The accompanying notes are an integral part of these condensed consolidated financial statements.
SEASPINE HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
(In thousands)
|
| | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional | | Accumulated Other | | | | Total |
| Number of | | | | Paid-In | | Comprehensive | | Accumulated | | Stockholders' |
| Shares | | Amount | | Capital | | Income | | Deficit | | Equity |
Balance December 31, 2019 | 19,124 |
| | $ | 191 |
| | $ | 284,211 |
| | $ | 1,434 |
| | $ | (176,076 | ) | | $ | 109,760 |
|
Net loss | — |
| | — |
| | — |
| |
|
| | (12,551 | ) | | (12,551 | ) |
Foreign currency translation adjustment | — |
| | — |
| | — |
| | (164 | ) | | — |
| | (164 | ) |
Unrealized gain on short-term investments | — |
| | — |
| | — |
| | 190 |
| | — |
| | 190 |
|
Restricted stock issued | 213 |
| | 2 |
| | — |
| | — |
| | — |
| | 2 |
|
Issuance of common stock - public offering | 7,820 |
| | 78 |
| | 91,544 |
| | — |
| | — |
| | 91,622 |
|
Issuance of common stock - exercise of stock options | 80 |
| | 1 |
| | 901 |
| | — |
| | — |
| | 902 |
|
Repurchases of common stock for income tax withheld upon vesting of restricted stock awards and restricted stock units | — |
| | — |
| | (1,855 | ) | | — |
| | — |
| | (1,855 | ) |
Stock-based compensation | — |
| | — |
| | 1,983 |
| | — |
| | — |
| | 1,983 |
|
Balance March 31, 2020 | 27,237 |
| | 272 |
| | 376,784 |
| | 1,460 |
| | (188,627 | ) | | 189,889 |
|
Net loss | — |
| | — |
| | — |
| |
|
| | (13,713 | ) | | (13,713 | ) |
Foreign currency translation adjustment | — |
| | — |
| | — |
| | 142 |
| | — |
| | 142 |
|
Unrealized loss on short-term investments | — |
| | — |
| | — |
| | (89 | ) | | — |
| | (89 | ) |
Restricted stock issued | 79 |
| | 1 |
| | (1 | ) | | — |
| | — |
| | — |
|
Issuance of common stock under employee stock purchase plan | 78 |
| | 1 |
| | 697 |
| | — |
| | — |
| | 698 |
|
Issuance of common stock- exercise of stock options | 5 |
| | — |
| | 46 |
| | — |
| | — |
| | 46 |
|
Repurchases of common stock for income tax withheld upon vesting of restricted stock awards and restricted stock units | — |
| | — |
| | (43 | ) | | — |
| | — |
| | (43 | ) |
Stock-based compensation | — |
| | — |
| | 2,769 |
| | — |
| | — |
| | 2,769 |
|
Balance June 30, 2020 | 27,399 |
| | $ | 274 |
| | $ | 380,252 |
| | $ | 1,513 |
| | $ | (202,340 | ) | | $ | 179,699 |
|
|
| | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional | | Accumulated Other | | | | Total |
| Number of | | | | Paid-In | | Comprehensive | | Accumulated | | Stockholders' |
| Shares | | Amount | | Capital | | Income | | Deficit | | Equity |
Balance December 31, 2018 | 18,669 |
| | $ | 187 |
| | $ | 277,096 |
| | $ | 1,602 |
| | $ | (136,800 | ) | | $ | 142,085 |
|
Net loss | — |
| | — |
| | — |
| | — |
| | (8,989 | ) | | (8,989 | ) |
Foreign currency translation adjustment | — |
| | — |
| | — |
| | (169 | ) | | — |
| | (169 | ) |
Unrealized gain on short-term investments | — |
| | — |
| | — |
| | 11 |
| | — |
| | 11 |
|
Restricted stock issued | 216 |
| | 2 |
| | — |
| | — |
| | — |
| | 2 |
|
Issuance of common stock- exercise of stock options | 11 |
| | — |
| | 143 |
| | — |
| | — |
| | 143 |
|
Repurchases of common stock for income tax withheld upon vesting of restricted stock awards and restricted stock units | — |
| | — |
| | (1,851 | ) | | — |
| | — |
| | (1,851 | ) |
Stock-based compensation | — |
| | — |
| | 1,947 |
| | — |
| | — |
| | 1,947 |
|
Balance March 31, 2019 | 18,896 |
| | 189 |
| | 277,335 |
| | 1,444 |
| | (145,789 | ) | | 133,179 |
|
Net loss | — |
| | — |
| | — |
| | — |
| | (12,036 | ) | | (12,036 | ) |
Foreign currency translation adjustment | — |
| | — |
| | — |
| | 108 |
| | — |
| | 108 |
|
Unrealized gain on short-term investments | — |
| | — |
| | — |
| | 3 |
| | — |
| | 3 |
|
Restricted stock issued | 71 |
| | 1 |
| | — |
| | — |
| | — |
| | 1 |
|
Issuance of common stock under employee stock purchase plan | 64 |
| | 1 |
| | 670 |
| | — |
| | — |
| | 671 |
|
Issuance of common stock- exercise of stock options | 5 |
| | — |
| | 76 |
| | — |
| | — |
| | 76 |
|
Repurchases of common stock for income tax withheld upon vesting of restricted stock awards and restricted stock units | — |
| | — |
| | (57 | ) | | — |
| | — |
| | (57 | ) |
Stock-based compensation | — |
| | — |
| | 1,970 |
| | — |
| | — |
| | 1,970 |
|
Balance June 30, 2019 | 19,036 |
| | 191 |
| | 279,994 |
| | 1,555 |
| | (157,825 | ) | | 123,915 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
SEASPINE HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND BASIS OF PRESENTATION
Business
SeaSpine Holdings Corporation was incorporated in Delaware on February 12, 2015 in connection with the spin-off of the orthobiologics and spinal implant business of Integra LifeSciences Holdings Corporation, a diversified medical technology company. The spin-off occurred on July 1, 2015. Unless the context indicates otherwise, (i) references to "SeaSpine" or the "Company" refer to SeaSpine Holdings Corporation and its wholly-owned subsidiaries, and (ii) references to "Integra" refer to Integra LifeSciences Holdings Corporation and its subsidiaries other than SeaSpine.
SeaSpine is a global medical technology company focused on the design, development and commercialization of surgical solutions for the treatment of patients suffering from spinal disorders. SeaSpine has a comprehensive portfolio of orthobiologics and spinal implant solutions to meet the varying combinations of products that neurosurgeons and orthopedic spine surgeons need to perform fusion procedures in the lumbar, thoracic and cervical spine. The Company believes this broad combined portfolio of orthobiologics and spinal implant products is essential to meet the “complete solution” requirements of such surgeons.
Basis of Presentation and Principles of Consolidation
The Company prepared the unaudited interim condensed consolidated financial statements included in this report in accordance with accounting principles generally accepted in the U.S. (GAAP) for interim financial information and the rules and regulations of the Securities and Exchange Commission (SEC) related to quarterly reports on Form 10-Q.
The Company’s financial statements are presented on a consolidated basis. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. The unaudited interim condensed consolidated financial statements do not include all information and disclosures required by GAAP for annual audited financial statements and should be read in conjunction with the Company’s consolidated financial statements and notes thereto for the year ended December 31, 20162019 included in the Company’s Annual Report on Form 10-K filed with the SEC. In the opinion of management, the unaudited interim condensed consolidated financial statements included in this report have been prepared on the same basis as the Company's audited consolidated financial statements and include all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the financial position, results of operations, cash flows, and statement of equity for periods presented. The results for the three and ninesix months ended SeptemberJune 30, 20172020 are not necessarily indicative of the results expected for the full year. In addition, the full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition, including revenues, expenses, manufacturing, research and development costs and employee-related compensation, will depend on future developments that are highly uncertain and cannot be predicted. See Note 2. Summary of Significant Accounting Policies-Use of Estimates, below. The condensed consolidated balance sheet as of December 31, 20162019 was derived from the audited consolidated financial statementsbalance sheet for the year ended December 31, 2016.2019. Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations.
Under current SEC rules, generally, a company qualifies as a "smaller reporting company" if it has a public float of less than $250 million as of the last business day of its most recently completed second fiscal quarter. If a company qualifies as a smaller reporting company on that date, it may elect to reflect that determination and use the smaller reporting company scaled disclosure accommodations in its subsequent SEC filings until the beginning of the first quarter of the fiscal year following the date it determines it does not qualify as a smaller reporting company. The Company's public float as of June 30, 2020, the last business day of its most recent second fiscal quarter, was less than $250 million, and as such, the Company qualifies as a smaller reporting company, elected to reflect that determination and intends to use certain of the scaled disclosure accommodations in its SEC filings made during and for each of the years ended December 31, 2020 and 2021.
Concentration of Risk
Integra and PcoMed, LLC (PcoMed) entered into a supply agreement in May 2013 (the Supply Agreement), which was subsequently assigned to the Company by Integra in May 2015. For the six months ending June 30, 2020, the sales of products incorporating the NanoMetalene® technology licensed and supplied to the Company pursuant to the Supply Agreement exceeded 10% of the Company's revenue.
SEASPINE HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Pursuant to the Supply Agreement, PcoMed granted the Company a worldwide exclusive license to sell certain of its products treated with certain proprietary PcoMed technology (Treatment) for use in the spinal interbody and intervertebral market (Treated Products). PcoMed serves as the sole supplier of the Treatment. As consideration for the license and the Treatment, the Company paid to PcoMed initial milestone payments prior to the initial sale and the Company will pay PcoMed a low single digit royalty on the Company’s net sales of all Treated Products. In the event the Company fails to meet any of its payment obligations, the license will, at PcoMed’s option and following a cure period, convert to a non-exclusive license. The Supply Agreement contains customary representations and termination provisions, including for material breach and bankruptcy. Each of the Company and PcoMed retain the rights to their respective intellectual property.
The Company's financial instruments that are exposed to concentrations of credit risk consist primarily of cash. Cash balances are maintained primarily at major financial institutions in the United States and exceed the regulatory limit of $250,000 insured by the Federal Deposit Insurance Corporation (FDIC). The Company has not experienced any credit losses associated with its cash balances.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation ofPreparing consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities, and the reported amounts of revenues and expenses. Significant estimates affecting amounts reported or disclosed in the consolidated financial statements include allowances for doubtful accounts receivable and sales returns and other credits, net realizable value of inventories, discount rates and estimated projected cash flows used to value and test impairments of identifiable intangible and long-lived assets, assumptions related to the timing and probability of product launch dates, discount rates matched to the estimated timing of payments, probability of success rates and discount adjustments on the related cash flows for contingent considerations in business combinations, depreciation and amortization periods for identifiable intangible and long-lived assets, computation of taxes, valuation allowances recorded against deferred tax assets, the valuation of stock-based compensation and loss contingencies. These estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the current circumstances. Actual results could differ from these estimates.
The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition, including revenues, expenses, manufacturing, research and development costs and employee-related compensation, will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19 and the actions taken to contain it or treat COVID-19, as well as the economic impact on local, regional, national and international customers and markets. We have made estimates of the impact of COVID-19 within our financial statements and there may be changes to those estimates in future periods. Actual results may differ from these estimates.
Recent Accounting Standards Not Yet Adopted
The Company qualifies as an “emerging growth company” (EGC) pursuant to the provisions ofunder the Jumpstart Our Business Startups (JOBS) Act and elected to take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, which permits EGCs to defer compliance with new or revised accounting standards (the EGC extension) until non-issuers are required tomust comply with such standards. Accordingly, so long as the Company continues to qualify as an EGC, the Company will not have to adopt or comply with new or revised accounting standards until non-issuers are required tomust adopt or comply with such standards. The Company will no longer qualify as an EGC on December 31, 2020, the last day of the fiscal year following the fifth year after its spin-off from Integra.
In May 2014,June 2016, the FinancialFASB issued Accounting Standards Board (FASB)Update (ASU or Update) No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires credit losses on most financial assets measured at amortized cost, including trade receivables, and certain other instruments to be measured using an expected credit loss model, referred to as the current expected credit loss model. Under this model, entities will estimate credit losses over the entire contractual term of the instrument. The new standard will be effective for the Company beginning January 1, 2023. The FASB subsequently issued other related ASUs that amend ASU 2016-13 to provide clarification and additional guidance. The Company is evaluating the impact of this standard on its consolidated financial statements.
In August 2018, the FASB issued Update No. 2014-09, Revenue from Contracts2018-15, Intangibles-Goodwill and Other-Internal Use Software (Subtopic 350-40). The amendments in this Update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The new standard will be
SEASPINE HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Customers (Topic 606)effective for the Company beginning on January 1, 2021. Early adoption is permitted. The Company is evaluating the impact of this standard on its consolidated financial statements.
In April 2019, the FASB issued Update No. 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. This Update includes several amendments to the FASB Accounting Standards Codification (Codification) intended to clarify, improve, or correct errors therein. Some amendments do not require transition guidance and are effective upon issuance. The new standard provides a five-step approach to be applied to all contracts with customers. The new standard also requires expanded disclosure about revenue recognition. The new standardamendments requiring transition guidance have the same effective dates as amended by ASU 2015-14Update No. 2016-13 and will be effective for the Company beginning on January 1, 2019, and for interim periods within annual periods beginning on January 1, 2020.2023. The Company performed a preliminary assessment ofis evaluating the impact of this new standard on its consolidated financial statements. In assessing the impact, the Company has outlined all revenue streams, and has considered the five steps outlined in the standard for product sales, from which substantially all the Company's revenue is generated. The Company will continue to evaluate the future impact of the new standard throughout 2017.
Recently Adopted Accounting Standards
In February 2016, the FASB issued Update No. 2016-02, Leases (Topic 842). The new standard requires lessees to recognize lease liabilities and corresponding right-of-use assets for all leases with lease terms of greater than twelve months. It also changes the definition of a lease and expands the disclosure requirements of lease arrangements. The new standard must be adopted using the modified retrospective approach. In July 2018, the FASB issued Update No. 2018-10, Codification Improvements to Topic 842 (Leases) and Update No. 2018-11, Leases (Topic 842): Targeted Improvements. In March 2019, the FASB issued Update No. 2019-01, Leases (Topic 842): Codification Improvements. In November 2019, the FASB issued Update No. 2019-10, Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates, which modifies the effective dates for Topic 842. The standard will beamendments in ASU 2018-10, ASU 2018-11, ASU 2019-01, and ASU 2019-10 provide additional clarification and implementation guidance on certain aspects of Topic 842 and have the same effective fordate and transition requirements as ASU 2019-10. The Company early adopted the Companynew standard beginning on January 1, 2020, and interim periods within annual periods beginning on January 1, 2021, with early adoption permitted.2020. The Company doesadopted the new standard electing the optional transition method that allows for a cumulative-effect adjustment in the period of adoption and did not plan to early adopt and expects to applyrestate prior periods. The Company applied the transition package of practical expedients allowed by the standard. Note 11 to the Condensed Consolidated Financial Statements provides details onAs a result of the Company’s current lease arrangements. Whileadoption of the new standard, the Company continues to evaluate the impact of this new standard on its consolidated financial statements, the Company currently expects the primary impact will be to recordrecorded right-of-use assets and lease liabilities of $9.1 million and $10.5 million, respectively, for existing operating leases in the consolidated balance sheets.sheets at January 1, 2020. Additionally, the Company reversed $1.4 million of deferred rent liabilities previously recorded under the previous accounting guidance. The Company does not currently expect the adoption of this new standard to have ahad no material impact on its consolidated results of operations or cash flows.
In August 2016,June 2018, the FASB issued Update No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash
Receipts and Cash Payments. This new standard addresses eight specific cash flow issues related to cash receipts and cash payments with the objective of reducing the existing diversity of presentation and classification in the statement of cash flows. The new standard will be effective for the Company beginning on January 1, 2019, and interim periods within annual periods beginning on January 1, 2020. Early adoption is permitted and should be applied using a retrospective transition method to each period presented. The Company is in the process of evaluating the impact of this standard on its consolidated financial statements.
In May 2017, the FASB issued Update No. 2017-09, Compensation- Stock2018-07, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting. The new standard provides guidance regarding which changesImprovements to the terms or conditions of a share-based payment award requireNonemployee Share-Based Payment Accounting. This Update requires an entity to apply modification accountingthe requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost (that is, the period of time over which share-based payment awards vest and the pattern of cost recognition over that period). The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The amendments also clarify that Topic 718.718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606. The new standard will be effective for the Company beginning on January 1, 2018, and interim periods within annual periods beginning on January 1, 2018. The new standard should be applied prospectively to an award modified on or after the adoption date. The Company is in the process of evaluating the impact of this standard on its consolidated financial statements.
Recently Adopted Accounting Standards
In July 2015, the FASB issued Update No. 2015-11, Simplifying the Measurement of Inventory (Topic 330). The new guidance
requires an entity to measure inventory within the scope of the amendment at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The guidance was effective for the Company beginning on January 1, 2017,2020. The adoption of this new standard had no material impact on its consolidated financial statements.
In August 2018, the FASB issued Update No. 2018-13, Fair Value Measurement (Topic 820)-Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this Update modify the disclosure requirements on fair value measurements in Topic 820 based on the concepts in the Concepts Statement including the consideration of costs and interim periods within annual periodsbenefits. The new standard was effective for the Company beginning on January 1, 2018. Adoption2020. The adoption of this new guidance hasstandard had no material impact on the Company’sits consolidated financial statements.
In March 2020, the FASB issued Update No. 2020-04, Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in this Update apply only to contracts, hedging relationships, and other transactions that reference LIBOR, or another reference rate expected to be discontinued, due to the reference rate reform. The new standard was effective for the Company beginning March 12, 2020. The adoption of this new standard had no material impact on its consolidated financial statements.
SEASPINE HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Net Loss Per Share
Basic and diluted net loss per share was calculated using the weighted-average number of shares of common stock outstandingduring the period. The weighted average number of shares used to compute diluted net loss per share excludes any assumed exercise of stock options, any assumed issuance of common stock under restricted stock awards andor units, and any assumed issuances under the Company's 2015 Employee Stock Purchase Plan, asemployee stock purchase plan, because the effect, in each case, would be antidilutive. Common stock equivalents of 3.44.3 million and 3.7 million shares for each of the three and ninesix months ended SeptemberJune 30, 2017,2020 and 2.9 million shares for each of the three and nine months ended September 30, 2016,2019, respectively, were excluded from the calculation because of their antidilutive effect.
Out-of-Period Adjustment
In the third quarter of 2016, the Company recorded an adjustment to correct an error in the first quarter of 2016 reported amounts. This resulted in an increase to cost of goods sold by $0.6 million for the three months ended September 30, 2016. The error had the effect of overstating the inventory balance and understating the cost of goods sold, in each case, by $0.6 million for the three months ended March 31, 2016. The adjustment recorded in the third quarter of 2016 corrected the balance sheet
SEASPINE HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
and cost of goods sold for the nine months ended September 30, 2016. The impact to the periods presented and to the previously issued related financial statements was not material.
3. DEBT AND INTEREST
Credit Agreement
In December 2015, the Company entered into a three-year credit facility with Wells Fargo Bank, National Association, which was subsequently amended in October 2016 (as amended, theand in July 2018 (the Credit Facility). The Credit Facility provides an asset-backed revolving line of credit of up to $30.0 million in borrowing capacity with a maturity date of December 24, 2018,July 27, 2021, which maturity date is subject to a one-time, one-year extension at the Company's election. In addition, under the Credit Facility, at any time through July 27, 2020, the Company may increase the $30.0 million borrowing limit by up to an additional $10.0 million, subject to the Company having sufficient amounts of eligible accounts receivable and inventory and to customary conditions precedent, including obtaining the commitment of lenders to provide such additional amount. On July 30, 2020, the Company and Wells Fargo entered into an amendment to the Credit Facility to extend the date through which the Company may elect to increase the borrowing limit under the Credit Facility from July 27, 2020 to July 27, 2021. In connection with entering into the Credit Facility, the Company was required to become a guarantor and to provide a security interest in substantially all its assets for the benefit of the counterparty.
There were no amounts outstanding under the Credit Facility at June 30, 2020 or December 31, 2019. At June 30, 2020, the Company had $20.0 million of current borrowing capacity under the Credit Facility before the requirement to maintain the minimum fixed charge coverage ratio as discussed below. Debt issuance costs and legal fees related to the Credit Facility totaling $0.6 million were recorded as a deferred asset and are being amortized ratably over the term of the arrangement.
Borrowings under the Credit Facility accrue interest at the rate then applicable to base rate loans (as customarily defined), unless and until converted into LIBOR rate loans (as customarily defined) in accordance with the terms of the Credit Facility. Borrowings bear interest at a floating annual rate equal to (a) during any month for which the Company's average excess availability (as customarily defined) is greater than $20.0 million, (i) base rate plus 1.25 percentage points for base rate loans and (ii) LIBOR rate plus 2.25 percentage points for LIBOR rate loans, (b) during any month for which the Company's average excess availability is greater than $10.0 million but less than or equal to $20.0 million, (i) base rate plus 1.50 percentage points for base rate loans and (ii) LIBOR rate plus 2.50 percentage points for LIBOR rate loans and (c) during any month for which the Company's average excess availability is less than or equal to $10.0 million, (i) base rate plus 1.75 percentage points for base rate loans and (ii) LIBOR rate plus 2.75 percentage points for LIBOR rate loans. The Company will also paypays an unused line fee in anbased on the average amount borrowed under the Credit Facility for the most recently completed month. If such average amount is 25% or greater of the maximum borrowing capacity, the unused fee will be equal to 0.375% per annum of the amount unused under the Credit Facility, amount.and if such average amount is less than 25%, the unused line fee will be equal to 0.50% per annum of the amount unused under the Credit Facility. The unused line fee is due and payable on the first day of each month.
In September 2016, the Company borrowed $3.3 million under the Credit Facility. The Company elected to have the LIBOR rate apply to the amount borrowed with an interest period of six months commencing on September 28, 2016, which was further extended for another interest period of six months commencing on March 28, 2017. During the three months ended September 30, 2017, the Company paid off the entire amount borrowed plus accrued interest, totaling $4.1 million. At September 30, 2017, there were no amounts outstanding under the Credit Facility, and the Company had $18.2 million of current borrowing capacity thereunder. Debt issuance costs and legal fees related to the Credit Facility totaling $0.4 million were recorded as a deferred asset and are being amortized ratably over the term of the arrangement.
The Credit Facility contains various customary affirmative and negative covenants, including prohibiting the Company from incurring indebtedness without the lender’s consent. The Credit Facility also includes a financial covenant that requires the Company to maintain a minimum fixed charge coverage ratio of 1.10 to 1.00 for the applicable measurement period, if the Company's Total Liquidity (as defined in the Credit Facility) is less than $5.0 million. The Company was in compliance with all applicable covenants at SeptemberJune 30, 2017.
2020.
The Credit Facility also includes customary events of default, including events of default relating to non-payment of amounts due under the Credit Facility, material inaccuracy of representations and warranties, violation of covenants, bankruptcy and insolvency, failure to comply with health care laws, violation of certain of the Company’s existing agreements, and the occurrence of a change of control. Under the Credit Facility, if an event of default occurs, the lender will have the right to terminate the commitments and accelerate the maturity of any loans outstanding.
Insurance Premium Finance Agreements
In July 2016, the Company entered into two insurance premium finance agreements (the Finance Agreements) with First Insurance Funding Corporation and AFCO Acceptance Corporation (the Lenders), under which the Lenders agreed to pay premiums, taxes and fees to insurance companies on the Company's behalf for various insurance policies. The Company financed an aggregate of $1.2 million under the Finance Agreements with annual interest rates between 2% and 4%. The Company recorded the total amounts due to the Lenders as short-term debt on the balance sheet. At June 30, 2017, the financed amount plus accrued interest was paid off and no amounts were outstanding under the Finance Agreements, and no additional amounts have been financed under the Finance Agreements since then.
SEASPINE HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Paycheck Protection Program
4. TRANSACTIONS WITH INTEGRA
PriorIn April 2020, due to the spin-off,economic uncertainty resulting from the impact of the COVID-19 pandemic on the Company's operations and pursuant to certain supply agreements subsequentsupport its ongoing operations and retain all employees, the Company applied for a loan under the Paycheck Protection Program (PPP) of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The Company received a loan in the original principal amount of $7.2 million. The Company subsequently repaid $1.0 million of the loan. Under the terms of the PPP, subject to specified limitations, the spin-off, SeaSpine purchased aloan may be forgiven if the proceeds are used in accordance with the CARES Act. The Company intends to use the loan proceeds for purposes consistent with the terms of the PPP and intends to apply for forgiveness of the entire loan; however, no assurance is provided that the Company will obtain forgiveness of the loan in whole or in part. Any unforgiven portion of raw materials and finished goods from Integra for SeaSpine's Mozaik familythe loan is payable over two years at an interest rate of products, and SeaSpine contract manufactured certain finished goods for Integra. The Company's purchases1%, with a deferral of raw materials and Mozaik product finished goods from Integra totaled $0.1 million for each of the three months ended September 30, 2017 and 2016, and $0.4 million and $1.1 millionpayments for the nine months ended September 30, 2017 and 2016, respectively. The Company's sale of finished goods sold to Integra under its contract manufacturing arrangement was immaterial for each of the three months ended September 30, 2017 and 2016, and totaled $0.4 million and $0.2 million for the nine months ended September 30, 2017 and 2016, respectively.
Pursuant to a transition services agreement, Integra and SeaSpine provided certain services to one another following the spin-off, and Integra and SeaSpine agreed to indemnify each other against certain liabilities arising from their respective businesses. Under this agreement, Integra provided the Company with certain support functions, including information technology, accounting and other financial functions, regulatory affairs and quality assurance, human resources and other administrative support. The Company incurred no costs under this agreement for either of the three or nine months ended September 30, 2017, an immaterial amount for the three months ended September 30, 2016, and approximately $0.3 million for the nine months ended September 30, 2016.first six months.
4. INVESTMENTS
The amortized cost, estimated fair value and gross unrealized gains and losses on investments are shown in the table below:
|
| | | | | | | | | | | | | | | |
| June 30, 2020 |
| Amortized Cost | | Gross Unrealized | | Fair Value |
| | Gains | | (Losses) | |
| (In thousands) |
U.S. Treasury Bills | $ | 25,015 |
| | $ | 101 |
| | $ | — |
| | $ | 25,116 |
|
There were no realized gains or losses during the three and six months ended June 30, 2020. As of December 31, 2019, there were no short-term investments.
5. INVENTORIES
Inventories consisted of the following:of: |
| | | | | | | |
| June 30, 2020 | | December 31, 2019 |
| (In thousands) |
Finished goods | $ | 35,412 |
| | $ | 30,042 |
|
Work in process | 8,364 |
| | 10,847 |
|
Raw materials | 6,854 |
| | 6,266 |
|
| $ | 50,630 |
| | $ | 47,155 |
|
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
| (In thousands) |
Finished goods | $ | 31,182 |
| | $ | 30,922 |
|
Work in process | 8,214 |
| | 10,554 |
|
Raw materials | 2,880 |
| | 3,823 |
|
| $ | 42,276 |
| | $ | 45,299 |
|
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at historical cost less accumulated depreciation and amortization and any impairment charges. The Company provides for depreciation using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the lesser of the lease term or the useful life. The cost of major additions and improvements is capitalized, while maintenance and repair costs that do not improve or extend the lives of the respective assets are charged to operations as incurred. The cost of computer software obtained for internal use is accounted for in accordance with the Accounting Standards Codification (ASC) 350-40, Internal-Use Software.
The cost of purchased spinal instruments which the Company consigns to hospitals and independent sales agents to support surgeries is initially capitalized as construction in progress. The amount is either then reclassified to spinal instrumentinstruments and sets, and depreciation is initiated when instruments are put together in a newly built set with spinal implants, or directly expensed for the instruments that are used to replace damaged instruments in an existing set. The depreciation expense and direct expense for replacement instruments are recorded in selling general and administrativemarketing expense.
SEASPINE HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Property, plant and equipment balances and corresponding useful lives were as follows: |
| | | | | | | | | | | | | |
| June 30, 2020 | | December 31, 2019 | | Useful Lives |
| (In thousands) | | |
Leasehold improvements | $ | 5,956 |
| | $ | 5,878 |
| | Shorter of lease term or useful life |
Machinery and production equipment | 9,038 |
| | 8,562 |
| | | 3 | - | 10 | years |
Spinal instruments and sets | 29,303 |
| | 25,511 |
| | | 4 | - | 5 | years |
Information systems and hardware | 7,778 |
| | 7,442 |
| | | 3 | - | 7 | years |
Furniture and fixtures | 1,456 |
| | 1,412 |
| | | 3 | - | 5 | years |
Construction in progress | 9,941 |
| | 9,716 |
| | | | | | |
Total | 63,472 |
| | 58,521 |
| | | | | | |
Less accumulated depreciation and amortization | (35,880 | ) | | (32,770 | ) | | | | | | |
Property, plant and equipment, net | $ | 27,592 |
| | $ | 25,751 |
| | | | | | |
|
| | | | | | | | | |
| September 30, 2017 | | December 31, 2016 | | Useful Lives |
| (In thousands) | | |
Leasehold improvement | $ | 5,320 |
| | $ | 5,003 |
| | Lease Term |
Machinery and production equipment | 7,014 |
| | 6,826 |
| | 3-10 years |
Spinal instrument sets | 23,187 |
| | 26,618 |
| | 5 years |
Information systems and hardware | 7,402 |
| | 6,918 |
| | 3-7 years |
Furniture and fixtures | 1,102 |
| | 1,058 |
| | 3-5 years |
Construction in progress | 7,505 |
| | 7,828 |
| | |
Total | 51,530 |
| | 54,251 |
| | |
Less accumulated depreciation and amortization | (29,666 | ) | | (32,388 | ) | | |
Property, plant and equipment, net | $ | 21,864 |
| | $ | 21,863 |
| | |
Depreciation and amortization expenses totaled $1.0$1.6 million and $1.1$1.2 million for the three months ended SeptemberJune 30, 20172020 and 2016,2019, respectively, and $3.1 million and $3.4$2.3 million for the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, respectively. The cost of purchased instruments used to replace damaged instruments in existing sets and recorded directly to the instrument replacement expense totaled $0.4$0.6 million and $0.2$0.4 million for the three months ended SeptemberJune 30, 20172020 and 2016,2019, respectively, and $1.1$0.9 million and $1.0 million for the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, respectively.
For the three and ninesix months ended SeptemberJune 30, 2016,2020, the Company recorded impairment charges to selling and marketing expense totaling $0.2 million and $0.9 million, respectively, against spinal instruments that are no longer expected to be placed into service. No impairmentImpairment charges against spinal instruments were recorded for the three or nine months ended SeptemberJune 30, 2017.2020 and the three and six months ended June 30, 2019 were immaterial.
SEASPINE HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. IDENTIFIABLE INTANGIBLE ASSETS
Identifiable intangible assets are initially recorded at fair value at the time of acquisition, generally using an income or cost approach. The Company capitalizes costs incurred to renew or extend the term of recognized intangible assets and amortizes those costs over their expected useful lives.
Primarily as a result of an expected shift in future product revenue mix more toward a parallel expanding interbody device designed based on the Company’s internally developed technology and, in turn, lower future revenue anticipated for the lordotic expanding implant based on technology the Company acquired from N.L.T. Spine Ltd. (NLT) and NLT Spine, Inc., a wholly owned subsidiary of NLT, the Company's estimated future net sales associated with those NLT Spine product technologies decreased. Accordingly, the Company evaluated the ongoing value of the product technology intangible assets associated with the acquisition of these assets. Based on this evaluation, the Company determined that intangible assets with a carrying amount of $1.6 million were no longer recoverable and were impaired, and the Company wrote those intangible assets down to their estimated fair value of $0.3 million at March 31, 2020. Significant estimates used in determining the estimated fair value include measurements estimating cash flows and determining the appropriate discount rate, which are considered Level 3 inputs under Codification 820.
The components of the Company’s identifiable intangible assets were as follows:were: | | | September 30, 2017 | June 30, 2020 |
| Weighted Average Life | | Cost | | Accumulated Amortization | | Net | Weighted Average Life | | Cost | | Accumulated Amortization | | Net |
| (Dollars in thousands) | (Dollars in thousands) |
Product technology | 12 years | | $ | 40,769 |
| | $ | (24,967 | ) | | $ | 15,802 |
| 12 years | | $ | 32,641 |
| | $ | (29,255 | ) | | $ | 3,386 |
|
Customer relationships | 12 years | | 56,830 |
| | (35,773 | ) | | 21,057 |
| 12 years | | 56,830 |
| | (44,488 | ) | | 12,342 |
|
Trademarks/brand names | — | | 300 |
| | (300 | ) | | — |
| — | | 300 |
| | (300 | ) | | — |
|
| | $ | 97,899 |
| | $ | (61,040 | ) | | $ | 36,859 |
| | $ | 89,771 |
| | $ | (74,043 | ) | | $ | 15,728 |
|
|
| | | | | | | | | | | | | |
| December 31, 2019 |
| Weighted Average Life | | Cost | | Accumulated Amortization | | Net |
| (Dollars in thousands) |
Product technology | 12 years | | $ | 34,158 |
| | $ | (28,912 | ) | | $ | 5,246 |
|
Customer relationships | 12 years | | 56,830 |
| | (42,903 | ) | | 13,927 |
|
Trademarks/brand names | — | | 300 |
| | (300 | ) | | — |
|
| | | $ | 91,288 |
| | $ | (72,115 | ) | | $ | 19,173 |
|
|
| | | | | | | | | | | | | |
| December 31, 2016 |
| Weighted Average Life | | Cost | | Accumulated Amortization | | Net |
| (Dollars in thousands) |
Product technology | 12 years | | $ | 40,569 |
| | $ | (22,218 | ) | | $ | 18,351 |
|
Customer relationships | 12 years | | 56,830 |
| | (33,396 | ) | | 23,434 |
|
Trademarks/brand names | — | | 300 |
| | (300 | ) | | — |
|
| | | $ | 97,699 |
| | $ | (55,914 | ) | | $ | 41,785 |
|
Annual amortization expense (including amounts reported in cost of goods sold) is expected to be approximately $6.8 million in 2017, $6.5 million in 2018, $5.8 million in 2019, $4.9$4.2 million in 2020, and $4.9$4.1 million in 2021. Amortization expense totaled $1.72021, $4.0 million in 2022, $3.4 million in 2023, and $1.6$1.5 million forin 2024. For the three months ended SeptemberJune 30, 20172020 and 2016,2019, amortization expense totaled $1.0 million and $1.5 million, respectively, and included $0.9$0.2 million and $0.7 million, respectively, of amortization of product technology intangible assets that is presented within cost of goods sold. Amortization expense totaled $5.1$2.1 million and $5.6$3.1 million for the ninesix months ended SeptemberJune 30, 20172020 and
SEASPINE HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
2016, 2019, respectively, and included $2.7$0.5 million and $2.0$1.5 million, respectively, of amortization of product technology intangible assets that is presented within cost of goods sold.
SEASPINE HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. BUSINESS COMBINATIONS
In August 2016, the Company entered into an asset purchase agreement with N.L.T Spine Ltd. (NLT), and NLT Spine, Inc., a wholly owned subsidiary of NLT, pursuant to which the Company agreed to purchase certain of the assets of NLT’s medical device business, including substantially all of NLT’s medical device intellectual property related to the ownership, design, development, manufacture, marketing and commercial exploitation of certain expandable interbody devices. The acquisition was undertaken to increase the Company's product offering in expandable interbody devices.
At the initial closing under the asset purchase agreement, the Company entered into (i) an exclusive license agreement with NLT, pursuant to which the Company received an exclusive, worldwide license to make, use, import, offer for sale, sell and otherwise commercially exploit NLT’s expandable interbody device products , (ii) a transition services agreement with NLT, pursuant to which NLT agreed to provide certain services with respect to the continued development of the acquired intellectual property and (iii) a non-competition and non-solicitation agreement with NLT, pursuant to which NLT and its affiliates agreed not to compete with the Company with respect to the acquired intellectual property, subject to certain exceptions.
FAIR VALUE MEASUREMENTS
The purchase price consisted of an initial cash payment to NLT of $1.0 million, which was paid in September 2016 upon the initial closing, and the issuance in January 2017 of 350,000 sharesfair values of the Company’s common stock with a totalassets and liabilities, including contingent consideration liabilities, are measured at fair value of $2.5 million at issuanceon a recurring basis, and are determined under the fair value categories as contingent closing consideration upon the satisfaction of certain conditions, including FDA 510(K) clearance of onefollows (in thousands):
|
| | | | | | | | | | | | | | | | |
| | Total | | Quoted Price in Active Market (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
June 30, 2020: | | | | | | | | |
Short-term investments | | $ | 25,116 |
| | $ | 25,116 |
| | $ | — |
| | $ | — |
|
| | | | | | | | |
Contingent consideration liabilities- current | | $ | 2,011 |
| | $ | — |
| | $ | — |
| | $ | 2,011 |
|
Contingent consideration liabilities- non-current | | 95 |
| | — |
| | — |
| | 95 |
|
Total contingent consideration | | $ | 2,106 |
| | $ | — |
| | $ | — |
| | $ | 2,106 |
|
|
| | | | | | | | | | | | | | | | |
| | Total | | Quoted Price in Active Market (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
December 31, 2019: | | | | | | | | |
Short-term investments | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| | | | | | | | |
Contingent consideration liabilities- current | | $ | 1,864 |
| | $ | — |
| | $ | — |
| | $ | 1,864 |
|
Contingent consideration liabilities- non-current | | 230 |
| | — |
| | — |
| | 230 |
|
Total contingent consideration | | $ | 2,094 |
| | $ | — |
| | $ | — |
| | $ | 2,094 |
|
Short-term investments are classified with Level 1 of the acquired product technologies. In accordance withfair value hierarchy because they use quoted market prices in active markets for identical assets.
Under the terms of the 2016 asset purchase agreement between the number of shares issued was determined based onCompany and NLT, the volume weighted average closing price (VWAP) of the Company's common stock during the 20 trading day period ending one trading day prior to the issuance date, subject to a minimum and maximum VWAP of $10.00 and $17.00, respectively. The VWAP over such 20-trading day period was $7.58 and therefore $10.00 was used.
The Company is also obligated to pay up to a maximum of $5.0 million in milestone payments to NLT, payable at the Company's election in cash or in shares of its common stock, whichstock. Such milestone payments are contingent on the Company's achievement of four independent events related to the commercialization of the product technologies the Company acquired product technologies.in the transaction. The Company achieved one of the milestones during the three months ended June 30, 2020 and elected to pay the milestone payment at a value of $1.0 million in shares in July 2020. Additionally, the Company is required tomust pay royalty payments, in cash, to NLT equal to declining (over time) percentages of the Company’s future net sales of certain of the acquired product technologies not to exceed $43.0 million in the aggregate. The Company has the option to terminate any future obligation to make royalty payments by making a one-time cash payment to NLT of $18.0 million.
The Company accounted for this transaction as a business combination in accordance with ASC 805 Business Combinations, and as such, the assets acquired have been recorded at their respective fair values. There were no liabilities assumed. The determination of fair value for the identifiable intangible assets acquired requires extensive use of estimates and judgments. Significant estimates include estimating cash flows and determining the appropriate discount rate, which are considered significant unobservable inputs (Level 3) under the fair value concepts defined in ASC 820. Intangible assets acquired were valued at $9.3 million as of the initial closing date and recorded as product technology intangible assets, which are being amortized ratably over a useful life of 10 years from the initial closing. Acquisition costs of $0.5 million incurred were recorded as selling, marketing and administrative expenses.
The following table summarizes the estimated fair value of total consideration to be paid to NLT as of September 26, 2016, the date of the initial closing. The Company estimated the fair value of the contingent consideration, including contingent milestone payments and contingent royalty payments, using a probability weighted approach that considers the possible outcomes based on assumptions related to the timing and probability of the product launch dates, discount rates matched to the timing of payments, and probability of success rates and discount adjustments on the related cash flows. Subsequent to the acquisition date, at each reporting period, the contingent consideration liabilities will be remeasured at current fair value with changes to be recorded in the consolidated statements of operations. The total purchase price was allocated entirely to product technology intangible asset.
|
| | | |
(In thousands) | |
Cash paid for purchase | $ | 1,000 |
|
Contingent closing consideration | 2,930 |
|
Contingent milestone payments | 2,310 |
|
Contingent royalty payments | 3,010 |
|
Total purchase price | $ | 9,250 |
|
SEASPINE HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
The unaudited pro forma financial information set forth below assumes that the NLT purchased assets had been acquired on January 1, 2016. The unaudited pro forma financial information includes the effect of estimated amortization charges for acquired intangible assets of $0.2 million and $0.6 million for the three and nine months ended September 30, 2016, respectively, and the estimated research and development expenses for the purchased assets of $0.3 million and $0.8 million for the three and nine months ended September 30, 2016, respectively, and excludes the non-recurring acquisition costs of $0.5 million for each of the three and nine months ended September 30, 2016. There was no adjustment to the total revenues. The unaudited pro forma information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of the periods presented.
The actual amortization charges for acquired intangible assets and research and development expenses for the purchased assets are included in the consolidated statement of operations for the three and nine months ended September 30, 2017, and therefore no adjustment was made to such statement.
|
| | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(In thousands, except per share data) | 2016 | | 2016 |
Operating loss | $ | (9,511 | ) | | $ | (34,945 | ) |
Net loss | (9,467 | ) | | (34,419 | ) |
Net loss per share, basic and diluted | $ | (0.84 | ) | | $ | (3.07 | ) |
Weighted average shares used to compute basic and diluted net loss per share | 11,271 |
| | 11,206 |
|
9. FAIR VALUE MEASUREMENTS
The fair values of the Company’s assets and liabilities, including contingent consideration liabilities, are measured at fair value on a recurring basis, and are determined under the fair value categories as follows (in thousands):
|
| | | | | | | | | | | | | | | | |
| | Total | | Quoted Price in Active Market (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
September 30, 2017: | | | | | | | | |
Contingent consideration liabilities- current | | $ | 900 |
| | $ | — |
| | $ | — |
| | $ | 900 |
|
Contingent consideration liabilities- non-current | | 3,632 |
| | — |
| | — |
| | 3,632 |
|
Total contingent consideration | | $ | 4,532 |
| | $ | — |
| | $ | — |
| | $ | 4,532 |
|
|
| | | | | | | | | | | | | | | | |
December 31, 2016: | | | | | | | | |
Contingent consideration liabilities- current | | $ | 2,855 |
| | $ | — |
| | $ | — |
| | $ | 2,855 |
|
Contingent consideration liabilities- non-current | | 5,125 |
| | — |
| | — |
| | 5,125 |
|
Total contingent consideration | | $ | 7,980 |
| | $ | — |
| | $ | — |
| | $ | 7,980 |
|
Contingent consideration liabilities are classified within Level 3 of the fair value hierarchy because they use significant unobservable inputs. For those liabilities, fair value is determined using a probability-weighted discounted cash flow model and significant inputs which are not observable in the market. The significant inputs include assumptions related to the timing and probability of the product launch dates, estimated future sales of the products, estimated commission rates, discount rates matched to the timing of payments, and probability of success rates.
The following table sets forth the changes in the estimated fair value of the Company’s liabilities measured on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2017.. The gain from change in fair value of contingent closing consideration is the difference between the fair value of shares expected to be issued to NLT based on assumptions as of December 31, 2016, including the forecasted issuance date and stock price, and the fair value of the shares actually issued to NLT on January 31, 2017. The gainloss from change in fair value of contingent milestone and royalty payments resulted from updated estimated timing of payments, probability of success rates, the passage of time, updated discount rates matched to the estimated timing of payments, actual net sales of certain products for the three and ninesix months ended SeptemberJune 30, 2017,2020, and lower estimated net sales for the remainder of 2017 and for future royalty payment periods.
A change in estimated timing of payments, probability of success rates, or estimated net sales for future royalty payment periods would be expected to have a material impact on the fair value of contingent milestone and royalty payments.
SEASPINE HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
| | | | |
Three Months Ended September 30, 2017 | | (in thousands) |
|
Balance as of June 30, 2017 | | $ | 5,777 |
|
Contingent consideration liabilities settled | | (3 | ) |
Gain from change in fair value of contingent milestone and royalty payments recorded in selling, general and administrative expenses | | (1,242 | ) |
Fair value at September 30, 2017 | | $ | 4,532 |
|
|
| | | | |
Three Months Ended June 30, 2020: | | (in thousands) |
|
Balance as of March 31, 2020 | | $ | 2,045 |
|
Contingent consideration liabilities settled | | (39 | ) |
Loss from change in fair value of contingent consideration recorded in general and administrative expenses | | 100 |
|
Fair value at June 30, 2020 | | $ | 2,106 |
|
|
| | | | |
Six Months Ended June 30, 2020: | | (in thousands) |
|
Balance as of January 1, 2020 | | $ | 2,094 |
|
Contingent consideration liabilities settled | | (72 | ) |
Loss from change in fair value of contingent consideration recorded in general and administrative expenses | | 84 |
|
Fair value at June 30, 2020 | | $ | 2,106 |
|
|
| | | | |
Nine Months Ended September 30, 2017 | | (in thousands) |
|
Balance as of January 1, 2017 | | $ | 7,980 |
|
Contingent consideration liabilities settled | | (2,551 | ) |
Gain from change in fair value of contingent closing consideration recorded in other income | | (112 | ) |
Gain from change in fair value of contingent milestone and royalty payments recorded in selling, general and administrative expenses | | (785 | ) |
Fair value at September 30, 2017 | | $ | 4,532 |
|
SEASPINE HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
10.9. EQUITY AND STOCK-BASED COMPENSATION
Common Stock
OnIn January 31, 2017, the Company issued 350,000 shares of common stock to NLT as the settlement of contingent closing consideration pursuant to the terms of the asset purchase agreement entered into with NLT in August 2016. The total fair value of such shares was $2.5 million at issuance. See Note 8, "Business Combinations" above.
In August 2016,2020, the Company entered into an equity distribution agreement (Distribution Agreement)Underwriting Agreement with Piper JaffraySandler & Co. (Piper Jaffray),and Canaccord Genuity LLC relating to the issuance and sale of 6,800,000 shares of the Company’s common stock at a price to the public of $12.50 per share, before underwriting discounts and commissions. Under the terms of that agreement, the Company granted the underwriters an option, exercisable for 30 days, to purchase up to an additional 1,020,000 shares of common stock. The underwriters exercised this option and the offering closed on January 10, 2020 with the sale of 7,820,000 shares of common stock, resulting in net proceeds to the Company of approximately $91.6 million, after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company. The offering was made pursuant to which the Company may offer and sell shares of its common stock in “at the market” (ATM) offerings (as defined in Rule 415 of the Securities Act of 1933, as amended) having an aggregate offering price up to $25.0 million in gross proceeds from time to time through Piper Jaffray acting as sales agent. The shares offered and sold under the Distribution Agreement are covered by aCompany’s shelf registration statement on Form S-3 that was declared effective on August 24, 2016. Under the Distribution Agreement, the Company sold 1,500,000 shares of common stock at an average price per share of $10.78 and received net proceeds of approximately $15.6 million (net of $0.6 million of offering costs) during the nine months ended September 30, 2017. The Company intends to use the net proceeds for general corporate purposes, including paying down outstanding borrowings under the Credit Facility, sales and marketing expenditures aimed at growing its business, and research and development expenditures focused on product development. The Company has the capacity to issue additional shares of its common stock to generate up to $8.8 million of gross proceeds under the Distribution Agreement as of September 30, 2017. Future sales, if any, will depend on a variety of factors including, but not limited to, market conditions, the trading price of the Company’s common stock and the Company’s capital needs.
May 22, 2019.
Equity Award Plans
As of June 30, 2015, Integra had stock options, restricted stock awards, performance stock awards, contract stock awards and restricted stock units outstanding under three plans, the 2000 Equity Incentive Plan, the 2001 Equity Incentive Plan, and the 2003 Equity Incentive Plan. In connection with the spin-off, Integra equity awards granted to individuals who became employees of SeaSpine were converted to equity awards denominated in SeaSpine common stock. In general, each post-conversion award is subject to the same terms and conditions as were applicable to the pre-conversion award.
In May 2015, the Company adopted the 2015 Incentive Award Plan, which was subsequently amended and restated with approval of the Company's stockholders. In February and March 2018, the Company's board of directors approved amendments to the plan that increased the share reserve by an aggregate of 2,726,000 shares over the then-existing share reserve thereunder, subject to stockholder approval. The Company's stockholders (asapproved both amendments in May 2018. On April 13, 2020, the Company's board of directors approved an amendment to the plan that, among other things, increased the share reserve by an aggregate of 3,500,000 shares over the then-existing share reserve thereunder, subject to stockholder approval. The Company's stockholders approved the amendment on June 3, 2020 (the 2015 Incentive Award Plan, as amended and restated to date, the 2015Restated Plan). Under the 2015Restated Plan, the Company can grant its employees, and non-employee directors and consultants incentive stock options and non-qualified stock options, restricted stock, performance stock, dividend equivalent rights, stock appreciation rights, stock payment awards and other incentive awards. The Companyaggregate number of shares that may issue upbe issued or transferred pursuant to 3,509,500awards under the Restated Plan is the sum of (1) the number of shares issuable upon exercise or vesting of the number of Integra equity awards converted to the Company's equity awards under the Restated Plan as of the date of the spin-off and (2) 9,735,500 shares of its common stock in respect of awards granted under the 2015Restated Plan. As of SeptemberJune 30, 2017, there2020, 3,931,226 shares were 290,289 shares available to grantfor issuance under the 2015Restated Plan.
In 2016,June 2018, the Company established the 20162018 Employment Inducement Incentive Award Plan (the 20162018 Inducement Plan). The plan is a broad-basedterms of the 2018 Inducement Plan are substantially similar to the terms of the Restated Plan with these principal exceptions: (1) incentive plan which allows for the issuance of stock-based awards, including non-qualified stock options restricted stockmay not be granted under the 2018 Inducement Plan; (2) there are no annual limits on awards performancethat may be issued to an individual under the 2018 Inducement Plan; (3) awards restricted stock unit awards and stock appreciation rights,granted under the 2018 Inducement Plan are not required to be subject to any prospective officer or otherminimum vesting period; and (4) awards may be granted under the 2018 Inducement Plan only to those individuals and in those circumstances described below. An aggregate of 2,000,000 shares are reserved under the 2018 Inducement Plan. As of June 30, 2020, 1,908,483 shares were available for issuance under the 2018 Inducement Plan. As a result of the approval of the amendment to the Restated Plan by the Company's stockholders in June 2020, no awards will be granted under the 2018 Inducement Plan in the future.
The 2018 Inducement Plan was adopted by the Company’s board of directors without stockholder approval pursuant to Rule 5635(c)(4) of the Nasdaq Listing Rules. In accordance with Rule 5635(c)(4) of the Nasdaq Listing Rules, awards under this plan may only be made to an employee who has not previously been an employee or directormember of SeaSpinethe Company's board of directors or an affiliateof any board of directors of any parent or who is commencing employment with SeaSpinesubsidiary of the Company, or an affiliate following a bona-fidebona fide period of non-employment by SeaSpinethe Company or a parent or subsidiary, if he or she is granted such award in connection with his or her commencement of employment with the Company or a subsidiary and such grant is an affiliate. An aggregate of 1,000,000 shares are reserved for issuance underinducement material to his or her entering into employment with the 2016 Plan. The Company has not awarded any shares under the 2016 Plan as of September 30, 2017.or such subsidiary.
Restricted Stock Awards and Restricted Stock UnitsForfeiture Rate Assumptions
The Company expenses the fair value of restricted stock awards and of restricted stock units on an accelerated basis over the vesting period or requisite service period, whichever is shorter. Stock-based compensation expense related to restricted stockall equity awards and to restricted stock units includes an estimate for forfeitures. The expected forfeiture rate of all equity-based compensation is based on historical experience of pre-vesting forfeitures on awards and options by each homogenoushomogeneous group of shareowners. For awards and options granted to non-executive employees, the forfeiture rate is estimated to be 15%14% annually for the ninesix months ended SeptemberJune 30, 20172020 and 12%13% annually for the ninesix months ended SeptemberJune 30, 2016.
SEASPINE HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
2019. There is no forfeiture rate applied to awards or options granted to non-employee directors or executive employees because their pre-vesting forfeitures are anticipated to be highly unlikely. As individual awards and options become fully vested, stock-based compensation expense is adjusted to recognize actual forfeitures.
ThereRestricted Stock Awards and Restricted Stock Units
Restricted stock award and restricted stock unit grants to employees generally have a requisite service period of three years, and restricted stock award and restricted stock unit grants to non-employee directors generally have a requisite service period of one year. Both are subject to graded vesting. The Company expenses the fair value of restricted stock awards and restricted stock units on an accelerated basis over the vesting period or requisite service period, whichever is shorter.
During each of the three and six months ended June 30, 2020, there were no72,520 shares of restricted stock awards granted to non-employee directors. During the three and six months ended June 30, 2019, there were 64,631 and 76,471 shares of restricted stock awards granted to non-employee directors, during either of the three months ended September 30, 2017 or 2016. There were 120,610 and 75,075 shares ofrespectively. No restricted stock awardsunits were granted to non-employee
SEASPINE HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
directors during the ninethree or six months ended SeptemberJune 30, 20172020 or 2019.
During the three and 2016,six months ended June 30, 2020, 30,267 and 376,754 restricted stock units were granted to employees, respectively. ThereDuring the three and six months ended June 30, 2019, there were 34,8007,800 and 778,755 shares of218,610 restricted stock units granted to employees, during the three and nine months ended September 30, 2017, respectively. Of the totalNo restricted stock unitsawards were granted to employees 131,523 shares were issued in lieu of cash bonuses earned under the annual incentive program for corporate and individual performance in 2016. There were no restricted stock units granted during the three or ninesix months ended SeptemberJune 30, 2016. 2020 or 2019.
As of SeptemberJune 30, 2017,2020, there was approximately $3.2$5.0 million of total unrecognized compensation expense related to the unvested portions of restricted stock awards and of restricted stock units. This costexpense is expected to be recognized over a weighted-average period of approximately 1.21.1 years.
Stock Options
Stock option grants to employees generally have a requisite service period of four years, and stock option grants to non-employee directors generally have a requisite service period of one year. Both are subject to graded vesting. The Company records stock-based compensation expense associated with stock options on an accelerated basis over the variousapplicable vesting periodsperiod within each grant and based on their fair value at the date of grant using the Black-Scholes-Merton option pricing model. There were zero238,491 and 43,5000 stock options granted during the three months ended SeptemberJune 30, 20172020 and 2016,2019, respectively, and 21,500920,250 and 900,524434,708 stock options granted during the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, respectively. The following weighted-average assumptions were used in the calculation of fair value for options grants forgranted during the periodsperiod indicated.
|
| | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
Expected dividend yield | | — | % | | — | % | | — | % | | — | % |
Risk-free interest rate | | 0.2 | % | | 2.5 | % | | 1.2 | % | | 2.5 | % |
Expected volatility | | 53.6 | % | | 30.3 | % | | 41.3 | % | | 30.3 | % |
Expected term (in years) | | 2.5 |
| | 2.9 |
| | 2.6 |
| | 2.9 |
|
|
| | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2016 | | 2017 | | 2016 |
Expected dividend yield | | 0 | % | | 0 | % | | 0 | % |
Risk-free interest rate | | 1.1 | % | | 2.0 | % | | 1.3 | % |
Expected volatility | | 38.1 | % | | 35.7 | % | | 38.3 | % |
Expected term (in years) | | 5.1 |
| | 5.1 |
| | 4.9 |
|
The Company considered that it has never paid, and does not currently intend to pay, cash dividends. The risk-free interest rates are derived from the U.S. Treasury yield curve in effect on the date of grant for instruments with a remaining term similar to the expected term of the options. Due to the Company’s limited historical data, theThe expected volatility is calculated based upon the historical volatility of comparable companies in the medical device industry whoseCompany's share prices are publicly available for a sufficient period of time.prices. The expected term of "plain vanilla" options is calculated using the simplified method as prescribed by accounting guidance for stock-based compensation. A "plain vanilla" option is an option with the following characteristics: (1) the option is granted at-the-money; (2) exercisability is conditional only on satisfaction of a service condition through the vesting date; (3) employees who terminate their service prior to vesting forfeit the option; (4) employees who terminate their service after vesting are granted limited time to exercise their options; and (5) the option is nontransferable and non-hedgeable. The expectedhistorical weighted average term of any other option is based on disclosures from similar companies with similar grants. In addition, the Company applies an expected forfeiture rate when amortizing stock-based compensation expense. The expected forfeiture rate of options is based on historical experience of pre-vesting forfeitures on awards by each homogenous group of shareowners. The forfeiture rate of options granted to non-executive employees is estimated to be 15% annually for the nine months ended September 30, 2017, and 12% annually for the nine months ended September 30, 2016. There is no forfeiture rate applied to options granted to non-employee directors or executive employees because their pre-vesting forfeitures are anticipated to be highly unlikely. As individual options become fully vested, stock-based compensation expense is adjusted to recognize actual forfeitures.
Company’s options.
As of SeptemberJune 30, 2017,2020, there was approximately $1.2$2.2 million of total unrecognized compensation expense related to unvested stock options. This costexpense is expected to be recognized over a weighted-average period of approximately 1.11.6 years.
SEASPINE HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Employee Stock Purchase Plan
In May 2015, the Company adopted the SeaSpine Holdings Corporation 2015 Employee Stock Purchase Plan, which was amended in December 2015November 2018, as described below (as amended, the ESPP). Under the ESPP, eligible employees may purchase shares of the Company’s common stock through payroll deductions of up to 15% of eligible compensation during an offering period. Generally, each offering period will be for a period of twenty-four24 months as determined by the Company's board of directors. There are four six-month purchase periods in each offering period for contributions to be made and to be converted into shares at the end of the purchase period. In no event may an employee purchase more than 2,500 shares per purchase period based on the closing price on the first trading date of an offering period or more than $25,000 worth of stock during any calendar year. The purchase price for shares to be purchased under the ESPP is 85% of the lesser of the market price of the Company's common stock on the first trading date of an offering period or on any purchase date during an offering period (June 30 or December 31).
TheSubject to stockholder approval, on and effective as of November 2, 2018, the Company's board of directors approved an amendment to the ESPP authorizespursuant to which the issuance of up toshare reserve under the ESPP would increase from 400,000 shares of common stock pursuant to purchase rights granted to employees.800,000 shares. The Company's stockholders approved that amendment in May 2019. The ESPP is intended to qualify as an “employee stock purchase plan” within the meaning of Section 423 of the Internal Revenue Code of 1986, as amended (the IRC). The first offering period under the ESPP commenced on January 1, 2016 and will end on December 31, 2017. However, the ESPP contains a restart feature, such that if the market price of the stock at the end of any six-month purchase period is lower than the market price at the original grant date of an offering period, that offering period will terminate after that purchase date, and a new two-year offering period will commence on the January 1 or July 1 immediately following the date the original offering period terminated. This restart feature was first triggered on the purchase date that occurred on June 30, 2016,2019, such that the offering period that commenced on January 1, 20162019 was terminated, and a new two-year offering period commenced on July 1, 2016.2019 and would end on June 30, 2021. This restart feature was triggered again on the purchase date that occurred on December 31, 2016,2019, such that the offering periodperiods that commenced on each of July 1, 2016 was2018 and July 1, 2019 were terminated, and a new two-year offering period commenced on January 1, 20172020 and would end on December 31, 2021. This restart feature was triggered again on the purchase date that occurred on June 30, 2020, such that the offering period that commenced on January 1, 2020 was terminated, and a new two-year offering period commenced on July 1, 2020 and will end on December 31, 2018.June 30, 2022. The Company applied share-based payment modification accounting to the awards that were initially valued at the grant date to determine the amount of any incremental fair value associated with the modified awards. The impact to stock-based compensation expense for modifications during the three and ninesix months ended SeptemberJune 30, 20172020 was immaterial.
During the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, there were 70,53778,360 and 39,95564,008 shares of common stock, respectively, purchased under the ESPP.
The Company recognized $0.4 million in expense related to the ESPP for each of the six months ended June 30, 2020 and 2019. As of June 30, 2020, 202,102 shares were available under the ESPP for future issuance.
The Company estimates the fair value of shares issued to employees under the ESPP using the Black-Scholes-Merton option-pricing model. The following weighted average assumptions were used in the calculation of fair value of shares under the ESPP at the grant date for the periods indicated:
|
| | | | | |
| Three and Six Months Ended June 30, |
| 2020 | | 2019 |
Expected dividend yield | — | % | | — | % |
Risk-free interest rate | 1.6 | % | | 2.5 | % |
Expected volatility | 34.4 | % | | 39.0 | % |
Expected term (in years) | 1.2 |
| | 1.2 |
|
|
| | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Expected dividend yield | 0 | % | | 0 | % | | 0 | % | | 0 | % |
Risk-free interest rate | 1.3 | % | | 0.5 | % | | 1.0 | % | | 0.6 | % |
Expected volatility | 25.3 | % | | 29.3 | % | | 28.1 | % | | 30.5 | % |
Expected term (in years) | 1.2 |
| | 1.2 |
| | 1.2 |
| | 1.2 |
|
SEASPINE HOLDINGS CORPORATION
11.NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. LEASES
The impact of the adoption of Topic 842 to the Company's applicable balance sheet items as of January 1, 2020 is presented in the table below. The standard did not have a material impact to the Company's unaudited condensed consolidated statements of operations or comprehensive loss or cash flows.
|
| | | | | | | | | | | |
(in thousands) | December 31, 2019 | | Impact of Adoption of ASC 842 | | January 1, 2020 |
ASSETS | | | | | |
Right of use assets | $ | — |
| | $ | 9,059 |
| | $ | 9,059 |
|
Total assets | $ | 141,718 |
| | $ | 9,059 |
| | $ | 150,777 |
|
LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | |
Current liabilities: | | | | | |
Other accrued expenses and current liabilities | 5,444 |
| | (138 | ) | | 5,306 |
|
Current portion of operating lease liabilities | — |
| | 2,080 |
| | 2,080 |
|
Total current liabilities | 30,478 |
| | 1,942 |
| | 32,420 |
|
Operating lease liabilities, net of current portion | — |
| | 8,367 |
| | 8,367 |
|
Other liabilities | 1,480 |
| | (1,250 | ) | | 230 |
|
Total liabilities | $ | 31,958 |
| | $ | 9,059 |
| | $ | 41,017 |
|
Total stockholders' equity | $ | 109,760 |
| | $ | — |
| | $ | 109,760 |
|
Total liabilities and stockholders' equity | $ | 141,718 |
| | $ | 9,059 |
| | $ | 150,777 |
|
The Company determines if an arrangement is a lease at inception. The Company's leases primarily relate to administrative, manufacturing, research, and distribution facilities and various manufacturing, office and transportation equipment throughequipment. Lease assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Lease assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As the Company's leases do not provide an implicit rate, the Company's incremental borrowing rate is used as a discount rate, based on the information available at the commencement date, in determining the present value of lease payments. Lease assets also include the impact of any prepayments made and are reduced by impact of any lease incentives.
The Company made an accounting policy election for short-term leases, such that the Company will not recognize a lease liability or lease asset on its balance sheet for leases with a lease term of twelve months or less as of the commencement date. Rather, any short-term lease payments will be recognized as an expense on a straight-line basis over the lease term. The current period short-term lease expense reasonably reflects the Company's short-term lease commitments.
The Company made a policy election for all classifications of leases to combine lease and non-lease components and to account for them as a single lease component. Variable lease payments are excluded from the lease liability and recognized in the period in which the obligation is incurred. Additionally, lease terms may include options to extend or terminate the lease when it is reasonably certain the Company will exercise the option.
The Company’s lease portfolio only includes operating leases. As of June 30, 2020, the weighted average remaining lease agreements. Duringterm of these operating leases was 5.7 years and the nineweighted average discount rate was 6.5%. For the three and six months ended SeptemberJune 30, 2017, the Company entered into two2020, lease agreements: one for an office located in Wayne, Pennsylvania, where the Company designs spinal implantsexpense, which represents expense from operating leases, was $0.6 million and which facilitates the Company's interactions with customers in the Eastern United States, and another for an office located in Lyon, France, which serves as the Company's international sales and marketing office. The terms of these two lease agreements are through June 2022 and February 2026, respectively, and both have an average annual cost of less than $0.1 million.$1.1 million, respectively.
SEASPINE HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Future minimum lease payments underA summary of the Company's operating leasesremaining lease liabilities at SeptemberJune 30, 20172020 are as follows:
|
| | | |
| Operating Leases |
|
| (In thousands) |
|
2020 | 1,894 |
|
2021 | 3,340 |
|
2022 | 2,238 |
|
2023 | 1,563 |
|
2024 | 1,369 |
|
Thereafter | 3,273 |
|
Total undiscounted value of lease liabilities | $ | 13,677 |
|
Less: present value adjustment | (2,052 | ) |
Less: short-term leases not capitalized | (1,964 | ) |
Present value of lease liabilities | 9,661 |
|
Less: current portion of lease liability | (2,110 | ) |
Operating lease liability, less current portion | $ | 7,551 |
|
|
| | | |
| Payments Due by Calendar Year |
|
| (In thousands) |
|
2017 | $ | 535 |
|
2018 | 2,082 |
|
2019 | 2,130 |
|
2020 | 2,179 |
|
2021 | 2,221 |
|
Thereafter | 8,474 |
|
Total minimum lease payments | $ | 17,621 |
|
Total lease expense for the three months ended September 30, 2017 and 2016 was $0.5 million and $0.7 million, respectively, and $1.6 million and $2.3 million for the nine months ended September 30, 2017 and 2016, respectively.
12.11. INCOME TAXES
The following table provides a summary ofsummarizes the Company’s effective tax rate for the periods indicated:
|
| | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| | | | | | | |
Reported income tax expense rate | (0.2 | )% | | (0.2 | )% | | (0.3 | )% | | (0.2 | )% |
|
| | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| | | | | | | |
Reported tax rate | 0.8 | % | | 1.1 | % | | — | % | | 1.6 | % |
The Company reported anrecorded a provision for income tax benefitexpense for the three and ninesix months ended SeptemberJune 30, 20172020 primarily related to the release of its ASC 740-10 (Accounting for Uncertainty in Income Taxes) liabilities due to the expiration of the statute of limitations, offset by income tax expenses related to foreign and state operations.
The Company reported an income tax benefit for the three and nine months ended September 30, 2016 which was primarily the result of a refund of tax initially paid toward the income tax return for its U.S. subsidiary which was not part of the U.S consolidated tax group for the tax period January 1, 2015 through August 31, 2015 as well as the release of its ASC 740-10 liabilities due to the expiration of the statute of limitations.
In addition, for all periods presented, the pretax losses incurred by the consolidated U.S. tax group received no corresponding tax benefit because the Company has concluded that it is more likely than not that the Company will be unable to realize the value of any resulting deferred tax assets. The Company will continue to assess its position in future periods to determine if it is appropriate to reduce a portion of its valuation allowance in the future.
On March 27, 2020, Congress enacted the CARES Act to provide certain relief as a result of the COVID-19 pandemic. The CARES Act, among other things, includes provisions relating to net operating loss carryback periods, alternative minimum tax credit refunds, and modification to the net interest deduction limitations. The CARES Act did not have a material impact on the Company's consolidated financial statements for the three or six months ended June 30, 2020. The Company continues to monitor any effects on its financial statements that may result from the CARES Act.
13.
SEASPINE HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
12. COMMITMENTS AND CONTINGENCIES
In consideration for certain technology, manufacturing, distribution, and selling rights and licenses granted to the Company, the Company has agreed to pay royalties on sales of certain products sold by the Company. The royalty payments thatExcept for the royalties paid to NLT, the royalties the Company made under these agreementspaid are included in the consolidated statements of operations as a component of cost of goods sold.sold in the consolidated statements of operations.
The Company is subject to various legal proceedings in the ordinary course of its business with respect to its products, its current or former employees, and its commercial relationships, some of which have been settled by the Company. In the opinion of management, such proceedings are either adequately covered by insurance or otherwise indemnified, or are not expected, individually or in the aggregate, to result in a material adverse effect on the Company's financial condition. However, it is possible that the Company's results of operations, financial position and cash flows in a particular period could be materially affected by these contingencies.
The Company accrues for loss contingencies when it is deemed probable that a loss has been incurred and that loss is estimable. The amounts accrued are based on the full amount of the estimated loss before considering insurance proceeds, and do not include an estimate for legal fees expected to be incurred in connection with the loss contingency. While uncertainty exists, the Company does not believe there are any pending legal proceedings that would have a material impact on the Company’s financial position, cash flows or results of operations.
SEASPINE HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
14.13. SEGMENT AND GEOGRAPHIC INFORMATION
Segment Reporting
Management assessed its segment reporting based on how it internally manages and reports the results of its business to its chief operating decision maker. Management reviews financial results, manages the business and allocates resources on an aggregate basis. Therefore, financial results are reported in a single operating segment: the development, manufacture and marketing of orthobiologics and of spinal implants. The Company reports revenue in two2 product categories: orthobiologics and spinal implants. Orthobiologics products consist of a broad range of advanced and traditional bone graft substitutes that are designed to improve bone fusion rates following surgery. The spinal implants portfolio consists of an extensive line of products for minimally invasive surgery, complex spine, deformity and degenerative procedures.
Revenue, net consisted of the following:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Orthobiologics | $ | 16,333 |
| | $ | 16,186 |
| | $ | 51,073 |
| | $ | 49,649 |
|
Spinal implants | 15,409 |
| | 15,555 |
| | 46,759 |
| | 46,692 |
|
Total revenue, net | $ | 31,742 |
| | $ | 31,741 |
| | $ | 97,832 |
| | $ | 96,341 |
|
The Company attributes revenues to geographic areas based on the location of the customer. Total
The following table disaggregates revenue by major geographic area consistedsales channel for each of the following:periods presented (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
United States | $ | 28,245 |
| | $ | 28,485 |
| | $ | 87,209 |
| | $ | 87,041 |
|
International | 3,497 |
| | 3,256 |
| | 10,623 |
| | 9,300 |
|
Total revenue, net | $ | 31,742 |
| | $ | 31,741 |
| | $ | 97,832 |
| | $ | 96,341 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2020 | | Six Months Ended June 30, 2020 |
| United States | | International | | Total | | United States | | International | | Total |
Orthobiologics | $ | 12,665 |
| | $ | 1,190 |
| | $ | 13,855 |
| | $ | 30,026 |
| | $ | 3,450 |
| | $ | 33,476 |
|
Spinal implants | 13,214 |
| | 1,520 |
| | 14,734 |
| | 27,666 |
| | 3,558 |
| | 31,224 |
|
Total revenue, net | $ | 25,879 |
| | $ | 2,710 |
| | $ | 28,589 |
| | $ | 57,692 |
| | $ | 7,008 |
| | $ | 64,700 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2019 | | Six Months Ended June 30, 2019 |
| United States | | International | | Total | | United States | | International | | Total |
Orthobiologics | $ | 18,160 |
| | $ | 1,894 |
| | $ | 20,054 |
| | $ | 35,197 |
| | $ | 3,883 |
| | $ | 39,080 |
|
Spinal implants | 16,910 |
| | 2,342 |
| | 19,252 |
| | 31,857 |
| | 4,519 |
| | 36,376 |
|
Total revenue, net | $ | 35,070 |
| | $ | 4,236 |
| | $ | 39,306 |
| | $ | 67,054 |
| | $ | 8,402 |
| | $ | 75,456 |
|
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The terms “we,” “us,” “our,” “SeaSpine” or the “Company” refer collectively to SeaSpine Holdings Corporation and its wholly-owned subsidiaries, unless otherwise stated. All information presented in this report is based on our fiscal year. Unless otherwise stated, references to particular years, quarters, months or periods refer to our fiscal years ending December 31 and the associated quarters, months and periods of those fiscal years.
This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). The matters discussed in these forward-looking statements are subject to risk and uncertainties that could cause actual results to differ materially from those made, projected or implied in the forward-looking statements. Such risks and uncertainties may also give rise to future claims and increase exposure to contingent liabilities. Please see the “Risk Factors” section included in our Annual Report on Form 10-K for the year ended December 31, 20162019 (the 20162019 10-K), as updated in our Quarterly Reports on Form 10-Q for quarters ended after that date, and as updated in our Current Report on Form 8-K dated April 6, 2020, for a discussion of the uncertainties, risks and assumptions associated with these statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
You can identify these forward-looking statements by forward-looking words such as “believe,” “may,” “could,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “seek,” “plan,” “expect,” “should,”��� “would” and similar expressions.
These risks and uncertainties arise from (among other factors) the following:
general economic and business conditions, in both domestic and international markets;
:
our expectations and estimates concerning future financial performance, financing plans and the impact of competition;
anticipated trendsour ability to successfully develop new and next-generation products and the costs associated with designing and developing those new and next-generation products, including risks inherent in our business, including healthcare reform in the United States, increased pricing pressure from our competitorsnewly initiated collaborations, such as with restor3d, Inc. and 7D Surgical, or hospitals, exclusion from major healthcare systems, whetheruse of nascent manufacturing techniques, such as a result of unwillingness to provide required pricing or otherwise, and changes in third-party payment systems;additive processing/3D printing;
physicians’ willingness to adopt our recently launched and planned products, customers’ continued willingness to pay for our products and third-party payors’ willingness to provide or continue coverage and appropriate reimbursement for any of our products and our ability to secure regulatory clearance and/or approval for products in development;
our ability to attract and retain new, high-quality distributors, whether as a result of perceived deficiencies, or gaps, in our existing product portfolio, inability to reach agreement on financial or other contractual terms or otherwise, as well as disruption associated with restrictive covenants to, which distributors may be subject and potential litigation and expense associate therewith;
the impact that the COVID-19 pandemic may have with respect to deferrals of procedures using our products, disruptions or restrictions on the ability of many of our employees and of third parties on which we rely to work effectively, and temporary closures of our facilities and of the facilities of our customers and suppliers;
the full extent to which the COVID-19 pandemic will, directly or indirectly, impact our business, results of operations and financial condition, including our sales, expenses, supply chain integrity, manufacturing capability, research and development activities, and employee-related compensation, including as a result of (1) a resurgence in COVID-19 transmission and infection after the loosening of “stay at home” restrictions or resumption of surgical procedures, (2) actions required or recommended to contain or treat COVID-19, in light of any or all of the foregoing or other as-yet unanticipated developments, and (3) the direct and indirect economic impact, both domestically and abroad, of COVID-19 as a result of any or all of the foregoing, including actions taken by local, state, national and international governmental agencies, whether such impact affects customers, suppliers, or markets generally, all of which currently are highly uncertain;
our ability to continue to invest in medical education and training, product development, and/or sales and commercial marketing initiatives at levels sufficient to drive future revenue growth;
anticipated trends in our business, including consolidation among hospital systems, healthcare reform in the United States, increased pricing pressure from our competitors or hospitals, exclusion from major healthcare systems, whether as a result of unwillingness to provide required pricing or otherwise, and changes in third-party payment systems;
the risk of supply shortages, and the associated potentially long-term disruption to product sales, including as a result of our dependence on PcoMed to supply products incorporating NanoMetalene technology and a limited number of third-party suppliers for components and raw materials and certain processing services;
unexpected expenses and delay and our ability to manage timelines and costs related to manufacturing our products including as a result of litigation or developing and supporting the full commercial launch of new products;
our ability to obtain additional debt and equity financing to fund capital expenditures and working capital requirements and acquisitions;
our ability to complete acquisitions, integrate operations post-acquisition and maintain relationships with customers of acquired entities;
our ability to support the safety and efficacy of our products with long-term clinical data;
existing and future regulations affecting our business, both in the United States and internationally, and enforcement of those regulations;
anticipated demand for our products and our ability to purchase or produce our products in sufficient quantities to meet customer demand;
our ability to manage timelines and costs related to manufacturing our products;
our ability to attract and retain new, high-quality independent sales agents, whether as a result of inability to reach agreement on financial or other contractual terms or otherwise, disruption to our existing distribution network as new independent sales agents are added, and the ability of new independent sales agents to generate growth or offset disruption to existing independent sales agents;
our ability to successfully develop new and next-generation products and the costs associated with designing and developing those new and next-generation products;
our ability to support the safety and efficacy of our products with long-term clinical data;
our ability to obtain additional debt and equity financing to fund capital expenditures and working capital requirements and acquisitions;
the risk of supply shortages, including our dependence on a limited number of third-party suppliers for components and raw materials;
our ability to protect our intellectual property, including unpatented trade secrets, and to operate without infringing or misappropriating the proprietary rights of others;
our ability to complete acquisitions, integrate operations post-acquisitiongeneral economic and maintain relationships with customers of acquired entities;business conditions, in both domestic and
international markets; and
other risk factors described in our other SEC filings, including in the section entitled “Risk Factors” of the 2016 10-K.
2019 10-K, in Item 8.01 of our Current Report on Form 8-K dated April 6, 2020, and in Part II, Item 1A of our Quarterly Reports on Form 10-Q for quarters ended after December 31, 2019.
These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this report.
Overview
We are a global medical technology company focused on the design, development and commercialization of surgical solutions for the treatment of patients suffering from spinal disorders. We have a comprehensive portfolio of orthobiologics and spinal implant solutions to meet the varying combinations of products that neurosurgeons and orthopedic spine surgeons need to perform fusion procedures in the lumbar, thoracic and cervical spine. We believe this broad combined portfolio of orthobiologics and spinal implant products is essential to meet the “complete solution” requirements of neurosurgeons and orthopedic spinesuch surgeons.
We report revenue in two product categories: orthobiologics and spinal implants. Our orthobiologics products consist of a broad range of advanced and traditional bone graft substitutes that are designed to improve bone fusion rates following a wide range of orthopedic surgeries, including spine, hip, and extremities procedures. Our spinal implant portfolio consists of an extensive line of products to facilitate spinal fusion in MIS,degenerative, minimally invasive surgery (MIS), and complex spine,spinal deformity and degenerative procedures.
Our U.S. sales organization consists of regional and territory managers who oversee a broad network of independent orthobiologics and spinal implant sales agents. We pay these sales agents to whom we pay commissions based on the sales of our products. Our international sales organization consists of a sales management team that oversees a network of independent orthobiologics and spinal implant stocking sales agentsdistributors that purchase products directly from us and independently sell them. For the ninethree months ended SeptemberJune 30, 20172020 and 2016,2019, international sales accounted for approximately 11%9% and 10%11% of our revenue, respectively, and 11% for each of the six months ended June 30, 2020 and 2019, respectively. Our policy is not to sell our products through or to participate in physician-owned distributorships.
For the nine months ended September 30, 2017, our total revenue, net was $97.8 million and our net loss was $24.6 million. For the same period, revenue from sales of orthobiologics and spinal implants totaled $51.0 million and $46.8 million, respectively. We expect to continue to incur losses as we further invest in the expansion of our business, primarily in sales, marketing and research and development related expenditures, and from the general and administrative expenses we expect to incur. As of September 30, 2017, our cash and cash equivalents totaled $16.7 million.
SeaSpine was incorporated in Delaware on February 12, 2015 in connection with the spin-off of the orthobiologics and spinal implant business of Integra.Integra LifeSciences Holdings Corporation. The spin-off occurred on July 1, 2015.
Components of Our Results of Operations
Revenue
Our net revenue is derived primarily from the sale of orthobiologics and spinal implant products across North America, Europe, Asia Pacific and Latin America. Sales are reported net of returns, rebates, group purchasing organization fees and other customer allowances.
In the United States, we generate most of our revenue by consigning our orthobiologics products and by consigning or loaning our spinal implant sets to hospitals and independent sales agents, who in turn either deliver them to hospitals for a single surgical procedure, after which they are returned to us, or leave them with hospitals that are high volume users for multiple procedures. The spinal implant sets typically contain the instruments, disposables, and spinal implants required to complete a surgery. We ship replacement inventory to independent sales agents to replace the consigned inventory used in surgeries. We maintain and replenish loaned sets at our kitting and distribution centers and return replenished sets to a hospital or independent sales agent for the next procedure. We recognize revenue on these consigned or loaned products when they have been used or implanted in a surgical procedure.
For all other sales transactions, including sales to international stocking sales agentsdistributors and private label partners, we generally recognize revenue when the products are shipped toand the customer or stocking sales agent anddistributor obtains control of the transfer of title and risk of loss occurs.
products. There is generally no customer acceptance or other condition that prevents us from recognizing revenue in accordance with the delivery terms for these sales transactions.
Cost of Goods Sold
Cost of goods sold primarily consists of the costs of finished goods purchased directly from third parties and raw materials used in the manufacturemanufacturing of our products, plant and equipment overhead, labor costs and packaging costs, amortization of product technology intangible assets and freight.costs. The majority of our orthobiologics products are designed and manufactured internally. The cost of human tissue and fixed manufacturing overhead costs are significant drivers of the costscost of goods sold, and consequently our orthobiologics products, at current production volumes, generate lower gross margin than our spinal implant products. We rely on third-party suppliers to manufacture our spinal implant products, and we assemble them into surgical sets at our kitting and distribution centers. BeginningThe cost to inspect incoming finished goods is included in the fourth quartercost of 2016, we began outsourcing a portion of that assembly function to a third party logistics provider.goods sold. Other costs included in cost of goods sold include amortization of product technology intangible assets, royalties, shipping, inspectionscrap and consignment losses, and charges for expired, excess and obsolete inventory. We expect our cost of goods sold to continue to increase in absolute dollars as our sales volume increases over time.
Selling General and AdministrativeMarketing Expense
Our selling general and administrative (SG&A)marketing expenses consist primarily of sales commissions to independent sales agents, cost of medical education and training, payroll and other headcount related expenses, marketing expenses, shipping, third-party logistics expenses, depreciation of instrument sets, instrument replacement expense, stock-based compensation, marketingand cost of medical education and training.
General and Administrative Expense
Our general and administrative expenses supply chainconsist primarily of payroll and distributionother headcount related expenses and expenses for information technology, legal, human resources, insurance, finance, facilities, and management andmanagement. We also record gains or losses associated with changes in the fair value of contingent consideration liabilities.liabilities in general and administrative expenses.
Research and Development Expense
Our research and development (R&D) expenses primarily consist of expenses related to the headcount for engineering, product development, clinical affairs and regulatory functions, as well as consulting services, third-party prototyping services, outside research and clinical studies activities, and materials, production and other costs associated with development of our products. We expense R&D costs as they are incurred.
While our R&D expenses fluctuate from period to period based on the timing of specific initiatives, we expect that these costs will increase over time as we continue to design and commercialize new products and expand our product portfolio, add related personnel and conduct additional clinical activities.
Intangible Amortization
Our intangible amortization, including the amounts reported in cost of goods sold, consists of acquisition-related amortization and impairments related to product discontinuations.amortization. We expect total annual amortization expense (including amounts reported in cost of goods sold) to be approximately $6.8 million in 2017, $6.5 million in 2018, $5.8 million in 2019, $4.9$4.2 million in 2020, and $4.9$4.1 million in 2021.
RESULTS2021, $4.0 million in 2022, $3.4 million in 2023 and $1.5 million in 2024. See “RESULTS OF OPERATIONS |
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | 2017 vs. 2016 | | Nine Months Ended September 30, | | 2017 vs. 2016 |
(In thousands, except percentages) | 2017 | | 2016 | | % Change | | 2017 | | 2016 | | % Change |
Total revenue, net | $ | 31,742 |
| | $ | 31,741 |
| | — | % | | $ | 97,832 |
| | $ | 96,341 |
| | 1.5 | % |
Cost of goods sold | 12,176 |
| | 13,881 |
| | (12.3 | )% | | 39,342 |
| | 42,094 |
| | (6.5 | )% |
Gross profit | 19,566 |
| | 17,860 |
| | 9.6 | % | | 58,490 |
| | 54,247 |
| | 7.8 | % |
Gross margin | 61.6 | % | | 56.3 | % | | | | 59.8 | % | | 56.3 | % | |
|
|
Operating expenses: | | | | | | | | | | |
|
|
Selling, general and administrative | 23,674 |
| | 23,803 |
| | (0.5 | )% | | 71,893 |
| | 76,166 |
| | (5.6 | )% |
Research and development | 2,834 |
| | 2,600 |
| | 9.0 | % | | 9,228 |
| | 8,534 |
| | 8.1 | % |
Intangible amortization | 792 |
| | 955 |
| | (17.1 | )% | | 2,376 |
| | 3,517 |
| | (32.4 | )% |
Total operating expenses | 27,300 |
| | 27,358 |
| | (0.2 | )% | | 83,497 |
| | 88,217 |
| | (5.4 | )% |
Operating loss | (7,734 | ) | | (9,498 | ) | | (18.6 | )% | | (25,007 | ) | | (33,970 | ) | | (26.4 | )% |
Other income (expense), net | 215 |
| | (59 | ) | | (464.4 | )% | | 387 |
| | (33 | ) | | (1,272.7 | )% |
Loss before income taxes | (7,519 | ) | | (9,557 | ) | | (21.3 | )% | | (24,620 | ) | | (34,003 | ) | | (27.6 | )% |
Benefit for income taxes | (57 | ) | | (103 | ) | | (44.7 | )% | | (12 | ) | | (559 | ) | | (97.9 | )% |
Net loss | $ | (7,462 | ) | | $ | (9,454 | ) | | (21.1 | )% | | $ | (24,608 | ) | | $ | (33,444 | ) | | (26.4 | )% |
ThreeOPERATIONS-Three Months Ended SeptemberJune 30, 20172020 Compared to Three Months Ended SeptemberJune 30, 20162019-Impairment of Intangible Assets,” below.
COVID-19 Pandemic - Impact on our Business
The COVID-19 pandemic has presented a substantial public health and economic challenge around the world and has materially and adversely affected our business. We continue to closely monitor developments related to the COVID-19 pandemic and our decisions will continue to be driven by the health and well-being of our employees, our distributor and surgeon customers, and their patients while maintaining operations to support our customers and their patients in the near-term.
| |
• | Surgery Deferrals: From late March 2020 to mid-May 2020, among other impacts on our business related to the pandemic, surgeons and their patients deferred surgical procedures in which our products otherwise could have been used. This decrease in demand for our products recovered to varying degrees in the latter half of May and into June 2020, though still below pre-pandemic levels, as local conditions improved in certain geographies that opened after an initial improvement in COVID-19 infection rates, allowing patients to resume receiving their treatments. However, a resurgence of infections has been observed, which may further restrict demand similar to early phases of the pandemic. As a result, we expect to see continued volatility through at least the duration of the pandemic as geographies respond to current local conditions. The duration of further deferrals of surgical procedures, the magnitude of such deferrals, the timing and extent of the economic impact of the pandemic, and the pace at which the economy recovers therefrom, cannot be determined at this time. We continue to work closely with our surgeon customers, distributors and suppliers to navigate through this unforeseen event while maintaining flexible operations and investing for future growth. |
| |
• | Operations. Our sales, marketing and research and development efforts have continued since the outbreak of the pandemic, but steps we have taken in response to the pandemic have adversely affected our business. To protect the safety, health and well-being of our employees, distributor and surgeon customers, and communities, we implemented preventative measures including travel restrictions, the temporary closures of certain of our facilities, and requiring all office-based employees to work from home, except for those related to manufacturing, distribution and select others, as permitted under governmental orders. Production at our Irvine orthobiologics manufacturing facility was temporarily halted in April and May 2020. Production restarted in June 2020. The change in the manner in which our workforce is functioning could adversely affect sales and may delay the product launches we planned in 2020 and beyond. Due to patients resuming to receive surgical procedures in May and June, we proceeded with certain product launches we deferred during the early phases of the pandemic, however the pandemic could still adversely affect our future revenue growth or such growth may not be consistent with the timelines we anticipated previously. |
Our manufacturing, distribution and supply chain has largely been uninterrupted, but could be disrupted as a result of the pandemic, including because of staffing shortages, production slowdowns, stoppages, or disruptions in delivery systems.
| |
• | Cost Containment: We continue to carefully manage expenses and cash spend to preserve liquidity and we initiated actions to generate savings in areas such as travel, events, clinical studies, and consulting. We also implemented a temporary freeze on new hires and our senior leadership team voluntarily agreed to a 25% reduction in their base salaries from April 26, 2020 through June 20, 2020. |
| |
• | Product Development: We continue to evaluate the timing and scope of planned product development and launch initiatives and capital expenditures and inventory growth investments to support those initiatives. Based on that evaluation, we expect to delay and/or reduce some of the spending associated with these initiatives, which may delay the |
product launches we planned in 2020 and beyond, and could adversely affect our future revenue growth or such growth may not be consistent with the timelines we anticipated previously. We expect to increase our spending on product launches, capital expenditures and inventory from the levels during the early stages of the pandemic as our revenue and cash flow improve and as our expectations for demand of our products improve.
| |
• | 1st Half 2020 Results. Due to the impacts from the COVID-19 pandemic, our total revenue, net, gross profit and gross margin for the first and second quarters of 2020 were significantly lower compared to the same periods in 2019. |
At this time, the full extent of the impact of the COVID-19 pandemic on our business, financial condition and results of operations is uncertain and cannot be predicted with reasonable accuracy and will depend on future developments that are also uncertain and cannot be predicted with reasonable accuracy.
For additional information on the various risks posed by the COVID-19 pandemic on our business, financial condition and results of operations, please see Item 1A. Risk Factors in this report.
RESULTS OF OPERATIONS
|
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | 2020 vs. 2019 | | Six Months Ended June 30, | | 2020 vs. 2019 |
(In thousands, except percentages) | 2020 | | 2019 | | % Change | | 2020 | | 2019 | | % Change |
Total revenue, net | $ | 28,589 |
| | $ | 39,306 |
| | (27 | )% | | $ | 64,700 |
| | $ | 75,456 |
| | (14 | )% |
Cost of goods sold | 11,659 |
| | 14,317 |
| | (19 | )% | | 25,471 |
| | 27,896 |
| | (9 | )% |
Gross profit | 16,930 |
| | 24,989 |
| | (32 | )% | | 39,229 |
| | 47,560 |
| | (18 | )% |
Gross margin | 59.2 | % | | 63.6 | % | | | | 60.6 | % | | 63.0 | % | |
|
|
Operating expenses: | | | | | | | | | | |
|
|
Selling and marketing | 17,013 |
| | 19,896 |
| | (14 | )% | | 37,489 |
| | 38,870 |
| | (4 | )% |
General and administrative | 8,845 |
| | 7,712 |
| | 15 | % | | 17,399 |
| | 16,046 |
| | 8 | % |
Research and development | 3,974 |
| | 3,587 |
| | 11 | % | | 7,869 |
| | 7,099 |
| | 11 | % |
Intangible amortization | 792 |
| | 793 |
| | — | % | | 1,584 |
| | 1,585 |
| | — | % |
Impairment of intangible assets | — |
| | 4,993 |
| | 100 | % | | 1,325 |
| | 4,993 |
| | (73 | )% |
Total operating expenses | 30,624 |
| | 36,981 |
| | (17 | )% | | 65,666 |
| | 68,593 |
| | (4 | )% |
Operating loss | (13,694 | ) | | (11,992 | ) | | 14 | % | | (26,437 | ) | | (21,033 | ) | | 26 | % |
Other income (expense), net | 14 |
| | (25 | ) | | (156 | )% | | 241 |
| | 48 |
| | 402 | % |
Loss before income taxes | (13,680 | ) | | (12,017 | ) | | 14 | % | | (26,196 | ) | | (20,985 | ) | | 25 | % |
Provision for income taxes | 33 |
| | 19 |
| | 74 | % | | 68 |
| | 40 |
| | 70 | % |
Net loss | $ | (13,713 | ) | | $ | (12,036 | ) | | 14 | % | | $ | (26,264 | ) | | $ | (21,025 | ) | | 25 | % |
Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019
Revenue
Total revenue, net for the three months ended SeptemberJune 30, 2017,2020, was $31.7$28.6 million, relatively unchangeda decrease of 27% compared to the same period in 2016.2019.
| | | | Three Months Ended September 30, | | 2017 vs. 2016 | | Three Months Ended June 30, | | 2020 vs. 2019 |
| | 2017 | | 2016 | | % Change | | 2020 | | 2019 | | % Change |
| | (In thousands) | | | | (In thousands) | | |
Orthobiologics | | $ | 16,333 |
| | $ | 16,186 |
| | 0.9 | % | | $ | 13,855 |
| | $ | 20,054 |
| | (31 | )% |
United States | | 14,890 |
| | 14,593 |
| | 2.0 | % | | 12,665 |
| | 18,160 |
| | (30 | )% |
International | | 1,443 |
| | 1,593 |
| | (9.4 | )% | | 1,190 |
| | 1,894 |
| | (37 | )% |
% of total revenue, net | | 51 | % | | 51 | % | | | |
| | | | | | | | | | | | |
Spinal Implants | | $ | 15,409 |
| | $ | 15,555 |
| | (0.9 | )% | | $ | 14,734 |
| | $ | 19,252 |
| | (23 | )% |
United States | | 13,355 |
| | 13,892 |
| | (3.9 | )% | | 13,214 |
| | 16,910 |
| | (22 | )% |
International | | 2,054 |
| | 1,663 |
| | 23.5 | % | | 1,520 |
| | 2,342 |
| | (35 | )% |
% of total revenue, net | | 49 | % | | 49 | % | | | |
| | | | | | | | | | | | |
Total revenue, net | | $ | 31,742 |
| | $ | 31,741 |
| | — | % | | $ | 28,589 |
| | $ | 39,306 |
| | (27 | )% |
| | | | Three Months Ended September 30, | | 2017 vs. 2016 | | Three Months Ended June 30, | | 2020 vs. 2019 |
| | 2017 | | 2016 | | % Change | | 2020 | | 2019 | | % Change |
| | (In thousands) | | | | (In thousands) | | |
United States | | $ | 28,245 |
| | $ | 28,485 |
| | (0.8 | )% | | $ | 25,879 |
| | $ | 35,070 |
| | (26 | )% |
International | | 3,497 |
| | 3,256 |
| | 7.4 | % | | 2,710 |
| | 4,236 |
| | (36 | )% |
Total revenue, net | | $ | 31,742 |
| | $ | 31,741 |
| | — | % | | $ | 28,589 |
| | $ | 39,306 |
| | (27 | )% |
Intangible amortization expense, excluding the amounts reported in cost of goods sold for product technology intangible assets, decreased $0.2remained consistent at $0.8 million to $0.8 millionfor both the three months ended June 30, 2020 and 2019.
Intangible amortization expense, excluding the amounts reported in cost of goods sold for product technology intangible assets, decreased $1.1was $1.6 million to $2.4for each of the six months ended June 30, 2020 and 2019.