Form 8-K/A
true0001760173 0001760173 2021-12-30 2021-12-30
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) December 30, 2021
SURGALIGN HOLDINGS, INC.
(Exact Name of Registrant as Specified in its Charter)
 
Delaware
 
001-38832
 
83-2540607
(State or Other Jurisdiction
of Incorporation)
 
(Commission
File Number)
 
(IRS Employer
Identification No.)
520 Lake Cook Road, Suite 315, Deerfield, Illinois
 
60015
(Address of Principal Executive Offices)
 
(Zip Code)
Registrant’s telephone number, including area code:
(224303-4651
(Former Name or Former Address, if Changed Since Last Report)
Check the appropriate box below if the Form
8-K
filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
 
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
 
Soliciting material pursuant to Rule
14a-12
under the Exchange Act (17 CFR
240.14a-12)
 
Pre-commencement
communications pursuant to Rule
14d-2(b)
under the Exchange Act (17 CFR
240.14d-2(b))
 
Pre-commencement
communications pursuant to Rule
13e-4
(c) under the Exchange Act (17 CFR
240.13e-4(c))
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
Trading
Symbol
 
Name of exchange
on which registered
common stock, $0.001 par value
 
SRGA
 
Nasdaq Global Select Market
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (17 CFR §230.405) or Rule
12b-2
of the Securities Exchange Act of 1934 (17 CFR
§240.12b-2).
Emerging growth company 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Explanatory Note
On January 5, 2022, Surgalign Holdings, Inc., a Delaware corporation (the “
Company
”), filed with the Securities and Exchange Commission a Current Report on Form
8-K
(the “
Initial Form
8-K
”) reporting that on December 30, 2021, the Company completed the acquisition (the “
Acquisition
”) of
forty-two
percent (42%) of the issued and outstanding equity interests of Inteneural Networks Inc., a Delaware corporation (“
INN
”), pursuant to that certain Stock Purchase Agreement, dated as of December 30, 2021, by and among the Company, INN, Dearborn Capital Management LLC, Neva, LLC, Krzysztof Siemionow, MD, PhD and Pawel Lewicki, PhD.
This Current Report on Form
8-K/A
is being filed to amend the Initial Form
8-K
to provide the financial statements and the pro forma financial information described below in accordance with the requirements of Item 9.01 of Form
8-K.
The pro forma financial information included in this Current Report on Form
8-K/A
has been presented for informational purposes only, as required by Form
8-K.
It does not purport to represent the actual results of operations that the Company and INN would have achieved had the companies been combined during the periods presented in the pro forma financial information and is not intended to project the future results of operations that the combined company may achieve following the Acquisition. Except as described in this Current Report on Form
8-K/A,
the Initial Form
8-K
remains unchanged.
Item 9.01. Financial Statements and Exhibits.
(a) Financial Statements of Businesses Acquired.
The audited consolidated balance sheets of INN as of December 31, 2020 and 2019, and the audited consolidated statements of operations, stockholders’ equity and cash flows of INN for the years ended December 31, 2020 and 2019, and related notes are included as Exhibit 99.1 to this Form
8-K/A.
The unaudited consolidated balance sheets of INN as of September 30, 2021 and 2020, and the unaudited consolidated statement of operations, stockholders’ equity and cash flows of INN for the nine months ended September 30, 2021 and 2020, and related notes are included as Exhibit 99.2 to this Form
8-K/A.
(b) Pro Forma Financial Information.
The unaudited pro forma condensed combined statement of operations of the Company for the year ended December 31, 2021 and related notes, which give pro forma effect to the Acquisition as if it had occurred on January 1, 2021, are included as Exhibit 99.3 to this Form
8-K/A.
(d) Exhibits.
 
23.1
  
99.1
  
99.2
  
99.3
  
104
  
Cover Page Interactive Data File (embedded within the Inline XBRL document).

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
 
    SURGALIGN HOLDINGS, INC.
Date: March 18, 2022     By:  
/s/ Dave Lyle
    Name: Dave Lyle
    Title: Chief Financial Officer
EX-23.1

Exhibit 23.1

 

LOGO

Consent of Independent Registered Public Accounting Firm

We consent to the inclusion in the Registration Statement on Form 8-K/A of Surgalign Holdings, Inc. of our report dated March 15, 2022, relating to the consolidated financial statements of Inteneural Networks Inc and to the reference to our Firm under the caption Experts.

BAKER TILLY US, LLP

/s/ Baker Tilly US, LLP

Chicago, Illinois

March 16, 2022

 

 

    

Baker Tilly US, LLP, trading as Baker Tilly, is a member of the global network of Baker Tilly International Ltd., the members of which are separate and independent legal entities.

EX-99.1

Exhibit 99.1

Inteneural Networks Inc. and Subsidiary

Consolidated Financial Statements

December 31, 2020 and 2019


Inteneural Networks Inc. and Subsidiary

 

Table of Contents

December 31, 2020 and 2019

 

         Page    

Independent Auditors’ Report

   1

Consolidated Financial Statements

  

Consolidated Balance Sheets

   3

Consolidated Statements of Operations

   4

Consolidated Statements of Stockholders’ Equity

   5

Consolidated Statements of Cash Flows

   6

Notes to Consolidated Financial Statements

   7


LOGO

Independent Auditors’ Report

To the Stockholders and Board of Directors of

Inteneural Networks Inc. and Subsidiary

Opinion

We have audited the consolidated financial statements of Inteneural Networks Inc and Subsidiary (the Company), which comprise the consolidated balance sheets as of December 31, 2020 and 2019 and the related consolidated statements of income, changes in stockholders’ equity and cash flows for the years then ended and the related notes to the consolidated financial statements.

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of Inteneural Networks Inc and Subsidiary as of December 31, 2020 and 2019 and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

Basis for Opinion

We conducted our audits in accordance with auditing standards generally accepted in the United States of America (GAAS). Our responsibilities under those standards are further described in the Auditors’ Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are required to be independent of Inteneural Networks Inc and Subsidiary and to meet our other ethical responsibilities, in accordance with the relevant ethical requirements relating to our audits. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Responsibilities of Management for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America and for the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about Inteneural Networks Inc and Subsidiary’s ability to continue as a going concern within one year after the date that the financial statements are available to be issued.

Baker Tilly US, LLP, trading as Baker Tilly, is a member of the global network of Baker Tilly International Ltd., the members of which are separate and independent legal entities.

 

1


Auditors’ Responsibilities for the Audit of the Consolidated Financial Statements

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with GAAS will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the consolidated financial statements.

In performing an audit in accordance with GAAS, we:

 

   

Exercise professional judgment and maintain professional skepticism throughout the audit.

 

   

Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error and design and perform audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements.

 

   

Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of Inteneural Networks Inc and Subsidiary’s internal control. Accordingly, no such opinion is expressed.

 

   

Evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluate the overall presentation of the consolidated financial statements.

 

   

Conclude whether, in our judgment, there are conditions or events, considered in the aggregate, that raise substantial doubt about Inteneural Networks Inc and Subsidiary’s ability to continue as a going concern for a reasonable period of time.

We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings and certain internal control–related matters that we identified during the audit.

/s/ BAKER TILLY US, LLP

Chicago, Illinois

March 15, 2022

 

2


Inteneural Networks Inc. and Subsidiary

 

Consolidated Balance Sheets

December 31, 2020 and 2019

 

     2020      2019  
Assets              

Current Assets

     

Cash

   $ 6,283      $ 3,574  

Other current assets

     4,328        7,678  
  

 

 

    

 

 

 

Total current assets

     10,611        11,252  
  

 

 

    

 

 

 

Property and Equipment, Net

     7,715        11,080  

Intangible assets

     31,775        17,680  
  

 

 

    

 

 

 

Total assets

   $ 50,101      $ 40,012  
  

 

 

    

 

 

 
Liabilities and Stockholders’ Equity              

Accrued expenses

   $ 15,732      $ 7,556  
  

 

 

    

 

 

 

Total current liabilities

     15,732        7,556  

Stockholders’ Equity

     

Common stock

     1        1  

.0001 par value

     

10,000 shares authorized

     

10,000 shares issued and outstanding

     

Additional paid-in capital

             388,911                216,799  

Accumulated deficit

       (354,543)          (184,344)  
  

 

 

    

 

 

 

Total stockholders’ equity

     34,369        32,456  
  

 

 

    

 

 

 

Total liabilities and stockholders’ equity

   $ 50,101      $ 40,012  
  

 

 

    

 

 

 

 

See notes to financial statements

 

3


Inteneural Networks Inc. and Subsidiary

 

Consolidated Statements of Operations

Years Ended December 31, 2020 and 2019

 

     2020      2019  

Revenue

   $      $ -  

Costs of Goods Sold

             
  

 

 

    

 

 

 

Gross profit

             

Operating income

             
  

 

 

    

 

 

 

Operating Expenses

     

General and administrative expenses

             

Research and development costs

             159,814                159,079  

Depreciation and amortization expense

     8,896        5,058  
  

 

 

    

 

 

 

Total operating expenses

     168,710        164,137  
  

 

 

    

 

 

 

Operating loss

     (168,710)        (164,137)  
  

 

 

    

 

 

 

Other expense

     (1,489)        (1,769)  
  

 

 

    

 

 

 

Net other expense

     (1,489)        (1,769)  
  

 

 

    

 

 

 

Net loss

   $ (170,199)      $ (165,906)  
  

 

 

    

 

 

 

 

See notes to financial statements

 

4


Inteneural Networks Inc. and Subsidiary

 

Consolidated Statements of Stockholders’ Equity

Years Ended December 31, 2020 and 2019

 

         Common    
Stock
     Additional
 Paid-in Capital 
       Accumulated  
Deficit
     Total
 Stockholders’ 

 

Equity

 

Balances, January 1, 2019

   $ 1      $ 34,999      $ (18,438)      $ 16,562  

2019 net loss

     -        -        (165,906)        (165,906)  

Stockholder contribution

     -        181,800        -        181,800  
  

 

 

    

 

 

    

 

 

    

 

 

 

Balances, December 31, 2019

     1        216,799        (184,344)        32,456  

2020 net loss

     -        -        (170,199)        (170,199)  

Stockholder contribution

     -        172,112        -        172,112  
  

 

 

    

 

 

    

 

 

    

 

 

 

Balances, December 31, 2020

   $ 1      $ 388,911      $ (354,543)      $ 34,369  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

See notes to financial statements

 

5


Inteneural Networks Inc. and Subsidiary

 

Consolidated Statements of Cash Flows

Years Ended December 31, 2020 and 2019

 

     2020      2019  

Cash Flows From Operating Activities

     

Net loss

   $ (170,199)      $ (165,906)  

Adjustments to reconcile net loss to net cash flows used in operating activities:

     

Depreciation and amortization

     8,896        5,058  

Other current assets

     3,350        10,519  

Accrued expenses

     8,176        (1,599)  
  

 

 

    

 

 

 

Net cash flows used in operating activities

     (149,777)        (151,928)  
  

 

 

    

 

 

 

Cash Flows From Investing Activities

     

Capital expenditures

     (19,626)        (33,818)  
  

 

 

    

 

 

 

Cash Flows From Financing Activities

     

Contributions by stockholders

             172,112                181,800  
  

 

 

    

 

 

 

Net cash flows from financing activities

     172,112        181,800  
  

 

 

    

 

 

 

Net change in cash and cash equivalents

     2,709        (3,946)  

Cash, Beginning

     3,574        7,520  
  

 

 

    

 

 

 

Cash, Ending

   $ 6,283      $ 3,574  
  

 

 

    

 

 

 

 

See notes to financial statements

 

6


Inteneural Networks Inc. and Subsidiary

 

Notes to Financial Statements

December 31, 2020 and 2019

 

1.

Summary of Significant Accounting Policies

Nature of Operations

Inteneural Networks Inc and its subsidiary (collectively the Company) is a medical high-tech company, specializing in artifical inteligence and big-data-learning analysis of brain imaging.

Principles of Presentation

The accompanying consolidated financial statements include the accounts of Inteneural Networks Inc and its wholly owned subsidiary Inteneural Networks Polska sp. Zoo. Significant intercompany accounts and transactions have been eliminated.

Foreign Currency Translation

The local currency is the functional currency for the Company’s foreign subsidiary. Expenses allocated to the Company by the Parent are translated at the weighted-average exchange rates for the year.

Cash

The Company defines cash and cash equivalents as highly liquid, short-term investments with a maturity at the date of acquisition of three months or less.

Property and Equipment

Property and equipment are stated at cost. Major expenditures for property and equipment are capitalized. Maintenance, repairs and minor renewals are expensed as incurred. When assets are retired or otherwise disposed of, their costs and related accumulated depreciation are removed from the accounts and resulting gains or losses are included in income.

Property and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful lives. For income tax reporting purposes, depreciation is calculated using applicable accelerated methods.

Depreciation

Depreciation is computed on individual assets using the straight-line method over estimated economic useful lives.

For income tax reporting purposes, depreciation is calculated using applicable accelerated methods.

Intangible Assets

Internally-developed intangibles are carried at cost of expenses incurred. Internally-developed patents are amortized over their estimated useful life.

Impairment of Long-Lived Assets

The Company reviews intangible assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of an asset may not be fully recoverable. An impairment loss would be recognized when the estimated future cash flows from the use of the asset are less than the carrying amount of that asset. To date, there have been no such losses.

 

7


Inteneural Networks Inc. and Subsidiary

 

Notes to Financial Statements

December 31, 2020 and 2019

 

Research and Development Costs

Research and development costs are expensed in the period incurred. These costs, representing raw materials, engineering salaries, fringe benefits, other direct expenses and a portion of the Company’s overhead, are included in the accompanying consolidated statements of operations, within operating expenses. Research and development expenses were $159,814 and $159,079 for the years ended December 31, 2020 and 2019, respectively.

Income Taxes

Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes resulting from temporary differences. Such temporary differences result from differences in the carrying value of assets and liabilities for tax and financial reporting purposes.

Temporary differences arise principally from the use of the allowance method of bad debt recognition for financial reporting purposes and the direct write-off method for income tax purposes; differences in depreciation methods used for book and tax purposes; capitalization of certain handling, storage and administrative expenses for income tax purposes only; differences in required methods for reporting pension expense; timing of deductions of contracts payable to former officers; and recognition of an allowance for obsolete inventory for financial reporting purposes only. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Recent Accounting Pronouncements

During February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842). ASU No. 2016-02 requires lessees to recognize the assets and liabilities that arise from leases on the balance sheet. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. In August 2018, the FASB issued ASU 2018-11, Targeted Improvements, which provides entities with an additional (and optional) transition method whereby an entity initially applies the new lease standard at the adoption date and recognizes a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption. Due to the deferred required implementation date set forth by the FASB in June 2020, Topic 842 (as amended) is effective for annual periods beginning after December 15, 2021. Early adoption is permitted. The Company is currently assessing the effect that Topic 842 (as amended) will have on its results of operations, financial position and cash flows but plans to elect the transitional method noted in ASU 2018-11.

Subsequent Events

The Company has evaluated subsequent events through March 15, 2022, which is the date the consolidated financial statements were made available for issuance and has concluded that no such events or transactions took place which would require disclosure herein.

The Company is dependent on cash flows from stockholder contributions to fund research and development operations. However, in December 2021, the Company entered into a stock purchase agreement whereby all issued and outstanding shares of common stock were acquired by Surgalign Holdings, Inc.

 

8


Inteneural Networks Inc. and Subsidiary

 

Notes to Financial Statements

December 31, 2020 and 2019

 

 

2.

Income Taxes

The provision (benefit) for income tax expense and the related components are as follows for the years ended December 31:

 

             2020                      2019          

Current:

     

Federal

   $      $  

State

             
  

 

 

    

 

 

 
             
  

 

 

    

 

 

 

Deferred:

     

Federal

             

State

             
  

 

 

    

 

 

 

Total tax provision (benefit)

             
  

 

 

    

 

 

 

Valuation allowance

             
  

 

 

    

 

 

 

Total income tax provision (benefit), net

   $      $  
  

 

 

    

 

 

 

The valuation allowance has been established because, based on the weight of available evidence, management has determined that it is more likely than not that the Company’s deferred tax assets will not be realized. The components of deferred income tax assets and liabilities are as follows as of December 31:

 

             2020                      2019          

Deferred tax assets:

     

Net operating losses, federal

   $ 8,303       $ 2,393   

Net operating losses, state

     2,967         8,555   
  

 

 

    

 

 

 

Total deferred tax assets

     11,270         10,948   

Valuation allowance

     (11,270)         (10,948)   
  

 

 

    

 

 

 

Total deferred tax assets, net

   $      $  
  

 

 

    

 

 

 

As of December 31, 2020, the Company has not recorded any reserve related to uncertain tax positions. There were no interest and penalty amounts included in the uncertain tax positions as of December 31, 2020. The Company does not expect any changes in its uncertain tax positions during the next 12 months that will have a significant impact on the Company’s financial position or results of operations. Tax years 2019 - 2018 for Federal and state remain open to statute.

At December 31, 2020, the Company has $39,536 of Federal and $39,536 of state net operating losses to carryforward. The state net operating loss carryforwards will begin to expire in 2031.

The Company currently has a valuation allowance against its net deferred tax assets it is expected that the Company will not be able to utilize the assets in future years.

 

9

EX-99.2

Exhibit 99.2

Inteneural Networks Inc and Subsidiary

Consolidated Financial Statements

September 30, 2021 and 2020


Inteneural Networks Inc and Subsidiary

 

Table of Contents

September 30, 2021 and 2020

 

         Page    

Independent Auditor’s Review Report

   1

Consolidated Financial Statements

  

Consolidated Balance Sheets

   2

Consolidated Statements of Operations

   3

Consolidated Statements of Stockholders’ Equity

   4

Consolidated Statements of Cash Flows

   5

Notes to Consolidated Financial Statements

   6


LOGO

Independent Auditor’s Review Report

To the Stockholders and Board of Directors of

Inteneural Networks Inc and Subsidiary

Results of Review of Interim Financial Information

We have reviewed the accompanying consolidated financial statements of Inteneural Networks Inc and Subsidiary as of September 30, 2021 and 2020, and for the nine-month periods then ended, and the related notes (collectively referred to as the interim financial information).

Based on our review, we are not aware of any material modifications that should be made to the accompanying interim financial information for it to be in accordance with accounting principles generally accepted in the United States of America.

Basis for Review Results

We conducted our review in accordance with auditing standards generally accepted in the United States of America (GAAS) applicable to reviews of interim financial information. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. A review of interim financial information is substantially less in scope than an audit conducted in accordance with GAAS, the objective of which is an expression of an opinion regarding the financial information as a whole, and accordingly, we do not express such an opinion. We are required to be independent of Inteneural Networks Inc and Subsidiary and to meet our other ethical responsibilities in accordance with the relevant ethical requirements relating to our review. We believe that the results of the review procedures provide a reasonable basis for our conclusion.

Responsibilities of Management for the Interim Financial Information

Management is responsible for the preparation and fair presentation of the interim financial information in accordance with accounting principles generally accepted in the United States of America; and for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of interim financial information that is free from material misstatement, whether due to fraud or error.

/s/ BAKER TILLY US, LLP

Chicago, Illinois

March 15, 2022

Baker Tilly US, LLP, trading as Baker Tilly, is a member of the global network of Baker Tilly International Ltd., the members of which are separate and independent legal entities.

 

1


Inteneural Networks Inc and Subsidiary

 

Consolidated Balance Sheets

September 30, 2021 and 2020

 

                     2021                      2020  
Assets      

Current Assets

     

Cash

   $ 126       $ 9,470   

Other current assets

     14,765         5,614   
  

 

 

    

 

 

 

Total current assets

     14,891         15,084   
  

 

 

    

 

 

 

Property and Equipment, Net

     4,762         8,310   

Intangible Assets

     36,754         29,387   
  

 

 

    

 

 

 

Total assets

   $ 56,407       $ 52,781   
  

 

 

    

 

 

 
Liabilities and Stockholders’ Equity      

Accrued expenses

   $ 8,537       $ 24,213   
  

 

 

    

 

 

 

Total current liabilities

     8,537         24,213   

Stockholders’ Equity

     

Common stock
.0001 par value
10,000 shares authorized
10,000 shares issued and outstanding

             

Additional paid-in capital

     585,134         350,986   

Accumulated deficit

     (537,265)        (322,419)  
  

 

 

    

 

 

 

Total stockholders’ equity

     47,870         28,568   
  

 

 

    

 

 

 

Total liabilities and stockholders’ equity

   $ 56,407       $ 52,781   
  

 

 

    

 

 

 

See notes to consolidated financial statements

 

2


Inteneural Networks Inc and Subsidiary

 

Consolidated Statements of Operations

Nine-month Period Ended September 30, 2021 and 2020

 

                     2021                      2020  

Revenue

   $ —        $ —    

Costs of Goods Sold

     —          —    
  

 

 

    

 

 

 

Gross profit

     —          —    

Operating Expenses

     

General and administrative expenses

     —          —    

Research and development costs

     178,329        131,255  

Depreciation and amortization expense

     4,393        6,820  
  

 

 

    

 

 

 

Total operating expenses

     182,722        138,075  
  

 

 

    

 

 

 

Operating loss

     (182,722)        (138,075)  
  

 

 

    

 

 

 

Net loss

   $ (182,722)      $ (138,075)  
  

 

 

    

 

 

 

See notes to consolidated financial statements

 

3


Inteneural Networks Inc and Subsidiary

 

Consolidated Statements of Stockholders’ Equity

Nine-month Period Ended September 30, 2021 and 2020

 

         Common    
Stock
     Additional
 Paid-in Capital 
       Accumulated  
Deficit
     Total
 Stockholders’ 

 

Equity

 

Balances, January 1, 2020

   $      $ 216,799       $ (184,344)      $ 32,456  

2020 net loss

                   (138,075)        (138,075)  

Stockholder contribution

            134,187                134,187  
  

 

 

    

 

 

    

 

 

    

 

 

 

Balances, September 30, 2020

            350,986         (322,419)        28,568  
  

 

 

    

 

 

    

 

 

    

 

 

 

Balances, January 1, 2021

            388,911         (354,543)        34,369  

2021 net loss

                   (182,722)        (182,722)  

Stockholder contribution

            196,223                196,223  
  

 

 

    

 

 

    

 

 

    

 

 

 

Balances, September 30, 2021

   $      $ 585,134       $ (537,265)      $ 47,870  
  

 

 

    

 

 

    

 

 

    

 

 

 

See notes to consolidated financial statements

 

4


Inteneural Networks Inc and Subsidiary

 

Consolidated Statements of Cash Flows

Nine-month Period Ended September 30, 2021 and 2020

 

     2021      2020  

Cash Flows From Operating Activities

     

Net loss

   $         (182,722)      $         (138,075)  

Adjustments to reconcile net loss to net cash flows used in operating activities:

     

Depreciation and amortization

     4,393        6,820  

Other current assets

     (10,437)        2,064  

Accrued expenses

     (7,195)        16,657  
  

 

 

    

 

 

 

Net cash flows used in operating activities

     (195,961)        (112,534)  
  

 

 

    

 

 

 

Cash Flows from Investing Activities

     

Capital expenditures

     (6,419)        (15,757)  
  

 

 

    

 

 

 

Cash Flows From Financing Activities

     

Contributions by stockholders

     196,223        134,187  
  

 

 

    

 

 

 

Net cash flows from financing activities

     196,223        134,187  
  

 

 

    

 

 

 

Net change in cash and cash equivalents

     (6,157)        5,896  

Cash, Beginning

     6,283        3,574  
  

 

 

    

 

 

 

Cash, Ending

   $ 126      $ 9,470  
  

 

 

    

 

 

 

See notes to consolidated financial statements

 

5


Inteneural Networks Inc and Subsidiary

 

Notes to Consolidated Financial Statements

September 30, 2021 and 2020

 

1.

Summary of Significant Accounting Policies

Nature of Operations

Inteneural Networks Inc and its subsidiary (collectively the Company) is a medical high-tech company, specializing in artifical inteligence and big-data-learning analysis of brain imaging.

Principles of Presentation

The accompanying consolidated financial statements include the accounts of Inteneural Networks Inc and its wholly owned subsidiary Inteneural Networks Polska sp. Zoo. Significant intercompany accounts and transactions have been eliminated.

Foreign Currency Translation

The local currency is the functional currency for the Company’s foreign subsidiary. Expenses allocated to the Company by the Parent are translated at the weighted-average exchange rates for the year.

Cash

The Company defines cash and cash equivalents as highly liquid, short-term investments with a maturity at the date of acquisition of three months or less.

Property and Equipment

Property and equipment are stated at cost. Major expenditures for property and equipment are capitalized. Maintenance, repairs and minor renewals are expensed as incurred. When assets are retired or otherwise disposed of, their costs and related accumulated depreciation are removed from the accounts and resulting gains or losses are included in income.

Property and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful lives. For income tax reporting purposes, depreciation is calculated using applicable accelerated methods.

Depreciation

Depreciation is computed on individual assets using the straight-line method over estimated economic useful lives.

For income tax reporting purposes, depreciation is calculated using applicable accelerated methods.

Intangible Assets

Internally-developed intangibles are carried at cost of expenses incurred. Internally-developed patents are amortized over their estimated useful life.

Impairment of Long-Lived Assets

The Company reviews intangible assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of an asset may not be fully recoverable. An impairment loss would be recognized when the estimated future cash flows from the use of the asset are less than the carrying amount of that asset. To date, there have been no such losses.

 

6


Inteneural Networks Inc and Subsidiary

 

Notes to Consolidated Financial Statements

September 30, 2021 and 2020

 

Research and Development Costs

Research and development costs are expensed in the period incurred. These costs, representing raw materials, engineering salaries, fringe benefits, other direct expenses, and a portion of the Company’s overhead, are included in the accompanying consolidated statements of operations, within operating expenses. Research and development expenses were $178,329 and $131,255 for the periods ended September 30, 2021 and 2020, respectively.

Income Taxes

Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes resulting from temporary differences. Such temporary differences result from differences in the carrying value of assets and liabilities for tax and financial reporting purposes.

Temporary differences arise principally from the use of the allowance method of bad debt recognition for financial reporting purposes and the direct write-off method for income tax purposes; differences in depreciation methods used for book and tax purposes; capitalization of certain handling, storage and administrative expenses for income tax purposes only; differences in required methods for reporting pension expense; timing of deductions of contracts payable to former officers; and recognition of an allowance for obsolete inventory for financial reporting purposes only. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Recent Accounting Pronouncements

During February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842). ASU No. 2016-02 requires lessees to recognize the assets and liabilities that arise from leases on the balance sheet. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. In August 2018, the FASB issued ASU 2018-11, Targeted Improvements, which provides entities with an additional (and optional) transition method whereby an entity initially applies the new lease standard at the adoption date and recognizes a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption. Due to the deferred required implementation date set forth by the FASB in June 2020, Topic 842 (as amended) is effective for annual periods beginning after December 15, 2021. Early adoption is permitted. The Company is currently assessing the effect that Topic 842 (as amended) will have on its results of operations, financial position and cash flows but plans to elect the transitional method noted in ASU 2018-11.

Subsequent Events

The Company has evaluated subsequent events through March 15, 2022, which is the date the consolidated financial statements were made available for issuance, and has concluded that no such events or transactions took place which would require disclosure herein.

The Company is dependent on cash flows from stockholder contributions to fund research and development operations. However, in December 2021, the Company entered into a stock purchase agreement whereby all issued and outstanding shares of common stock were acquired by Surgalign Holdings, Inc.

 

7


Inteneural Networks Inc and Subsidiary

 

Notes to Consolidated Financial Statements

September 30, 2021 and 2020

 

2.

Income Taxes

The provision (benefit) for income tax expense and the related components are as follows for the nine-month periods ended September 30:

 

             2021                      2020          

Current

     

Federal

   $      $  

State

             
  

 

 

    

 

 

 
             

Deferred

     

Federal

   $      $  

State

             
  

 

 

    

 

 

 

Total tax provision (benefit)

             

Valuation allowance

             
  

 

 

    

 

 

 

Total income tax provision (benefit), net

   $      $  
  

 

 

    

 

 

 

The valuation allowance has been established because, based on the weight of available evidence, management has determined that it is more likely than not that the Company’s deferred tax assets will not be realized. The components of deferred income tax assets and liabilities are as follows as of September 30:

 

             2021                      2020          

Deferred tax assets

     

Net operating losses - federal

   $ 32,967       $ 4,640   

Net operating losses - state

     11,782         1,658   
  

 

 

    

 

 

 

Total deferred tax assets

     44,749         6,298   

Valuation allowance

     (44,749)        (6,298)  
  

 

 

    

 

 

 

Total deferred tax assets, net

   $      $  
  

 

 

    

 

 

 

As of September 30, 2021, the Company has not recorded any reserve related to uncertain tax positions. There were no interest and penalty amounts included in the uncertain tax positions as of September 30, 2021. The Company does not expect any changes in its uncertain tax positions during the next 12 months that will have a significant impact on the Company’s financial position or results of operations. Tax years 2020 - 2018 for Federal and state remain open to statute.

At September 30, 2021, the Company has $156,984 of Federal and $156,984 of state net operating losses to carryforward. The state net operating loss carryforwards will begin to expire in 2031.

The Company currently has a valuation allowance against its net deferred tax assets it is expected that the company will not be able to utilize the assets in future years.

 

8

EX-99.3

Exhibit 99.3

SURGALIGN HOLDINGS, INC. AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

On December 30, 2021, Surgalign Holdings, Inc. (“Surgalign” or the “Company”) entered into and closed on a Stock Purchase Agreement with Dearborn Capital Management LLC, and Neva, LLC, a Delaware limited liability company (collectively the Sellers of Inteneural Networks, Inc. (“Inteneural”), to acquire a 42% equity interest in the issued and outstanding shares of Inteneural for a non-exclusive right to use their proprietary technology. As consideration for the 42% ownership the Company paid total consideration of $19.9 million which consisted of $5.0 million in cash, issued to the Sellers 6,820,792 shares of our common stock with a fair value of $4.9 million and issued of 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, subject to certain contingencies, the Company must purchase up to 100% of the equity of Inteneural if the three additional clinical, regulatory, and revenue milestones are met. With the achievement of each milestone and the satisfaction of the related contingencies, the Company will acquire an additional 19.3% equity interest in INN for $19.3 million.

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 Inteneural to be a variable interest entity (“VIE”) and has fully consolidated Inteneural into the consolidated financial statements as of December 31, 2021.

The following unaudited pro forma condensed combined statements of operations is presented to illustrate the estimated effects of the Transaction and certain other related adjustments described below (collectively, “Adjustments” or “Transaction Accounting Adjustments”). The pro forma financial information has been prepared in accordance with Regulation S-X Article 11, Pro Forma Financial Information, as amended by the final rule, Amendments to Financial Disclosures about Acquired and Disposed Businesses, as adopted by the U.S. Securities and Exchange Commission (“SEC”) on May 20, 2020 (“Article 11”).

The following unaudited pro forma combined financial statements are based on Surgalign’s historical consolidated financial statements and Inteneural’s historical consolidated financial statements as adjusted to give effect to the acquisition. The unaudited pro forma condensed combined statement of operations is presented for the year ended December 31, 2021 for Surgalign and for the twelve months ended September 30, 2021 (“the LTM Period”) for Inteneural and gives effect to the Acquisition as if it had occurred on January 1, 2021. An unaudited pro forma condensed combined balance sheet has not been presented herein as the acquisition has already been fully reflected in the consolidated balance sheet included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on March 15, 2022.

The unaudited pro forma condensed combined financial information should be read together with:

 

   

The accompanying notes to the unaudited pro forma condensed combined financial information;

   

Surgalign’s audited historical consolidated financial statements and accompanying notes as of and for the year ended December 31, 2021

   

Audited consolidated balance sheets of Inteneural Networks Inc., as of December 31, 2020 and 2019, and audited consolidated statements of operations, stockholders’ equity and cash flows for the years ended December 31, 2020 and 2019, and related notes included as Exhibit 99.1 to this Current Report on Form 8-K/A; and

   

Unaudited consolidated balance sheets of Inteneural Networks Inc., as of September 30, 2021 and 2020 and unaudited consolidated statement of operations, stockholders’ equity and cash flows for the nine months ended September 30, 2021 and 2020, and related notes included as Exhibit 99.2 to this Current Report on Form 8-K/A.


Information for the LTM Period was derived from the audited consolidated statement of operations for the fiscal year ended December 31, 2020, less the unaudited consolidated statement of operations for the nine months ended September 30, 2020, plus the unaudited consolidated statement of operations for the nine months ended September 30, 2021. Information for the fiscal year ended December 31, 2020 was derived from our historical audited consolidated statements of operations for the year ended December 31, 2020 as filed.

In the opinion of the Company’s management, our historical financial statements have been adjusted in the accompanying unaudited pro forma condensed combined financial information to give effect to pro forma events that are transaction accounting adjustments which are necessary to account for the acquisition and related to the financing of the acquisition, in accordance with U.S. GAAP.

The historical financial information of Surgalign and Inteneural reflect factually supportable items that are directly attributable to the Transaction. The Transaction is reflected in the accompanying unaudited pro forma condensed combined financial information and related notes as an asset acquisition. Accordingly, the consideration given by Surgalign in exchange for the assets acquired in the Transaction will be primarily allocated to the in-process research and development (“IPR&D”) asset based upon the estimated fair value as of the date of the completion of the Transaction.

The pro forma combined financial statements do not necessarily reflect what the combined company’s financial condition or results of operations would have been had the acquisition occurred on the dates indicated. They also may not be useful in predicting the future financial condition and results of operations of the combined company. Our actual financial condition and results of operations may differ significantly from the pro forma amounts reflected herein due to a variety of factors.


SURGALIGN HOLDINGS, INC. AND SUBSIDIARIES

Unaudited Pro Forma Condensed Combined Financial Statement of Operations

For the Twelve Months Ended December 31, 2021 and September 30, 2021

(In thousands, except share and per share data)

 

     12/31/2021 
Surgalign
Holdings
    12 months
ended 9/30/21
Inteneural

Networks Inc
    Pro Forma
 Adjustments 
      Note  
Ref.
    Pro
Forma
 

Revenues

  $ 90,500     $ -         $  -           $ 90,500  

Costs of goods sold

    29,775       -           -             29,775  
 

 

 

   

 

 

   

 

 

     

 

 

 

Gross profit

    60,725       -           -             60,725  
 

 

 

   

 

 

   

 

 

     

 

 

 

Expenses:

         

General and administrative

    104,668       6       (6     [A]       104,668  

Research and development

    13,888       207       -             14,095  

Loss (gain) on acquisition contingency

    (4,587     -           -             (4,587

Asset acquisition expenses

    72,087       -           -             72,087  

Asset impairment and abandonments

    12,195       -           -             12,195  

Goodwill impairment

    -       -           -             -      

Transaction and integration expenses

    3,689       -           -             3,689  
 

 

 

   

 

 

   

 

 

     

 

 

 

Total operating expenses

    201,940       213       (6       202,147  
 

 

 

   

 

 

   

 

 

     

 

 

 

Other operating income, net

    (3,932     -           -             (3,932
 

 

 

   

 

 

   

 

 

     

 

 

 

Operating loss

    (137,283     (213     6         (137,490
 

 

 

   

 

 

   

 

 

     

 

 

 

Other (income) expense - net:

         

Other (income) expense - net:

    (202     1       -             (201

Foreign exchange gain (loss)

    1,447       -           -             1,447  

Change in fair value of warrant liability

    (14,736     -           -             (14,736
 

 

 

   

 

 

   

 

 

     

 

 

 

Total other (income) expense - net

    (13,491     1       -             (13,490
 

 

 

   

 

 

   

 

 

     

 

 

 

Loss before income tax benefit (provision)

    (123,792     (214     6         (124,000

Income tax benefit (provision)

    (886     -           -             (886
 

 

 

   

 

 

   

 

 

     

 

 

 

Net loss from continuing operations

    (122,906     (214     6         (123,114

Discontinued operations

         

(Loss) Income from operations of discontinued operations

    (6,316     -           -             (6,316

Income tax provision

    (2,674     -           -             (2,674
 

 

 

   

 

 

   

 

 

     

 

 

 

Net (loss) income from discontinued operations

    (3,642     -           -             (3,642
 

 

 

   

 

 

   

 

 

     

 

 

 

Net loss

    (126,548     (214     6         (126,756
 

 

 

   

 

 

   

 

 

     

 

 

 

Net loss applicable to noncontrolling interests

    41,897       -           121       [B]       42,018  
 

 

 

   

 

 

   

 

 

     

 

 

 

Net (loss) applicable to Surgalign Holdings, Inc.

    (84,651     -           (87     [B]       (84,738
 

 

 

   

 

 

   

 

 

     

 

 

 

Net loss from continuing operations per common share - basic

  $ (1.00         $ (1.00
 

 

 

         

 

 

 

Net income from discontinued operations per common share - basic

  $ (0.03         $ (0.03
 

 

 

         

 

 

 

Net loss per share applicable to Surgalign Holdings, Inc.- basic

  $ (0.69         $ (0.69
 

 

 

         

 

 

 

Net loss from continuing operations per common share - diluted

  $ (1.00         $ (1.00
 

 

 

         

 

 

 

Net income from discontinued operations per common share - diluted

  $ (0.03         $ (0.03
 

 

 

         

 

 

 

Net loss per share applicable to Surgalign Holdings, Inc.- diluted

  $ (0.69         $ (0.69
 

 

 

         

 

 

 

Weighted average shares outstanding - basic

    122,592,569             122,592,569  
 

 

 

         

 

 

 

Weighted average shares outstanding - diluted

    122,592,569             122,592,569  
 

 

 

         

 

 

 

See accompanying notes to unaudited pro forma condensed combined financial information.


Note 1 – Basis of Presentation

On January 5, 2022, Surgalign Holdings, Inc. (“Surgalign” or the “Company”) filed a Current Report on Form 8-K (the “Form 8-K”) in connection with the closing, on December 30, 2021, of the previously announced transaction, pursuant to which Inteneural Networks, Inc. (“Inteneural”) and its subsidiaries became direct wholly owned subsidiaries of the Company (the “Transaction”).

The underlying financial information of the Company has been derived from the audited consolidated financial statements of the Company included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. The underlying financial information of Inteneural has been derived from the audited consolidated financial statements of Inteneural for the year ended December 31, 2020, and 2019 and the unaudited consolidated financial statements for the nine months ended September 30, 2021 and 2020 which are included in this Current Report on Form 8-K/A.

This unaudited pro forma condensed combined financial information has been prepared assuming that the Transaction had been completed on January 1, 2021 and is not intended to reflect the financial results of operations which would have actually resulted had the Transaction been effected on the dates indicated.

The transaction has been treated as an asset acquisition, with the Company as the accounting acquirer. Accordingly, unaudited pro forma condensed combined financial information reflects the assets acquired at cost. To determine the accounting for this transaction under U.S. GAAP, the Company must first assess whether an integrated set of assets and activities should be accounted for as an acquisition of a business or an asset acquisition. The U.S. GAAP guidance requires an initial screen test to determine if substantially all of the fair value of the gross assets acquired is concentrated in a single asset or group of similar assets. If that screen is met, the set is not considered a business and is accounted for as an asset acquisition. The Company determined that substantially all of the fair value of Inteneural 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 Inteneural 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.

The purchased IPR&D was expensed immediately after 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 during the fourth quarter of 2021 due to the Company’s negative projected cash flows. This loss has a net impact of $30.2 million to Surgalign, and $41.9 million impact to noncontrolling interests.


Note 2 - LTM Period

Inteneural’s historical financial statements were prepared in accordance with U.S. GAAP, presented in U.S. dollars. The following table presents the reconciliation of historical unaudited financial data for the nine-month periods ended September 30, 2021 and September 30, 2020, and the historical audited consolidated statement of operations for the fiscal year ended December 31, 2020 to the unaudited twelve months ended September 30, 2021 presented in the unaudited pro forma condensed combined statement of operations.

ADJUSTED LTM STATEMENT OF OPERATIONS RECONCILIATION

For the Last Twelve Months Ended September 30, 2021

(in thousands, except share data)

 

     Audited     Unaudited  
           Less     Plus        
(in thousands)    Year Ended
December 31,
2020
    Nine Months
Ended

September 30,
2020
    Nine Months
Ended

September 30,
2021
    LTM Period
Ended

September 30,
2021
 
                                  

Sales

     -       -       -       -  

Cost of goods sold

     -       -       -       -  

Gross profit

     -       -       -       -  

General and administrative

     9       7       4       6  

Research and development

     160       131       178       207  

Loss (gain) on acquisition contingency

     -       -       -       -  

Asset acquisition expenses

     -       -       -       -  

Asset impairment and abandonment

     -       -       -       -  

Goodwill impairment

     -       -       -       -  

Transaction and integration expenses

     -       -       -       -  

Operating (loss)

     (169)       (138)       (182)       (213)  

Other (income) expense, net

     1       -       -       1  

(Loss) before income taxes

     (170)       (138)       (182)       (214)  

Provision for income taxes

     -       -       -       -  

Net loss from continued operations

     (170)       (138)       (182)       (214)  

Note 3 – Pro Forma Adjustments

The unaudited pro forma condensed combined financial information reflects the following adjustments:

[A] General and administrative

Transaction accounting adjustments made to remove the historical amortization expense related to the other intangible assets, which were noted as impaired. For the last twelve months ended September 30, 2021, $6 was adjusted in the pro forma statement of operations.

[B] Net loss applicable to noncontrolling interest and Surgalign Holdings, Inc.

To record the allocation of the amortization expense and operating loss as applicable to the noncontrolling interest and Surgalign. The 58% noncontrolling interest ownership of these balances equate to net adjustments of $121 applicable to noncontrolling interest and $87 to Surgalign.