After a mix of skyrocketing expenses and dwindling cash stores led Surgalign late last year to kick off a companywide review of additional cost-cutting options, the surgical device maker has settled on selling off the entire business.
Surgalign announced Tuesday that it has voluntarily filed for Chapter 11 bankruptcy, through which it will pursue an auction and sale of its assets.
In a filing (PDF) with the U.S. Securities and Exchange Commission (SEC), the company explained that on Sunday, prior to entering bankruptcy, it had signed an asset purchase agreement with Xtant Medical Holdings—which purchased two of Surgalign’s product lines for $17 million earlier this year—to both sell off even more of its devices and transfer some of its debt to Xtant.
Under the terms of that agreement, Xtant offered $5 million to take on “certain specified liabilities” and “certain assets related to the company’s business of designing, developing and manufacturing hardware medical technology and distributing biologics medical technology.” Ten percent of the total purchase price was slated to go into an escrow account that could be returned to Xtant if the deal fell through.
In the wake of the bankruptcy filing, however, Surgalign has put a pin in the Xtant sale. Now, it plans to offer up all of its assets—including those specified in the Xtant deal—at auction. Xtant has been dubbed a “stalking horse bidder” in the sale process, meaning that its original $5 million offer will serve as the minimum threshold for all future bids on Surgalign’s assets.
Surgalign also noted in the SEC filing that if a higher bidder wins the auction, Xtant could be entitled to a “break-up fee” of 3% of its offer, plus reimbursement of certain expenses.
Elsewhere in the filing, Surgalign said that entering bankruptcy has triggered a default on two of its outstanding debts—both for just over $5.1 million, to Dearborn Capital Management and Neva—but the Chapter 11 bankruptcy stops the creditors from immediately enforcing any payment obligations.
Surgalign said that it plans to continue normal operations amid the bankruptcy filing and auction process and that it has “sufficient liquidity” on hand to fund the proceedings.
Surgalign’s bankruptcy comes after the company has struggled to stay afloat. Though it cut its operating expenses almost in half in 2022—down to just under $120 million from 2021’s $202 million—it still posted a net loss of more than $54 million for the year and closed out 2022 with only $16 million in cash, compared to $51 million a year prior.
Amid those struggles, in November, Surgalign said it was embarking on a restructuring plan that would save between $30 million and $35 million in operating expenses throughout 2023. The plan included trimming down the company’s product portfolio—as with the subsequent sale of its Coflex and Cofix lines to Xtant in March—as well as laying off an untold number of its approximately 230 employees.
Even as it plowed ahead with that plan, however, Surgalign remained wary. In its annual report (PDF) for 2022 published at the end of March, the devicemaker warned that while the asset sale to Xtant earlier that month had slightly cushioned its coffers, a bankruptcy filing could be on the horizon. Without any additional funding, Surgalign said, “we do not expect to have adequate capital resources to meet our anticipated cash needs and our current obligations as they become due into the fourth quarter of 2023.”
More recently, after having already laid off around 20% of its workforce earlier this year, per Reuters, Surgalign said in another SEC filing (PDF) this month that it was laying off 25 more employees and eliminating its chief commercial officer position. The layoffs were expected to save the company around $3.5 million throughout the next year while also racking up one-time severance costs and benefits payments of $242,000.