing. More specifically, pursuant to the terms of the Purchase Agreement, the Company and its subsidiaries 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 U.S. Securities and Exchange Commission (the “SEC”) on June 18, 2020.

Agreement to Acquire Paradigm – On March 8, 2019, pursuant to the Master Transaction Agreement, the Company acquired Paradigm in a cash and stock transaction valued at up to $300,000, consisting of $150,000 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 $100,000 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 of value. In addition, the Company may be required to pay up to an additional $150,000 in a combination of cash and Company common stock based on a revenue earnout consideration. Based on a probability weighted model, the Company estimates a contingent liability related to the revenue based earnout of 0.0 utilizing a Monte-Carlo simulation model. A Monte-Carlo simulation 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

Acquisition of Zyga– 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 $21,000 in consideration paid at closing (consisting of borrowings of $18,000 on its revolving credit facility and $3,000 cash on hand), $1,000 contingent upon the successful achievement of a clinical milestone, and a revenue based earnout consideration of up to an additional $35,000. Based on a probability weighted model, the Company estimates a contingent liability related to the clinical milestone of $1,000, which is within the Accrued expenses line of the Condensed Consolidated Balance Sheets.

Distribution Agreement with Medtronic – On October 12, 2013, the Company entered into a replacement distribution agreement with Medtronic, plc. (“Medtronic”), pursuant to which Medtronic will distribute certain allograft implants for use in spinal, general orthopedic and trauma surgery. Under the terms of this distribution agreement, Medtronic will be a non-exclusive distributor except for certain specified implants for which Medtronic will be the exclusive distributor. Medtronic will maintain its exclusivity with respect to these specified implants unless the cumulative fees received by us from Medtronic for these specified implants decline by a certain amount during any trailing 12-month period. The initial term of this distribution agreement was to have been through December 31, 2017. The term automatically renews for successive five-year periods, unless either party provides written notice of its intent not to renew at least one year prior to the expiration of the initial term or the applicable renewal period. Neither party provided notice of non-renewal on or before December 31, 2016, thereby triggering the five-year automatic renewal period upon the expiration of the initial term. The distribution agreement will therefore continue at least through December 31, 2022. This agreement was transferred in connection with the sale of the OEM Businesses and is now reported in discontinued operations.

Distribution Agreement with Zimmer Dental Inc. - On September 3, 2010, the Company entered into an exclusive distribution agreement with Zimmer Dental, Inc. (“Zimmer Dental”), a subsidiary of Zimmer, with an effective date of September 30, 2010, as amended from time to time. The Agreement was assigned to Biomet 3i, LLC (“Biomet”), an affiliate of Zimmer Dental, on January 1, 2016. The Agreement has an initial term of ten years. Under the terms of this distribution agreement, the Company agreed to supply sterilized allograft and xenograft implants at an agreed upon transfer price, and Biomet agreed to be the exclusive distributor of the implants for dental and oral applications worldwide (except Ukraine), subject to certain Company obligations under an existing distribution agreement with a third party with respect to certain implants for the dental market. In consideration for Biomet’s exclusive distribution rights, Biomet agreed to the following: 1) payment to the Company of $13,000 within ten days of the effective date (the “Upfront Payment”); 2) annual exclusivity fees (“Annual Exclusivity Fees”) paid annually as long as Biomet maintains exclusivity for the term of the contract to be paid at the beginning of each calendar year; and 3) annual purchase minimums to maintain exclusivity. Upon occurrence of an event that materially and adversely affects Biomet’s ability to distribute the implants, Biomet may be entitled to certain refund rights with respect to the then current Annual Exclusivity Fee, where such refund would be in an amount limited by a formula specified in this agreement that is based substantially on the occurrence’s effect on Biomet’s revenues. The Upfront Payment, the Annual Exclusivity Fees and the fees associated with distributions of processed tissue are considered to be a single performance obligation. Accordingly, the Upfront Payment and the Annual Exclusivity Fees are deferred as received and are being recognized as other revenues over the term of this distribution agreement based on the expected contractual annual purchase minimums relative to the total contractual minimum purchase requirements in this distribution agreement. Additionally, the Company considered the potential impact of this distribution agreement’s contractual refund provisions and does not expect these provisions to impact future expected revenue related to this distribution agreement. This agreement was transferred in connection with the sale of the OEM Businesses and is now reported in discontinued operations..

The Company’s aforementioned revenue recognition methods related to the Zimmer distribution agreements do not result in the deferral of revenue less than amounts that would be refundable in the event the agreements were to be terminated in future periods. Additionally, the Company evaluates the appropriateness of the aforementioned revenue recognition methods on an ongoing basis.

The Company is, from time to time, involved in litigation relating to claims arising out of its operations in the ordinary course of business. Based on the information currently available to the Company, including the availability of coverage under its insurance policies, the Company does not believe that any of these claims that were outstanding as of ~~June~~September 30, 2020 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.

Coloplast — The Company 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 has as its catalyst various Public Health Notifications issued by the FDA with respect to the placement of certain TSM implants that were the subject of 510k regulatory clearance prior to their distribution. The Company does not process or 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.

In addition to claims made directly against the Company, Coloplast, a distributor of TSM’s and certain allografts processed and private labeled for them under a contract with the Company, has also been named as a defendant in individual TSM cases in various federal and state courts. Coloplast requested that the Company indemnify or defend Coloplast in those claims which allege injuries caused by the Company’s allograft implants, and on April 24, 2014, Coloplast sued RTI Surgical, Inc. in the Fourth Judicial District of Minnesota for declaratory relief and breach of contract. On December 11, 2014, Coloplast entered into a settlement agreement with RTI Surgical, Inc. and Tutogen Medical, Inc. (the “Company Parties”) resulting in dismissal of the case. Under the terms of the settlement agreement, the Company Parties are responsible for the defense and indemnification of two categories of present and future claims: (1) tissue only (where Coloplast is solely the distributor of Company processed allograft tissue and no Coloplast-manufactured or distributed synthetic mesh is identified) (“Tissue Only Claims”), 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 ~~June~~September 30, 2020, there are a cumulative total of ~~1,137~~1,157 Indemnified Claims for which the Company Parties are providing defense and indemnification. The defense and indemnification of these cases are covered under the Company’s insurance policy subject to a reservation of rights by the insurer.

Based on the current information available to the Company, the impact that current or any future TSM litigation may have on the Company cannot be reasonably estimated.

LifeNet — On June 27, 2018, LifeNet Health, Inc. (“LifeNet”) filed a patent infringement lawsuit in the United States District Court for the Middle District of Florida (since moved to the Northern District of Florida) claiming infringement of five of its patents by the ~~Company.~~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 ~~now~~ 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) 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. ~~Final~~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 ~~patentability~~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 ~~LifeNet’s patents (which may be appealed by either party) is expected to take place in~~Appeal with the ~~second half~~Federal Circuit on October 27, 2020 and LifeNet filed a Notice of Cross-appeal on November 9, 2020. 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.

Securities Class Action—There is currently ongoing stockholder litigation related to the Company’s Investigation (as defined below). 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 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 Action”). The court appointed a different shareholder as Lead Plaintiff and ~~set August 16, 2020 as the deadline for the filing of any amended complaint. Counsel for Lead Plaintiff has~~she filed ~~a motion seeking to extend the deadline for the filing~~ an amended complaint ~~until~~on August 31, 2020. ~~. Based on the current information available to~~On October 15, 2020, the Company and the ~~impact that current or any future litigation may have on~~other-named defendants moved to dismiss the ~~Company cannot be reasonably estimated.~~amended complaint.

Derivative Lawsuits—NaN derivative lawsuits have also been filed on behalf of the Company, naming it as a nominal defendant, and demanding a jury trial. On June 5, 2020, David Summers filed a shareholder derivative lawsuit (“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). The 3 derivative lawsuits have been consolidated into the first-filed Summers Action. ~~No response to any complaint is due until after~~On September 6, 2020 the Court ~~rules on a leadership structure for plaintiffs’ counsel and either a consolidated amended complaint is filed or~~entered an order staying the ~~operative complaint is identified. Based on the current information available to the Company the financial or other impact~~Summers Action pending resolution of the ~~Investigation cannot be reasonably determined.~~motions to dismiss in the Lowry Action.

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. Based on the current information available to the Company, the impact that current or any future stockholder litigation may have on the Company cannot be reasonably estimated.

~~The Company’s accounting policy is to accrue for legal costs as they are incurred.~~

SEC Investigation— As previously disclosed in the Company’s Current Report on Form 8-K filed with the SEC on March 16, 2020, and the Form 10-K filed with the SEC on June 8,2020, the Audit Committee of the Board of Directors, 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. As a result of the Investigation, the Audit Committee concluded that the Company would restate its previously issued audited financial statements for fiscal years 2018, 2017 and 2016, selected financial data for fiscal years 2015 and 2014, 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 Investigation was precipitated by an investigation by the U.S. Securities and Exchange Commission initially related to the periods 2014 through 2016. The SEC investigation is ongoing and the Company is cooperating with the SEC in its investigation. Based on the current information available to the Company the financial or other impact of the Investigation cannot be reasonably determined.

Environmental Protection Agency—On January 28, 2020, RTI received an Opportunity to Show Cause letter from the United States Environmental Protection Agency (“EPA”). The letter alleged potential violations of hazardous waste regulations at the Company’s Alachua, Florida facilities based on a November 20, 2019 inspection conducted by EPA, and offered the Company the opportunity to meet with EPA to explain why EPA should not take any formal enforcement action. The Company held a virtual meeting with EPA on May 19, 2020 to discuss the corrective actions it had taken in response to EPA’s letter. During subsequent discussions, EPA has indicated that it intends to impose a penalty on the Company related to the allegations in the letter. The Company has recorded a liability for the amount the EPA has communicated they intend to impose on the Company related to the allegations in the letter which is included in accrued expenses in the condensed consolidated balance sheet. The Company is in negotiations with EPA.

On July 15, 2020, the Board appointed Stuart F. Simpson to serve as the Chairman of the Board, effective immediately upon consummation of the Transactions. On July 20, 2020, Mr. Simpson entered into a consulting agreement (“Consulting Agreement”) with the Company, pursuant to which he will provide consulting services to the Company. The Consulting Agreement has an initial term of three years, but may be extended with the mutual agreement of the parties. Mr. Simpson will be entitled to an annual consulting fee of $275,000 per year during the term of the Consulting Agreement, payable in 12 equal monthly installments, and the Company agreed to enter into a restricted stock award agreement, pursuant to which the Company will grant to Mr. Simpson a restricted stock award equal to $825,000. 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.

The Company evaluated subsequent events as of the issuance date of the consolidated financial statements as defined by FASB ASC 855, Subsequent Events.

On July 15, 2020, RTI Surgical Holdings, Inc. (the “Company”) the Company announced that it received all of the necessary approvals for the transactions contemplated by the previously disclosed Equity Purchase Agreement, dated as of January 13, 2020 (as amended, the “Purchase Agreement”), by and between the Company and Ardi Bidco Ltd., an entity owned and controlled by Montagu Private Equity LLP, and each of the agreements ancillary to the Purchase Agreement (the “Contemplated Transactions”), the Company’s plans to change the name of the Company from “RTI Surgical Holdings, Inc.” to “Surgalign Holdings, Inc.” and the ticker symbol of the Company from “RTIX” to “SRGA” shortly after consummation of the Contemplated Transactions and the Company’s leadership transitions.

~~On July 20,~~Sept 29, 2020, the Company ~~announced~~ entered into a Stock Purchase Agreement (the consummation of the Transactions, the Company’s payment of its outstanding indebtedness, the Company’s planned redemption of all of the outstanding shares of its Series A Convertible Preferred Stock, the Name Change, the Symbol Change“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 the Company’s previously announced leadership transitions, including, without limitation, the appointment of Stuart F. Simpson as the Chairman of the Board, Terry M. Rich as a director and the President and Chief Executive ofKrzysztof Siemionow, MD, PhD (“Siemionow”), which provides for the Company ~~and Jonathon M. Singer as the Chief Financial and Operating Officer of the Company.~~

~~On July 20, 2020, the Company filed: (i) a Certificate of Amendment of the Certificate of Incorporation with the Secretary of Delaware~~to acquire (the ~~“Certificate of Incorporation Amendment”~~“Acquisition”); and (ii) an Amended and Restated Certificate of Designation of Series A Convertible Preferred Stock (the “A&R Certificate of Designation”) to change the name of the Company from “RTI Surgical Holdings, Inc.” to “Surgalign Holdings, Inc.” (the “Name Change”). In connection with the Name Change, the Company’s common stock began trading under the new ticker symbol “SRGA;” trading under the new ticker symbol is expected to begin on Thursday, July 23, 2020 (the “Symbol Change”). The new CUSIP number of the Company’s common stock is 86882C 105.

The Name Change and Symbol Change do not affect the rights of the Company’s security holders. The Company’s common stock will continue to be quoted on Nasdaq. Following the Name Change, the stock certificates, which reflect the former name of the Company, will continue to be valid. Any certificates reflecting the Name Change will be issued in due course as old stock certificates are tendered for exchange or transfer to the Company’s transfer agent.

On July 20, 2020, pursuant to the previously announced Equity Purchase Agreement, dated as of January 13, 2020, as amended by that certain First Amendment to Equity Purchase Agreement dated as of March 6, 2020, that certain Second Amendment to Equity Purchase Agreement, dated as of April 27, 2020 and that certain Third Amendment to Equity Purchase Agreement, dated as of July 8, 2020 (as amended, the “Purchase Agreement”), by and between the Company and Ardi Bidco Ltd. (the “Buyer”), an entity owned and controlled by Montagu Private Equity LLP, and each of the agreements ancillary to the Purchase Agreement, the transactions contemplated by the Purchase Agreement (the “Transactions”) were consummated. As a result of the Transactions, among other things, the Company’s original equipment manufacturing business and the Company’s business related to processing donated human musculoskeletal and other tissue and bovine and porcine animal tissue in producing allograft and xenograft implants using BIOCLEANSE^®~~, TUTOPLAST~~^® ~~and CANCELLE~~^® ~~SP sterilization processes were sold to the Buyer and its affiliates for a purchase price of $440 million of cash, subject to certain adjustments.~~ After consideration of initial working capital adjustments, we currently expect to record a pre-tax gain on disposition of the OEM business in the range of $245 million to $260 million during the third quarter of fiscal 2020. ~~More specifically, pursuant to the terms of the Purchase Agreement, the Company and its subsidiaries sold to the Buyer and its affiliates~~ 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”.

As consideration for the Acquisition, the Company paid to the Seller $30,000,000 in cash and issue to the Seller 6,250,000 shares of ~~RTI OEM, LLC (which, prior~~common stock, par value $0.001 of the Company (“Common Stock”). In addition, following the closing, the Seller will be entitled to receive contingent consideration from the Company valued in an aggregate amount of up to $83,000,000, to be paid through the issuance of Common Stock or the payment of cash, contingent upon and following the achievement of certain regulatory, commercial and utilization milestones by specified time periods occurring up to the ~~Transactions, was converted~~sixth (6th) anniversary of the closing. The Purchase Agreement provides that the Company will issue Common Stock to ~~a corporation and changed its name to “RTI Surgical, Inc.”), RTI Surgical, LLC (which, prior~~satisfy any contingent consideration payable to the ~~Transactions, was converted~~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 ~~corporation~~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 ~~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~~obligations of the Company with respect to the ~~U.S. Securities and Exchange Commission (the “SEC”) on June 18, 2020.~~operation of the business of Holo Surgical that apply during the period in which the milestones may be achieved.

~~Effective~~The Acquisition was closed on ~~July 20, 2020, Surgalign Holdings, Inc. (i) paid in full its $80.0 million revolving credit facility under that certain Credit Agreement dated as~~October 23, 2020. The preliminary valuation of ~~June 5, 2018, by~~the acquired assets and among Surgalign Spine Technologies, Inc. (formerly known as RTI Surgical, Inc.), as a 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 lenderliabilities is not yet complete, and as ~~administrative agent~~such, the Company has not yet completed its allocation of the purchase price allocation for the JPM Lenders, as amended, (ii) terminated the 2018 Credit Agreement, (iii) paid in full its $100.0 million term loan and $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 and (iv) terminated the 2019 Credit Agreement.acquisition.

Information contained in this filing contains “forward-looking statements” which can be identified by the use of forward-looking terminology such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “requires,” “hopes,” “assumes” or comparable terminology, or by discussions of strategy. There can be no assurance that the future results covered by these forward-looking statements will be achieved. Some of the matters described in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2019, or in subsequent Quarterly Reports on Form 10-Q (including this one), constitute cautionary statements which identify some of the factors regarding these forward-looking statements, including certain risks and uncertainties, that could cause actual results to vary materially from the future results indicated in these forward-looking statements. Other factors could also cause actual results to vary materially from the future results indicated in such forward-looking statements.

~~On July 20, 2020, RTI completed the disposition of the OEM business, and was renamed~~ Surgalign Holdings Inc. ~~References in this Form 10-Q to Surgalign~~and Subsidiaries (“Surgalign”, we, our or ~~the Company refer to the Company~~us), formerly known as of June 30, 2020, prior to the disposition of the OEM business, unless otherwise noted or obvious from the context. In conjunction with the sale of the OEM business the Company repaid and terminated all outstanding debt held on the books as of June 30, 2020.

~~Surgalign~~RTI Surgical Holdings, Inc. and Subsidiaries (“RTI”), is a global medical technology company advancing the science of spine care, focused on delivering innovative solutions that drive superior clinical and economic outcomes. The ~~company~~Company is building off a legacy of high quality and differentiated products and continues to invest in clinically validated innovation to deliver better surgical outcomes and improve patient’s lives. Surgalign markets products throughout the United States and in more than 50 countries worldwide through an expanding network of top independent distributors. Surgalign, a member of AdvaMed (“Advanced Medical Technology Association”), is headquartered in Deerfield, ~~Illinois,~~IL, with commercial, innovation and ~~as of the date of this filing, has~~ design centers in San Diego, ~~California,~~CA, Marquette, MI, and Wurmlingen, ~~Germany.~~Germany. ~~We were founded in 1997.~~

Our domestic distributions and services accounted for ~~91%~~83% of total revenues in the first ~~six~~nine months of 2020. Most of our implants are distributed directly to healthcare providers, hospitals and other healthcare facilities and various original equipment manufacturer (“OEM”) relationships.

~~International~~Our international distributions and services accounted for 9%17% of total revenues in the first ~~six~~nine months of 2020. Our implants are distributed in over 50 countries through a direct sales force in Germany and through stocking distributors in the rest of the world outside of Germany and the U.S.

We ~~continue to implement~~are implementing a focused strategy to ~~expand our spine and OEM operations and~~ create long-term, profitable growth for the Company. The core components of our strategy are:

In line with our strategy, on March 8, 2019, we acquired Paradigm Spine, LLC (“Paradigm”), a leader in motion preservation and non-fusion spinal implant technology. Paradigm’s primary product is the coflex® Interlaminar Stabilization® device. Under the terms of the master transaction agreement dated March 8, 2019, we acquired Paradigm for $150.0 million in consideration paid at closing consisting of new debt financing of $100.0 million and $50.0 million of issued securities. In addition to the cash consideration amount and the stock consideration amount, we may be required to make further cash payments or issue additional shares of our common stock to Paradigm in an amount up to $50.0 million of shares of our common stock and an additional $100.0 million of cash and/or our common stock, in each case, if certain revenue targets are achieved between closing and December 31, 2022.

On Sept 29, 2020, we entered into a Stock Purchase Agreement to acquire Holo Surgical Inc., a Chicago-based private technology company developing the revolutionary Augmented Reality and Artificial Intelligence digital surgery platform (‘ARAI^™’), to enable digital spine surgery. Total consideration for the transaction is valued at up to $125 million, consisting of consideration valued at $42 million payable at closing in cash and shares plus potential future milestone payments. The transaction was closed on October 23, 2020.

We believe ~~this is a~~these are significant ~~step~~steps toward focusing our business and advancing our efforts to generate predictable and sustainable operating results through disciplined execution and building scale to extend distribution of our products in those areas that offer the greatest opportunities to benefit our patients and shareholders.

We continue to maintain our commitment to research and development and the introduction of new strategically targeted allograft, xenograft, metal and synthetic implants as well as focused clinical efforts to support their acceptance in the marketplace. In addition, we consider strategic acquisitions from time to time for new implants and technologies intended to augment our existing implant offerings, as well as strategic dispositions from time to time in response to market trends or industry developments.

~~On July 15, 2020, RTI Surgical Holdings, Inc. (the “Company”) announced that the Company has received all~~ and Redemption of the necessary approvals for the transactions contemplated by the previously disclosed Equity Purchase Agreement, dated as of January 13, 2020 (as amended, the “Purchase Agreement”), by and between the Company and Ardi Bidco Ltd., an entity owned and controlled by Montagu Private Equity LLP, and each of the agreements ancillary to the Purchase Agreement (the “Contemplated Transactions”), the Company’s plans to change the name of the Company from “RTI Surgical Holdings, Inc.” to “Surgalign Holdings, Inc.” and the ticker symbol of the Company from “RTIX” to “SRGA” shortly after consummation of the Contemplated Transactions and the Company’s leadership transitions.

On July 20, 2020, the Company announced the consummation of the Transactions, the Company’s payment of its outstanding indebtedness, the Company’s planned redemption of all of the outstanding shares of its Series A Convertible Preferred Stock the Name Change, the Symbol Change and the Company’s previously announced leadership transitions, including, without limitation, the appointment of Stuart F. Simpson as the Chairman of the Board, Terry M. Rich as the President and Chief Executive of the Company and Jonathon M. Singer as the Chief Operating Officer of the Company.

On July 20, 2020, pursuant to the ~~previously announced~~ Equity Purchase Agreement ~~dated as of January 13,~~and subsequent amendments entered in 2020, as amended by that certain First Amendment to Equity Purchase Agreement dated as of March 6, 2020, that certain Second Amendment to Equity Purchase Agreement, dated as of April 27, 2020 and that certain Third Amendment to Equity Purchase Agreement, dated as of July 8, 2020 (as amended, the “Purchase Agreement”), by and between the Company and Ardi Bidco Ltd. (the “Buyer”), an entity owned and controlled by Montagu Private Equity LLP, and each of the agreements ancillary to the Purchase Agreement, the transactions contemplated by the Purchase Agreement (the “Transactions”) were consummated. As a result of the Transactions, among other things, the Company’sRTI sold its original equipment manufacturing business and ~~the Company’s~~ business related to processing donated human musculoskeletal and other tissue and bovine and porcine animal tissue ~~in producing allograft and xenograft implants using BIOCLEANSE~~^®~~, TUTOPLAST~~^® ~~and CANCELLE~~^® ~~SP sterilization processes were sold~~(collectively, the “OEM Businesses”) to ~~the Buyer~~Ardi Bidco Ltd. (the “Buyer”) and its affiliates for a purchase price of $440 million of cash, subject to certain ~~adjustments.~~adjustments (the “Transactions”). More specifically, pursuant to the terms of the Purchase Agreement, ~~the Company and its subsidiaries~~RTI 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 U.S. Securities and Exchange Commission (the “SEC”) on June 18, 2020. Subsequent to the Transactions, RTI was renamed to Surgalign Holdings, Inc, operating as Surgalign Spine Technologies. References in this Form 10-Q to Surgalign or the Company refer to the Company including, where obvious from the context, the disposed OEM Businesses. “Legacy RTI” refers to the Company prior to the acquisition of Paradigm Spine on March 8, 2019.

Effective on July 20, 2020, ~~Surgalign Holdings, Inc. (formerly known as RTI Surgical Holdings, Inc.) (“Surgalign” or the “Company”)~~we (i) paid in full ~~its~~our $80.0 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.), as a 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 (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 inour full its $100.0 million term loan and $30.0 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, as administrative agent for the other lenders party thereto, as amended and (iv) terminated the 2019 Credit Agreement.

On July 17, 2020, ~~the Company~~we received a notification from WSHP 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, ~~the Company~~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.

In connection with the Transactions, we also made certain leadership transitions, including, without limitation, the appointment of Stuart F. Simpson as the Chairman of the Board, Terry M. Rich as the President and Chief Executive of the Company and Jonathon M. Singer as the Chief Operating Officer of the Company.

The COVID-19 pandemic has directly and indirectly materially and adversely impacted the Company’s business, financial condition and operating results. The extent to which these adverse impacts will continue will depend on numerous evolving factors that are highly uncertain, rapidly changing and cannot be predicted with precision or certainty at this time. The spread of COVID-19 has caused many hospitals and other healthcare providers to refocus their care on the surge of the COVID-19 cases and to postpone elective and non-emergent procedures, restrict access to these facilities, and in some cases re-allocate scarce resources to their critically ill patients. These efforts have impacted and could continue to impact our business activities, including our product sales, as many of our products are used in connection with elective surgeries. Further, disruptions in the manufacture and/or distribution of our products or in our supply chain may occur as a result of the pandemic or pandemic-related events that result in staffing shortages, production slowdowns, stoppages, or disruptions in delivery systems, any of which could materially and adversely affect our ability to manufacture and/or distribute our products, or to obtain the raw materials and supplies necessary to manufacture and/or distribute our products, in a timely manner, or at all.

~~In response to the COVID-19 novel coronavirus pandemic and the resulting federal and local guidelines, Surgalign~~The Company furloughed or reduced the hours of ~~over 500~~a majority of its U.S.-based employees ~~beginning on April 6, 2020.~~in Q2 2020, but they have since returned to work. Although our operations are beginning to increase towards normal levels, we continue to have many employees working remotely. Surgalign cannot predict when it will be able to resume normal operations and will continue to carefully monitor the situation. COVID-19 has had an adverse effect on the overall productivity of our workforce, and we may be required to continue to take extraordinary measures to ensure the safety of our employees and those of our business partners. ~~In addition, our employees may be required to take time off for extended periods of time due to illness or as a result of government-imposed changes to daily routines, including school closures.~~ Additionally, these measures are hindering our ability to recruit, vet and hire personnel for key positions. It is unknown how long these disruptions could continue.

As the global outbreak of COVID-19 continues to ~~rapidly~~ evolve, it could continue to materially and adversely affect our revenues, financial condition, profitability, and cash flows for an indeterminate period of time. We are unable to accurately predict the full impact that the ongoing COVID-19 pandemic will have due to numerous factors that are not within our control, including the duration and severity of the pandemic. Stay-at-home/ shelter-in-place orders, business closures, travel restrictions, supply chain disruptions, employee illness or quarantines, and other extended periods of interruption to our business have resulted and could continue to result in disruptions to our operations, which have had and could continue to have adverse impacts on the growth of our business, have and could continue to cause us to cease or delay operations, and could prevent our customers from receiving shipments or processing payments. Some experts expect a second, more severe phase of the pandemic in the Fall of 2020 and Winter of 2021. Such a severe second phase would result in additional material adverse impacts upon the Company.

As of September 30, 2020, we had cash of $95,790 and an accumulated deficit of $384,922. For the nine-months ended September 30, 2020, we had a loss from continuing operations of $75,890. We have incurred losses from operations in the previous two fiscal years and did not generate positive cash flows from operations in fiscal year 2019 or for the nine-months ended September 30, 2020. The Company closed on the sale of the OEM business to Ardi Bidco, Ltd., on July 20, 2020 and upon the close of the sale, the Company repaid all of its debt obligations in full. Additionally, all preferred stock was also redeemed by Water Street Healthcare Partners, resulting in cash payment of $66,519 during the third quarter of 2020.

The Company is projecting it will continue to generate significant negative operating cash flows over the next 12-months and beyond. In consideration of i) COVID-19 uncertainties, ii) negative cash flows that are projected over the next 12-month period, iii) the income taxes to be paid related to the gain on sale associated with the OEM business, and iv) approx. $10 million in contingent consideration amounts which are expected to become due to the former owners of Holosurgical if regulatory approval in the US is obtained in 2021, which would paid through combination of common stock and cash; the Company has forecasted the need to raise additional capital in order to continue as a going concern. The Company’s operating plan for the next 12-month period also includes continued investments in its product pipeline which will necessitate additional debt and/or equity financing in addition to the funding of future operations through 2021 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. If cash resources are insufficient to satisfy the Company’s on-going cash requirements through 2021, 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.

The recoverability of a major portion of the recorded asset amounts shown in the Company’s accompanying consolidated balance sheets is dependent upon continued operations of the Company, which in turn is dependent upon the Company’s ability to meet its funding requirements on a continuous basis, to maintain existing financing and to succeed in its future operations. The Company’s financial statements do not include any adjustment relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence.

The following table set forth, in both dollars and as a percentage of revenues, the results of our operations for the three and ~~six~~nine months ended ~~June~~September 30, 2020 and 2019, respectively.

	For the Three Months Ended June 30,										For the Six Months June 30,										For the Three Months Ended September 30,										For the Nine Months September 30,
	2020					2019					2020					2019					2020					2019					2020					2019
Revenues	$	54,225		100.0	%	$	81,554		100.0	%	$	127,951		100.0	%	$	151,575		100.0	%	$	27,926		100.0	%	$	28,702		100.0	%	$	75,562		100.0	%	$	85,849		100.0	%
Costs of processing and distribution		31,093		57.3	%		35,430		43.4	%		64,366		50.3	%		67,564		44.6	%
Cost of goods sold																						11,892		42.6	%		7,607		26.5	%		30,336		40.1	%		24,711		28.8	%
Gross profit		23,132		42.7	%		46,124		56.6	%		63,585		49.7	%		84,011		55.4	%		16,034		57.4	%		21,095		73.5	%		45,226		59.9	%		61,138		71.2	%
Expenses:
Marketing, general and administrative		37,066		68.4	%		41,108		50.4	%		79,719		62.3	%		73,224		48.3	%		27,754		99.4	%		34,247		119.3	%		97,095		128.5	%		95,454		111.2	%
Research and development		3,274		6.0	%		3,868		4.7	%		7,556		5.9	%		8,204		5.4	%		2,208		7.9	%		4,271		14.9	%		9,764		12.9	%		12,475		14.5	%
Severance and restructuring costs		604		1.1	%		-		0.0	%		604		0.5	%		-		0.0	%
Gain on acquisition contingency		(130	)	-0.2	%		(1,590	)	-1.9	%		(130	)	-0.1	%		(1,590	)	-1.0	%		-		0.0	%		-		0.0	%		(130	)	-0.2	%		(1,590	)	-1.9	%
Asset impairment and abandonments		882		1.6	%		-		0.0	%		2,761		2.2	%		15		0.0	%		9,356		33.5	%		4		0.0	%		12,117		16.0	%		15		0.0	%
Goodwill impairment		-		0.0	%		-		0.0	%		-		0.0	%		-		0.0	%
Transaction and integration expenses		4,923		9.1	%		1,953		2.4	%		14,203		11.1	%		10,910		7.2	%		3,411		12.2	%		3,089		10.8	%		5,826		7.7	%		13,999		16.3	%
Total operating expenses		46,619		86.0	%		45,339		55.6	%		104,713		81.8	%		90,763		59.9	%		42,729		153.0	%		41,611		145.0	%		124,672		165.0	%		120,353		140.2	%
Operating income (loss)		(23,487	)	-43.3	%		785		1.0	%		(41,128	)	-32.1	%		(6,752	)	-4.5	%
Operating loss																						(26,695	)	-95.6	%		(20,516	)	-71.5	%		(79,446	)	-105.1	%		(59,215	)	-69.0	%
Other (expense) income:
Interest expense		(5,972	)	-11.0	%		(3,635	)	-4.5	%		(9,537	)	-7.5	%		(5,239	)	-3.5	%
Interest income		21		0.0	%		26		0.0	%		71		0.1	%		157		0.1	%		21		0.1	%		4		0.0	%		92		0.1	%		161		0.2	%
Derivative loss		(12,641	)	-23.3	%		-		0.0	%		(12,641	)	-9.9	%		-		0.0	%
Foreign exchange loss		217		0.4	%		(19	)	0.0	%		(29	)	0.0	%		(50	)	0.0	%
Foreign exchange gain (loss)																						21		0.1	%		(51	)	-0.2	%		(28	)	0.0	%		(88	)	-0.1	%
Total other expense - net		(18,375	)	-33.9	%		(3,628	)	-4.4	%		(22,136	)	-17.3	%		(5,132	)	-3.4	%		42		0.2	%		(47	)	-0.2	%		64		0.1	%		73		0.1	%
Loss before income tax benefit (expense)		(41,862	)	-77.2	%		(2,843	)	-3.5	%		(63,264	)	-49.4	%		(11,884	)	-7.8	%
Income tax benefit (expense)		3,298		6.1	%		3,031		3.7	%		6,837		5.3	%		2,721		1.8	%
Net loss		(38,564	)	-71.1	%		188		0.2	%		(56,427	)	-44.1	%		(9,163	)	-6.0	%
Loss before income tax benefit																						(26,653	)	-95.4	%		(20,563	)	-71.6	%		(79,382	)	-105.1	%		(59,142	)	-68.9	%
Income tax benefit																						-		0.0	%		3,591		12.5	%		3,492		4.6	%		9,955		11.6	%
Net loss from continuing operations																						(26,653	)	-95.4	%		(16,972	)	-59.1	%		(75,890	)	-100.4	%		(49,187	)	-57.3	%
Discontinued operations (Note 4)
Income from operations of discontinued operations (including gain on disposition of $210,866 for the three and nine months ended 9/30/2020)																						191,871		687.1	%		13,292		46.3	%		181,337		240.0	%		39,987		46.6	%
Income tax (expense)																						(42,534	)	-152.3	%		(1,458	)	-5.1	%		(39,189	)	-51.9	%		(5,101	)	-5.9	%
Gain on discontinued operations																						149,337		534.8	%		11,834		41.2	%		142,148		188.1	%		34,886		40.6	%
Net income (loss)																						122,684		439.3	%		(5,138	)	-17.9	%		66,258		87.7	%		(14,301	)	-16.7	%
Convertible preferred dividend		-		0.0	%		-		0.0	%		-		0.0	%		-		0.0	%		-		0.0	%		-		0.0	%		-		0.0	%		-		0.0	%
Net income (loss) applicable to common shares	$	(38,564	)	-71.1	%	$	188		0.2	%	$	(56,427	)	-44.1	%	$	(9,163	)	-6.0	%		122,684		439.3	%		(5,138	)	-17.9	%		66,258		87.7	%		(14,301	)	-16.7	%
Other comprehensive (loss) gain:																								0.0	%				0.0	%				0.0	%				0.0	%
Unrealized foreign currency translation loss																						(108	)	-0.4	%		(1,122	)	-3.9	%		(180	)	-0.2	%		(1,120	)	-1.3	%
Comprehensive loss																					$	122,576		438.9	%	$	(6,260	)	-21.8	%	$	66,078		87.4	%	$	(15,421	)	-18.0	%

~~The following table reflects revenues for the three and six months ended June 30, 2020 and 2019, respectively.~~

Three Months Ended ~~June~~September 30, 2020, Compared With Three Months Ended ~~June~~September 30, 2019

~~Total~~ Revenues – Our ~~total~~ revenues decreased ~~$27.3~~$0.8 million, or ~~33.5%~~2.7%, to ~~$54.2~~$27.9 million for the three months ended ~~June~~September 30, 2020, compared to ~~$81.6~~$28.7 million for the three months ended ~~June~~September 30, 2019, as a result of decrease in international biologic sales, which were approximately $0.6 million in the prior year comparable period.

Cost of Goods Sold – Costs of good sold increased $4.3 million, or 56.3%, to $11.9 million for the three months ended September 30, 2020, compared to $7.6 million for the three months ended September 30, 2019. Adjusted for the impact of purchase accounting step-up and inventory write-offs, cost of goods sold increased $0.6 million or 9.4%, to $7.5 million, or 26.8% of revenue, for the three months ended September 30, 2020, compared to $6.9 million, or 24.0% of revenue, for the three months ended September 30, 2019. The decrease in costs of goods sold was primarily due to product mix.

Marketing, General and Administrative Expenses – Marketing, general and administrative expenses decreased $6.5 million, or 19.0%, to $27.8 million for the three months ended September 30, 2020, compared to $34.2 million for the three months ended September 30, 2019. The decrease in marketing, general and administrative costs is driven by a $7.9 million reduction in spending through the simplification of the distribution and marketing infrastructure and reduction in spending due to the sale of the OEM business offset by restatement and related costs of $1.4 million for the three months ended September 30, 2020.

Research and Development Expenses – Research and development expenses decreased $2.1 million or 48.3%, to $2.2 million from $4.3 million for the three months ended September 30, 2019. The decrease in research and development expenses is result of a reduction in spending on new product development, specifically external consultant and advisor expense, as the Company was focused on the sale of the OEM businesses during the current quarter.

Asset Impairment and Abandonments– Asset impairment and abandonments expenses were $9.4 million for the three months ended September 30, 2020, which was primarily the result of Spine asset group property, plant and equipment being impaired.

Transaction and Integration Expenses – Transaction and integration expenses related to the acceleration of stock compensation expense related to OEM employees and acquisition of the HoloSurgical business were $3.4 million for the three months ended September 30, 2020, compared to $3.1 million of Paradigm acquisition costs for the three months ended September 30, 2019.

Total Net Other Expense – Total net other expense, which includes interest income, and foreign exchange loss, increased $0.1 million to $0.1 million as a result of foreign exchange gain associated with our foreign operations for the three months ended September 30, 2020, from $0.1 million loss for the three months ended September 30, 2019.

Income Tax Benefit – Income tax expense for the three months ended September 30, 2020, decreased $3.6 million to zero from $3.6 million benefit for the three months ended September 30, 2019. The decrease is the result of the full valuation allowance on deferred tax assets of the continuing operations.

Discontinued Operations – Net income from discontinued operations for the three months ended September 30, 2020 was $149.3 million, including a gain on sale of the OEM Business of $211 million, transaction expense of $12 million and income tax expense of $42.5 million. Net income from discontinued operations for the three months ended September 30, 2019 was $11.8 million, net of $1.5 million of income taxes.

Nine Months Ended September 30, 2020, Compared With Nine Months Ended September 30, 2019

Revenues – Our revenues decreased $10.3 million, or 12.0%, to $75.6 million for the nine months ended September 30, 2020, compared to $85.8 million for the nine months ended September 30, 2019, due to decreased demand during the second quarter as a result in the reduction of elective surgical procedures related to COVID-19 impacting ~~both~~ our Spine ~~and OEM businesses.~~business.

~~Spine~~Cost of Goods Sold – ~~Revenues from spine implants decreased $12.2~~Costs of goods sold increased $5.6 million, or ~~37.0%~~22.8%, to ~~$20.5~~$30.3 million for the ~~three~~nine months ended ~~June~~September 30, 2020, compared to ~~$32.7~~$24.7 million for the ~~three~~nine months ended ~~June~~September 30, 2019. ~~Spine revenues decreased as a result of the impact of COVID-19.~~

~~OEM -~~ Revenues from OEM decreased $15.1 million, or 31.2%, to $33.7 million for the three months ended June 30, 2020, compared to $48.9 million for the three months ended June 30, 2019. OEM revenues decreases entirely as a result of the impact of COVID-19.

~~Costs of Processing and Distribution –~~ ~~Costs of processing and distribution decreased $4.3 million, or 12.1%, to $31.1 million for the three months ended June 30, 2020, compared to $35.4 million for the three months ended June 30, 2019~~ Adjusted for the impact of purchase accounting step-up and inventory write-offs, cost of ~~processing and distribution decreased $3.3~~goods sold increased $1.5 million or ~~9.4%~~6.6%, to ~~$31.7~~$24.5 million, or ~~58.5%~~32.4% of revenue, for the ~~three~~nine months ended ~~June~~September 30, 2020, compared to ~~$35.0~~$23.0 million, or ~~42.9%~~26.7% of revenue, for the ~~three~~nine months ended ~~June~~September 30, 2019. The ~~decrease~~increase in costs of ~~processing and distribution~~goods sold was primarily due to decreased revenue distributions ~~and impact~~which occurred during the second quarter of ~~unabsorbed overhead due to reduction of activity in our plants~~2020 in response to COVID-19.

Marketing, General and Administrative Expenses – Marketing, general and administrative expenses ~~decreased $4.0~~increased $1.6 million, or ~~9.7%~~1.7%, to ~~$37.1~~$97.1 million for the ~~three~~nine months ended ~~June~~September 30, 2020, compared to ~~$41.1~~$95.4 million for the ~~three~~nine months ended ~~June~~September 30, 2019. ~~Marketing, general and administrative expenses increased as a percentage of revenues from 50.4% for the three months ended June 30, 2019, to 68.4% for the three months ended June 30, 2020.~~ The ~~decrease~~increase in marketing, general and administrative costs is ~~driven by a reduction in distribution, marketing and commissions correlating~~primarily due to ~~the reduction in revenue and the furlough of the majority of our sales resources offset by~~ restatement and related costs of ~~$7.8~~$12.6 million for the ~~three~~nine months ended ~~June~~September 30, ~~2020..~~2020 offset by reduction in spending through the simplification of the distribution and marketing infrastructure and reduction in spending due to the sale of the OEM business.

Research and Development Expenses – Research and development expenses decreased ~~$0.6~~$2.7 million or ~~15.4%~~21.7%, to ~~$3.3 million from $3.9~~$9.8 million for the ~~three~~nine months ended ~~June~~September 30, ~~2019. Research and development expenses decreased as a percentage of revenues~~2020 from ~~4.7%~~$12.5 million for the ~~three~~nine months ended ~~June~~September 30, ~~2019, to 6.0% for the three months ended June 30, 2020.~~2019. The decrease in ~~Research~~research and development expenses is the result of reduced spending on new product development, specifically external consultant and advisor expense, in the current quarter due to focus on the sale of the OEM business, as well as the furlough of a portion of our research and development team during the ~~current quarter.~~

~~Severance and restructuring costs –~~ ~~Severance and restructuring costs were $0.6 million for the three months ended June 30, 2020, which is the result~~second quarter of ~~employee transition in relation to the OEM transaction. There were no severance and restructuring costs for the three months ended June 30, 2019.~~2020.

Gain on acquisition contingency – Gain on acquisition ~~Contingency~~contingency was $0.1 million for the ~~three~~nine months ended ~~June~~September 30, 2020 compared to $1.6 million for the ~~three~~nine months ended ~~June~~September 30, 2019. The gain on acquisition contingency was the result of an adjustment to our estimate of obligation for future milestone payments on the Zyga acquisition for both periods.

Asset Impairment and Abandonments– Asset impairment and abandonments expenses were ~~$0.9~~$12.1 million for the ~~three~~nine months ended ~~June~~September 30, 2020, which was primarily the result of Spine asset group ~~Property, Plant~~property, plant and equipment being impaired. ~~There were no asset impairment and abandonments for the three months ended June 30, 2019.~~

Transaction and Integration Expenses – Transaction and integration expenses related to the ~~sale~~acceleration of stock compensation expense related to OEM employees and ~~separation~~acquisition of ~~the OEM business~~HoloSurgical were ~~$4.9~~$5.8 million for the ~~three~~nine months ended ~~June~~September 30, 2020, compared to ~~$2.0~~$14.0 million of Paradigm acquisition costs for the ~~three~~nine months ended ~~June~~September 30, 2019.

Total Net Other Expense – Total net other expense, which includes interest ~~expense, amortization of debt discount, interest~~ income and foreign exchange loss, increased $14.8 million to $18.4 million as a result of amortization of debt discount of $12.6 million associated with the Ares incremental term loan and increased borrowings for the three months ended June 30, 2020, from $3.6was consistent at $0.1 million for ~~the three months ended June 30, 2019.~~both periods.

Income Tax Benefit – Income tax benefit for the ~~three~~nine months ended ~~June~~September 30, 2020, was ~~$3.3~~$3.5 million compared to ~~$3.0~~$10.0 million for the ~~three~~nine months ended ~~June 30, 2019. Our effective tax rate for the three months ended June 30, 2020, was 6.1% compared to 106.6% for the three months ended June~~September 30, 2019. For the ~~three~~nine months ended ~~June 30, 2020, the Company has provided a full valuation allowance against all of the net domestic deferred tax assets in the amount of $63 million.~~

~~Six Months Ended June 30, 2020, Compared With Six Months Ended June 30, 2019~~

~~Total Revenues –~~ Our total revenues decreased $23.6 million, or 15.6%, to $128.0 million for the six months ended June 30, 2020, compared to $151.6 million for the six months ended June 30, 2019, due to decreased demand as a result in the reduction of elective surgical procedures related to COVID-19 impacting both our Spine and OEM businesses.

~~Spine –~~ Revenues from spine implants decreased $9.5 million, or 16.3%, to $47.6 million for the six months ended June 30, 2020, compared to $57.1 million for the six months ended June 30, 2019. Spine revenues decreased primarily as a result of as a result of the impact of COVID-19.

~~OEM -~~ Revenues from OEM decreased $14.2 million, or 15.1%, to $80.3 million for the six months ended June 30, 2020, compared to $94.5 million for the six months ended June 30, 2019. OEM revenues decreased primarily as a result of the impact of COVID-19.

~~Costs of Processing and Distribution –~~ Costs of processing and distribution decreased $3.2 million, or 4.6%, to $64.4 million for the six months ended June 30, 2020, compared to $67.6 million for the six months ended June 30, 2019 Adjusted for the impact of purchase accounting step-up, cost of processing and distribution decreased $3.6 million or 5.4%, to $63.0 million, or 49.2% of revenue, for the six months ended June 30, 2020, compared to $66.6 million, or 43.9% of revenue, for the six months ended June 30, 2019. The decrease in costs of processing and distribution was primarily due to decreased revenue distributions and impact of unabsorbed overhead due to reduction of activity in our plants in response to COVID-19.

~~Marketing, General and Administrative Expenses –~~ Marketing, general and administrative expenses increased $6.5 million, or 8.9%, to $79.7 million for the six months ended June 30, 2020, compared to $73.2 million for the six months ended June 30, 2019. Marketing, general and administrative expenses increased as a percentage of revenues from 48.3% for the six months ended June 30, 2019, to 62.3% for the six months ended June 30, 2020. The increase in marketing, general and administrative costs is primarily due to restatement and related costs of $11.3 million for the six months ended June 30, 2020 offset by a reduction in distribution, marketing and commissions correlating to the reduction in revenue and the furlough of a majority of our sales resources during the second quarter of 2020.

~~Research and Development Expenses –~~ Research and development expenses decreased $0.6 million or 7.9%, to $7.6 million from $8.2 million for the six months ended June 30, 2019. Research and development expenses increased as a percentage of revenues from 5.4% for the six months ended June 30, 2019, to 5.9% for the six months ended June 30, 2020. The decrease in Research and development expenses is due to the furlough of a portion of our research and development team during the second quarter of 2020.

~~Severance and restructuring costs –~~ Severance and restructuring costs were $0.6 million for the six months ended June 30, 2020, which is the result of employee transition in relation to the OEM transaction. There were no severance and restructuring costs for the six months ended June 30, 2019.

~~Gain on acquisition contingency –~~ Gain on acquisition Contingency was $0.1 million for the six months ended June 30, 2020 compared to $1.6 million for the six months ended June 30, 2019. The gain on acquisition contingency was the result of an adjustment to our estimate of obligation for future milestone payments on the Zyga acquisition for both periods.

~~Asset Impairment and Abandonments–~~ Asset impairment and abandonments expenses were $2.8 million for the six months ended June 30, 2020, which was primarily the result of Spine asset group Property, Plant and equipment being impaired. There were no asset impairment and abandonments for the six months ended June 30, 2019.

~~Transaction and Integration Expenses –~~ Transaction and integration expenses related to the sale and separation of the OEM business were $14.2 million for the six months ended June 30, 2020, compared to $10.9 million of Paradigm acquisition costs for the six months ended June 30, 2019.

~~Total Net Other Expense –~~ Total net other expense, which includes interest expense, amortization of debt discount, interest income, and foreign exchange loss, increased $17.0 million to $22.1 million as a result of amortization of debt discount of $12.6 million associated with the Ares incremental term loan and increased borrowings for the six months ended June 30, 2020, from $5.1 million for the six months ended June 30, 2019.

~~Income Tax Benefit –~~ Income tax benefit for the six months ended June 30, 2020, was $6.8 million compared to $2.7 million for the six months ended June 30, 2019. Our effective tax rate for the six months ended June 30, 2020, was 5.3% compared to 22.9% for the six months ended June 30, 2019. For the six months ended JuneSeptember 30, 2020, the Company has provided a full valuation allowance against all of the net domestic deferred tax assets in the amount of $63 million. On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was enacted by the United States Congress. As a result of the enactment of the CARES Act, net operating losses (“NOL’s”) can now be carried back for five years and resulted in the Company recognizing approximately $3.5 million of a tax receivable.

Discontinued Operations – Net income from discontinued operations for the nine months ended September 30, 2020 was $142.1 million, including a gain on sale of the OEM Business of $211 million, transaction expenses of $24 million, and income taxes of $39.2 million. Net income from discontinued operations for the nine months ended September 30, 2019 was $34.9 million, net of $5.1 million of income taxes.

We utilize certain financial measures that are not calculated based on Generally Accepted Accounting Principles (“GAAP”). Certain of these financial measures are considered “non-GAAP” financial measures within the meaning of Item 10 of Regulation S-K promulgated by the SEC. We believe that non-GAAP financial measures provide an additional way of viewing aspects of our operations that, when viewed with the GAAP results, provide a more complete understanding of our results of operations and the factors and trends affecting our business. These non-GAAP financial measures are also used by our management to evaluate financial results and to plan and forecast future periods. However, non-GAAP financial measures should be considered as a supplement to, and not as a substitute for, or superior to, the corresponding measures calculated in accordance with GAAP. Non-GAAP financial measures used by us may differ from the non-GAAP measures used by other companies, including our competitors.

To supplement our condensed consolidated financial statements presented on a GAAP basis, we disclose non-GAAP net income applicable to common shares and non-GAAP gross profit adjusted for certain amounts. The calculation of the tax effect on the adjustments between GAAP net loss applicable to common shares and non-GAAP net income applicable to common shares is based upon our estimated annual GAAP tax rate, adjusted to account for items excluded from GAAP net loss applicable to common shares in calculating non-GAAP net income applicable to common shares. Reconciliations of each of these non-GAAP financial measures to the corresponding GAAP measures are included in the reconciliations below:

	For the Three Months Ended						For the Six Months Ended						For the Three Months Ended						For the Nine Months Ended
	June 30,						June 30,						September 30,						September 30,
	2020			2019			2020			2019			2020			2019			2020			2019
	(In thousands)												(In thousands)
Net loss applicable to common shares, as reported	$	(38,564	)	$	188		$	(56,427	)	$	(9,163	)
Severance and restructuring costs	$	604		$	-		$	604		$	-
Net loss from continuing operations, as reported													$	(26,653	)	$	(16,972	)	$	(75,890	)	$	(49,187	)
Gain on acquisition contingency		(130	)		(1,590	)		(130	)		(1,590	)		—			—			(130	)		(1,590	)
Asset impairment and abandonments		882			—			2,761			15			9,356			4			12,117			15
Transaction and integration expenses		4,923			1,953			14,203			10,910
Restatement and related expenses		7,818			—			11,254			—
Inventory purchase price adjustment		563			1,036			1,441			1,036			788			730			2,229			1,752
Inventory write-off		—			—			48			—			3,583			—			3,631			-
Restatement and related expenses														1,381			—			12,637			—
Transaction and integration expenses														3,411			3,089			5,826			13,999
Tax effect on adjustments		—			(3,313	)		—			(2,696	)		—			(668	)		(1,597	)		(2,386	)
Non-GAAP net (loss) income applicable to common shares, adjusted	$	(23,904	)	$	(1,726	)	$	(26,246	)	$	(1,488	)	$	(8,134	)	$	(13,817	)	$	(41,177	)	$	(37,397	)

	For the Three Months Ended				For the Six Months Ended				For the Three Months Ended				For the Nine Months Ended
	June 30,				June 30,				September 30,				September 30,
	2020		2019		2020		2019		2020		2019		2020		2019
	(In thousands)								(In thousands)
Revenues	$	54,225	$	81,554	$	127,951	$	151,575	$	27,926	$	28,702	$	75,562	$	85,849
Costs of processing and distribution		31,093		35,430		64,366		67,564		11,892		7,607		30,336		24,711
Gross profit, as reported		23,132		46,124		63,585		84,011		16,034		21,095		45,226		61,138
Inventory write-off		—		—		48		—		3,583		—		3,631		—
Inventory purchase price adjustment		563		1,036		1,441		1,036		788		730		2,229		1,752
Non-GAAP gross profit, adjusted	$	23,695	$	47,160	$	65,074	$	85,047	$	20,405	$	21,825	$	51,086	$	62,890

The following are explanations of the adjustments that management excluded as part of the non-GAAP measures for the three and ~~six~~nine months ended ~~June~~September 30, 2020 and 2019. Management removes the amount of these costs including the tax effect on the adjustments from our operating results to supplement a comparison to our past operating performance.

2020 Asset impairment and abandonments – These costs relate to asset impairment and abandonments of certain long-term assets within the ~~Spine~~ asset group.

2020 Restatement and related expenses – These costs relate to consulting and legal fees and settlement expenses incurred as a result of the restatement, regulatory and related activities in 2020.

2020 and 2019 Gain on acquisition contingency – The gain on acquisition contingency relates to an adjustment to our estimate of obligation for future milestone payments on the Zyga acquisition.

2020 Transaction and integration expenses – These costs relate to professional fees associated with the ~~on-going SEC investigation~~acquisition of HoloSurgical, accelerated stock compensation expense related to OEM employees terminated in transaction and other matters.

2020 ~~Restatement~~ and ~~related expenses – These costs relate to transaction and separation expenses due the Sale of OEM in 2020.~~

~~2020~~2019 Inventory purchase price adjustment – These costs relate to the purchase price effects of acquired Paradigm inventory that was sold during the three and ~~six~~nine months ended ~~June~~September 30, ~~2020.~~2020 and 2019.

~~2019 Gain on acquisition contingency~~2020 Inventory write-off – ~~The gain on acquisition contingency relates~~These costs relate to the write off of inventory related to the transition from an ~~adjustment~~integrated manufacturing company to ~~our estimate of obligation for future milestone payments on the Zyga acquisition.~~a distributed model.

~~2019~~ Transaction and integration expenses – These costs relate to acquisition and integration expenses due to the purchase of Paradigm in 2019.

On April 27, 2020, we entered into an amendment to the 2019 Credit Agreement. The amendment amended the 2019 Credit Agreement to: (i) establish an incremental term loan commitment in an aggregate principal amount not to exceed $30 million (the “Second Amendment Incremental Loan Commitments”); and (ii) provide for a portion of the Second Amendment Incremental Loan Commitments up to $13.5 million be available on a delayed-draw basis at any time after the effective date of the amendment and on or prior to August 31, 2020, subject to certain conditions as set forth in the amendment and the 2019 Credit Agreement. The maturity of the loans advanced under Second Amendment Incremental Loan Commitments have a maturity date of April 27, 2021. These term loans must be repaid in their entirety, at which time a takeout fee ranging from $11.25 million to $25.5 million shall be due and payable.

The accompanying consolidated financial statements of the Company have been prepared assuming the Company will continue as a going concern and in accordance with generally accepted accounting principles in the United States of America. The going concern basis of presentation assumes that we will continue in operation one year after the date these financial statements are issued, and we will be able to realize our assets and discharge our liabilities and commitments in the normal course of business. As of June 30, 2020, we had cash of $2.2 million, a working capital deficiency of $101.7 million and an accumulated deficit of $507.6 million. We had a loss from operations of $41.1 million and a net loss of $56.4 million for the six months ended June 30, 2020. We have suffered losses from operations in the previous two fiscal years and did not generate positive cash flows from operations in fiscal year 2019. Management is projecting that it will continue to generate losses from operations into the future. As of July 31, 2020, our cash balance was approximately $123.7 million.

~~As a result of the Company not filing its 2019 10-K timely~~In connection with the Securities and Exchange Commission (“SEC”), the Company is unable to issue securities until they have filed in a timely manner for at least 12 months. While management does not believe there is any need to raise capital over the near term, the Company is currently exploring strategic alternatives in relation to raising capital under an offering under Rule 144A.

~~On July 20, 2020, RTI completed the disposition of its OEM business~~. Upon the close of the transaction, the Company fully repaid all of its outstanding indebtedness, including its revolving line of credit with JP Morgan Chase Bank and both its term loan and incremental term loan commitment with Ares Capital Corporation. Additionally, the Company redeemed all of the outstanding shares of Series A Convertible Preferred Stock. Management believes that after payment of taxes related to the transaction that it will have approximately $53 million of available cash.

As discussed in Note 24, the Securities and Exchange Commission (“SEC”) has an active investigation that remains ongoing. The Company continues to cooperate with the SEC in relation to its investigation. Additionally, as disclosed in Note 23, there is currently ongoing shareholder litigation. Based on current information available to the Company, the impact associated with SEC investigation and shareholder litigation may have on the Company cannot be reasonably estimated.

Although there is uncertainty relate to the matters noted above, based on current information available, management believes it will have sufficient cash and liquidity, such that it is not probable the Company will be unable to meet its obligations during the next year. As of June 30, 2020, we had cash of $2.2 million, working capital deficiency of $101.7 million and an accumulated deficit of $507.6 million. We had a loss from operations of $41.1 million and a net loss of $56.4 million for the six months ended June 30, 2020. We have suffered losses from operations in the previous two fiscal years and did not generate positive cash flows from operations in fiscal year 2019.

~~Effective~~Transactions on July 20, 2020, the Company (i) paid in full its ~~outstanding balance of $76.9 million on the~~ $80.0 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.), as a 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 ~~(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 (the “2018 Credit Agreement”), (ii) terminated the 2018 Credit Agreement, (iii) paid in full its ~~outstanding balance of $155.3 million on the~~ $100.0 million term loan and $30.0 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, as administrative agent for the other lenders party thereto, as amended (the “2019 Credit Agreement”) and (iv) terminated the 2019 Credit Agreement.Additionally, the Company redeemed all of the outstanding shares of Series A Convertible Preferred Stock.

As discussed in Note 21, the Securities and Exchange Commission (“SEC”) has an active investigation that remains ongoing. The Company continues to cooperate with the SEC in relation to its investigation. Based on current information available to the Company, the impact associated with SEC investigation and shareholder litigation may have on the Company cannot be reasonably estimated.

The following table presents a summary of our cash flow activity for the periods set forth below (in thousands):

At ~~June~~September 30, 2020, we had 6082 days of revenues outstanding in trade accounts receivable, ~~a decrease~~an increase of 68 days compared to December 31, 2019. The ~~decrease~~increase is primarily driven ~~by the longer period receivables remain outstanding for contracts with~~due to timing of collections from our customers ~~where inventory is exclusively built with no alternative use to us, and where revenue is recognized over time under FASB ASC 606. While we previously recorded revenue and receivables at the time~~as a result of ~~shipment, they are now recorded over time. The customer, however, is only billed at the time of shipment.~~COVID impacts.

At ~~June~~September 30, 2020, excluding the purchase accounting step-up of Paradigm inventory and written-off of obsolete inventories, we had 33 266days of inventory on hand, a decrease of 10 8days compared to December 31, 2019. The decrease in inventory days is primarily due to the ~~acquisition~~utilization of ~~Paradigm.~~our implants during the most recent quarter. We believe that our inventory levels will be adequate to support our on-going ~~operations for the next twelve months.~~operations.

At June 30, 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.

Our short and long-term obligations at June 30, 2020, increased $37.9 million to $212.1 million from $174.2 million at December 31, 2019. The 2018 Credit Agreement and the 2019 Credit Agreement contain customary covenants, including, in the case of the 2019 Credit Agreement, a debt to trailing twelve month EBITDA ratio (the “Leverage Ratio”) which, assuming our short and long-term obligations remain constant, progressively requires the Company to achieve higher earnings before interest, depreciation, taxes, and amortization to outstanding debt ratio.

The 2019 Credit Agreement contains a debt to EBITDA covenant, which requires the Company to maintain a 5.75:1 Leverage Ratio for each quarter ending in 2020, including the fiscal quarter ended March 31, 2020. The 2019 Credit Agreement provides that the Leverage Ratio reduces to 5.25:1 for the quarters ending March 31, 2021 and June 30, 2021, with a final reduction to 3.50:1 for each quarter ending thereafter. ~~With the termination of both credit agreements the financial covenant s for June 30, 2020 were no longer required.~~

To maintain an adequate amount of available liquidity and execute on our current business plan, we intend to utilize cash flow from the sale if the OEM business to fund operations and business expenses

As of ~~June~~September 30, 2020, we have no material off-balance sheet arrangements.

~~Our long-term debt obligations and availability of credit as of June 30, 2020 are as follows:~~

The following table provides a summary of our ~~long-term debt obligations,~~ operating lease obligations and other significant obligations as of ~~June~~September 30, 2020.

	Contractual Obligations Due by Period										Contractual Obligations Due by Period
	Total		Less than 1 Year		1-3 Years		4-5 Years		More than 5 Years		Total		Less than 1 Year		1-3 Years		4-5 Years		More than 5 Years
	(In thousands)										(In thousands)
Long-term debt obligations	$	212,140	$	212,140	$	—	$	-	$	—
Operating lease obligations		2,777		666		1,076		319		716		2,022		255		732		319		716
Purchase obligations (1)		15,874		15,874		—		—		—		74,051		26,293		47,758		—		—
Total	$	230,791	$	228,680	$	1,076	$	319	$	716	$	76,073	$	26,548	$	48,490	$	319	$	716

We are subject to market risk from exposure to changes in interest rates based upon our financing, investing and cash management activities. We are exposed to interest rate risk in the United States and Germany. Changes in interest rates affect interest income earned on cash and cash equivalents and interest expense on revolving credit arrangements. We have not entered into derivative transactions related to cash and cash equivalents or debt. Our borrowings under the Ares Term Loan and JPM Facility expose us to market risk related to changes in interest rates. As of June 30, 2020, our outstanding floating rate indebtedness totaled $175.7 million. The primary base interest rate is LIBOR. Assuming the outstanding balance on our floating rate indebtedness remains constant over a year, a 100-basis point increase in the interest rate would decrease net income and cash flow by approximately $1.4 million. Other outstanding debt consists of fixed rate instruments. We do not expect changes in interest rates to have a material adverse effect on our income or our cash flows in 2020. However, we can give no assurance that interest rates will not significantly change in the future.

The value of the U.S. dollar compared to the Euro affects our financial results. Changes in exchange rates may positively or negatively affect revenues, gross margins, operating expenses and net income. Our international operations currently transact business primarily in the Euro. Assets and liabilities of foreign subsidiaries are translated at the period end exchange rate while revenues and expenses are translated at the average exchange rate for the period. Intercompany transactions are translated from the Euro to the U.S. dollar. Based on ~~June~~September 30, 2020 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 2020. However, we can give no assurance that exchange rates will not significantly change in the future.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has 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 of ~~June~~September 30, 2020. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of ~~June~~September 30, 2020, due to the existence of the material weaknesses in our internal control over financial reporting described below, our disclosure controls and procedures were not effective to provide reasonable assurance that the information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure.

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

As previously identified and described more fully under Item 9A in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, we identified material weaknesses in the control environment, risk assessment, control activities, monitoring activities, information and communication components of internal control as we did not appropriately design controls in response to the risk of misstatement due to changes in our business environment. The material weaknesses resulted in misstatements that were corrected in the restatement included in our Annual Report on Form 10-K for the year ended December 31, 2019. The material weaknesses have not been remediated as of ~~June 30,~~September 3, 2020.

Additionally, the material weaknesses described above could result in a misstatement of the aforementioned account balances or disclosures that would result in a material misstatement of the annual or interim consolidated financial statements that would not be prevented or detected.

Our management, with oversight from our Audit Committee, continues to take action on the remediation plan more fully described under Item 9A in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. This plan includes enhancing the overall internal control environment, the addition of experienced internal resources and/or third-party advisors and the implementation of additional controls and procedures to strengthen our internal controls over financial reporting. While the remediation plan has been developed, and action has been taken on resolution of required activities within it, there are still a significant number of steps to be taken to enable management to complete the remediation. Accordingly, we concluded that the material weaknesses had not yet been remediated as of ~~June 30,~~September 3, 2020.

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 key controls. The Company will have access to review and validate the design and operating effectiveness of those controls. There ~~have been~~were no other changes in ~~our~~the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the ~~six months~~quarter ended ~~June~~September 30, 2020 that have materially affected, or are reasonably likely to ~~materially~~ affect, our internal control over financial reporting.

As previously disclosed in the Company’s Current Report on Form 8-K filed with the SEC on March 16, 2020, the Audit Committee of the Board, 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 and the Company is cooperating with the SEC in its investigation.

The Audit Committee completed its Investigation in the second quarter of 2020. 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 2018, 2017 and 2016, selected financial data for fiscal years 2015 and 2014, 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 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 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 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 stockholder litigation related to the Company’s Investigation. 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 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 Action”). ~~In the~~ ~~Lowry~~ ~~Action, another purported~~The court appointed a different shareholder ~~of the Company has filed a motion seeking to be appointed~~ as Lead Plaintiff and ~~for the court to appoint her counsel as Lead Counsel. The court has not yet ruled~~she filed an amended complaint on ~~that motion.~~

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. Based on the current information available toAugust 31, 2020. On October 15, 2020, the Company and the ~~impact that current or any future stockholder litigation may have on~~other-named defendants moved to dismiss the ~~Company cannot be reasonably estimated.~~amended complaint.

Three derivative lawsuits have also been filed on behalf of the Company, naming it as a nominal defendant, and demanding a jury trial. On June 5, 2020, David Summers filed a shareholder derivative lawsuit (“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). The three derivative lawsuits have been consolidated into the first-filed Summers Action. ~~No response to any complaint is due until after~~On September 6, 2020 the ~~parties file a Joint Status Report and Plaintiffs’ counsel advise how they intend to proceed with~~Court entered an order staying the ~~prosecution~~Summers Action pending resolution of the ~~consolidated derivative action.~~motions to dismiss in the Lowry Action.

For a further description, we refer you to Part I, Item 1, Note 23 entitled “Legal Actions” to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for a description of material legal proceedings.

~~There~~Except as described below, there has been no material change in our risk factors as previously disclosed in Part I, Item 1.A., Risk Factors, of our Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the Securities and Exchange Commission on June 8, 2020. In connection with the sale of the OEM Business and the related Transactions and other events occurring at or about the time of the closing of the Transactions, certain risk factors listed in the Form 10-K no longer apply to the Company as of the date of this filing. These would include the following risk factors listed in our 2019 Form 10-K.

We depend heavily upon sources of human tissue, and any failure to obtain tissue from these sources in a timely manner will interfere with our ability to process and distribute allografts. A majority of all of our allograft processing facilities are currently conducted in locations that may be at risk of damage from hurricanes, fire, or other natural disasters. If a natural disaster strikes our administrative headquarters or any of our other processing or manufacturing facilities, our operations may be interrupted and we may be unable to process or manufacture certain products for a substantial amount of time.

The allograft industry is subject to additional local, state, federal and international government regulations and any increased regulations of our activities could significantly increase the cost of doing business, thereby reducing profitability.

If we do not manage the medical release of donor tissue into processing in an effective and efficient manner, it could adversely affect profitability.

Negative publicity concerning methods of human tissue recovery and screening of donor tissue in the industry in which we operate may reduce demand for our allografts and impact the supply of available donor tissue.

Water Street may exercise significant influence over us, including through its ability to elect up to two members of our Board of Directors.

Our ability to pay dividends and to make distributions may be limited or prohibited by the terms of our indebtedness or Preferred Stock.

The 2018 Credit Agreement and the 2019 Credit Agreement contain financial and operating restrictions that may limit our access to credit. If we fail to comply with financial or other covenants in the 2018 Credit Agreement and the 2019 Credit Agreement, we may be required to repay indebtedness to our existing lenders, which may harm our liquidity.

We have incurred a significant amount of secured debt, and expect to incur a significant amount of additional debt in the future.

Failure to consummate the Contemplated Transactions within the expected timeframe or at all could have a material adverse impact on the business, financial condition and results of operations of RTI.

The OEM Purchase Agreement limits our ability to pursue alternatives to the Contemplated Transactions.

The amount of the net proceeds that RTI will receive is subject to uncertainties.

Failure to complete the Contemplated Transactions could cause RTI’s stock price to decline.

The Sale may trigger the liquidation, redemption and conversion rights of WSHP, an affiliate of Water Street, and WSHP may exercise those rights.

We may fail to realize the potential benefits of our Holosurgical acquisition, which could negatively affect our business, financial condition, and operating results.

We recently completed our acquisition of Holosurgical in October 2020. Holosurgical is in the process of developing its ARAI platform, an artificial intelligence-based digital surgery platform designed to enable digital spine surgery. As a result, the Holosurgical acquisition provides us with an entry into the digital surgical products market, a business line in which we have not previously engaged, which may be challenging to integrate with our core product lines and more difficult to develop and manage than we anticipated. We cannot provide assurance that this acquisition will result in long-term benefits to us or our stockholders, or that we will be able to effectively integrate and manage the Holosurgical business. Our ability to successfully integrate, and realize the potential benefits of, Holosurgical and its ARAI digital surgery platform is subject to a number of uncertainties and risks, including:

If we are not able to successfully integrate, develop and manage Holosurgical and its operations, or if we experience delays or other challenges with executing our strategy for the ARAI platform or combining the businesses, the anticipated benefits of the acquisition may not be realized fully or at all or may take longer to realize than expected and our business, financial condition, and operating results may be negatively impacted. In addition, the integration process could result in higher than expected costs, diversion of management attention and disruption of either company’s ongoing businesses, any of which may adversely affect our business, financial condition and results of operations.

Our independent auditors have indicated in their report on our financial statements for the years ended December 31, 2018 and December 31, 2019 and for the nine months ended September 30, 2020 that there is substantial doubt about our ability to continue as a going concern. 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 and 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.

Further, the Company is projecting it will continue to generate significant negative operating cash flows over the next 12 months and beyond. In consideration of these projected negative cash flows, as well as, (i) income taxes to be paid related to the gain on sale associated with the Company’s sale of its OEM business, (ii) contingent consideration amounts payable in common stock and cash in connection with the Holosurgical acquisition (including approximately $10 million which is expected to come due if certain regulatory approval in the US is obtained in 2021), and (iii) uncertainties related to COVID-19, the Company has forecasted the need to raise additional capital in order to continue as a going concern. The Company’s operating plan for the next 12-month period also includes continued investments in its product pipeline which will necessitate additional debt and/or equity financing in addition to the funding of future operations through 2021 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. If cash resources are insufficient to satisfy the Company’s on-going cash requirements through 2021, 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.

The following table presents information with respect to our repurchases of our common stock during the ~~six~~nine months ended ~~June~~September 30, 2020.

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		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, 2020 to January 31, 2020		7,215	$	2.69		—		—		7,215	$	2.69		—		—
February 1, 2020 to February 28, 2020		3,208	$	4.05		—		—		3,208	$	4.05		—		—
March 1, 2020 to March 31, 2020		38,950	$	3.89		—		—		38,950	$	3.89		—		—
April 1, 2020 to April 30, 2020		8,125	$	1.86		—		—		8,125	$	1.86		—		—
May 1, 2020 to May 31, 2020		7,513	$	2.67		—		—		7,513	$	2.67		—		—
June 1, 2020 to June 30, 2020		2,791	$	3.89		—		—		2,791	$	3.89		—		—
July 1, 2020 to July 31, 2020										18,673	$	2.91		—		—
August 1, 2020 to August 31, 2020										40,204	$	2.89		—		—
September 1, 2020 to September 30, 2020										17,238	$	1.93		—		—
Total		67,802	$	3.39		—		—		143,917	$	3.39		—		—

On November 13, 2020, following a comprehensive review of its bylaws, the ~~closing~~Board of Directors (the “Board”) of the ~~sale~~Company adopted Amended and Restated Bylaws, effective the same date. The primary changes effected by the amendment and restatement, among other things, are to:

The foregoing description of the ~~OEM business, Olivier Visa~~Amended and ~~John Varela resigned from~~Restated Bylaws is not complete and is qualified in its entirety by reference to the Amended and Restated Bylaws filed herewith as Exhibit 3.1 and incorporated herein by reference.

Deadlines for Submission of Stockholder Proposals Under Company’s Bylaws and Rule 14a-8

Pursuant to the Amended and Restated Bylaws, the deadline for nominations by stockholders of persons for election to the board of directors of the Company ~~effective July 20, 2020. Their resignation was not as a result~~at the Company’s 2021 annual meeting of ~~any disagreement with~~stockholders or other business sought to be brought by stockholders before the Company’s 2021 annual meeting of stockholders must be received by the Secretary of the Company ~~regarding any operations, policies~~not earlier than the close of business on the ninetieth (90th) day, or ~~practice.~~earlier than the close of business on the one hundred twentieth (120th) day, prior to the first anniversary of the date of the preceding year’s annual meeting of stockholders.

Accordingly, notice of nominations by stockholders of persons for election to the Board at the Company’s 2021 annual meeting of stockholders and other business to be brought by stockholders before the Company’s 2021 annual meeting of stockholders must be received by the Secretary of the Company not earlier than the close of business on March 17, 2021 nor later than the close of business on April 16, 2021.

However, under the Amended and Restated Bylaws, if the date of an annual meeting of stockholders is more than thirty (30) days prior to, or more than sixty (60) days after, the first anniversary of the date of the preceding year’s annual meeting, to be timely, a stockholder’s notice must be so received not later than the close of business on the later of (i) the ninetieth (90th) day prior to such annual meeting and (ii) the tenth (10th) day following the day on which public disclosure (as defined in the amended and restated bylaws) of the date of the meeting is first made by the Company.

The aforementioned deadlines do not apply to proposals submitted pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Proposals submitted under Rule 14a-8 for the 2021 annual meeting of stockholders must be received by the Secretary of the Company not later than February 22, 2021.

The aforementioned deadlines supersede and replace those disclosed in the Company’s proxy statement for its 2020 annual meeting of stockholders.

Surgalign Holdings, Inc.
520 Lake Cook Road, Suite 315
Deerfield, Illinois 60015

Pursuant to the requirements 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.

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

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

Title of each class		Trading Symbol		Name of exchange on which registered
common stock, $0.001 par value		SRGA		Nasdaq Global Select Market

		Page #

Part I Financial Information

Item 1	Unaudited Condensed Consolidated Financial Statements	1 - 2823

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2924 - 3831

Item 3	Quantitative and Qualitative Disclosures About Market Risk	3932

Item 4	Controls and Procedures	3932

Part II Other Information

Item 1	Legal Proceedings	4033

Item 1A	Risk Factors	4134

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	4136

Item 3	Defaults Upon Senior Securities	4136

Item 4	Mine Safety Disclosures	4136

Item 5	Other Information	4136

Item 6	Exhibits	4238

Signatures		4339

	For the Three Month Ended				For the Six Months Ended
	June 30,				June 30,
	2020		2019		2020		2019
Revenues:
Spine Segment
Domestic	$	16,951	$	26,351	$	39,228	$	46,570
International		3,567		6,396		8,400		10,554
OEM Segment
OEM		18,765		32,120		46,084		61,119
Sports		13,248		13,955		30,350		27,791
International		1,694		2,732		3,889		5,541
Total revenues from contracts with customers	$	54,225	$	81,554	$	127,951	$	151,575

						Contract
				Contract		Liability
	Accounts			Liability		(Long-
	Receivable			(Current)		Term)
Opening Balance, January 1, 2020	$	59,288		$	3,378	$	-
Closing Balance, June 30, 2020		46,865			3,721		-
Increase/(decrease)		(12,423	)		343		-

						Contract
				Contract		Liability
	Accounts			Liability		(Long-
	Receivable			(Current)		Term)
Opening Balance, January 1, 2019	$	48,096		$	5,425	$	744
Closing Balance, June 30, 2019		55,540			5,537		325
Increase/(decrease)		7,444			112		(419	)

Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

	As of December 31, 2019
Carrying amounts of the major classes of assets included in discontinued operations:
Accounts receivable - net	$	36,072
Inventories - net		99,575
Prepaid and other current assets		2,735
Total current assets		138,382
Property, plant and equipment - net		69,102
Deferred tax assets - net		-
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:
Current Liabilities:
Accounts payable	$	19,010
Accrued expenses		17,814
Current portion of deferred revenue		2,748
Current portion of long-term obligations		174,177
Total current liabilities		213,749
Other long-term liabilities		285
Total liabilities of discontinued operations	$	214,034

		Balance at		Balance at
	Balance Sheet Classification	June 30, 2020		December 31, 2019
Assets:
Right-of-use assets	Other assets - net	$	1,883	$	2,155
Liabilities:
Current	Accrued expenses	$	1,001	$	1,159
Noncurrent	Other long-term liabilities		1,440		1,547
Total operating lease liabilities		$	2,441	$	2,706

	Balance at
Maturity of Operating Lease Liabilities	June 30, 2020
2020 (remaining)	$	666
2021		778
2022		298
2023		160
2024		159
2025 and beyond		716
Total future minimum lease payments		2,777
Less imputed interest		(336	)
Total	$	2,441

	Nine Months Ended
	September 30			September 30
	2020			2019
Significant operating non-cash reconciliation items:
Depreciations and amortization	$	4,633		$	6,445
Provision for bad debt and products returns	$	650		$	56
Provision on inventory write-downs	$	-		$	1,455
Revenue recognized due to change in deferred revenue	$	(2,618	)	$	(3,772	)
Deferred income tax provision	$	(3,644	)	$	(184	)
Stock-based compensation	$	792		$	401
Gain on sale of discontinued assets, net	$	(210,866	)	$	-
Paid in kind interest expense	$	-		$	2,948
Loss on extinguishment of debt	$	2,686			-
Amortizations of debt issuance costs	$	283			361
Amortizations of debt discount	$	2,479			-

Significant investing items:
Purchase of property, plant and equipment	$	(1,867	)	$	(5,171	)
Patent and acquired intangible asset costs	$	(419	)	$	(1,786	)
Proceeds from sale of OEM business	$	437,097		$	-

	(In thousands)
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, 2019
	(In thousands)
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

						Weighted
				Weighted		Average
				Average		Remaining		Aggregate
	Number of			Exercise		Contractual		Intrinsic
	Shares			Price		Life (Years)		Value
Outstanding at January 1, 2020		4,536,461		$	3.75
Granted		755,866			4.21
Exercised		(5,000	)		4.02
Forfeited or expired		(599,630	)		4.31
Outstanding at June 30, 2020		4,687,697		$	3.75		4.77	$	229
Vested or expected to vest at June 30, 2020		4,369,996		$	3.73		4.45	$	192
Exercisable at June 30, 2020		1,135,490		$	3.63		3.03	$	25
Available for grant at June 30, 2020		2,738,076

	June 30, 2020						December 31, 2019
	Gross				Net		Gross				Net
	Carrying		Accumulated		Carrying		Carrying		Accumulated		Carrying
	Amount		Amortization		Amount		Amount		Amortization		Amount
Patents	$	5,128	$	2,983	$	2,145	$	5,095	$	2,768	$	2,327
Acquired licensing rights		2,522		157		2,365		1,413		64		1,349
Marketing and procurement and other intangible assets		16,509		10,405		6,104		16,488		9,672		6,816
Total	$	24,159	$	13,545	$	10,614	$	22,996	$	12,504	$	10,492

	Amortization
	Expense
2020 (remaining)		1,150
2021		2,300
2022		2,300
2023		700
2024		700
2025		700

	For the Three Months Ended				For the Nine Months Ended
	September 30, 2020				September 30, 2020
	Impairment		Fair Value		Impairment		Fair Value
Property, plant and equipment - net		9,210		617		11,971		617
Intangibles		146		—		146		—
	$	9,356	$	617	$	12,117	$	617

	Outstanding			Available
	Balance			Credit
	(In thousands)
Ares Term loan	$	127,710
JPM facility		64,096		$	7,404
Derivative Liability		23,020
Less unamortized debt issuance costs		(2,686	)
Total	$	212,140

2.1*†		~~Second Amendment to Equity~~Stock Purchase Agreement, dated ~~April 27,~~as of September 29, 2020, by and ~~between the Company~~among Surgalign Holdings, Inc., Roboticine, Inc, Holo Surgical S.A., Pawel Lewicki and ~~Ardi Bidco Ltd.~~Krzysztof Siemionow.(1)

2.2*2.2†		First Amendment to Stock Purchase Agreement, dated as of October 23, 2020, by and among Surgalign Holdings, Inc., Roboticine, Inc, Holo Surgical S.A., Pawel Lewicki and Krzysztof Siemionow. (2)

2.3#		Third Amendment to Equity Purchase Agreement, dated July 8, 2020, by and between the Company and Ardi Bidco Ltd.~~(2)~~ (3)

3.1		Amended and Restated ~~Certificate~~Bylaws of ~~Incorporation of the Company, effective as of March 8, 2019. (3)~~Surgalign Holdings, Inc., adopted on November 13, 2020

3.2		~~Certificate of Amendment to Certificate of Incorporation of the Company, effective as of July 20, 2020. (4)~~

~~3.3~~		Amended and Restated Certificate of Designation of Series A Convertible Preferred Stock of the Company, effective as of July 20, 2020. ~~(4)~~(5)

~~3.4~~3.3		Certificate of Retirement of Series A Convertible Preferred Stock of the Company, effective as of July 24, 2020.~~(5)~~ (6)

~~3.5~~		~~Amended and Restated Bylaws of the Company, effective as of July 20, 2020. (4)~~

10.1		Second Amendment to Equity Commitment Letter, dated as of April 27, 2020, by and among Montagu V LP, Montagu V (Non-US) LP, Montagu V (US) LP, Montagu V (D) LP, Ardi Bidco Ltd. and the Company.(1)

~~10.2~~		Second Amendment to Second Lien Credit Agreement, dated April 27, 2020, by and among RTI Surgical, Inc., the other loan parties thereto as guarantors, Ares Capital Corporation, as lender (together with the various financial institutions from time to time party thereto as lenders, the “Lenders”) and as administrative agent for the Lenders. (1)

~~10.3~~		Fourth Amendment to Credit Agreement, dated April 27, 2020, by and among RTI Surgical, Inc., the other loan parties thereto as guarantors, JPMorgan Chase Bank, N.A., as lender (together with the various financial institutions from time to time party thereto as lenders, the “Lenders”) and as administrative agent for the Lenders. (1)

~~10.4~~		Consultant Agreement, dated July 20, 2020, by and between the Company and Stuart F. Simpson. (7)

~~10.5~~10.2		Separation Agreement and General Release, dated July 17, 2020, by and between the Company and Camille Farhat.

~~10.6~~		~~Amended and Restated Employment Agreement, dated June 15, 2020, by and between the Company and Terry M. Rich.~~

~~10.7~~		~~Stand Alone Restricted Stock Agreement for Terry M. Rich, dated November 29, 2019, by and between the Company and Terry M. Rich.~~

~~10.8~~		~~Stand Alone Nonqualified Stock Option Agreement for Terry M. Rich, dated November 29, 2019, by and between the Company and Terry M. Rich.~~ (8)

31.1		Certification of Principal Executive Officer pursuant to Exchange Act Rules 13a-14(a)/15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Principal Financial Officer pursuant to Exchange Act Rules 13a-14(a)/15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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)

	SURGALIGN HOLDINGS, INC. (Registrant)

	By:		/s/ Terry M. Rich
			Terry M. Rich President and Chief Executive Officer

	By:		/s/ Jonathon M. Singer
			Jonathon M. Singer Chief Financial and Operating Officer