UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

For the transition period from              to             

 

 

 

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):

SEASPINE HOLDINGS CORPORATION

INDEX

SEASPINE HOLDINGS CORPORATION

CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share data)

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

SEASPINE HOLDINGS CORPORATION

CONDENSED CONSOLIDATED AND

(Unaudited)

(In thousands)

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

SEASPINE HOLDINGS CORPORATION

CONDENSED CONSOLIDATED AND COMBINED BALANCE SHEETS

(Unaudited)

(In thousands, except par value data)

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

SEASPINE HOLDINGS CORPORATION

CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

SEASPINE HOLDINGS CORPORATION

CONDENSED CONSOLIDATED AND COMBINED STATEMENT OF EQUITY

(Unaudited)

(In thousands)

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

SEASPINE HOLDINGS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

Spin-off from Integra

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.

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

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.

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.

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.

Related-party Transactions

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.

Property, plant and equipment balances and corresponding useful lives were as follows:

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.

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

Revenue, net consisted of the following:

The Company attributes revenues to geographic areas based on the location of the customer. Total revenue by major geographic area consisted of the following:

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

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.

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.

 

Overview

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.

Revenue

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.

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.

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.

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.

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.

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.

Overview

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.

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.

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.