Disaggregation of Revenue
The Company’s entire revenue for the three months ended March 31, 2022 and 2021 was recognized at a point in time. The following table represents total revenue by geographical region for the three months ended March 31, 2022 and 2021, respectively:
| | | | | | | | | | | | | | | |
| | | | For the Three Months Ended
March 31, |
| | | | | | 2022 | | 2021 |
| Revenues: | | | | | | | |
| Domestic | | | | | $ | 17,170 | | | $ | 19,849 | |
| International | | | | | 3,435 | | | 3,442 | |
| Total revenues from contracts with customers | | | | | $ | 20,605 | | | $ | 23,291 | |
5.Business Combinations
Inteneural Networks Inc.
On December 30, 2021, the Company entered into a Stock Purchase Agreement with Dearborn Capital Management LLC, and Neva, LLC, a Delaware limited liability company (collectively the sellers of INN), that are owned by Krzysztof Siemionow, MD, PhD (“Siemionow”), Pawel Lewicki, PhD ("Lewicki") respectively to acquire a 42% equity
interest in the issued and outstanding shares of INN for a non-exclusive right to use their proprietary technology. Lewicki is a former member of the Board of Directors (the “Board”).
INN is a medical high-tech company, specializing in AI and big data learning analysis of brain imaging. INN has a proprietary AI technology that autonomously segments and identifies neural structures in medical images and helps identify possible pathological states. This technology has future applications in neurosurgery as well as the potential to address a wide variety of potential disorders, including dementia, autism, tumors, aneurysm, stroke, and neurovascular structures using magnetic resonance imaging and computed tomography platforms. The Company believes the transaction has the following benefits: i) the integration of INN’s ML and AI technologies positions the Company as a leader in intelligent digital health; ii) bringing INN’s intercranial capabilities to the HOLOTM AI platform, the Company can expand the applicability of HOLOTM AI technology into significant segments beyond spine, in particular neurosurgery; iii) the synergies in the research and development and eventual commercial functions should provide for a particularly efficient integration of INN’s technology and talent; and iv) the transaction materially contributes to the Company's mission to improve patient's lives through better outcomes.
As consideration for the 42% ownership we paid $19.9 million which consisted of $5.0 million in cash, issuance to the Sellers of 6,820,792 shares of our common stock, par value of $0.001, which had a fair value of $4.9 million and issuance of unsecured promissory notes to the Sellers in fair value of the principal in the amount of $10.0 million. In exchange for 42% equity interest the Company is able to use the proprietary AI technology as a nonexclusive licensee. As part of the transaction, the Company must purchase up to 100% of the equity of INN if the three additional clinical, regulatory, and revenue milestones are met. With each additional closing, the Company will acquire an additional 19.3% equity within INN for an additional $19.3 million in cash payment for each milestone. These milestones have not been achieved as of March 31, 2022
Management has determined that the Company has obtained control through means other than voting rights as the Company is deemed to be the primary beneficiary and is the most closely associated decision maker under ASC 810, Consolidation. Based on this the Company has considered INN to be a VIE and was fully consolidated into the consolidated financial statements as of March 31, 2022. INN does not have any assets or liabilities as of March 31, 2022. Additionally, there was no income statement activity within INN for the three month period ended March 31, 2022.
The Company further determined that substantially all of the fair value of INN was concentrated in the acquired in-process research and development ("IPR&D") asset in accordance with ASC 805, Business Combination and therefore accounted for this as an asset acquisition. The total consideration of the asset acquisition was determined to be $72.3 million, which consisted of cash consideration of $5.0 million, $4.9 million of fair value of shares issued to the seller, $10.0 million of seller notes issued to the sellers, direct and incremental expenses of $0.4 million incurred for the INN acquisition, $10.3 million in forward contracts related to the three potential milestone payments and $41.7 million in noncontrolling interest related to the 58% equity interest not purchased. As the forward contracts are redeemable upon a future event, FDA approval and as the event is not probable under the accounting guidance, the forward contracts are not remeasured to fair value at March 31, 2022.
The total purchase price paid in the INN acquisition has been allocated to the net assets acquired based on the relative fair value as the completion of the acquisition, primarily including the IPR&D related to INN's development of their AI technology that autonomously segments neural structures and other intangible assets for assembled workforce. The neuro networks and segmentation has not yet reached technological feasibility and has no alternative use; thus, the purchased IPR&D was expensed immediately to the acquisition, resulting in a one-time charge of $72.1 million recognized in the asset acquisition expense line on the consolidated statement of comprehensive loss for the year ended December 31, 2021. Additionally, the intangible asset related to the assembled workforce, in the amount of $0.2 million was immediately impaired together with other intangible assets during the fourth quarter of 2021 due to the Company's negative projected cash flows.
The Company recorded noncontrolling interest of $52.0 million which is comprised of $41.7 million related to the investment in INN and $10.3 million related to the embedded forward contracts as of the transaction date. Management determined that because the IPR&D asset was immediately expensed as it did not have technological feasibility. As a result of the transaction, the company recorded a $72.1 million loss within the Consolidated Statements of Comprehensive Loss during the fourth quarter for the year ended December 31, 2021. This loss had a net impact of $30.2 million to Surgalign, and $41.9 million impact to INN.
Prompt Prototypes Acquisition
On April 30, 2021, the Company, entered into an Asset Purchase Agreement (the “Agreement”) with Prompt Prototypes LLC (“Prompt”), a California limited liability company, and Peter Kopley, an individual residing in the State of California (the “Sellers”). The Company purchased the assets of Prompt to expand its research and development capabilities and create the capacity to produce certain medical prototypes. Pursuant to the terms of the Agreement, the Company purchased specific assets and assumed certain liabilities of Prompt for a purchase price of $1.1 million. At the closing, the Company paid $0.3 million of cash and issued restricted shares with an aggregate fair market value of $0.2 million to the sellers. The remaining $0.6 million of the purchase price will be paid to Mr. Kopley, contingent on the continued employment with the Company, in the form of cash and restricted shares in two equal amounts on the 18th and 36th month anniversary of the closing date. These payments are considered future compensation.
The following table summarizes the fair value of the identifiable assets acquired and liabilities assumed from the acquisition of Prompt as of April 30, 2021 (in thousands):
| | | | | | | | |
| | |
| Inventories | | $ | 140 | |
| Right-of-use assets | | 78 | |
| Property and equipment | | 528 | |
| Operating lease liabilities | | (78) | |
| Deferred tax liability | | (28) | |
| Net assets acquired | | $ | 640 | |
| Bargain purchase gain | | (90) | |
| Total purchase price | | $ | 550 | |
Based on the preliminary purchase price, the fair value of the assets acquired and liabilities assumed exceeded the purchase price consideration resulting in a bargain purchase gain of $0.1 million and was recorded in "Other (income) expense – net" during the second quarter ended June 30, 2021. The bargain purchase was primarily driven by the potential future compensation expense in lieu of an increased purchase price.
6.Stock-Based Compensation
The following tables summarize our stock option and stock grant awards by plan:
For the three months ended March 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Plan | | Stock Options | | Restricted Stock Awards | | Restricted Stock Units | | Total |
| 2021 Incentive Inducement Plan | | — | | | — | | | 2,340,316 | | | 2,340,316 | |
| 2021 Incentive Compensation Plan | | — | | | — | | | 24,899 | | | 24,899 | |
| Total | | — | | | — | | | 2,365,215 | | | 2,365,215 | |
For the three months ended March 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Plan | | Stock Options | | Restricted Stock Awards | | Restricted Stock Units | | Total |
| 2018 Incentive Compensation Plan | | 173,683 | | | 78,084 | | | — | | | 251,767 | |
| Total | | 173,683 | | | 78,084 | | | — | | | 251,767 | |
The Company recognized stock-based compensation as follows:
| | | | | | | | | | | | | | | |
| | | | For the Three Months Ended
March 31, |
| | | | | | 2022 | | 2021 |
| Stock-based compensation: | | | | | | | |
| Costs of goods sold | | | | | $ | — | | | $ | 21 | |
| General and administrative | | | | | 1,271 | | | 889 | |
| Research and development | | | | | 103 | | | 26 | |
| | | | | | | |
| Total | | | | | $ | 1,374 | | | $ | 936 | |
The expense in the table above represents stock-based compensation for outstanding awards, and related expenses for the Company's employee stock purchase program.
7.Net Income Per Common Share
A reconciliation of the number of shares of common stock used in the calculation of basic and diluted net income per common share is presented below:
| | | | | | | | | | | | | | | |
| | | | For the Three Months Ended
March 31, |
| | | | | | 2022 | | 2021 |
| Weighted average basic shares | | | | | 172,009,259 | | | 98,109,900 | |
| Stock Options | | | | | — | | | — | |
| Restricted Stock Units and Restricted Stock Awards | | | | | 5,318,840 | | | — | |
| Weighted average diluted shares | | | | | 177,328,099 | | | 98,109,900 | |
For the three months ended March 31, 2021, the Company has recorded a net loss from operations. As a result, the Company has excluded all potential dilutive shares from the computation of the diluted net loss per common share to avoid the anti-dilutive effect.
The following table includes the number of potential dilutive shares that were excluded due to the anti-dilutive effect:
| | | | | | | | | | | | | | | |
| | | | For the Three Months Ended
March 31, |
| | | | | | 2022 | | 2021 |
| Stock Options | | | | | — | | | 781,144 | |
| Restricted Stock Units and Restricted Stock Awards | | | | | — | | | 886,434 | |
| Total | | | | | — | | | 1,667,578 | |
For the three months ended March 31, 2022 and 2021, the company excluded 3,541,328 and 4,264,055 of issued stock options in the computation of diluted net income per share and diluted net loss per share, respectively, because their exercise price exceeded the average market price during the respective periods. The Company’s outstanding warrants were also excluded from the computation of diluted net loss per common share as they were considered “out-of-the-money” as of March 31, 2022.
8.Inventories
The inventory balances as of March 31, 2022 and December 31, 2021 consist entirely of finished goods. The Company values its inventories at the lower of net realizable value or cost using first-in, first-out ("FIFO").
For the three months ended March 31, 2022 and 2021, the Company had inventory write-downs of $3.0 million and $2.8 million, respectively, relating primarily to excess quantities and obsolescence ("E&O") of inventories. The E&O write-downs are included in the cost of goods sold on the condensed consolidated statements of comprehensive income/(loss).
9.Prepaid and Other Current Assets
Prepaid and other current assets are as follows:
| | | | | | | | | | | |
| | March 31,
2022 | | December 31,
2021 |
| Income tax receivable | $ | 3,913 | | | $ | 4,116 | |
| Leasehold improvement reimbursement | $ | 3,410 | | | $ | — | |
| Prepaid expenses | $ | 2,952 | | | $ | 2,553 | |
| Payroll tax receivable | $ | 1,695 | | | $ | — | |
| Insurance recovery receivable | $ | — | | | $ | 1,500 | |
| Other receivables | 1,221 | | | 815 | |
| | $ | 13,191 | | | $ | 8,984 | |
10.Property and Equipment
The net book value of property and equipment after accumulated depreciation and all impairment is as follows:
| | | | | | | | | | | |
| | March 31, 2022 | | December 31, 2021 |
| Processing equipment | $ | 273 | | | $ | 346 | |
| Surgical instruments | 449 | | | 489 | |
| Office equipment, furniture and fixtures | 10 | | | 15 | |
| Computer equipment and software | 163 | | | 44 | |
| Construction in process | 5 | | | 51 | |
| | $ | 900 | | | $ | 945 | |
For the three months ended March 31, 2022 and 2021, the Company recorded depreciation expense in connection with property and equipment of $0.5 million and $0.5 million, respectively. The Company uses the straight-line method of depreciation.
For the three months ended March 31, 2022 and 2021, the Company recorded asset impairment and abandonment charges of $0.9 million and $2.2 million, respectively. The fair value of property and equipment was measured utilizing an orderly liquidation value of each of the underlying assets.
For the three months ended March 31, 2022 and 2021, the Company capitalized a total of $0.0 million and $0.3 million of internal software expense related to the implementation of a new Enterprise Resource Planning ("ERP") system. The ERP system was implemented in January 2022 and related capitalized expenses were transferred from "Construction in process to "Computer equipment and software" to coincide with implementation.
Impairment of the ERP costs was $0.0 million and $0.3 million for the three months ended March 31, 2022 and 2021, respectively. The impairment charges were triggered by continued negative operating cash flows.
For the three-month periods ended March 31, 2022 and 2021, the Company expensed $0.6 million and $0.1 million, respectively, related to the ERP implementation. These non-capitalizable expenses are recorded in the “General, and administrative” line on the condensed consolidated statements of comprehensive income/(loss).
11.Warrants
On February 15, 2022, we issued and sold in an underwritten public offering 38,565,220 shares of common stock and 4,913,044 of pre-funded warrants to purchase common stock with gross proceeds of $20.0 million at an effective offering price of $0.46 and $0.4599 per share respectively. In addition, the Company issued warrants to purchase up to an aggregate of 32,608,698 shares of common stock at a strike price of $0.60 that are exercisable over the next five years. Also in connection with the offering, the Company issued placement agent warrants to purchase an aggregate of up to 2,608,696 shares of common stock at a strike price of $0.575 per share that are exercisable over the next five years. Finally, the Company granted the underwriters the option for a period of 30 days from February 15, 2022 to purchase up to 6,521,736 additional shares of our common stock at the public offering price of $0.4599 per share and/or warrants to purchase up to 4,891,302 shares of the Company's common stock at a public offering price of $0.0001 per warrant. The
Underwriters did not exercise the option to purchase the common shares from the Company, but they did exercise the option to purchase the warrants which have not been converted to common shares as of March 31, 2022. We received net proceeds of $17.7 million from the offering. The Company incurred issuance costs related to the offering of $2.3 million which has been allocated between the value of the warrant liability and the amounts recorded within the Statement of Shareholders Equity. Fees allocated to the warrant liabilities were $0.9 million and is reflected in the "Transaction and integration expenses" line in the condensed consolidated statement of income/(loss). The remaining $1.4 million is allocated to common shares and is reflected in "Additional Paid-In Capital" and "Common Stock" sections of the Company’s condensed consolidated balance sheets
On June 14, 2021, the Company issued and sold in a registered direct offering priced at-the-market an aggregate of 28,985,508 shares of its common stock and warrants exercisable for an aggregate of 28,985,508 shares of Company common stock, at a combined purchase price of $1.725 per share. The warrants have an exercise price equal to $1.725 per share, are exercisable immediately upon issuance and will expire three years from the issuance date. The net proceeds from the direct offering, after deducting investor and management fees, were $45.8 million. Upon any exercise of the offering warrants issued in the offering for cash, the Company agreed to pay the placement agent a total cash fee equal to 7.0% of the aggregate gross proceeds from the exercise of the offering warrants and a management fee equal to 1.0% of the aggregate gross proceeds from the exercise of the offering warrants. The Company, also in connection with the direct offering, issued the placement agent or its designees warrants to purchase an aggregate of up to 1,739,130 shares of its common stock. The placement agent warrants have substantially the same terms as the warrants described above, except that the placement agent warrants will have an exercise price of $2.15625 per share, and holders of the placement agent warrants are not entitled to receive cash dividends issued by the Company during such time as the placement agent warrant is outstanding.
The Company accounts for its warrants in accordance with ASC 815-40, “Derivatives and Hedging—Contracts in Entity’s Own Equity” (“ASC 815”), under which the warrants did not meet the criteria for equity classification and thus were recorded as liabilities. Since the warrants met the definition of a derivative in accordance with ASC 815, these warrants were measured at fair value at inception and will be remeasured at each reporting date in accordance with ASC 820, Fair Value Measurement, with changes in fair value recognized in in our condensed consolidated statements of comprehensive income in the period of change. The Company determined the fair value of its warrants based on the Black Scholes Option Pricing Model.
12.Fair Value Information
Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy defines a three-level valuation hierarchy for classification and disclosure of fair value measurements as follows:
Level 1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Acquisition Contingencies
Changes in the fair value of contingent consideration are recorded in the "Gain on acquisition contingency" line in the condensed consolidated statement of income/(loss). Significant changes in unobservable inputs, mainly the probability of success and projected cash flows, could result in material changes to the contingent consideration liability.
Inteneural Networks Inc.
On December 30, 2021, we completed a Stock Purchase Agreement (“Purchase Agreement”) to acquire 42% of Inteneural Networks Inc. ("INN") for a non-exclusive license to use INN's proprietary AI technology for autonomously segmenting and identifying neural structures in medical images and helping identify possible pathological states to advance our digital health strategy. INN is a private technology company that is developing technology that harnesses machine learning ("ML") and AI to autonomously and accurately identify and segment neural structures in medical images and integrate specific reference information regarding possible pathological states to physicians caring for patients. As
consideration for the 42% stake in INN, we paid total consideration of $19.9 million which consisted of $5.0 million in cash, 6,820,792 shares of our common stock with a fair value of $4.9 million and issued unsecured promissory notes to the Sellers in an aggregate principal amount of $10.6 million with a fair value of $10.0 million. As part of the transaction and subject to certain contingencies, the Company must purchase up to 100% of the equity of INN in three 19.3% tranches for $19.3 million for each of the achievement of the three additional clinical, regulatory, and revenue milestones.
Holo Surgical
On September 29, 2020, the Company entered into a Stock Purchase Agreement (the “Holo Purchase Agreement”), with Roboticine, Inc, a Delaware corporation (the “Seller”), Holo Surgical S.A., a Polish joint-stock company (“Holo S.A.”), Pawel Lewicki, PhD (“Lewicki”), and Krzysztof Siemionow, MD, PhD (“Siemionow”), which provides for the Company to acquire all of the issued and outstanding equity interests in Holo Surgical Inc., a Delaware corporation and a wholly owned subsidiary of the Seller (“Holo Surgical”). The Seller, Holo S.A., Lewicki and Siemionow are together referred to herein as the “Seller Group Members.” The Acquisition was closed on October 23, 2020.
As consideration for the Holo Surgical acquisition, the Company paid to the Seller $30.0 million in cash and issued to the Seller 6,250,000 shares of common stock, par value $0.001 of the Company (“Common Stock”). In addition, the Seller is entitled to receive contingent consideration from the Company valued in an aggregate amount of up to $83.0 million, to be paid through the issuance of Common Stock or the payment of cash, contingent upon and following the achievement of certain regulatory, commercial and utilization milestones by specified time periods occurring up to the sixth (6th) anniversary of the closing. The contingent consideration is evaluated quarterly, or more frequently, if circumstances dictate. Changes in the fair value of contingent consideration are recorded in the "Gain on acquisition contingency" line item in the condensed consolidated statements of comprehensive income/(loss). Significant changes in unobservable inputs, mainly the probability of success and cash flows projected, could result in material changes to the contingent consideration liabilities.
The Purchase Agreement provides that the Company will issue Common Stock to satisfy any contingent consideration payable to the Seller, until the total number of shares of Common Stock issued to the Seller pursuant to the Purchase Agreement (including the 6,250,000 shares of Common Stock issued at closing) is equal to 14,900,000 shares of Common Stock. Following the attainment of that limitation, the post-closing contingent payments would be payable in cash. The number of shares of Common Stock issued as contingent consideration with respect to the achievement of a post-closing milestone, if any, will be calculated based on the volume weighted average price of the Common Stock for the five (5) day trading period commencing on the opening of trading on the third trading day following the achievement of the applicable milestone. On January 12, 2022, the Company entered into a Second Amendment to the Stock Purchase Agreement with the sellers of Holo Surgical to amendment one of the regulatory milestones beyond December 31, 2021. This regulatory milestone was subsequently achieved on January 14, 2022 when the Company received 510(k) clearance for its HOLO Portal™ surgical guidance system. Upon achievement of this milestone the Company issued 8,650,000 in common stock at a value of $5.9 million, and also paid the sellers $4.1 million in cash for a total payment for achieving the milestone of $10.0 million pursuant to the terms of the agreement (the "Holo Milestone Payments").
The Company determined the fair value of the Holo Milestone Payments to be the present value of each future payment amount estimated using a probability weighted model, driven by the probability of success factor and expected payment date. The probability of success factor was used in the fair value calculation to reflect inherent regulatory, development and commercial risk of the Holo Milestone Payments. More specifically, the probability of expected achievement of the specific milestones, including risks associated with the uncertainty regarding the achievement and payment of milestones; obtaining regulatory approvals in the United States and Europe; the development of new features used with the product; the adaption of the new technology by surgeons; and the placement of the devices within the field. This fair value measurement is based on significant unobservable inputs in the market and thus represents a Level 3 measurement within the fair value hierarchy.
Inputs used in estimating the fair value of the contingent consideration for Holo Surgical as of March 31, 2022 and December 31, 2021, are summarized below:
| | | | | | | | | | | |
Fair Value at March 31, 2022 | Valuation Technique | Unobservable Inputs | Ranges |
| $33,425 | Earn-Out Valuation | Probability of success factor | 0% - 95% |
| | Discount rates | 0.00% - 12.47% |
| | | | | | | | | | | |
Fair Value at December 31, 2021 | Valuation Technique | Unobservable Inputs | Ranges |
| $51,928 | Earn-Out Valuation | Probability of success factor | 0% - 90% |
| | Discount rates | 0.06% - 11.60% |
The following table provides a reconciliation of contingent consideration measured at fair value using significant unobservable inputs (Level 3) as of March 31, 2022 and December 31, 2021:
| | | | | | | | | | | |
| | March 31,
2022 | | December 31,
2021 |
| Beginning balance as of January 1 | $ | 51,928 | | | $ | 56,515 | |
| Gain on acquisition contingency | (8,503) | | | (4,587) | |
| Milestone payments | (10,000) | | | — | |
Ending balance as of March 31 | $ | 33,425 | | | $ | 51,928 | |
Paradigm
On March 8, 2019, the Company acquired Paradigm, which included a contingent liability related to the revenue based earnout ("Paradigm Earnout") of $72.2 million. The fair value of the contingent liability was measured using Level 3 inputs. Unobservable inputs for the probability-weighted model included weighted average cost of capital and company specific projected revenue and costs. During 2019 management reduced the contingency consideration to $0.0 million due to a revision in the milestone inputs and recorded a gain of $72.2 million which was recognized during 2019. There are no amounts recorded as contingent consideration as of March 31, 2022 and December 31, 2021 as management has determined that the milestones will not be met. The last milestones will expire on December 31, 2022.
Property and Equipment, Intangibles and Other Assets
As of March 31, 2022, and December 31, 2021, respectively, property and equipment with a carrying amount of $1.7 million and $12.0 million were written down to their estimated fair value of $0.9 million and $0.9 million using Level 3 inputs. The Level 3 fair value was measured based on orderly liquidation value and is evaluated on a quarterly basis. Unobservable inputs for the orderly liquidation value included replacement costs, physical deterioration estimates and market sales data for comparable assets.
Definite-lived intangible and other assets subject to amortization were impaired and written down to their estimated fair values in 2022 and 2021. Fair value is measured as of the impairment date using Level 3 inputs. Definite-lived intangible assets and other assets’ fair value was measured based on the income approach and orderly liquidation value, respectively. Due to the Company’s forecasted cash flow being negative, any intangible assets acquired during the period were immediately impaired. Unobservable inputs for the orderly liquidation value included replacement costs, physical deterioration estimates and market sales data for comparable assets. Unobservable inputs for the income approach included forecasted cash flows generated from use of the definite-lived intangible assets.
As a result of impairments recognized, the following table summarizes the post impairment fair values of the corresponding assets subject to fair value measured using Level 3 inputs as of March 31, 2022 and December 31, 2021:
| | | | | | | | | | | |
| Fair value | March 31,
2022 | | December 31,
2021 |
Property and equipment – net | $ | 900 | | | $ | 945 | |
Definite-lived intangible assets - net | — | | | |
Other assets – net | 7,114 | | | 6,970 | |
| | $ | 8,014 | | | $ | 7,915 | |
Property and equipment was impaired and written down to their estimated fair values during the three months ended March 31, 2022 and 2021. Other intangible assets and other assets were impaired and written down to their
estimated fair values during the three months ended March 31, 2022. The following table summarizes the corresponding impairment charge during the three months ended March 31, 2022 and 2021:
| | | | | | | | | | | | | | | |
| | | | For the Three Months Ended
March 31, |
| Impairment | | | | | 2022 | | 2021 |
Property and equipment – net | | | | | $ | 789 | | | $ | 1,778 | |
Definite-lived intangible assets - net | | | | | 101 | | | 161 | |
Other assets – net | | | | | 49 | | | 237 | |
| | | | | | $ | 939 | | | $ | 2,176 | |
During the three months ended March 31, 2022 and 2021, the Company concluded, through its ASC 360 impairment testing of long-lived assets classified as held and used, that factors existed indicating that finite-lived intangible assets were impaired. The factors considered by management include a history of net losses and negative cash flows in each of those periods to be able to support the assets. The Company tested the carrying amounts of the property and equipment, definite lived intangibles, and other assets for impairment. As a result, we recorded an impairment charge of $0.9 million and $2.2 million for the three months ended March 31, 2022 and 2021 recorded within the "Asset impairment and abandonments" line item on the consolidated statement of comprehensive loss.
Warrant Liability
Warrants are accounted for as liabilities in accordance with ASC 815-40 and are presented within "Warrant liability" in the Company’s condensed consolidated balance sheets.
The following table presents information about the Company’s liabilities that are measured at fair value:
| | | | | | | | | | | | | | | | | |
| | Level | | March 31, 2022 | | December 31, 2021 |
| Warrant liability | 3 | | $ | 10,678 | | | $ | 12,013 | |
June 15, 2021 Warrants
The table presented below is a summary of changes in the fair value of the Company’s Level 3 valuation for the June 15, 2021 warrant liability for the three months ended March 31, 2022, there were no warrants issued as of March 31, 2021:
| | | | | |
| | Warrant Liability |
December 31, 2021 | $ | 12,013 | |
| Change in fair value of warrant liability | (7,600) | |
March 31, 2022 | $ | 4,413 | |
The warrant liability is revalued each reporting period with the change in fair value recorded in the accompanying condensed consolidated statements of comprehensive income/(loss) until the warrants are exercised or expire. The fair
value of the warrant liability is estimated using the Black-Scholes Option Pricing Model using the following valuation inputs:
| | | | | | | | | | | |
| | March 31,
2022 | | December 31,
2021 |
| Stock price | $ | 0.30 | | | 0.72 | |
| Risk-free interest rate | 2.31 | % | | 0.84 | % |
| Dividend yield | — | % | | — | % |
| Volatility | 150 | % | | 130 | % |
February 15, 2022 Warrants
The table presented below is a summary of changes in the fair value of the Company’s Level 3 valuation for the February 15, 2022 warrant liability for the three months ended March 31, 2022, there were no warrants issued as of March 31, 2021:
| | | | | |
| | Warrant Liability |
December 31, 2021 | $ | — | |
| Fair value of warrants on date of issuance | 10,157 | |
| Execution of prefunded warrants | (1,749) | |
| Change in fair value of warrant liability | (2,143) | |
March 31, 2022 | $ | 6,265 | |
The warrant liability is revalued each reporting period with the change in fair value recorded in the accompanying condensed consolidated statements of comprehensive income/(loss) until the warrants are exercised or expire. The fair value of the warrant liability is estimated using the Black-Scholes Option Pricing Model using the following valuation inputs:
| | | | | |
| | March 31,
2022 |
| Stock price | $ | 0.30 | |
| Risk-free interest rate | 2.42 | % |
| Dividend yield | — | % |
| Volatility | 80 | % |
13.Accrued Expenses
Accrued expenses are as follows:
| | | | | | | | | | | |
| | March 31,
2022 | | December 31,
2021 |
| Accrued compensation | $ | 4,405 | | | $ | 5,258 | |
| Accrued distributor commissions | $ | 3,186 | | | $ | 2,957 | |
| Accrued securities class action settlement | $ | — | | | $ | 1,500 | |
| Other | 8,222 | | | 8,054 | |
| Total accrued expenses | $ | 15,813 | | | $ | 17,769 | |
14.Other Long-term Liabilities
Other long-term liabilities are as follows:
| | | | | | | | | | | |
| | March 31, 2022 | | December 31, 2021 |
| Acquisition contingencies | $ | 33,425 | | | $ | 26,343 | |
| Warrant Liability | 10,678 | | | 12,013 | |
| Lease obligations | 892 | | | 947 | |
| Other | 2,484 | | | 2,229 | |
| Total other long-term liabilities | $ | 47,479 | | | $ | 41,532 | |
15.Income Taxes
The Company evaluates the need for deferred tax asset valuation allowances based on a more likely than not standard. The ability to realize deferred tax assets depends on the ability to generate sufficient taxable income within the carryback or carryforward periods provided for in the tax law for each applicable tax jurisdiction. The Company has evaluated all evidence, both positive and negative, and maintains a valuation allowance on deferred tax assets in the United States as well as most foreign jurisdictions as of March 31, 2022.
For the three months ended March 31, 2022 and 2021, the Company recorded income tax expense of $0.2 million and $0.2 million, respectively in continuing operations. The March 31, 2022 three-month income tax provision was primarily a result of federal tax notices received, non-U.S. income tax expense, and interest accrued on uncertain tax positions. The March 31, 2021 three-month income tax provision was primarily a result of federal interest associated with the timing of payments.
16.Debt
On December 30, 2021, the Company issued $10.6 million aggregate principal amount of unsecured seller notes (“Seller Notes”) recorded at $10.0 million and $10.0 million as of March 31, 2022 and December 31, 2021 respectively. All principal and accrued interest due and payable on the earlier of December 30, 2024, or the date upon which a change in control occurs. Interest is paid in kind and capitalized into the principal amount of the Seller Notes on each anniversary of the issuance date at a rate of 6.8% per year. For the three months ended March 31, 2022 management accrued $0.2 million in interest expense and accredited $0.1 million related to the seller notes for a total interest expense of $0.3 million. In the event of default, as defined in the agreement, any and all of the indebtedness may be immediately declared due and payable, and the interest would accrue at a 4.0% higher rate. There is no prepayment penalty or covenants related to the fixed rate notes. The Seller Notes were issued as deferred consideration in connection with the INN Purchase Agreement discussed at Note 1, Note 5, and Note 20.
Debt issuance costs were immaterial and were included within the overall costs of the acquisition of INN. The following table summarizes the debt recorded on the condensed consolidated balance sheet:
| | | | | | | | | | | |
| | Carrying Value (In thousands) |
| March 31, 2022 | December 31, 2021 |
Seller Notes-P. Lewicki | $ | 5,306 | | $ | 5,306 | |
| Seller Notes-K. Siemionow | 5,306 | | 5,306 | |
Less: fair value adjustment | (578) | | (630) | |
| Total Seller Notes - related party | 10,034 | | 9,982 | |
| Current portion of seller notes | — | | — | |
| Total long-term seller note, excluding current portion | $ | 10,034 | | $ | 9,982 | |
The fair value of the Seller Notes is $10.0 million at March 31, 2022 and December 31, 2021, respectively. The Company has determined that the Seller Notes is a level 2 financial instrument as there are other unobservable inputs.
As of March 31, 2022, the future maturities of long-term debt, excluding deferred financing costs, accrued interest and debt discount, were as follows:
| | | | | | | | |
| 2022 | | $ | — | |
| 2023 | | — | |
| 2024 | | 10,612 | |
| 2025 | | — | |
| 2026 | | — | |
| Thereafter | | — | |
| Total | | $ | 10,612 | |
17.Commitments and Contingencies
Acquisition of Paradigm – On March 8, 2019, pursuant to a Master Transaction Agreement, the Company acquired Paradigm in a cash and stock transaction valued at up to $300.0 million consisting of $150.0 million of cash, plus potential future milestone payments. Paradigm’s primary product is the Coflex® Interlaminar Stabilization® device, a minimally invasive motion preserving stabilization implant that is FDA premarket approved for the treatment of moderate to severe lumbar spinal stenosis in conjunction with decompression.
Under the terms of the agreement, the Company paid $100.0 million in cash and issued 10,729,614 shares of the Company’s common stock. The shares of Company common stock issued on March 8, 2019, were valued based on the volume weighted average closing trading price for the five trading days prior to the date of execution of the definitive agreement, representing $50.0 million of value. In addition, under the terms of the agreement, the Company may have been required to pay up to an additional $150.0 million in a combination of cash and Company common stock based on a revenue earnout consideration. The first potential earnout payment of $20.0 million was based on revenues achieved during any twelve-month period ending on December 31, 2020. As the revenue milestone was not achieved, there was no consideration due with respect to the first earnout period and the Company has no further liability with respect thereto. The last milestone is based on a probability weighted model and, the Company estimates a contingent liability related to the revenue based earnout of zero 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. There are no amounts recorded as contingent consideration as of March 31, 2022 and December 31, 2021 as management has determined that the milestones will not be met. The last milestones will expire on December 31, 2022.
Aziyo – On August 1, 2018, the Company and Aziyo Biologics, Inc. ("Aziyo") entered into a Distribution Agreement which was subsequently amended on December 3, 2018, and November 15, 2020 (the “Distribution Agreement”). Pursuant to the Distribution Agreement, the Company has exclusive distribution rights to certain biologic implants manufactured by Aziyo and marketed under the ViBone trade name (“ViBone”). The Distribution Agreement provides for minimum purchases of ViBone implants on an annual basis through calendar 2025. For calendar years 2019-2021, if the minimum purchase obligations for a particular year are not fulfilled, the Distribution Agreement provides various options for the Company to satisfy such obligations (“Shortfall Obligations”) in subsequent years, including a combination of payments and/or providing purchase orders for the shortfall amount in a given year. If a purchase order is submitted, the contract does not provide that it needs to be satisfied during the following year (i.e., the Company can satisfy the orders over multiple years and until the minimum is achieved). For calendar years 2022 and beyond, if the Company does not satisfy the minimum purchase obligations specified in the Distribution Agreement, the Company can continue to market the ViBone implants on a non-exclusive basis without any Shortfall Obligations. In January 2021, the Company issued a purchase order to Aziyo for $12.4 million relating to the 2020 Shortfall Obligation. In January 2022, the Company issued a purchase order to Aziyo for $14.2 million relating to the 2021 Shortfall Obligation.
Acquisition of Holo Surgical – As part of the Holo Surgical acquisition, the Company issued contingent consideration which would be payable to the sellers upon the achievement of certain regulatory, commercial, and utilization milestones by specified time periods. On January 14, 2022 the Company received 510(k) clearance for the HOLO PortalTM surgical guidance system. Upon achievement of this milestone the Company issued 8,650,000 in common stock at a value of $5.9 million and also paid the sellers $4.1 million in cash for a total payment for achieving the milestone of $10.0 million pursuant to the terms of the agreement. The fair value of the liability was $33.4 million as of March 31, 2022 all of which is being classified as a long-term liability in the accompanying condensed consolidated balance sheets, within "Acquisition contingencies - Holo." The fair value of the liability was $51.9 million on December 31, 2021 with
$25.6 million classified as current liabilities within "Current portion of accrued acquisition contingency- Holo" while $26.3 million classified as "Acquisition contingencies - Holo." The change in the fair value of the liability of $8.5 million since December 31, 2021 was recognized in the gain on acquisition contingency line of the condensed consolidated statements of comprehensive income/(loss).
Manufacturing Agreements with Former OEM Affiliates – In connection with the closing of the OEM Transaction, on July 20, 2020 the Company entered into three manufacturing and distribution agreements with affiliates of Montague Private Equity: (i) a Manufacture and Distribution Agreement (the “Hardware MDA”) with Pioneer Surgical Technology, Inc. (“Pioneer”) pursuant to which Pioneer would manufacture certain hardware implants for the Company; (ii) a Processing and Distribution Agreement with RTI Surgical, Inc. (“RTI”), an affiliate of Pioneer, pursuant to which RTI would process certain biologic implants for the Company (the “PDA”); and (iii) a Manufacture and Distribution Agreement (“NanOss”) pursuant to which Pioneer would manufacture certain synthetic implants for the Company (the “NanOss MDA”), and together with the Hardware MDA and the PDA, the “OEM Distribution Agreements.” The OEM Distribution Agreements contain aggregate minimum purchase obligations for each of the first three years of the agreements as follows:
•Year 1: $24.2 million
•Year 2: $25.8 million
•Year 3: $27.2 million
The OEM Distribution Agreements contain provisions whereby the minimum purchase obligations are reduced under certain circumstances, including certain force majeure events and termination of the agreements for certain specified reasons.
In addition, on July 20, 2020, the Company entered into a Design and Development Agreement with Pioneer pursuant to which Pioneer will provide certain design and development services with respect to certain implants (the “Design and Development Agreement”). The Design and Development Agreement contains a provision whereby the Company will pay Pioneer a minimum of $1.7 million for direct labor costs and certain services with respect to maintaining design history files in each of the first two years under the Design and Development Agreement. Pioneer has filed a legal dispute with the Company regarding the Design and Development Agreement related certain disputed invoices. All amounts have been properly accrued related to the agreement within the condensed consolidated balance sheet as of March 31, 2022.
San Diego Lease – On March 12, 2021, the Company entered into a Lease (the “Lease”) with SNH Medical Office Properties Trust, a Maryland real estate investment trust (the “Landlord”), to house the Company’s offices, lab and innovation space (the “Building”) in San Diego, California. The initial term of the Lease is twelve years, with one extension option for a period of seven years.
Under the terms of the Lease, the Company will lease an aggregate of approximately 94,457 rentable square feet building located at 3030 Science Park Road, San Diego, California (the “Premises”). The Landlord agreed to make improvements over the 12 month period after the execution of the leases, after which occupancy is expected to be delivered to the Company.
Aggregate payments towards base rent for the Premises over the term of the lease will be approximately $64.6 million, including 13 months of rent abatement. The Company will recognize the lease assets and liabilities when the Landlord makes the underlying asset available to the Company and as such no amounts were accrued as of September 30, 2021. Concurrent with the Company’s execution of the Lease, as a security deposit, the Company delivered to the Landlord a payment in the amount of $2.5 million which is recorded within "Other assets – net" in our condensed consolidated balance sheets.
18.Legal Actions
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, except as described below and in Note 19 the Company does not believe that any of these claims that were outstanding as of March 31, 2022 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 — RTI Surgical, Inc., as a predecessor to 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 510(k) 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 March 31, 2022, there are a cumulative total of 1,028 Indemnified Claims for which the Company Parties are providing defense and indemnification. In connection with the transactions, liabilities related to these claims remained a liability retained by the Company. The defense and indemnification of these cases are covered under the Company’s insurance policy subject to a reservation of rights by the insurer.
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’s predecessor RTI Surgical, Inc. The suit requests damages, enhanced damages, reimbursement of costs and expenses, reasonable attorney fees, and an injunction. The asserted patents are expired. On April 7, 2019, the Court granted the Company’s request to stay the lawsuit pending the U.S. Patent Trial and Appeal Board’s (“PTAB”) decision whether to institute review of the patentability of LifeNet’s patents. On August 12, 2019 the PTAB instituted review of three LifeNet patents, and on September 3, 2019 the PTAB instituted review of the remaining two. On August 4, 2020 and August 26, 2020, the PTAB issued final written decisions finding that certain claims were shown to be unpatentable and others not. Neither party appealed the PTAB’s decisions with respect to the three LifeNet patents on which the PTAB instituted review on August 12, 2019. With respect to the remaining two LifeNet patents, Surgalign filed Notices of Appeal with the Federal Circuit on October 27, 2020 and LifeNet filed a Notice of Cross-appeal on November 9, 2020. The Federal Circuit issued its written opinion regarding Surgalign's Appeal and LifeNet's Cross-appeal on April 11, 2022, affirming in-part, reversing in-part, and remanding one issue to the PTAB. In connection with the transactions, liabilities related to these claims remained a liability retained by the Company. The Company continues to believe the suit is without merit and will vigorously defend its position. Based on the current information available to the Company, the impact that current or any future litigation may have on the Company cannot be reasonably estimated.
Securities Class Action— The Company’s Investigation (as defined below) resulted in stockholder litigation. A class action complaint was filed by Patricia Lowry, a purported shareholder of the Company, against the Company, and certain former officers of the Company, in the United States District Court for the Northern District of Illinois (the “Court”) on March 23, 2020, asserting claims under Sections 10(b) and 20(a) the Securities Exchange Act of 1934 (the “Exchange Act”) and demanding a jury trial (the “Lowry Action”). The court appointed a different shareholder as Lead Plaintiff and she filed an amended complaint on August 31, 2020. On October 15, 2020, the Company and the other named defendants moved to dismiss the amended complaint. In April 2021, the court denied the defendants’ motions to dismiss. On June 30, 2021, the parties to the Lowry Action conducted a mediation session, after which negotiations among the parties continued into July. On July 27, 2021, a binding term sheet settling the Lowry Action was entered into whereby the defendants will pay $10.5 million (inclusive of attorneys’ fees and administrative costs) in exchange for the dismissal with prejudice of all claims against the defendants in connection with the Lowry Action (the “Lowry Settlement”). On September 22, 2021, the court granted preliminary approval to the Lowry Settlement, and the settlement amount was paid by the Company’s insurers under its Directors' and Officers’ insurance policies in October 2021 in the amount of $10.5 million. No amounts were outstanding on March 31, 2022 and December 31, 2021. The Court entered an order approving the settlement on January 26, 2022. The matter is now concluded.
Derivative Lawsuits—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 (the “Summers Action”) against certain current and former directors and officers of the Company (as well as the Company as a nominal defendant), in the United States District Court for the Northern District of Illinois asserting statutory claims under Sections 10(b), 14(a), and 20(a) of the Exchange Act, as well as common law claims for breach of fiduciary duty, unjust enrichment and corporate waste. Thereafter, two similar shareholder derivative lawsuits asserting many of the same claims were filed in the same court against the same current and former directors and officers of the Company (as well as the Company as a nominal defendant), as well as a books and records demand under Section 220 of the Delaware General Corporate Law (the “Books and Records Demand”). The three derivative lawsuits have been consolidated into the first-filed Summers Action (together with the Books and Records Demand, the “Derivative Actions”). On September 6, 2020, the court entered an order staying the Summers Action pending resolution of the motions to dismiss in the Lowry Action. On September 30, 2021, the court granted preliminary approval of a proposed settlement of the Derivative Actions (the “Derivative Actions Settlement”). Pursuant to the Derivative Actions Settlement, the Company has agreed to adopt or revise certain corporate governance policies and procedures, and the Company’s insurers agreed to pay $1.5 million to plaintiffs’ counsel. Based on this a corresponding receivable and liability of $1.5 million was recorded within "Prepaid and other current assets," and "Accrued expenses" on the consolidated balance sheets as of December 31, 2021. The settlement amount was paid by the Company's insurers under its Directors' and Officers' insurance policies in January 2022 in the amount of $1.5 million. On January 24, 2022, the court gave final approval to the Derivative Actions Settlement. The matter is now concluded and no amounts were outstanding at March 31, 2022.
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.
19.Regulatory Actions
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 customers of the Company’s formerly-owned OEM Businesses, 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 condensed consolidated financial statements for the quarterly periods within these years commencing with the first quarter of 2016, as well as the condensed consolidated financial statements for the quarterly periods within the 2019 fiscal year. The Investigation was precipitated by an investigation by the SEC initially related to the periods 2014 through 2016 (the “SEC Investigation”). The SEC Investigation is ongoing, and the Company is cooperating with the SEC. The Company is in discussions with the SEC regarding a potential settlement. We have determined a reasonable estimate of this liability and have recorded that estimate in Accrued Expenses on the consolidated balance sheets as of March 31, 2022 and December 31, 2021.
20.Related Party Transactions
The Company’s related parties include: i) a person who is or was (since the beginning of the last fiscal year for which the Company has filed a Form 10-K and proxy statement, even if he or she does not presently serve in that role) an executive officer, director or nominee for election as a director; ii) greater than five percent beneficial owner of the Company’s common stock; or iii) immediate family member of any of the foregoing. The Company has not entered into any related part transaction in 2022. The following transactions were determined to be related parties at the time of the transaction:
The Holo Surgical Acquisition
As discussed in Note 5, on September 29, 2020, the Company entered into the Holo Purchase Agreement, pursuant to which, among other things, the Company consummated the Acquisition on October 23, 2020. As consideration
for the Acquisition, the Company paid to Seller $30.0 million in cash and issued to Seller 6,250,000 shares of its common stock with a fair value of $12.3 million. In addition, the Seller will be entitled to receive contingent consideration from the Company valued at $50.6 million as of October 23, 2020, which must be first paid in shares of our common stock (in an amount up to 8,650,000 shares) and then paid in cash thereafter, contingent upon and following the achievement of certain regulatory, commercial and utilization milestones by specified time periods occurring up to the sixth (6th) anniversary of the Closing Date. Dr. Lewicki was appointed to the Company's board of directors on November 23, 2020. He will not be nominated to the Board of Directors following the May 10, 2022 shareholders meeting. Dr. Pawel Lewicki indirectly owns approximately 57.5% of the outstanding ownership interests in the Seller.
Simpson Consulting Agreement
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 contemplated by the Holo Surgical Purchase Agreement. On July 20, 2020, Mr. Simpson entered into a consulting agreement (“the Consulting Agreement”) with the Company, pursuant to which he would provide consulting services to the Company. The Consulting Agreement had an initial term of three years, but may be extended with the mutual agreement of the parties. On September 10, 2021, Mr. Simpson resigned as Chairman of the Board and as a member of the Board of Directors of the Company. Due to his resignation, Mr. Simpson's Consulting agreement with the Company was terminated. For the three months ended March 31, 2022 and 2021, total cash compensation paid to Mr. Simpson for his services were $0.0 million and $0.1 million, respectively.
INN Acquisition
On December 30, 2021, we executed the INN Purchase Agreement with the related party Sellers, Siemionow and Lewicki who own the remaining 58% of INN evenly. See Note 1, Note 5, and Note 16 for further discussion on amounts outstanding to them.
21.Subsequent Events
The Company evaluated subsequent events as of the issuance date of the condensed consolidated financial statements as defined by FASB ASC 855, Subsequent Events.