SURGALIGN HOLDINGS, INC. MANAGEMENT'S DISCUSSION …

You should read the following discussion of our financial condition and resultsof operations together with those financial statements and the notes to thosestatements included elsewhere in this filing. This discussion containsforward-looking statements based on our current expectations, assumptions,estimates and projections about us and our industry. Our actual results coulddiffer materially from those anticipated in these forward-looking statements.

Weundertake no obligation to update publicly any forward-looking statements forany reason, even if new information becomes available or other events occur inthe future.Management Overview:We are a global medical technology company focused on elevating the standard ofcare by driving the evolution of digital health. We have developed an AI andaugmented reality AR technology platform called HOLO(TM) AI, which we view as apowerful suite of AI software technology that connects the continuum of carefrom the pre-op and clinical stage through post-op care. HOLO AI is designed toachieve better surgical outcomes, reduce complications, and improve patientsatisfaction.

We believe HOLO AI is one of the most advanced AI technologieswith applications beyond the spine and operating room. Our HOLO Portal(TM) surgicalguidance system, a component of our HOLO AI technology platform, is designed toautomatically recognize, identify, and segment patient anatomy to autonomouslyassist the surgeon throughout the surgical procedure. This proprietary AI-basedplatform was developed to be an intelligent anatomical mapping technologydesigned to assist surgeons by allowing them to remain in safe anatomical zonesand to enhance surgical performance.

We plan to leverage our HOLO AI platform toimprove patient outcomes and drive adoption of our spinal hardware implants andbiomaterials products. We have launched several new products and are developinga pipeline of new innovative technologies that we plan to integrate with ourHOLO AI platform.In addition to our digital health solutions, we have a broad portfolio of spinalhardware implants, including solutions for fusion procedures in the lumbar,thoracic, and cervical spine, and a minimally invasive surgical implant systemfor fusion of the sacroiliac joint. We also have a portfolio of advanced andtraditional orthobiologics, or biomaterials, products.Our product portfolio of spinal hardware implants and biomaterials productsaddress an estimated £15.8 billion global spine market.

We estimate that ourcurrent portfolio addresses nearly 87% of all surgeries utilizing spinalhardware implants and approximately 70% of the biomaterials used inspine-related uses. Our portfolio of spinal hardware implants consists of abroad line of solutions for spinal fusion in minimally invasive surgery (“MIS”),deformity, and degenerative procedures; motion preservation solutions indicatedfor use in one or two-level disease; and an implant system designed to relievesacroiliac joint pain. Our biomaterials products consist of a broad range ofadvanced and traditional bone graft substitutes that are designed to improvebone fusion rates following spinal surgery.We offer a portfolio of products for thoracolumbar procedures, including: theStreamline(R) TL Spinal Fixation system, a system for degenerative and complexspine procedures; and the Streamline MIS(R) Spinal Fixation System, a broad rangeof implants and instruments used via a percutaneous or mini-open approach.

Weoffer a complementary line of interbody fusion devices, Fortilink(R)-TS,Fortilink(R)-L, and Fortilink(R)-A, in our TETRAfuse(R) 3D Technology, which is 3Dprinted with nano-rough features that have been shown to allow more bone cellsto attach to more of the implant, increasing the potential for fusion. We alsooffer a portfolio of products for cervical procedures, including: the CervAlign(R)ACP System, a comprehensive anterior cervical plate system; the Fortilink(R)-C IBFSystem, a cervical interbody fusion device that utilizes TETRAfuse(R) 3Dtechnology; and the Streamline(R) OCT System, a broad range of implants used inthe occipito-cervico-thoracic posterior spine. Our motion preservation systemsare designed to enable restoration of segmental stability while preservingmotion.

These systems include the HPS(R) 2.0 Universal Fixation System, a pediclescrew system used for posterior stabilization of the thoracolumbar spine thatincludes a unique dynamic coupler shown to preserve motion and reduce themechanical burden on adjacent segments available in select markets. Our implantsystem for fusion of the sacroiliac joint, the SImmetry(R) SI Joint Fusion System,is a minimally invasive surgical implant system that has been clinicallydemonstrated to facilitate fusion of the sacroiliac joint and statisticallysignificant decreases in opioid use, pain, and disability.Through a series of distribution agreements, our product portfolio ofbiomaterials consists of a variety of bone graft substitutes, including cellularallografts, demineralized bone matrices (“DBMs”), and synthetic bone growthsubstitutes that have a balance of osteoinductive and osteoconductive propertiesto enhance bone fusion rates following spinal surgery. We market ViBone(R) andViBone(R) Moldable, two next-generation viable cellular allograft bone matrixproducts intended to provide surgeons with improved results for bone repair.

TheViBone and ViBone Moldable products 35——————————————————————————–are processed using a proprietary method optimized to protect and preserve thehealth of native bone cells to potentially enhance new bone formation and aredesigned to perform and handle in a manner similar to an autograft. The ViBoneand ViBone Moldable products contain cancellous bone particles as well asdemineralized cortical bone particles and fibers, delivering osteoinductive,osteoconductive, and osteogenic properties. Our DBM product offering includesBioSet(R), BioReady(R), and BioAdapt(R), a DBM portfolio consisting of putty, puttywith chips, strips, and boat configurations for various surgical applicationswhile providing osteoinductive properties to aid in bone fusion.

Our syntheticbone growth substitutes include nanOss(R) and nanOss(R) 3D Plus, a family ofproducts that provide osteoconductive nano-structured hydroxyapatite (“HA”) andan engineered extracellular matrix bioscaffold collagen carrier that mimics anatural bone growth solution.On January 18, 2022 we announced receipt of 510(k) clearance from the U.S. Foodand Drug Administration for the HOLO Portal surgical guidance system for usewithin lumbar spine procedures.The HOLO Portal surgical guidance system is designed to combine (i) advanced ARto assist the surgeon with an “X-ray vision”-like 3D overlay rendering of thepatient’s anatomy, (ii) automated image processing and modular spine levelidentification and segmentation of the patient’s anatomy to enhance navigation,and (iii) automatically suggesting a patient specific surgical plan. The HOLOPortal(TM) system’s AI is designed to recognize the different classes of anatomicalstructures and help the surgeon identify anatomy within complex areas of thespine.

The HOLO Portal system has been designed with unique set up process ofquickly establishing the synchronization between virtual images and thepatient’s real anatomy, a process called registration. The HOLO Portal surgicalguidance system is also designed to provide surgeons with real-timeperioperative information such as alerts and suggestions to assist the executionof the surgeon’s approved operative, decrease surgical complications, reducesurgical times, and improve patient outcomes. Following our first 510(k)clearance, we continue to commercialize the HOLO Portal surgical guidance systemin a limited market release for use in the lumbar spine, with plans to expand tothoracic and cervical spine and intracranial in the future.With respect to the HOLO AI technology platform, we plan to develop andcommercialize several next-generation features, including smart instrumentation,integration with robotic platforms, patient-specific 3D printed implants, anddiagnostic and predictive analytics.

This new generation of surgical deviceswill be designed with tracking technology intended to allow real-time 3Dvisualization and positioning of the instruments in the surgical field andautonomous safety features to aid in surgical precision and help avoid potentialdamage to surrounding tissue and neurological structures. We are designing HOLOAI technology to be integrated with existing robotic platforms to make them”smart” by identifying relevant anatomy. In addition, we are designing the HOLOAI platform with a software application to enable patient-specific implants withexact dimensions, shape, and contour based on a patient’s specific bone densityand height.

We are also working on a novel diagnostic and predictive analyticscapability using machine learning that leverages a large volume of patient datawith known outcomes to allow for autonomous identification of spinal pathology.We have aligned our core business principles with a focused business strategythat we believe will advance and scale our business with the ultimate goal ofdelivering on our promise to help improve surgical procedures and provide betterpatient outcomes. To support this effort, we have assembled a spine-industryexperienced executive leadership team to execute our growth strategy. Thisstrategy includes leveraging our technology platform to improve patient outcomesand drive adoption of our spinal hardware implants and biomaterials products,developing and commercializing an increased cadence of innovative spinalhardware implants and biomaterials products, validating our innovative productswith clinical evidence, growing our international business, and strategicallypursuing acquisition, license, and distribution opportunities.We currently market and sell our products to hospitals, ambulatory surgerycenters, and healthcare providers in the United States and in approximately 40countries worldwide.

Our U.S. sales organization consists of area salesdirectors and regional product specialists who oversee a network of independentspine and orthobiologics distributors who receive commissions for sales thatthey generate. Our international sales organization is composed of a salesmanagement team that oversees a network of direct sales representatives,independent spine and orthobiologics distributors, and stocking distributors.We plan to use our existing cash to fund our general corporate needs and are inthe process of initiating expense reduction plans to lower operating expensesand reduce our overall cash burden. Further, we are evaluating corporaterealignment programs to further streamline the organization, improve processesand lower future capital outlays moving into 2023.

Based on our current cashflow forecast, these cost containment programs will not be sufficient to meetour anticipated cash needs into the fourth quarter of 2023. In the interim, weare seeking additional funding through the issuance of equity or debt or otherfinancial instruments. Absent receipt of additional third-party financing, basedon our current cash flow forecast, the Company will not have adequate capitalresources to meet its current obligations as they 36——————————————————————————–become due into the fourth quarter of 2023, we may be required to seek bankruptcy protection of the courts, which could cause us to be delisted from the NASDAQ, further limiting our ability to obtain financing.Recent DevelopmentsReverse Stock SplitWe completed our l-for-30 Reverse Stock Split that became effective on May 16,2022.

Unless we indicate otherwise, all per share amounts and references tocommon shares and common share amounts in this Report reflect the Reverse StockSplit, and the accompanying financial statements and notes to the financialstatements give effect to the Reverse Stock Split.Disposition of Coflex and Cofix product linesSubsequent to December 31, 2022, Xtant acquired 100% of the issued andoutstanding equity of Surgalign SPV, from the Seller upon completion of theCoflex Transaction, which occurred on February 28, 2023. The aggregateconsideration paid in the Coflex Transaction for 100% of Surgalign SPV’s equitysecurities was £17.0 million in cash, which provided net cash of £14.8 millionto the Company. The Coflex Purchase Agreement contains customary representationsand warranties by the Company, Seller and Xtant.

As a result of the CoflexTransaction, Xtant acquired our Coflex and Cofix product lines in the UnitedStates and worldwide intellectual property rights therein. The Seller, SurgalignSPV and Xtant also entered into the Transition Services Agreement in connectionwith the Coflex Transaction pursuant to which the Seller has agreed to providecertain transition services to Xtant immediately after the closing for an agreedupon transition period.AcquisitionsSee Note 7 – Business Combinations and AcquisitionsCOVID-19As discussed in more detail above in Part I, Item 1, “Business” of this Form10-K, the coronavirus (“COVID-19”) pandemic and its variants has adverselyaffected our business. The consequences of the outbreak and impact on theeconomy continue to evolve and the full extent of the impact is uncertain as ofthe date of this filing.

The outbreak has already had, and continues to have, amaterial adverse effect on our business, operating results and financialcondition and has significantly disrupted our operations.Critical Accounting PoliciesThe preparation of our financial statements in accordance with accountingprinciples generally accepted in the United States (“GAAP”) often requires us tomake estimates and judgments that affect reported amounts. These estimates andjudgments are based on historical experience and assumptions that we believe tobe reasonable under the circumstances. Assumptions and judgments based onhistorical experience may provide reported results which differ from actualresults; however, these assumptions and judgments historically have not variedsignificantly from actual experience and we therefore do not expect them to varysignificantly in the future.Due to the COVID-19 pandemic, there has been uncertainty and disruption in theglobal economy and financial markets.

Our estimates or judgments as of March 30,2023 may change as new events occur and additional information is obtained.Accordingly, actual results could differ materially from our estimates orjudgements made under different assumptions or conditions.The accounting policies which we believe are “critical,” or require the most useof estimates and judgment, relate to the following items presented in ourfinancial statements: (1) Excess and Obsolete Inventory Valuation; (2) AccountsReceivable Allowances; (3) Long-Lived Assets; (4) Revenue Recognition; (5)Warrant Valuation; (6) Income Taxes; (7) Contingent Consideration Valuation and(8) Non-controlling interest.Excess and Obsolete Inventory Valuation. Our calculation of the amount ofinventory that is excess, obsolete, or will expire prior to sale has thefollowing components: 1) a consumption based component that compares historicalsales to inventory quantities on hand for our United States calculation andprojected sales to quantities on hand for our international calculation givenits wind down; 2) for expiring inventory we assess the risk related to inventorythat is near expiration by analyzing historical expiration trends to projectinventory that will expire prior to being sold; and 3) identifying product linesthat will be rationalized in the near future. Our demand-based consumption modelassumes that inventory will be sold 37——————————————————————————–on a first-in-first-out basis.

Our metal inventory does not expire and can bere-sterilized and sold; however, we assess quantities on hand, historical sales,projected sales, projected consumption, the number of forecasted years, winddown timing for rationalized product lines when calculating the estimate.Accounts Receivable Allowances. We maintain the allowance for estimated lossesresulting from the inability of our customers to make required payments. Theallowance represents the current estimate of lifetime expected credit lossesover the remaining duration of existing accounts receivable considering currentmarket conditions and supportable forecasts when appropriate.

The estimate is aresult of our ongoing evaluation of collectability, customer creditworthiness,historical levels of credit losses, and future expectations. Write-off activityand recoveries for the years were not material.Long-Lived Assets. We periodically review our long-lived assets for impairmentwhenever events or changes in circumstances indicate the carrying value of anasset may not be recoverable.

Recoverability is measured by a comparison of thecarrying amount to the net undiscounted cash flows expected to be generated bythe asset group. An impairment loss would be recorded for the excess of netcarrying value over the fair value of the asset impaired. The fair value isestimated based on expected discounted future cash flows or other methods suchas orderly liquidation value.

The results of impairment tests are subject tomanagement’s estimates and assumptions of projected cash flows and operatingresults. Changes in assumptions or market conditions could result in a change inestimated future cash flows and the likelihood of materially different reportedresults. Because our forecasted cash flow is negative, long-lived assets,including property and equipment and intangible assets subject to amortizationwere impaired and written down to their estimated fair values in 2022 and 2021.Revenue Recognition.

The Company recognizes revenue upon transfer of control ofpromised products in an amount that reflects the consideration it expects toreceive in exchange for those products. The Company typically transfers controlat a point in time upon shipment or delivery of the implants for direct sales,or upon implantation for sales of consigned inventory. The customer is able todirect the use of, and obtain substantially all of the benefits from, theimplant at the time the implant is shipped, delivered, or implanted,respectively based on the terms of the contract.The Company’s performance obligations consist mainly of transferring control ofimplants identified in the contracts.

The Company’s transaction price isgenerally fixed. Any discounts or rebates are estimated at the inception of thecontract and recognized as a reduction of the revenue. Some of the Company’scontracts offer assurance-type warranties in connection with the sale of aproduct to a customer.

Assurance-type warranties provide a customer withassurance that the related product will function as the parties intended becauseit complies with agreed-upon specifications. Such warranties do not represent aseparate performance obligation and are not material to the consolidatedfinancial statements.Warrant Valuation. The Company accounts for its warrants in accordance with ASC815-40, “Derivatives and Hedging-Contracts in Entity’s Own Equity” (“ASC 815”),under which the warrants did not meet the criteria for equity classification andthus were recorded as liabilities.

Since the warrants met the definition of aderivative in accordance with ASC 815, these warrants were measured at fairvalue at inception and will be remeasured at each reporting date in accordancewith ASC 820, “Fair Value Measurement,” with changes in fair value recognized inearnings in the period of change. The Company determined the fair value of itswarrants based on the Black Scholes Option Pricing Model.Income Taxes. We use the asset and liability method of accounting for incometaxes.

Deferred income taxes are recorded to reflect the tax consequences onfuture years for differences between the tax basis of assets and liabilities andtheir financial reporting amounts at each year-end based on enacted tax laws andstatutory tax rates applicable to the periods in which the differences areexpected to affect taxable income. Valuation allowances are established whennecessary to reduce deferred tax assets to amounts which are more likely thannot to be realized.Contingent Consideration Valuation. We account for the contingent considerationrelated to the Holo Acquisition as a liability in accordance with the guidanceof ASC 480, Distinguishing Liabilities from Equity, because the contingentconsideration represents a conditional obligation that has a fixed monetaryvalue known at inception and we may settle by issuing a variable number of ourequity shares.

The liability is recorded at its fair value at inception andshall be marked to market subsequently at the end of each reporting period, withany change recognized in the current earnings.Noncontrolling Interest. The Company’s consolidated noncontrolling interest iscomprised of INN. The Company evaluated whether noncontrolling interest issubject to redemption features outside of the Company’s control.

We classifiednoncontrolling interest that is currently redeemable for cash or probable ofbeing redeemable for cash in the future in the mezzanine section of theconsolidated balance sheet. Currently, the noncontrolling interest is notredeemable. It is only redeemable upon the occurrence of FDA approval andtherefore will not be remeasured at each reporting period until approval isobtained.

38——————————————————————————–Accounting Standard Update ConsiderationsTo date, there have been no recent accounting pronouncements not yet effective that we expect will have a material, or potential material, impact to our consolidated financial statements.Off Balance-Sheet ArrangementsAs of December 31, 2022, we had no off-balance-sheet arrangements, as defined in Item 303 of Regulation S-K.Results of OperationsThe following tables set forth, in both thousands of dollars and as a percentage of revenues, the results of our operations for the years indicated:Year Ended December 31, 2022 2021Statement of Operations Data:Revenues £ 81,979 100.0 % £ 90,500 100.0 %Costs of goods sold 41,691 50.9 29,775 32.9Gross profit 40,288 49.1 60,725 67.1Operating Expenses:General and administrative 95,888 117.0 104,460 115.7Severance and restructuring costs 1,148 1.4 208 -Research and development 15,736 19.2 13,888 15.3Gain on acquisition contingency (17,867) (21.8) (4,587) (5.1)Asset acquisition expenses – – 72,087 79.7Asset impairment and abandonments 5,352 6.5 12,195 13.5Transaction and financing expenses 19,391 23.7 3,689 4.1Total operating expenses 119,648 145.9 201,940 223.1Other operating income, net (898) (1.1) (3,932) (4.3)Operating loss (78,462) (95.7) (137,283) (151.7)Other expense (income) – netOther expense (income) – net 26 – (202) (0.2)Interest expense 1,009 1.2 – -Foreign exchange loss 978 1.2 1,447 1.6Change in fair value of warrant liability (24,827) (30.3) (14,736) (16.3)Total other income – net (22,814) (27.8) (13,491) (14.9)Loss before income tax provision (55,648) (67.9) (123,792) (136.8)Income tax benefit (1,043) (1.3) (886) (1.0)Net loss from continuing operations (54,605) (66.6) (122,906) (135.8)Discontinued operationsLoss from operations of discontinued operations – – (6,316) (7.0)Income tax benefit – – (2,674) (3.0)Net loss from discontinued operations – – (3,642) (4.0)Net loss (54,605) (66.6) (126,548) (139.8)Net loss applicable to noncontrolling interests – – 41,897 46.3Net loss applicable to Surgalign Holdings, Inc. £ (54,605) (66.6) £ (84,651) (93.5) 39——————————————————————————– For the Year Ended December 31, Percent Change 2022 2021 2022/2021 Revenues: Domestic £ 68,647 £ 77,927 (11.9) % International 13,332 12,573 6.0 % Total revenues £ 81,979 £ 90,500 (9.4) %2022 Compared to 2021Revenues – Total revenues decreased £8.5 million, or 9.4%, to £82.0 million forthe year ended December 31, 2022, compared to £90.5 million for the year endedDecember 31, 2021. The decrease in revenue was primarily related to thecontinued pricing pressures faced with our customers and the current market andeconomic conditions in the U.S and abroad. The impact of the global pandemic,which has led to fewer surgical procedures and hospital staffing shortagesthroughout the U.S., among other factors.Gross profit – Gross profit decreased £20.4 million or 33.7% to £40.3 millionfor the year ended December 31, 2022 compared to £60.7 million for the yearended December 31, 2021.

Gross profit percentage decreased by 18.0% to 49.1%from 67.1% for the year ended December 31, 2021. The decrease in gross profitand gross margin was primarily related to increases in our excess and obsoleteinventory calculation as a result of product rationalization initiatives. Thiswas coupled with a decrease in overall revenue year-over-year.Operating expenses – Total operating expenses decreased by £82.3 million or40.8% to £119.6 million for the year ended December 31, 2022 compared to£201.9 million for the year ended December 31, 2021.

The primary driver was a£72.1 million decrease in “Asset acquisition” expense related to the INNacquisition in 2021. Additionally, there was an £8.6 million decrease in”General and administrative” expenses caused by a reduction in spending throughcontinued simplification of the distribution and administrative infrastructure.Additionally, there was a decrease in “Asset impairment and abandonment” of£6.8 million due to impairment of the ERP system in 2021 and a reduction incapital expenditures during 2022. This was partially offset by an increase of£1.8 million in “Research and development” expenses in 2022 related to thecontinued development of the HOLOTM platform and obtaining regulatory approval,and also from an increase of £1.0 million in “Severance and restructuring costs”in 2022 associated with our restructuring plan.Net income loss from operations and per share amount – Total net loss fromoperations decreased £68.3 million or 55.6% to £54.6 million net loss for theyear ended December 31, 2022 from a net loss of £122.9 million for the yearended December 31, 2021.

Net loss per share decreased from £30.08 net loss pershare as of December 31, 2021 to £8.33 net loss per share as of December 31,2022. The main drivers of the decrease are identified within the operatingexpenses identified above and partially offset by the £10.1 million change inwarrant liability revaluation.Non-GAAP Financial MeasuresWe utilize certain financial measures that are important financial measures forus but are not financial measures calculated in accordance with GAAP. Thesefinancial measures are considered “non-GAAP” financial measures within themeaning of Regulation G and Item 10(e) of Regulation S-K promulgated by the SEC.We believe that non-GAAP financial measures provide an additional way of viewingaspects of our operations that, when viewed with the GAAP results, provide amore complete understanding of our results of operations and the factors andtrends affected our business.

These non-GAAP financial measures are also used byour management to evaluate financial results and to plan and forecast futureperiods. However, non-GAAP financial measures should be considered as asupplement to, and not as a substitute for, or superior to, the correspondingmeasures calculated in accordance with GAAP. Non-GAAP financial measures used byus may differ from the non-GAAP measures used by other companies, including ourcompetitors.To supplement our consolidated financial statements presented on a GAAP basis,we disclose non-GAAP net loss applicable to common shares, non-GAAP net loss perdiluted share, non-GAAP operating expenses, and non-GAAP gross profit, in eachcase adjusted for certain amounts.

In addition, we disclose EBITDA and AdjustedEBITDA, which are non-GAAP financial measures. The calculation of the tax effecton the adjustments between GAAP net loss applicable to common shares andnon-GAAP net loss applicable to common shares is based upon our estimated annualGAAP tax rate, adjusted to account for items excluded from GAAP net lossapplicable to common shares in calculating non-GAAP net loss applicable tocommon shares. Reconciliations of each of these non-GAAP financial measures tothe most directly comparable GAAP measures are included in the reconciliationsbelow: 40——————————————————————————–Non-GAAP Gross Profit, Adjusted: For the Year Ended December 31,(In thousands) 2022 2021Revenues £ 81,979 100.0 % £ 90,500 100.0 %Costs of goods sold 41,691 50.9 % 29,775 32.9 %Gross profit, as reported 40,288 49.1 % 60,725 67.1 %Inventory write-off 3,709 4.5 % – – %Product rationalization 13,822 16.9 % – – %Supplier prepayment write-off 180 0.2 % 3,000 3.3 %Inventory purchase price adjustment 1,678 2.0 % 2,036 2.2 %Non-GAAP gross profit, adjusted £ 59,677 72.8 % £ 65,761 72.7 %Non-GAAP Operating Expenses, Adjusted: For the Year Ended December 31,(In thousands) 2022 2021Operating Expenses £ 119,648 £ 201,940Non-cash stock-based compensation 4,634 5,212Gain on acquisition contingency (17,867) (4,587)Asset acquisition expenses – 72,087Bargain purchase gain – (90)Asset impairment and abandonments 5,352 12,195Transaction and financing expenses 19,391 3,689Severance and restructuring costs 1,148 208Non-GAAP operating expenses, adjusted* £ 106,990 £ 113,226Non-GAAP operating expenses, adjusted as a percent of revenues 130.5 % 125.1 %*Please note this reconciliation does not include HOLO Portal capitalized costs of £1.2 million and £0.0 million for the years ended December 31, 2022 and 2021.Reconciliation of Net Loss Applicable to Common Shares and Net Loss Per DilutedShare to Adjusted Net Loss Applicable to Common Shares and Adjusted Net Loss PerDiluted Share 41——————————————————————————– For the Year Ended December 31, 2022 2021 Net Loss Net Loss Applicable to Amount Per Applicable to Amount Per(In thousands) Common Shares Diluted Share Common Shares Diluted Share Net loss from continuing operations, as reported £ (54,605) £ (8.33) £ (122,906) £ (30.08)Change in fair value of warrant liability (24,827) (3.79) (14,736) (3.61)Gain on acquisition contingency (17,867) (2.73) (4,587) (1.12)Non-cash stock-based compensation 4,634 0.71 5,212 1.28Foreign exchange loss 978 0.15 1,447 0.35Supplier prepayment write-off 180 0.03 3,000 0.73Asset acquisition expenses – – 72,087 17.64Bargain purchase gain – – (90) (0.02)Other operating income (898) (0.14) (3,932) (0.96)Asset impairment and abandonments 5,352 0.82 12,195 2.98Transaction and financing expenses 19,391 2.96 3,689 0.90Inventory purchase price adjustment 1,678 0.26 2,036 0.50Inventory write-off 3,709 0.57 – -Product rationalization 13,822 2.11 – -Severance and restructuring costs 1,148 0.18 208 0.05Tax effect on other adjustments 33 0.01 (28) (0.01)Non-GAAP net loss applicable to common shares,adjusted* £ (47,272) £ (7.19) £ (46,405) £ (11.37)*Please note this reconciliation does not include HOLO Portal capitalized costs of £1.2 million and £0.0 million for the years ended December 31, 2022 and 2021. 42——————————————————————————–Reconciliation of Net Loss Applicable to Common Shares to Adjusted EBITDA For the Twelve Months Ended December31,(In thousands) 2022 2021Net loss income for continuing operations £ (54,605) £ (122,906)Interest expense, net 1,009 -Provision (benefit) for income taxes (1,043) (886)Depreciation 1,973 2,457EBITDA (52,666) (121,335)Reconciling items impacting EBITDANon-cash stock based compensation 4,634 5,212Foreign exchange loss 978 1,447Other reconciling items *Inventory write-off 3,709 -Supplier prepayment write-off 180 3,000Product rationalization 13,822 -Other operating income (898) (3,932)Inventory purchase price adjustment 1,678 2,036Asset acquisition expenses – 72,087Change in fair value of warrant liability (24,827) (14,736)Gain on acquisition contingency (17,867) (4,587)Bargain purchase gain – (90)Asset impairment and abandonments 5,352 12,195Transaction and financing expenses 19,391 3,689Severance and restructuring costs 1,148 208Adjusted EBITDA* £ (45,366) £ (44,806)Adjusted EBITDA as a percent of revenues (55.3) % (49.5) %*Please note this reconciliation does not include HOLO Portal capitalized costs of £1.2 million and £0.0 million for the years ended December 31, 2022 and 2021.The following are explanations of the adjustments that management excluded aspart of the non-GAAP measures for the years ended December 31, 2022 and 2021.Management removes the amount of these costs from our operating results tosupplement a comparison to our past operating performance.2022 and 2021 Non-cash stock-based compensation – These costs relate to expenseamortization for all stock-based awards made to employees and directors,including restricted stock awards, restricted stock units, stock options and theemployee stock purchase plan purchase rights.2022 and 2021 Foreign exchange loss – These costs relate to the process of remeasuring international activity into the Company’s functional currency.2022 and 2021 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 Inventory purchase price adjustment – These costs relate to thepurchase price effects of acquired Paradigm inventory that was sold during theyears ended December 31, 2022 and 2021.

43——————————————————————————–2022 and 2021 Transaction and financing expenses – These costs relate to professional fees associated with financings and issuance costs for the registered direct offering and professional fees associated with the acquisition of INN, Holo Surgical, and Prompt Prototypes, LLC.2022 and 2021 Tax effect on other adjustments – These adjustments represent the tax effects of the non-GAAP measures for the respective years.2022 and 2021 Severance and restructuring costs – 2022 costs relate to employeerelated severance costs as a result of the Company’s organization restructuringplan.

2021 costs relate to the reduction of our organizational structure,primarily driven by simplification of our Marquette, MI location.2022 and 2021 Other operating income, net – Gain relates to the Company’s inventory settlement with OEM.2022 Inventory write-off – These costs relate to inventory write-offs associated with reduced sales forecasts applied for the Company’s continuing inventory product portfolio.2022 Product rationalization – These costs relate to inventory write downs associated with the Company’s product portfolio rationalization initiative and wind down of the international business.2021 Bargain purchase gain – Gain related to our acquisition of Prompt Prototypes, LLC.2021 Supplier prepayment write-off – Cost related to the write-off of prepaid royalty payments that the Company assessed would not be met in future years.2021 Asset acquisition expenses – The asset acquisition expenses related to the INN acquisition in 2021.Non-GAAP 2022 Compared to Non-GAAP 2021Non-GAAP gross profit – Non-GAAP gross profit decreased £6.1 million or 9.3% to£59.7 million for the year ended December 31, 2022 compared to £65.8 million forthe year ended December 31, 2021. Gross profit percentage increased by 0.1% to72.8% from 72.7% for the year ended December 31, 2022 and 2021, respectively.The decrease in gross profit was primarily related to lower revenue for thecomparable 2022 and 2021 periods, while the increase in gross profit percentagewas primarily related to an improved product mix.Non-GAAP operating expenses – Total non-GAAP operating expenses decreased by£6.2 million or 5.5% to £107.0 million for the year ended December 31, 2022compared to £113.2 million for the year ended December 31, 2021. The decreasewas primarily related to a £8.6 million decrease in “General and administrative”expenses caused by a reduction in spending through continued simplification ofthe Company’s distribution and administrative infrastructure, with a£1.8 million partial offset in “Research and development” expenses related tothe continued development of the HOLOTM platform and obtaining regulatoryapproval.Non-GAAP Net loss from operations and Non-GAAP per share amount – Total net lossfrom operations increased £0.9 million or 1.9% to £47.3 million for the yearended December 31, 2022 from a £46.4 million net loss for the year endedDecember 31, 2021.

Non-GAAP net loss per share decreased from £11.37 as ofDecember 31, 2021 to net loss per share of £7.19 as of December 31, 2022. Themain drivers of the increase are caused by the decrease non-GAAP gross profitexplained above, decrease in non-GAAP operating expenses explained above, and a£1.0 million increase in interest expense due to the debt issued related to theINN acquisition.Adjusted EBITDA – Total adjusted EBITDA increased £0.6 million or 1.2% to a£45.4 million loss for the year ended December 31, 2022 from a £44.8 millionloss for the year ended December 31, 2021. The main drivers of the increase arecaused by the decrease in non-GAAP operating expenses explained above.Liquidity and Going ConcernAs of December 31, 2022, we had approximately £16.3 million in cash and £20.9million in trade accounts payable and accrued expense liabilities, all of whichwere current.

We plan to use our existing cash to fund our general corporateneeds. In December 2022, we implemented a restructuring plan based on a thoroughreview of our organizational structure, processes, costs, and product portfolio,which we expect will lower operating expenses and reduce our overall cashburden. We believe this corporate realignment program will streamline theorganization, improve processes and result in a significant reduction inoperating expenses, significantly decrease our current operating cash flow, andleading to a lower cost basis to operate in 2023.

In addition, to continue toincrease our overall cash position, we sold our U.S. Coflex 44——————————————————————————–business in the first quarter of 2023 for total consideration of £17.0 millionwhich provided net cash of £14.8 million to the Company following transactioncosts. Based on the current execution of the strategy and our current cash flowforecast, we expect our current net working capital available will be sufficientto satisfy our needs into the fourth quarter of 2023.

We are currently executingon our overall corporate strategy which includes the possibility of furthercorporate alignment programs, additional financing events through debt orequity, the potential sale of certain or substantially all assets, a sale of theCompany or a potential merger with another entity. There is no assurance that wewill be successful in further implementing these initiatives. Absent receipt ofadditional funding, based on our current cash flow forecast, we do not expect tohave adequate capital resources to meet our anticipated cash needs and ourcurrent obligations as they become due into the fourth quarter of 2023, whichcould require the Company to seek protection through a bankruptcy filing.In the interim, if we seek to raise additional capital through debt or equity orother financial instruments, there is no assurance that we will be able toobtain financing in a timely manner or on acceptable terms to meet any liquidityneeds.

If we are unable to secure additional funding and successfully implementour planned corporate realignment programs designed to significantly reduceexpenses, we may be required to seek protection under applicable bankruptcy lawsand/or liquidate or reorganize our assets, which could cause us to be delistedfrom the NASDAQ, further limiting our ability to obtain financing.Financing ActivitiesOn November 13, 2022, we entered into a securities purchase agreement with asingle institutional investor pursuant to which we agreed to sell, in aregistered direct offering (the “2022 Registered Direct Offering”), 740,000shares of our common stock, pre-funded warrants exercisable for up to anaggregate of 5,260,000 shares of common stock at an exercise price of £0.001 pershare, Series A warrants to purchase an aggregate of up to 6,000,000 shares ofcommon stock that are exercisable through November 13, 2027 at an exercise priceof £1.8150 per share, and Series B warrants to purchase an aggregate of up to1,500,000 shares of common stock that are exercisable through November 13, 2025at an exercise price of £1.8150 per share. We received gross proceeds of £12.0million associated with the 2022 Registered Direct Offering. Also in connectionwith the 2022 Registered Direct Offering, we issued placement agent warrants topurchase an aggregate of up to 360,000 shares of common stock that areexercisable through November 13, 2027 at an exercise price of £2.5000 per share.On February 15, 2022, we issued and sold in an underwritten public offering1,285,507 shares of our common stock and 163,768 of pre-funded warrants topurchase common stock.

In addition, the Company issued warrants to purchase upto an aggregate of 1,086,956 shares of common stock that are exercisable throughFebruary 15, 2027. Also in connection with the offering, the Company issuedplacement agent warrants to purchase an aggregate of up 86,956 shares of commonstock that are exercisable through February 15, 2027. Finally, the Companygranted the underwriters the option for a period of 30 days from February 15,2022 to purchase up to 217,391 additional shares of the Company’s common stockand/or warrants to purchase up to 163,043 shares of the Company’s common stock.The Underwriters did not exercise the option to purchase the common shares fromthe Company, but they did exercise the option to purchase the warrants whichhave not been converted to common shares as of December 31, 2022.

We receivedgross proceeds of £20.0 million from the offering.On June 14, 2021, we issued and sold in a registered direct offering anaggregate of 966,183 shares of our common stock and investor warrants topurchase up to an aggregate of 966,183 shares of common stock. The Company, alsoin connection with the direct offering, issued placement agent warrants topurchase an aggregate of up to 57,971 shares of our common stock that areexercisable through June 14, 2024. We received gross proceeds of £50.0 millionfrom the offering.On February 1, 2021, we closed a public offering and sold a total of 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 £44.5 million from the offering. 45——————————————————————————–Commitments & ContingenciesThe following table provides a summary of our operating lease obligations and other significant obligations as of December 31, 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 (1) 66,874 3,955 11,473 11,993 39,453Purchase obligations (2) 24,460 13,531 10,929 – -Milestone payments (3) 34,328 4,377 29,951 – -Total £ 125,662 £ 21,863 £ 52,353 £ 11,993 £ 39,453(1)These represent our operating lease commitments including the commitments related to the San Diego Lease.(2)These amounts consist of contractual obligations for capital expenditures,annual minimums with suppliers, and certain open purchase orders with Aziyo, andpurchase commitments with RTI Surgical.(3)These amounts relate to the future milestone payments related to the Holo Surgical acquisition and the forward contracts related to the INN acquisition.Cash Flow Analysis – Financing RiskWe expect to devote significant efforts to raise capital, restructure ourindebtedness and identify and evaluate potential strategic alternatives,however; there can be no assurance that we will be successful in obtainingcapital sufficient to meet our operating needs on terms or a timeframeacceptable to us or at all. Further, in the event that market conditionspreclude our ability to consummate such a financing or capital-raisingtransaction, we may be required to evaluate additional alternatives inrestructuring our business and our capital structure. Any failure in theseefforts could force us to delay, limit or terminate our operations, makereductions in our workforce, liquidate all or a portion of our assets or pursueother strategic alternatives, and/or seek protection under the provisions of theU.S.

Bankruptcy Code.Although we have estimated our liquidity requirements based on assumptions weconsider to be reasonable, we may need additional cash resources due to changedbusiness conditions or other developments, including supply chain challenges,disruptions due to COVID-19, competitive pressures, and regulatory developments,among other developments. Our budget projections may be subject to cost overrunsfor reasons outside of our control, which would pose a risk to achieve positivecash flow.We have based our estimate of liquidity on assumptions that may prove to bewrong, and we could use our available capital resources sooner than we currentlyexpect. Our cash flows may fluctuate and are difficult to forecast and willdepend on many factors mentioned elsewhere in this discussion and analysis.

Ifwe require additional equity or debt financing from outside sources, we may notbe able to raise it on terms acceptable to us, or at all, and we may enter intodefinitive agreements with respect to financing transactions that are unable tobe completed. If we are unable to raise additional capital, our business,financial condition and results of operations would be harmed.Working capital comparison 2022 Compared to 2021Our working capital at December 31, 2022 decreased £17.0 million to £35.6million from £52.6 million at December 31, 2021, primarily as a result of thedecrease in sales year over year. As of December 31, 2022, we had £16.3 millionof cash and cash equivalents.

For the year ended December 31, 2022, the Companyused approximately £52.1 million of cash in its operations, primarily related tothe execution of its digital health strategy.At December 31, 2022, we had 72 days of revenues outstanding in trade accountsreceivable, a decrease of 5 days compared to December 31, 2021. The decrease isprimarily due to improved collection efforts in addition to reduced sales ascompared to the prior period.At December 31, 2022, excluding the purchase accounting step-up of Paradigm inventory, we had 254 days of inventory on hand, a decrease of 170 days compared to December 31, 2021. The decrease in inventory days is a result of 46——————————————————————————–the product rationalization initiative.

For continuing product lines, we believethat our inventory levels will be adequate to support our on-going operationsfor the next twelve months.At December 31, 2022, our foreign subsidiaries held £2.0 million in cash. Weintend to indefinitely reinvest the earnings of our foreign subsidiaries. If wewere to repatriate indefinitely reinvested foreign funds, we would not besubject to additional U.S. federal income tax; however, we would be required toaccrue and pay any applicable withholding tax and U.S. state income taxliabilities.

We do not believe that this policy of indefinitely reinvesting theearnings of our foreign subsidiaries will have a material adverse effect on thebusiness as a whole.Going ConcernThe accompanying consolidated financial statements of the Company have beenprepared assuming the Company will continue as a going concern and in accordancewith generally accepted accounting principles in the United States of America.The going concern basis of presentation assumes that we will continue inoperation one year after the date these financial statements are issued, and wewill be able to realize our assets and discharge our liabilities and commitmentsin the normal course of business. However, as discussed below, management hasconcluded that substantial doubt exists with respect to the Company’s ability tocontinue as a going concern within one year after the date the consolidatedfinancial statements are issued.As of December 31, 2022, the Company had cash of £16.3 million and anaccumulated deficit of £624.2 million. For the year ended December 31, 2022, theCompany had a loss from continuing operations of £54.6 million and a net lossapplicable to Surgalign Holdings, Inc. of £54.6 million.

The Company hasincurred losses from operations in the previous two fiscal years and did notgenerate positive cash flows from operations in fiscal year 2022 nor in 2021.The Company expects net operating losses for the full year 2023 as it works tocommercialize its HOLO Portal(TM) surgical guidance system and further develop itsHOLO(TM) AI platform and spinal device product lines.On November 13, 2022, we entered into a securities purchase agreement with asingle institutional investor pursuant to which we agreed to sell, in aregistered direct offering (the “2022 Registered Direct Offering”), 740,000shares of our common stock, pre-funded warrants exercisable for up to anaggregate of 5,260,000 shares of common stock, Series A warrants to purchase anaggregate of up to 6,000,000 shares of common stock that are exercisable throughNovember 13, 2027, and Series B warrants to purchase an aggregate of up to1,500,000 shares of common stock that are exercisable through November 13, 2025.We received gross proceeds of £12.0 million associated with the purchaseagreement. Also in connection with the 2022 Registered Direct Offering, weissued placement agent warrants to purchase an aggregate of up to 360,000 ofcommon stock that are exercisable through November 13, 2027.On February 15, 2022, we issued and sold in an underwritten public offering1,285,507 shares of our common stock and 163,768 of pre-funded warrants topurchase common stock. In addition, the Company issued warrants to purchase upto an aggregate of 1,086,956 shares of common stock that are exercisable throughFebruary 15, 2027.

Also in connection with the offering, the Company issuedplacement agent warrants to purchase an aggregate of up to 86,956 shares ofcommon stock that are exercisable through February 15, 2027. Finally, theCompany granted the underwriters the option for a period of 30 days fromFebruary 15, 2022 to purchase up to 217,391 additional shares of the Company’scommon stock and/or warrants to purchase up to 163,043 shares of the Company’scommon stock. The Underwriters did not exercise the option to purchase thecommon shares from the Company, but they did exercise the option to purchase thewarrants which have not been converted to common shares as of December 31, 2022.We received gross proceeds of £20.0 million from the offering.On June 14, 2021, we issued and sold in a registered direct offering anaggregate of 966,183 shares of our common stock and investor warrants topurchase up to an aggregate of 966,183 shares of common stock.

The Company, alsoin connection with the direct offering, issued placement agent warrants topurchase an aggregate of up to 57,971 shares of our common stock that areexercisable through June 14, 2024. We received gross proceeds of £50.0 millionfrom the offering.On February 1, 2021, we closed a public offering and sold a total of 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 £44.5 million from the offering.The Company is projecting it will continue to generate significant negativeoperating cash flows over the next 12-months and beyond.

In management’sevaluation of the going concern conclusion we considered the following: i)supply chain and labor issues, potential of a COVID-19 or related variantresurgence, inflation, and recent market volatility; ii) negative cash flowsthat are projected over the next 12-month period; iii) probability of payment ofpotential milestone 47——————————————————————————–payments related to the Holo Surgical and INN acquisitions should any of themilestones be achieved; iv) INN seller notes with an aggregate amount of £10.6million due to the seller of INN on December 31, 2024; and v) various supplierminimum purchase agreements. The Company’s operating plan for the next 12-monthperiod also includes continued investments in its product pipeline that requireadditional financings, including digital health, its digital health products,and certain hardware assets.Historically, the Company has successfully funded its cash requirements withcapital raised through financings and/or asset sales and intends to continue topursue those paths to address cash shortfalls. We completed the CoflexTransaction for £17.0 million gross funds and net cash of £14.8 million to theCompany.Even with this sale, absent receipt of additional third-party funding and basedon our current cash flow forecast, the Company does not expect to have adequatecapital resources to meet its current obligations as they become due into thefourth quarter of 2023.

The Company’s ability to meet its current obligations asthey become due over the next twelve months and to be able to continue with itsoperations will depend on obtaining additional capital and executing its currentcorporate strategy. No assurance can be given that any of these actions will becompleted. If the Company is unable to secure additional funding andsuccessfully implement its planned corporate realignment programs designed tosignificantly reduce expenses, the Company may be required to seek protectionunder applicable bankruptcy laws and/or liquidate or reorganize its assets,which could cause us to be delisted from the NASDAQ, further limiting ourability to obtain financing.In consideration of the inherent risks and uncertainties and the Company’sforecasted negative cash flows as described above, management has concluded thatsubstantial doubt exists with respect to the Company’s ability to continue as agoing concern within one year after the date the consolidated financialstatements are issued.

Management continually evaluates plans to raiseadditional debt and/or equity financing and will continue to attempt to curtaildiscretionary expenditures in the future; however, in consideration of the risksand uncertainties mentioned, such plans cannot be considered probable ofoccurring at this time.The recoverability of a major portion of the recorded asset amounts shown in theCompany’s accompanying consolidated balance sheets is dependent upon continuedoperations of the Company, which in turn is dependent upon the Company’s abilityto meet its funding requirements on a continuous basis to maintain existingfinancing to succeed in its future operations.

The Company’s consolidatedfinancial statements do not include any adjustments relating to therecoverability and classification of recorded asset amounts and classificationof liabilities that might be necessary should the Company be unable to continuein existence.Impact of InflationInflation generally affects us by increasing our cost of labor, equipment andprocessing tools and supplies.

We do not believe that the relatively low ratesof inflation experienced in the United States since the time we began operationshave had any material effect on our business.(C) Edgar Online, source Glimpses