UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q

(Mark One)
x☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended SeptemberJune 30, 20192020
or
o☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to  
COMMISSION FILE NO. 001-36905
SeaSpine Holdings Corporation
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWAREDelaware 47-3251758
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
 
(I.R.S. EMPLOYER
IDENTIFICATION NO.)
5770 Armada Drive, Carlsbad, California92008
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)(ZIP CODE)
5770 Armada Drive, Carlsbad, CA 92008
(Address of principal executive offices) (zip code)
REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE: (760) (760) 727-8399
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common StockSPNEThe Nasdaq Global Select Market
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yesx   No  o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yesx    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act.


Large accelerated fileroAccelerated filer
x
    
Non-accelerated fileroSmaller reporting company
x
☒
    
  Emerging growth company
x
☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o☐  No  ý

The number of shares of the registrant’s common stock, $0.01 par value, outstanding as of October 25, 2019July 29, 2020 was 19,066,831.27,521,745.









SEASPINE HOLDINGS CORPORATION
INDEX


 
Page
Number
PART I. FINANCIAL INFORMATION
 
  
Item 1. Financial Statements
4
  
Condensed Consolidated Statements of Operations for the three and ninesix months ended SeptemberJune 30, 2020 and 2019 and 2018 (Unaudited)
4
  
Condensed Consolidated Statements of Comprehensive Loss for the three and ninesix months ended SeptemberJune 30, 2020 and 2019 and 2018 (Unaudited)
5
  
Condensed Consolidated Balance Sheets as of SeptemberJune 30, 20192020 and December 31, 20182019 (Unaudited)
6
  
Condensed Consolidated Statements of Cash Flows for the ninesix months ended SeptemberJune 30, 2020 and 2019 and 2018 (Unaudited)
7
  
Condensed Consolidated Statements of Equity for the three and ninesix months ended SeptemberJune 30, 2020 and 2019 and 2018 (Unaudited)
8
  
Notes to Unaudited Condensed Consolidated Financial Statements
10
  
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
2526
  
Item 3. Quantitative and Qualitative Disclosures About Market Risk
36
Item 4. Controls and Procedures
36
PART II. OTHER INFORMATION
38
  
Item 1. Legal Proceedings4. Controls and Procedures
38
  
Item 1A. Risk Factors
38
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
39
Item 3. Defaults Upon Senior Securities
39
Item 4. Mine Safety DisclosuresPART II. OTHER INFORMATION
40
  
Item 5. Other Information1. Legal Proceedings
40
  
Item 6. Exhibits1A. Risk Factors
4140
  
SIGNATURESItem 2. Unregistered Sales of Equity Securities and Use of Proceeds
4244
  
Exhibit 31.1
Item 3. Defaults Upon Senior Securities
44
 
Exhibit 31.2
Item 4. Mine Safety Disclosures
45
 
Exhibit 32.1
Item 5. Other Information
45
 
Exhibit 32.2
Item 6. Exhibits
46
 
EX-101 INSTANCE DOCUMENT
SIGNATURES
48
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT 







PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

SEASPINE HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
 Three Months Ended June 30, Six Months Ended June 30,
 2020 2019 2020 2019
Total revenue, net$28,589
 $39,306
 $64,700
 $75,456
Cost of goods sold11,659
 14,317
 25,471
 27,896
Gross profit16,930
 24,989
 39,229
 47,560
Operating expenses:       
Selling and marketing17,013
 19,896
 37,489
 38,870
General and administrative8,845
 7,712
 17,399
 16,046
Research and development3,974
 3,587
 7,869
 7,099
Intangible amortization792
 793
 1,584
 1,585
Impairment of intangible assets—
 4,993
 1,325
 4,993
Total operating expenses30,624
 36,981
 65,666
 68,593
Operating loss(13,694) (11,992) (26,437) (21,033)
Other income (expense), net14
 (25) 241
 48
Loss before income taxes(13,680) (12,017) (26,196) (20,985)
Provision for income taxes33
 19
 68
 40
Net loss$(13,713) $(12,036) $(26,264) $(21,025)
Net loss per share, basic and diluted$(0.50) $(0.64) $(0.98) $(1.11)
Weighted average shares used to compute basic and diluted net loss per share27,279
 18,917
 26,852
 18,894
 Three Months Ended September 30, Nine Months Ended September 30,
 2019 2018 2019 2018
Total revenue, net$39,888
 $35,834
 $115,344
 $105,418
Cost of goods sold14,407
 14,247
 42,303
 40,986
Gross profit25,481
 21,587
 73,041
 64,432
Operating expenses:       
Selling, general and administrative30,134
 27,041
 85,050
 76,940
Research and development3,896
 3,203
 10,995
 8,783
Intangible amortization792
 792
 2,377
 2,376
Impairment of intangible assets—
 —
 4,993
 —
Total operating expenses34,822
 31,036
 103,415
 88,099
Operating loss(9,341) (9,449) (30,374) (23,667)
Other expense, net(97) (190) (49) (327)
Loss before income taxes(9,438) (9,639) (30,423) (23,994)
Provision (benefit) for income taxes225
 (107) 265
 4
Net loss$(9,663) $(9,532) $(30,688) $(23,998)
Net loss per share, basic and diluted$(0.51) $(0.65) $(1.62) $(1.66)
Weighted average shares used to compute basic and diluted net loss per share19,051
 14,750
 18,947
 14,477




The accompanying notes are an integral part of these condensed consolidated financial statements.





SEASPINE HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
(In thousands)

 Three Months Ended September 30, Nine Months Ended September 30,
 2019 2018 2019 2018
Net loss$(9,663) $(9,532) $(30,688) $(23,998)
Other comprehensive (loss) income       
Foreign currency translation adjustments(327) (57) (388) (238)
Unrealized (loss) gain on investments(9) —
 5
 —
Comprehensive loss$(9,999) $(9,589) $(31,071) $(24,236)




 Three Months Ended June 30, Six Months Ended June 30,
 2020 2019 2020 2019
Net loss$(13,713) $(12,036) $(26,264) $(21,025)
Other comprehensive (loss) income       
Foreign currency translation adjustments142
 108
 (22) (61)
Unrealized (loss) gain on investments(89) 3
 101
 14
Comprehensive loss$(13,660) $(11,925) $(26,185) $(21,072)
The accompanying notes are an integral part of these condensed consolidated financial statements.









SEASPINE HOLDINGS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except par value data)
 June 30, 2020 December 31, 2019
    
ASSETS   
Current assets:   
Cash and cash equivalents$75,346
 $20,199
Short-term investments25,116
 —
Trade accounts receivable, net of allowances of $394 and $11120,836
 24,902
Inventories, net50,630
 47,155
Prepaid expenses and other current assets1,480
 3,906
  Total current assets173,408
 96,162
Property, plant and equipment, net27,592
 25,751
Right of use assets8,363
 —
Intangible assets, net15,728
 19,173
Other assets578
 632
Total assets$225,669
 $141,718
LIABILITIES AND STOCKHOLDERS' EQUITY   
Current liabilities:   
Short-term debt$6,173
 $—
Accounts payable, trade11,295
 7,448
Accrued compensation6,008
 7,879
Accrued commissions6,363
 7,843
Contingent consideration liabilities2,011
 1,864
Short-term lease liability2,110
 —
Other accrued expenses and current liabilities4,364
 5,444
  Total current liabilities38,324
 30,478
Long-term lease liability7,551
 —
Other liabilities95
 1,480
Total liabilities45,970
 31,958
    
Commitments and contingencies

 

Stockholders' equity:   
Preferred stock, $0.01 par value; 15,000 authorized; no shares issued and outstanding at June 30, 2020 and December 31, 2019—
 —
Common stock, $0.01 par value; 60,000 authorized; 27,399 and 19,124 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively274
 191
Additional paid-in capital380,252
 284,211
Accumulated other comprehensive income1,513
 1,434
Accumulated deficit(202,340) (176,076)
Total stockholders' equity179,699
 109,760
Total liabilities and stockholders' equity$225,669
 $141,718
 September 30, 2019 December 31, 2018
    
ASSETS   
Current assets:   
Cash and cash equivalents$22,314
 $24,233
Short-term investments4,996
 29,800
Trade accounts receivable, net of allowances of $188 and $85023,720
 20,335
Inventories, net48,011
 42,742
Prepaid expenses and other current assets3,723
 2,948
  Total current assets102,764
 120,058
Property, plant and equipment, net26,641
 22,623
Intangible assets, net19,412
 28,712
Other assets691
 949
Total assets$149,508
 $172,342
LIABILITIES AND STOCKHOLDERS' EQUITY   
Current liabilities:   
Accounts payable, trade$11,559
 $9,214
Accrued compensation6,477
 7,900
Accrued commissions7,372
 5,451
Contingent consideration liabilities711
 129
Other accrued expenses and current liabilities5,091
 3,852
  Total current liabilities31,210
 26,546
Contingent consideration liabilities, net of current portion1,116
 2,367
Other liabilities1,430
 1,344
Total liabilities33,756
 30,257
    
Commitments and contingencies
 
Stockholders' equity:   
Preferred stock, $0.01 par value; 15,000 authorized; no shares issued and outstanding at September 30, 2019 and December 31, 2018—
 —
Common stock, $0.01 par value; 60,000 authorized; 19,060 and 18,669 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively191
 187
Additional paid-in capital281,830
 277,096
Accumulated other comprehensive income1,219
 1,602
Accumulated deficit(167,488) (136,800)
Total stockholders' equity115,752
 142,085
Total liabilities and stockholders' equity$149,508
 $172,342



The accompanying notes are an integral part of these condensed consolidated financial statements.









SEASPINE HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 Six Months Ended June 30,
 2020 2019
OPERATING ACTIVITIES:   
Net loss$(26,264) $(21,025)
Adjustments to reconcile net loss to net cash used in operating activities:   
Depreciation and amortization5,216
 5,456
Instrument replacement expense930
 986
Impairment of intangible assets1,325
 4,993
Impairment of spinal instruments210
 30
Provision for excess and obsolete inventories2,976
 1,329
Stock-based compensation4,752
 3,917
Loss/(gain) from change in fair value of contingent consideration liabilities84
 (506)
Other(25) 52
Changes in assets and liabilities:   
Accounts receivable4,048
 (2,787)
Inventories(5,587) (4,716)
Prepaid expenses and other current assets2,417
 682
Other non-current assets(10) (2)
Accounts payable1,820
 1,871
Accrued commissions(1,487) 754
Other accrued expenses and current liabilities(2,339) (2,897)
Other non-current liabilities(15) 100
Net cash used in operating activities(11,949) (11,763)
INVESTING ACTIVITIES:   
Purchases of property and equipment(4,463) (4,900)
Additions to technology assets(850) —
Purchases of short-term investments(25,007) —
Maturities of short-term investments—
 15,000
Net cash (used in) provided by investing activities(30,320) 10,100
FINANCING ACTIVITIES:   
Proceeds from Paycheck Protection Program Loan7,173
 —
Repayments of Paycheck Protection Program Loan(1,000) —
Proceeds from issuance of common stock- employee stock purchase plan698
 671
Proceeds from exercise of stock options948
 219
Proceeds from issuance of common stock, net of offering costs91,622
 —
Repurchases of common stock for income tax withheld upon vesting of restricted stock awards and restricted stock units(1,898) (1,908)
Payment of contingent consideration liabilities in connection with acquisition of
business
(72) (56)
Net cash provided by (used in) financing activities97,471
 (1,074)
Effect of exchange rate changes on cash and cash equivalents(55) (33)
Net change in cash and cash equivalents55,147
 (2,770)
Cash and cash equivalents at beginning of period20,199
 24,233
Cash and cash equivalents at end of period$75,346
 $21,463
Supplemental cash flow information:   
Interest paid$78
 $76
Income taxes paid$105
 $88
Non-cash investing activities:   
Property and equipment in liabilities$3,167
 $3,604
 Nine Months Ended September 30,
 2019 2018
OPERATING ACTIVITIES:   
Net loss$(30,688) $(23,998)
Adjustments to reconcile net loss to net cash used in operating activities:   
Depreciation and amortization7,929
 7,950
Instrument replacement expense1,632
 1,269
Impairment of intangible assets4,993
 —
Provision for excess and obsolete inventories2,358
 2,940
Amortization of debt issuance costs57
 94
Deferred income tax provision176
 36
Stock-based compensation5,907
 3,449
Gain from change in fair value of contingent consideration liabilities(571) (893)
Changes in assets and liabilities:   
Accounts receivable(3,531) 1,069
Inventories(6,413) (3,446)
Prepaid expenses and other current assets(236) (622)
Other non-current assets(2) (218)
Accounts payable2,117
 3,763
Accrued commissions1,918
 (1,032)
Other accrued expenses and current liabilities(1,013) 898
Other non-current liabilities237
 140
Net cash used in operating activities(15,130) (8,601)
INVESTING ACTIVITIES:   
Purchases of property and equipment(10,337) (6,565)
Maturities of short-term investments25,000
 —
Net cash provided by (used in) investing activities14,663
 (6,565)
FINANCING ACTIVITIES:   
Borrowings under credit facility—
 7,000
Proceeds from issuance of common stock, net of offering costs- ATM transactions—
 8,514
Proceeds from issuance of common stock- employee stock purchase plan671
 546
Proceeds from exercise of stock options230
 886
Repurchases of common stock for income tax withheld upon vesting of restricted stock awards and restricted stock units(2,070) (600)
Payment of contingent consideration liabilities in connection with acquisition of
business
(98) (113)
Net cash (used in) provided by financing activities(1,267) 16,233
Effect of exchange rate changes on cash and cash equivalents(185) (73)
Net change in cash and cash equivalents(1,919) 994
Cash and cash equivalents at beginning of period24,233
 10,788
Cash and cash equivalents at end of period$22,314
 $11,782
Supplemental cash flow information:   
Interest paid$115
 $109
Income taxes paid$98
 $126
Non-cash investing activities:   
Property and equipment in liabilities$1,358
 $538


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, 201919,124
 $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 issued213
 2
 —
 —
 —
 2
Issuance of common stock - public offering7,820
 78
 91,544
 —
 —
 91,622
Issuance of common stock - exercise of stock options80
 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, 202027,237
 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 issued79
 1
 (1) —
 —
 —
Issuance of common stock under employee stock purchase plan78
 1
 697
 —
 —
 698
Issuance of common stock- exercise of stock options5
 —
 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, 202027,399
 $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, 201818,669
 $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 issued216
 2
 —
 —
 —
 2
Issuance of common stock - exercise of stock options11
 —
 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, 201918,896
 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 issued71
 1
 —
 —
 —
 1
Issuance of common stock under employee stock purchase plan64
 1
 670
 —
 —
 671
Issuance of common stock- exercise of stock options5
 —
 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, 201919,036
 $191
 $279,994
 $1,555
 $(157,825) $123,915
Net loss—
 —
 —
 —
 (9,663) (9,663)
Foreign currency translation adjustment—
 —
 —
 (327) —
 (327)
Unrealized loss on short-term investments—
 —
 —
 (9) —
 (9)
Restricted stock issued23
 —
 —
 —
 —
 —
Issuance of common stock- exercise of stock options1 —
 10
 —
 —
 10
Repurchases of common stock for income tax withheld upon vesting of restricted stock awards and restricted stock units—
 —
 (164) —
 —
 (164)
Stock-based compensation—
 —
 1,990
 —
 —
 1,990
Balance September 30, 201919,060
 191
 281,830
 1,219
 (167,488) 115,752

  Common Stock  Additional  Accumulated Other   Total
 Number of    Paid-In Comprehensive Accumulated Stockholders'
 Shares  Amount  Capital Income Deficit  Equity
Balance December 31, 201713,508
 $135
 $206,844
 $1,950
 $(103,276) $105,653
Net loss—
 —
 —
 —
 (7,105) (7,105)
Foreign currency translation adjustment—
 —
 —
 240
 —
 240
Issuance of common stock upon vesting of restricted stock units147
 2
 —
 —
 —
 2
Issuance of common stock, net of offering costs- ATM transactions882
 9
 8,505
 —
 —
 8,514


 Common Stock  Additional  Accumulated Other   Total
Number of    Paid-In Comprehensive Accumulated Stockholders'
Shares  Amount  Capital Income Deficit  Equity
Balance December 31, 201818,669
 $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 issued216
 2
 —
 —
 —
 2
Issuance of common stock- exercise of stock options11
 —
 143
 —
 —
 143
Repurchases of common stock for income tax withheld upon vesting of restricted stock awards and restricted stock units(2) —
 (514) —
 —
 (514)—
 —
 (1,851) —
 —
 (1,851)
Stock-based compensation—
 —
 835
 —
 —
 835
—
 —
 1,947
 —
 —
 1,947
Balance March 31, 201814,535
 146
 215,670
 2,190
 (110,381) 107,625
Balance March 31, 201918,896
 189
 277,335
 1,444
 (145,789) 133,179
Net loss—
 —
 —
 —
 (7,361) (7,361)—
 —
 —
 —
 (12,036) (12,036)
Foreign currency translation adjustment—
 —
 —
 (421) —
 (421)—
 —
 —
 108
 —
 108
Issuance of common stock upon vesting of restricted stock units99
 —
 —
 —
 —
 —
Unrealized gain on short-term investments—
 —
 —
 3
 —
 3
Restricted stock issued71
 1
 —
 —
 —
 1
Issuance of common stock under employee stock purchase plan81
 1
 545
 —
 —
 546
64
 1
 670
 —
 —
 671
Issuance of common stock- exercise of stock options20
 —
 250
 —
 —
 250
5
 —
 76
 —
 —
 76
Repurchases of common stock for income tax withheld upon vesting of restricted stock awards and restricted stock units—
 —
 (20) —
 —
 (20)—
 —
 (57) —
 —
 (57)
Stock-based compensation—
 —
 943
 —
 —
 943
—
 —
 1,970
 —
 —
 1,970
Balance June 30, 201814,735
 147
 217,388
 1,769
 (117,742) 101,562
Net loss—
 —
 —
 —
 (9,532) (9,532)
Foreign currency translation adjustment—
 —
 —
 (57) —
 (57)
Issuance of common stock upon vesting of restricted stock units10
 1
 —
 —
 —
 1
Issuance of common stock- exercise of stock options47
 —
 636
 —
 —
 636
Repurchases of common stock for income tax withheld upon vesting of restricted stock awards and restricted stock units—
 —
 (67) —
 —
 (67)
Stock-based compensation—
 —
 1,671
 —
 —
 1,671
Balance September 30, 201814,792
 148
 219,628
 1,712
 (127,274) 94,214
Balance June 30, 201919,036
 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 with the Company’s consolidated financial statements and notes thereto for the year ended December 31, 20182019 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, 20192020 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, 20182019 was derived from the audited consolidated financial statementsbalance sheet for the year ended December 31, 2018.

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, of 2018 was less than $250 million, and as such, the Company qualifies as a smaller reporting company, elected to reflect that determination and is followingintends to use certain of the scaled disclosure accommodations. The Company measured its public float as of the last business day of its second fiscal quarter of 2019 and determined that it will continue to qualify as a smaller reporting company foraccommodations in its SEC filings made in 2020.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 onin May 15, 2013 (the "Supply Agreement")Supply Agreement), which was subsequently assigned to the Company by Integra onin May 21, 2015. For the ninesix months ending SeptemberJune 30, 2019,2020, 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.

SEASPINE HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

Preparing 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 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) under 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 must 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 must 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 FebruaryJune 2016, the Financial Accounting Standard Board (FASB)FASB issued Accounting Standards 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. 2018-15, 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)

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 amendments requiring transition guidance have the same effective dates as Update No. 2016-13 and will be effective for the Company beginning on January 1, 2023. The Company is evaluating the impact of this standard on its consolidated financial statements.
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. The Company will early adopt the standard beginning on January 1, 2020. The Company expects to apply the transition practical expedients allowed by the standard. 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. Improvements. In March 2019, the FASB issued Update No. 2019-01, Leases (Topic 842): Codification Improvements. 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 amendments in ASU 2018-10, ASU 2018-11, ASU 2019-01, and ASU 2019-012019-10 provide additional clarification and implementation guidance on certain aspects of the previously issued ASU 2016-02Topic 842 and have the same effective date and transition requirements as ASU 2016-02. Note 10 to2019-10. The Company early adopted the Condensed Consolidated Financial Statements provides detailsnew standard beginning on January 1, 2020. The Company adopted the new standard electing the optional transition method that allows for a cumulative-effect adjustment in the period of adoption and did not restate prior periods. The Company applied the transition package of practical expedients allowed by the standard. As 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 June 2018, the FASB issued Update No. 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. Accounting. This Update will requirerequires an entity to apply the 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 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, 2020. Early adoption is permitted but no earlier than an entity's adoption date of Topic 606. The Company does not currently expect the adoption of this new standard to have a material impact on its consolidated financial statements.

In July 2018, the FASB issued Update No. 2018-09, Codification Improvements. This Update includes several amendments to the FASB Accounting Standards Codification (Codification) intended to clarify, improve, or correct errors in the Codification. Some amendments do not require transition guidance and are effective upon issuance. The amendments requiring transition guidance will bewas effective for the Company beginning on January 1, 2020. The Company is evaluating the impactadoption of this new standard had no material impact on its consolidated financial statements.

SEASPINE HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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 benefits. The new standard will be effective for the Company beginning on January 1, 2020. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this Update and delay adoption of the additional disclosures until their effective date. The Company is evaluating the impact of this standard on its consolidated financial statements.

In August 2018, the FASB issued Update No. 2018-15, 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 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 Improvementsto Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. This Update includes several amendments to the Codification intended to clarify, improve, or correct errors in the Codification. Some amendments do not require transition guidance and are effective upon issuance. The amendments requiring transition guidance will bewas effective for the Company beginning on January 1, 2020. The Company is evaluating the impactadoption of this new standard had no material impact on its consolidated financial statements.

Recently Adopted Accounting Standards

In May 2014,March 2020, the FASB issued Update No. 2014-09, Revenue from Contracts with Customers2020-04, Reference Rate Reform (Topic 606).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 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 standard as amended by ASU 2015-14, ASU 2016-10 and ASU 2016-12, was effective for the Company beginning on January 1, 2019.March 12, 2020. The Company performed an assessment of the impactadoption of this new standard had no material impact on its consolidated financial statements. In assessing the impact, the Company outlined all revenue streams, and considered the five steps outlined in the standard for product sales, from which substantially all the Company's revenue is generated. The Company analyzed the impact of this new standard on all revenue streams and on all contracts with customers, including by reviewing contracts and current accounting policies and practices to identify differences that would result from applying the requirements under the new standard. The Company adopted the new standard using the modified retrospective methodunder which the cumulative effect of initially applying the new guidance to open contracts as of December 31, 2018 is recognized as an adjustment to the opening balance of retained earnings as of January 1, 2019. The timing of revenue recognition under the new standard is not materially different from the Company's previous revenue recognition policy. As a result of the Company's adoption of the new standard, the Company reclassed its sales return reserve from accounts receivable to a refund liability account within other current liabilities. Based on the Company’s analysis of open contracts as of December 31, 2018, the cumulative effect of applying the new standard was not material.

Revenue is recognized when obligations under the terms of a contract with the Company's customer are satisfied which occurs with the transfer of control of the Company's products. This occurs either upon shipment or delivery of goods, depending on whether the contract is Free on Board (FOB) origin or FOB destination, or, in other situations such as consignment arrangements, when the products are used in a surgical procedure (implanted in a patient). Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products to a customer (transaction price).

To the extent that the transaction price includes variable consideration, such as discounts, list price discounts, rebates, volume discounts and customer payment penalties, the Company estimates the amount of variable consideration that should be included in the transaction price utilizing the most likely amount method. Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. Estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of the Company’s anticipated performance and all information (historical, current and forecasted) that is reasonably available.

The Company reduces revenue by estimates of potential future product returns and other allowances. Provisions for product returns and other allowances are recorded as a reduction to revenue in the period sales are recognized. The Company estimates the amount of sales returns and allowances that will eventually be incurred. Certain contracts with stocking distributors contain provisions requiring the Company to repurchase inventory upon termination of the contract or discontinuation of a product line.
SEASPINE HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Included in the sales returns reserve within other current liabilities is an estimate of repurchases that are likely to be made under these provisions. Management analyzes sales programs that are in effect, contractual arrangements, market acceptance and historical trends when evaluating the adequacy of sales returns and allowance accounts.

The Company has made an accounting policy election to account for shipping and handling activities as fulfillment activities. As such the Company does not evaluate shipping and handling as promised services to its customers. See Note 13 "Segment and Geographic Information" below for a presentation of the Company's disaggregated revenue.

In August 2016, 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 was effective for the Company beginning on January 1, 2019, and was applied using a retrospective transition method to each period presented. Adoption of this new guidance had no impact on the Company’s cash flows statements.

In May 2017, the FASB issued Update No. 2017-09, Compensation- Stock Compensation (Topic 718): Scope of Modification Accounting. The new standard provides guidance regarding which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The new standard was effective for the Company beginning on January 1, 2018. Adoption of this new guidance had no impact on the Company’s consolidated financial statements.


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 or units, and any assumed issuances under the Company's employee stock purchase plan, asbecause the effect, in each case, would be antidilutive. Common stock equivalents of 3.64.3 million and 3.43.7 million shares for the ninesix months ended SeptemberJune 30, 20192020 and 2018,2019, respectively, were excluded from the calculation because of their antidilutive effect.


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 amended in October 2016 and in July 2018 (as amended, the(the Credit Facility). The Credit Facility provides an asset-backed revolving line of credit of up to $30.0 million with a maturity date of July 27, 2021, which 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 SeptemberJune 30, 20192020 or December 31, 2018.2019. At SeptemberJune 30, 2019,2020, the Company had $25.0$20.0 million of current borrowing capacity under the Credit Facility.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 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 based 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
SEASPINE HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

borrowing capacity, the unused fee will be equal to 0.375% per annum of the amount unused under the Credit Facility, 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 on the first day of each month.

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, 2019.

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.

SEASPINE HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Paycheck Protection Program
In April 2020, due to the economic uncertainty resulting from the impact of the COVID-19 pandemic on the Company's operations and to support 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 loan 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 the loan is payable over two years at an interest rate of 1%, with a deferral of payments for the 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

 September 30, 2019
 Amortized Cost Gross Unrealized Fair Value
  Gains (Losses) 
 (In thousands)
U.S. Treasury Bills$4,994
 2
 $—
 $4,996

 December 31, 2018
 Amortized Cost Gross Unrealized Fair Value
  Gains (Losses) 
 (In thousands)
U.S. Treasury Bills$29,803
 —
 $(3) $29,800

As of September 30, 2019, the Company’s investment portfolio included zero U.S. Treasury Bills in an unrealized loss position, as compared to 9 at December 31, 2018. There were no other-than-temporary impairments on debt securities or realized gains or losses during the three and ninesix months ended SeptemberJune 30, 2019.

2020. As of December 31, 2019, there were no short-term investments.

5. INVENTORIES
Inventories consisted of:

June 30, 2020 December 31, 2019
 (In thousands)
Finished goods$35,412
 $30,042
Work in process8,364
 10,847
Raw materials6,854
 6,266
 $50,630
 $47,155

September 30, 2019 December 31, 2018
 (In thousands)
Finished goods$30,904
 $27,589
Work in process10,583
 10,367
Raw materials6,524
 4,786
 $48,011
 $42,742


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 Codification 350-40, Internal-Use Software.
SEASPINE HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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 instruments 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 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 equipment9,038
 8,562
  3-10years
Spinal instruments and sets29,303
 25,511
  4-5years
Information systems and hardware7,778
 7,442
  3-7years
Furniture and fixtures1,456
 1,412
  3-5years
Construction in progress9,941
 9,716
      
     Total63,472
 58,521
      
Less accumulated depreciation and amortization(35,880) (32,770)      
Property, plant and equipment, net$27,592
 $25,751
      
 September 30, 2019 December 31, 2018 Useful Lives
 (In thousands)  
Leasehold improvement$5,848
 $5,724
 Shorter of lease term or useful life
Machinery and production equipment8,545
 7,752
 3-10 years
Spinal instruments and sets25,820
 23,212
 5 years
Information systems and hardware7,651
 7,290
 3-7 years
Furniture and fixtures1,359
 1,222
 3-5 years
Construction in progress10,067
 7,013
  
     Total59,290
 52,213
  
Less accumulated depreciation and amortization(32,649) (29,590)  
Property, plant and equipment, net$26,641
 $22,623
  

Depreciation and amortization expenses totaled $1.3$1.6 million and $1.1$1.2 million for the three months ended SeptemberJune 30, 2020 and 2019, and 2018, respectively, and $3.6 million and $3.1 million and $2.3 million for the ninesix months ended SeptemberJune 30, 20192020 and 2018,2019, respectively. The cost of purchased instruments used to replace damaged instruments in existing sets and recorded directly to instrument replacement expense totaled $0.6 million and $0.3$0.4 million for the three months ended SeptemberJune 30, 20192020 and 2018,2019, respectively, and $1.6$0.9 million and $1.3$1.0 million for the ninesix months ended SeptemberJune 30, 2020 and 2019, respectively.
For the six months ended June 30, 2020, the Company recorded impairment charges to selling and marketing expense totaling $0.2 million against spinal instruments that are no longer expected to be placed into service. Impairment charges against spinal instruments recorded for the three months ended June 30, 2020 and the three and six months ended June 30, 2019 and 2018, respectively.

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.
ThePrimarily 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 shifted its commercialization strategy with respect to the product technologies it acquired from N.L.T. Spine Ltd. (NLT) and NLT (as defined below) due to market trend factors, new features necessary to be competitive, and more cost-effective internal development initiatives andSpine, 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 $6.8$1.6 million were no longer recoverable and were impaired, and the Company wrote those intangible assets down to their estimated fair value of $1.8$0.3 million at June 30, 2019.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 as defined using the fair value concepts defined inunder Codification 820.
The components of the Company’s identifiable intangible assets were:
September 30, 2019June 30, 2020
Weighted
Average
Life
 Cost 
Accumulated
Amortization
 Net
Weighted
Average
Life
 Cost 
Accumulated
Amortization
 Net
(Dollars in thousands)(Dollars in thousands)
Product technology12 years $33,309
 $(28,616) $4,693
12 years $32,641
 $(29,255) $3,386
Customer relationships12 years 56,830
 (42,111) 14,719
12 years 56,830
 (44,488) 12,342
Trademarks/brand names— 300
 (300) —
— 300
 (300) —
 $90,439
 $(71,027) $19,412
 $89,771
 $(74,043) $15,728
 December 31, 2019
 
Weighted
Average
Life
 Cost 
Accumulated
Amortization
 Net
 (Dollars in thousands)
Product technology12 years $34,158
 $(28,912) $5,246
Customer relationships12 years 56,830
 (42,903) 13,927
Trademarks/brand names— 300
 (300) —
   $91,288
 $(72,115) $19,173
 December 31, 2018
 
Weighted
Average
Life
 Cost 
Accumulated
Amortization
 Net
 (Dollars in thousands)
Product technology12 years $40,769
 $(29,153) $11,616
Customer relationships12 years 56,830
 (39,734) 17,096
Trademarks/brand names— 300
 (300) —
   $97,899
 $(69,187) $28,712


Annual amortization expense (including amounts reported in cost of goods sold) is expected to be approximately $5.4 million in 2019, $4.3$4.2 million in 2020, $4.3$4.1 million in 2021, $4.1$4.0 million in 2022, and $3.5$3.4 million in 2023.2023, and $1.5 million in 2024. For the three months ended SeptemberJune 30, 20192020 and 2018,2019, amortization expense totaled $1.2$1.0 million and $1.6$1.5 million, respectively, and included $0.4$0.2 million and $0.8$0.7 million, respectively, of amortization of product technology intangible assets that is presented within cost of goods sold. Amortization expense totaled $4.3$2.1 million and $4.9$3.1 million for the ninesix months ended SeptemberJune 30, 20192020 and 2018,2019, respectively, and included $1.9$0.5 million and $2.5$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. 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):
SEASPINE HOLDINGS CORPORATION
  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
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)


  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
  Total Quoted Price in Active Market (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3)
September 30, 2019:        
Short-term investments $4,996
 $4,996
 $—
 $—
Total Assets        
    Contingent consideration liabilities- current $711
 $—
 $—
 $711
    Contingent consideration liabilities- non-current 1,116
 —
 —
 1,116
Total contingent consideration $1,827
 $—
 $—
 $1,827
  Total Quoted Price in Active Market (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3)
December 31, 2018:        
Short-term investments $29,800
 $29,800
 $—
 $—
Total Assets        
    Contingent consideration liabilities- current $129
 $—
 $—
 $129
    Contingent consideration liabilities- non-current 2,367
 —
 —
 2,367
Total contingent consideration $2,496
 $—
 $—
 $2,496


Short-term investments are classified with Level 1 of the fair value hierarchy because they use quoted market prices in active markets for identical assets.

TheUnder the terms of the 2016 asset purchase agreement between the Company and NLT, the Company is obligated to pay up to a maximum $5.0 million in milestone payments in connection with the August 2016 purchase of certain assets of N.L.T Spine Ltd. (NLT) and NLT Spine, Inc., a wholly owned subsidiary ofto NLT, payable at the Company's election in cash or in shares of its common stock. 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 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 must 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.

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). 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 ninethree and six months ended SeptemberJune 30, 2019,2020, and estimated net sales 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, 2019: (in thousands)
Balance as of June 30, 2019 $1,934
    Contingent consideration liabilities settled (42)
Gain from change in fair value of contingent consideration recorded in selling, general and administrative expenses (65)
Fair value at September 30, 2019 $1,827
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



SEASPINE HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Nine Months Ended September 30, 2019: (in thousands)
Balance as of January 1, 2019 $2,496
    Contingent consideration liabilities settled (98)
Gain from change in fair value of contingent consideration recorded in selling, general and administrative expenses (571)
Fair value at September 30, 2019 $1,827

SEASPINE HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)



9. EQUITY AND STOCK-BASED COMPENSATION

Common Stock

In August 2016, the Company entered into an equity distribution agreement (Distribution Agreement) with Piper Jaffray & Co. (Piper Jaffray), 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 a registration statement on Form S-3 that was declared effective on August 24, 2016. Under the Distribution Agreement, during the nine months ended September 30, 2018, the Company sold 882,332 shares of common stock at an average price per share of $10.00 and received net proceeds of approximately $8.5 million (net of $0.3 million of offering costs), which consumed the remaining capacity under the Distribution Agreement. The Company used the net proceeds for general corporate purposes, including sales and marketing expenditures aimed at growing its business, research and development expenditures focused on product development, and investments in inventory and spinal instruments and sets.

In May 2018, the Company entered into another equity distribution agreement with Piper Jaffray (the May 2018 Distribution Agreement), pursuant to which the Company may offer and sell shares of its common stock in ATM offerings having an aggregate offering price up to $50.0 million in gross proceeds from time to time through Piper Jaffray acting as sales agent. The shares offered and sold under the May 2018 Distribution Agreement are covered by a registration statement on Form S-3 that was declared effective on August 24, 2016. On March 1, 2019, the Company terminated the May 2018 Distribution Agreement. The Company is not subject to any termination penalties related to the termination of the May 2018 Distribution Agreement. Prior to termination, the Company had not sold any shares of its Common Stock pursuant to the May 2018 Distribution Agreement.

In October 2018,January 2020, the Company entered into an Underwriting Agreement (Underwriting Agreement) with Wells Fargo Securities, LLC, Piper Jaffray and Cantor FitzgeraldSandler & Co. (Cantor Fitzgerald) acting as joint bookrunning managers and as representatives of the underwritersCanaccord Genuity LLC relating to the issuance and sale of 3,250,0006,800,000 shares of the Company’s common stock. Thestock at a price to the public in the offering was $15.50of $12.50 per share, before underwriting discounts and commissions. TheUnder the terms of that agreement, the Company granted the underwriters an option, exercisable for 30 days, to purchase up to an additional 487,5001,020,000 shares of common stock. The underwriters exercised this option and the offering closed on October 15, 2018January 10, 2020 with the sale of 3,737,5007,820,000 shares of the Company's common stock. Thestock, resulting in net proceeds to the Company from the offering wereof approximately $54.1$91.6 million, after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company. The Company used a portion ofoffering was made pursuant to the net proceeds from the offering to repay all of its then-outstanding borrowings under the Credit Facility, and intends to use the remaining proceeds for general corporate purposes, including general and administrative expenses, capital expenditures and general working capital purposes.

In March 2019, the Company entered into a controlled equity offering sales agreement (Sales Agreement) with Cantor Fitzgerald to sell shares of its common stock having an aggregate offering price of up to $50.0 million from time to time, through an ATM offering under which Cantor Fitzgerald will act as sales agent. The shares offered and sold under the Sales Agreement are covered by aCompany’s shelf registration statement on Form S-3 that was declared effective on August 24, 2016, and a prospectus supplement related to the ATM offering, dated March 1,May 22, 2019. The Company did not sell any shares of common stock under the Sales Agreement during the nine months ended September 30, 2019 and, on October 23, 2019, notified Cantor Fitzgerald of its intent to terminate the agreement, which the Company and Cantor Fitzgerald mutually agreed to terminate effective as of October 23, 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 approved 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 May 30, 2018June 3, 2020 (the 2015 Incentive
SEASPINE HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Award Plan, as amended and restated to date, the Restated Plan). Under the Restated Plan, the Company can grant its employees, 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 aggregate number of shares that may be issued or transferred pursuant to awards 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) 6,235,5009,735,500 shares of its common stock in respect of awards granted under the Restated Plan. As of SeptemberJune 30, 2019, 1,834,8772020, 3,931,226 shares were available for issuance under the Restated Plan.

In 2016, the Company established the 2016 Employment Inducement Incentive Award Plan (the 2016 Plan), a broad-based incentive plan which allows for the issuance of stock-based awards, including non-qualified stock options, restricted stock awards, performance awards, restricted stock unit awards and stock appreciation rights, to those individuals and in those circumstances described below. An aggregate of 1,000,000 shares are reserved for issuance under the 2016 Plan. The Company has not awarded any shares under the 2016 Plan as of September 30, 2019. As a result of the stockholders' approval of the Restated Plan, the Company's board of directors will not grant any awards under the 2016 Plan.

In June 2018, the Company established the 2018 Employment Inducement Incentive Award Plan (the 2018 Inducement Plan). The terms of the 2018 Inducement Plan are substantially similar to the terms of the Restated Plan with these principal exceptions: (1) incentive stock options may not be granted under the 2018 Inducement Plan; (2) there are no annual limits on awards that may be issued to an individual under the 2018 Inducement Plan; (3) awards granted under the 2018 Inducement Plan are not required to be subject to any minimum 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 SeptemberJune 30, 2019, 1,939,7502020, 1,908,483 shares were available for issuance under the 2018 Inducement Plan.

Both As a result of the 2016 Inducementapproval of the amendment to the Restated Plan andby the Company's stockholders in June 2020, no awards will be granted under the 2018 Inducement Plan werein 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 those plansthis plan may only be made to an employee who has not previously been an employee or member of the Company's board of directors or of any board of directors of any parent or subsidiary of the Company, or following a bona fide period of non-employment by the 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 inducement material to his or her entering into employment with the Company or such subsidiary.
Forfeiture Rate Assumptions
Stock-based compensation expense related to all equity awards 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 14% annually for the ninesix months ended SeptemberJune 30, 20192020 and 13% annually for the ninesix months ended SeptemberJune 30, 2018.
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.
Restricted 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 of 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 72,520 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, respectively. No restricted stock units were granted to non-employee directors during the three or ninesix months ended SeptemberJune 30, 20192020 or 2018. During the nine months ended September 30, 2019 and 2018, there were 76,471 and 95,658 shares of restricted stock awards granted to non-employee directors, respectively.2019.

During the three and ninesix months ended SeptemberJune 30, 2019, there were 34,1002020, 30,267 and 252,710376,754 restricted stock units were granted to employees, respectively. During the three and ninesix months ended SeptemberJune 30, 2018,2019, there were 67,3197,800 and 554,600218,610 restricted stock units granted to employees, respectively. Of such restricted stock units granted to employees during the nine months ended September 30, 2018, 341,808 were granted, in part, out of the increase to the share reserve under the Restated Plan adopted by the Company's board of directors on February 1, 2018, all of which were granted subject to stockholder approval of the Restated Plan (the Contingent RSUs). On May 30, 2018, the Company's stockholders approved the Restated Plan, and in accordance with the Codification 718, Compensation-Stock Compensation, the Company began recognizing the expense for the Contingent RSUs over the requisite service period.
SEASPINE HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)


No shares of restricted stock awards were granted to employees during the three or ninesix months ended SeptemberJune 30, 20192020 or 2018.2019.
As of SeptemberJune 30, 2019,2020, there was approximately $4.3$5.0 million of unrecognized compensation expense related to the unvested portions of restricted stock awards and of restricted stock units. This expense is expected to be recognized over a weighted-average period of approximately 0.81.1 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 applicable vesting period within each grant and based on their fair value at the date of grant using the Black-Scholes-Merton option pricing model. No stock options were granted during the three months ended September 30, 2019. There were 22,500238,491 and 0 stock options granted during the three months ended SeptemberJune 30, 2018,2020 and 434,7082019, respectively, and 27,500920,250 and 434,708 stock options granted during the ninesix months ended SeptemberJune 30, 20192020 and 2018,2019, respectively. The following weighted-average assumptions were used in the calculation of fair value for options granted during the period 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,
  2018 2019 2018
Expected dividend yield 0% 0% 0%
Risk-free interest rate 2.8% 2.5% 2.8%
Expected volatility 25.6% 30.3% 25.6%
Expected term (in years) 4.9
 2.9
 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.

the Company’s options.
As of SeptemberJune 30, 2019,2020, there was approximately $1.0$2.2 million of unrecognized compensation expense related to unvested stock options. This expense is expected to be recognized over a weighted-average period of approximately 1.31.6 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 24 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).
Subject to stockholder approval, on and effective as of November 2, 2018, the Company's board of directors approved an amendment to the ESPP pursuant to which the share reserve under the ESPP would increase from 400,000 shares to 800,000 shares. On May 29, 2019, theThe Company's stockholders approved that amendment.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.amended (the IRC). 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
SEASPINE HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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 triggered on the purchase date that occurred on December 31, 2016, such that the offering period that commenced on July 1, 2016 was terminated, and a new two-year offering period commenced on January 1, 2017 and ended on December 31, 2018. The restart feature was triggered again on the purchase date that occurred on June 30, 2019, such that the offering period that commenced on January 1, 2019 was terminated, and a new two-year offering period commenced on July 1, 2019 and would end on June 30, 2021. This restart feature was triggered again on the purchase date that occurred on December 31, 2019, such that the offering periods that commenced on each of July 1, 2018 and July 1, 2019 were terminated, and a new two-year offering period commenced on January 1, 2020 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 June 30, 2021.2022. 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 ninesix months ended SeptemberJune 30, 20192020 was immaterial.
During the ninesix months ended SeptemberJune 30, 20192020 and 2018,2019, there were 64,00878,360 and 80,90764,008 shares of common stock, respectively, purchased under the ESPP. The Company recognized $0.6$0.4 million and $0.2 million, respectively, in expense related to the ESPP for each of the ninesix months ended SeptemberJune 30, 20192020 and 2018.2019. As of SeptemberJune 30, 2019, 336,0562020, 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 rate1.6% 2.5%
Expected volatility34.4% 39.0%
Expected term (in years)1.2
 1.2
 Three Months Ended September 30, Nine Months Ended September 30,
 2019 2018 2019 2018
Expected dividend yield0% 0% 0% 0%
Risk-free interest rate1.9% 2.4% 1.4% 2.0%
Expected volatility36.6% 34.2% 21.9% 29.4%
Expected term (in years)1.3
 1.3
 0.7
 1.3



10. LEASES

The Company leases administrative, manufacturing, research, and distribution facilities and various manufacturing, office and transportation equipment through operating lease agreements.

Future minimum lease payments under the Company's operating leases at September 30, 2019 are as follows:
 Payments Due by Calendar Year
 (In thousands)
2019987
20203,243
20212,162
20222,183
20231,508
Thereafter4,537
Total minimum lease payments$14,620

Total lease expense was $0.5 million for each of the three months ended September 30, 2019 and 2018 and was $1.6 million for each of the nine months ended September 30, 2019 and 2018.

11. INCOME TAXES
The following table summarizes the Company’s effective tax rate for the periods indicated:
 Three Months Ended September 30, Nine Months Ended September 30,
 2019 2018 2019 2018
        
Reported income tax expense rate(2.4)% 1.1% (0.9)% —%

SEASPINE HOLDINGS CORPORATION
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 liabilities5,444
 (138) 5,306
Current portion of operating lease liabilities—
 2,080
 2,080
  Total current liabilities30,478
 1,942
 32,420
Operating lease liabilities, net of current portion—
 8,367
 8,367
Other liabilities1,480
 (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. 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 term of these operating leases was 5.7 years and the weighted average discount rate was 6.5%. For the three and six months ended June 30, 2020, lease expense, which represents expense from operating leases, was $0.6 million and $1.1 million, respectively.
SEASPINE HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

A summary of the Company's remaining lease liabilities at June 30, 2020 are as follows:
 Operating Leases
 (In thousands)
20201,894
20213,340
20222,238
20231,563
20241,369
Thereafter3,273
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 liabilities9,661
Less: current portion of lease liability(2,110)
Operating lease liability, less current portion$7,551

11. INCOME TAXES
The following table summarizes 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)%

The Company recorded a provision for income tax expense for the three and ninesix months ended SeptemberJune 30, 20192020 primarily related to foreign and state operations.

The Tax Cuts and Jobs Act (the Tax Act) enacted in 2017 reduced the U.S. federal corporate rate from 35% to 21%, requires companies to pay a one-time transition tax on accumulated earnings of certain foreign subsidiaries previously deferred from tax, and created a new provision designed to tax global intangible low-taxed income (GILTI).

The Company is not subject to the one-time transition tax on accumulated foreign earnings or the GILTI provisions enacted by the Tax Act because the Company's foreign operations have been included in its US tax filings pursuant to an election to disregard its foreign entity for federal income tax purposes.

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 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.


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. Except for the royalties payablepaid to NLT, the royalty payments thatroyalties the Company made under these agreementspaid are included in the condensed 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)



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. The Company attributes revenues to geographic areas based on the location of the customer.

The following table disaggregates revenue by major sales channel for each of the periods presented (in thousands):

Three Months Ended September 30, 2019 Nine Months Ended September 30, 2019Three Months Ended June 30, 2020 Six Months Ended June 30, 2020
United States International Total United States International TotalUnited States International Total United States International Total
Orthobiologics$18,165
 $1,908
 $20,073
 $53,362
 $5,821
 $59,183
$12,665
 $1,190
 $13,855
 $30,026
 $3,450
 $33,476
Spinal implants17,371
 2,444
 19,815
 49,197
 6,964
 56,161
13,214
 1,520
 14,734
 27,666
 3,558
 31,224
Total revenue, net$35,536
 $4,352
 $39,888
 $102,559
 $12,785
 $115,344
$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 implants16,910
 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



 Three Months Ended September 30, 2018 Nine Months Ended September 30, 2018
 United States International Total United States International Total
Orthobiologics$16,689
 $1,840
 $18,529
 $49,140
 $6,046
 $55,186
Spinal implants15,028
 2,277
 17,305
 44,754
 5,478
 50,232
Total revenue, net$31,717
 $4,117
 $35,834
 $93,894
 $11,524
 $105,418



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 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 in our Annual Report on Form 10-K for the year ended December 31, 20182019 (the 20182019 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):
our expectations and estimates concerning future financial performance, financing plans and the impact of competition;


our 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 newly initiated collaborations, such as with restor3d, Inc., and 7D Surgical, or use of nascent manufacturing techniques, such as 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 associatedassociate 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;


our ability to protect our intellectual property, including unpatented trade secrets, and to operate without infringing or misappropriating the proprietary rights of others;


general economic and 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 20182019 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, 2018.

2019.
These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements 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 such 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 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 degenerative, minimally invasive surgery (MIS), and complex spinal deformity 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 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 distributors that purchase products directly from us and independently sell them. For the three months ended June 30, 2020 and 2019, international sales accounted for approximately 9% and 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.

SeaSpine 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. 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 distributors and private label partners, we generally recognize revenue when the products are shipped toand the customer or stocking distributor andobtains 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 manufacturing of our products, plant and equipment overhead, labor costs and packaging 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 cost 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. The cost to inspect incoming finished goods is included in the cost of goods sold. Other costs included in cost of goods sold include amortization of product technology intangible assets, royalties, scrap and consignment losses, and charges for expired, excess and obsolete inventory.
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 including costs to ship our spinal implants to and from hospitals and independent sales agents, and expenses for information technology, legal, human resources, insurance, finance, facilities, and management. We also record gains or losses associated with changes in the fair value of contingent consideration liabilities in SG&Ageneral 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 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. We expect total annual amortization expense (including amounts reported in cost of goods sold) to be approximately $5.4 million in 2019, $4.3$4.2 million in 2020, $4.3$4.1 million in 2021, $4.1$4.0 million in 2022, and $3.5$3.4 million in 2023.2023 and $1.5 million in 2024. See “RESULTS OF OPERATIONS-NineOPERATIONS-Three Months Ended SeptemberJune 30, 20192020 Compared to NineThree Months Ended SeptemberJune 30, 2018-Impairment2019-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 September 30, 2019 vs. 2018 Nine Months Ended September 30, 2019 vs. 2018
 (In thousands, except percentages)2019 2018 % Change 2019 2018 % Change
Total revenue, net$39,888
 $35,834
 11 % $115,344
 $105,418
 9 %
Cost of goods sold14,407
 14,247
 1 % 42,303
 40,986
 3 %
Gross profit25,481
 21,587
 18 % 73,041
 64,432
 13 %
Gross margin63.9% 60.2%   63.3% 61.1% 

Operating expenses:          

Selling, general and administrative30,134
 27,041
 11 % 85,050
 76,940
 11 %
Research and development3,896
 3,203
 22 % 10,995
 8,783
 25 %
Intangible amortization792
 792
 — % 2,377
 2,376
 — %
Impairment of intangible assets—
 —
 — % 4,993
 —
 100 %
Total operating expenses34,822
 31,036
 12 % 103,415
 88,099
 17 %
Operating loss(9,341) (9,449) (1)% (30,374) (23,667) 28 %
Other expense, net(97) (190) (49)% (49) (327) (85)%
Loss before income taxes(9,438) (9,639) (2)% (30,423) (23,994) 27 %
Provision (benefit) for income taxes225
 (107) NM
 265
 4
 NM
Net loss$(9,663) $(9,532) 1 % $(30,688) $(23,998) 28 %
____________
NM: Percentage change is not meaningful


 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 sold11,659
 14,317
 (19)% 25,471
 27,896
 (9)%
Gross profit16,930
 24,989
 (32)% 39,229
 47,560
 (18)%
Gross margin59.2% 63.6%   60.6% 63.0% 

Operating expenses:          

Selling and marketing17,013
 19,896
 (14)% 37,489
 38,870
 (4)%
General and administrative8,845
 7,712
 15 % 17,399
 16,046
 8 %
Research and development3,974
 3,587
 11 % 7,869
 7,099
 11 %
Intangible amortization792
 793
 — % 1,584
 1,585
 — %
Impairment of intangible assets—
 4,993
 100 % 1,325
 4,993
 (73)%
Total operating expenses30,624
 36,981
 (17)% 65,666
 68,593
 (4)%
Operating loss(13,694) (11,992) 14 % (26,437) (21,033) 26 %
Other income (expense), net14
 (25) (156)% 241
 48
 402 %
Loss before income taxes(13,680) (12,017) 14 % (26,196) (20,985) 25 %
Provision for income taxes33
 19
 74 % 68
 40
 70 %
Net loss$(13,713) $(12,036) 14 % $(26,264) $(21,025) 25 %





Three Months Ended SeptemberJune 30, 20192020 Compared to Three Months Ended SeptemberJune 30, 20182019
Revenue
Total revenue, net for the three months ended SeptemberJune 30, 2019,2020, was $39.9$28.6 million, an increasea decrease of 11%27% compared to the same period in 2018.2019.
 Three Months Ended September 30, 2019 vs. 2018 Three Months Ended June 30, 2020 vs. 2019
 2019 2018 % Change 2020 2019 % Change
 (In thousands)   (In thousands)  
Orthobiologics $20,073
 $18,529
 8% $13,855
 $20,054
 (31)%
United States 18,165
 16,689
 9% 12,665
 18,160
 (30)%
International 1,908
 1,840
 4% 1,190
 1,894
 (37)%
            
Spinal Implants $19,815
 $17,305
 15% $14,734
 $19,252
 (23)%
United States 17,371
 15,028
 16% 13,214
 16,910
 (22)%
International 2,444
 2,277
 7% 1,520
 2,342
 (35)%
            
Total revenue, net $39,888
 $35,834
 11% $28,589
 $39,306
 (27)%
 Three Months Ended September 30, 2019 vs. 2018 Three Months Ended June 30, 2020 vs. 2019
 2019 2018 % Change 2020 2019 % Change
 (In thousands)   (In thousands)  
United States $35,536
 $31,717
 12% $25,879
 $35,070
 (26)%
International 4,352
 4,117
 6% 2,710
 4,236
 (36)%
Total revenue, net $39,888
 $35,834
 11% $28,589
 $39,306
 (27)%
Revenue from orthobiologics sales totaled $20.1$13.9 million for the three months ended SeptemberJune 30, 2019, an increase2020, a decrease of $1.5$6.2 million or 8%31%, from the same period in 2018.2019. Revenue from orthobiologics sales in the United States increased $1.5decreased $5.5 million to $18.2$12.7 million for the three months ended SeptemberJune 30, 20192020 compared to the same period in 2018.2019. This growthdecrease was driven by sales of recently launched demineralized bone matrix (DBM)lower current demand for our orthobiologics products which was somewhat offset by expected cannibalizationdue to hospitals and patients deferring procedures and other declines in legacy DBM product lines.factors related to the impact of the COVID-19 pandemic. Revenue from orthobiologics sales internationally, which can be volatile from quarter to quarter because of irregular ordering patterns from our stocking distributors, increased $0.1decreased $0.7 million for the three months ended SeptemberJune 30, 20192020 compared to the same period in 2018.2019 and was similarly affected by reduced demand from our stocking distributors caused by the impact of the pandemic. See "COVID-19 Pandemic - Impact on our Business," above.
Revenue from spinal implant sales was $19.8$14.7 million for the three months ended SeptemberJune 30, 2019, an increase2020, a decrease of $2.5$4.5 million or 15%23%, from the same period in 2018.2019. Revenue from spinal implants sales in the United States increased $2.3decreased $3.7 million to $17.4$13.2 million for the three months ended SeptemberJune 30, 20192020 compared to the same period in 2018,2019, due to growth contributed by saleshospitals and patients deferring procedures as a result of recently launched products and favorable procedural mix.the COVID-19 pandemic. Spinal implant surgery procedure volume increaseddecreased by more than 10%22%, but were somewhat offset by continuedunit pricing declined in the low-single digit price declines.range. Revenue from spinal implant sales internationally, which can be volatile from quarter to quarter because of irregular ordering patterns from our stocking distributors, increased $0.2decreased $0.8 million for the three months ended SeptemberJune 30, 20192020 compared to the same period in 2018.2019 and was similarly affected by reduced demand from our stocking distributors caused by the impact of the pandemic.
Cost of Goods Sold and Gross Margin
Cost of goods sold increased $0.2decreased $2.7 million, to $14.4$11.7 million for the three months ended SeptemberJune 30, 2019,2020, compared to the same period in 2018.2019. Gross margin was 63.9%59.2% for the three months ended SeptemberJune 30, 20192020 and 60.2%63.6% for the same period in 2018.2019. The increasedecrease in gross margin was due primarily to a shift in geographiccosts associated with our Irvine manufacturing facility while production there was temporarily halted during April and product mix, with higher gross margin U.S. revenue growing faster than international revenue and higher gross margin spinal implant product revenue growing faster than orthobiologics product revenue. Additionally, manufacturing scrap rates, inventory losses and excess and obsolete provisions were lower in the current period compared to the prior year period.May 2020.
Cost of goods sold included $0.4$0.2 million and $0.8$0.7 million of amortization for product technology intangible assets for the three months ended SeptemberJune 30, 2020 and 2019, and 2018, respectively.



Selling General and AdministrativeMarketing
SG&ASelling and marketing expenses increased $3.1decreased $2.9 million to $30.1$17.0 million for the three months ended SeptemberJune 30, 20192020 compared to the same period in 2018.2019. The increasedecrease was mainly driven by higher saleslower commission expense due to a decline in revenue related to the impact of the COVID-19 pandemic and lower travel expenses.
General and Administrative
General and administrative expenses increased revenue,$1.1 million to $8.8 million for the three months ended June 30, 2020. The increase was primarily driven by the increase in the loss from change in fair value of contingent consideration related to the acquisition of assets from NLT and higher salaries and wages, and increased legal fees, freight and other logistics expenses.additional bad debt provisions.
Research and Development
R&D expenses increased $0.7$0.4 million to $3.9$4.0 million, or 10%14% of revenue, for the three months ended SeptemberJune 30, 20192020 compared to the same period in 2018.2019. The increase was primarily driven by a $0.5 million fee paid in connectionpayments related to newly acquired licenses and other costs associated with our recently announced development and license agreement for 3D-printed implants and the absence of a similar expense in the prior year period.product development.
Intangible Amortization
Intangible amortization expense, excluding the amounts reported in cost of goods sold for product technology intangible assets, remained consistent at $0.8 million for both the three months ended SeptemberJune 30, 20192020 and 2018.
Income Taxes
 Three Months Ended September 30,
 2019 2018
 (In thousands)
Loss before income taxes$(9,438) $(9,639)
Provision for income taxes225
 (107)
Effective tax rate(2.4)% 1.1%



We reported income tax expense for the three months ended September 30, 2019 and 2018 primarily related to foreign and state operations.
The Tax Cuts and Jobs Act (the Tax Act) enacted in 2017 reduced the U.S. federal corporate rate from 35% to 21%, requires companies to pay a one-time transition tax on accumulated earnings of certain foreign subsidiaries previously deferred from tax, and created a new provision designed to tax global intangible low-taxed income (GILTI). We are not subject to the one-time transition tax on accumulated foreign earnings or the GILTI provisions enacted by the Tax Act because our foreign operations have been included in our US tax filings pursuant to an election to disregard our foreign entity for federal income tax purposes.
In addition, for all periods presented, the pretax losses incurred by the consolidated U.S. tax group received no corresponding tax benefit because we concluded that it is more likely than not that we will be unable to realize the value of any resulting deferred tax assets.



Nine Months Ended September 30, 2019 Compared to Nine Months Ended September 30, 2018
Revenue
Total revenue, net for the nine months ended September 30, 2019 was $115.3 million, an increase of 9% compared to the same period in 2018.
  Nine Months Ended September 30, 2019 vs. 2018
  2019 2018 % Change
  (In thousands)  
Orthobiologics $59,183
 $55,186
 7 %
United States 53,362
 49,140
 9 %
International 5,821
 6,046
 (4)%
       
Spinal Implants $56,161
 $50,232
 12 %
United States 49,197
 44,754
 10 %
International 6,964
 5,478
 27 %
       
Total revenue, net $115,344
 $105,418
 9 %
  Nine Months Ended September 30, 2019 vs. 2018
  2019 2018 % Change
  (In thousands)  
United States $102,559
 $93,894
 9%
International 12,785
 11,524
 11%
Total revenue, net $115,344
 $105,418
 9%
Revenue from orthobiologics sales totaled $59.2 million for the nine months ended September 30, 2019, an increase of $4.0 million, from the same period in 2018. Revenue from orthobiologics sales in the United States increased $4.2 million for the nine months ended September 30, 2019 compared to the same period in 2018. This growth was driven primarily by sales of recently launched DBM products, which was somewhat offset by expected cannibalization of a legacy DBM product line. Revenue from orthobiologics sales internationally, which can be volatile from quarter to quarter because of irregular ordering patterns from our stocking distributors, decreased $0.2 million for the nine months ended September 30, 2019 compared to the same period in 2018.
Revenue from spinal implant sales totaled $56.2 million for the nine months ended September 30, 2019, an increase of $5.9 million, from the same period in 2018. Revenue from spinal implant sales in the United States increased $4.4 million for the nine months ended September 30, 2019 compared to the same period in 2018, due to the revenue growth contributed by sales of recently launched products and favorable procedure mix. Spinal implant surgery procedure volumes increased by approximately 11%, but were somewhat offset by continued low-single digit price declines. Revenue from spinal implant sales


internationally, which can be volatile from quarter to quarter because of irregular ordering patterns from our stocking distributors, increased $1.5 million for the nine months ended September 30, 2019 compared to the same period in 2018. Revenue growth was led by replenishment orders from our distributors in Australia and Europe.
Cost of Goods Sold and Gross Margin
Cost of goods sold increased $1.3 million to $42.3 million for the nine months ended September 30, 2019, compared to the same period in 2018. Gross margin was 63.3% for the nine months ended September 30, 2019, compared to 61.1% for the same period in 2018. The increase in gross margin was due to a shift in product mix, with the higher margin spinal implant product revenue growing slightly faster than orthobiologics product revenue. Additionally, manufacturing scrap, inventory losses and excess and obsolete provisions were lower in the current period compared to the prior year period.
Cost of goods sold included $1.9 million and $2.5 million of amortization for product technology intangible assets, for the nine months ended September 30, 2019 and 2018, respectively.
Selling, General and Administrative
SG&A expenses increased $8.1 million to $85.1 million for the nine months ended September 30, 2019 compared to the same period in 2018. The increase was mainly driven by higher sales commission expense due to increased revenue, increased stock-based compensation due to the value of the Contingent RSUs granted in 2018 not being expensed until after stockholder approval was obtained in May 2018 (see Note 9 "Equity and Stock-Based Compensation" to the Notes to Unaudited Consolidated Financial Statements included in Part I, Item 1 of this report) and higher salaries and wages, legal fees, and freight and other logistics expenses.
Research and Development
R&D expenses increased $2.2 million to $11.0 million, or 10% of revenue, for the nine months ended September 30, 2019 compared to the same period in 2018. The increase was primarily driven by increased salaries and wages, a $0.5 million fee paid in connection with our recently announced development and license agreement for 3D-printed implants and higher stock-based compensation due to the value of the Contingent RSUs granted in 2018 not being expensed until after stockholder approval was obtained in May 2018.
Intangible Amortization
Intangible amortization expense, excluding the amounts reported in cost of goods sold for product technology intangible assets, was $2.4 million for each of the nine months ended September 30, 2019 and 2018.2019.
Impairment of Intangible Assets
Impairment of intangible assets was $5.0 millionzero for the ninethree months ended SeptemberJune 30, 2019,2020, compared to zero$5.0 million for the same period in 2018. We2019. During the three months ended June 30, 2019, we shifted our commercialization strategy with respect to the product technologies we acquired from NLT due to market trend factors, new features necessary to be competitive, and more cost-effective internal development initiatives. Accordingly, we evaluated the ongoing value of the product technology intangible assets associated with the acquisition of these assets. Based on this evaluation, we determined that intangible assets with a carrying amount of $6.8 million were no longer recoverable and were impaired, and we wrote those intangible assets down to their estimated fair value of $1.8 million.

Income Taxes
 Nine Months Ended September 30,
 2019 2018
 (In thousands)
Loss before income taxes$(30,423) $(23,994)
Provision for income taxes265
 4
Effective tax rate(0.9)% — %



 Three Months Ended June 30,
 2020 2019
 (In thousands)
Loss before income taxes$(13,680) $(12,017)
Provision for income taxes33
 19
Effective tax rate(0.2)% (0.2)%
We reported income tax expense for the ninethree months ended SeptemberJune 30, 2020 and 2019 primarily related to foreign and state operations.
In addition, for any pretax losses incurred subsequent to the spin-off by the consolidated U.S. tax group, we recorded no corresponding tax benefit because we have concluded that it is more-likely-than-not that we will be unable to realize the benefit from any resulting deferred tax assets. We will continue to assess our position in future periods to determine if it is appropriate to reduce a portion of our 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 our consolidated financial statements for the three and six months ended June 30, 2020. We will continue to monitor any effects that may result on our consolidation financial statements from the CARES Act.




Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019
Revenue
Total revenue, net for the six months ended June 30, 2020 was $64.7 million, a decrease of 14% compared to the same period in 2019.
  Six Months Ended June 30, 2020 vs. 2019
  2020 2019 % Change
  (In thousands)  
Orthobiologics $33,476
 $39,080
 (14)%
United States 30,026
 35,197
 (15)%
International 3,450
 3,883
 (11)%
       
Spinal Implants $31,224
 $36,376
 (14)%
United States 27,666
 31,857
 (13)%
International 3,558
 4,519
 (21)%
       
Total revenue, net $64,700
 $75,456
 (14)%
  Six Months Ended June 30, 2020 vs. 2019
  2020 2019 % Change
  (In thousands)  
United States $57,692
 $67,054
 (14)%
International 7,008
 8,402
 (17)%
Total revenue, net $64,700
 $75,456
 (14)%
Revenue from orthobiologics sales totaled $33.5 million for the six months ended June 30, 2020, a decrease of $5.6 million, from the same period in 2019. Revenue from orthobiologics sales in the United States decreased $5.2 million for the six months ended June 30, 2020 compared to the same period in 2019. This decrease was driven by lower current demand for our orthobiologics products due to hospitals and patients deferring procedures and other factors related to the impact of the COVID-19 pandemic. Revenue from orthobiologics sales internationally, which can be volatile from quarter to quarter because of irregular ordering patterns from our stocking distributors, decreased $0.4 million for the six months ended June 30, 2020 compared to the same period in 2019 and was similarly affected by reduced demand from our stocking distributors caused by the impact of the pandemic. See "COVID-19 Pandemic - Impact on our Business," above.
Revenue from spinal implant sales totaled $31.2 million for the six months ended June 30, 2020, a decrease of $5.2 million, from the same period in 2019. Revenue from spinal implant sales in the United States decreased $4.2 million for the six months ended June 30, 2020 compared to the same period in 2019. This decrease was driven by lower current demand for our orthobiologics products due to hospitals and patients deferring procedures and other factors related to the COVID-19 pandemic. Spinal implant surgery procedure volumes decreased by approximately 9%. Revenue from spinal implant sales internationally, which can be volatile from quarter to quarter because of irregular ordering patterns from our stocking distributors, decreased $1.0 million for the six months ended June 30, 2020 compared to the same period in 2019 and was similarly affected by reduced demand from our stocking distributors caused by the impact of the pandemic.
Cost of Goods Sold and Gross Margin
Cost of goods sold decreased $2.4 million to $25.5 million for the six months ended June 30, 2020, compared to the same period in 2019. Gross margin was 60.6% for the six months ended June 30, 2020, compared to 63.0% for the same period in 2019. The decrease in gross margin was due primarily to costs associated with our Irvine manufacturing facility while production there was temporarily halted during April and May 2020 and higher excess and obsolete inventory charges, particularly in our legacy product portfolio, for which revenues continue to decline at a faster rate due, in part, to increased substitution by our more recently launched products.



Cost of goods sold included $0.5 million and $1.5 million of amortization for product technology intangible assets, for the six months ended June 30, 2020 and 2019, respectively.
Selling and Marketing
Selling and marketing expenses decreased $1.4 million to $37.5 million for the six months ended June 30, 2020 compared to the same period in 2019. The decrease was mainly driven by lower sales commission expense due to a decline in revenue, offset by an increase in marketing, customer service and logistics headcount and an increase in depreciation on surgical kits placed in service since June 30, 2019 and on instruments for systems expected to be discontinued in the next two years.
General and Administrative
General and administrative expenses increased $1.4 million to $17.4 million for the six months ended June 30, 2020 compared to the same period in 2019. The increase was primarily driven by the increase in the loss from change in fair value of contingent consideration related to the acquisition of assets from NLT and additional bad debt provisions.
Research and Development
R&D expenses increased $0.8 million to $7.9 million, or 12% of revenue, for the six months ended June 30, 2020 compared to the same period in 2019. The increase was primarily driven by an increase in payments related to newly acquired licenses and other costs associated with product development.
Intangible Amortization
Intangible amortization expense, excluding the amounts reported in cost of goods sold for product technology intangible assets, was $1.6 million for each of the six months ended June 30, 2020 and 2019.
Impairment of Intangible Assets
Impairment of intangible assets was $1.3 million for the six months ended June 30, 2020, compared to $5.0 million for the same period in 2019. During the six months ended June 30, 2020, primarily as a result of an expected shift in future product revenue mix more toward a parallel expanding interbody device designed based on our internally developed technology and, in turn, lower future revenue anticipated for the lordotic expanding implant based on technology we acquired from NLT, our estimated future net sales associated with those NLT Spine product technologies decreased. Accordingly, we evaluated the ongoing value of the product technology intangible assets associated with the acquisition of these assets. Based on this evaluation, we determined that intangible assets with a carrying amount of $1.6 million were no longer recoverable and were impaired, and we wrote those intangible assets down to their estimated fair value of $0.3 million. During the six months ended June 30, 2019, we shifted our commercialization strategy with respect to the product technologies we acquired from NLT due to market trend factors, new features necessary to be competitive, and more cost-effective internal development initiatives. Accordingly, we evaluated the ongoing value of the product technology intangible assets associated with the acquisition of these assets. Based on this evaluation, we determined that intangible assets with a carrying amount of $6.8 million were no longer recoverable and were impaired, and we wrote those intangible assets down to their estimated fair value of $1.8 million.

Income Taxes
 Six Months Ended June 30,
 2020 2019
 (In thousands)
Loss before income taxes$(26,196) $(20,985)
Provision for income taxes68
 40
Effective tax rate(0.3)% (0.2)%

We reported income tax expense for the six months ended June 30, 2020 and 2019 primarily related to foreign and state operations. See “-Three Months Ended SeptemberJune 30, 20192020 Compared to Three Months Ended SeptemberJune 30, 2018-Income2019-Income Taxes,” above, for information related to the effect of the TaxCARES Act on our taxes.








Business Factors Affecting the Results of Operations
Special Charges and Gains
We define special charges and gains as expenses and gains for which the amount or timing can vary significantly from period to period, and for which the amounts are non-cash in nature, or the amounts are not expected to recur at the same magnitude.
We believe that identification of these special charges and gains provides important supplemental information to investors regarding financial and business trends relating to our financial condition and results of operations. Investors may find this information useful in assessing comparability of our operating performance from period to period, against the business model objectives that management has established, and against other companies in our industry. We provide this information to investors so that they can analyze our operating results in the same way that management does and use this information in their assessment of our core business and valuation.
Loss before income taxes includes the following special charges/(gains) for the three and ninesix months ended SeptemberJune 30, 20192020 and 2018:2019:
Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended June 30, Six Months Ended June 30,
2019 2018 2019 20182020 2019 2020 2019
Special Charges/(Gains):(In thousands)(In thousands)
Impairment of intangible assets(1)
$—
 $—
 $4,993
 $—
$—
 $4,993
 $1,325
 $4,993
Gain from change in fair value of contingent consideration liabilities(2)
(65) (176) (571) (893)
Total Special (Gains)/Charges$(65) $(176) $4,422
 $(893)
Loss/(Gain) from change in fair value of contingent consideration liabilities(2)
100
 (570) 84
 (506)
Total Special Charges$100
 $4,423
 $1,409
 $4,487
(1) Relates to the impairment of the product technology intangible assets associated with the NLT acquisition.
(2) Relates to the net decreaseincrease/(decrease) in the fair value of contingent liabilities associated with the NLT acquisition.
The items reported above are reflected in the consolidated statements of operations as follows:
 Three Months Ended September 30, Nine Months Ended September 30,
 2019 2018 2019 2018
 (In thousands)
Impairment of intangible assets$—
 $—
 $4,993
 $—
Selling, general and administrative(65) (176) (571) (893)
Total Special (Gains)/Charges$(65) $(176) $4,422
 $(893)
 Three Months Ended June 30, Six Months Ended June 30,
 2020 2019 2020 2019
 (In thousands)
Impairment of intangible assets$—
 $4,993
 $1,325
 $4,993
General and administrative100
 (570) 84
 (506)
Total Special Charges$100
 $4,423
 $1,409
 $4,487

Liquidity and Capital Resources
Overview

As of SeptemberJune 30, 2019,2020, we had cash, cash equivalents and investments totaling approximately $27.3$100.5 million, and $25.0$20.0 million of current borrowing capacity was available under our credit facility. We believe that our cash, cash equivalents and investments on hand, including the $91.6 million of net proceeds generated from our recent public offering described below, and the amount currently available to us under our credit facility will be sufficient to fund our operations for at least the next twelve months.

Paycheck Protection Program Loan
In April 2020, due to the economic uncertainty resulting from the impact of the COVID-19 pandemic on our operations and to support our ongoing operations and retain all employees, we applied for a loan under the PPP of the CARES Act. We received a loan in the original principal amount of $7.2 million. We subsequently repaid $1.0 million of the loan. Under the terms of the PPP, subject to specified limitations, the loan may be forgiven if the proceeds are used in accordance with the CARES Act. We intend to apply for forgiveness of the entire loan; however, no assurance is provided that we will obtain forgiveness of the loan in whole or in part. Any unforgiven portion of the loan is payable over two years at an interest rate of 1%, with a deferral of payments for the first six months.



Credit Facility

We have a $30.0 million credit facility with Wells Fargo Bank, National Association which matures in July 2021, subject to a one-time, one-year extension at our election. In addition, at any time through July 27, 2020,2021, we may increase the borrowing limit by up to an additional $10.0 million, subject to us 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. At SeptemberJune 30, 2019,2020, we had no outstanding borrowings under the credit facility. The borrowing capacity under the credit facility is determined monthly and is based on the amount of our eligible accounts receivable and inventory balances and qualified cash (as defined in the credit facility). Depending on the extent to which our eligible accounts receivable and inventory balances increase, our borrowing capacity could increase by as much as an additional $1.5$6.5 million from the $25.0$20.0 million available as of SeptemberJune 30, 20192020 before we are required to maintain the minimum fixed charge coverage ratio as discussed below. The credit facility contains various customary affirmative and negative covenants, including prohibiting us


from incurring indebtedness without the lender’s consent. In April 2020, we received the lender’s consent to obtain the PPP loan. Under the terms of the credit facility, if our Total Liquidity (as defined in the credit facility) is less than $5.0 million, we are required to maintain a minimum fixed charge coverage ratio of 1.10 to 1.00 for the applicable measurement period. Our Total Liquidity was $49.0$118.0 million at SeptemberJune 30, 2019,2020, and therefore that financial covenant was not applicable at that time.

Business Combinations

In August 2016, we entered into an asset purchase agreement with NLT to acquire certain of the assets of NLT’s medical device business related to the expandable interbody medical devices. We made an up-front cash payment of $1.0 million in connection with the initial closing in September 2016 and issued 350,000 shares of our common stock in January 2017 as contingent closing consideration. At SeptemberAs of June 30, 2019, we recorded2020, included in contingent consideration liabilities was a $1.5$1.9 million liability representing the estimated fair value of future contingent milestone payments related to the achievement of certain commercial milestones, one of which is payable in the third quarter of 2020 and one of which we anticipate will become payable at varying times betweenin the third quarter of 2020, and 2025, and a $0.3$0.2 million liability representing the estimated fair value of future contingent royalty payments based on percentages of our future net sales of certain of the products and technology we acquired, which we anticipate will become payable at varying times between 20192020 and 2030. The contingent milestone payments, if any, are payable in cash or in shares of our common stock, at our election. In July 2020, we elected to pay $1.0 million of our milestone payments in shares of our common stock. The contingent royalty payments are payable in cash.

At the Market Program

In August 2016, we entered into an equity distribution agreement (Distribution Agreement) with Piper Jaffray & Co. (Piper Jaffray), pursuant to which we may offer and sell shares of our 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 a registration statement on Form S-3 that was declared effective on August 24, 2016. Under the Distribution Agreement, during the three months ended March 31, 2018, we sold 882,332 shares of common stock at an average price per share of $10.00 and received net proceeds of approximately $8.5 million (net of $0.3 million of offering costs) which consumed the $25.0 million in capacity under the Distribution Agreement.

In May 2018, we entered into another equity distribution agreement with Piper Jaffray (the May 2018 Distribution Agreement), pursuant to which we may offer and sell shares of our common stock in ATM offerings having an aggregate offering price up to $50.0 million in gross proceeds from time to time through Piper Jaffray acting as sales agent. The shares offered and sold under the May 2018 Distribution Agreement are covered by a registration statement on Form S-3 that was declared effective on August 24, 2016. On March 1, 2019, we terminated the May 2018 Distribution Agreement. We are not subject to any termination penalties related to the termination of the May 2018 Distribution Agreement. Prior to termination, we had not sold any shares of our common stock pursuant to the May 2018 Distribution Agreement.

In March 2019, we entered into a controlled equity offering sales agreement (Sales Agreement) with Cantor Fitzgerald & Co. (Cantor Fitzgerald) to sell shares of our common stock having an aggregate offering price of up to $50.0 million from time to time, through an ATM offering under which Cantor Fitzgerald will act as sales agent. The shares offered and sold under the Sales Agreement are covered by a registration statement on Form S-3 that was declared effective on August 24, 2016, and a prospectus supplement related to the ATM offering, dated March 1, 2019. We did not sell any shares of common stock under the Sales Agreement and, on October 23, 2019, we notified Cantor Fitzgerald of our intent to terminate the agreement, which we and Cantor Fitzgerald mutually agreed to terminate effective as of October 23, 2019.

Underwritten Offering

In October 2018,January 2020, we entered into an Underwriting Agreement (Underwriting Agreement) with Wells Fargo Securities,Piper Sandler & Co. and Canaccord Genuity LLC Piper Jaffray and Cantor Fitzgerald acting as joint bookrunning managers and as representatives of the underwriters relating to the issuance and sale of 3,250,0006,800,000 shares of our common stock. Thestock at a public offering price to the public in the offering was $15.50of $12.50 per share, before underwriting discounts and commissions. We granted the underwriters an option, exercisable for 30 days, to purchase up to an additional 487,5001,020,000 shares of common stock. The underwriters exercised this option and the offering closed on October 15, 2018January 10, 2020 with the sale of 3,737,5007,820,000 shares of our common stock. The netstock, resulting in proceeds from the offering wereof approximately $54.1$91.6 million, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We used a portion of the net proceeds from this offering to repay all of our then outstanding borrowings under our Wells Fargo credit facility, and we intend to use the remaining proceeds for general corporate purposes, including research and development, general and administrative expenses, capital expenditures and general working capital purposes.



Cash and Cash Equivalents
We had cash and cash equivalents totaling approximately $22.3$75.3 million and $24.2$20.2 million at SeptemberJune 30, 20192020 and December 31, 2018,2019, respectively.



Cash Flows
 Six Months Ended June 30, 2020 vs. 2019
 2020 2019 % Change
 (In thousands)  
Net cash used in operating activities$(11,949) $(11,763) 2 %
Net cash (used in) provided by investing activities(30,320) 10,100
 (400)%
Net cash provided by (used in) financing activities97,471
 (1,074) NM
Effect of exchange rate changes on cash and cash equivalents(55) (33) 67 %
Net change in cash and cash equivalents$55,147
 $(2,770) NM
_______
 Nine Months Ended September 30, 2019 vs. 2018
 2019 2018 % Change
 (In thousands)  
Net cash used in operating activities$(15,130) $(8,601) 75.9 %
Net cash provided by (used in) investing activities14,663
 (6,565) (323.4)%
Net cash (used in) provided by financing activities(1,267) 16,233
 (107.8)%
Effect of exchange rate changes on cash and cash equivalents(185) (73) 153.4 %
Net change in cash and cash equivalents$(1,919) $994
 (293.1)%


NM: not meaningful
Net Cash Flows Used in Operating Activities
Net cash used in operating activities for the ninesix months ended SeptemberJune 30, 20192020 increased by $6.5$0.2 million compared to the same period in 2018.2019. The increase was due to a $6.0 million higher net loss adjusted for non-cash items of $10.8 million for the six months ended June 30, 2020, compared to $4.8 million for the six months ended June 30, 2019. This was offset by a $5.8 million lower change in working capital with a $1.2 million increase in working capital for the six months ended June 30, 2020 compared to a $7.0 million increase in working capital for the six months ended June 30, 2019. The lower working capital change was mostly related to a decrease in accounts receivable due to lower year-over-year sales.
Net Cash Flows (Used in) Provided by Investing Activities
Net cash used in investing activities was $30.3 million for the six months ended June 30, 2020 compared to net cash provided by investing activities of $10.1 million for the same period in 2019. The change was primarily due to an increase$25.0 million in accounts receivable and higher inventory levelspurchases of our investments in U.S. Treasury Bills during the six months ended June 30, 2020 compared to support recent and upcoming product launches and expected future revenue growth.$15.0 million in maturities of short-term investments for the same period in 2019.
Net Cash Flows Provided by (Used in) InvestingFinancing Activities
Net cash provided by investingfinancing activities was $14.7$97.5 million for the ninesix months ended SeptemberJune 30, 2019 compared to2020. It was comprised primarily of $91.6 million proceeds from issuance of common stock, net cash used in investing activities of $6.6offering costs, $6.2 million forof net proceeds from the same period in 2018. The increase was due to $25.0PPP loan, $0.7 million in maturities of proceeds from the issuance of common stock under our investments in U.S. Treasury Bills, which was partiallyESPP, and $0.9 million of proceeds from the exercise of stock options, offset by larger investments in spinal instruments and sets$1.9 million of cash for tax payments we made on our employees' behalf for shares we withheld from such employees on the vesting of restricted stock awards to support recent and upcoming spinal implant product launches.
Net Cash Flows (Used in) Provided by Financing Activities
cover statutory tax withholding requirements. Net cash used in financing activities was $1.3$1.1 million for the ninesix months ended SeptemberJune 30, 2019.2019. It was comprised primarily of $2.1$1.9 million of cash for tax payments we made on our employees' behalf for shares we withheld from such employees on the vesting of restricted stock awards to cover statutory tax withholding requirements, partially offset by $0.7 million of proceeds from the issuance of common stock under our ESPP and by $0.2 million of proceeds from the exercise of stock options. Net cash provided by financing activities was $16.2 million for the nine months ended September 30, 2018 and was comprised primarily of $8.5 million of net proceeds from the sale of shares of our common stock under the ATM equity offering program, $7.0 million in borrowings under our revolving line of credit, $0.5 million in proceeds from the issuance of stock under our ESPP, and $0.9 million in proceeds from the exercise of stock options, partially offset by $0.6 million of cash for tax payments we made on our employees' behalf for shares we withheld from such employees on the vesting of restricted stock awards to cover statutory tax withholding requirements.
Off-Balance Sheet Arrangements
There were no off-balance sheet arrangements as of SeptemberJune 30, 20192020 that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to our business.

Contractual Obligations and Commitments

There have been no material changes outside the ordinary course of our business to the contractual obligations disclosed in the 20182019 10-K.





Other Matters
Critical Accounting Policies and the Use of Estimates



Our discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. Preparing these financial statements requires us 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 revenue recognition, allowances for doubtful accounts receivable and sales return and other credits, net realizable value of inventories, amortization periods for acquired intangible assets, estimates of projected cash flows and discount rates used to value intangible assets and test them for impairment, estimates of projected cash flows and 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 used to value contingent consideration liabilities from business combinations, estimates of projected cash flows and depreciation and amortization periods for long-lived assets, valuation of stock-based compensation, computation of taxes and valuation allowances recorded against deferred tax assets, and loss contingencies. These estimates are based on historical experience and on various other assumptions believed to be reasonable under the current circumstances. Actual results could differ from these estimates.

Note 2, “Summary of Significant Accounting Policies” to the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this report and included in Part II, Item 8 of the 20182019 10-K describe the significant accounting policies and estimates used in the preparation of our condensed consolidated financial statements. ThoseOther than the adoption of Topic 842, those policies and estimates disclosed in the 20182019 10-K have not materially changed.
The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition, including sales, 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.
Recently Issued Accounting Pronouncements
Information regarding new accounting pronouncements is included in Note 2, "Summary of Significant Accounting Policies,"to the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this report.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a "smaller reporting company" as defined by Item 10 of Regulation S-K, the Company is not required to provide this information.    


ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Based on an evaluation under the supervision and with the participation of our management, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act were effective as of the end of the period covered by this report to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15(d) and 15d-15(d) under the Exchange Act that occurred during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.





Inherent Limitations of Internal Controls

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.






PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, we are subject to legal proceedings and claims in the ordinary course of business. Management presently believes that each of these claims is meritless and, if litigated, the likelihood of loss is remote and/or that, individually and in the aggregate, any loss would not materially harm our financial position, cash flows, or overall results of operations, in part because of the insurance policies we maintain that cover certain of these claims.  However, legal proceedings are subject to inherent uncertainties and unfavorable rulings or outcomes could occur that have, individually or in aggregate, a material adverse effect on our business, financial condition or operating results. 


ITEM 1A. RISK FACTORS
TheExcept as set forth below, the risk factors described in the 20182019 10-K have not materially changed.
Our PPP loan may not be forgiven and may subject us to challenges and investigations regarding qualification for the loan.
In April 2020, due to the economic uncertainty resulting from the impact of the COVID-19 pandemic on our operations and to support our ongoing operations and retain all employees, we applied for, and received, a loan under the PPP of the CARES Act administered by the U.S. Small Business Administration (SBA). The original principal amount of the loan was $7.2 million; we subsequently repaid $1.0 million. Under the terms of the PPP, subject to specified limitations, the loan may be forgiven if the proceeds are used in accordance with the CARES Act, including for qualifying expenses, which include payroll costs, rent, and utility costs, over the allowable measurement period following receipt of the loan proceeds.
The PPP loan application required us to certify that the current economic uncertainty made the loan request necessary to support our ongoing operations. We made this certification in good faith after carefully considering the facts and circumstances, and although we believe we satisfied all eligibility criteria for the PPP loan and our receipt of the PPP loan is consistent with the objectives of the PPP, the certification described above does not contain objective criteria and is subject to interpretation. Further, following the date we applied for the PPP Loan, the SBA issued updated guidance regarding the PPP, including regarding required borrower certifications and requirements for loan forgiveness. The SBA stated that it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and that all PPP loans in excess of $2 million will be subject to review by the SBA for compliance with program requirements. The lack of clarity regarding loan eligibility under the PPP resulted in significant media coverage and controversy regarding public companies applying for and receiving PPP loans. We intend to apply for forgiveness of the entire loan, and in connection therewith we expect to be required to make certain certifications that will be subject to audit and review by governmental entities and could subject us to significant penalties and liabilities if found to be inaccurate. No assurance is provided that we will obtain forgiveness of the loan in whole or in part. Any unforgiven portion of the loan is payable over two years at an interest rate of 1%, with a deferral of payments for the first six months. In addition, if despite our good faith belief that we satisfied all eligibility requirements for the PPP loan, we are found to have been ineligible to receive it or in violation of any of the laws or regulations that apply to us in connection with the PPP loan, including the False Claims Act, we may be subject to penalties, including significant civil, criminal and administrative penalties, and could have to repay the PPP loan upon demand. If we are audited or reviewed by the U.S. Department of the Treasury or the SBA, such audit or review could result in the diversion of management's time and attention, generate negative publicity and cause us to incur legal and reputational costs. In addition, our receipt of the PPP loan may result in adverse publicity and damage to our reputation. Any of these events could harm our business, results of operations and financial condition.
Our business, financial condition and results of operations will continue to be materially and adversely impacted in the near-term, and could be materially and adversely impacted beyond 2020, by the COVID-19 pandemic.
The COVID-19 pandemic materially and adversely impacted our business and we expect the impact to continue through at least the duration of the pandemic as regions respond to local conditions. To date, the impacts include: the deferral 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, including because of stay-at-home orders and similar government actions; and temporary closures of our facilities and of the facilities of our customers and suppliers. As jurisdictions throughout the world continue to deal with and respond to the pandemic, the degree of the foregoing impacts may increase in scope or magnitude or we may experience additional material adverse impacts in one or more regions. Any other outbreaks of contagious diseases or other adverse public health developments in countries where we operate or where our customers or suppliers are located could also have a material and adverse effect on our business, financial condition and results of operations.



Because of the COVID-19 pandemic, surgeons and their patients were required, and in certain regions continue to be required, or are choosing, to defer procedures in which our products otherwise could be used, and many facilities that specialize in the procedures in which our products otherwise could be used temporarily closed or continue to be temporarily closed or operating at reduced hours. In addition, even after the pandemic subsides and/or governmental orders no longer prohibit or recommend against performing such procedures, patients may continue to defer such procedures out of concern of being exposed to coronavirus or for other reasons. Further, facilities at which our products typically are used may not reopen or, even if they reopen, patients may elect to have procedures performed at facilities that are, or are perceived to be, lower-risk, such as ambulatory surgery centers, and our products may not be approved at such facilities, and we may be unable to have our products approved for use at such facilities on a timely basis, or at all. The effect of the pandemic on the broader economy could also negatively affect demand for procedures using our products, both in the near- and long-term.
Workforce limitations and travel restrictions resulting from government actions taken to contain the spread of COVID-19 has and will continue to adversely affect almost every aspect of our business. If a significant percentage of our workforce, or of the workforce of third parties on which we rely, cannot work, including because of illness or travel or government restrictions, our operations may be negatively affected. Because of government restrictions and social distancing guidelines in many countries around the world, there is an increased reliance on working from home for our workforce and on the workforce of third parties on which we rely. For example, most of our independent sales agents currently are working largely using virtual and online engagement tools and tactics, which may be less effective than our ordinary, in-person sales and marketing programs. In addition, we reduced access to our hands-on cadaveric training facility in Carlsbad, California, which, in turn, adversely impacted our ability to educate and train surgeons and sales agents on the proper use of our products (which may make surgeons and sales agents less comfortable using, and therefore less likely to use, our products), and which we expect will also limit our ability to develop, and therefore launch, the products we believe will drive our future revenue growth on the timelines we anticipated previously, or at all. The change in the manner in which our workforce is functioning could also delay the launch of products we planned to launch in 2020 and beyond. It may also cause us not to timely submit required filings, including with the U.S. Securities and Exchange Commission, U.S. Food and Drug Administration (FDA), or other regulatory bodies, both in the U.S. and outside the U.S., any of which by itself may have a negative effect on our business, such as by making us ineligible to conduct an offering under a Form S-3 registration statement, which generally takes less time and is less expensive than other means, such as conducting an offering under a Form S-1 registration statement. In addition, changes impacting workforce function at the FDA and other regulatory bodies, as well as changes impacting workforce function at the facilities at which we seek to have new products approved for use, could adversely impact the timing of when our new products are cleared for marketing and approved for use, either of which could adversely impact the timing of our ability to sell these new products and could have a material and adverse effect on our revenue growth.
Further, disruptions in the manufacture and/or distribution of our products or in our supply chain may occur as a result of the pandemic, including for the reasons above, or other events that result in staffing shortages, production slowdowns, stoppages, or disruptions in delivery systems, any of which could materially and adversely affect our ability to manufacture and/or distribute our products, or to obtain the raw materials and supplies necessary to manufacture and/or distribute our products, in a timely manner, or at all. See “If any of our manufacturing, development or research facilities are damaged and/or our manufacturing processes are interrupted, we could experience supply disruptions, lost revenues and our business could be seriously harmed” and “In addition to PcoMed, we depend on a limited number of third-party suppliers for components and raw materials and losing any of these suppliers, or their inability to provide us with an adequate supply of materials that meet our quality and other requirements, could harm our business” in Item 1A. Risk Factors in Part I of the 2019 10-K (the “10-K Risk Factors”).
We may also experience other unknown adverse impacts from COVID-19 that cannot be predicted. For example, hospitals and other facilities at which we sell our products may renegotiate their purchase prices, including as a result of, or the perception they may be suffering, financial difficulty as a result of the pandemic. Similarly, facilities at which we seek to sell our products in the future may require price reductions relative to the price at which we previously expected to sell our products. Reduction in the prices at which we sell products to existing customers may have a material and adverse effect on our future financial results and reductions in the prices at which we expected to sell products to anticipated customers may have a material and adverse effect on our expectations for revenue growth. See “Changes in third-party payment systems and in the healthcare industry may require us to decrease the selling price for our products, may reduce the size of the market for our products, or may eliminate a market, any of which could have a material and adverse effect on our financial performance” in the 10-K Risk Factors.
Further, the global capital markets experienced, and we expect will continue to experience, disruption and volatility due to the COVID-19 pandemic, adversely impacting access to capital not only for us, but also for our customers and suppliers who need access to capital. Their inability to access capital in a timely manner, or at all, could adversely impact demand for our products and/or adversely impact our ability to manufacture and/or supply our products, any of which could have a material and adverse effect on our business. See “Our future capital needs are uncertain and we may need to raise additional funds in the future, and such funds may not be available on acceptable terms or at all,” “The market price of our common stock has been and likely will



continue to be volatile,” and “Your percentage of ownership in us may be diluted and issuances of substantial amounts of our common stock, or the perception that such issuances may occur, could cause the market price of our common stock to decline significantly, even if our business is performing well” in the 10-K Risk Factors.
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, is currently highly uncertain and cannot be predicted with reasonable accuracy at this time and will depend on future developments that are also highly uncertain and cannot be predicted with reasonable accuracy at this time, including, without limitation: (a) new information that may emerge concerning COVID-19, its contagiousness and/or virulence; (b) resurgences in COVID-19 transmission and infection following the easing or lifting of “stay-at-home” or other restrictions or following resumption of surgical procedures, whether as a result thereof, as a result of reinfection, as a result of a delay in the emergence of symptoms following infection (or reinfection) by COVID-19, or as a result of its ability to lay dormant following infection (or reinfection), and the adverse impact the foregoing may have on our business and financial condition, including because of the adverse impact on patients’ willingness to undergo procedures in which our products could be used; (c) 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, whether related to COVID-19 directly or indirectly; and (d) 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.
The COVID-19 pandemic also heightens the risks in certain of the other risk factors described in in the 10-K Risk Factors, including, without limitation, those related to:
(1)
our ability to compete successfully in the highly competitive industry in which we operate as result of the uncertainty of the full extent of the impact of the pandemic on our business, financial condition and results of operations (see “We operate in an industry and in market segments that are highly competitive and we may not compete successfully” in the 10-K Risk Factors);
(2)
our ability to (a) effectively demonstrate to neurosurgeon and orthopedic spine surgeons the merits of our products compared to those of our competitors and (b) successfully educate and train surgeons and their staff on the proper use of our products in light of the reduced access to our hands-on cadaveric training facility in Carlsbad, California or if we are required to or elect to temporarily close it, which is the primary manner in which we offer such education and training (see “To be commercially successful, we must effectively demonstrate to neurosurgeon and orthopedic spine surgeons the merits of our products compared to those of our competitors” and “We must successfully educate and train surgeons and their staff on the proper use of our products,” in the 10-K Risk Factors);
(3)
our ability to develop and launch new products in a timely and consistent manner in light of (a) the reduced access to our hands-on cadaveric training facility in Carlsbad, California or if we are required to or elect to temporarily close it, which will limit our ability to develop and launch the products we believe will drive our future revenue growth on the timelines we anticipated previously, or at all, (b) the change in the manner in which our workforce is functioning and (c) the changes impacting workforce function at the FDA and other regulatory bodies, as well as changes impacting workforce function at the facilities at which we seek to have new products approved for use (see “We may not develop new products in a timely and consistent manner, and failure to do so may adversely affect the attractiveness of our overall product portfolio to our surgeon customers and negatively impact our sales and market share” in the 10-K Risk Factors);
(4)
our ability to maintain or expand our network of independent sales agents and stocking distributors (see “If we are unable to maintain and expand our network of independent sales agents and stocking distributors, we may not maintain or grow our revenue” in the 10-K Risk Factors);
(5)
an inability to conduct clinical studies effectively to demonstrate the safety and efficacy of our products as a result of, among other things, cost-savings measure we implement or the closure or reduced operating hours of the sites at which such clinical studies would be conducted (see “Sales of, or the price at which we sell, our products may be adversely affected unless the safety and efficacy of our products, alone and relative to competitive products, is demonstrated in clinical studies” and “If the third parties on which we rely to conduct our clinical studies and to assist us with pre-clinical development do not perform as contractually required or expected, we may not obtain regulatory clearance, approval or a CE Certificate of Conformity for or commercialize our products” in the 10-K Risk Factors);
(6)
our ability to maintain the integrity of our data and to avoid security breaches, loss of data, and other disruptions that could compromise sensitive information as a result of most of our workforce working remotely in environments that may be less secure than our office environment and the increased use of video conferencing and other technologies to conduct business virtually in light of the COVID-19 pandemic (see “We depend on information technology and if our information technology fails to operate adequately or fails to properly maintain the integrity of our data, our business could be materially and adversely affected” and “Security breaches, loss of data and other disruptions could compromise sensitive



information related to our business, prevent us from accessing critical information or expose us to liability, which could adversely affect our business and our reputation” in the 10-K Risk Factors);
(7)
increased exposure to uninsured risks (see “Our insurance policies are expensive and protect us only from some risks, which will leave us exposed to significant uninsured liabilities” in the 10-K Risk Factors);
(8)
our inability to increase our international sales and a potential adverse impact by changes in foreign currency exchange rates in light of the COVID-19 pandemic (see “We are exposed to a variety of risks relating to our international sales and operations” in the 10-K Risk Factors);
(9)
fluctuation in our sales volumes and operating results as a result of the adverse effects of the COVID-19 pandemic (see “Our sales volumes and our operating results may fluctuate” in the 10-K Risk Factors); and
(10)
increased economic instability around the world in light of the COVID-19 pandemic (see “Continuing economic instability, including challenges faced by European countries, may adversely affect the ability of hospitals and other customers to access funds or otherwise have available liquidity, which could reduce orders for our products or impede our ability to obtain new customers, particularly in European markets” in the 10-K Risk Factors).









ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Recent Sales of Unregistered Securities
None.
Purchases of Equity Securities by the Issuer
The table below is a summary of purchases of our common stock we made during the quarter covered by this report. Other than as indicated in the table below, no such purchases were made in any other month during the quarter. We do not have any publicly announced repurchase plans or programs.
Period Total Number of Shares Purchased (1)
 Average Price Paid per Share
 Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 Maximum Number of Shares That May Yet be Purchased Under the Plans or Programs
         
July 1 - July 31 11,213
 $12.89
 —
 —
August 1 - August 31 492
 $12.47
 —
 —
September 1 - September 30 1,270
 $11.01
 —
 —
Period Total Number of Shares Purchased (1)
 Average Price Paid per Share
 Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 Maximum Number of Shares That May Yet be Purchased Under the Plans or Programs
         
April 1 - April 30 625
 $7.54
 —
 —
May 1 - May 31 1,711
 $10.29
 —
 —
June 1 - June 30 1,874
 $11.16
 —
 —
(1)These shares were surrendered to the Company to satisfy tax withholdings obligations in connection with the vesting of restricted stock awards.


ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.






ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

On August 3, 2020, the Company's board of directors adopted the SeaSpine Holdings Corporation 2020 Employment Inducement Incentive Award Plan (the 2020 Inducement Plan). The terms of the 2020 Inducement Plan are substantially similar to the terms of the Company’s 2015 Incentive Award Plan, as amended and restated to date, with three principal exceptions: (1) incentive stock options may not be granted under the 2020 Inducement Plan; (2) there are no annual limits on awards that may be issued to an individual under the 2020 Inducement Plan; and (3) awards granted under the 2020 Inducement Plan are not required to be subject to any minimum vesting period. The 2020 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.
NoneThe Company's board of directors has initially reserved 2,000,000 shares of the Company’s common stock for issuance pursuant to awards granted under the 2020 Inducement Plan. In accordance with Rule 5635(c)(4) of the Nasdaq Listing Rules, awards under the 2020 Inducement Plan may only be made to an employee who has not previously been an employee or member of the Company's board of directors or of any board of directors of any parent or subsidiary of the Company, or following a bona fide period of non-employment by the 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 inducement material to his or her entering into employment with the Company or such subsidiary.
A complete copy of the 2020 Inducement Plan and the forms of award agreements to be used thereunder, a copy of which are each filed as Exhibits 10.5, 10.6, 10.7 and 10.8 hereto, are incorporated herein by reference. The above summary of the 2020 Inducement Plan does not purport to be complete and is qualified in its entirety by reference to such exhibits.






ITEM 6. EXHIBITS

Exhibit No. Description
10.1*
Consent Under and First Amendment to Amended and Restated Credit Agreement
10.2 (1
Letter agreement dated April 23, 2020 with Keith C. Valentine
10.3 (1)
Form of letter agreement dated April 23, 2020 with members of the senior leadership team of SeaSpine Holdings Corporation other than Keith C. Valentine
10.4 (2)
Amendment to the SeaSpine Holdings Corporation Amended and Restated 2015 Incentive Award Plan (effective June 3, 2020)
10.5*
SeaSpine Holdings Corporation 2020 Employment Inducement Incentive Award Plan
10.6*
Form of Restricted Stock Unit Award Grant Notice and Restricted Stock Unit Award Agreement under the SeaSpine Holdings Corporation 2020 Employment Inducement Incentive Award Plan
10.7*
Form of Stock Option Grant Notice and Stock Option Agreement under the SeaSpine Holdings Corporation 2020 Employment Inducement Incentive Award Plan (for Senior Leadership Team Members)
10.8*
Form of Stock Option Grant Notice and Stock Option Agreement under the SeaSpine Holdings Corporation 2020 Employment Inducement Incentive Award Plan (for Non-Senior Leadership Team Members)
31.1* 
Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
31.2* 
Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
32.1** 
Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
32.2** 
Certification of Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
101.INS*† Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
   
101.SCH*† Inline XBRL Taxonomy Extension Schema Document
   
101.CAL*† Inline XBRL Taxonomy Extension Calculation Linkbase Document
   
101.DEF*† Inline XBRL Definition Linkbase Document
   
101.LAB*† Inline XBRL Taxonomy Extension Labels Linkbase Document
   
101.PRE*† Inline XBRL Taxonomy Extension Presentation Linkbase Document
104Cover Page Interactive Data File (embedded within Exhibit 101.INS Inline XBRL document)

*Filed herewith



**
These certifications are being furnished solely to accompany this report pursuant to 18 U.S.C. 1350, and are not being
filed for purposes of Section 18 of the Securities Exchange Act of 1934 and are not to be incorporated by reference into any filing of the registrant, whether made before or after the date hereof, regardless of any general incorporation by reference language in such filing.
(1)Incorporated by reference from the registrant's current report on Form 8-K filed on April 24, 2020.
(2)Incorporated by reference from Appendix A to the registrant's Definitive Proxy Statement filed with the Securities and Exchange Commission on April 20, 2020.

† The financial information of SeaSpine Holdings Corporation Quarterly Report on Form 10-Q for the quarter ended SeptemberJune 30, 20192020 filed on October 29, 2019August 4, 2020 formatted in XBRL (ExtensibleiXBRL (Inline Extensible Business Reporting Language): (i) the Condensed Consolidated Statements of Operations, (ii) Condensed Consolidated Statements of Comprehensive Loss, (iii) the Condensed Consolidated Balance Sheets, (iv) Parenthetical Data to the Condensed Consolidated Balance Sheets, (v) the Condensed Consolidated Statements of Cash Flows, (vi) the Condensed Consolidated Statements of Equity, and (vii) Notes to Unaudited Condensed Consolidated Financial Statements, is furnished electronically herewith.









SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
    
   SEASPINE HOLDINGS CORPORATION
   
Date:October 29, 2019August 4, 2020 /s/ Keith C. Valentine
   Keith C. Valentine
   President and Chief Executive Officer
   (Principal Executive Officer)
   
Date:October 29, 2019August 4, 2020 /s/ John J. Bostjancic
   John J. Bostjancic
   Chief Financial Officer
   (Principal Financial Officer)


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