UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
FORM 10-Q
 
(Mark One)
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2015March 31, 2016
or
oTRANSITION 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)
 
DELAWARE 47-3251758
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
 
(I.R.S. EMPLOYER
IDENTIFICATION NO.)
  
5770 Armada Drive, Carlsbad, California 92008
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE: (760) 727-8399
2302 La Mirada Drive, Vista, California92081
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT
 
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.    Yes  x   No  o  
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  x    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated fileroAccelerated filero
    
Non-accelerated filer
x  (Do not check if a smaller reporting company)
Smaller reporting companyo
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 November 5, 2015May 2, 2016 was 11,102,928.11,092,931.



Table of Contents





SEASPINE HOLDINGS CORPORATION
INDEX
 

 
Page
Number
 
  
  
Condensed Consolidated and Combined Statements of Operations for the three and nine months ended September 30,March 31, 2016 and 2015 and 2014 (Unaudited)
  
Condensed Consolidated and Combined Statements of Comprehensive Loss for the three and nine months ended September 30,March 31, 2016 and 2015 and 2014 (Unaudited)
  
Condensed Consolidated and Combined Balance Sheets as of September 30, 2015March 31, 2016 and December 31, 20142015 (Unaudited)
  
Condensed Consolidated and Combined Statements of Cash Flows for the ninethree months ended September 30,March 31, 2016 and 2015 and 2014 (Unaudited)
  
Condensed Consolidated and Combined Statement of Equity for the ninethree months ended September 30, 2015March 31, 2016 (Unaudited)
  
Notes to Unaudited Condensed Consolidated and Combined Financial Statements
  
  
  
  
  
  
  
  
  
  
Item 5. Other Information
  
  
  
Exhibit 10.1 
Exhibit 31.1 
Exhibit 31.2 
Exhibit 32.1 
Exhibit 32.2 
EX-101 INSTANCE DOCUMENT 
EX-101 SCHEMA DOCUMENT 
EX-101 CALCULATION LINKBASE DOCUMENT 
EX-101 DEFINITION LINKBASE DOCUMENT 
EX-101 LABELS LINKBASE DOCUMENT 
EX-101 PRESENTATION LINKBASE DOCUMENT 



Table of Contents


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

SEASPINE HOLDINGS CORPORATION
CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
 
Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended March 31,
2015 2014 2015 20142016 2015
Total revenue, net$32,679
 $33,606
 $98,454
 $103,547
$31,399
 $32,314
Cost of goods sold17,341
 14,282
 44,448
 42,077
14,283
 12,601
Gross profit15,338
 19,324
 54,006
 61,470
17,116
 19,713
Operating expenses:    

 

   
Selling, general and administrative26,348
 20,262
 83,059
 64,518
25,374
 25,051
Research and development2,364
 2,111
 5,973
 6,259
2,753
 1,582
Intangible amortization1,295
 1,397
 4,049
 4,174
1,281
 1,397
Total operating expenses30,007
 23,770
 93,081
 74,951
29,408
 28,030
Operating loss(14,669) (4,446) (39,075) (13,481)(12,292) (8,317)
Other income (expense), net195
 (30) (577) (59)258
 (721)
Loss before income taxes(14,474) (4,476) (39,652) (13,540)(12,034) (9,038)
Provision (benefit) for income taxes(275) 840
 2,130
 2,764
(27) 860
Net loss$(14,199) $(5,316) $(41,782) $(16,304)$(12,007) $(9,898)
Net Loss per share, basic and diluted$(1.27) $(0.48) $(3.75) $(1.48)
Net loss per share, basic and diluted$(1.08) $(0.90)
Weighted average shares used to compute basic and diluted net loss per share11,171
 11,048
 11,130
 11,048
11,167
 11,048



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


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Table of Contents


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

Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended March 31,
2015 2014 2015 20142016 2015
Net loss$(14,199) $(5,316) $(41,782) $(16,304)$(12,007) $(9,898)
Other comprehensive income (loss)       
Change in foreign currency translation adjustments525
 (535) 937
 (446)
Other comprehensive income   
Foreign currency translation adjustments190
 63
Comprehensive loss$(13,674) $(5,851) $(40,845) $(16,750)$(11,817) $(9,835)




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



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Table of Contents


SEASPINE HOLDINGS CORPORATION
CONDENSED CONSOLIDATED AND COMBINED BALANCE SHEETS
(Unaudited)
(In thousands, except par value data)
 
`
September 30, 2015 December 31, 2014March 31, 2016 December 31, 2015
      
ASSETS      
Current assets:      
Cash and cash equivalents$38,503
 $652
$28,602
 $33,429
Trade accounts receivable, net of allowances of $794 and $55825,345
 22,538
Trade accounts receivable, net of allowances of $588 and $76422,893
 25,326
Inventories52,897
 49,862
50,309
 51,271
Deferred tax assets141
 436
Prepaid expenses and other current assets4,300
 1,128
2,165
 3,696
Total current assets121,186
 74,616
103,969
 113,722
Property, plant and equipment, net23,026
 16,360
21,051
 21,958
Intangible assets, net41,589
 46,891
37,677
 39,632
Deferred tax assets450
 501
Other assets222
 1,274
1,007
 1,077
Total assets$186,473
 $139,642
$163,704
 $176,389
LIABILITIES AND INVESTED EQUITY      
Current liabilities:      
Accounts payable, trade13,748
 36,637
$11,185
 $13,689
Income taxes payable726
 608
Accrued compensation6,550
 6,300
3,948
 4,177
Accrued commissions4,029
 4,227
Accrued expenses and other current liabilities3,724
 2,407
3,906
 3,942
Total current liabilities24,748
 45,952
23,068
 26,035
Long-term borrowings under credit facility361
 328
Other liabilities2,565
 2,406
2,908
 2,687
Total liabilities27,313
 48,358
26,337
 29,050
      
Commitments and contingencies
 

 
Stockholders' equity:      
Preferred stock, $0.01 par value; 15,000 authorized; none issued and outstanding
 

 
Common stock, $0.01 par value; 60,000 authorized; 11,103 shares issued and outstanding at September 30, 2015, and none issued and outstanding at December 31, 2014111
 
Common stock, $0.01 par value; 60,000 authorized; 11,093 shares issued and outstanding at March 31, 2016, and 11,102 shares issued and outstanding at December 31, 2015111
 111
Additional paid-in capital171,418
 
175,631
 173,786
Integra net investment prior to the spin-off

90,391
Accumulated other comprehensive income1,830
 893
1,581
 1,391
Accumulated deficit(14,199) 
(39,956) (27,949)
Total stockholders' equity159,160
 91,284
137,367
 147,339
Total liabilities and stockholders' equity$186,473
 $139,642
$163,704
 $176,389


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


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SEASPINE HOLDINGS CORPORATION
CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 
Nine Months Ended September 30,Three Months Ended March 31,
2015 20142016 2015
      
OPERATING ACTIVITIES:      
Net loss$(41,782) $(16,304)$(12,007) $(9,898)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:      
Depreciation and amortization9,169
 9,857
3,162
 3,005
Instrument replacement expense944
 1,206
589
 200
Impairment of instruments175
 
103
 
Provision for excess and obsolete inventories6,069
 2,037
2,525
 430
Amortization of debt issuance costs35
 
Deferred income tax benefit(35) 
Stock-based compensation1,775
 454
1,974
 89
Amortization of inventory step-up
 165
Allocation of non-cash charges from Integra563
 1,523

 247
Changes in assets and liabilities      
Accounts receivable(2,099) 5,667
2,551
 2,525
Inventories(8,752) (1,322)(1,022) 846
Prepaid expenses and other current assets5,612
 213
1,534
 362
Other non-current assets(6,164) 524
101
 (4)
Accounts payable5,213
 1,317
(3,394) 676
Income taxes payable406
 (621)
 (157)
Accrued expenses and other current liabilities1,413
 308
Accrued commissions(200) (478)
Accrued compensation, accrued expenses and other current liabilities(277) 2,866
Other non-current liabilities(1,993) (84)170
 (101)
Net cash (used in) provided by operating activities(29,451) 4,940
(4,191) 608
INVESTING ACTIVITIES:      
Purchases of property and equipment(9,826) (2,343)(983) (3,571)
Technology license milestone payment(150) 
Net cash used in investing activities(9,976) (2,343)(983) (3,571)
FINANCING ACTIVITIES:      
Other financing activity(2) 
Integra net investment prior to the spin-off77,173
 (2,587)
 2,962
Excess tax benefits from stock-based compensation arrangements37
 
Net cash provided by (used in) financing activities77,210
 (2,587)
Net cash (used in) provided by financing activities(2) 2,962
Effect of exchange rate changes on cash and cash equivalents68
 (2)349
 (3)
Net change in cash and cash equivalents37,851
 8
(4,827) (4)
Cash and cash equivalents at beginning of period652
 646
33,429
 652
Cash and cash equivalents at end of period$38,503
 $654
$28,602
 $648
Non-cash financing activities:   
Settlement of related-party payable to Integra net investment$29,022
 $
Non-cash investing activities:      
Property and equipment in liabilities$1,419
 $520
998
 541

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


6

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SEASPINE HOLDINGS CORPORATION
CONDENSED CONSOLIDATED AND COMBINED STATEMENT OF EQUITY
(Unaudited)
(In thousands)


  Common Stock  Additional Integra  Accumulated Other   Total
 Number of    Paid-In Net Comprehensive Accumulated Stockholder's
 Shares  Amount  Capital  Investment Income Deficit  Equity
Balance January 1, 2015
 $
 $
 $90,391
 $893
 $
 $91,284
Net loss
 
 
 (27,583) 
 (14,199) (41,782)
Net transfer from Integra
 
 
 107,106
 
 
 107,106
Reclassification of Integra net investment in connection with spin-off
 
 169,914
 (169,914)   
 
Foreign currency translation adjustment
 
 
 
 937
 
 937
Issuance of common stock in connection with spin-off11,048
 110
 (110) 
 
 
 
Restricted stock awards issued66
 1
 (1) 
 
 
 
Restricted stock awards forfeited(11) 
 
 
 
 
 
Stock-based compensation
 
 1,578
 
 
 
 1,578
Excess tax benefits from stock-based compensation arrangements
 
 37
 
 
 
 37
Balance September 30, 201511,103
 $111
 $171,418
 $
 $1,830
 $(14,199) $159,160
  Common Stock  Additional  Accumulated Other   Total
 Number of    Paid-In Comprehensive Accumulated Stockholder's
 Shares  Amount  Capital Income Deficit  Equity
Balance December 31, 201511,102
 $111
 $173,786
 $1,391
 $(27,949) $147,339
Net loss
 
 
 
 (12,007) (12,007)
Foreign currency translation adjustment
 
 
 190
 
 190
Restricted stock awards forfeited(9) 
 (129) 
 
 (129)
Stock-based compensation
 
 1,974
 
 
 1,974
Balance March 31, 201611,093
 $111
 $175,631
 $1,581
 $(39,956) $137,367



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


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Table of Contents


SEASPINE HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

1. BUSINESS
Spin-off from Integra
As of June 30, 2015, SeaSpine Holdings Corporation ("SeaSpine", or the "Company") was a subsidiary of Integra LifeSciences Holdings Corporation (“Integra”). On July 1, 2015, Integra completed the spin-off of its orthobiologics and spinal fusion hardware business into SeaSpine, which was created to be a separate, independent, publicly-traded medical technology company focused on the design, development and commercialization of surgical solutions for the treatment of patients suffering from spinal disorders. Unless the context indicates otherwise, (i) references to "SeaSpine", the "Company", and the "Business", refer to SeaSpine Holdings Corporation and its orthobiologics and spinal fusion hardware business and (ii) references to "Integra" refer to Integra LifeSciences Holdings Corporation and its subsidiaries other than SeaSpine.
On July 1, 2015 (the "Distribution Date"), SeaSpine common stock was distributed, on a pro rata basis, to Integra’s stockholders of record as of 5:00 p.m. Eastern Time on June 19, 2015 (the "Record Date"). On the Distribution Date, each holder of Integra common stock received one share of SeaSpine common stock for every three shares of Integra common stock held by such holder as of the Record Date.The spin-off was completed pursuant to a Separation and Distribution Agreement and several other agreements with Integra or its subsidiaries related to the spin-off, including an Employee Matters Agreement, a Tax Matters Agreement, a Transition Services Agreement and several Supply Agreements, each of which is filed as an Exhibit to the Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission ("SEC") on July 1, 2015 and incorporated by reference herein. These agreements govern the relationship between SeaSpine and Integra following the spin-off and provide for the allocation of various assets, liabilities, rights and obligations. These agreements also include arrangements for transition services, products and raw materials to be provided by Integra to SeaSpine and transition services and products to be provided by SeaSpine to Integra. For a discussion of each agreement, see the section entitled “Certain Relationships and Related Party Transactions" in the SeaSpine Information Statement included as Exhibit 99.1 to the Registration Statement on Form 10, as amended, filed with the SEC on June 9, 2015 (the “Information Statement”).
The SeaSpine Registration Statement on Form 10 became effective on June 9, 2015, and SeaSpine common stock began “regular-way” trading on the NASDAQ Global Market on July 2, 2015 under the symbol “SPNE.”


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

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 periods prior to the spin-off, the Company’s condensed combinedconsolidated financial statements were derived from the audited combined financial statements included in the Information Statement, which were prepared on a stand-alone basis and derived from Integra's consolidated financial statements and accounting records related to its orthobiologics and spinal fusion hardware business and should be read in conjunction with the notes to financial statements included in the Information Statement.business. The Company relied on Integra for a significant portion of its operational and administrative support. The combinedconsolidated financial statements for all periods prior to the spin-off included allocations of certain Integra corporate expenses, including information technology resources and support; finance, accounting, auditing services; real estate and facility management services; human resources activities; certain procurement activities; treasury services, legal advisory services and costs for research and development. These costs were allocated to the Company on the basis of direct usage when identifiable, with the remainder allocated on a pro-rata basis of revenue, standard costs of sales, or other measures.
Integra used a centralized approach to cash management and financing of its operations and substantially all cash generated by the Company through May 4, 2015, the date the Company implemented a separate enterprise resource planning ("ERP") system for SeaSpine, was assumed to be remitted to Integra. Prior to the spin-off, cash management and financing transactions relating to the Company were accounted for through the Integra invested equity account. Accordingly, none of the Integra cash and cash equivalents at the corporate level were assigned to SeaSpine in the combinedconsolidated financial statements. Integra’s debt and related interest expense were not allocated to SeaSpine for any of the periods presented since the Company was not the legal obligor of the debt and Integra’s borrowings were not directly attributable to SeaSpine.
Subsequent to the spin-off, the Company’s unaudited interim condensed financial statements as of and for the three months ended September 30, 2015 are presented on a consolidated basis, as the Company became a separate publicly-traded company on July 1, 2015. In the opinion of management, the March 31, 2016 unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the financial position, results of operations and cash flows of the Company. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements for the year ended December 31, 2015 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 filed with the SEC. The Company's consolidated balance sheet as of December 31, 2015 was derived from audited financial statements, but does not include all disclosures required by GAAP. The Company performs its operational and administrative support using internal resources and purchased

8

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

services, some of which will behave been provided by Integra for a fee during a transitional period pursuant to a transition services agreement. These fees are partially offset by other income from SeaSpine services provided to Integra.

The Company prepared the unaudited interim condensed consolidated and combined 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 SEC related to quarterly reports on Form 10-Q. Accordingly, they do not include all information and disclosures required by GAAP for annual audited financial statements and should be read in conjunction with the Company’s audited combined financial statements and notes thereto included in the Information Statement. In the opinion of management, the unaudited interim condensed consolidated and combined financial statements have been prepared on the same basis as the audited combined financial statements and include all adjustments, which include only 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 nine months ended September 30, 2015 are not necessarily indicative of the results expected for the full year. The condensed combined balance sheet as of December 31, 2014 was derived from the audited combined financial statements for the year ended December 31, 2014 included in the Information Statement.
See Note 4, “Transactions with Integra,” for further information regarding the relationships the Company has with Integra.
Reclassifications
Certain reclassifications have been made to prior year amounts to conform to the current year presentation. The reclassifications were not material to the interim condensed consolidated and combined financial statements.
Principles of Consolidation and Combination

For periods prior to the spin-off, the combinedconsolidated financial statements include certain assets and liabilities that have historically been held at the Integra level but were specifically identifiable or otherwise attributable to the Company. All significant intra-company transactions within Integra's pre-spin off orthobiologics and spinal fusion hardware business have been eliminated. All

8

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

significant transactions between the Company and other businesses of Integra before the spin-off are included in these combinedcondensed consolidated financial statements.

For periods subsequent to the spin-off, the consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.

Cash and Cash Equivalents

The Company considers all highly liquid investments with a maturity of 90 days or less at the date of purchase to be cash equivalents. Cash and cash equivalents include cash in readily available checking and money market accounts.

Fair Value of Financial Instruments

The carrying amounts of cash, cash equivalents, receivables, accounts payable and accrued expenses at September 30, 2015 and December 31, 2014, are considered to approximate fair value because of the short term nature of those items.
Recently Issued Accounting Standards

In May 2014, the Financial Accounting Standards Board ("FASB") issued Update No. 2014-09, Revenue from Contracts with Customers (Topic 606). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should: 1) identify the contract(s) with a customer, 2) identify the performance obligations in the contract, 3) determine the transaction price, 4) allocate the transaction price to the performance obligations in the contract, and 5) recognize revenue when (or as) the entity satisfies a performance obligation. In July 2015, the FASB deferred for one year the effective date of the new revenue standard, but early adoption
is permitted. The new standard will be effective for the Company on January 1, 2018. The Company is in the process of evaluating the impact of this standard on its financial statements.

In August 2014, the FASB issued Update No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The amendment requires management to evaluate, for each annual and interim reporting period, whether there are conditions and events, considered in the aggregate, that raise substantial doubt about an entity’s ability to continue as a

9

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

going concern within one year after the date the financial statements are issued or are available to be issued. If substantial doubt is raised, additional disclosures around management’s plan to alleviate these doubts are required. This update will become effective for all annual periods and interim reporting periods beginning after December 15, 2016. The implementation of the amended guidance is not expected to have an impact on current disclosures in our financial statements.

In April 2015, the FASB issued Update No. 2015-03, Simplifying the Presentation of Debt Issuance Costs. The new standard will require debt issuance costs to be presented on the balance sheet as a direct reduction of the carrying value of the associated debt liability, consistent with the presentation of debt discounts. The recognition and measurement requirements will not change as a result of this guidance. The standard is effective for the annual reporting periods beginning after December 15, 2015 and requires a retrospective application. The guidance in ASUAccounting Standards Update ("ASU") 2015-03 does not address presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements. In August 2015, the FASB issued ASU 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements. Under the new standard, the SEC staff will not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The implementation of the amended guidance isdid not expected to have an impact on current disclosures in our financial statements.

In July 2015, the FASB issued Update No. 2015-11, Simplifying the Measurement of Inventory.Inventory (Topic 330). The new guidance requires an entity to measure inventory within the scope of the amendment at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The implementation of the amended guidance is not expected to have an impact on current disclosures in our financial statements.

In November 2015, the FASB issued Update No. 2015-17, Income Taxes - Balance Sheet Reclassification of Deferred Taxes (Topic 740). This ASU requires that deferred tax liabilities and assets be classified as non-current in a classified statement of financial position. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by the amendments in this update. The amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted and the amendments may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. The Company early adopted this ASU in the fourth quarter of 2015 on a prospective basis. The Company did not adjust our prior period consolidated balance sheet as a result of the adoption of this ASU.

In February 2016, the FASB issued Update No. 2016-02, Leases (Topic 842), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months

9

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

regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. Topic 842 supersedes the previous leases standard, Topic 840 Leases. The standard is effective on January 1, 2019, with early adoption permitted. The Company is in the process of evaluating the impact of this new guidance.

In March 2016, the FASB issued Update No. 2016-09, Improvements to Employee Share-Based Payment Accounting (Topic 718). Under current accounting guidance an entity is required to report excess tax benefits and tax deficiencies to the extent of previous windfalls in equity when the tax benefit is realized. Excess settlements are currently reported as cash inflows from financing activities. The amendment requires that an entity present all excess tax benefits and all tax deficiencies as income tax expense or benefit in the statement of operations to be applied using a prospective transition method. Related tax settlements are to be presented as cash inflows from operating activities. The Company has the option to use either a prospective or retrospective transition method. The amendment removes the requirement to delay recognition of an excess tax benefit until the tax benefit is realized. A modified retrospective transition method must be applied. This update will become effective for all annual periods and interim reporting periods beginning after December 15, 2016. Early adoption is permitted. The Company is in the process of evaluating the impact of this standard on its financial statements.

Net Loss Per Share

For periods prior to the spin-off, basic and diluted net loss per share was calculated based on the approximately 11.0 million shares of SeaSpine common stock that were distributed to Integra shareholders on July 1, 2015. For periods subsequent to the spin-off, basic and diluted net loss per share was calculated using the weighted-average number of shares of common stock outstanding during the period. The weighted average number of shares used to compute diluted net loss per share excludes any assumed exercise of stock options, and any assumed issuance of common stock under restricted stock units as the effect would be antidilutive. Common stock equivalents of 1.82.7 million shares for the three and nine months ended September 30, 2015March 31, 2016 were excluded from the calculation because of their antidilutive effect.
 Three Months Ended September 30, Nine Months Ended September 30, Three Months Ended March 31,
 2015 2014 2015 2014 2016 2015
 (In thousands, except per share data) (In thousands, except per share data)
Net loss $(14,199) $(5,316) $(41,782) $(16,304) $(12,007) $(9,898)
Loss Per Share Data            
Loss per share            
Basic and diluted $(1.27) $(0.48) $(3.75) $(1.48) $(1.08) $(0.90)
Weighted average number of shares outstanding            
Basic and diluted 11,171
 11,048
 11,130
 11,048
 11,167
 11,048
Out-of-Period Adjustment

In the second quarter of 2015, the Company recorded an adjustment to correct an error in the first quarter of 2015 reported
amounts. This resulted in an increase to finished goods inventory and Integra's net investment by $0.7 million. In addition to
understating the inventory balance and net investment balance as of March 31, 2015, the error had the effect of increasing first
quarter cash flows from operations and decreasing first quarter cash flows from financing by $0.7 million. The adjustment
recorded in the second quarter of 2015 corrects the year to date cash flows from operations and cash flows from financing. The Company retrospectively adjusted the Condensed Consolidated Statement of Cash Flows for the period ended March 31, 2015.


3. FAIR VALUE MEASUREMENTSCREDIT AGREEMENT

On December 24, 2015, the Company entered into a three-year credit facility (the "Credit Facility") with Wells Fargo Capital Finance. The Credit Facility provides an asset-backed revolving line of credit of up to $30.0 million in borrowing capacity with a maturity date of December 24, 2018, which maturity date is subject to a one-time one-year extension at the Company's election. In connection with the spin-off,Credit Facility, the Company received $34.0 millionwas required to become guarantors and to provide a security interest in cash from Integra on July 1, 2015. The Company investedsubstantially all its assets for the entire amount in money market funds, which are valued based on publicly available quoted market prices for identical securities asbenefit of September 30, 2015. The Company recorded the fair value of these money market funds, which totaled $26.0 million at September 30, 2015, as cash equivalents, based on quoted market prices in active markets. These cash equivalents are classified as level 1 fair value financial instruments.counterparty.

Borrowings under the Credit Facility accrue interest at the rate then applicable to the Base Rate (as customarily defined) Loans, unless and until converted into LIBOR Rate Loans in accordance with the terms of the Credit Facility. Borrowings bear interest at a floating annual rate equal to (a) during any month for which the Company's average excess availability (as customarily defined)

10

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

is greater than $20.0 million, base rate plus (i) 1.25 percentage points for base rate loans and (ii) LIBOR rate plus 2.25 percentage points for LIBOR 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 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 loans.

The Company will also pay an annual unused line fee in an amount equal to 0.375% of the unused Credit Facility amount. The unused line fee is due and payable on the first day of each month. At March 31, 2016, there was $0.4 million outstanding under the Credit Facility. Debt issuance costs and legal fees related to the Credit Facility totaling $0.4 million were recorded as a deferred asset and are being amortized ratably over the term of the arrangement.

The Credit Facility contains various customary affirmative and negative covenants, including prohibiting the Company from incurring indebtedness without the lender’s consent. The Credit Facility also includes a financial covenant that requires the Company to maintain a minimum fixed charge coverage ratio of 1.10 to 1.00 for the applicable measurement period, if the Company's Total Liquidity (as defined in the Credit Facility) is less than $5.0 million. The Company was in compliance with all applicable covenants at March 31, 2016.

The Credit Facility also includes customary events of default, including events 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, lenders holding a majority of the revolving commitments will have the right to terminate the commitments and accelerate the maturity of any loans outstanding.


4. TRANSACTIONS WITH INTEGRA
Related-party Transactions
Prior to the spin-off, and pursuant to certain supply agreements subsequent to the spin-off, SeaSpine purchasespurchased a portion of raw materials and finished goods from Integra for the Company's Mozaik family of products, and SeaSpine contract manufacturesmanufactured certain finished goods for Integra. The Company's purchases of raw materials and Mozaik product finished goods from Integra for the three months ended September 30,March 31, 2016 and 2015 and 2014 totaled $1.9 million and $0.3 million, respectively, and for the nine months ended September 30, 2015 and 2014 totaled $5.6$0.5 million and $1.2 million, respectively. The amount of finished goods sold by SeaSpine to Integra under its contract manufacturing arrangement was immaterial for all periods presented.
Pursuant to a transition services agreement, Integra and SeaSpine will provide certain services following the spin-off, and Integra and SeaSpine will indemnify each other against certain liabilities arising from their respective businesses. Under this agreement, Integra provides us with certain support functions, including information technology, accounting and other financial functions, regulatory affairs and quality assurance, human resources and other administrative support. In addition, SeaSpine provides limited information technology and systems support services to Integra. The Company incurred approximately $1.8$0.1 million of costs under the agreement duringfor the three months ended September 30, 2015,March 31, 2016, all of which $0.5 million was outstanding at September 30, 2015. The amount of services provided by SeaSpine toMarch 31, 2016. Integra was immaterial during the three months ended September 30, 2015. Integra also collectedcollects certain funds from customers on behalf of the Company, of which $1.0$0.3 million was outstandingdue to the Company as of September 30, 2015March 31, 2016 and recorded in Other Current Assets.
Allocated Costs
For periods prior to the spin-off, the condensed combinedconsolidated statements of operations included direct expenses for cost of goods sold, research and development, sales and marketing, customer service, and administration as well as allocations of expenses arising from shared services and infrastructure provided by Integra to the Company, such as costs of information technology, including the costs of a multi-year global enterprise resource planning implementation, accounting and legal services, real estate and facilities management, corporate advertising, insurance and treasury services, and other corporate and infrastructure services. These allocations are included in the table below. These expenses were allocated to the Company using estimates that the Company considers to be a reasonable reflection of the utilization of services provided to or benefits received from the Company. The allocation methods include pro-rata basis of revenue, standard cost of sales or other measures.

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

 Three Months Ended September 30, Nine Months Ended September 30,
 2015 2014 2015 2014 Three Months Ended March 31, 2015
 (In thousands) (In thousands)
Cost of goods sold $
 $326
 $488
 $978
 $244
Selling, general and administrative 
 4,215
 8,633
 13,977
 4,249
Research and development 
 119
 253
 370
 105
Total Allocated Costs $
 $4,660
 $9,374
 $15,325
 $4,598

Included in the above amounts are certain non-cash allocated costs, including stock-based compensation. Such amounts were $0.4$0.2 million for the three months ended September 30, 2014, and $0.6 million and $1.5 millionMarch 31, 2015. There were no allocated costs for the ninethree months ended September 30, 2015 and 2014 respectively.March 31, 2016.
All significant related party transactions between SeaSpine and Integra were included in the condensed consolidated and combined financial statements and, prior to the spin-off, were considered to be effectively settled for cash at the time the transaction was recorded, with the exception of (i) the purchases from Integra of Mozaik raw materials and finished goods for all periods presented and (ii) the provision of services by Integra to SeaSpine under the transition services agreement during the three months ended September 30, 2015.presented. The total net effect of the transactions considered to be effectively settled for cash was reflected in the combinedconsolidated statement of cash flows as a financing activity and in the combinedconsolidated balance sheet as Integra net investment.
The following table summarizes the components of the net increase (decrease) in Integra net investment for the three and nine months ended September 30, 2015 and 2014:March 31, 2015. The Integra net investment was reclassified to Additional Paid-in Capital in connection with the spin-off.

11

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

 Three Months Ended September 30, Nine Months Ended September 30,
 2015 2014 2015 2014 Three Months Ended March 31, 2015
 (In thousands) (In thousands)
Cash pooling and general financing activities (a) $34,025
 $(5,489) $68,386
 $(16,389) $(1,390)
Corporate Allocations (excluding non-cash adjustments) 
 4,265
 8,787
 13,802
 4,351
Total Integra net investment in financing activities within cash flow statement 34,025
 (1,224) 77,173
 (2,587) 2,961
Non-cash adjustments (b) 
 540
 29,806
 1,977
 336
Spin-off related adjustment (c) (166) 
 (166) 
Reclassification of Integra net investment in connection with the spin-off (169,914) 
 (169,914) 
Foreign exchange impact 
 (133) 293
 (79) 475
Net decrease in Integra investment $(136,055) $(817) $(62,808) $(689)
Net increase in Integra investment $3,772

(a)Includes financing activities for capital transfers, cash sweeps and other treasury services.
(b)Reflects allocation of non-cash charges from Integra, including stock-based compensation and settlement of related-party payable to Integra net investment.compensation.
(c)During the three months ended September 30, 2015, certain spin-off related adjustments were recorded in stockholders' equity, to reflect the appropriate opening balances related to SeaSpine’s legal entities at the Distribution Date.


5. INVENTORIES
Inventories consisted of the following:

September 30, 2015 December 31, 2014March 31, 2016 December 31, 2015
(In thousands)(In thousands)
Finished goods$32,432
 $32,364
$30,275
 $29,845
Work in process15,205
 11,675
16,505
 15,574
Raw materials5,260
 5,823
3,529
 5,852
$52,897
 $49,862
$50,309
 $51,271
Inventories included $18.7 million and $12.7 million of reserves for excess and obsolete inventory as of September 30, 2015 and DecemberDuring the three months ended March 31, 2014, respectively. The2016, the Company recorded a $4.4$1.7 million provision for excess and obsolete spinal fusion hardwareorthobiologics inventory during the three months ended September 30, 2015, the substantial majority of which was purchased priorrelated to the spin-off and a portion of which was primarily intended for distribution in international markets.its matched-donor cancellous bone raw material on hand. This charge wasresulted from the repurposing of a resultlarge portion of the Company's assessmentCompany’s matched-donor cortical bone raw material that has historically been used in production with the matched-donor cancellous bone raw material. The quantities on hand of the now unmatched cancellous bone raw material exceed the anticipated volumes that will be consumed in future production needs such that its growth strategy for international markets, completed in the third quarter, following the spin-off. The Company now intendsshelf life is expected to deploy and invest its limited sales and marketing resources dedicated to international markets in a more targeted manner in fewer countries. As a result of this shift in international strategy and other factors, the Company no longer expects to sell the spinal fusion hardware inventory against which the excess and obsolete reserve was recorded.expire before it would be consumed.

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



6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at historical cost less accumulated depreciation and any impairment charges. The Company provides for depreciation using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the lesser of the lease term or the useful life. The cost of major additions and improvements is capitalized, while maintenance and repair costs that do not improve or extend the lives of the respective assets are charged to operations as incurred. The cost of computer software obtained for internal use is accounted for in accordance with the Accounting Standards Codification 350-40, Internal-Use Software.
The cost of purchased instruments which the Company consigns to hospitals and independent sales agents to support surgeries is initially capitalized as construction in progress. The amount is then reclassified to instrument sets and depreciation is initiated when instruments are put together in a newly built set with spinal implants, or directly expensed for the instruments that are used to replace damaged instruments in an existing set. The depreciation expense and direct expense for replacement instruments are recorded in selling, general and administrative expense.

12

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

Property, plant and equipment balances and corresponding useful lives were as follows:
September 30, 2015 December 31, 2014 Useful LivesMarch 31, 2016 December 31, 2015 Useful Lives
(In thousands) (In thousands) 
Leasehold improvement$4,655
 $4,262
 1 year$4,950
 $4,830
 Lease Term
Machinery and production equipment6,240
 5,810
 3-20 years6,404
 6,404
 3-20 years
Instrument sets23,880
 22,122
 4-5 years25,243
 25,080
 5 years
Information systems & hardware6,524
 1,720
 1-7 years
Furniture & fixtures763
 657
 1-15 years
Information systems and hardware6,908
 6,872
 3-7 years
Furniture and fixtures1,052
 944
 3-15 years
Construction in progress10,193
 8,789
 8,022
 8,375
 
Total52,255
 43,360
 52,579
 52,505
 
Less accumulated depreciation and amortization(29,229) (27,000) (31,528) (30,547) 
Property, plant and equipment, net$23,026
 $16,360
 $21,051
 $21,958
 
Depreciation expenses totaled $1.3$1.2 million and $1.2$0.9 million for the three month periods ended September 30,March 31, 2016 and 2015, and 2014, respectively, and $3.1 million and $3.7 million for the nine months ended September 30, 2015 and 2014, respectively. The cost of purchased instruments used to replace damaged instruments in existing sets and recorded directly to the instrument replacement expense totaled $0.4$0.6 million and $0.6$0.2 million for the three month periods ended September 30,March 31, 2016 and 2015, and 2014, respectively, and $0.9 million and $1.2 million for the nine months ended September 30, 2015 and 2014, respectively.

The Company entered a sublease agreement for an office located in Carlsbad, California, which became effective September 8, 2015 upon the Company's receipt of the consent to sublease of the landlord. As a result, the Company does not intend to exercise its renewal options for the lease of its offices located in Vista, California. The useful lives for leasehold improvements at the Vista facilities were previously based on the assumption that the renewal options would be exercised. In July 2015, the Company reduced those useful lives to reflect the lease term ending on the May 23, 2016 expiration date. The change in estimate resulted in additional depreciation expense of $0.3 million for the three months ended September 30, 2015.

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.
The components of the Company’s identifiable intangible assets were as follows:
 
September 30, 2015March 31, 2016
Weighted
Average
Life
 Cost 
Accumulated
Amortization
 Net
Weighted
Average
Life
 Cost 
Accumulated
Amortization
 Net
(Dollars in thousands)(Dollars in thousands)
Completed technology12 years $31,169
 $(18,604) $12,565
12 years $31,169
 $(19,955) $11,214
Customer relationships12 years 56,830
 (27,806) 29,024
12 years 56,830
 (30,367) 26,463
Trademarks/brand names 300
 (300) 
 300
 (300) 
 $88,299
 $(46,710) $41,589
 $88,299
 $(50,622) $37,677


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

December 31, 2014December 31, 2015
Weighted
Average
Life
 Cost 
Accumulated
Amortization
 Net
Weighted
Average
Life
 Cost 
Accumulated
Amortization
 Net
(Dollars in thousands)(Dollars in thousands)
Completed technology12 years $30,419
 $(16,582) $13,837
12 years $31,169
 $(19,280) $11,889
Customer relationships12 years 56,830
 (23,963) 32,867
12 years 56,830
 (29,087) 27,743
Trademarks/brand names 300
 (300) 
 300
 (300) 
Non-Compete agreements4 years 1,900
 (1,713) 187
 $89,449
 $(42,558) $46,891
 $88,299
 $(48,667) $39,632
Annual amortization expense (including amounts reported in cost of goods sold) is expected to be approximately $8.0 million in 2015, $7.0 million in 2016, $5.8 million in 2017, $5.5 million in 2018, and $4.8 million in 2019.2019 and $4.0 million in 2020. Amortization of product technology-based intangible assets totaled $0.7 million for each of the three months ended September 30,March 31, 2016 and 2015, and 2014 and $2.0 million for each of the nine months ended September 30, 2015 and 2014, and is presented by the Company within cost of goods sold.


8. STOCK-BASED COMPENSATION

For periods prior to the spin-off, the Company’s stock-based compensation was derived from the equity awards granted by Integra to individuals who would become the Company’s employees. As those stock-based compensation plans were Integra’s plans, the amounts have been recognized in the condensed combinedconsolidated statements of operations and the Integra net investment account on the combinedconsolidated balance sheet. For periods after the spin-off, the Company's stock-based compensation has been recognized through the condensed consolidated statement of operations and the Company's additional paid-in capital account on the condensed consolidated balance sheet.

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 would becomebecame employees of the Company were converted to SeaSpine equity awards. In general, each award is subject to the same terms and conditions as were in effect prior to the spin-off.
In May 2015, the Company adopted a 2015 Incentive Award Plan (the "2015 Plan"), under which the Company can grant its employees and non-employee directors 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 Company may issue up to 2,000,000 shares of its common stock under the 2015 Plan. On January 27, 2016, the Company's board of directors approved an amendment and restatement of the 2015 Plan, pursuant to which the share reserve was increased by 300,000 shares over the original share reserve under the 2015 Plan, and on March 30, 2016, the board of directors approved a further amendment and restatement of the 2015 Plan, pursuant to which the share reserve was increased by an additional 1,209,500 shares of common stock, in each case subject to the Company obtaining the requisite stockholder approval. As a result, pursuant to the final amended and restated 2015 Plan (the "Restated Plan"), an aggregate of 1,509,500 additional shares will be reserved for issuance under the Restated Plan relative to the share reserve under the 2015 Plan.
Restricted Stock Awards, Restricted Stock Units and Performance Stock Awards
Performance stock awards, restricted stock awards and restricted stock units generally have requisite service periods of three years. Performance stock awards are subject to graded vesting and the Company expenses their fair value over the requisite service period. The Company expenses the fair value of restricted stock awards and restricted stock units on an accelerated basis over the vesting period or requisite service period, whichever is shorter. Stock-based compensation expense related to restricted stock awards, restricted stock units and performance stock awards includes an estimate for forfeitures. The expected forfeiture rate of all equity based compensation is based on historical patterns of the Company’s employees and is estimated to be 10% annually for the three months ended September 30, 2015.March 31, 2016. As of September 30, 2015,March 31, 2016, there werewas approximately $0.4$0.2 million of total unrecognized compensation expense related to unvested awards. These costs areThis cost is expected to be recognized over a weighted-average period of approximately one year.


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

Stock Options

Stock option grants to employees generally have requisite service periods 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 various vesting periods within each grant and based on their fair value at the date of grant using the Black-Scholes-Merton option pricing

14

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

model. The following weighted-average assumptions were used in the calculation of fair value for options grants duringfor the three months ended September 30, 2015:March 31, 2016:

 September 30, 2015March 31, 2016
Expected Dividenddividend yield0%
Risk-free interest rate1.61.5%
Expected volatility35.338.6%
Expected term (in years)5.35.1

The Company considered that it has never paid cash dividends 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, the expected volatility is calculated based upon the historical volatility of comparable companies in the medical device industry whose share prices are publicly available for a sufficient period of time. The expected term of options is calculated using the simplified method as prescribed by accounting guidance for stock-based compensation. In addition, the Company applies an expected forfeiture rate when amortizing stock-based compensation expense. The expected forfeiture rate of stock options is based on historical patterns of the employee turnover rate and is estimated to be 10% annually for stock-based compensation expense recorded for the three months ended September 30, 2015.March 31, 2016. As individual grant awards become fully vested, stock-based compensation expense is adjusted to recognize actual forfeitures.

There were 700,532 stock options granted during the three months ended March 31, 2016, of which 547,099 shares were granted, in part, out of the share reserve increases approved by the board of directors under the Restated Plan and, in part, out of the remaining share reserve under the 2015 Plan, but all of which were granted subject to the Company obtaining the requisite stockholder approval (the “Contingent Options”). In the event stockholder approval of the Restated Plan is not obtained, all of the Contingent Options will automatically be forfeited. There were no expenses recorded for these Contingent Options for the three months ended March 31, 2016 in accordance with the Accounting Standards Codification 718, Compensation- Stock Compensation.

As of September 30, 2015,March 31, 2016, there werewas approximately $5.5$3.9 million of total unrecognized compensation expense related to unvested stock options. These costs areThis cost is expected to be recognized over a weighted-average period of approximately 1.41.9 years.
Employee Stock Purchase Plan

In May 2015, the Company adopted a 2015 Employee Stock Purchase Plan (the “ESPP”), which was amended in December 2015. The ESPP enables eligible employees to 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 will be for a period but notof twenty-four 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 in anyworth of stock during each calendar year, subject to certain restrictions.year. The purchase price is 85% of the lesser of the market price of the stock at the beginning or at the endfirst trading date of an offering period whichever is less.or any purchase date during an offering period (June 30 or December 31).
  
The ESPP authorizes the issuance of 400,000 shares of common stock pursuant to purchase rights granted to employees. 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. The Company expects the first offering period will commencecommenced on January 1, 2016 and will end on December 31, 2016.2017. As of September 30, 2015,March 31, 2016, no shares of common stock have been purchased under the ESPP.
9. LEASE

The Company entered into a sublease agreement for an office locatedestimates 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 Carlsbad, California, which became effective September 8, 2015 upon the Company's receiptcalculation of fair value of shares under the consent to sublease ofESPP at the landlord. The term of the lease agreement is from October 1, 2015 through April 28, 2027 at an average annual cost of approximately $1.6 million. Future minimum lease payments under this operating lease at September 30, 2015 are as follows:grant date:

 Payments Due by Calendar Year
 (In thousands)
2015$302
20161,300
20171,500
20181,529
20191,559
Thereafter12,827
Total minimum lease payments$19,017

15

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

March 31, 2016
Expected dividend yield0%
Risk-free interest rate0.7%
Expected volatility32.4%
Expected term (in years)1.3


9. 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 these operating leases at March 31, 2016 are as follows:
 Payments Due by Calendar Year
 (In thousands)
2016$1,777
20172,177
20182,208
20192,262
20202,317
Thereafter12,160
Total minimum lease payments$22,901

Total rental expense for the three months ended March 31, 2016 and 2015 was $0.8 million and $0.6 million, respectively.


10. INCOME TAXES
The following table provides a summary of the Company’s effective tax rate for the three and nine months ended September 30, 2015March 31, 2016 and 2014:2015: 
 Three Months Ended September 30, Nine Months Ended September 30,
 2015 2014 2015 2014
        
Reported tax rate1.9% (18.8)% (5.4)% (20.4)%

 Three Months Ended March 31,
 2016 2015
    
Reported tax rate0.2% (9.5)%

The Company reported income tax expense for the three months ended September 30, 2014 and for the nine month periods ended September 30,March 31, 2015 and 2014 related to the taxable income generated by its U.S. subsidiary that was not part of the U.S. consolidated tax group as of AugustMarch 31, 2015. As such, despite the reported losses before income taxes in those periods, the taxable income generated by such U.S. subsidiary was not allowed to be offset against the taxable losses generated by its other U.S. subsidiaries through August 31, 2015. Effective September 1, 2015, the Company made an election that will allow it to offset any future taxable losses generated by its U.S. subsidiaries against any future taxable income generated by its U.S. subsidiaries. In addition, for all periods presented, the pretax losses incurred by the consolidated U.S. tax group received no corresponding tax benefit because we have concluded that it is more-likely-than-notmore 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.

For the three months ended September 30, 2015, the Company recognized a $0.3 million benefit from the change in realizable deferred tax assets of a foreign subsidiary.

The income tax provision in the combinedconsolidated statements of operations for periods prior to the spinoffspin-off was calculated using the separate return method, as if the Company had filed a separate tax return and operated as a stand-alone business. However, because Integra historically generated taxable income in excess of the Company’s pretax losses incurred prior to the spinoffspin-off and all of the Company’s U.S. subsidiaries that incurred these pretax losses were included in Integra’s U.S. consolidated tax group, those pretax losses were more than offset by Integra’s taxable income. Therefore, there were no U.S. net operating losses available to the Company for future use at the date of the spin-off.



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

11. COMMITMENTS AND CONTINGENCIES
In consideration for certain technology, manufacturing, distribution, and selling rights and licenses granted to the Company, the Company has agreed to pay royalties on sales of certain products sold by the Company. The royalty payments that the Company made under these agreements were not significant for anyincluded on the interim condensed consolidated statements of the periods presented.operations as a component of cost of goods sold.
The Company is subject to various claims, lawsuits and proceedings in the ordinary course of the Company’sits business including claims by current or former employees, distributors and competitors and with respect to its products, its current or former employees, and product liability claims, lawsuits and proceedings,involving commercial disputes, some of which have been settled by the Company. In the opinion of management, such claims 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 ourthe Company's financial condition. However, it is possible that the Company’sour 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. The Company consistently accrues legal fees expected to be incurred in connection with loss contingencies as those fees are incurred by outside counsel as a period cost. The Company does not believe there are any pending legal proceedings that would have a material impact on the Company’s financial position, liquidity or results of operations.


12. SEGMENT AND GEOGRAPHIC INFORMATION

In the three months ended September 30, 2015, subsequentSubsequent to the spin-off from Integra, management assessed its segment reporting based on how the Companyit internally manages and reports the results of its business to its chief operating decision maker. The Company’s 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 spinal fusion hardware. The Company reports revenue in two product categories: orthobiologics and spinal fusion hardware. 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 fusion hardware portfolio consists of an extensive line of products for minimally invasive surgery, complex spine, deformity and degenerative procedures.
Revenue, net consisted of the following:
 Three Months Ended September 30, Nine Months Ended September 30, Three Months Ended March 31,
 2015 2014 2015 2014 2016 2015
 (In thousands) (In thousands)
Orthobiologics $16,472
 $16,571
 $49,599
 $49,595
 $16,658
 $16,028
Spinal fusion hardware 16,207
 17,035
 48,855
 53,952
 14,741
 16,286
Total Revenues $32,679
 $33,606
 $98,454
 $103,547
Total revenue, net $31,399
 $32,314

The Company attributes revenues to geographic areas based on the location of the customer. Total revenue by major geographic area consisted of the following:
 Three Months Ended September 30, Nine Months Ended September 30, Three Months Ended March 31,
 2015 2014 2015 2014 2016 2015
 (In thousands) (In thousands)
United States $30,139
 $30,644
 $89,081
 $93,432
 $28,544
 $29,362
International 2,540
 2,962
 9,373
 10,115
 2,855
 2,952
Total Revenues $32,679
 $33,606
 $98,454
 $103,547
Total revenue, net $31,399
 $32,314

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)



ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis refers to and should be read in conjunction with the condensed consolidated and combined financial statements and the corresponding notes included elsewhere in this report and our combined financial statements for the year ended December 31, 2014, included in the Information Statement and the corresponding notes.report. 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 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 ofincluded in our Annual Report on Form 10-K for the Information Statementfiscal year ended December 31, 2015 for a discussion of the uncertainties, risks and assumptions associated with these statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
You can identify these forward-looking statements by forward-looking words such as “believe,” “may,” “could,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “seek,” “plan,” “expect,” “should,” “would” and similar expressions.
These risks and uncertainties arise from (among other factors) the following:

general economic and business conditions, in both domestic and international markets;
 
our expectations and estimates concerning future financial performance, financing plans and the impact of competition;
 
anticipated trends in our business, including healthcare reform in the United States, increased pricing pressure from our competitors or hospitals and changes in third-party payment systems;
 
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 approval for products in development;
 
existing and future regulations affecting our business, both in the United States and internationally, and enforcement of those regulations;
 
anticipated demand for our products and our ability to produce our products in sufficient quantities to meet customer demand;

our ability to manage timelines and costs related to manufacturing our products;
 
our ability to maintain and expand our marketing and sales networks;networks and the costs related thereto;
 
our ability to successfully develop new products and the costs associated with designing and developing those new products;
 
our ability to support the safety and efficacy of our products with long-term clinical data;
 
our ability to obtain additional debt and equity financing to fund capital expenditures and working capital requirements and acquisitions;
 
our dependence on a limited number of third-party suppliers for components and raw materials;
 
our ability to protect our intellectual property, including unpatented trade secrets, and to operate without infringing or misappropriating the proprietary rights of others;
 
our ability to complete acquisitions, integrate operations post-acquisition and maintain relationships with customers of acquired entities;

our operation as an independent, publicly-traded company subsequent to the spin-off; and
 

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other risk factors described in the section entitled “Risk Factors” included in our Annual Report on Form 10-K for the Information Statement.fiscal year ended December 31, 2015.


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These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this report.

Spin-off from Integra
On November 3, 2014, Integra announced its plan to spin off its orthobiologics and
SeaSpine was incorporated in Delaware on February 12, 2015 in connection with the spin-off of Integra’s spinal fusion hardware business. The spin-off, which was completedand orthobiologics business from Integra’s diversified medical technology business on July 1, 2015, created a separate, independent, publicly-traded medical technology company focused on the design, development and commercialization of surgical solutions for the treatment of patients suffering from spinal disorders. As part of the spin-off, Integra transferred the assets, liabilities and operations of its orthobiologics and spinal fusion hardware business on a global basis to SeaSpine.2015.
For periods prior to the spin-off, our combinedconsolidated financial statements were prepared on a stand-alone basis and were derived from Integra’s consolidated financial statements and accounting records. Therefore, these financial statements reflected, in conformity with accounting principles generally accepted in the United States, the financial position, results of operations, comprehensive loss and cash flows as the orthobiologics and spinal fusion hardware business was historically operated as part of Integra. They may not be indicative of our future performance and do not necessarily reflect what our consolidated results of operations, financial condition and cash flows would have been had we operated as a separate, publicly-traded company during the periods presented, particularly because we implemented many changes in our operations and capitalization after the spin-off from Integra.
The combinedconsolidated financial statements for periods prior to the spin-off included the attribution of certain assets and liabilities that were historically held at the Integra corporate level but which were specifically identified or attributable to us. However, cash held by Integra was not attributed to us. Integra’s debt and related interest expense also were not allocated to us for any of the periods presented since we were not the legal obligor of the debt and Integra’s borrowings were not directly attributable to us. Integra managesmanaged cash centrally and substantially all cash generated by our business through May 4, 2015, the date we implemented a separate enterprise resource planning ("ERP") system for SeaSpine, was assumed to be remitted to Integra. All significant related party transactions between us and Integra were included in the condensed consolidated and combined financial statements and, prior to the spin-off, were considered to be effectively settled for cash at the time the transaction was recorded, with the exception of (i) the purchases from Integra of Mozaik raw materials and finished goods. Prior to the spin-off, SeaSpine purchased a portion of raw materials and finished goods from Integra for the Mozaik family of products, and SeaSpine contract manufactured certain finished goods for all periods presented and (ii) the provision of services by Integra to SeaSpine under a transition services agreements during the three months ended September 30, 2015.Integra. The total net effect of the settlement of the transactions considered to be effectively settled for cash was reflected in the combinedconsolidated statements of cash flows as a financing activity and in the combinedconsolidated balance sheet as Integra net investment.
Our combinedconsolidated statements of operations included our direct expenses for cost of goods sold, research and development, sales and marketing, distribution, and administration as well as allocations of expenses arising from shared services and infrastructure provided by Integra to us, such as costs of information technology, including the costs of a multi-year global ERPEnterprise Resource Planning ("ERP") implementation, accounting and legal services, real estate and facilities, corporate advertising, insurance services and related treasury, and other corporate and infrastructure services. In addition, other costs allocated to us include restructuring costs, share-based compensation expense and retirement plan expenses related to Integra’s corporate and shared services employees. These operating expenses were allocated to us using estimates that we considered to be a reasonable reflection of the utilization of services provided to or benefits received by us. We expect, however, that the actual expenses that we would have incurred had we been operating as a separate, publicly-traded company for the periods presented would have been lower, in the aggregate, as they would not include the allocation of the multi-year ERP implementation and other corporate strategic initiatives of Integra in place at the time. The allocation methods include pro-rata basis of revenue, standard cost of sales or other measures.
 
Integra will continuecontinues to provide some of thesethe services related to these functions to us after the spin-off on a transitional basis for a fee. These services will be receivedfee under a transition services agreement describedagreement. We incurred $0.1 million of transition service fees from Integra in the “Certain Relationships and Related Party Transactions” section of the Information Statement.three months ended March 31, 2016. In addition, certain costs associated with certain supply agreements with Integra discussed in the “Certain Relationships and Related Party Transactions” section of the Information Statement may befor our Mozaik product line are at materially different terms than those that were incurred while the business was part of Integra. Also, we expect to incurare incurring costs as an independent, publicly-traded company that are different from the costs historically allocated to us by Integra. We currently estimate the costs will be $13.0 million to $14.0 million on an annual pre-tax basis.

Subsequent to the spin-off, our unaudited interim condensed financial statements as of and for the three months ended September 30, 2015March 31, 2016 are presented on a consolidated basis, as we became a separate publicly-traded company on July 1, 2015.

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We incurred $4.3 million and $19.1 million of non-recurring transaction and spin-off related costs and transition service fees from Integra in the three and nine months ended September 30, 2015, respectively. These costs include, among other things, branding, legal, accounting and other advisory fees and other costs to separate and transition from Integra.
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 fusion hardware 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 fusion hardware products is essential to meet the “complete solution” requirements of neurosurgeons and orthopedic spine surgeons.

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We report revenue in two product categories: orthobiologics and spinal fusion hardware. Our orthobiologics products consist of a broad range of advanced and traditional bone graft substitutes that are designed to improve bone fusion rates following a wide range of orthopedic surgeries, including spine, hip, and extremities procedures. Our spinal fusion hardware portfolio consists of an extensive line of products to facilitate spinal fusion in minimally invasive surgery, (“MIS”), complex spine, deformity and degenerative procedures.
Our U.S. sales organization consists of regional business managers who oversee a broad network of orthobiologics sales specialists and independent orthobiologics and spinal fusion hardware sales agents, to whom we consign and loan our products and pay commissions based on the sales of our products that they generate. These sales are generated by building and maintaining relationships with the neurosurgeons and orthopedic spine surgeons who use our products in surgeries or from the hospitals that order our products directly. Our international sales organization is composed of a sales management team that oversees a network of independent orthobiologics and spinal fusion hardware stocking distributors in over 30 countries that purchase products directly from us and independently sell them. For the ninethree months ended September 30, 2015,March 31, 2016, international sales accounted for approximately 10%9% of our revenue. Our policy is not to sell our products through or participate in physician-owned distributorships.
For the nine months ended September 30, 2015, our total revenue, net was $98.5 million and our net loss was $41.8 million. For the same period, our orthobiologics sales were $49.6 million, and our spinal fusion hardware sales were $48.9 million, each representing approximately 50% of our total revenue, net. We expect to continue to incur losses in the foreseeable future as we further invest in the expansion of our business, primarily in sales, marketing and research and development, and from the general and administrative expenses we expect to incur due to our operation as an independent, publicly-traded company. As of September 30, 2015, our cash balance was $38.5 million. In connection with the spin-off, Integra contributed $34.0 million in cash to us.
As of September 30, 2015,March 31, 2016, we had 279305 employees.

Components of Our Results of Operations
Revenue
Our net revenue is derived primarily from the sale of orthobiologics and spinal fusion hardware products across North America, Europe, Asia Pacific and Latin America. Sales are reported net of returns, group purchasing organization fees and other customer allowances.
In the United States, we generate most of our revenue by consigning our orthobiologics products and consigning or loaning our spinal fusion hardware sets to hospitals and independent sales agents, who in turn 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 fusion hardware sets typically contain the instruments, including 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 and maintain and replenish loaned sets at our facility, and return them 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 transactions, including sales to international stocking distributors and private label partners, we recognize revenue when the products are shipped to the customer or stocking distributor and the transfer of title and risk of loss occurs. There is generally no customer acceptance or other condition that prevents us from recognizing revenue in accordance with the delivery terms.

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We entered into certain supply agreements with Integra, prior to the spin-off, pursuant to which Integra will provideprovides us with certain raw materials and we will provide each other with finished product for further sale in the operation of each other’s business. These supply agreements are expectedreflect new pricing compared to modify our historical related party arrangements and reflect new pricing. See “Certain Relationships and Related Party Transactions" inprior to the Information Statement.spin-off.
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 manufacture of our products, plant and equipment overhead, labor costs, packaging costs, amortization of technology-related intangible assets and freight. 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 costs of goods sold and consequently our orthobiologics products, at current production volumes, generate lower gross profitsmargin than our spinal fusion hardware products. We rely on third-party suppliers to manufacture our spinal fusion hardware products, and we assemble them into surgical sets in-house.in-house, part of which, beginning in the fourth quarter of 2016, will be outsourced to a third party logistics provider. Other related costs included in cost of goods sold include royalties, shipping, inspection and charges for expired, excess and obsolete inventory. We expect our cost of goods sold to continue to increase in absolute dollars due primarily to increasedas our sales volume.volume increases over time.

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Selling, General and Administrative Expense
Our selling, general and administrative (“SG&A”) expenses consist primarily of sales commissions to independent sales agents, cost of medical education and training, payroll and other headcount related expenses, depreciation and other expenses recorded against instrument sets, stock-based compensation, the Medical Device Excise Tax,medical device excise tax, marketing expenses, supply chain and distribution expenses, and expenses for information technology, legal, human resources, insurance, finance, facilities, and management, the substantial majority of which were allocated from Integra prior to the spin-off. Subsequent to the spin-off, we are incurring these administrative expenses directly as an independent, publicly-traded company.
We expect our SG&A expenses, excluding allocations from Integra incurred prior to the spin-off, to increase as we continue to hire additional personnel to support the growth of our business, continue to expand our product portfolio and add related sales and marketing personnel, and as a result of being an independent, publicly-traded company.
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.
We expect our R&D expenses to increase as we invest in the design and commercialization of new products. While our R&D expenses fluctuate from period to period based on the timing of specific initiatives, we expect that these costs will increase over time as we continue to design and commercialize new products and expand our product portfolio, add related personnel and conduct additional clinical activities.
Intangible Amortization
Our intangible amortization, including the amounts reported in cost of goods sold, consists of acquisition-related amortization and impairments related to product discontinuations. We expect total annual amortization expense (including amounts reported in cost of goods sold) to be approximately $8.0 million in 2015, $7.0 million in 2016, $5.8 million in 2017, $5.5 million in 2018, and $4.8 million in 2019.2019 and $4.0 million in 2020.
Other Income (Expense), Net
Other income (expense), net consists of non-operating items such as interest income and expense, and foreign exchange transaction gains and losses on related party transactions and balances.

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RESULTS OF OPERATIONS
Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended March 31,
(In thousands, except percentages)2015 2014 2015 20142016 2015
Total revenue, net$32,679
 $33,606
 $98,454
 $103,547
$31,399
 $32,314
Cost of goods sold17,341
 14,282
 44,448
 42,077
14,283
 12,601
Gross profit15,338
 19,324
 54,006
 61,470
17,116
 19,713
Gross profit %46.9% 57.5% 54.9% 59.4%
Gross margin54.5% 61.0%
Operating expenses:          
Selling, general and administrative26,348
 20,262
 83,059
 64,518
25,374
 25,051
Research and development2,364
 2,111
 5,973
 6,259
2,753
 1,582
Intangible amortization1,295
 1,397
 4,049
 4,174
1,281
 1,397
Total operating expenses30,007
 23,770
 93,081
 74,951
29,408
 28,030
Operating loss(14,669) (4,446) (39,075) (13,481)(12,292) (8,317)
Other income (expense), net195
 (30) (577) (59)258
 (721)
Loss before income taxes(14,474) (4,476) (39,652) (13,540)(12,034) (9,038)
Provision for income taxes(275) 840
 2,130
 2,764
Provision (benefit) for income taxes(27) 860
Net loss$(14,199) $(5,316) $(41,782) $(16,304)$(12,007) $(9,898)

Three Months Ended September 30, 2015 asMarch 31, 2016 Compared to Three Months Ended September 30, 2014March 31, 2015
Revenue
ForTotal revenue, net decreased for the three months ended September 30, 2015, total revenue, net decreasedMarch 31, 2016 by $0.9 million, or 3%, to $32.731.4 million fromcompared to $33.632.3 million for the same period in 2014.2015.

 Three Months Ended September 30,  Three Months Ended March 31,
 2015 2014  2016 2015
 (In millions)  (In millions)

         
Orthobiologics $16.5
 $16.6
  $16.7
 $16.0
% of total revenue, net 50% 49%  53% 50%
Spinal Fusion Hardware 16.2
 17.0
  14.7
 16.3
% of total revenue, net 50% 51%  47% 50%
Total revenue, net $32.7
 $33.6
  $31.4
 $32.3
Orthobiologics revenues were $16.5totaled $16.7 million for the three months ended September 30, 2015, roughly flat compared toMarch 31, 2016, an increase of 4% from the three months ended September 30, 2014.same period in 2015. Sales in the United States increased 2%5% to $14.9 million in the three months ended March 31, 2016 compared to the prior yearsame period in 2015, primarily because of increased demand for demineralized bone matrix products, especially our third-generation products and a recently launched product. This growth was somewhat offset by lower sales of our synthetic orthobiologics products in the United States. A decrease in internationalInternational orthobiologics revenues compared to the prior year period more than offset the increase in domestic revenues. Supply shortages in our third-generation demineralized bone matrix products limited growth in the orthobiologics portfoliototaled $1.8 million in the three months ended September 30,March 31, 2016, roughly flat as compared to the same period in 2015. However, we expect thatThe recent increases in production capacity and output have alleviated these supply issues and do not expect supply to limit growth for the remainder of 2015 or for 2016.shortages in our third-generation demineralized bone matrix products.
Spinal fusion hardware revenues were $16.2totaled $14.7 million for the three months ended September 30, 2015,March 31, 2016, a decrease of 5%10% from the three months ended September 30, 2014.same period in 2015. The decrease was primarily due to lower sales in the United States. The U.S. hardware businessportfolio continued to face mid-single digit pricing pressures and lower demand for existingour older spinal fusion hardware products, while delaysparticularly in introducingour thoracolumbar systems. We expect sales of the new and recently launched products negatively impacted revenueto continue to accelerate in 2016 and to offset the current period.anticipated continued decline in sales of our older spinal fusion hardware product lines by the second half of the year. Sales of our spinal hardware fusion products internationally also decreased slightly fortotaled $1.1 million in the three months ended September 30, 2015 asMarch 31, 2016, roughly flat compared to the same period in 2015.

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compared to the same period in 2014. We expect the performance of the hardware portfolio to improve in the fourth quarter as new product launches stimulate increased demand and as we begin to realize the benefits of recently added distributors and members of sales management.
The following table sets forth our total revenue, net by geography for the three months ended September 30, 2015March 31, 2016 and 2014.2015. 
 Three Months Ended September 30, Three Months Ended March 31,
 2015 2014 2016 2015
 (In millions) (In millions)
United States $30.1
 $30.6
 $28.5
 $29.4
International 2.6
 3.0
 2.9
 2.9
Total revenue, net $32.7
 $33.6
 $31.4
 $32.3
Cost of Goods Sold and Gross ProfitMargin
Cost of goods sold for the three months ended September 30, 2015 was $17.3March 31, 2016 increased $1.7 million to $14.3 million compared to $14.3 millionthe same period in 2015. Gross margin was 54.5% for the three months ended September 30, 2014. Gross profit as a percentage of revenues was 46.9%March 31, 2016 and 61.0% for the three months ended September 30, 2015March 31, 2015. The decrease in gross margin was mainly driven by a $2.5 million provision for excess and 57.5%obsolete inventories and by a higher percentage of sales for the three months ended September 30, 2014. The decrease in gross profit percentage was mainly driven byMarch 31, 2016 being derived from orthobiologics products, which generally carry a $4.4lower margin than the spinal hardware products. During the three months ended March 31, 2016, we recorded a $1.7 million charge taken in the third quarter of 2015provision for excess and obsolete spinal fusion hardwareorthobiologics inventory the substantial majority of which was purchased priorrelated to the spin-off and a portion of which was primarily intendedour matched-donor cancellous bone raw material on hand. This charge resulted from the repurposing of a large portion of our matched-donor cortical bone raw material that has historically been used in production with the matched-donor cancellous bone raw material.  The repurposing of the cortical bone raw materials for distribution in international markets. Duringother production needs is expected to reduce our future purchases of cortical bone raw materials by more than $3.5 million over the third quarter ended September 30, 2015, we assessed our growth strategy for international markets, completed innext two years. The quantities on hand of the third quarter, followingnow unmatched cancellous bone raw material far exceeds the spin-off. We now intend to deploy and invest our limited sales and marketing resources dedicated to international markets in a more targeted manner in fewer countries. As we introduce more new products in the future, we expect to leverage those new product launches to lead our international expansion activities. Primarily as a result of this shift in international strategy, we no longer expectanticipated volumes that we will be ableconsumed in future production needs such that its shelf life is expected to sell the inventory against which we recorded the excess and obsolete inventory charge in the current period. This excess and obsolete inventory cost was somewhatexpire before it would be consumed.
The higher costs were partially offset by total lower manufacturing costs in 2016 resulting from increased production volumes and more efficient production of our orthobiologics product portfolio.portfolio, and the absence of $0.2 million of allocation expenses from Integra that were reported for the three months ended March 31, 2015. Cost of goods sold included $0.7 million of amortization for technology-based intangible assets for each ofin the three months ended September 30, 2015March 31, 2016 and 2014. Allocations from Integra accounted for $0.3 million for the three months ended September 30, 2014, and there was no such allocation for the three months ended September 30, 2015. As we further refine our global strategy post spin-off, we may identify additional risks related to inventory and other assets purchased or otherwise acquired prior to the spin-off that could be impaired by those decisions.
Selling, General and Administrative
SG&A expenses increased $0.3 million to $26.3$25.4 million for the three months ended September 30, 2015 from $20.3 million forMarch 31, 2016 compared to the three months ended September 30, 2014.same period in 2015. The increase in SG&A expenses was mainly driven by $2.5an approximately $9.6 million of nonrecurring professional fees directly related to the spin-off, $1.8 million of fees incurred under a transition services agreement with Integra,increase in direct operating expenses, including higher salary costs due to increased sales, marketing and administrative headcount and the hiring of an executive management team, and increased costs associated with being an independent, publicly-traded company, such as higher stock- basedstock-based compensation expense and higher salary costs due to the hiring of an executive management team, medical device tax expenses and increased audit, legal, insurance, and information technology-related fees, and $0.1 million of fees incurred under a transition services agreement with Integra. Many of these operating expenses were previously represented in the allocation from Integra.
These increases were offset by the absence of $4.2 million of allocation expense, from Integra$4.9 million of nonrecurring global ERP implementation and spin-off related charges, and $0.3 million of medical device excise tax that waswere reported for the three months ended September 30, 2014.
ThroughMarch 31, 2015. The Consolidated Appropriations Act, 2016 includes a two year moratorium on the remaindermedical device excise tax imposed by Section 4191 of 2015, we expectthe Internal Revenue Code of 1986. Thus, the medical device excise tax does not apply to incur $1.0 million to $1.5 million of costs under a transition services agreement with Integra and expect to incur additional operational costs as we complete the remaining spin-off related projects. While the amount and timing of such costs may be significant and can vary from period to period, we do not expect to incur spin-off and transition service costssale of a similar magnitude in future years.taxable medical device by the manufacturer, producer, or importer of the device during the period beginning on January 1, 2016, and ending on December 31, 2017.
Research and Development
R&D expenses increased $0.3$1.2 million to $2.4$2.8 million, or 9% of revenue, for the three months ended September 30, 2015 from $2.1 million forMarch 31, 2016 compared to the same period in 2014.2015. The increase of $0.3 million was primarily driven by higher compensation costs due to an increase in headcount, and higher external costs related to product development and clinical studies, offset by the absence of $0.1 million of allocation expense from Integra that was reported for the three months ended September 30, 2014.March 31, 2015. In future periods,2016, we plan to increase our investment in R&D to between 7%-9% of revenues as we continue to add personnel and accelerate the design and commercialization of new products to expand our product portfolio and conduct additional clinical activities.
Intangible Amortization

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expect R&D expenses to increase as a percentage of revenues as we expand our product portfolio, add personnel and conduct additional clinical studies.
Intangible Amortization
Intangible amortization expense, excluding amounts$0.7 million of reported in cost of goods sold for technology-based intangible assets, decreased $0.1 million to $1.3 million for the three months ended September 30, 2015 from $1.4 million forMarch 31, 2016 compared to the same period in 2014,2015, primarily due to non-compete agreements that were fully amortized during the second quarter of 2015.
Other Income (Expense), Net
Other income (expense), net increased $0.2$1.0 million to $0.2$0.3 million for the three months ended September 30,March 31, 2016 compared to the same period in 2015, primarily as a result of interest income from money market funds anddue to the positive impact of foreign exchange rates.
Income Taxes
Three Months Ended September 30,Three Months Ended March 31,
2015 20142016 2015
(In thousands)(In thousands)
Loss before income taxes$(14,474) $(4,476)$(12,034) $(9,038)
Provision for income taxes(275) 840
Provision (benefit) for income taxes(27) 860
Effective tax rate1.9% (18.8)%0.2% (9.5)%

Our effective tax rates were primarily driven by pretax losses incurred by our consolidated U.S. tax group that received no corresponding tax benefit because it is more-likely-than-notmore likely than not that we will be unable to realize the value of any resulting deferred tax assets.

We reported income tax expense for the three months ended September 30, 2014March 31, 2015 related to the taxable income generated by itsour U.S. subsidiary that was not part of the U.S. consolidated tax group as of August 31, 2015. As such, despite the reported losses before income taxes in those periods, the taxable income generated by such U.S. subsidiary was not allowed to be offset against the taxable losses generated by itsour other U.S. subsidiaries through August 31, 2015. Effective September 1, 2015, the Companywe made an election that will allow itallows us to offset any future taxable losses generated by itsour U.S. subsidiaries against any future taxable income generated by its U.S. subsidiaries. In addition, for all periods presented, the pretax losses incurred by the consolidated U.S. tax group received no corresponding tax benefit because we have concluded that it is more-likely-than-notmore likely than not that the Companywe 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.

For the three months ended September 30, 2015, we recognized a $0.3 million benefit from the change in realizable deferred tax assets of a foreign subsidiary.

The income tax provision in the combined statements of operations for periods prior to the spinoff was calculated using the separate return method, as if the Companywe had filed a separate tax return and operated as a stand-alone business. However, because Integra historically generated taxable income in excess of our pretax losses incurred prior to the spinoff and all of our U.S. subsidiaries that incurred these pretax losses were included in Integra’s U.S. consolidated tax group, those pretax losses were more than offset by Integra’s taxable income. Therefore, there were no U.S. net operating losses available to us for future use at the date of the spin-off.


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Nine Months Ended September 30, 2015 as Compared to Nine Months Ended September 30, 2014
Revenue
For the nine months ended September 30, 2015, total revenue, net decreased by $5.1 million, or 5%, to $98.5 million from $103.5 million for the same period in 2014.
  Nine Months Ended September 30,
  2015 2014
  (In millions)

    
Orthobiologics $49.6
 49.5
     % of total revenue, net 50% 48%
Spinal Fusion Hardware 48.9
 54.0
     % of total revenue, net 50% 52%
Total revenue, net $98.5
 $103.5
Orthobiologics revenues were $49.6 million for the nine months ended September 30, 2015, roughly flat as compared to the nine months ended September 30, 2014. Sales in the United States increased primarily because of increased demand for demineralized bone matrix products, especially our third-generation products and a recently launched product. This growth was somewhat offset by lower sales of our synthetic orthobiologics products in the United States. A decrease in international orthobiologics revenues compared to the prior year period further offset the increase in domestic orthobiologics revenues. Supply shortages in our third-generation demineralized bone matrix products limited growth in the orthobiologics portfolio in the nine months ended September 30, 2015. However, we expect that recent increases in production capacity and output have alleviated these supply issues and do not expect supply to limit growth for the remainder of 2015 or for 2016.
Spinal fusion hardware revenues were $48.9 million for the nine months ended September 30, 2015, a decrease of 9% from the nine months ended September 30, 2014. The U.S. hardware business continued to face pricing pressures and lower demand for existing products, while delays in introducing some of our new products negatively impacted revenue in the current period. International sales of our spinal hardware fusion products were relatively flat over the nine months ended September 30, 2015 and 2014. We expect the performance of the hardware portfolio to improve in the fourth quarter as new product launches stimulate increased demand and as we begin to realize the benefits of recently added distributors and members of sales management.
The following table sets forth our total revenue, net by geography for the nine months ended September 30, 2015 and 2014.
  Nine Months Ended September 30,
  2015 2014
  (In millions)
United States $89.1
 $93.4
International 9.4
 10.1
Total revenue, net $98.5
 $103.5
Cost of Goods Sold and Gross Profit
Cost of goods sold for the nine months ended September 30, 2015 increased $2.4 million to $44.4 million compared to the nine months ended September 30, 2014. Gross profit as a percentage of revenues was 54.9% for the nine months ended September 30, 2015 and 59.4% for the nine months ended September 30, 2014. The decrease in gross profit percentage was mainly driven by a higher percentage of sales being derived from orthobiologics products, which have lower gross profit than our hardware products, and by $4.0 million of higher charges for excess and obsolete spinal fusion hardware inventory, the largest of which was recorded in the three months ended September 30, 2015 and a portion of which was primarily related to inventory for sale in international markets. These costs were partially offset by lower manufacturing costs in 2015 resulting

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from increased production volumes and more efficient production of our orthobiologics product portfolio, and a nonrecurring charge recorded in 2014 related to a discontinued product line. Cost of goods sold included $2.0 million of amortization for technology-based intangible assets for each of the nine months ended September 30, 2015 and 2014. Allocations from Integra accounted for $0.5 million of expense for the nine months ended September 30, 2015 as compared to $1.0 million for the nine months ended September 30, 2014.
Selling, General and Administrative
SG&A expenses increased to $83.1 million for the nine months ended September 30, 2015 from $64.5 million for the nine months ended September 30, 2014. The increase in SG&A expenses was mainly driven by $18.6 million of nonrecurring spin-off related charges, $1.8 million of fees incurred under a transition services agreement with Integra, higher salary costs due to increased sales, marketing and administrative headcount, and increased costs associated with being an independent, publicly-traded company, such as higher stock-based compensation expense, higher salary costs due to the hiring of an executive management team, medical device tax expenses, and increased audit, legal, insurance, and information technology-related fees, offset by a reduction of $5.4 million allocation from Integra. Allocations from Integra accounted for $8.6 million of expense for the nine months ended September 30, 2015, as compared to $14.0 million for the nine months ended September 30, 2014.
Research and Development
R&D expenses decreased $0.3 million to $6.0 million for the nine months ended September 30, 2015 compared to $6.3 million for the nine months ended September 30, 2014. The decrease in R&D expenses during the nine months ended September 30, 2015 was primarily derived from lower outside project spending and from Integra's shifting R&D investments to other areas of its business prior to the spin-off. Allocations from Integra were essentially flat at $0.3 million for the nine months ended September 30, 2015 and 2014.
Intangible Amortization
Intangible amortization expense, excluding amounts reported in cost of goods sold for technology-based intangible assets, decreased $0.1 million to $4.0 million for the nine months ended September 30, 2015 compared to the same period in 2014, primarily due to non-compete agreements that were fully amortized during the second quarter of 2015.
Other Income (Expense), Net
Other expense, net increased $0.5 million to $0.6 million for the nine months ended September 30, 2015, as compared to the nine months ended September 30, 2014, primarily due to the negative impact of foreign exchange rates on related party loans.
Income Taxes
 Nine Months Ended September 30,
 2015 2014
 (In thousands)
Loss before income taxes$(39,652) $(13,540)
Provision for income taxes2,130
 2,764
Effective tax rate(5.4)% (20.4)%
The primary drivers of the effective tax rate for the nine months ended September 30, 2015 and 2014 were pretax losses incurred by the consolidated U.S. tax group that received no corresponding tax benefit and pretax income incurred by a U.S. subsidiary not included in the Company’s U.S. consolidated federal income tax return.
We reported income tax expense for the nine months ended September 30, 2015 and 2014 related to the taxable income generated by its U.S. subsidiary that was not part of the U.S. consolidated tax group as of August 31, 2015. As such, despite the reported losses before income taxes in those periods, the taxable income generated by such U.S. subsidiary was not allowed to be offset against the taxable losses generated by its other U.S. subsidiaries through August 31, 2015. Effective September 1, 2015, the Company made an election that will allow it to offset any future taxable losses generated by its U.S. subsidiaries against any future taxable income generated by its U.S. subsidiaries. In addition, for all periods presented, the pretax losses incurred by the consolidated U.S. tax group received no corresponding tax benefit because we have 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

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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.

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Business Factors Affecting the Results of Operations
Special Charges  
We define special charges as expenses 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 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 the core business and valuation of SeaSpine.

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Loss before income taxes includes the following special charges:
charges recorded in SG&A Expenses:
 Three Months Ended September 30, Nine Months Ended September 30,
 2015 2014 2015 2014
 (In thousands) (In thousands)
Global ERP implementation charges$
 $23
 $95
 $108
SeaSpine spin-off related charges2,500
 148
 17,278
 148
Transition services agreement charges1,800
 
 1,800
 
Discontinued product line charges
 147
 
 860
Acquisition-related charges
 96
 
 165
Total$4,300
 $414
 $19,173
 $1,281
The items reported above are reflected in the condensed consolidated and combined statements of operations as follows:
 Three Months Ended September 30, Nine Months Ended September 30,
 2015 2014 2015 2014
 (In thousands) (In thousands)
Cost of goods sold$436
 $243
 $563
 $1,025
Selling, general and administrative3,864
 171
 18,610
 256
Total$4,300
 $414
 $19,173
 $1,281
        
 Three Months Ended March 31,
 2016 2015
 (In thousands)
Global ERP implementation charges
 $95
SeaSpine spin-off related charges
 4,847
Transition services agreement charges135
 
Total$135
 $4,942
These special charges are directly related to the SeaSpine business and do not include allocations from Integra. Global ERP implementation charges consist of the non-capitalizable portion of internal labor and outside consulting costs related to the implementation of a global ERP system for SeaSpine, which was completed in May 2015. SeaSpine spin-off related charges include legal, accounting, program management and outside consulting expenses incurred as part of the spin-off from Integra, and incremental personnel costs associated with becoming an independent, publicly-traded company. Discontinued product line charges are related to the exit of one of our product lines sold internationally. Acquisition-related charges include transaction fees and the amortization of inventory fair value adjustments related to acquisitions.

Liquidity and Capital Resources
Overview
Historically,Prior to the spin-off, Integra provided financing, cash management and other treasury services to us. Prior to the spin-off,us, and we transferred the majority of cash from operations to Integra andIntegra; accordingly we generally had no significant cash. With the implementation of our own global ERP system on May 4, 2015, we began to collect against our own accounts receivable, including accounts receivable with Integra, and to directly pay some of our obligations. Effective with the spin-off, we no longer transfer any of our cash to Integra and began to directly pay all of our obligations. Cash historically transferred to and from Integra prior to the spin-off has been reflected in the combinedconsolidated statement of cash flows as a financing activityIntegra net investment and in the combinedconsolidated balance sheet through Integra net investment in us.investment.

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We believe that our cash and cash equivalents on hand, and the maximum $30.0 million borrowing capacity that we expect to have under a credit facility that we expect to enterentered into in the fourth quarter ofDecember 2015, will be sufficient to fund our operations for at least the next twelve months.

Our estimate of the period of time through which our current financial resources will be adequate to support our operations are
forward-looking statements based on significant assumptions and we could utilize our financial resources sooner than we
currently expect. Forward-looking statements involve a number of risks and uncertainties and actual results could differ materially if the assumptions on which we have based our forward-looking statements prove to be wrong. Factors that will affect our operating expenses and future capital requirements include, but are not limited to:
the costs associated with designing and developing new products, including modifications to our existing products;
the design, initiation, scope, rate of progress, results and timing of any clinical studies we conduct;
the successful completion of our product development programs and our ability to manage costs associated with the
development and commercialization of new products;
our ability to timely obtain and maintain regulatory clearance or approval of our existing and new products;
the rate at which we launch and commercialize products and the extent of their commercial success;
our ability to manage timelines and costs related to manufacturing our products;
the extent to which we increase our employee workforce and/or number of independent sales agent, including in
connection with expanding our product portfolios;
the costs required to build out our new Carlsbad, CA facility and to complete the move of existing operations from our Vista, CA facilities;
our ability to protect our intellectual property and operate our business without infringing upon the intellectual
property rights of others; and
the extent to which we seek to expand through acquisitions and execute on transactions intended to do so.
whether we enter into and the timing and terms of the credit facility that currently we are negotiating.
Cash and Cash Equivalents
We had cash and cash equivalents totaling approximately $38.5$28.6 million and $0.7$33.4 million at September 30, 2015March 31, 2016 and December 31, 2014,2015, respectively.
Cash Flows
 Nine Months Ended September 30,
 2015 2014
 (In thousands)
Net cash (used in) provided by operating activities$(29,451) $4,940
Net cash used in investing activities(9,976) (2,343)
Net cash provided by (used in) financing activities77,210
 (2,587)
Effect of exchange rate fluctuations on cash68
 (2)
Net increase in cash and cash equivalents$37,851
 $8
 Three Months Ended March 31,
 2016 2015
 (In thousands)
Net cash (used in) provided by operating activities$(4,191) $608
Net cash used in investing activities(983) (3,571)
Net cash (used in ) provided by financing activities(2) 2,962
Effect of exchange rate changes on cash and cash equivalents349
 (3)
Net decrease in cash and cash equivalents$(4,827) $(4)

Net Cash Flows (Used in) Provided by (Used in) Operating Activities
We used $29.5 million and generated operating cash flows of $4.9 million for the nine months ended September 30, 2015 and 2014, respectively.
Operating cash outflows for the ninethree months ended September 30, 2015March 31, 2016 increased by $34.4$4.8 million compared to the ninethree months ended September 30, 2014. Net loss plus adjustments to reconcile net loss to net cash (used in) provided by operating activities decreased cash flows by $22.0 million, largely driven by spin-off related charges.March 31, 2015. Among the changes in working capital, accounts payable and accrued expenses used $7.2 million more cash, purchases of inventory used $7.4$1.9 million more of cash, offset by $1.3 million more cash provided by prepaid insurance and other assets primarily related to the commencement of our activities as a separate, publicly-traded company used $1.3 million more of cash in 2015. The increase in accounts receivable also used $2.1 million of cash in 2015.assets.

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Net Cash Flows Used in Investing Activities
Net cash used in investing activities was $10.0$1.0 million for the ninethree months ended September 30, 2015 asMarch 31, 2016 compared to $2.3$3.6 million for the ninethree months ended September 30, 2014.March 31, 2015. The increaseddecreased use of cash was primarily attributable to the implementationcompletion of implementing a global ERP system and new hardware and software required to meet our needs afterduring the spin-off, $3.0 millionsecond quarter of purchases of spinal fusion hardware sets and instruments related to existing products and planned new product launches, and a milestone payment related to the NeuroStructures license agreement.
During the nine months ended September 30, 2014, we paid $2.3 million for capital expenditures, most of which was purchases of spinal fusion hardware set and instruments.2015.
Net Cash Flows (Used in) Provided by (Used in) Financing Activities
NetThe net cash provided by financing activities was $77.2of $3.0 million for the ninethree months ended September 30,March 31, 2015 was investment received from Integra.

Credit Facility

On December 24, 2015, we entered into a three-year credit facility (the "Credit Facility") with Wells Fargo Capital Finance, as comparedAdministrative Agent and as a Lender. The Credit Facility provides a revolving line of credit of up to net cash used$30.0 million in financing activitiesborrowing capacity with a maturity date of $2.6 million for the nine months ended September 30, 2014. The increase in cash resulted fromDecember 24, 2018, which maturity date is subject to a higher investment from Integra and the $34 million cash contribution inone-time one-year extension at our election. In connection with the spin-off.Credit Facility, we were required to become guarantors and to provide a security interest in substantially all our assets for the benefit of Agent and the Lender.

Our borrowings under the Credit Facility shall accrue interest at the rate then applicable to the Base Rate (as customarily defined) Loans, unless and until converted into LIBOR Rate Loans in accordance with the terms of the Credit Facility. Borrowings bear interest at a floating annual rate equal to (a) during any month for which our average excess availability (as customarily defined) is greater than $20.0 million, base rate plus (i) 1.25 percentage points for base rate loans and (ii) LIBOR rate plus 2.25 percentage points for LIBOR loans, (b) during any month for which our 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 loans and (c) during any month for which our 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 loans.

We will also pay an annual unused line fee in an amount equal to 0.375% times the unused Credit Facility amount. The unused line fee is due and payable on the first day of each month. At March 31, 2016, there was $0.4 million outstanding under the Credit Facility. Debt issuance costs and legal fees related to the financing totaling $0.4 million were recorded as a deferred asset and are subsequently being amortized ratably over the term of the Credit Facility.

The Credit Facility contains various customary affirmative and negative covenants agreed to by us, including prohibiting us from incurring indebtedness without the lender’s consent. The Credit Facility also includes a financial covenant that requires us to maintain a minimum fixed charge coverage ratio of 1.10 to 1.00 for the applicable measurement period if our Total Liquidity (as defined in the Credit Facility) is less than $5.0 million. We were in compliance with all such covenants at March 31, 2016.

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 our existing agreements, and the occurrence of a change of control. Under the Credit Facility, if an event of default occurs, lenders holding a majority of the revolving commitments will have the right to terminate the commitments and accelerate the maturity of any loans outstanding.
Off-Balance Sheet Arrangements
There were no off-balance sheet arrangements as of September 30, 2015March 31, 2016 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
As of September 30, 2015,March 31, 2016, we were obligated to pay the following amounts under various agreements:

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  Payments Due by Calendar Year  Payments Due by Calendar Year

Total
Remaining 2015
2016-2017
2018-2019
ThereafterTotal
Less than 1 Year
1-3 Years
3-5 Years
More than 5 Years
(In millions)(In millions)
Employment Agreements$1.8

$0.2

$1.0

$0.6

$
$1.5

$0.4

$1.1

$

$
Operating Leases26.4

0.6

4.8

4.9

16.1
22.9

1.8

4.4

4.6

12.1
Purchase Obligations2.3

0.1

0.8

0.9

0.5
7.4

7.4






Credit Facility0.4
 
 0.4
 
 
Other3.5

3.5






2.2

0.3

0.9

1.0


Total$34.0

$4.4

$6.6

$6.4

$16.6
$34.4

$9.9

$6.8

$5.6

$12.1
Excluded from the table is the liability for uncertain tax benefits, including interest and penalties, totaling less thanapproximately $0.3 million. This liability for uncertain tax benefits has been excluded because we cannot make a reliable estimate of the period in which such liability may be realized. "Other" includes minimum royalty, warranty obligationroyalties and capital leases.milestone payments for certain license agreements.

Other Matters
Critical Accounting Estimates
The critical accounting estimates disclosed in our Annual Report on Form 10-K for the Information Statementfiscal year ended December 31, 2015 filed with the SEC have not materially changed.
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 and Combined Financial Statements included elsewhere in this report.


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to various market risks, including changes in foreign currency exchange rates and interest rates that could adversely affect our results of operations and financial condition. Although we do not have any derivative instruments for hedging purposes, to manage the volatility relating to these typical business exposures, we may consider entering into various derivative transactions when appropriate. We do not hold or issue derivative instruments for trading or other speculative purposes.

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Foreign Currency Exchange and Other Rate RisksRisk

DuringWe operate on a global basis and are exposed to the nine months ended September 30, 2015risk that changes in foreign currency exchange rates could adversely affect our financial condition, results of operations and September 30, 2014, we generatedcash flows. We generate revenues outside the United States in multiple foreign currencies including euros, British pounds, Swiss francs and New Zealand dollars, and in U.S. dollar-denominated transactions conducted with customers who generated revenue in currencies other than the U.S. dollar. We also incur operating expenses in euros. As a result, changes in the exchange rates of any such foreign currency vs. the U.S. dollar may affect our revenues, gross profits and net incomeloss and may also affect the book value of our assets and the amount of stockholders’ equity. We cannot predict the consolidated effects of exchange rate fluctuations upon our future operating results because of the variability of foreign currency exposure in our revenues and operating expenses and the potential volatility of currency exchange rates.
Interest Rate Risk

AsOur primary exposure to market risk is interest expense and interest income sensitivity, which is affected by changes in the general level of September 30,U.S. interest rates.

Our cash and cash equivalents as of December 31, 2015 we did not have any outstanding debt or derivative instruments,consisted of cash and therefore we were nota bank deposit sweep. We are exposed to market risk related to fluctuations in interest rates and market prices. We currently do not hedge interest rate risk.exposure. However, we willbecause of the short-term nature of the instruments in our portfolio, a sudden change in market interest rates would not be exposedexpected to have a material impact on our financial condition or results of operation.

We had outstanding borrowings under the Credit Facility of $0.4 million as of March 31, 2016. Interest expense is accrued at an annual variable interest rate riskwhich is equal to the greatest of (a) the Federal Funds Rate plus ½%, (b) the LIBOR Rate (which rate shall be calculated based upon an interest period of 1 month and shall be determined on a daily basis), plus 1 percentage point,

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and (c) the rate of interest announced within Wells Fargo at its principal office in connection with any future borrowings that we may enter into, includingSan Francisco as its “prime rate.” A hypothetical 100 basis point change in interest rates would not be expected to have a credit facility that we expect to enter into inmaterial effect on our net loss for the fourth quarter of 2015.period or cash flows.


ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the direction of our Chief Executive Officer and Chief Financial Officer, we evaluated our disclosure controls and procedures and concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
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 Securities and Exchange Act of 1934, as amended, 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.


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. While management presently believes that the ultimate outcome of these proceedings, individually and in the aggregate, will not materially harm our financial position, cash flows, or overall trends in results of operations, 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
The Risk Factors included in our Registration StatementAnnual Report on Form 10, as amended,10-K for the fiscal year ended December 31, 2015 filed with the SEC on June 9, 2015 have not materially changed.


ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicableapplicable.


ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.


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ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.


ITEM 5. OTHER INFORMATION

None


ITEM 6. EXHIBITS

*10.1 Sublease Agreement betweenAmended and Restated SeaSpine OrthopedicsHoldings Corporation and SkinMedica, Inc., dated as of July 8, 2015 (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on September 11, 2015).Non-Employee Director Compensation Program, effective March 30, 2016.
   
*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 XBRL Instance Document
   
*†101.SCH XBRL Taxonomy Extension Schema Document
   
*†101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
   
*†101.DEF XBRL Definition Linkbase Document
   
*†101.LAB XBRL Taxonomy Extension Labels Linkbase Document
   
*†101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
 
*Filed herewith

† The financial information of SeaSpine Holdings Corporation Quarterly Report on Form 10-Q for the quarter ended September 30, 2015March 31, 2016 filed on November 12, 2015May 16, 2016 formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated and Combined Statements of Operations, (ii) Condensed Combined Statements of Comprehensive Loss, (iii) the Condensed Consolidated and Combined Balance Sheets, (iv) Parenthetical Data to the Condensed Consolidated and Combined Balance Sheets, (v) the Condensed Consolidated and Combined Statements of Cash Flows, (vi) the Condensed Consolidated and Combined Statement of Equity, and (vii) Notes to Unaudited Condensed Consolidated and Combined Financial Statements, is furnished electronically herewith.


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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:November 12, 2015May 16, 2016 /s/ Keith C. Valentine
   Keith C. Valentine
   President and Chief Executive Officer
   
Date:November 12, 2015May 16, 2016 /s/ John J. Bostjancic
   John J. Bostjancic
   Chief Financial Officer


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Table of Contents
 
Exhibits  
*10.1 Sublease Agreement betweenAmended and Restated SeaSpine OrthopedicsHoldings Corporation and SkinMedica, Inc., dated as of July 8, 2015 (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on September 11, 2015).Non-Employee Director Compensation Program, effective March 30, 2016.
   
*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 XBRL Instance Document
  
*†101.SCH XBRL Taxonomy Extension Schema Document
  
*†101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
  
*†101.DEF XBRL Definition Linkbase Document
  
*†101.LAB XBRL Taxonomy Extension Labels Linkbase Document
  
*†101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
 
*Filed herewith

† The financial information of SeaSpine Holdings Corporation Quarterly Report on Form 10-Q for the quarter ended September 30, 2015March 31, 2016 filed on November 12, 2015May 16, 2016 formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated and Combined Statements of Operations, (ii) Condensed Combined Statements of Comprehensive Loss, (iii) the Condensed Consolidated and Combined Balance Sheets, (iv) Parenthetical Data to the Condensed Consolidated and Combined Balance Sheets, (v) the Condensed Consolidated and Combined Statements of Cash Flows, (vi) the Condensed Consolidated and Combined Statement of Equity, and (vii) Notes to Unaudited Condensed Consolidated and Combined Financial Statements, is furnished electronically herewith.



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