SEASPINE HOLDINGS CORPORATION
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
On May 20, 2021, SeaSpine Holdings Corporation (the "Company"), announced the closing of the previously announced acquisition (the "Transaction") of 7D Surgical Inc. (the "7D"), a Toronto-based company that develops advanced optical technologies and machine vision-based registration algorithms to improve surgical workflow and patient care.
The accompanying unaudited pro forma combined statements of financial position as at March 31, 2021, and the unaudited pro forma combined statements of operations and comprehensive income for the year ended December 31, 2020 and three months ended March 31, 2021 (the "Unaudited Pro Forma Statements"), have been prepared in accordance with general accepted accounting principles in the United States of America (U.S. GAAP) and Regulation S-X. Accounting policies used in the preparation of the Unaudited Pro Forma Statements are consistent with those disclosed in the Company's audited consolidated financial statements as at and for the year ended December 31, 2020 (the "Annual Financial Statements") and the unaudited consolidated financial statements as at and for the three months ended March 31, 2021 (the "Interim Financial Statements").
The note disclosure requirements of annual consolidated financial statements provide additional disclosures to that required for pro forma condensed consolidated financial statements. The Unaudited Pro Forma Statements have been prepared from the Interim Financial Statements and the Annual Financial Statements, and should be read in conjunction with the Interim Financial Statements and the Annual Financial Statements.
The accompanying unaudited pro forma combined statements of financial position as at March 31, 2021, has been prepared to give effect to the Transaction as if it had occurred on March 31, 2021. The unaudited pro forma combined statements of operations and comprehensive income for the year ended December 31, 2020 and the three months ended March 31, 2021 have been prepared to give effect to the Transaction as if it had occurred on January 1, 2020.
The pro forma adjustments are based on the best information available and assumptions that the Company believes are factually supportable and reasonable; however, such adjustments are subject to change. The unaudited pro forma combined financial information is for illustrative and informational purposes only and is not intended to reflect what the Company's consolidated statements of income would have been had the Transaction occurred on the dates indicated and is not necessarily indicative of the Company's future consolidated statements of income.
SEASPINE HOLDINGS CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENTS OF FINANCIAL POSITION
AS OF MARCH 31, 2021
(Expressed in United States dollars unless otherwise noted)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| SeaSpine Holdings Corporation (US GAAP) | | 7D Surgical Inc.
(US GAAP) | | Pro Forma Transaction Adjustment | | Notes | | Combined Pro Forma |
| ASSETS | | | | | | | | | |
| Current assets | | | | | | | | | |
| Cash and cash equivalents | $ | 87,749 | | $ | 8,596 | | $ | 44,281 | | | (a), (b), (c), (f) | | $ | 140,626 |
| Trade accounts receivables | 25,030 | | 2,807 | | — | | | | 27,837 |
| Inventories, net | 58,182 | | 952 | | — | | | | 59,134 |
| Prepaid expenses and other | 2,729 | | 79 | | — | | | | 2,808 |
| Total current assets | 173,690 | | 12,434 | | 44,281 | | | | 230,405 |
| Property, plant and equipment, net | 35,779 | | 698 | | — | | | | 36,477 |
| Right of use assets | 7,274 | | — | | — | | | | 7,274 |
| Intangible assets, net | 13,373 | | 288 | | 45,712 | | (a) | | 59,373 |
| Other assets | 300 | | 142 | | — | | | | 442 |
| GOODWILL | — | | | | | 55,340 | | (a) | | 55,340 |
| Total assets | 230,416 | | | 13,562 | | | 145,333 | | | | | 389,311 | |
| LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | | |
| Current liabilities | | | | | | | | | |
| Accounts payable, trade | 12,086 | | 461 | | 2,554 | | (e) | | 15,101 |
| Accrued compensation | 7,346 | | 44 | | — | | | | 7,390 |
| Accrued commissions | 9,051 | | 382 | | — | | | | 9,433 |
| Income tax payable | — | | 5 | | — | | | | 5 |
| Short-term debt | 1,393 | | 237 | | (1,630) | | (f), (g) | | — |
| Short-term lease liability | 2,159 | | — | | — | | | | 2,159 |
| Other accrued expenses and current liabilities | 7,893 | | 2,513 | | (2,513) | | (f) | | 7,893 |
| Total current liabilities | 39,928 | | 3,642 | | (1,589) | | | | 41,981 |
| Long-term debt | 24,781 | | — | | (24,781) | | (c), (g) | | — |
| Long-term lease liability | 6,349 | | — | | — | | | | 6,349 |
| Other liabilities | 91 | | 972 | | — | | | | 1,063 |
| Total liabilities | 71,149 | | 4,614 | | (26,370) | | | | 49,393 |
| SHAREHOLDERS' EQUITY (DEFICIT) | | | | | | | | | |
| Common stock | 279 | | 25,677 | | (25,111) | | (a), (b) | | 845 |
| Additional paid-in capital | 389,198 | | 791 | | 175,281 | | (a), (b) | | 565,270 |
| Accumulated other comprehensive income | 1,767 | | (1) | | 1 | | (a) | | 1,767 |
| Accumulated deficit | (231,977) | | (17,519) | | 21,532 | | (a), (e), (g) | | (227,964) |
| Total stockholders' equity | 159,267 | | 8,948 | | 171,703 | | | | 339,918 |
| Total liabilities and stockholders' equity | 230,416 | | | 13,562 | | | 145,333 | | | | | 389,311 | |
SEASPINE HOLDINGS CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE YEAR ENDED DECEMBER 31, 2020
(Expressed in United States dollars unless otherwise noted)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| SeaSpine Holdings Corporation (US GAAP) | | 7D Surgical Inc.
(US GAAP) | | Pro Forma Transaction Adjustment | | Notes | | Combined Pro Forma |
| Total revenue, net | $ | 154,345 | | | $ | 8,123 | | | $ | — | | | | $ | 162,468 | |
| Cost of Goods sold | 56,841 | | | 2,963 | | | 3,499 | | | (a) | | 63,303 | |
| Gross profit | 97,504 | | 5,160 | | (3,499) | | | | 99,165 |
| Operating expenses | | | | | | | | | |
| Sales and marketing | 84,304 | | 878 | | — | | | | 85,182 |
| General and administration | 35,874 | | 6,263 | | — | | | | 42,137 |
| Research and development | 16,258 | | 558 | | — | | | | 16,816 |
| Intangible amortization | 3,169 | | 55 | | 545 | | (a) | | 3,769 |
| Impairment of intangible assets | 1,325 | | — | | — | | | | 1,325 |
| 140,930 | | 7,754 | | 545 | | | | 149,229 |
| Operating loss | (43,426) | | (2,594) | | (4,044) | | | | (50,064) |
| Other (income) loss, net | (463) | | (108) | | (3,621) | | (e) (g) | | (4,192) |
| Loss before income taxes | (42,963) | | (2,486) | | (423) | | | | (45,872) |
| Provision for income taxes | 218 | | 10 | | — | | | | 228 |
| Net loss | (43,181) | | | (2,496) | | | (423) | | | | | (46,100) | |
| | | | | | | | | |
| Other comprehensive (loss) income | | | | | | | | | |
| Foreign currency translation adjustments | 690 | | | (1) | | | — | | | | | 689 | |
| Comprehensive loss | (42,491) | | | (2,497) | | | (423) | | | | | (45,411) | |
| Net loss per share, basic and diluted | 1.59 | | — | | | — | | | | | 1.24 | |
| Weighted average shares used to compute basis and diluted net loss per share | 27,222 | | — | | | — | | | | | 36,687 |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
SEASPINE HOLDINGS CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2021
(Expressed in United States dollars unless otherwise noted)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| SeaSpine Holdings Corporation (US GAAP) | | 7D Surgical Inc.
(US GAAP) | | Pro Forma Transaction Adjustment | | Notes | | Combined Pro Forma |
| Total revenue, net | $ | 41,954 | | | $ | 2,953 | | | $ | — | | | | | $ | 44,907 |
| Cost of Goods sold | 15,366 | | 1,147 | | | 791 | | | (a) | | 17,304 |
| Gross profit | 26,588 | | 1,806 | | (791) | | | | | 27,603 |
| Operating expenses | | | | | | | | | |
| Sales and marketing | 23,399 | | 728 | | | — | | | | | 24,127 |
| General and administration | 10,427 | | 2,069 | | | — | | | | | 12,496 |
| Research and development | 4,506 | | 151 | | | — | | | | | 4,657 |
| Intangible amortization | 792 | | 14 | | | 136 | | | (a) | | 942 |
| Impairment of intangible assets | — | | — | | — | | | | | — |
| 39,124 | | 2,962 | | 136 | | | | | 42,222 |
| Operating loss | (12,536) | | (1,156) | | | (927) | | | | | (14,619) |
| Other loss (income), net | 159 | | (41) | | | (130) | | | (d) (f) | | (12) |
| Loss before income taxes | (12,695) | | (1,115) | | | (797) | | | | | (14,607) |
| Provision for income taxes | 25 | | — | | | — | | | | | 25 |
| Net loss | (12,720) | | (1,115) | | (797) | | | | | (14,632) |
Other comprehensive (loss) income Foreign currency translation adjustments | (357) | | | — | | | — | | | | | (357) | |
| Comprehensive loss | (13,077) | | (1,115) | | (797) | | | | | (14,989) |
| Net loss per share, basic and diluted | 0.46 | | — | | — | | | | | 0.40 |
| Weighted average shares used to compute basis and diluted net loss per share | 27,913 | | — | | — | | | | | 37,378 |
| | | | | | | | | |
| | | | | | | | | |
SEASPINE HOLDINGS CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
1.BASIS OF PRESENTATION
The pro forma adjustments are based on the best information available and assumptions that the Company believes are factually supportable and reasonable; however, such adjustments are subject to change. The unaudited pro forma condensed consolidated financial information is for illustrative and informational purposes only and is not intended to reflect what the Company's consolidated statements of income would have been had the Transaction occurred on the dates indicated and is not necessarily indicative of the Company's future consolidated statements of income.
The Unaudited Pro Forma Statements have been derived from, and should be read in conjunction with the following:
–The Company's audited consolidated financial statements for the year ended December 31, 2020
–The Company's unaudited condensed interim consolidated financial statements for the three months ended March 31, 2021
–7D's audited consolidated financial statements for the year ended March 31, 2021
The Unaudited Pro Forma Statements are presented in United States Dollars and all values are rounded to the nearest thousands, except where otherwise noted. 7D's consolidated statements of operation have been translated from the Canadian Dollar to the United States Dollar using the period-to-date average rate for the period presented. The consolidated statement of financial position have been translated from the Canadian Dollar to the United States Dollar using the spot rate as at March 31, 2021.
The Unaudited Pro Forma Statements do not reflect any operating synergies, related cost savings or revenue enhancements that may be achieved, or costs to integrate the operations of the Company and 7D. Further, adjustments have not been made to reflect the administrative efficiencies of combining the operations of the Company and 7D.
2.PRO FORMA ASSUMPTIONS AND ADJUSTMENTS
The Unaudited Pro Forma Statements reflect the purchase of 7D for total cash consideration of $110 million. The Unaudited Pro Forma Statements have been prepared in accordance with ASC 805 - Business Combinations, whereby the excess of the aggregate consideration over the fair value of the identifiable net assets is allocated to goodwill and intangible assets given management is in the process of finalizing the purchase price allocation.
The unaudited pro forma consolidated financial statements reflect the following adjustments:
a) The following summarizes goodwill and intangible assets:
| | | | | |
| Cash consideration | $ | 27,500 | |
| Share consideration | 82,500 | |
| Intangible asset identified* | 46,000 | |
| Other net assets acquired | 8,660 | |
| Goodwill and intangible assets | 55,340 | |
| * Total net assets acquired include preliminarily identified intangible assets acquired in its acquisition of 7D as of May 20, 2021 of $46 million (the closing date of the acquisition and date of the purchase price allocation). They include developed technology, tradenames and customer relationships. |
| | | | | | | | | | | |
| 7D historical | Transaction adjustments | Pro forma combined |
| Developed technology | $ | 288 | | $ | 39,712 | | $ | 40,000 | |
| Other intangibles | — | | 6,000 | | 6,000 | |
The Unaudited Pro Forma Statements reflect the adjustment of historical intangible assets acquired by the Company to their estimated fair values. Since all information required to perform a detailed valuation analysis of 7D’s intangible assets could not be obtained as of the date of this filing, for purposes of these Unaudited Pro Forma Statements, the Company used certain assumptions based on the preliminary analysis of a 3rd party valuation firm. The following table summarizes the estimated fair values of 7D identifiable intangible assets and their estimated useful lives and uses a straight-line method of amortization.
| | | | | | | | | | | | | | |
| Estimated fair value | Estimated useful life in years | Annual amortization | Three months amortization |
| Cost of goods sold | $ | 40,000 | | 10 | $ | 4,000 | | $ | 1,000 | |
| Historical amortization included in Cost of goods sold | | | (501) | | (209) | |
| Transaction adjustment to cost of goods sold | | | $ | 3,499 | | $ | 791 | |
| | | | |
| Intangible amortization | $ | 6,000 | | 10 | $ | 600 | | $ | 150 | |
| Historical amortization expense | | | (55) | | (14) | |
| Transaction adjustments to amortization | | | $545 | $136 |
| These preliminary estimates of fair value and estimated useful lives will likely differ from final amounts the Company will calculate after completing a detailed valuation analysis. |
b) In April 2021, the Company entered into an Underwriting Agreement with Piper Sandler & Co., Canaccord Genuity LLC, and Stifel, Nicolaus & Company, Incorporated relating to the issuance and sale of 4,500,000 shares of the Company's common stock at a price to the public of $19.50 per share, before underwriting discounts and commissions. Under the terms of that agreement, the Company granted the underwriters an option, exercisable for 30 days, to purchase up to an additional 675,000 shares of common stock. The underwriters exercised this option and the offering closed on April 20, 2021 with the sale of 5,175,000 shares of common stock, resulting in net proceeds to the Company of approximately $95 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 outstanding borrowings under its credit facility with Wells Fargo Bank, National Association (the "Credit Facility").
The table below sets forth the Company's debt and capitalization as of December 31, 2020, as follows:
| | | | | | | | |
| As of December 31, 2020 |
| Actual | As adjusted |
| Long-term debt | $ | 20,000 | | $ | — | |
| SHAREHOLDERS' EQUITY | | |
| Common stock, $0.01 par value; 60,000 authorized; 27,729 shares issued and outstanding, actual and 32,904 shares, as adjusted at December 31, 2020 | 279 | | 329 | |
| Additional paid-in capital | 389,198 | | 483,679 | |
| Accumulated other comprehensive income | 1,767 | | 1,767 | |
| Accumulated deficit | (231,977) | | (231,977) | |
| Total shareholders' equity | 159,267 | | 253,798 | |
| Total capitalization | $ | 179,267 | | $ | 253,798 | |
c) On April 19, 2021, the Company repaid the entire $20.0 million of outstanding borrowings under the Credit Facility.
d) Given the Unaudited Pro Forma Statements have been presented as if the Transaction occurred on January 1, 2020, the corresponding interest expense associated with the entire $20.0 million of outstanding borrowings under the Credit Facility is removed.
e) In order to complete the transaction, the Company paid total transaction costs of $1,705,433, and 7D paid total costs of $847,824. Transaction costs are expensed and are adjusted through retained earnings on the Pro Forma Statement of Financial Position.
f) In May 2021, the Company repaid all the outstanding government debt related to the contribution agreements with the FedDev programs and 7D’s loan under the Paycheck Protection Program (PPP) of the Coronavirus Aid, Relief, and Economic Security Act. Given the Unaudited Pro Forma Statements have been presented as if the Transaction occurred on January 1, 2020, the corresponding interest expense is removed.
g) On June 14, 2021, the Company received full forgiveness of the $6.2 million balance of its PPP loan.
h) The Company also decided to issue new share-based awards to the employees of 7D that replace their unvested 7D stock-based awards. The replacement share-based awards vest over post combination service periods that range from 1.6 to 4.6 years. The Company concluded that these new compensation arrangements were not material under S-X 11-01(a)(8).
