Cautionary Statement Relating to Forward Looking Statements
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, 2021, 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.
We are a global medical technology company focused on elevating the standard of care by driving the evolution of digital health. We have a broad portfolio of spinal hardware implants, including solutions for fusion procedures in the lumbar, thoracic, and cervical spine, motion preservation solutions for the lumbar spine, and a minimally invasive surgical implant system for fusion of the sacroiliac joint. We also have a portfolio of advanced and traditional orthobiologics, or biomaterials, products. Our product portfolio of spinal hardware implants and biomaterials products address an estimated $13.6 billion global spine market. We estimate that our current portfolio addresses nearly 87% of all surgeries utilizing spinal hardware implants and approximately 70% of the biomaterials used in spine-related uses. Our portfolio of spinal hardware implants consists of a broad line of solutions for spinal fusion in minimally invasive surgery ("MIS"), deformity, and degenerative procedures; motion preservation solutions indicated for use in one or two-level disease; and an implant system designed to relieve sacroiliac joint pain. Our biomaterials products consist of a broad range of advanced and traditional bone graft substitutes that are designed to improve bone fusion rates following spinal surgery. We offer a portfolio of products for thoracolumbar procedures, including: the Streamline® TL Spinal Fixation system, a system for degenerative and complex spine procedures; and the Streamline MIS® Spinal Fixation System, a broad range of implants and instruments used via a percutaneous or mini-open approach. We offer a complementary line of interbody fusion devices, Fortilink-TS®, Fortilink-L®, and Fortilink-A®, in our TETRAfuse® 3D Technology, which is 3D printed with nano-rough features that have been shown to allow more bone cells to attach to more of the implant, increasing the potential for fusion. We offer a portfolio of products for cervical procedures, including: the CervAlign® ACP System, a comprehensive anterior cervical plate system; the Fortilink®-C IBF System, a cervical interbody fusion device that utilizes TETRAfuse® 3D technology; and the Streamline® OCT System, a broad range of implants used in the occipito-cervico-thoracic posterior spine. Our motion preservation systems are designed to enable restoration of segmental stability, while preserving motion. These systems include: the Coflex® Interlaminar Stabilization device, the only FDA PMA-approved implant for the treatment of moderate to severe lumbar spinal stenosis in conjunction with decompression; and the HPS® 2.0 Universal Fixation System, a pedicle screw system used for posterior stabilization of the thoracolumbar spine that includes a unique dynamic coupler, shown to preserve motion and reduce the mechanical burden on adjacent segments. Our implant system for fusion of the sacroiliac joint, the SImmetry® SI Joint Fusion System, is a minimally invasive surgical implant system that has been clinically demonstrated to produce high rates of sacroiliac joint fusion and statistically significant decreases in opioid use, pain, and disability. Through a series of distribution agreements, our product portfolio of biomaterials consists of a variety of bone graft substitutes including cellular allografts, demineralized bone matrices ("DBMs") and synthetic bone growth substitutes that have a balance of osteoinductive and osteoconductive properties to enhance bone fusion rates following spinal surgery. We market ViBone® and ViBone® Moldable, two next-generation viable cellular allograft bone matrix products intended to provide surgeons with improved results for bone repair. ViBone and ViBone Moldable are processed using a proprietary method optimized to protect and preserve the health of native bone cells to potentially enhance new bone formation and are designed to perform and handle in a manner similar to an autograft. ViBone and ViBone Moldable contain cancellous bone particles as well as demineralized cortical bone particles and fibers, delivering osteoinductive, osteoconductive, and osteogenic properties. Our DBM product offering includes BioSet®, BioReady®, and BioAdapt®, a DBM portfolio consisting of putty, putty with chips, strips, and boat configurations for various surgical applications while providing osteoinductive properties to aid in bone fusion. Our synthetic bone growth substitutes include nanOss® and nanOss® 3D Plus, a family of products that provide osteoconductive nano-structured hydroxyapatite ("HA") and an engineered extracellular matrix bioscaffold collagen carrier that mimics a natural bone growth solution. 29 -------------------------------------------------------------------------------- We are also developing an artificial intelligence ("AI") and augmented reality ("AR") technology platform called HOLO™ AI, a powerful suite of AI software technology which connects the continuum of care from the pre-op and clinical stage through post-op care, and is designed to achieve better surgical outcomes, reduce complications, and improve patient satisfaction. We believe HOLO AI is one of the most advanced AI technologies with applications beyond the spine and operating room. Our HOLO Portal™ surgical guidance system, a component of our HOLO™ AI technology platform, is designed to automatically recognize, identify, and segment patient anatomy to autonomously assist the surgeon throughout the surgical procedure. This proprietary AI-based platform is an intelligent anatomical mapping technology designed to assist surgeons by allowing them to remain in safe anatomical zones, and to enhance surgical performance. We plan to leverage our HOLO AI platform to improve patient outcomes and drive adoption of our spinal hardware implants and biomaterials products. We are developing a pipeline of new innovative technologies that we plan to integrate with our HOLO AI platform. The Company filed an FDA 510(k) premarket submission for our HOLO Portal surgical guidance system in the first quarter of 2021. On January 18, 2022 we announced, among other items, the receipt of 510(k) clearance from the U.S. Food and Drug Administration for the HOLO Portal surgical guidance system for use within lumbar spine procedures. The HOLO Portal surgical guidance system combines (i) advanced AR to provide the surgeon with an "X-ray vision"-like 3D overlay rendering of the patient's anatomy, (ii) automated image processing and modular spine level identification and segmentation so the system knows the patient's anatomy to enhance navigation, (iii) autonomous planning software and implant selection, and (iv) artificial intelligence and predictive analytics to provide autonomous guidance for preoperative and intraoperative surgeon decision-making. The HOLO Portal system's AI is designed to recognize the difference between patient anatomy, such as a nerve root and a blood vessel, and help identify anatomy within complex areas of the spine, where it is easy to miscount levels. The HOLO Portal system has been designed with unique set up process of quickly establishing the synchronization between virtual images and the patient's real anatomy, a process called registration. Many other computer-assisted spine surgery and robotics systems have long set up requirements and registration times that can result in surgery delays, leading to inefficiencies that are cited as a major reason why surgeons have not yet widely adopted navigation and robotic technology. The HOLO Portal surgical guidance system has been designed to provide surgeons with real-time perioperative information such as alerts and suggestions to ensure the correct operative plan is being followed, decrease surgical complications, reduce surgical times, and improve patient outcomes. Following FDA 510(k) clearance, we have and continue to commercialize the HOLO Surgical Guidance System for use in the lumbar spine, with plans to expand to thoracic and cervical spine and intracranial. With respect to the HOLO AI technology platform, we plan to develop and commercialize several next-generation features, including smart instrumentation, integration with robotic platforms, patient-specific 3D printed implants, and diagnostic and predictive analytics. These surgical devices will be designed with tracking technology intended to allow real-time 3D visualization and positioning of the instruments in the surgical field and autonomous safety features to aid in surgical precision and help avoid potential damage to surrounding tissue and neurological structures. We are designing HOLO AI technology to be integrated with existing robotic platforms to make them "smart" by identifying relevant anatomy. In addition, we are designing the HOLO AI platform with a software application to enable patient-specific implants with exact dimensions, shape, and contour based on a patient's specific bone density and height. We are also developing a novel diagnostic and predictive analytics capability using machine learning that leverages a large volume of patient data with known outcomes to allow for autonomous identification of spinal pathology. We have aligned our core business principles with a focused business strategy that we believe will advance and scale our business with the ultimate goal of delivering on our promise to help improve surgical procedures and provide better patient outcomes. To support this effort, we have assembled a spine-industry experienced executive leadership team to execute our growth strategy, which includes leveraging our technology platform to improve patient outcomes and drive adoption of our spinal hardware implants and biomaterials products, developing and commercializing an increased cadence of innovative spinal hardware implants and biomaterials products, validating our innovative products with clinical evidence, growing our international business, and strategically pursuing acquisition, license, and distribution opportunities. We currently market and sell our products to hospitals, ambulatory surgery centers, and healthcare providers in the United States and in more than 50 countries worldwide. Our U.S. sales organization consists of area sales directors and regional product specialists who oversee a network of independent spine and orthobiologics distributors who receive commissions for sales that they generate. Our international sales organization is composed of a sales management team that oversees a network of direct sales representatives, independent spine and orthobiologics distributors, and stocking distributors. 30 --------------------------------------------------------------------------------
See Note 3 - Discontinued Operations
See Note 6 - Business Combinations.
COVID-19 See Note 1 - Business Results of Operations The following table set forth, in both thousands of dollars and as a percentage of revenues, the results of our operations for the three and six months ended June 30, 2022 and 2021, respectively: For the Three Months Ended June 30, For the Six Months Ended June 30, 2022 2021 2022 2021 Revenues $ 20,623 100.0 % $ 24,834 100.0 % $ 41,228 100.0 % $ 48,125 100.0 % Cost of goods sold 6,414 31.1 % 7,229 29.1 % 12,824 31.1 % 13,467 28.0 % Gross profit 14,209 68.9 % 17,605 70.9 % 28,404 68.9 % 34,658 72.0 % Operating Expenses: General and administrative 24,289 117.8 % 25,541 102.8 % 49,606 120.3 % 51,701 107.4 % Research and development 4,082 19.8 % 3,183 12.8 % 8,530 20.7 % 6,059 12.6 % Gain on acquisition contingency (1,990) (9.6) % (2,236) (9.0) % (10,493) (25.5) % (2,287) (4.8) % Asset impairment and abandonments 996 4.8 % 2,206 8.9 % 1,935 4.7 % 4,382 9.1 % Transaction and integration expenses 222 1.1 % 2,188 8.8 % 1,138 2.8 % 2,510 5.2 % Total operating expenses 27,599 133.8 % 30,882 124.4 % 50,716 123.0 % 62,365 129.6 % Operating loss (13,390) (64.9) % (13,277) (53.5) % (22,312) (54.1) % (27,707) (57.6) % Other expense (income) - net Other expense (income) - net 22 0.1 % (101) (0.4) % 49 0.1 % (105) (0.2) % Interest expense 252 1.2 % - - % 504 1.2 % - - % Foreign exchange loss (gain) 1,056 5.1 % (95) (0.4) % 1,409 3.4 % 450 0.9 % Change in fair value of warrant liability (9,124) (44.2) % (2,523) (10.2) % (18,867) (45.8) % (2,523) (5.2) % Total other (income) - net (7,794) (37.8) % (2,719) (10.9) % (16,905) (41.0) % (2,178) (4.5) % (Loss) before income tax provision (5,596) (27.1) % (10,558) (42.5) % (5,407) (13.1) % (25,529) (53.0) % Income tax provision 92 0.4 % 81 0.3 % 254 0.6 % 300 0.6 % Net (loss) from operations (5,688) (27.6) % (10,639) (42.8) % (5,661) (13.7) % (25,829) (53.7) % Discontinued Operations (Note 3) (Loss) from operations of discontinued operations - - % (6,316) (25.4) % - - % (6,316) (13.1) % Income tax (benefit) - - % (763) (3.1) % - - % (763) (1.6) % Net (loss) from discontinued operations - - % (5,553) (22.4) % - - % (5,553) (11.5) % Net (loss) (5,688) (27.6) % (16,192) (65.2) % (5,661) (13.7) % (31,382) (65.2) % Noncontrolling interests Net income applicable to noncontrolling interests - - % - - % - - % - - % Net income (loss) applicable to Surgalign Holdings, Inc. (5,688) (27.6) % (16,192) (65.2) % (5,661) (13.7) % (31,382) (65.2) % Other comprehensive income (loss) Unrealized foreign currency translation (gain) loss (313) (1.5) % 35 0.1 % (422) (1.0) % (36) (0.1) % Total other comprehensive (loss) $ (5,375) (26.1) % $ (16,227) (65.3) % $ (5,239) (12.7) % $ (31,346) (65.1) % 31
Three Months Ended June 30, 2022, Compared With Three Months Ended June 30, 2021
Revenues - Total revenues decreased $4.2 million, or 17.0%, to $20.6 million for the three months ended June 30, 2022, compared to $24.8 million for the three months ended June 30, 2021. The decrease in revenue was primarily related to the impact of the global pandemic, which has led to fewer surgical procedures and hospital staffing shortages throughout the U.S., among other factors. Gross profit - Gross profit decreased $3.4 million or 19.3% to $14.2 million for the three months ended June 30, 2022 compared to $17.6 million for the three months ended June 30, 2021. Gross profit percentage decreased by 2.1% to 68.9% from 70.9% for the three months ended June 30, 2021. The decrease in gross profit was primarily caused by decreased revenue for the comparable period. The decrease in gross margin was primarily due to an increase in inventory write-offs caused by continued product rationalization programs instituted by the Company. Operating expenses - Total operating expenses decreased by $3.3 million or 10.6% to $27.6 million for the three months ended June 30, 2022 compared to $30.9 million for the three months ended June 30, 2021. The primary driver was a $1.3 million decrease in "General and administrative" expenses caused by a reduction in spending through continued simplification of the distribution and administrative infrastructure. Additionally, there was a decrease in "Asset impairment and abandonment" of $1.2 million due to impairment of the ERP system in 2021 and a reduction in capital expenditures during 2022. This was partially offset by an increase of $0.9 million in "Research and development" expenses related to the continued development of the HOLOTM platform and obtaining regulatory approval. Net income (loss) from operations and per share amount - Total net loss from operations decreased $4.9 million or 46.5% to $5.7 million loss for the three months ended June 30, 2022 from a net loss of $10.6 million for the three months ended June 30, 2021. Net loss per share decreased from $2.79 net loss per share as of June 30, 2021 to $0.86 net loss per share as of June 30, 2022. The main drivers of the increase are caused by the $6.6 million change in warrant liability revaluation and the fluctuations within the operating expense accounts as described above.
Six Months Ended June 30, 2022, Compared With Six Months Ended June 30, 2021
Revenues - Total revenues decreased $6.9 million, or 14.3%, to $41.2 million for the six months ended June 30, 2022, compared to $48.1 million for the six months ended June 30, 2021. The decrease in revenue was primarily related to the impact of the global pandemic, which has led to fewer surgical procedures and hospital staffing shortages throughout the U.S., among other factors. Gross profit - Gross profit decreased $6.3 million or 18.0% to $28.4 million for the six months ended June 30, 2022 compared to $34.7 million for the six months ended June 30, 2021. Gross profit percentage decreased by 3.1% to 68.9% from 72.0% for the six months ended June 30, 2021. The decrease in gross profit was primarily caused by decreased revenue in the period over period. The decrease in gross margin was primarily to an increase in inventory write-offs caused by continued product rationalization programs instituted by the Company. Operating expenses - Total operating expenses decreased by $11.7 million or 18.7% to $50.7 million for the six months ended June 30, 2022 compared to $62.4 million for the six months ended June 30, 2021. The primary driver was the decrease in the Holo milestone valuation of approximately $8.1 million, which is recorded through the "Gain on acquisition contingency" line item on the condensed consolidated statements of comprehensive loss. This was further decreased by a $2.1 million decrease in "General and administrative" expenses caused by a reduction in spending through the continued simplification of the distribution and administrative infrastructure. Additionally, there was a decrease in "Asset impairment and abandonment" of $2.4 million due the impairment of the ERP system costs occurring in 2021 and a reduction in capital expenditures. This was partially offset by an increase of $2.5 million in "Research and development" expenses related to the continued development of the HOLO platform and obtaining regulatory approval. Net income (loss) from operations and per share amount - Total net loss from operations decreased $20.1 million or 78.1% to a $5.7 million loss for the six months ended June 30, 2022 from a $25.8 million of loss for the six months ended June 30, 2021. Net loss per share decreased from $7.29 net loss per share as of June 30, 2021 to $0.92 net loss per share as of June 30, 2022. The main drivers of the increase are caused by the $8.1 million gain on acquisition contingency caused by the revaluation of the Holo milestones, the $16.3 million change in warrant liability revaluation and the fluctuations within the operating expense accounts as described above. 32 --------------------------------------------------------------------------------
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 loss 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 June 30, (In thousands) 2022 2021 Revenues $ 20,623 100.0 % $ 24,834 100.0 % Costs of goods sold 6,414 31.1 % 7,229 29.1 % Gross profit, as reported 14,209 68.9 % 17,605 70.9 % Inventory write-off 535 2.6 % - - % Inventory purchase price adjustment 414 2.0 % 554 2.2 % Non-GAAP gross profit, adjusted $ 15,158 73.5 % $ 18,159 73.1 % For the Six Months Ended June 30, (In thousands) 2022 2021 Revenues $ 41,228 100.0 % $ 48,125 100.0 % Costs of goods sold 12,824 31.1 % 13,467 28.0 % Gross profit, as reported 28,404 68.9 % 34,658 72.0 % Inventory write-off 535 1.3 % - - % Inventory purchase price adjustment 824 2.0 % 1,081 2.2 % Non-GAAP gross profit, adjusted $ 29,763 72.2 % $ 35,739 74.3 % 33
For the Six Months Ended June For the Three Months Ended June 30, 30, (In thousands) 2022 2021 2022 2021 Operating Expenses $ 27,599 $ 30,882 $ 50,716 $ 62,365 Non-cash stock-based compensation 925 1,413 2,299 2,349 Gain on acquisition contingency (1,990) (2,236) (10,493) (2,287) Bargain purchase gain - (90) - (90) Asset impairment and abandonments 996 2,206 1,935 4,382 Transaction and integration expenses 222 2,188 1,138 2,510 Severance and restructuring costs - 20 - 237 Adjusted Operating Expenses $ 27,446 $ 27,381 $ 55,837 $ 55,264 Adjusted Operating Expenses as a percent of revenues 133.1 % 110.3 % 135.4 % 114.8 %
*Please note this reconciliation does not include HOLO Portal capitalized costs of $0.4 million and $0.0 million for the three months ended June 30, 2022 and 2021, and $0.4 million and $0.0 million for the six months ended June 30, 2022 and 2021.
Reconciliation of Net Loss Applicable to Common Shares and Net Loss Per Diluted Share to Adjusted Net Loss Applicable to Common Shares and Adjusted Net Loss Per Diluted Share For the Three Months Ended June 30, 2022 June 30, 2021 Net Loss Net Loss Applicable to Amount Per Applicable to Amount Per Common Shares
Diluted Share Common Shares Diluted Share Net loss from continuing operations
$ (0.86) $ (10,639) $ (2.79) Change in fair value of warrant liability
(9,124) (1.37) (2,523) (0.66) Gain on acquisition contingency (1,990) (0.30) (2,236) (0.59) Non-cash stock-based compensation 925 0.14 1,413 0.37 Foreign exchange loss (gain) 1,056 0.16 (95) (0.02) Bargain purchase gain - - (90) (0.02) Asset impairment and abandonments 996 0.15 2,206 0.58 Transaction and integration expenses 222 0.03 2,188 0.57 Inventory purchase price adjustment 414 0.06 554 0.15 Inventory write-off 535 0.08 - - Severance and restructuring costs - - 20 0.01 Tax effect on adjustments - - (28) (0.01)
Non-GAAP net loss from continuing operations $ (12,654) $ (1.91) $ (9,230) $ (2.41)
*Please note this reconciliation does not include HOLO Portal capitalized costs of $0.4 million and $0.0 million for the three months ended June 30, 2022 and 2021.
34 -------------------------------------------------------------------------------- For the Six Months Ended June 30, 2022 June 30, 2021 Net Loss Net Loss Applicable to Amount Per Applicable to Amount Per Common Shares
Diluted Share Common Shares Diluted Share Net loss from continuing operations
$ (0.92) $ (25,829) $ (7.29) Change in fair value of warrant liability
(18,867) (3.06) (2,523) (0.71) Gain on acquisition contingency (10,493) (1.70) (2,287) (0.65) Non-cash stock-based compensation 2,299 0.37 2,349 0.66 Foreign exchange loss 1,409 0.23 450 0.13 Bargain purchase gain - - (90) (0.03) Asset impairment and abandonments 1,935 0.31 4,382 1.24 Transaction and integration expenses 1,138 0.18 2,510 0.71 Inventory purchase price adjustment 824 0.13 1,081 0.31 Inventory write-off 535 0.09 - - Severance and restructuring costs - - 237 0.07 Tax effect on adjustments - - (28) (0.01)
Non-GAAP net loss from continuing operations $ (26,881) $ (4.37) $ (19,748) $ (5.57)
*Please note this reconciliation does not include HOLO Portal capitalized costs of $0.4 million and $0.0 million for the six months ended June 30, 2022 and 2021.
Reconciliation of Net Loss Applicable to Common Shares to Adjusted EBITDA
For the Three Months Ended June 30, For the Six Months Ended June 30, (In thousands) 2022 2021 2022 2021 Net loss from continuing operations $ (5,688) $ (10,639) $ (5,661) $ (25,829) Interest expense, net 252 - 504 - Provision for income taxes 92 81 254 300 Depreciation 566 633 1,075 1,153 EBITDA (4,778) (9,925) (3,828) (24,376) Non-cash stock-based compensation 925 1,413 2,299 2,349 Foreign exchange loss 1,056 (95) 1,409 450 Inventory purchase price adjustment 414 554 824 1,081 Change in fair value of warrant liability (9,124) (2,523) (18,867) (2,523) Gain on acquisition contingency (1,990) (2,236) (10,493) (2,287) Bargain purchase gain - (90) - (90) Asset impairment and abandonments 996 2,206 1,935 4,382 Transaction and integration expenses 222 2,188 1,138 2,510 Inventory write-off 535 - 535 - Severance and restructuring costs - 20 - 237 Adjusted EBITDA $ (11,744) $
(8,488) $ (25,048) $ (18,267) Adjusted EBITDA as a percent of revenues
*Please note this reconciliation does not include HOLO Portal capitalized costs of $0.4 million and $0.0 million for the three months ended June 30, 2022 and 2021, and $0.4 million and $0.0 million for the six months ended June 30, 2022 and 2021.
35 -------------------------------------------------------------------------------- The following are explanations of the adjustments that management excluded as part of the non-GAAP measures for the three and six months ended June 30, 2022 and 2021. 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. 2022 and 2021 Non-cash stock-based compensation - These costs relate to expense amortization for all stock-based awards made to employees and directors, including restricted stock awards, restricted stock units, stock options and the employee stock purchase plan purchase rights.
2022 and 2021 Foreign exchange (gain) loss - These costs relate to the process of remeasuring international activity into the Company's functional currency.
2022 Change in fair value of warrant liability - Other income related to the revaluation of our warrant liability.
2022 and 2021 Gain on acquisition contingency - The gain on acquisition contingency relates to an adjustment to our estimate of obligation for future milestone payments on the Holo Surgical acquisition.
2022 and 2021 Asset impairment and abandonments - These costs relate to asset impairment and abandonments of certain long-term assets within the asset group.
2022 and 2021 Transaction and integration expenses - These costs relate to professional fees associated with financings and with the acquisition of Holo Surgical and Prompt Prototypes, and other matters.
2022 and 2021 Inventory purchase price adjustment - These costs relate to the purchase price effects of acquired Paradigm inventory that was sold during the three months ended June 30, 2022 and 2021.
2022 Inventory write-off - These costs relate to inventory write-offs for product rationalization.
2021 Bargain purchase gain - Gain related to our acquisition of Prompt Prototypes, LLC.
2021 Severance and restructuring costs - These gain and costs relate to the reduction of our organizational structure, primarily driven by simplification of our Marquette, MI location.
Non-GAAP Three Months Ended June 30, 2022, Compared With Non-GAAP Three Months Ended June 30, 2021
Non-GAAP gross profit - Non-GAAP gross profit decreased $3.0 million or 16.5% to $15.2 million for the three months ended June 30, 2022 compared to $18.2 million for three months ended June 30, 2021. Gross profit percentage increased by 0.4% to 73.5% from 73.1% for the three months ended June 30, 2022 and 2021, respectively. The decrease in gross profit was primarily caused by decreased revenue in the period over period. The increase in gross margin was primarily due to related impacts on product mix. Non-GAAP operating expenses - Total Non-GAAP operating expenses increased by $0.1 million or 0.2% to $27.5 million for the three months ended June 30, 2022 compared to $27.4 million for the three months ended June 30, 2021. There was an increase in "Research and development" expenses of $0.9 million mainly caused by the continued development of the HOLOTM platform and obtaining regulatory approval. This was partially offset by a decrease in "Asset impairment and abandonment" of $1.2 million due to impairment of the ERP system in 2021 and a reduction in capital expenditures. Non-GAAP Net loss from operations and Non-GAAP per share amount - Total net loss from operations increased $3.5 million or 38.2% to $12.7 million for the three months ended June 30, 2022 from a $9.2 million net loss for the three months ended June 30, 2021. Non-GAAP net loss per share decreased from $2.41 as of June 30, 2021 to net loss per share of $1.91 as of June 30, 2022. The main drivers of the decrease are caused by the decrease in non-GAAP gross profit explained above, increase in non-GAAP operating expenses and an increase in interest expense of $0.3 million due to the debt issued related to the INN acquisition. The increase in net loss per share is drive by the increase in shares outstanding over the period. Adjusted EBITDA - Total adjusted EBITDA increased $3.2 million or 37.2% to a $11.7 million loss for the three months ended June 30, 2022 from a $8.5 million loss for the three months ended June 30, 2021. The main drivers of the decrease are caused by the decrease in non-GAAP gross profit explained above and an increase in non-GAAP operating expenses.
Non-GAAP Six Months Ended June 30, 2022, Compared With Non-GAAP Six Months Ended June 30, 2021
36 -------------------------------------------------------------------------------- Non-GAAP gross profit - Non-GAAP gross profit decreased $5.9 million or 3.1% to $29.8 million for the six months ended June 30, 2022 compared to $35.7 million for the six months ended June 30, 2021. Gross profit percentage decreased by 2.1% to 72.2% from 74.3% for the six months ended June 30, 2022 and 2021, respectively. The decrease in gross profit was primarily caused by decreased revenue in the period over period. The decrease in gross margin was primarily due to increase in our inventory write-offs caused by continued product rationalization. In addition the inventory purchase price adjustment reduced by $0.3 million due to a continued amortization of the fair value adjustment. Non-GAAP operating expenses - Total Non-GAAP operating expenses increased by $0.5 million or 1.0% to $55.8 million for the six months ended June 30, 2022 compared to $55.3 million for the six months ended June 30, 2021. There was an increase in "Research and development" expenses of $2.5 million mainly caused by the continued development of the HOLO platform and obtaining regulatory approval. This was partially offset by a decrease in "General and administrative" expenses of $2.1 million due to a reduction in spending through the simplification of the distribution and administrative infrastructure. Non-GAAP Net loss from operations and Non-GAAP per share amount - Total net loss from operations increased $7.2 million or 36.6% to $26.9 million for the six months ended June 30, 2022 from $19.7 million for the six months ended June 30, 2021. Non-GAAP net loss per share decreased from $5.57 as of June 30, 2021 to net loss per share of $4.37 as of June 30, 2022. The main drivers of the decrease are caused by the decrease in non-GAAP gross profit explained above, increase in non-GAAP operating expenses and an increase in interest expense of $0.5 million due to the debt issued related to the INN acquisition. The increase in net loss per share is driven by the increase in shares outstanding over the period. Adjusted EBITDA - Total adjusted EBITDA increased $6.7 million or 36.6% to a $25.0 million loss for the six months ended June 30, 2021 from a $18.3 million loss for the six months ended June 30, 2021. The main drivers of the decrease are caused by the decrease in non-GAAP gross profit explained above and an increase in non-GAAP operating expenses.
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.
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 condensed consolidated financial statements are issued, and we will be able to realize our assets and discharge our liabilities and commitments in the normal course of business. As of June 30, 2022, the company had cash and cash equivalent of $29.3 million and an accumulated deficit of $575.3 million. For the three and six months ended June 30, 2022, the company had a loss from continuing operations of $5.7 million and $5.7 million, and a net loss applicable to Surgalign Holdings, Inc. of $5.7 million and $5.7 million, respectively. The Company has incurred losses from operations in the previous two fiscal years and did not generate positive cash flows from operations in fiscal year 2021 or for the six months ended June 30, 2022. On February 15, 2022, we issued and sold in an underwritten public offering 1,285,507 shares of common stock and 163,768 of pre-funded warrants to purchase common stock with gross proceeds of $20.0 million at an effective offering price of $13.8000 and $13.7970 per share respectively. In addition, the Company issued warrants to purchase up to an aggregate of 1,086,956 shares of common stock at a strike price of $18.0000 that are exercisable over the next five years. Also in connection with the offering, the Company issued placement agent warrants to purchase an aggregate of up to 86,956 shares of common stock at a strike price of $17.2500 per share that are exercisable over the next five years. Finally, the Company granted the underwriters the option for a period of 30 days from February 15, 2022 to purchase up to 217,391 additional shares of our common stock at the public offering price of $13.7970 per share and/or warrants to purchase up to 163,043 shares of the Company's common stock at a public offering price of $0.0030 per warrant. The Underwriters did not exercise the option to purchase the common shares from the Company, but they did exercise the option to purchase the warrants which have not been converted to common shares as of June 30, 2022. We received net proceeds of $17.7 million from the offering.
On June 14, 2021, we issued and sold in a registered direct offering an aggregate of 966,183 shares of our common stock and investor warrants to purchase up to an aggregate of 966,183 shares at a strike price of $51.7500. The
37 -------------------------------------------------------------------------------- Company, also in connection with the direct offering, issued placement agent warrants to purchase an aggregate of up to 57,971 shares of our common stock at a strike price of $64.6875 per share. We received net proceeds of $45.8 million from the offering after deducting investor fees of $4.2 million. On February 1, 2021, we closed a public offering and sold a total 956,666 shares of our common stock at a price of $45.0000 per share, less the underwriter discounts and commissions. We received gross proceeds of $40.5 million from the offering after deducting the underwriting discounts and commission of $4.0 million. The Company is projecting it will continue to generate significant negative operating cash flows over the next 12-months and beyond. In management's evaluation of the going concern conclusion we considered the following: i) continued COVID-19 uncertainties and recent market volatility; ii) negative cash flows that are projected over the next 12-month period; iii) potential milestone payments related to the Holo Surgical and INN acquisitions should any of the milestones be achieved; iv) seller notes with a fair value amount of $10.1 million due to the seller of INN on December 31, 2024; and v) various supplier minimum requirements. The Company's operating plan for the next 12-month period also includes continued investments in its product pipeline including both within digital health and hardware and biologics, which will necessitate additional financing. In addition to these efforts the Company will need continued capital and cash flows to fund the future operations through 2022 and beyond. The Company's ability to raise additional capital may be adversely impacted by potential worsening global economic and geopolitical conditions and the recent disruptions to, and volatility in, financial markets in the United States and worldwide. If cash resources are insufficient to satisfy the Company's on-going cash requirements through 2022, the Company will be required to scale back operations, reduce research and development expenses, and postpone, as well as suspend capital expenditures, in order to preserve liquidity. No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing, or cause substantial dilution for our stockholders, in the case of equity financing. In consideration of the inherent risks and uncertainties and the Company's forecasted negative cash flows as described above, management has concluded that substantial doubt exists with respect to the Company's ability to continue as a going concern within one year after the date the condensed consolidated financial statements are issued. Management continually evaluates plans to raise additional debt and/or equity financing and will attempt to curtail discretionary expenditures in the future, if necessary, however, in consideration of the risks and uncertainties mentioned, such plans cannot be considered probable of occurring at this time. The recoverability of a major portion of the recorded asset amounts shown in the Company's accompanying condensed consolidated balance sheets is dependent upon continued operations of the Company, which in turn is dependent upon the Company's ability to meet its funding requirements on a continuous basis, to maintain existing financing and to succeed in its future operations. The Company's condensed consolidated financial statements do not include any adjustment relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence.
The following table presents a summary of our cash flow activity for the periods set forth below (in thousands):
For the Six Months Ended
June 30, June 30, (In thousands) 2022 2021 Net cash used in operating activities $ (32,409) $ (46,147) Net cash (used in) provided by investing activities (3,218) (11,023) Net cash provided by (used in) financing activities 13,778 82,216 Effect of exchange rate changes on cash and cash equivalents (94) 249 Net increase in cash and cash equivalents $ (21,943) $ 25,295 Cash and cash equivalents, beginning of period 51,287 43,962 Cash and cash equivalents, end of period $ 29,344 $ 69,257
At June 30, 2022, we had 90 days of revenues outstanding in trade accounts receivable, an increase of 13 days compared to December 31, 2021. The increase is primarily due to timing of collections from our customers.
At June 30, 2022, excluding the purchase accounting step-up of Paradigm inventory, we had 514 days of inventory on hand, an increase of 90 days compared to December 31, 2021. The increase in inventory days is primarily due
to the continued purchase of implants during six months ended June 30, 2022. We believe that our inventory levels will be adequate to support our on-going operations.
As of June 30, 2022, we have no material off-balance sheet arrangements.
The following table provides a summary of our operating lease obligations and other significant obligations as of June 30, 2022:
Contractual Obligations Due by Period
Less than 1 More than 5 Total Year 1-3 Years 4-5 Years Years (In thousands) Operating lease obligations 65,708 1,374 10,758 11,365 42,211 Purchase obligations (1) 37,295 22,899 13,872 524 - Acquisition contingencies 41,702 13,419 28,283 - - Total $ 144,705 $ 37,692 $ 52,913 $ 11,889 $ 42,211
(1)These amounts consist of contractual obligations for capital expenditures, open purchase orders and minimum purchase obligations.
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