UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)



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

For the quarterly period ended September 30, ~~2017~~2019



o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

COMMISSION FILE NO. 001-36905

SeaSpine Holdings Corporation

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)



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

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock	SPNE	The Nasdaq Global Select Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 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, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act.



Large accelerated filer	o	Accelerated filer	x

Non-accelerated filer	o ~~(Do not check if a smaller reporting company)~~	Smaller reporting company	o x

		Emerging growth company	x

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý

The number of shares of the registrant’s common stock, $0.01 par value, outstanding as of October ~~30, 2017~~25, 2019 was ~~13,429,128.~~19,066,831.

SEASPINE HOLDINGS CORPORATION

INDEX



	Page Number
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements	34

Condensed Consolidated Statements of Operations for the three and nine months ended September 30, ~~2017~~2019 and ~~2016~~2018 (Unaudited)	34

Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, ~~2017~~2019 and ~~2016~~2018 (Unaudited)	4

~~Condensed Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016 (Unaudited)~~	5

Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018 (Unaudited)	6

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, ~~2017~~2019 and ~~2016~~2018 (Unaudited)	67

Condensed Consolidated ~~Statement~~Statements of Equity for the three and nine months ended September 30, ~~2017~~2019 and 2018 (Unaudited)	8

Notes to Unaudited Condensed Consolidated Financial Statements	910

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	2225

Item 3. Quantitative and Qualitative Disclosures About Market Risk	3136

Item 4. Controls and Procedures	3136

PART II. OTHER INFORMATION	3238

Item 1. Legal Proceedings	3238

Item 1A. Risk Factors	3238

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	3339

Item 3. Defaults Upon Senior Securities	3339

Item 4. Mine Safety Disclosures	3440

Item 5. Other Information	3440

Item 6. Exhibits	3441

SIGNATURES	3542

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

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

SEASPINE HOLDINGS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share data)


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016			2019			2018			2019			2018
Total revenue, net	$	31,742		$	31,741		$	97,832		$	96,341		$	39,888		$	35,834		$	115,344		$	105,418
Cost of goods sold	12,176			13,881			39,342			42,094			14,407			14,247			42,303			40,986
Gross profit	19,566			17,860			58,490			54,247			25,481			21,587			73,041			64,432
Operating expenses:
Selling, general and administrative	23,674			23,803			71,893			76,166			30,134			27,041			85,050			76,940
Research and development	2,834			2,600			9,228			8,534			3,896			3,203			10,995			8,783
Intangible amortization	792			955			2,376			3,517			792			792			2,377			2,376
Impairment of intangible assets													—			—			4,993			—
Total operating expenses	27,300			27,358			83,497			88,217			34,822			31,036			103,415			88,099
Operating loss	(7,734		)	(9,498		)	(25,007		)	(33,970		)	(9,341		)	(9,449		)	(30,374		)	(23,667		)
Other income (expense), net	215			(59		)	387			(33		)
Other expense, net													(97		)	(190		)	(49		)	(327		)
Loss before income taxes	(7,519		)	(9,557		)	(24,620		)	(34,003		)	(9,438		)	(9,639		)	(30,423		)	(23,994		)
Benefit for income taxes	(57		)	(103		)	(12		)	(559		)
Provision (benefit) for income taxes													225			(107		)	265			4
Net loss	$	(7,462	)	$	(9,454	)	$	(24,608	)	$	(33,444	)	$	(9,663	)	$	(9,532	)	$	(30,688	)	$	(23,998	)
Net loss per share, basic and diluted	$	(0.58	)	$	(0.84	)	$	(2.04	)	$	(2.98	)	$	(0.51	)	$	(0.65	)	$	(1.62	)	$	(1.66	)
Weighted average shares used to compute basic and diluted net loss per share	12,815			11,271			12,079			11,206			19,051			14,750			18,947			14,477

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

SEASPINE HOLDINGS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

(In thousands)


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016			2019			2018			2019			2018
Net loss	$	(7,462	)	$	(9,454	)	$	(24,608	)	$	(33,444	)	$	(9,663	)	$	(9,532	)	$	(30,688	)	$	(23,998	)
Other comprehensive income
Other comprehensive (loss) income
Foreign currency translation adjustments	166			45			567			131			(327		)	(57		)	(388		)	(238		)
Unrealized (loss) gain on investments													(9		)	—			5			—
Comprehensive loss	$	(7,296	)	$	(9,409	)	$	(24,041	)	$	(33,313	)	$	(9,999	)	$	(9,589	)	$	(31,071	)	$	(24,236	)

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

SEASPINE HOLDINGS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except par value data)


	September 30, 2017			December 31, 2016			September 30, 2019			December 31, 2018

ASSETS
Current assets:
Cash and cash equivalents	$	16,689		$	14,566		$	22,314		$	24,233
Trade accounts receivable, net of allowances of $519 and $483	19,822			20,982
Inventories	42,276			45,299
Short-term investments							4,996			29,800
Trade accounts receivable, net of allowances of $188 and $850							23,720			20,335
Inventories, net							48,011			42,742
Prepaid expenses and other current assets	2,477			1,813			3,723			2,948
Total current assets	81,264			82,660			102,764			120,058
Property, plant and equipment, net	21,864			21,863			26,641			22,623
Intangible assets, net	36,859			41,785			19,412			28,712
Other assets	718			857			691			949
Total assets	$	140,705		$	147,165		$	149,508		$	172,342
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt	$	—		$	445
Accounts payable, trade	7,930			8,537			$	11,559		$	9,214
Accrued compensation	5,817			4,393			6,477			7,900
Accrued commissions	4,564			4,398			7,372			5,451
Contingent consideration liabilities	900			2,855			711			129
Other accrued expenses and current liabilities	3,979			3,790			5,091			3,852
Total current liabilities	23,190			24,418			31,210			26,546
Long-term borrowings under credit facility	—			3,835
Contingent consideration liabilities	3,632			5,125
Contingent consideration liabilities, net of current portion							1,116			2,367
Other liabilities	2,927			2,810			1,430			1,344
Total liabilities	29,749			36,188			33,756			30,257

Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value; 15,000 authorized; no shares issued and outstanding at September 30, 2017 and December 31, 2016	—			—
Common stock, $0.01 par value; 60,000 authorized; 13,429 and 11,258 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively	134			113
Preferred stock, $0.01 par value; 15,000 authorized; no shares issued and outstanding at September 30, 2019 and December 31, 2018							—			—
Common stock, $0.01 par value; 60,000 authorized; 19,060 and 18,669 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively							191			187
Additional paid-in capital	204,752			180,753			281,830			277,096
Accumulated other comprehensive income	1,839			1,272			1,219			1,602
Accumulated deficit	(95,769		)	(71,161		)	(167,488		)	(136,800		)
Total stockholders' equity	110,956			110,977			115,752			142,085
Total liabilities and stockholders' equity	$	140,705		$	147,165		$	149,508		$	172,342

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

SEASPINE HOLDINGS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

Nine Months Ended September 30,
2017 2016
OPERATING ACTIVITIES:
Net loss $ (24,608 ) $ (33,444 )
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 8,184
8,984
Instrument replacement expense 1,146
950
Impairment of spinal instruments —
919
Provision for excess and obsolete inventories 3,229
4,057
Amortization of debt issuance costs 104
105
Deferred income tax provision (benefit) 103
(80 )
Stock-based compensation 4,505
5,406
Gain from change in fair value of contingent consideration liabilities (897 ) —
Changes in assets and liabilities:
Accounts receivable 1,405
4,182
Inventories 1,814
87
Prepaid expenses and other current assets (653 ) 1,051
Other non-current assets (11 ) 102
Accounts payable (1,160 ) (3,941 )
Accrued commissions 166
(277 )
Other accrued expenses and current liabilities 2,600
1,289
Other non-current liabilities (36 ) 204
Net cash used in operating activities (4,109 ) (10,406 )
INVESTING ACTIVITIES:
Purchases of property and equipment (5,518 ) (5,707 )
Additions to technology assets (200 ) (1,150 )
Net cash used in investing activities (5,718 ) (6,857 )
FINANCING ACTIVITIES:
Borrowings under credit facility —
3,300
Borrowings under short-term debt —
1,202
Repayments of credit facility (4,020 ) —
Repayments of short-term debt (445 ) (378 )
Proceeds from issuance of common stock- employee stock purchase plan and exercise of stock options 488
356
Proceeds from issuance of common stock, net of offering costs- ATM transactions 15,557
—
Repurchases of common stock for income tax withheld upon vesting of restricted stock awards (48 ) (25 )
Net cash provided by financing activities 11,532
4,455
Effect of exchange rate changes on cash and cash equivalents 418
187
Net change in cash and cash equivalents 2,123
(12,621 )
Cash and cash equivalents at beginning of period 14,566
33,429
Cash and cash equivalents at end of period $ 16,689
$ 20,808
Non-cash operating activities:
Settlement of bonus in payment of restricted stock units $ 970
$ —
Non-cash investing activities:
Property and equipment in liabilities $ 972
$ 1,556
Fair value of intangible assets acquired through acquisition of business (see Note 8)
$ —
$ 8,300
Fair value of contingent consideration liabilities in connection with acquisition of business $ —
$ 8,300

Settlement of contingent closing consideration liabilities in connection with acquisition of business (see Note 8)

$ 2,548
$ —



	Nine Months Ended September 30,
	2019			2018
OPERATING ACTIVITIES:
Net loss	$	(30,688	)	$	(23,998	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	7,929			7,950
Instrument replacement expense	1,632			1,269
Impairment of intangible assets	4,993			—
Provision for excess and obsolete inventories	2,358			2,940
Amortization of debt issuance costs	57			94
Deferred income tax provision	176			36
Stock-based compensation	5,907			3,449
Gain from change in fair value of contingent consideration liabilities	(571		)	(893		)
Changes in assets and liabilities:
Accounts receivable	(3,531		)	1,069
Inventories	(6,413		)	(3,446		)
Prepaid expenses and other current assets	(236		)	(622		)
Other non-current assets	(2		)	(218		)
Accounts payable	2,117			3,763
Accrued commissions	1,918			(1,032		)
Other accrued expenses and current liabilities	(1,013		)	898
Other non-current liabilities	237			140
Net cash used in operating activities	(15,130		)	(8,601		)
INVESTING ACTIVITIES:
Purchases of property and equipment	(10,337		)	(6,565		)
Maturities of short-term investments	25,000			—
Net cash provided by (used in) investing activities	14,663			(6,565		)
FINANCING ACTIVITIES:
Borrowings under credit facility	—			7,000
Proceeds from issuance of common stock, net of offering costs- ATM transactions	—			8,514
Proceeds from issuance of common stock- employee stock purchase plan	671			546
Proceeds from exercise of stock options	230			886
Repurchases of common stock for income tax withheld upon vesting of restricted stock awards and restricted stock units	(2,070		)	(600		)
Payment of contingent consideration liabilities in connection with acquisition of business	(98		)	(113		)
Net cash (used in) provided by financing activities	(1,267		)	16,233
Effect of exchange rate changes on cash and cash equivalents	(185		)	(73		)
Net change in cash and cash equivalents	(1,919		)	994
Cash and cash equivalents at beginning of period	24,233			10,788
Cash and cash equivalents at end of period	$	22,314		$	11,782
Supplemental cash flow information:
Interest paid	$	115		$	109
Income taxes paid	$	98		$	126
Non-cash investing activities:
Property and equipment in liabilities	$	1,358		$	538

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

SEASPINE HOLDINGS CORPORATION

CONDENSED CONSOLIDATED ~~STATEMENT~~STATEMENTS OF EQUITY

(Unaudited)

(In thousands)



	Common Stock			Additional			Accumulated Other						Total
	Number of			Paid-In			Comprehensive			Accumulated			Stockholders'
	Shares	Amount		Capital			Income			Deficit			Equity
Balance December 31, 2018	18,669	$	187	$	277,096		$	1,602		$	(136,800	)	$	142,085
Net loss	—	—		—						(8,989		)	(8,989		)
Foreign currency translation adjustment	—	—		—			(169		)	—			(169		)
Unrealized gain on short-term investments	—	—		—			11			—			11
Restricted stock issued	216	2		—			—			—			2
Issuance of common stock - exercise of stock options	11	—		143			—			—			143
Repurchases of common stock for income tax withheld upon vesting of restricted stock awards and restricted stock units	—	—		(1,851		)	—			—			(1,851		)
Stock-based compensation	—	—		1,947			—			—			1,947
Balance March 31, 2019	18,896	189		277,335			1,444			(145,789		)	133,179
Net loss	—	—		—			—			(12,036		)	(12,036		)
Foreign currency translation adjustment	—	—		—			108			—			108
Unrealized gain on short-term investments	—	—		—			3			—			3
Restricted stock issued	71	1		—			—			—			1
Issuance of common stock under employee stock purchase plan	64	1		670			—			—			671
Issuance of common stock- exercise of stock options	5	—		76			—			—			76
Repurchases of common stock for income tax withheld upon vesting of restricted stock awards and restricted stock units	—	—		(57		)	—			—			(57		)
Stock-based compensation	—	—		1,970			—			—			1,970
Balance June 30, 2019	19,036	$	191	$	279,994		$	1,555		$	(157,825	)	$	123,915
Net loss	—	—		—			—			(9,663		)	(9,663		)
Foreign currency translation adjustment	—	—		—			(327		)	—			(327		)
Unrealized loss on short-term investments	—	—		—			(9		)	—			(9		)
Restricted stock issued	23	—		—			—			—			—
Issuance of common stock- exercise of stock options	1	—		10			—			—			10
Repurchases of common stock for income tax withheld upon vesting of restricted stock awards and restricted stock units	—	—		(164		)	—			—			(164		)
Stock-based compensation	—	—		1,990			—			—			1,990
Balance September 30, 2019	19,060	191		281,830			1,219			(167,488		)	115,752

Common Stock Additional Accumulated Other Total
Number of Paid-In Comprehensive Accumulated Stockholders'
Shares Amount Capital Income Deficit Equity
Balance December 31, 2016 11,258
$ 113
$ 180,753
$ 1,272
$ (71,161 ) $ 110,977
Net loss —
—
—
—
(24,608 ) (24,608 )
Foreign currency translation adjustment —
—
—
567
—
567
Restricted stock awards/units issued 252
2
968
—
—
970
Issuance of common stock under employee stock purchase plan 71
1
452
—
—
453
Issuance of common stock- NLT Spine Ltd contingent closing consideration 350
3
2,545
—
—
2,548
Issuance of common stock, net of offering costs- ATM transactions 1,500
15
15,542
—
—
15,557
Issuance of common stock- exercise of stock options 5
—
35
—
—
35
Repurchases of common stock for income tax withheld upon vesting of restricted stock awards (7 ) —
(48 ) —
—
(48 )
Stock-based compensation —
—
4,505
—
—
4,505
Balance September 30, 2017 13,429
$ 134
$ 204,752
$ 1,839
$ (95,769 ) $ 110,956



	Common Stock			Additional		Accumulated Other					Total
	Number of			Paid-In		Comprehensive		Accumulated			Stockholders'
	Shares	Amount		Capital		Income		Deficit			Equity
Balance December 31, 2017	13,508	$	135	$	206,844	$	1,950	$	(103,276	)	$	105,653
Net loss	—	—		—		—		(7,105		)	(7,105		)
Foreign currency translation adjustment	—	—		—		240		—			240
Issuance of common stock upon vesting of restricted stock units	147	2		—		—		—			2
Issuance of common stock, net of offering costs- ATM transactions	882	9		8,505		—		—			8,514



Repurchases of common stock for income tax withheld upon vesting of restricted stock awards and restricted stock units	(2	)	—	(514	)	—		—		(514	)
Stock-based compensation	—		—	835		—		—		835
Balance March 31, 2018	14,535		146	215,670		2,190		(110,381	)	107,625
Net loss	—		—	—		—		(7,361	)	(7,361	)
Foreign currency translation adjustment	—		—	—		(421	)	—		(421	)
Issuance of common stock upon vesting of restricted stock units	99		—	—		—		—		—
Issuance of common stock under employee stock purchase plan	81		1	545		—		—		546
Issuance of common stock- exercise of stock options	20		—	250		—		—		250
Repurchases of common stock for income tax withheld upon vesting of restricted stock awards and restricted stock units	—		—	(20	)	—		—		(20	)
Stock-based compensation	—		—	943		—		—		943
Balance June 30, 2018	14,735		147	217,388		1,769		(117,742	)	101,562
Net loss	—		—	—		—		(9,532	)	(9,532	)
Foreign currency translation adjustment	—		—	—		(57	)	—		(57	)
Issuance of common stock upon vesting of restricted stock units	10		1	—		—		—		1
Issuance of common stock- exercise of stock options	47		—	636		—		—		636
Repurchases of common stock for income tax withheld upon vesting of restricted stock awards and restricted stock units	—		—	(67	)	—		—		(67	)
Stock-based compensation	—		—	1,671		—		—		1,671
Balance September 30, 2018	14,792		148	219,628		1,712		(127,274	)	94,214

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

SEASPINE HOLDINGS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. BUSINESS AND BASIS OF PRESENTATION

Business

SeaSpine Holdings Corporation was incorporated in Delaware on February 12, 2015 in connection with the spin-off of the orthobiologics and spinal implant business of Integra LifeSciences Holdings Corporation, a diversified medical technology company. The spin-off occurred on July 1, 2015. Unless the context indicates otherwise, (i) references to "SeaSpine" or the "Company" refer to SeaSpine Holdings Corporation and its wholly-owned subsidiaries, and (ii) references to "Integra" refer to Integra LifeSciences Holdings Corporation and its subsidiaries other than SeaSpine.

Basis of Presentation and Principles of Consolidation

The Company prepared the unaudited interim condensed consolidated financial statements included in this report in accordance with accounting principles generally accepted in the U.S. (GAAP) for interim financial information and the rules and regulations of the Securities and Exchange Commission (SEC) related to quarterly reports on Form 10-Q.

The Company’s financial statements are presented on a consolidated basis. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. The unaudited interim condensed consolidated financial statements do not include all information and disclosures required by GAAP for annual audited financial statements and should be read ~~in conjunction~~ with the Company’s consolidated financial statements and notes thereto for the year ended December 31, ~~2016~~2018 included in the Company’s Annual Report on Form 10-K filed with the SEC. In the opinion of management, the unaudited interim condensed consolidated financial statements included in this report have been prepared on the same basis as the Company's audited consolidated financial statements and include all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the financial position, results of operations, cash flows, and statement of equity for periods presented. The results for the three and nine months ended September 30, ~~2017~~2019 are not necessarily indicative of the results expected for the full year. The condensed consolidated balance sheet as of December 31, ~~2016~~2018 was derived from the audited consolidated financial statements for the year ended December 31, ~~2016.~~2018.

Under current SEC rules, generally, a company qualifies as a "smaller reporting company" if it has a public float of less than $250 million as of the last business day of its second fiscal quarter. If a company qualifies as a smaller reporting company on that date, it may elect to reflect that determination and use the smaller reporting company scaled disclosure accommodations in its subsequent SEC filings until the beginning of the first quarter of the fiscal year following the date it determines it does not qualify as a smaller reporting company. The Company's public float as of the last business day of its second fiscal quarter of 2018 was less than $250 million, and as such, the Company qualifies as a smaller reporting company and is following certain of the scaled disclosure accommodations. The Company measured its public float as of the last business day of its second fiscal quarter of 2019 and determined that it will continue to qualify as a smaller reporting company for its SEC filings made in 2020.

Concentration of Risk

Integra and PcoMed, LLC (PcoMed) entered into a supply agreement on May 15, 2013 (the "Supply Agreement"), which was subsequently assigned to the Company by Integra on May 21, 2015. For the nine months ending September 30, 2019, the sales of products incorporating the NanoMetalene® technology licensed and supplied to the Company pursuant to the Supply Agreement exceeded 10% of the Company's revenue.

Pursuant to the Supply Agreement, PcoMed granted the Company a worldwide exclusive license to sell certain of its products treated with certain proprietary PcoMed technology (Treatment) for use in the spinal interbody and intervertebral market (Treated Products). PcoMed serves as the sole supplier of the Treatment. As consideration for the license and the Treatment, the Company paid to PcoMed initial milestone payments prior to the initial sale and the Company will pay PcoMed a low single digit royalty on the Company’s net sales of all Treated Products. In the event the Company fails to meet any of its payment obligations, the license will, at PcoMed’s option and following a cure period, convert to a non-exclusive license. The Supply Agreement contains customary representations and termination provisions, including for material breach and bankruptcy. Each of the Company and PcoMed retain the rights to their respective intellectual property.

SEASPINE HOLDINGS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

~~The preparation of~~Preparing consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities, and the reported amounts of revenues and expenses. Significant estimates affecting amounts reported or disclosed in the consolidated financial statements include allowances for doubtful accounts receivable and sales returns and other credits, net realizable value of inventories, discount rates and estimated projected cash flows used to value and test impairments of identifiable intangible and long-lived assets, assumptions related to the timing and probability of product launch dates, discount rates matched to the estimated timing of payments, probability of success rates and discount adjustments on the related cash flows for contingent considerations in business combinations, depreciation and amortization periods for identifiable intangible and long-lived assets, computation of taxes, valuation allowances recorded against deferred tax assets, the valuation of stock-based compensation and loss contingencies. These estimates are based on historical experience and on various other assumptions ~~that are~~ believed to be reasonable under the current circumstances. Actual results could differ from these estimates.

Recent Accounting Standards Not Yet Adopted

The Company qualifies as an “emerging growth company” (EGC) ~~pursuant to the provisions of~~under the Jumpstart Our Business Startups (JOBS) Act and elected to take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, which permits EGCs to defer compliance with new or revised accounting standards (the EGC extension) until non-issuers ~~are required to~~must comply with such standards. Accordingly, so long as the Company continues to qualify as an EGC, the Company will not have to adopt or comply with new or revised accounting standards until non-issuers ~~are required to~~must adopt or comply with such standards.

In ~~May 2014,~~February 2016, the Financial Accounting ~~Standards~~Standard Board (FASB) issued Accounting Standards Update ~~No. 2014-09,~~ ~~Revenue from Contracts with~~

~~SEASPINE HOLDINGS CORPORATION~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

~~Customers (Topic 606)~~. The new standard provides a five-step approach to be applied to all contracts with customers. The new standard also requires expanded disclosure about revenue recognition. The new standard as amended by ASU 2015-14 will be effective for the Company beginning on January 1, 2019, and for interim periods within annual periods beginning on January 1, 2020. The Company performed a preliminary assessment of the impact of this new standard on its consolidated financial statements. In assessing the impact, the Company has outlined all revenue streams, and has considered the five steps outlined in the standard for product sales, from which substantially all the Company's revenue is generated. The Company will continue to evaluate the future impact of the new standard throughout 2017.

~~In February 2016, the FASB issued Update~~(ASU or Update) No. 2016-02, Leases (Topic 842). The new standard requires lessees to recognize lease liabilities and corresponding right-of-use assets for all leases with lease terms of greater than twelve months. It also changes the definition of a lease and expands the disclosure requirements of lease arrangements. The new standard must be adopted using the modified retrospective approach. The ~~standard~~Company will ~~be effective for~~early adopt the ~~Company~~standard beginning on January 1, ~~2020, and interim periods within annual periods beginning on January 1, 2021, with early adoption permitted.~~2020. The Company ~~does not plan to early adopt and~~ expects to apply the transition practical expedients allowed by the standard. In July 2018, the FASB issued Update No. 2018-10, Codification Improvements to Topic 842 (Leases) and Update No. 2018-11, Leases (Topic 842): Targeted Improvements. In March 2019, the FASB issued Update No. 2019-01, Leases (Topic 842): Codification Improvements. The amendments in ASU 2018-10, ASU 2018-11, and ASU 2019-01 provide additional clarification and implementation guidance on certain aspects of the previously issued ASU 2016-02 and have the same effective date and transition requirements as ASU 2016-02. Note 1110 to the Condensed Consolidated Financial Statements provides details on the Company’s current lease arrangements. While the Company continues to evaluate the impact of this new standard on its consolidated financial statements, the Company currently expects the primary impact will be to record right-of-use assets and lease liabilities for existing operating leases in the consolidated balance sheets. The Company does not currently expect the adoption of this new standard to have a material impact on its consolidated results of operations or cash flows.

In June 2018, the FASB issued Update No. 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. This Update will require an entity to apply the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost (that is, the period of time over which share-based payment awards vest and the pattern of cost recognition over that period). The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The amendments also clarify that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606. The new standard will be effective for the Company beginning on January 1, 2020. Early adoption is permitted but no earlier than an entity's adoption date of Topic 606. The Company does not currently expect the adoption of this new standard to have a material impact on its consolidated financial statements.

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

SEASPINE HOLDINGS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

In August 2018, the FASB issued Update No. 2018-13, Fair Value Measurement (Topic 820)-Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this Update modify the disclosure requirements on fair value measurements in Topic 820 based on the concepts in the Concepts Statement including the consideration of costs and benefits. The new standard will be effective for the Company beginning on January 1, 2020. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this Update and delay adoption of the additional disclosures until their effective date. The Company is evaluating the impact of this standard on its consolidated financial statements.

In August 2018, the FASB issued Update No. 2018-15, Intangibles-Goodwill and Other-Internal Use Software (Subtopic 350-40). The amendments in this Update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The new standard will be effective for the Company beginning on January 1, 2021. Early adoption is permitted. The Company is evaluating the impact of this standard on its consolidated financial statements.

In April 2019, the FASB issued Update No. 2019-04, Codification Improvementsto Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. This Update includes several amendments to the Codification intended to clarify, improve, or correct errors in the Codification. Some amendments do not require transition guidance and are effective upon issuance. The amendments requiring transition guidance will be effective for the Company beginning on January 1, 2020. The Company is evaluating the impact of this standard on its consolidated financial statements.

Recently Adopted Accounting Standards

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

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

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

The Company reduces revenue by estimates of potential future product returns and other allowances. Provisions for product returns and other allowances are recorded as a reduction to revenue in the period sales are recognized. The Company estimates the amount of sales returns and allowances that will eventually be incurred. Certain contracts with stocking distributors contain provisions requiring the Company to repurchase inventory upon termination of the contract or discontinuation of a product line.

SEASPINE HOLDINGS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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

In August 2016, the FASB issued Update No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash

Receipts and Cash Payments. This new standard addresses eight specific cash flow issues related to cash receipts and cash payments with the objective of reducing the existing diversity of presentation and classification in the statement of cash flows. The new standard ~~will be~~was effective for the Company beginning on January 1, 2019, and ~~interim periods within annual periods beginning on January 1, 2020. Early adoption is permitted and should be~~was applied using a retrospective transition method to each period presented. ~~The Company is in the process of evaluating the impact~~Adoption of this ~~standard~~new guidance had no impact on ~~its consolidated financial~~the Company’s cash flows statements.

In May 2017, the FASB issued Update No. 2017-09, Compensation- Stock Compensation (Topic 718): Scope of Modification Accounting. The new standard provides guidance regarding which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The new standard will be effective for the Company beginning on January 1, 2018, and interim periods within annual periods beginning on January 1, 2018. The new standard should be applied prospectively to an award modified on or after the adoption date. The Company is in the process of evaluating the impact of this standard on its consolidated financial statements.

~~Recently Adopted Accounting Standards~~

~~In July 2015, the FASB issued Update No. 2015-11,~~ ~~Simplifying the Measurement of Inventory (Topic 330). The new guidance~~

requires an entity to measure inventory within the scope of the amendment at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The guidance was effective for the Company ~~beginning on January 1, 2017, and interim periods within annual periods~~ beginning on January 1, 2018. Adoption of this new guidance ~~has~~ had no impact on the Company’s consolidated financial statements.

Net Loss Per Share

Basic and diluted net loss per share was calculated using the weighted-average number of shares of common stock 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, any assumed issuance of common stock under restricted stock awards ~~and~~or units, and any assumed issuances under the ~~Company's 2015 Employee Stock Purchase Plan,~~employee stock purchase plan, as the effect, in each case, would be antidilutive. Common stock equivalents of 3.6 million and 3.4 million shares for ~~each of~~ the ~~three and~~ nine months ended September 30, ~~2017,~~2019 and ~~2.9 million shares for each of the three and nine months ended September 30, 2016,~~2018, respectively, were excluded from the calculation because of their antidilutive effect.

~~Out-of-Period Adjustment~~

In the third quarter of 2016, the Company recorded an adjustment to correct an error in the first quarter of 2016 reported amounts. This resulted in an increase to cost of goods sold by $0.6 million for the three months ended September 30, 2016. The error had the effect of overstating the inventory balance and understating the cost of goods sold, in each case, by $0.6 million for the three months ended March 31, 2016. The adjustment recorded in the third quarter of 2016 corrected the balance sheet

~~SEASPINE HOLDINGS CORPORATION~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

~~and cost of goods sold for the nine months ended September 30, 2016. The impact to the periods presented and to the previously issued related financial statements was not material.~~

3. DEBT AND INTEREST

Credit Agreement

In December 2015, the Company entered into a three-year credit facility with Wells Fargo Bank, National Association, which was ~~subsequently~~ amended in October 2016 and in July 2018 (as amended, the Credit Facility). The Credit Facility provides an asset-backed revolving line of credit of up to $30.0 million ~~in borrowing capacity~~ with a maturity date of ~~December 24, 2018,~~July 27, 2021, which ~~maturity date~~ is subject to a one-time, one-year extension at the Company's election. In addition, under the Credit Facility, at any time through July 27, 2020, the Company may increase the $30.0 million borrowing limit by up to an additional $10.0 million, subject to the Company having sufficient amounts of eligible accounts receivable and inventory and to customary conditions precedent, including obtaining the commitment of lenders to provide such additional amount. In connection with the Credit Facility, the Company was required to become a guarantor and to provide a security interest in substantially all its assets for the benefit of the counterparty.

There were no amounts outstanding under the Credit Facility at September 30, 2019 or December 31, 2018. At September 30, 2019, the Company had $25.0 million of current borrowing capacity under the Credit Facility. Debt issuance costs and legal fees related to the Credit Facility totaling $0.6 million were recorded as a deferred asset and are being amortized ratably over the term of the arrangement.

Borrowings under the Credit Facility accrue interest at the rate then applicable to base rate loans (as customarily defined), unless and until converted into LIBOR rate loans (as customarily defined) in accordance with ~~the terms of~~ the Credit Facility. Borrowings bear interest at a floating annual rate equal to (a) during any month for which the Company's average excess availability (as customarily defined) is greater than $20.0 million, (i) base rate plus 1.25 percentage points for base rate loans and (ii) LIBOR rate plus 2.25 percentage points for LIBOR rate loans, (b) during any month for which the Company's average excess availability is greater than $10.0 million but less than or equal to $20.0 million, (i) base rate plus 1.50 percentage points for base rate loans and (ii) LIBOR rate plus 2.50 percentage points for LIBOR rate loans and (c) during any month for which the Company's average excess availability is less than or equal to $10.0 million, (i) base rate plus 1.75 percentage points for base rate loans and (ii) LIBOR rate plus 2.75 percentage points for LIBOR rate loans. The Company will also pay an unused line fee ~~in an~~based on the average amount borrowed under the Credit Facility for the most recently completed month. If such average amount is 25% or greater of the maximum

SEASPINE HOLDINGS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

borrowing capacity, the unused fee will be equal to 0.375% per annum of the amount unused under the Credit Facility, ~~amount.~~and if such average amount is less than 25%, the unused line fee will be equal to 0.50% per annum of the amount unused under the Credit Facility. The unused line fee is due ~~and payable~~ on the first day of each month.

~~In September 2016, the Company borrowed~~ ~~$3.3 million~~ under the Credit Facility. The Company elected to have the LIBOR rate apply to the amount borrowed with an interest period of six months commencing on September 28, 2016, which was further extended for another interest period of six months commencing on March 28, 2017. During the three months ended September 30, 2017, the Company paid off the entire amount borrowed plus accrued interest, totaling $4.1 million. At September 30, 2017, there were no amounts outstanding under the Credit Facility, and the Company had $18.2 million of current borrowing capacity thereunder. Debt issuance costs and legal fees related to the Credit Facility totaling $0.4 million were recorded as a deferred asset and are being amortized ratably over the term of the arrangement.

The Credit Facility contains various customary affirmative and negative covenants, including prohibiting the Company from incurring indebtedness without the lender’s consent. The Credit Facility also includes a financial covenant that requires the Company to maintain a minimum fixed charge coverage ratio of 1.10 to 1.00 for the applicable measurement period, if the Company's Total Liquidity (as defined in the Credit Facility) is less than $5.0 million. The Company was in compliance with all applicable covenants at September 30, ~~2017.~~2019.

The Credit Facility also includes customary events of default, including events of default relating to non-payment of amounts due under the Credit Facility, material inaccuracy of representations and warranties, violation of covenants, bankruptcy and insolvency, failure to comply with health care laws, violation of certain of the Company’s existing agreements, and the occurrence of a change of control. Under the Credit Facility, if an event of default occurs, the lender will have the right to terminate the commitments and accelerate the maturity of any loans outstanding.

~~Insurance Premium Finance Agreements~~

4. INVESTMENTS

~~In July 2016,~~The amortized cost, estimated fair value and gross unrealized gains and losses on investments are shown in the Company entered into two insurance premium finance agreements (the Finance Agreements) with First Insurance Funding Corporation and AFCO Acceptance Corporation (the Lenders), under which the Lenders agreed to pay premiums, taxes and fees to insurance companies on the Company's behalf for various insurance policies. The Company financed an aggregate of $1.2 million under the Finance Agreements with annual interest rates between 2% and 4%. The Company recorded the total amounts due to the Lenders as short-term debt on the balance sheet. At June 30, 2017, the financed amount plus accrued interest was paid off and no amounts were outstanding under the Finance Agreements, and no additional amounts have been financed under the Finance Agreements since then.table below:



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

~~SEASPINE HOLDINGS CORPORATION~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~



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

~~4. TRANSACTIONS WITH INTEGRA~~

~~Prior~~As of September 30, 2019, the Company’s investment portfolio included zero U.S. Treasury Bills in an unrealized loss position, as compared to the spin-off, and pursuant to certain supply agreements subsequent to the spin-off, SeaSpine purchased a portion of raw materials and finished goods from Integra for SeaSpine's Mozaik family of products, and SeaSpine contract manufactured certain finished goods for Integra. The Company's purchases of raw materials and Mozaik product finished goods from Integra totaled $0.1 million for each of9 at December 31, 2018. There were no other-than-temporary impairments on debt securities or realized gains or losses during the three ~~months ended September 30, 2017~~ and ~~2016, and $0.4 million and $1.1 million for the~~ nine months ended September 30, 2017 and 2016, respectively. The Company's sale of finished goods sold to Integra under its contract manufacturing arrangement was immaterial for each of the three months ended September 30, 2017 and 2016, and totaled $0.4 million and $0.2 million for the nine months ended September 30, 2017 and 2016, respectively.2019.

Pursuant to a transition services agreement, Integra and SeaSpine provided certain services to one another following the spin-off, and Integra and SeaSpine agreed to indemnify each other against certain liabilities arising from their respective businesses. Under this agreement, Integra provided the Company with certain support functions, including information technology, accounting and other financial functions, regulatory affairs and quality assurance, human resources and other administrative support. The Company incurred no costs under this agreement for either of the three or nine months ended September 30, 2017, an immaterial amount for the three months ended September 30, 2016, and approximately $0.3 million for the nine months ended September 30, 2016.

5. INVENTORIES

Inventories consisted ~~of the following:~~of:


	September 30, 2017		December 31, 2016		September 30, 2019		December 31, 2018
	(In thousands)				(In thousands)
Finished goods	$	31,182	$	30,922	$	30,904	$	27,589
Work in process	8,214		10,554		10,583		10,367
Raw materials	2,880		3,823		6,524		4,786
	$	42,276	$	45,299	$	48,011	$	42,742

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 ~~(ASC)~~ 350-40, Internal-Use Software.

SEASPINE HOLDINGS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The cost of purchased spinal instruments which the Company consigns to hospitals and independent sales agents to support surgeries is initially capitalized as construction in progress. The amount is either then reclassified to spinal ~~instrument~~instruments and sets and depreciation is initiated when instruments are put together in a newly built set with spinal implants, or directly expensed for the instruments ~~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.

~~SEASPINE HOLDINGS CORPORATION~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

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


	September 30, 2017			December 31, 2016			Useful Lives	September 30, 2019			December 31, 2018			Useful Lives
	(In thousands)							(In thousands)
Leasehold improvement	$	5,320		$	5,003		Lease Term	$	5,848		$	5,724		Shorter of lease term or useful life
Machinery and production equipment	7,014			6,826			3-10 years	8,545			7,752			3-10 years
Spinal instrument sets	23,187			26,618			5 years
Spinal instruments and sets								25,820			23,212			5 years
Information systems and hardware	7,402			6,918			3-7 years	7,651			7,290			3-7 years
Furniture and fixtures	1,102			1,058			3-5 years	1,359			1,222			3-5 years
Construction in progress	7,505			7,828				10,067			7,013
Total	51,530			54,251				59,290			52,213
Less accumulated depreciation and amortization	(29,666		)	(32,388		)		(32,649		)	(29,590		)
Property, plant and equipment, net	$	21,864		$	21,863			$	26,641		$	22,623

Depreciation ~~and amortization~~ expenses totaled ~~$1.0~~$1.3 million and $1.1 million for the three months ended September 30, ~~2017~~2019 and ~~2016,~~2018, respectively, and ~~$3.1~~$3.6 million and ~~$3.4~~$3.1 million for the nine months ended September 30, ~~2017~~2019 and ~~2016,~~2018, respectively. The cost of purchased instruments used to replace damaged instruments in existing sets and recorded directly to ~~the~~ instrument replacement expense totaled ~~$0.4~~$0.6 million and ~~$0.2~~$0.3 million for the three months ended September 30, ~~2017~~2019 and ~~2016,~~2018, respectively, and ~~$1.1~~$1.6 million and ~~$1.0~~$1.3 million for the nine months ended September 30, ~~2017~~2019 and ~~2016,~~2018, respectively.

For the three and nine months ended September 30, 2016, the Company recorded impairment charges totaling $0.2 million and $0.9 million, respectively, against spinal instruments that are no longer expected to be placed into service. No impairment charges against spinal instruments were recorded for the three or nine months ended September 30, 2017.

SEASPINE HOLDINGS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

7. IDENTIFIABLE INTANGIBLE ASSETS

Identifiable intangible assets are initially recorded at fair value at the time of acquisition, generally using an income or cost approach. The Company capitalizes costs incurred to renew or extend the term of recognized intangible assets and amortizes those costs over their expected useful lives.

The Company shifted its commercialization strategy with respect to the product technologies it acquired from NLT (as defined below) due to market trend factors, new features necessary to be competitive, and more cost-effective internal development initiatives and the Company's estimated future net sales associated with those product technologies decreased. Accordingly, the Company evaluated the ongoing value of the product technology intangible assets associated with the acquisition of these assets. Based on this evaluation, the Company determined that intangible assets with a carrying amount of $6.8 million were no longer recoverable and were impaired, and the Company wrote those intangible assets down to their estimated fair value of $1.8 million at June 30, 2019. Significant estimates used in determining the estimated fair value include measurements estimating cash flows and determining the appropriate discount rate, which are considered Level 3 inputs, as defined using the fair value concepts defined in Codification 820.

The components of the Company’s identifiable intangible assets ~~were as follows:~~were:


	September 30, 2017								September 30, 2019
	Weighted Average Life	Cost		Accumulated Amortization			Net		Weighted Average Life	Cost		Accumulated Amortization			Net
	(Dollars in thousands)								(Dollars in thousands)
Product technology	12 years	$	40,769	$	(24,967	)	$	15,802	12 years	$	33,309	$	(28,616	)	$	4,693
Customer relationships	12 years	56,830		(35,773		)	21,057		12 years	56,830		(42,111		)	14,719
Trademarks/brand names	—	300		(300		)	—		—	300		(300		)	—
		$	97,899	$	(61,040	)	$	36,859		$	90,439	$	(71,027	)	$	19,412


	December 31, 2016								December 31, 2018
	Weighted Average Life	Cost		Accumulated Amortization			Net		Weighted Average Life	Cost		Accumulated Amortization			Net
	(Dollars in thousands)								(Dollars in thousands)
Product technology	12 years	$	40,569	$	(22,218	)	$	18,351	12 years	$	40,769	$	(29,153	)	$	11,616
Customer relationships	12 years	56,830		(33,396		)	23,434		12 years	56,830		(39,734		)	17,096
Trademarks/brand names	—	300		(300		)	—		—	300		(300		)	—
		$	97,699	$	(55,914	)	$	41,785		$	97,899	$	(69,187	)	$	28,712

Annual amortization expense (including amounts reported in cost of goods sold) is expected to be approximately ~~$6.8 million in 2017, $6.5 million in 2018, $5.8~~$5.4 million in 2019, ~~$4.9~~$4.3 million in 2020, ~~and $4.9~~$4.3 million in ~~2021. Amortization expense totaled $1.7~~2021, $4.1 million in 2022, and ~~$1.6~~$3.5 million ~~for~~in 2023. For the three months ended September 30, ~~2017~~2019 and ~~2016,~~2018, amortization expense totaled $1.2 million and $1.6 million, respectively, and included ~~$0.9~~$0.4 million and ~~$0.7~~$0.8 million, respectively, of amortization of product technology intangible assets that is presented within cost of goods sold. Amortization expense totaled ~~$5.1~~$4.3 million and ~~$5.6~~$4.9 million for the nine months ended September 30, ~~2017~~2019 and

~~SEASPINE HOLDINGS CORPORATION~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

~~2016,~~ 2018, respectively, and included ~~$2.7~~$1.9 million and ~~$2.0~~$2.5 million, respectively, of amortization of product technology intangible assets that is presented within cost of goods sold.

8. ~~BUSINESS COMBINATIONS~~FAIR VALUE MEASUREMENTS

InThe fair values of the Company’s assets and liabilities, including contingent consideration liabilities, are measured at fair value on a recurring basis, and are determined under the fair value categories as follows (in thousands):

SEASPINE HOLDINGS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)



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



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

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

The Company is obligated to pay up to $5.0 million in milestone payments in connection with the August 2016 ~~the Company entered into an asset~~ purchase ~~agreement with~~of certain assets of N.L.T Spine Ltd. (NLT), and NLT Spine, Inc., a wholly owned subsidiary of NLT, pursuant to which the Company agreed to purchase certain of the assets of NLT’s medical device business, including substantially all of NLT’s medical device intellectual property related to the ownership, design, development, manufacture, marketing and commercial exploitation of certain expandable interbody devices. The acquisition was undertaken to increase the Company's product offering in expandable interbody devices.

At the initial closing under the asset purchase agreement, the Company entered into (i) an exclusive license agreement with NLT, pursuant to which the Company received an exclusive, worldwide license to make, use, import, offer for sale, sell and otherwise commercially exploit NLT’s expandable interbody device products , (ii) a transition services agreement with NLT, pursuant to which NLT agreed to provide certain services with respect to the continued development of the acquired intellectual property and (iii) a non-competition and non-solicitation agreement with NLT, pursuant to which NLT and its affiliates agreed not to compete with the Company with respect to the acquired intellectual property, subject to certain exceptions.

The purchase price consisted of an initial cash payment to NLT of $1.0 million, which was paid in September 2016 upon the initial closing, and the issuance in January 2017 of 350,000 shares of the Company’s common stock with a total fair value of $2.5 million at issuance as contingent closing consideration upon the satisfaction of certain conditions, including FDA 510(K) clearance of one of the acquired product technologies. In accordance with the terms of the asset purchase agreement, the number of shares issued was determined based on the volume weighted average closing price (VWAP) of the Company's common stock during the 20 trading day period ending one trading day prior to the issuance date, subject to a minimum and maximum VWAP of $10.00 and $17.00, respectively. The VWAP over such 20-trading day period was $7.58 and therefore $10.00 was used.

~~The Company is also obligated to pay up to a maximum of $5.0 million in milestone payments,~~ payable at the Company's election in cash or in shares of its common ~~stock, which~~stock. Such milestone payments are contingent on the Company's achievement of four independent events related to the commercialization of the product technologies the Company acquired ~~product technologies.~~in the transaction. Additionally, the Company ~~is required to~~must pay royalty payments, in cash, to NLT equal to declining (over time) percentages of the Company’s future net sales of certain of the acquired product technologies not to exceed $43.0 million in the aggregate. The Company has the option to terminate any future obligation to make royalty payments by making a one-time cash payment to NLT of $18.0 million.

~~The Company accounted for this transaction as a business combination in accordance with ASC 805~~ ~~Business Combinations~~, and as such, the assets acquired have been recorded at their respective fair values. There were no liabilities assumed. The determination of fair value for the identifiable intangible assets acquired requires extensive use of estimates and judgments. Significant estimates include estimating cash flows and determining the appropriate discount rate, which are considered significant unobservable inputs (Level 3) under the fair value concepts defined in ASC 820. Intangible assets acquired were valued at $9.3 million as of the initial closing date and recorded as product technology intangible assets, which are being amortized ratably over a useful life of 10 years from the initial closing. Acquisition costs of $0.5 million incurred were recorded as selling, marketing and administrative expenses.

The following table summarizes the estimated fair value of total consideration to be paid to NLT as of September 26, 2016, the date of the initial closing. The Company estimated the fair value of the contingent consideration, including contingent milestone payments and contingent royalty payments, using a probability weighted approach that considers the possible outcomes based on assumptions related to the timing and probability of the product launch dates, discount rates matched to the timing of payments, and probability of success rates and discount adjustments on the related cash flows. Subsequent to the acquisition date, at each reporting period, the contingent consideration liabilities will be remeasured at current fair value with changes to be recorded in the consolidated statements of operations. The total purchase price was allocated entirely to product technology intangible asset.

(In thousands)
Cash paid for purchase $ 1,000
Contingent closing consideration 2,930
Contingent milestone payments 2,310
Contingent royalty payments 3,010
Total purchase price $ 9,250

~~SEASPINE HOLDINGS CORPORATION~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

The unaudited pro forma financial information set forth below assumes that the NLT purchased assets had been acquired on January 1, 2016. The unaudited pro forma financial information includes the effect of estimated amortization charges for acquired intangible assets of $0.2 million and $0.6 million for the three and nine months ended September 30, 2016, respectively, and the estimated research and development expenses for the purchased assets of $0.3 million and $0.8 million for the three and nine months ended September 30, 2016, respectively, and excludes the non-recurring acquisition costs of $0.5 million for each of the three and nine months ended September 30, 2016. There was no adjustment to the total revenues. The unaudited pro forma information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of the periods presented.

The actual amortization charges for acquired intangible assets and research and development expenses for the purchased assets are included in the consolidated statement of operations for the three and nine months ended September 30, 2017, and therefore no adjustment was made to such statement.

Three Months Ended September 30, Nine Months Ended September 30,
(In thousands, except per share data) 2016 2016
Operating loss $ (9,511 ) $ (34,945 )
Net loss (9,467 ) (34,419 )
Net loss per share, basic and diluted $ (0.84 ) $ (3.07 )
Weighted average shares used to compute basic and diluted net loss per share 11,271
11,206

~~9. FAIR VALUE MEASUREMENTS~~

The fair values of the Company’s assets and liabilities, including contingent consideration liabilities, are measured at fair value on a recurring basis, and are determined under the fair value categories as follows (in thousands):

Total Quoted Price in Active Market (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3)
September 30, 2017:
Contingent consideration liabilities- current $ 900
$ —
$ —
$ 900
Contingent consideration liabilities- non-current 3,632
—
—
3,632
Total contingent consideration $ 4,532
$ —
$ —
$ 4,532

December 31, 2016:
Contingent consideration liabilities- current $ 2,855
$ —
$ —
$ 2,855
Contingent consideration liabilities- non-current 5,125
—
—
5,125
Total contingent consideration $ 7,980
$ —
$ —
$ 7,980

Contingent consideration liabilities are classified within Level 3 of the fair value hierarchy because they use significant unobservable inputs. For those liabilities, fair value is determined using a probability-weighted discounted cash flow model and significant inputs which are not observable in the market. The significant inputs include assumptions related to the timing and probability of the product launch dates, estimated future sales of the products, discount rates matched to the timing of payments, and probability of success rates.

The following table sets forth the changes in the estimated fair value of the Company’s liabilities measured on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2017. The gain from change in fair value of contingent closing consideration is the difference between the fair value of shares expected to be issued to NLT based on assumptions as of December 31, 2016, including the forecasted issuance date and stock price, and the fair value of the shares actually issued to NLT on January 31, 2017.. The gain from change in fair value of contingent milestone and royalty payments resulted from updated estimated timing of payments, probability of success rates, the passage of time, updated discount rates matched to the estimated timing of payments, actual net sales of certain products for the ~~three and~~ nine months ended September 30, ~~2017,~~2019, and ~~lower~~ estimated net sales ~~for the remainder of 2017 and~~ for future royalty payment periods.

A change in estimated timing of payments, probability of success rates, or estimated net sales for future royalty payment periods would be expected to have a material impact on the fair value of contingent milestone and royalty payments.



Three Months Ended September 30, 2019:	(in thousands)
Balance as of June 30, 2019	$	1,934
Contingent consideration liabilities settled	(42		)
Gain from change in fair value of contingent consideration recorded in selling, general and administrative expenses	(65		)
Fair value at September 30, 2019	$	1,827

SEASPINE HOLDINGS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Three Months Ended September 30, 2017 (in thousands)
Balance as of June 30, 2017 $ 5,777
Contingent consideration liabilities settled (3 )
Gain from change in fair value of contingent milestone and royalty payments recorded in selling, general and administrative expenses (1,242 )
Fair value at September 30, 2017 $ 4,532



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

Nine Months Ended September 30, 2017 (in thousands)
Balance as of January 1, 2017 $ 7,980
Contingent consideration liabilities settled (2,551 )
Gain from change in fair value of contingent closing consideration recorded in other income (112 )
Gain from change in fair value of contingent milestone and royalty payments recorded in selling, general and administrative expenses (785 )
Fair value at September 30, 2017 $ 4,532

SEASPINE HOLDINGS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

~~10.~~9. EQUITY AND STOCK-BASED COMPENSATION

Common Stock

On January 31, 2017, the Company issued 350,000 shares of common stock to NLT as the settlement of contingent closing consideration pursuant to the terms of the asset purchase agreement entered into with NLT in August 2016. The total fair value of such shares was $2.5 million at issuance. See ~~Note 8, "Business Combinations"~~ ~~above.~~

In August 2016, the Company entered into an equity distribution agreement (Distribution Agreement) with Piper Jaffray & Co. (Piper Jaffray), pursuant to which the Company may offer and sell shares of its common stock in “at the market” (ATM) offerings (as defined in Rule 415 of the Securities Act of 1933, as amended) having an aggregate offering price up to $25.0 million in gross proceeds from time to time through Piper Jaffray acting as sales agent. The shares offered and sold under the Distribution Agreement are covered by a registration statement on Form S-3 that was declared effective on August 24, 2016. Under the Distribution Agreement, during the nine months ended September 30, 2018, the Company sold ~~1,500,000~~882,332 shares of common stock at an average price per share of ~~$10.78~~$10.00 and received net proceeds of approximately ~~$15.6~~$8.5 million (net of ~~$0.6~~$0.3 million of offering costs) ~~during~~, which consumed the ~~nine months ended September 30, 2017.~~remaining capacity under the Distribution Agreement. The Company ~~intends to use~~used the net proceeds for general corporate purposes, including ~~paying down outstanding borrowings under the Credit Facility,~~ sales and marketing expenditures aimed at growing its business, ~~and~~ research and development expenditures focused on product ~~development. The~~development, and investments in inventory and spinal instruments and sets.

In May 2018, the Company ~~has~~entered into another equity distribution agreement with Piper Jaffray (the May 2018 Distribution Agreement), pursuant to which the ~~capacity to issue additional~~Company may offer and sell shares of its common stock ~~to generate~~in ATM offerings having an aggregate offering price up to ~~$8.8~~$50.0 million ofin gross proceeds from time to time through Piper Jaffray acting as sales agent. The shares offered and sold under the May 2018 Distribution Agreement are covered by a registration statement on Form S-3 that was declared effective on August 24, 2016. On March 1, 2019, the Company terminated the May 2018 Distribution Agreement. The Company is not subject to any termination penalties related to the termination of the May 2018 Distribution Agreement. Prior to termination, the Company had not sold any shares of its Common Stock pursuant to the May 2018 Distribution Agreement.

In October 2018, the Company entered into an Underwriting Agreement (Underwriting Agreement) with Wells Fargo Securities, LLC, Piper Jaffray and Cantor Fitzgerald & Co. (Cantor Fitzgerald) acting as joint bookrunning managers and as representatives of ~~September 30, 2017. Future sales, if any, will depend on a variety~~the underwriters relating to the issuance and sale of ~~factors including, but not limited to, market conditions, the trading price~~3,250,000 shares of the Company’s common ~~stock~~stock. The price to the public in the offering was $15.50 per share, before underwriting discounts and commissions. The Company granted the underwriters an option, exercisable for 30 days, to purchase up to an additional 487,500 shares of common stock. The underwriters exercised this option and the ~~Company’s~~offering closed on October 15, 2018 with the sale of 3,737,500 shares of the Company's common stock. The net proceeds to the Company from the offering were approximately $54.1 million, after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company. The Company used a portion of the net proceeds from the offering to repay all of its then-outstanding borrowings under the Credit Facility, and intends to use the remaining proceeds for general corporate purposes, including general and administrative expenses, capital ~~needs.~~expenditures and general working capital purposes.

In March 2019, the Company entered into a controlled equity offering sales agreement (Sales Agreement) with Cantor Fitzgerald to sell shares of its common stock having an aggregate offering price of up to $50.0 million from time to time, through an ATM offering under which Cantor Fitzgerald will act as sales agent. The shares offered and sold under the Sales Agreement are covered by a registration statement on Form S-3 that was declared effective on August 24, 2016, and a prospectus supplement related to the ATM offering, dated March 1, 2019. The Company did not sell any shares of common stock under the Sales Agreement during the nine months ended September 30, 2019 and, on October 23, 2019, notified Cantor Fitzgerald of its intent to terminate the agreement, which the Company and Cantor Fitzgerald mutually agreed to terminate effective as of October 23, 2019.

Equity Award Plans

As of June 30, 2015, Integra had stock options, restricted stock awards, performance stock awards, contract stock awards and restricted stock units outstanding under three plans, the 2000 Equity Incentive Plan, the 2001 Equity Incentive Plan, and the 2003 Equity Incentive Plan. In connection with the spin-off, Integra equity awards granted to individuals who became employees of SeaSpine were converted to equity awards denominated in SeaSpine common stock. In general, each post-conversion award is subject to the same terms and conditions as were applicable to the pre-conversion award.

In May 2015, the Company adopted the 2015 Incentive Award Plan, which was subsequently amended and restated with approval of the Company's stockholders. In February and March 2018, the Company's board of directors approved amendments to the plan that increased the share reserve by an aggregate of 2,726,000 shares over the then-existing share reserve thereunder, subject to stockholder approval. The Company's stockholders ~~(as~~approved both amendments on May 30, 2018 (the 2015 Incentive

SEASPINE HOLDINGS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Award Plan, as amended and restated to date, the ~~2015~~Restated Plan). Under the ~~2015~~Restated Plan, the Company can grant its employees, ~~and~~ non-employee directors and consultants incentive stock options and non-qualified stock options, restricted stock, performance stock, dividend equivalent rights, stock appreciation rights, stock payment awards and other incentive awards. The ~~Company~~aggregate number of shares that may ~~issue up~~be issued or transferred pursuant to ~~3,509,500~~awards under the Restated Plan is the sum of (1) the number of shares issuable upon exercise or vesting of the number of Integra equity awards converted to the Company's equity awards under the Restated Plan as of the date of the spin-off and (2) 6,235,500 shares of its common stock in respect of awards granted under the ~~2015~~Restated Plan. As of September 30, ~~2017, there~~2019, 1,834,877 shares were ~~290,289 shares~~ available ~~to grant~~for issuance under the ~~2015~~Restated Plan.

In 2016, the Company established the 2016 Employment Inducement Incentive Award Plan (the 2016 Plan)~~. The plan is~~, a broad-based incentive plan which allows for the issuance of stock-based awards, including non-qualified stock options, restricted stock awards, performance awards, restricted stock unit awards and stock appreciation rights, to any prospective officer or other employee who has not previously been an employee or director of SeaSpine or an affiliate or who is commencing employment with SeaSpine or an affiliate following a bona-fide period of non-employment by SeaSpine or an affiliate.those individuals and in those circumstances described below. An aggregate of 1,000,000 shares are reserved for issuance under the 2016 Plan. The Company has not awarded any shares under the 2016 Plan as of September 30, ~~2017.~~2019. As a result of the stockholders' approval of the Restated Plan, the Company's board of directors will not grant any awards under the 2016 Plan.

In June 2018, the Company established the 2018 Employment Inducement Incentive Award Plan (the 2018 Inducement Plan). The terms of the 2018 Plan are substantially similar to the terms of the Restated Plan with these principal exceptions: (1) incentive stock options may not be granted under the 2018 Inducement Plan; (2) there are no annual limits on awards that may be issued to an individual under the 2018 Inducement Plan; (3) awards granted under the 2018 Inducement Plan are not required to be subject to any minimum vesting period; and (4) awards may be granted under the 2018 Inducement Plan only to those individuals and in those circumstances described below. An aggregate of 2,000,000 shares are reserved under the 2018 Inducement Plan. As of September 30, 2019, 1,939,750 shares were available for issuance under the 2018 Inducement Plan.

Both the 2016 Inducement Plan and the 2018 Inducement Plan were adopted by the Company’s board of directors without stockholder approval pursuant to Rule 5635(c)(4) of the Nasdaq Listing Rules. In accordance with Rule 5635(c)(4) of the Nasdaq Listing Rules, awards under those plans may only be made to an employee who has not previously been an employee or member of the Company's board of directors or of any board of directors of any parent or subsidiary of the Company, or following a bona fide period of non-employment by the Company or a parent or subsidiary, if he or she is granted such award in connection with his or her commencement of employment with the Company or a subsidiary and such grant is an inducement material to his or her entering into employment with the Company or such subsidiary.

Forfeiture Rate Assumptions

Stock-based compensation expense related to all equity awards includes an estimate for forfeitures. The expected forfeiture rate of all equity-based compensation is based on historical experience of pre-vesting forfeitures on awards and options by each homogenous group of shareowners. For awards and options granted to non-executive employees, the forfeiture rate is estimated to be 14% annually for the nine months ended September 30, 2019 and 13% annually for the nine months ended September 30, 2018. There is no forfeiture rate applied to awards or options granted to non-employee directors or executive employees because their pre-vesting forfeitures are anticipated to be highly unlikely. As individual awards and options become fully vested, stock-based compensation expense is adjusted to recognize actual forfeitures.

Restricted Stock Awards and Restricted Stock Units

The Company expenses the fair value of restricted stock awards and of restricted stock units on an accelerated basis over the vesting period or requisite service period, whichever is shorter. ~~Stock-based compensation expense related to restricted stock awards and to~~

No restricted stock units includes an estimate for forfeitures. The expected forfeiture rate of all equity-based compensation is based on historical experience of pre-vesting forfeitures on awards by each homogenous group of shareowners. For awardswere granted to ~~non-executive employees,~~non-employee directors during the ~~forfeiture rate is estimated to be 15% annually for~~three or nine months ended September 30, 2019 or 2018. During the nine months ended September 30, ~~2017~~2019 and 12% annually for the nine months ended September 30, 2016. There is no forfeiture rate applied to awards granted to non-employee directors or executive employees because their pre-vesting forfeitures are anticipated to be highly unlikely. As individual awards become fully vested, stock-based compensation expense is adjusted to recognize actual forfeitures.

~~There~~2018, there were no76,471 and 95,658 shares of restricted stock awards granted to non-employee directors, ~~during either of~~respectively.

During the three and nine months ended September 30, ~~2017 or 2016. There~~2019, there were ~~120,610~~34,100 and ~~75,075 shares of~~252,710 restricted stock ~~awards~~units granted to ~~non-employee~~employees, respectively. During the three and nine months ended September 30, 2018, there were 67,319 and 554,600 restricted stock units granted to employees, respectively. Of such restricted stock units granted to employees during the nine months ended September 30, 2018, 341,808 were granted, in part, out of the increase to the share reserve under the Restated Plan adopted by the Company's board of directors on February 1, 2018, all of which were granted subject to stockholder approval of the Restated Plan (the Contingent RSUs). On May 30, 2018, the Company's stockholders approved the Restated Plan, and in accordance with the Codification 718, Compensation-Stock Compensation, the Company began recognizing the expense for the Contingent RSUs over the requisite service period.

SEASPINE HOLDINGS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

~~directors during the nine months ended September 30, 2017 and 2016, respectively. There were 34,800 and 778,755~~

No shares of restricted stock ~~units~~awards were granted to employees during the three and nine months ended September 30, 2017, respectively. Of the total restricted stock units granted to employees, 131,523 shares were issued in lieu of cash bonuses earned under the annual incentive program for corporate and individual performance in 2016. There were no restricted stock units granted during the three or nine months ended September 30, ~~2016.~~ 2019 or 2018.

As of September 30, ~~2017,~~2019, there was approximately ~~$3.2~~$4.3 million of ~~total~~ unrecognized compensation expense related to the unvested portions of restricted stock awards and of restricted stock units. This ~~cost~~expense is expected to be recognized over a weighted-average period of approximately ~~1.2~~0.8 years.

Stock Options

Stock option grants to employees generally have a requisite service period of four years, and stock option grants to non-employee directors generally have a requisite service period of one year. Both are subject to graded vesting. The Company records stock-based compensation expense associated with stock options on an accelerated basis over the ~~various~~applicable vesting ~~periods~~period within each grant and based on their fair value at the date of grant using the Black-Scholes-Merton option pricing model. No stock options were granted during the three months ended September 30, 2019. There were ~~zero and 43,500~~22,500 stock options granted during the three months ended September 30, ~~2017~~2018, and ~~2016, respectively,~~434,708 and ~~21,500 and 900,524~~27,500 stock options granted during the nine months ended September 30, ~~2017~~2019 and ~~2016,~~2018, respectively. The following weighted-average assumptions were used in the calculation of fair value for options ~~grants for~~granted during the ~~periods~~period indicated.


	Three Months Ended September 30,		Nine Months Ended September 30,				Three Months Ended September 30,		Nine Months Ended September 30,
	2016		2017		2016		2018		2019		2018
Expected dividend yield	0	%	0	%	0	%	0	%	0	%	0	%
Risk-free interest rate	1.1	%	2.0	%	1.3	%	2.8	%	2.5	%	2.8	%
Expected volatility	38.1	%	35.7	%	38.3	%	25.6	%	30.3	%	25.6	%
Expected term (in years)	5.1		5.1		4.9		4.9		2.9		4.9

The Company considered that it has never paid, and does not currently intend to pay, cash dividends. The risk-free interest rates are derived from the U.S. Treasury yield curve in effect on the date of grant for instruments with a remaining term similar to the expected term of the options. Due to the Company’s limited historical data, 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 "plain vanilla" options is calculated using the simplified method as prescribed by accounting guidance for stock-based compensation. A "plain vanilla" option is an option with the following characteristics: (1) the option is granted at-the-money; (2) exercisability is conditional only on satisfaction of a service condition through the vesting date; (3) employees who terminate their service prior to vesting forfeit the option; (4) employees who terminate their service after vesting are granted limited time to exercise their options; and (5) the option is nontransferable and non-hedgeable. The expected term of any other option is based on disclosures from similar companies with similar grants. In addition, the Company applies an expected forfeiture rate when amortizing stock-based compensation expense. The expected forfeiture rate of options is based on historical experience of pre-vesting forfeitures on awards by each homogenous group of shareowners. The forfeiture rate of options granted to non-executive employees is estimated to be 15% annually for the nine months ended September 30, 2017, and 12% annually for the nine months ended September 30, 2016. There is no forfeiture rate applied to options granted to non-employee directors or executive employees because their pre-vesting forfeitures are anticipated to be highly unlikely. As individual options become fully vested, stock-based compensation expense is adjusted to recognize actual forfeitures.

As of September 30, ~~2017,~~2019, there was approximately ~~$1.2~~$1.0 million of ~~total~~ unrecognized compensation expense related to unvested stock options. This ~~cost~~expense is expected to be recognized over a weighted-average period of approximately ~~1.1~~1.3 years.

~~SEASPINE HOLDINGS CORPORATION~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

Employee Stock Purchase Plan

In May 2015, the Company adopted the SeaSpine Holdings Corporation 2015 Employee Stock Purchase Plan, which was amended in December 2015 (as amended, the ESPP). Under the ESPP, eligible employees may purchase shares of the Company’s common stock through payroll deductions of up to 15% of eligible compensation during an offering period. Generally, each offering period will be for ~~a period of twenty-four~~24 months as determined by the Company's board of directors. There are four six-month purchase periods in each offering period for contributions to be made and to be converted into shares at the end of the purchase period. In no event may an employee purchase more than 2,500 shares per purchase period based on the closing price on the first trading date of an offering period or more than $25,000 worth of stock during any calendar year. The purchase price for shares to be purchased under the ESPP is 85% of the lesser of the market price of the Company's common stock on the first trading date of an offering period or on any purchase date during an offering period (June 30 or December 31).

~~The~~Subject to stockholder approval, on and effective as of November 2, 2018, the Company's board of directors approved an amendment to the ESPP ~~authorizes~~pursuant to which the ~~issuance of up to~~share reserve under the ESPP would increase from 400,000 shares ~~of common stock pursuant~~ to ~~purchase rights granted to employees.~~800,000 shares. On May 29, 2019, the Company's stockholders approved that amendment. The ESPP is intended to qualify as an “employee stock purchase plan” within the meaning of Section 423 of the Internal Revenue Code of 1986, as ~~amended (the IRC).~~amended. The ~~first offering period under the ESPP commenced on January 1, 2016 and will end on December 31, 2017. However, the~~ ESPP contains a restart feature, such that if the market price of the stock at the end of any six-month purchase period is lower

SEASPINE HOLDINGS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

than the market price at the original grant date of an offering period, that offering period will terminate after that purchase date, and a new two-year offering period will commence on the January 1 or July 1 immediately following the date the original offering period terminated. This restart feature was ~~first~~ triggered on the purchase date that occurred on June 30, 2016, such that the offering period that commenced on January 1, 2016 was terminated, and a new two-year offering period commenced on July 1, 2016. This restart feature was triggered again on the purchase date that occurred on December 31, 2016, such that the offering period that commenced on July 1, 2016 was terminated, and a new two-year offering period commenced on January 1, 2017 and ~~will end~~ended on December 31, 2018. The restart feature was triggered again on the purchase date that occurred on June 30, 2019, such that the offering period that commenced on January 1, 2019 was terminated, and a new two-year offering period commenced on July 1, 2019 and will end on June 30, 2021. The Company applied share-based payment modification accounting to the awards that were initially valued at the grant date to determine the amount of any incremental fair value associated with the modified awards. The impact to stock-based compensation expense for modifications during the ~~three and~~ nine months ended September 30, ~~2017~~2019 was immaterial.

During the nine months ended September 30, ~~2017~~2019 and ~~2016,~~2018, there were ~~70,537~~64,008 and ~~39,955~~80,907 shares of common stock, respectively, purchased under the ESPP. The Company recognized $0.6 million and $0.2 million, respectively, in expense related to the ESPP for the nine months ended September 30, 2019 and 2018. As of September 30, 2019, 336,056 shares were available under the ESPP for future issuance.

The Company estimates the fair value of shares issued to employees under the ESPP using the Black-Scholes-Merton option-pricing model. The following weighted average assumptions were used in the calculation of fair value of shares under the ESPP at the grant date for the periods indicated:


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016		2019		2018		2019		2018
Expected dividend yield	0	%	0	%	0	%	0	%	0	%	0	%	0	%	0	%
Risk-free interest rate	1.3	%	0.5	%	1.0	%	0.6	%	1.9	%	2.4	%	1.4	%	2.0	%
Expected volatility	25.3	%	29.3	%	28.1	%	30.5	%	36.6	%	34.2	%	21.9	%	29.4	%
Expected term (in years)	1.2		1.2		1.2		1.2		1.3		1.3		0.7		1.3

~~11.~~10. LEASES

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

Future minimum lease payments under the Company's operating leases at September 30, 2019 are as follows:



	Payments Due by Calendar Year
	(In thousands)
2019	987
2020	3,243
2021	2,162
2022	2,183
2023	1,508
Thereafter	4,537
Total minimum lease payments	$	14,620

Total lease expense was $0.5 million for each of the three months ended September 30, 2019 and 2018 and was $1.6 million for each of the nine months ended September 30, ~~2017, the Company entered into two lease agreements: one for an office located in Wayne, Pennsylvania, where the Company designs spinal implants~~2019 and which facilitates the Company's interactions with customers in the Eastern United States, and another for an office located in Lyon, France, which serves as the Company's international sales and marketing office. The terms of these two lease agreements are through June 2022 and February 2026, respectively, and both have an average annual cost of less than $0.1 million.2018.

11. INCOME TAXES

The following table summarizes the Company’s effective tax rate for the periods indicated:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018

Reported income tax expense rate	(2.4	)%	1.1	%	(0.9	)%	—	%

SEASPINE HOLDINGS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

~~Future minimum lease payments under the Company's operating leases at September 30, 2017 are as follows:~~

Payments Due by Calendar Year
(In thousands)
2017 $ 535
2018 2,082
2019 2,130
2020 2,179
2021 2,221
Thereafter 8,474
Total minimum lease payments $ 17,621

~~Total lease expense for the three months ended September 30, 2017 and 2016 was $0.5 million and~~ ~~$0.7 million, respectively, and $1.6 million and $2.3 million for the nine months ended September 30, 2017 and 2016, respectively.~~

~~12. INCOME TAXES~~

~~The following table provides a summary of the Company’s effective tax rate for the periods indicated:~~

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016

Reported tax rate 0.8 % 1.1 % — % 1.6 %

The Company ~~reported an~~recorded a provision for income tax ~~benefit~~expense for the three and nine months ended September 30, ~~2017~~2019 primarily ~~related to the release of its ASC 740-10 (Accounting for Uncertainty in Income Taxes) liabilities due to the expiration of the statute of limitations, offset by income tax expenses~~ related to foreign and state operations.

The Company ~~reported~~is not subject to the one-time transition tax on accumulated foreign earnings or the GILTI provisions enacted by the Tax Act because the Company's foreign operations have been included in its US tax filings pursuant to an election to disregard its foreign entity for federal income tax benefit for the three and nine months ended September 30, 2016 which was primarily the result of a refund of tax initially paid toward the income tax return for its U.S. subsidiary which was not part of the U.S consolidated tax group for the tax period January 1, 2015 through August 31, 2015 as well as the release of its ASC 740-10 liabilities due to the expiration of the statute of limitations.purposes.

In addition, for all periods presented, the pretax losses incurred by the consolidated U.S. tax group received no corresponding tax benefit because the Company ~~has~~ concluded that it is more likely than not that the Company will be unable to realize the value of any resulting deferred tax assets. The Company will continue to assess its position in future periods to determine if it is appropriate to reduce a portion of its valuation allowance in the future.

~~13.~~12. COMMITMENTS AND CONTINGENCIES

In consideration for certain technology, manufacturing, distribution, and selling rights and licenses granted to the Company, the Company has agreed to pay royalties on sales of certain products sold by the Company. ~~The~~Except for the royalties payable to NLT, the royalty payments that the Company made under these agreements are included in the condensed consolidated statements of operations as a component of cost of goods sold.

The Company is subject to various legal proceedings in the ordinary course of its business with respect to its products, its current or former employees, and its commercial relationships, some of which have been settled by the Company. In the opinion of management, such proceedings are either adequately covered by insurance or otherwise indemnified, or are not expected, individually or in the aggregate, to result in a material adverse effect on the Company's financial condition. However, it is possible that the Company's results of operations, financial position and cash flows in a particular period could be materially affected by these contingencies.

The Company accrues for loss contingencies when it is deemed probable that a loss has been incurred and that loss is estimable. The amounts accrued are based on the full amount of the estimated loss before considering insurance proceeds, and do not include an estimate for legal fees expected to be incurred in connection with the loss contingency. While uncertainty exists, the Company does not believe there are any pending legal proceedings that would have a material impact on the Company’s financial position, cash flows or results of operations.

SEASPINE HOLDINGS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

~~14.~~13. SEGMENT AND GEOGRAPHIC INFORMATION

Segment Reporting

Management assessed its segment reporting based on how it internally manages and reports the results of its business to its chief operating decision maker. Management reviews financial results, manages the business and allocates resources on an aggregate basis. Therefore, financial results are reported in a single operating segment: the development, manufacture and marketing of orthobiologics and of spinal implants. The Company reports revenue in two product categories: orthobiologics and spinal implants. Orthobiologics products consist of a broad range of advanced and traditional bone graft substitutes that are designed to improve bone fusion rates following surgery. The spinal implants portfolio consists of an extensive line of products for minimally invasive surgery, complex spine, deformity and degenerative procedures.

~~Revenue, net consisted of the following:~~

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
Orthobiologics $ 16,333
$ 16,186
$ 51,073
$ 49,649
Spinal implants 15,409
15,555
46,759
46,692
Total revenue, net $ 31,742
$ 31,741
$ 97,832
$ 96,341

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

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

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
United States $ 28,245
$ 28,485
$ 87,209
$ 87,041
International 3,497
3,256
10,623
9,300
Total revenue, net $ 31,742
$ 31,741
$ 97,832
$ 96,341



	Three Months Ended September 30, 2019						Nine Months Ended September 30, 2019
	United States		International		Total		United States		International		Total
Orthobiologics	$	18,165	$	1,908	$	20,073	$	53,362	$	5,821	$	59,183
Spinal implants	17,371		2,444		19,815		49,197		6,964		56,161
Total revenue, net	$	35,536	$	4,352	$	39,888	$	102,559	$	12,785	$	115,344



	Three Months Ended September 30, 2018						Nine Months Ended September 30, 2018
	United States		International		Total		United States		International		Total
Orthobiologics	$	16,689	$	1,840	$	18,529	$	49,140	$	6,046	$	55,186
Spinal implants	15,028		2,277		17,305		44,754		5,478		50,232
Total revenue, net	$	31,717	$	4,117	$	35,834	$	93,894	$	11,524	$	105,418

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

The terms “we,” “us,” “our,” “SeaSpine” or the “Company” refer collectively to SeaSpine Holdings Corporation and its wholly-owned subsidiaries, unless otherwise stated. All information ~~presented~~ in this report is based on our fiscal year. Unless otherwise stated, references to particular years, quarters, months or periods refer to our fiscal years ending December 31 and the associated quarters, months and periods of those fiscal years.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). The matters discussed in these forward-looking statements are subject to risk and uncertainties that could cause actual results to differ materially from those made, projected or implied in the forward-looking statements. Such risks and uncertainties may also give rise to future claims and increase exposure to contingent liabilities. Please see the “Risk Factors” section ~~included~~ in our Annual Report on Form 10-K for the year ended December 31, ~~2016~~2018 (the ~~2016~~2018 10-K), as updated in our Quarterly Reports on Form 10-Q for quarters ended after that date, 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~~our ability to successfully develop new and next-generation products and the costs associated with designing and developing those new and next-generation products, including risks inherent in ~~our business, including healthcare reform in the United States, increased pricing pressure from our competitors~~newly initiated collaborations, such as with restor3d, Inc., or ~~hospitals, exclusion from major healthcare systems, whether~~use of nascent manufacturing techniques, such as ~~a result of unwillingness to provide required pricing or otherwise, and changes in third-party payment systems;~~additive processing/3D printing;

physicians’ willingness to adopt our recently launched and planned products, customers’ continued willingness to pay for our products and third-party payors’ willingness to provide or continue coverage and appropriate reimbursement for any of our products and our ability to secure regulatory clearance and/or approval for products in development;

~~existing and future regulations affecting our business, both in the United States and internationally, and enforcement of those regulations;~~

~~anticipated demand for our products and our ability to purchase or produce our products in sufficient quantities to meet customer demand;~~

~~our ability to manage timelines and costs related to manufacturing our products;~~

our ability to attract and retain new, high-quality ~~independent sales agents,~~distributors, whether as a result of perceived deficiencies, or gaps, in our existing product portfolio, inability to reach agreement on financial or other contractual terms or otherwise, as well as disruption associated with restrictive covenants to ~~our existing distribution network as new independent sales agents are added,~~which distributors may be subject and ~~the ability of new independent sales agents to generate growth or offset disruption to existing independent sales agents;~~potential litigation and expense associated therewith;

our ability to ~~successfully develop new~~continue to invest in medical education and ~~next-generation products~~training, product development, and/or sales and commercial marketing initiatives at levels sufficient to drive future revenue growth;

anticipated trends in our business, including consolidation among hospital systems, healthcare reform in the United States, increased pricing pressure from our competitors or hospitals, exclusion from major healthcare systems, whether as a result of unwillingness to provide required pricing or otherwise, and changes in third-party payment systems;

the risk of supply shortages, and the ~~costs~~ associated ~~with designing~~potentially long-term disruption to product sales, including as a result of our dependence on PcoMed to supply products incorporating NanoMetalene technology and ~~developing those new~~a limited number of third-party suppliers for components and ~~next-generation products;~~raw materials and certain processing services;

unexpected expenses and delay and our ability to ~~support the safety~~manage timelines and ~~efficacy of~~costs related to manufacturing our products ~~with long-term clinical data;~~including as a result of litigation or developing and supporting the full commercial launch of new products;

our ability to obtain additional debt and equity financing to fund capital expenditures and working capital requirements and acquisitions;

our ability to complete acquisitions, integrate operations post-acquisition and maintain relationships with customers of acquired entities;

our ability to support the ~~risk~~safety and efficacy of ~~supply shortages, including~~ our ~~dependence on a limited number~~products with long-term clinical data;

existing and future regulations affecting our business, both in the United States and internationally, and enforcement of ~~third-party suppliers for components and raw materials;~~those regulations;

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

~~our ability to complete acquisitions, integrate operations post-acquisition~~general economic and ~~maintain relationships with customers of acquired entities;~~business conditions, in both domestic and international markets; and

other risk factors described in the section entitled “Risk Factors” of the ~~2016 10-K.~~2018 10-K and in Part II, Item 1A of our Quarterly Reports on Form 10-Q for quarters ended after December 31, 2018.

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

Overview

We are a global medical technology company focused on the design, development and commercialization of surgical solutions for the treatment of patients suffering from spinal disorders. We have a comprehensive portfolio of orthobiologics and spinal implant solutions to meet the varying combinations of products that neurosurgeons and orthopedic spine surgeons need to perform fusion procedures in the lumbar, thoracic and cervical spine. We believe this broad combined portfolio of orthobiologics and spinal implant products is essential to meet the “complete solution” requirements of ~~neurosurgeons and orthopedic spine~~such surgeons.

We report revenue in two product categories: orthobiologics and spinal implants. Our orthobiologics products consist of a broad range of advanced and traditional bone graft substitutes ~~that are~~ designed to improve bone fusion rates following a wide range of orthopedic surgeries, including spine, hip, and extremities procedures. Our spinal implant portfolio consists of an extensive line of products to facilitate spinal fusion in ~~MIS,~~degenerative, minimally invasive surgery (MIS), and complex ~~spine,~~spinal deformity ~~and degenerative~~ procedures.

Our U.S. sales organization consists of regional and territory managers who oversee a broad network of independent orthobiologics and spinal implant sales agents. We pay these sales agents ~~to whom we pay~~ commissions based on the sales of our products. Our international sales organization consists of a sales management team that oversees a network of independent orthobiologics and spinal implant stocking ~~sales agents~~distributors that purchase products directly from us and independently sell them. ~~For the nine months ended September 30, 2017 and 2016, international sales accounted for approximately 11% and 10% of our revenue, respectively.~~ Our policy is not to sell our products through or to participate in physician-owned distributorships.

For the nine months ended September 30, 2017, our total revenue, net was $97.8 million and our net loss was $24.6 million. For the same period, revenue from sales of orthobiologics and spinal implants totaled $51.0 million and $46.8 million, respectively. We expect to continue to incur losses as we further invest in the expansion of our business, primarily in sales, marketing and research and development related expenditures, and from the general and administrative expenses we expect to incur. As of September 30, 2017, our cash and cash equivalents totaled $16.7 million.

SeaSpine was incorporated in Delaware on February 12, 2015 in connection with the spin-off of the orthobiologics and spinal implant business of ~~Integra.~~Integra LifeSciences Holdings Corporation. The spin-off occurred on July 1, 2015.

Components of Our Results of Operations

Revenue

Our net revenue is derived primarily from the sale of orthobiologics and spinal implant products across North America, Europe, Asia Pacific and Latin America. Sales are reported net of returns, rebates, group purchasing organization fees and other customer allowances.

In the United States, we generate most of our revenue by consigning our orthobiologics products and by consigning or loaning our spinal implant sets to hospitals and independent sales agents, who in turn either deliver them to hospitals for a single surgical procedure, after which they are returned to us, or leave them with hospitals that are high volume users for multiple procedures. The spinal implant sets typically contain the instruments, disposables, and spinal implants required to complete a surgery. We ship replacement inventory to independent sales agents to replace the consigned inventory used in surgeries. We maintain and replenish loaned sets at our kitting and distribution centers and return replenished sets to a hospital or independent sales agent for the next procedure. We recognize revenue on these consigned or loaned products when they have been used or implanted in a surgical procedure.

For all other sales transactions, including sales to international stocking ~~sales agents~~distributors and private label partners, we generally recognize revenue when the products are shipped to the customer or stocking ~~sales agent~~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 for these sales transactions.

Cost of Goods Sold

Cost of goods sold primarily consists of the costs of finished goods purchased directly from third parties and raw materials used in the ~~manufacture~~manufacturing of our products, plant and equipment overhead, labor costs and packaging ~~costs, amortization of product technology intangible assets and freight.~~costs. The majority of our orthobiologics products are designed and manufactured internally. The cost of human tissue and fixed manufacturing overhead costs are significant drivers of the ~~costs~~cost of goods sold, and consequently our orthobiologics products, at current production volumes, generate lower gross margin than our spinal implant products. We rely on third-party suppliers to manufacture our spinal implant products, and we assemble them into surgical sets at our kitting and distribution centers. ~~Beginning~~The cost to inspect incoming finished goods is included in the ~~fourth quarter~~cost of ~~2016, we began outsourcing a portion of that assembly function to a third party logistics provider.~~goods sold. Other costs included in cost of goods sold include amortization of product technology intangible assets, royalties, ~~shipping, inspection~~scrap and consignment losses, and charges for expired, excess and obsolete inventory. ~~We expect our cost of goods sold to continue to increase in absolute dollars as our sales volume increases over time.~~

Selling, General and 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 of instrument sets, instrument replacement expense, stock-based compensation, marketing expenses, supply chain and distribution expenses, including costs to ship our spinal implants to and from hospitals and independent sales agents, and expenses for information technology, legal, human resources, insurance, finance, facilities, and ~~management and~~management. We also record gains or losses associated with changes in the fair value of contingent consideration ~~liabilities.~~liabilities in SG&A expenses.

Research and Development Expense

Our research and development (R&D) expenses primarily consist of expenses related to the headcount for engineering, product development, clinical affairs and regulatory functions, as well as consulting services, third-party prototyping services, outside research and clinical studies activities, and materials, production and other costs associated with development of our products. We expense R&D costs as they are incurred.

While our R&D expenses fluctuate from period to period based on the timing of specific initiatives, we expect ~~that~~ these costs will increase over time as we continue to design and commercialize new products and expand our product portfolio, add related personnel and conduct additional clinical activities.

Intangible Amortization

Our intangible amortization, including the amounts reported in cost of goods sold, consists of acquisition-related ~~amortization and impairments related to product discontinuations.~~amortization. We expect total annual amortization expense (including amounts reported in cost of goods sold) to be approximately ~~$6.8 million in 2017, $6.5 million in 2018, $5.8~~$5.4 million in 2019, ~~$4.9~~$4.3 million in 2020, ~~and $4.9~~$4.3 million in ~~2021.~~2021, $4.1 million in 2022 and $3.5 million in 2023. See “RESULTS OF OPERATIONS-Nine Months Ended September 30, 2019 Compared to Nine Months Ended September 30, 2018-Impairment of Intangible Assets,” below.

RESULTS OF OPERATIONS


	Three Months Ended September 30,						2017 vs. 2016		Nine Months Ended September 30,						2017 vs. 2016		Three Months Ended September 30,						2019 vs. 2018		Nine Months Ended September 30,						2019 vs. 2018
(In thousands, except percentages)	2017			2016			% Change		2017			2016			% Change		2019			2018			% Change		2019			2018			% Change
Total revenue, net	$	31,742		$	31,741		—	%	$	97,832		$	96,341		1.5	%	$	39,888		$	35,834		11	%	$	115,344		$	105,418		9	%
Cost of goods sold	12,176			13,881			(12.3	)%	39,342			42,094			(6.5	)%	14,407			14,247			1	%	42,303			40,986			3	%
Gross profit	19,566			17,860			9.6	%	58,490			54,247			7.8	%	25,481			21,587			18	%	73,041			64,432			13	%
Gross margin	61.6		%	56.3		%			59.8		%	56.3		%			63.9		%	60.2		%			63.3		%	61.1		%
Operating expenses:
Selling, general and administrative	23,674			23,803			(0.5	)%	71,893			76,166			(5.6	)%	30,134			27,041			11	%	85,050			76,940			11	%
Research and development	2,834			2,600			9.0	%	9,228			8,534			8.1	%	3,896			3,203			22	%	10,995			8,783			25	%
Intangible amortization	792			955			(17.1	)%	2,376			3,517			(32.4	)%	792			792			—	%	2,377			2,376			—	%
Impairment of intangible assets																	—			—			—	%	4,993			—			100	%
Total operating expenses	27,300			27,358			(0.2	)%	83,497			88,217			(5.4	)%	34,822			31,036			12	%	103,415			88,099			17	%
Operating loss	(7,734		)	(9,498		)	(18.6	)%	(25,007		)	(33,970		)	(26.4	)%	(9,341		)	(9,449		)	(1	)%	(30,374		)	(23,667		)	28	%
Other income (expense), net	215			(59		)	(464.4	)%	387			(33		)	(1,272.7	)%
Other expense, net																	(97		)	(190		)	(49	)%	(49		)	(327		)	(85	)%
Loss before income taxes	(7,519		)	(9,557		)	(21.3	)%	(24,620		)	(34,003		)	(27.6	)%	(9,438		)	(9,639		)	(2	)%	(30,423		)	(23,994		)	27	%
Benefit for income taxes	(57		)	(103		)	(44.7	)%	(12		)	(559		)	(97.9	)%
Provision (benefit) for income taxes																	225			(107		)	NM		265			4			NM
Net loss	$	(7,462	)	$	(9,454	)	(21.1	)%	$	(24,608	)	$	(33,444	)	(26.4	)%	$	(9,663	)	$	(9,532	)	1	%	$	(30,688	)	$	(23,998	)	28	%

____________

NM: Percentage change is not meaningful

Three Months Ended September 30, ~~2017~~2019 Compared to Three Months Ended September 30, ~~2016~~2018

Revenue

Total revenue, net for the three months ended September 30, ~~2017,~~2019, was ~~$31.7~~$39.9 million, ~~relatively unchanged~~an increase of 11% compared to the same period in ~~2016.~~2018.


	Three Months Ended September 30,						2017 vs. 2016		Three Months Ended September 30,				2019 vs. 2018
	2017			2016			% Change		2019		2018		% Change
	(In thousands)								(In thousands)
Orthobiologics	$	16,333		$	16,186		0.9	%	$	20,073	$	18,529	8	%
United States	14,890			14,593			2.0	%	18,165		16,689		9	%
International	1,443			1,593			(9.4	)%	1,908		1,840		4	%
% of total revenue, net	51		%	51		%

Spinal Implants	$	15,409		$	15,555		(0.9	)%	$	19,815	$	17,305	15	%
United States	13,355			13,892			(3.9	)%	17,371		15,028		16	%
International	2,054			1,663			23.5	%	2,444		2,277		7	%
% of total revenue, net	49		%	49		%

Total revenue, net	$	31,742		$	31,741		—	%	$	39,888	$	35,834	11	%


	Three Months Ended September 30,				2017 vs. 2016		Three Months Ended September 30,				2019 vs. 2018
	2017		2016		% Change		2019		2018		% Change
	(In thousands)						(In thousands)
United States	$	28,245	$	28,485	(0.8	)%	$	35,536	$	31,717	12	%
International	3,497		3,256		7.4	%	4,352		4,117		6	%
Total revenue, net	$	31,742	$	31,741	—	%	$	39,888	$	35,834	11	%

Revenue from orthobiologics sales ~~of orthobiologics was $16.3~~totaled $20.1 million for the three months ended September 30, ~~2017,~~2019, an increase of ~~$0.1~~$1.5 million or ~~0.9%~~8%, from the same period in ~~2016.~~2018. Revenue from ~~sales of our~~ orthobiologics ~~products~~sales in the United States increased ~~$0.3~~$1.5 million to ~~$14.9~~$18.2 million for the three months ended September 30, ~~2017~~2019 compared to the same period in ~~2016~~

~~and~~2018. This growth was driven by ~~growth~~sales of recently launched demineralized bone matrix (DBM) products, which was somewhat offset by expected cannibalization and other declines in ~~sales across multiple~~legacy DBM product ~~lines generated from recently added independent sales agents.~~lines. Revenue from ~~international~~orthobiologics sales ~~of our orthobiologics products,~~internationally, which can be volatile from quarter to quarter because of irregular ordering patterns from our stocking ~~sales agents, decreased $0.2~~distributors, increased $0.1 million for the three months ended September 30, ~~2017~~2019 compared to the same period in ~~2016, which was primarily attributable to decreased sales in Europe.~~2018.

Revenue from spinal implant sales ~~of spinal implants~~ was ~~$15.4~~$19.8 million for the three months ended September 30, ~~2017, a decrease~~2019, an increase of ~~$0.1~~$2.5 million or ~~0.9%~~15%, from the same period in ~~2016.~~2018. Revenue from ~~sales of our~~ spinal ~~implant products~~implants sales in the United States ~~decreased $0.5~~increased $2.3 million to ~~$13.4~~$17.4 million for the three months ended September 30, ~~2017~~2019 compared to the same period in ~~2016, primarily~~2018, due to ~~lower prices and decreased usage of our legacy systems, which outpaced the revenue~~ growth contributed by sales of recently launched products and ~~from the impact of the hurricanes in Texas and the Southeast.~~favorable procedural mix. Spinal implant surgery procedure volume increased by more than 10%, but were somewhat offset by continued low-single digit price declines. Revenue from ~~international sales of our~~ spinal implant ~~products,~~sales internationally, which can be volatile from quarter to quarter because of irregular ordering patterns from our stocking ~~sales agents,~~distributors, increased ~~$0.4~~$0.2 million for the three months ended September 30, ~~2017~~2019 compared to the same period in ~~2016, which was primarily attributable to increased sales in Europe.~~2018.

Cost of Goods Sold and Gross Margin

Cost of goods sold ~~decreased $1.7~~increased $0.2 million, to ~~$12.2~~$14.4 million for the three months ended September 30, ~~2017,~~2019, compared to the same period in ~~2016.~~2018. Gross margin was ~~61.6%~~63.9% for the three months ended September 30, ~~2017~~2019 and ~~56.3%~~60.2% for the same period in ~~2016.~~2018. The increase in gross margin was ~~mainly driven by~~due to a shift in geographic and product mix, with higher gross margin U.S. revenue growing faster than international revenue and higher gross margin spinal implant product revenue growing faster than orthobiologics product revenue. Additionally, manufacturing scrap rates, inventory losses and excess and obsolete provisions were lower ~~manufacturing costs for orthobiologics products manufactured at our Irvine, California facility. This was partially offset by a $0.2 million increase~~ in ~~non-cash amortization of technology intangible assets acquired in September 2016 from NLT.~~the current period compared to the prior year period.

Cost of goods sold included ~~$0.9~~$0.4 million and ~~$0.7~~$0.8 million of amortization for product technology intangible assets for the three months ended September 30, ~~2017~~2019 and ~~2016,~~2018, respectively.

Selling, General and Administrative

SG&A expenses ~~decreased $0.1~~increased $3.1 million to ~~$23.7~~$30.1 million for the three months ended September 30, ~~2017~~2019 compared to the same period in ~~2016. This decrease~~2018. The increase was mainly driven by ~~a $1.2 million non-cash gain related~~higher sales commission expense due to ~~a decrease in the fair value of contingent consideration liabilities related to the NLT acquisition (see~~ ~~Note 8, "Business Combinations"~~ ~~to the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this report)~~increased revenue, and ~~a $1.0 million decrease in consulting~~higher salaries and wages, and increased legal fees, freight and other ~~expenses due to the completion in late 2016 of the outsourcing project to our third party~~ logistics provider. These decreases were partially offset by a $1.0 million increase in selling commissions and a $1.0 million increase in accrued incentive-based compensation related to our financial performance. While we expect total SG&A expenses for the full year 2017 to decrease as a percentage of revenue compared to the full year 2016, components within SG&A expenses, specifically selling commissions, are expected to increase relative to 2016, both in absolute terms and as a percentage of revenue.expenses.

Research and Development

R&D expenses increased ~~$0.2~~$0.7 million to ~~$2.8~~$3.9 million, or ~~8.9%~~10% of revenue, for the three months ended September 30, ~~2017~~2019 compared to the same period in ~~2016.~~2018. The increase was primarily driven by ~~higher fees incurred under~~a $0.5 million fee paid in connection with our recently announced development and license agreement for 3D-printed implants and the ~~transition services agreement with NLT. For~~absence of a similar expense in the ~~full~~prior year 2017, we expect our investment in R&D to be between 8% and 10% of revenue, as we continue to accelerate the design and commercialization of new and next generation products to expand our product portfolio and conduct additional clinical activities.period.

Intangible Amortization

Intangible amortization expense, excluding the amounts reported in cost of goods sold for product technology intangible assets, ~~decreased $0.2~~remained consistent at $0.8 million ~~to $0.8 million~~for both the three months ended September 30, 2019 and 2018.

Income Taxes



	Three Months Ended September 30,
	2019			2018
	(In thousands)
Loss before income taxes	$	(9,438	)	$	(9,639	)
Provision for income taxes	225			(107		)
Effective tax rate	(2.4		)%	1.1		%

We reported income tax expense for the three months ended September 30, ~~2017 compared to the same period in 2016. The decrease was primarily due to a customer relationships intangible that was fully amortized by July 2016.~~

~~Income Taxes~~

Three Months Ended September 30,
2017 2016
(In thousands)
Loss before income taxes $ (7,519 ) $ (9,557 )
Benefit for income taxes (57 ) (103 )
Effective tax rate 0.8 % 1.1 %

~~We reported an income tax benefit for the three months ended September 30, 2017~~2019 and 2018 primarily related to ~~the release of our ASC 740-10 liabilities due to the expiration of the statute of limitations, offset by income tax expenses related to our~~ foreign and state operations.

The Tax Cuts and Jobs Act (the Tax Act) enacted in 2017 reduced the U.S. federal corporate rate from 35% to 21%, requires companies to pay a one-time transition tax on accumulated earnings of certain foreign subsidiaries previously deferred from tax, and created a new provision designed to tax global intangible low-taxed income (GILTI). We ~~reported~~are not subject to the one-time transition tax on accumulated foreign earnings or the GILTI provisions enacted by the Tax Act because our foreign operations have been included in our US tax filings pursuant to an election to disregard our foreign entity for federal income tax benefit for the three months ended September 30, 2016 which was primarily the result of a refund of tax initially paid toward the income tax return for our U.S. subsidiary which was not part of the U.S consolidated tax group for the tax period January 1, 2015 through August 31, 2015 as well as the release of our ASC 740-10 liabilities due to the expiration of the statute of limitations.

purposes.

In addition, for all periods presented, the pretax losses incurred by the consolidated U.S. tax group received no corresponding tax benefit because we ~~have concluded that it is more likely than not that we will be unable to realize the value of any resulting deferred tax assets.~~

~~Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016~~

~~Revenue~~

~~Total revenue, net for the nine months ended September 30, 2017 increased by $1.5 million to $97.8 million compared to $96.3 million for the same period in 2016.~~

Nine Months Ended September 30, 2017 vs. 2016
2017 2016 % Change
(In thousands)
Orthobiologics $ 51,073
$ 49,649
2.9 %
United States 45,967
44,411
3.5 %
International 5,106
5,238
(2.5 )%
% of total revenue, net 52 % 52 %

Spinal Implants $ 46,759
$ 46,692
0.1 %
United States 41,242
42,631
(3.3 )%
International 5,517
4,061
35.9 %
% of total revenue, net 48 % 48 %

Total revenue, net $ 97,832
$ 96,341
1.5 %

Nine Months Ended September 30, 2017 vs. 2016
2017 2016 % Change
(In thousands)
United States $ 87,209
$ 87,041
0.2 %
International 10,623
9,300
14.2 %
Total revenue, net $ 97,832
$ 96,341
1.5 %

Revenue from sales of orthobiologics totaled $51.0 million for the nine months ended September 30, 2017, an increase of $1.4 million or 2.9%, from the same period in 2016. Revenue from sales of our orthobiologics products in the United States increased $1.6 million to $46.0 million for the nine months ended September 30, 2017 compared to the same period in 2016 and was driven by growth in sales across multiple product lines generated by recently added independent sales agents.

Revenue from sales of spinal implants totaled $46.8 million for the nine months ended September 30, 2017, an increase of $0.1 million or 0.1%, from the same period in 2016. Revenue from sales in the United States decreased $1.4 million to $41.2 million for the nine months ended September 30, 2017 compared to the same period in 2016, primarily due to lower prices and decreased usage of our legacy systems, which outpaced the revenue growth contributed by recently launched products. Revenue from international sales of spinal implants increased $1.5 million for the nine months ended September 30, 2017 compared to the same period in 2016 primarily due to sales by a stocking sales agent we added in Latin America in the third quarter of 2016 and to increased sales in Europe.

~~Cost of Goods Sold and Gross Margin~~

Cost of goods sold decreased $2.8 million, to $39.3 million for the nine months ended September 30, 2017, compared to the same period in 2016. Gross margin was 59.8% for the nine months ended September 30, 2017, compared to 56.3% for the same period in 2016. The increase in gross margin was mainly driven by lower manufacturing costs for orthobiologics products manufactured at our Irvine, California facility, and by a $1.7 million provision for excess orthobiologics raw material inventory recorded in the first quarter of 2016. This provision related to management's decision to repurpose a portion of our matched-donor bone raw material for other production uses and that rendered a large portion of the remaining and now unmatched-donor bone as excess quantities that were unlikely to be consumed in future production. These improvements were partially offset by a $0.7 million increase in non-cash amortization of technology intangible assets acquired in September 2016 from NLT.

~~Cost of goods sold included $2.7 million and $2.0 million of amortization for product technology intangible assets, for the nine months ended September 30, 2017 and 2016, respectively.~~

~~Selling, General and Administrative~~

SG&A expenses decreased $4.3 million to $71.9 million for the nine months ended September 30, 2017 compared to the same period in 2016. The decrease was mainly driven by a $3.1 million decrease in consulting and other expenses related to the completion in late 2016 of various significant information system related projects and of the project to outsource a large portion of our spinal implant kitting and distribution to a third party logistics provider, $1.2 million lower legal fees, the absence of a $0.9 million spinal instrument impairment charge recorded in 2016, and a $0.8 million non-cash gain related to a decrease in the fair value of contingent consideration liabilities related to the NLT acquisition. These decreases were partially offset by a $2.0 million increase in selling commissions.

~~Research and Development~~

R&D expenses increased $0.7 million to $9.2 million, or 9.4% of revenue, for the nine months ended September 30, 2017 compared to the same period in 2016. The increase was primarily driven by higher external costs related to product development related to our orthobiologics products, and by fees incurred under the transition services agreement with NLT.

~~Intangible Amortization~~

Intangible amortization expense, excluding the amounts reported in cost of goods sold for product technology intangible assets, decreased $1.1 million to $2.4 million for the nine months ended September 30, 2017 compared to the same period in 2016. The decrease was primarily due to a customer relationships intangible that was fully amortized by July 2016.

~~Income Taxes~~

Nine Months Ended September 30,
2017 2016
(In thousands)
Loss before income taxes $ (24,620 ) $ (34,003 )
Benefit for income taxes (12 ) (559 )
Effective tax rate — % 1.6 %

We reported an income tax benefit for the nine months ended September 30, 2017 primarily related to the release of our ASC 740-10 liabilities due to the expiration of the statute of limitations, offset by income tax expenses related to our foreign and state operations.

We reported an income tax benefit for the nine months ended September 30, 2016 which was primarily the result of a refund of tax initially paid toward the income tax return for our U.S. subsidiary which was not part of the U.S consolidated tax group for the tax period January 1, 2015 through August 31, 2015 as well as the release of our ASC 740-10 liabilities due to the expiration of the statute of limitations.

~~In addition, for all periods presented, the pretax losses incurred by the consolidated U.S. tax group received no corresponding tax benefit because we have~~ concluded that it is more likely than not that we will be unable to realize the value of any resulting deferred tax assets.

Nine Months Ended September 30, 2019 Compared to Nine Months Ended September 30, 2018

Revenue

Total revenue, net for the nine months ended September 30, 2019 was $115.3 million, an increase of 9% compared to the same period in 2018.



	Nine Months Ended September 30,				2019 vs. 2018
	2019		2018		% Change
	(In thousands)
Orthobiologics	$	59,183	$	55,186	7	%
United States	53,362		49,140		9	%
International	5,821		6,046		(4	)%

Spinal Implants	$	56,161	$	50,232	12	%
United States	49,197		44,754		10	%
International	6,964		5,478		27	%

Total revenue, net	$	115,344	$	105,418	9	%



	Nine Months Ended September 30,				2019 vs. 2018
	2019		2018		% Change
	(In thousands)
United States	$	102,559	$	93,894	9	%
International	12,785		11,524		11	%
Total revenue, net	$	115,344	$	105,418	9	%

Revenue from orthobiologics sales totaled $59.2 million for the nine months ended September 30, 2019, an increase of $4.0 million, from the same period in 2018. Revenue from orthobiologics sales in the United States increased $4.2 million for the nine months ended September 30, 2019 compared to the same period in 2018. This growth was driven primarily by sales of recently launched DBM products, which was somewhat offset by expected cannibalization of a legacy DBM product line. Revenue from orthobiologics sales internationally, which can be volatile from quarter to quarter because of irregular ordering patterns from our stocking distributors, decreased $0.2 million for the nine months ended September 30, 2019 compared to the same period in 2018.

Revenue from spinal implant sales totaled $56.2 million for the nine months ended September 30, 2019, an increase of $5.9 million, from the same period in 2018. Revenue from spinal implant sales in the United States increased $4.4 million for the nine months ended September 30, 2019 compared to the same period in 2018, due to the revenue growth contributed by sales of recently launched products and favorable procedure mix. Spinal implant surgery procedure volumes increased by approximately 11%, but were somewhat offset by continued low-single digit price declines. Revenue from spinal implant sales

internationally, which can be volatile from quarter to quarter because of irregular ordering patterns from our stocking distributors, increased $1.5 million for the nine months ended September 30, 2019 compared to the same period in 2018. Revenue growth was led by replenishment orders from our distributors in Australia and Europe.

Cost of Goods Sold and Gross Margin

Cost of goods sold increased $1.3 million to $42.3 million for the nine months ended September 30, 2019, compared to the same period in 2018. Gross margin was 63.3% for the nine months ended September 30, 2019, compared to 61.1% for the same period in 2018. The increase in gross margin was due to a shift in product mix, with the higher margin spinal implant product revenue growing slightly faster than orthobiologics product revenue. Additionally, manufacturing scrap, inventory losses and excess and obsolete provisions were lower in the current period compared to the prior year period.

Cost of goods sold included $1.9 million and $2.5 million of amortization for product technology intangible assets, for the nine months ended September 30, 2019 and 2018, respectively.

Selling, General and Administrative

SG&A expenses increased $8.1 million to $85.1 million for the nine months ended September 30, 2019 compared to the same period in 2018. The increase was mainly driven by higher sales commission expense due to increased revenue, increased stock-based compensation due to the value of the Contingent RSUs granted in 2018 not being expensed until after stockholder approval was obtained in May 2018 (see Note 9 "Equity and Stock-Based Compensation" to the Notes to Unaudited Consolidated Financial Statements included in Part I, Item 1 of this report) and higher salaries and wages, legal fees, and freight and other logistics expenses.

Research and Development

R&D expenses increased $2.2 million to $11.0 million, or 10% of revenue, for the nine months ended September 30, 2019 compared to the same period in 2018. The increase was primarily driven by increased salaries and wages, a $0.5 million fee paid in connection with our recently announced development and license agreement for 3D-printed implants and higher stock-based compensation due to the value of the Contingent RSUs granted in 2018 not being expensed until after stockholder approval was obtained in May 2018.

Intangible Amortization

Intangible amortization expense, excluding the amounts reported in cost of goods sold for product technology intangible assets, was $2.4 million for each of the nine months ended September 30, 2019 and 2018.

Impairment of Intangible Assets

Impairment of intangible assets was $5.0 million for the nine months ended September 30, 2019, compared to zero for the same period in 2018. We shifted our commercialization strategy with respect to the product technologies we acquired from NLT due to market trend factors, new features necessary to be competitive, and more cost-effective internal development initiatives. Accordingly, we evaluated the ongoing value of the product technology intangible assets associated with the acquisition of these assets. Based on this evaluation, we determined that intangible assets with a carrying amount of $6.8 million were no longer recoverable and were impaired, and we wrote those intangible assets down to their estimated fair value of $1.8 million.

Income Taxes



	Nine Months Ended September 30,
	2019			2018
	(In thousands)
Loss before income taxes	$	(30,423	)	$	(23,994	)
Provision for income taxes	265			4
Effective tax rate	(0.9		)%	—		%

We reported income tax expense for the nine months ended September 30, 2019 primarily related to foreign and state operations. See “-Three Months Ended September 30, 2019 Compared to Three Months Ended September 30, 2018-Income Taxes,” above, for information related to the effect of the Tax Act on our taxes.

Business Factors Affecting the Results of Operations

Special Charges and Gains

We define special charges and gains as expenses and gains for which the amount or timing can vary significantly from period to period, and for which the amounts are non-cash in nature, or the amounts are not expected to recur at the same magnitude.

We believe that identification of these special charges and gains provides important supplemental information to investors regarding financial and business trends relating to our financial condition and results of operations. Investors may find this information useful in assessing comparability of our operating performance from period to period, against the business model objectives that management has established, and against other companies in our industry. We provide this information to investors so that they can analyze our operating results in the same way that management does and use this information in their assessment of our core business and valuation.

Loss before income taxes includes the following special charges/(gains) for the three and nine months ended September 30, 2019 and 2018:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Special Charges/(Gains):	(In thousands)
Impairment of intangible assets⁽¹⁾	$	—		$	—		$	4,993		$	—
Gain from change in fair value of contingent consideration liabilities⁽²⁾	(65		)	(176		)	(571		)	(893		)
Total Special (Gains)/Charges	$	(65	)	$	(176	)	$	4,422		$	(893	)

(1) Relates to the impairment of the product technology intangible assets associated with the NLT acquisition.

(2) Relates to the net decrease in the fair value of contingent liabilities associated with the NLT acquisition.

The items reported above are reflected in the consolidated statements of operations as follows:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
	(In thousands)
Impairment of intangible assets	$	—		$	—		$	4,993		$	—
Selling, general and administrative	(65		)	(176		)	(571		)	(893		)
Total Special (Gains)/Charges	$	(65	)	$	(176	)	$	4,422		$	(893	)

Liquidity and Capital Resources

Overview

As of September 30, ~~2017,~~2019, we had cash, ~~and~~ cash equivalents and investments totaling approximately ~~$16.7~~$27.3 million, and ~~$18.2~~$25.0 million of current borrowing capacity was available under our credit facility. We believe that our cash, ~~and~~ cash equivalents and investments on hand and the amount currently available to us under our credit facility will be sufficient to fund our operations for at least the next twelve months.

Credit Facility

We have a $30.0 million credit facility with Wells Fargo Bank, National Association which ~~expires~~matures in ~~December 2018,~~July 2021, subject to a one-time, one-year extension at our election. In addition, at any time through July 27, 2020, we may increase the borrowing limit by up to an additional $10.0 million, subject to us having sufficient amounts of eligible accounts receivable and inventory and to customary conditions precedent, including obtaining the commitment of lenders to provide such additional amount. At September 30, ~~2017,~~2019, we had no outstanding borrowings under the credit facility. The borrowing capacity under the credit facility is determined monthly and is based on the amount of our eligible accounts receivable and inventory balances and qualified cash (as defined in the credit facility). Depending on the extent to which our eligible accounts receivable and inventory balances increase, our borrowing capacity could increase by as much as an additional ~~$8.3~~$1.5 million from the ~~$18.2~~$25.0 million available as of September 30, ~~2017~~2019 before we are required to maintain the minimum fixed charge coverage ratio as discussed below. The credit facility contains various customary affirmative and negative covenants, including prohibiting us

from incurring indebtedness without the lender’s consent. Under the terms of the credit facility, if our Total Liquidity (as defined in the credit facility) is less than $5.0 million, we are required to maintain a minimum fixed charge coverage ratio of 1.10 to 1.00 for the applicable measurement period. Our Total Liquidity was ~~$34.2~~$49.0 million at September 30, ~~2017,~~2019, and therefore that financial covenant was not applicable at that time.

Business Combinations

In August 2016, we entered into an asset purchase agreement with NLT to acquire certain of the assets of NLT’s medical device business related to the expandable interbody medical devices. We made an up-front cash payment of $1.0 million in connection with the initial closing in September 2016 and issued 350,000 shares of our common stock in January 2017 as contingent closing consideration. At September 30, ~~2017,~~2019, we recorded a ~~$2.5~~$1.5 million liability representing the estimated fair value of future contingent milestone payments related to the achievement of certain commercial milestones, which we anticipate will become payable at varying times between ~~2018~~2020 and ~~2023,~~2025, and a ~~$2.0~~$0.3 million liability representing the estimated fair value of future contingent royalty payments based on percentages of our future net sales of certain of the products and technology we acquired, which we anticipate will become payable at varying times between ~~2017~~2019 and ~~2028.~~2030. The contingent milestone payments, if any, are payable in cash or in shares of our common stock, at our election. The contingent royalty payments ~~if any,~~ are payable in cash.

At ~~The~~the Market Program

In August 2016, we entered into an equity distribution agreement (Distribution Agreement) with Piper Jaffray & Co. (Piper Jaffray), pursuant to which we may offer and sell shares of our common stock in “at the market” (ATM) offerings (as defined in Rule 415 of the Securities Act of 1933, as amended) having an aggregate offering price up to $25.0 million in gross proceeds from time to time through Piper Jaffray acting as sales agent. ~~During~~The shares offered and sold under the ~~nine~~Distribution Agreement are covered by a registration statement on Form S-3 that was declared effective on August 24, 2016. Under the Distribution Agreement, during the three months ended ~~September 30, 2017,~~March 31, 2018, we sold 882,332 shares of common stock at an average price per share of $10.00 and received net proceeds of approximately ~~$15.6~~$8.5 million ~~net~~(net of ~~$0.6~~$0.3 million of offering ~~costs,~~costs) which consumed the $25.0 million in capacity under the Distribution Agreement.

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

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

Underwritten Offering

In October 2018, we entered into an Underwriting Agreement (Underwriting Agreement) with Wells Fargo Securities, LLC, Piper Jaffray and Cantor Fitzgerald acting as joint bookrunning managers and as representatives of the underwriters relating to the issuance and sale of ~~1,500,000~~3,250,000 shares of our common stock. The price to the public in the offering was $15.50 per share, before underwriting discounts and commissions. We ~~have~~granted the ~~capacity~~underwriters an option, exercisable for 30 days, to ~~issue~~purchase up to an additional 487,500 shares of common stock. The underwriters exercised this option and the offering closed on October 15, 2018 with the sale of 3,737,500 shares of our common ~~stock~~stock. The net proceeds from the offering were approximately $54.1 million, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We used a portion of the net proceeds from this offering to generate up to $8.8 million of gross proceeds under the equity distribution agreement as of September 30, 2017. Future sales, if any, will depend on a variety of factors including, but not limited to, market conditions, the trading pricerepay all of our ~~common stock~~then outstanding borrowings under our Wells Fargo credit facility, and ~~our~~we intend to use the remaining proceeds for general corporate purposes, including research and development, general and administrative expenses, capital ~~needs.~~expenditures and general working capital purposes.

Cash and Cash Equivalents

We had cash and cash equivalents totaling approximately ~~$16.7~~$22.3 million and ~~$14.6~~$24.2 million at September 30, ~~2017~~2019 and December 31, ~~2016,~~2018, respectively.

Cash Flows

Nine Months Ended September 30, 2017 vs. 2016
2017 2016 % Change
(In thousands)
Net cash used in operating activities $ (4,109 ) $ (10,406 ) (60.5 )%
Net cash used in investing activities (5,718 ) (6,857 ) (16.6 )%
Net cash provided by financing activities 11,532
4,455
158.9 %
Effect of exchange rate changes on cash and cash equivalents 418
187
123.5 %
Net decrease in cash and cash equivalents $ 2,123
$ (12,621 ) (116.8 )%



	Nine Months Ended September 30,						2019 vs. 2018
	2019			2018			% Change
	(In thousands)
Net cash used in operating activities	$	(15,130	)	$	(8,601	)	75.9	%
Net cash provided by (used in) investing activities	14,663			(6,565		)	(323.4	)%
Net cash (used in) provided by financing activities	(1,267		)	16,233			(107.8	)%
Effect of exchange rate changes on cash and cash equivalents	(185		)	(73		)	153.4	%
Net change in cash and cash equivalents	$	(1,919	)	$	994		(293.1	)%

Net Cash Flows Used in Operating Activities

~~Cash~~Net cash used in operating activities for the nine months ended September 30, ~~2017 decreased~~2019 increased by ~~$6.3~~$6.5 million compared to the same period in ~~2016~~2018. The increase was primarily due to ~~lower cash-based operating expenses incurred~~an increase in accounts receivable and ~~lower purchases of~~higher inventory ~~in the nine months ended September 30, 2017 compared~~levels to ~~the same period in 2016, partially offset by lower cash collections in the nine months ended September 30, 2017 compared to the same period in 2016.~~support recent and upcoming product launches and expected future revenue growth.

Net Cash ~~Used in~~Flows Provided by (Used in) Investing ~~Activitie~~sActivities

Net cash ~~used in~~provided by investing activities was ~~$5.7~~$14.7 million for the nine months ended September 30, ~~2017~~2019 compared to ~~$6.9~~net cash used in investing activities of $6.6 million for the same period in ~~2016.~~2018. The ~~decrease~~increase was ~~primarily~~ due to $25.0 million in maturities of our investments in U.S. Treasury Bills, which was partially offset by larger investments in ~~leasehold improvements in our Carlsbad facility in the first half of 2016~~spinal instruments and ~~to the $1.0 million cash payment associated with the NLT acquisition during the third quarter of 2016, offset by more instrument purchases in 2017~~sets to support recent and upcoming spinal implant product launches.

Net Cash Flows (Used in) Provided by Financing Activities

Net cash ~~provided by~~used in financing activities was ~~$11.5~~$1.3 million for the nine months ended September 30, ~~2017~~2019. It was comprised primarily of $2.1 million of cash for tax payments we made on our employees' behalf for shares we withheld from such employees on the vesting of restricted stock awards to cover statutory tax withholding requirements, partially offset by $0.7 million of proceeds from the issuance of common stock under our ESPP and by $0.2 million of proceeds from the exercise of stock options. Net cash provided by financing activities was $16.2 million for the nine months ended September 30, 2018 and was comprised primarily of ~~$15.6~~$8.5 million of net proceeds from the sale of shares of our common stock under the ATM equity offering program, ~~and~~$7.0 million in borrowings under our revolving line of credit, $0.5 million ofin proceeds from the ~~sale~~issuance of ~~shares of our common~~ stock under our ~~2015 Employee Stock Purchase Plan. We used $4.0~~ESPP, and $0.9 million in proceeds from the exercise of stock options, partially offset by $0.6 million of cash for tax payments we made on our employees' behalf for shares we withheld from such employees on the vesting of restricted stock awards to ~~repay all of the outstanding borrowings under the credit facility and $0.4 million of cash to repay the remaining short-term debt related to our insurance premium finance agreements (see~~ ~~Note 3, "Debt and Interest"~~ ~~to the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this report).~~cover statutory tax withholding requirements.

Off-Balance Sheet Arrangements

There were no off-balance sheet arrangements as of September 30, ~~2017~~2019 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, ~~cash flows,~~ liquidity, capital expenditures or capital resources that is material to our business.

Contractual Obligations and Commitments

There have been no material changes outside the ordinary course of our business to the contractual obligations disclosed in the ~~2016~~2018 10-K.

Other Matters

Critical Accounting Policies and the Use of Estimates

Our discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with ~~GAAP. The preparation~~accounting principles generally accepted in the United States of America. Preparing these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities, and the reported amounts of revenues and expenses. Significant estimates affecting amounts reported or disclosed in the consolidated financial statements include revenue recognition, allowances for doubtful accounts receivable and sales return and

other credits, net realizable value of inventories, amortization periods for acquired intangible assets, estimates of projected cash flows and discount rates used to value intangible assets and test them for impairment, estimates of projected cash flows and assumptions related to the timing and probability of the product launch dates, discount rates matched to the ~~estimated~~ timing of payments, and probability of success rates used to value contingent consideration liabilities from business combinations, estimates of projected cash flows and depreciation and amortization periods for long-lived assets, valuation of stock-based compensation, computation of taxes and valuation allowances recorded against deferred tax assets, and loss contingencies. These estimates are based on historical experience and on various other assumptions ~~that are~~ believed to be reasonable under the current circumstances. Actual results could differ from these estimates.

Note 2, “Summary of Significant Accounting Policies” to the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this report and included in Part II, Item 8 of the ~~2016~~2018 10-K describe the significant accounting policies and estimates used in the preparation of our condensed consolidated financial statements. Those policies and estimates disclosed in the ~~2016~~2018 10-K 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 Financial Statements included in Part I, Item 1 of this report.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

~~The market risk exposures described in Part II,~~

As a "smaller reporting company" as defined by Item 7A10 of Regulation S-K, the ~~2016 10-K have~~Company is not ~~materially changed during the nine months ended September 30, 2017.~~required to provide this information.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Control over Financial Reporting

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

Inherent Limitations of Internal Controls

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

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

The risk factors described in the ~~2016~~2018 10-K have not materially changed.

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

Recent Sales of Unregistered Securities

None.

Purchases of Equity Securities by the Issuer

The table below is a summary of purchases of our common stock we made during the quarter covered by this report. Other than as indicated in the table below, no such purchases were made in any other month during the quarter. We do not have any publicly announced repurchase plans or programs.


Period	Total Number of Shares Purchased (1)	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares That May Yet be Purchased Under the Plans or Programs	Total Number of Shares Purchased (1)	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares That May Yet be Purchased Under the Plans or Programs

September 1- September 30	171	$	10.39	—	—
July 1 - July 31						11,213	$	12.89	—	—
August 1 - August 31						492	$	12.47	—	—
September 1 - September 30						1,270	$	11.01	—	—



(1)	These shares were surrendered to the Company to satisfy tax withholdings obligations in connection with the vesting of restricted stock awards.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS



Exhibit No.		Description
31.131.1		Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.231.2		Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1***32.1		Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2***32.2		Certification of Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS†~~101.INS~~		XBRL Instance Document

101.SCH†~~101.SCH~~		XBRL Taxonomy Extension Schema Document

101.CAL†~~101.CAL~~		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF†~~101.DEF~~		XBRL Definition Linkbase Document

101.LAB†~~101.LAB~~		XBRL Taxonomy Extension Labels Linkbase Document

101.PRE†~~101.PRE~~		XBRL Taxonomy Extension Presentation Linkbase Document



*	Filed herewith



**	These certifications are being furnished solely to accompany this report pursuant to 18 U.S.C. 1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934 and are not to be incorporated by reference into any filing of the registrant, whether made before or after the date hereof, regardless of any general incorporation by reference language in such filing.

† The financial information of SeaSpine Holdings Corporation Quarterly Report on Form 10-Q for the quarter ended September 30, ~~2017~~2019 filed on ~~November 2, 2017~~October 29, 2019 formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Statements of Operations, (ii) Condensed Consolidated Statements of Comprehensive Loss, (iii) the Condensed Consolidated Balance Sheets, (iv) Parenthetical Data to the Condensed Consolidated Balance Sheets, (v) the Condensed Consolidated Statements of Cash Flows, (vi) the Condensed Consolidated ~~Statement~~Statements of Equity, and (vii) Notes to Unaudited Condensed Consolidated Financial Statements, is furnished electronically herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.




		SEASPINE HOLDINGS CORPORATION

Date:	~~November 2, 2017~~October 29, 2019	/s/ Keith C. Valentine
		Keith C. Valentine
		President and Chief Executive Officer
		(Principal Executive Officer)

Date:	~~November 2, 2017~~October 29, 2019	/s/ John J. Bostjancic
		John J. Bostjancic
		Chief Financial Officer
		(Principal Financial Officer)

3542



Settlement of contingent closing consideration liabilities in connection with acquisition of business (see Note 8)	$	2,548	$	—



(In thousands)
Cash paid for purchase	$	1,000
Contingent closing consideration	2,930
Contingent milestone payments	2,310
Contingent royalty payments	3,010
Total purchase price	$	9,250



December 31, 2016:
Contingent consideration liabilities- current	$	2,855	$	—	$	—	$	2,855
Contingent consideration liabilities- non-current	5,125		—		—		5,125
Total contingent consideration	$	7,980	$	—	$	—	$	7,980



Three Months Ended September 30, 2017	(in thousands)
Balance as of June 30, 2017	$	5,777
Contingent consideration liabilities settled	(3		)
Gain from change in fair value of contingent milestone and royalty payments recorded in selling, general and administrative expenses	(1,242		)
Fair value at September 30, 2017	$	4,532



Nine Months Ended September 30, 2017	(in thousands)
Balance as of January 1, 2017	$	7,980
Contingent consideration liabilities settled	(2,551		)
Gain from change in fair value of contingent closing consideration recorded in other income	(112		)
Gain from change in fair value of contingent milestone and royalty payments recorded in selling, general and administrative expenses	(785		)
Fair value at September 30, 2017	$	4,532