SEAE HLDG The terms "we," "us," "our," "SeaSpine" or the "Company" refer collectively toSeaSpine Holdings Corporation and its wholly-owned subsidiaries, unless otherwise stated. All information in this report is based on our fiscal year. Unless otherwise stated, references to particular years, quarters, months or periods refer to our fiscal years endingDecember 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 for a discussion of the uncertainties, risks and assumptions associated with these statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
You can identify these forward-looking statements by forward-looking words such as "believe," "may," "could," "will," "estimate," "continue," "anticipate," "intend," "seek," "plan," "expect," "should," "would" and similar expressions.
These risks and uncertainties arise from (among other factors):
•our expectations and estimates concerning future financial performance, financing plans and the impact of competition;
•our ability to successfully develop new and next-generation products and the costs associated with designing and developing those new and next-generation products, including risks inherent in collaborations, such as with restor3d, Inc. or use of nascent manufacturing techniques, such as additive processing/3D printing; •physicians' willingness to adopt our recently launched and planned products, customers' continued willingness to pay for our products and third-party payors' willingness to provide or continue coverage and appropriate reimbursement for any of our products and our ability to secure regulatory clearance and/or approval for products in development; •our ability to attract and retain new, high-quality distributors, whether as a result of perceived deficiencies, or gaps, in our existing product portfolio, inability to reach agreement on financial or other contractual terms or otherwise, as well as disruption associated with restrictive covenants to, which distributors may be subject and potential litigation and expense associate therewith; •the full extent to which the COVID-19 pandemic will, directly or indirectly, impact our business, results of operations and financial condition, including our sales, expenses, supply chain integrity, manufacturing capability, research and development activities, including arising from or relating to deferrals of procedures using our products, disruptions or restrictions on the ability of many of our employees and of third parties on which we rely to work effectively, and temporary closures of our facilities and of the facilities of our customers and suppliers;
•our ability to continue to invest in medical education and training, product development, and/or sales and commercial marketing initiatives at levels sufficient to drive future revenue growth;
•anticipated trends in our business, including consolidation among hospital systems, healthcare reform inthe United States , increased pricing pressure from our competitors or hospitals, exclusion from major healthcare systems, whether as a result of unwillingness to provide required pricing or otherwise, and changes in third-party payment systems;
•the risk of supply shortages, and the associated potentially long-term disruption to product sales, including as a result of the pandemic and a limited number of third-party suppliers for components, raw materials and certain processing and assembly services;
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•unexpected expenses and delay and our ability to manage timelines and costs
related to manufacturing our products including as a result of litigation or
developing and supporting the full commercial launch of new products or relating
to the pandemic;
•our ability to obtain additional debt and equity financing to fund capital expenditures and working capital requirements and acquisitions;
•our ability to complete acquisitions, integrate operations post-acquisition and maintain relationships with customers of acquired entities;
•our ability to support the safety and efficacy of our products with long-term clinical data;
•existing and future regulations affecting our business, both in
•our ability to protect our intellectual property, including unpatented trade secrets, and to operate without infringing or misappropriating the proprietary rights of others;
•general economic and business conditions, in both domestic and international markets; and
•other risk factors described in the section entitled "Risk Factors."
These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements included in this report.
Overview
We are a global medical technology company focused on the design, development and commercialization of surgical solutions for the treatment of patients suffering from spinal disorders. We offer a comprehensive portfolio of orthobiologics and spinal implant solutions and a surgical navigation system intended to meet the needs of neurosurgeons and orthopedic spine surgeons who perform fusion procedures in the lumbar, thoracic and cervical spine. We believe our offerings are essential to meet the "complete solution" requirements of these surgeons. We report revenue in two product categories: (i) orthobiologics and (ii) spinal implants and enabling technologies. Our orthobiologics products consist of a broad range of advanced and traditional bone graft substitutes designed to improve bone fusion rates following a wide range of orthopedic surgeries, including spine, hip, and extremities procedures. Our spinal implants and enabling technologies portfolio consists of an extensive line of products and image-guided surgical solutions to facilitate spinal fusion in degenerative, minimally invasive surgery (MIS), and complex spinal deformity procedures. OurU.S. spinal implants and orthobiologics sales organization consists primarily of regional and territory managers who oversee a broad network of independent sales agents. We pay these sales agents commissions based on the sales of our products. Our enabling technologies sales organization consists of a direct sales force that works together with our independent sales agents to generate either a capital sale or to place systems and components in an account in a capital efficient manner in return for a longer-term revenue commitment for our spinal implant systems and/or orthobiologics products. Our international sales organization consists of a sales management team that oversees a network of independent stocking distributors that purchase products directly from us and independently sell them. For each of the years endedDecember 31, 2021 and 2020, international sales accounted for approximately 10% of our revenue. Our policy is not to sell our products through or to participate in physician-owned distributorships. For the year endedDecember 31, 2021 , our total revenue, net was$191.5 million and our net loss was$54.3 million . For the same period, revenue from sales of orthobiologics totaled$91.8 million and revenue from spinal implants and enabling technologies totaled$99.6 million . We will continue to invest in the expansion of our business, primarily in sales, marketing and research and development, and we expect to continue to incur losses. As ofDecember 31, 2021 , our cash and cash equivalents totaled$83.1 million . InJanuary 2020 andApril 2021 , we completed an underwritten offering of our common stock that raised net proceeds of approximately$91.6 million and$94.5 million , respectively, after deducting underwriting discounts and commissions and estimated offering expenses. 55
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Acquisition
InMay 2021 , we acquired 7DSurgical, Inc. , a pioneer in the image-guided surgery market, that developed and commercialized advanced machine-vision-based registration algorithms to improve surgical workflow and patient care, currently with applications in spine and cranial surgeries. Its flagship system, founded on its machine-vision, image-guided surgery platform, reduces radiation exposure in open spine surgery by eliminating intra-operative CT (computed tomography) and fluoroscopy for purposes of registration, both of which commonly are used for patient registration with traditional navigational systems.
European Spinal Implant Sales and Marketing
During the third quarter of 2021, we ceased in-person sales and marketing operations inFrance to reduce operating expenses, to centralize the management of our European operations in our headquarters located inCarlsbad, California , and to further leverage our existing partnerships to centralize our logistics. As a result, we closed our office located inLyon, France , and eliminated all employment positions at that location. During the fourth quarter of 2021, we notified our European distributors that we will discontinue all sales and marketing activities for the spinal implant portfolio in the European market effective inSeptember 2022 due to the significantly higher upfront and recurring annual costs required to comply with European medical device regulations. We will continue to market and sell our orthobiologics and enabling technologies products in the European market.
Components of Our Results of Operations
Revenue
Our net revenue is derived primarily from the sale of orthobiologics and spinal implants and enabling technology products inNorth America ,Europe ,Asia Pacific andLatin America . Sales are reported net of returns, rebates, group purchasing organization fees and other customer allowances. Inthe 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.
Enabling technologies revenue related to capital equipment, tools and software is recognized upon acceptance by the customer. Revenue from training and installation is recognized upon completion of the training and installation process. Revenue from service contracts is recognized over the term of the contract.
Under certain contracts, the transfer of capital equipment occurs over time as
the customer's purchase commitments on other spinal implant and orthobiologics
products are met. We allocate the transaction price to the multiple performance
obligations under these contracts related to the sale of the products
(recognized either upon the shipment or delivery of goods), the lease of capital
equipment (recognized over the contract period), and the sale of capital
equipment (recognized once the purchase commitments are met).
For all other sales transactions, including sales to international stocking
distributors and private label partners, we generally recognize revenue when the
products are shipped and the customer or stocking distributor obtains control of
the products. There is generally no customer acceptance or other condition that
prevents us from recognizing revenue in accordance with the delivery terms for
these sales transactions.
Cost of Goods Sold
Cost of goods sold primarily consists of the costs of finished goods purchased
directly from third parties and raw materials used in the manufacturing of our
products, plant and equipment overhead, labor costs and packaging costs. The
majority of our orthobiologics products are designed and manufactured
internally. The cost of human tissue and fixed manufacturing overhead
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costs are significant drivers of the cost of goods sold, and consequently our
orthobiologics products, at current production volumes, generate lower gross
margin than our spinal implant products. We rely on third-party suppliers to
manufacture our spinal implants and enabling technology products, and we
assemble the spinal implants into surgical sets at our kitting and distribution
centers. The cost to inspect incoming finished goods is included in the cost of
goods sold. Other costs included in cost of goods sold include amortization of
product technology intangible assets, royalties, scrap and consignment losses,
and charges for expired, excess and obsolete inventory.
Selling and Marketing Expense
Our selling and marketing expenses consist primarily of sales commissions, payroll and other headcount related expenses, marketing expenses, shipping, third-party logistics expenses, depreciation of instrument sets, instrument replacement expense, and cost of medical education and training.
General and Administrative Expense
Our general and administrative expenses consist primarily of payroll and other headcount related expenses, and expenses for information technology, legal, human resources, insurance, finance, and management. We also record gains or losses associated with changes in the fair value of contingent consideration liabilities in general and administrative expenses.
Research and Development Expense
Our research and development (R&D) expenses primarily consist of expenses related to the headcount for engineering, product development, clinical affairs and regulatory functions, as well as consulting services, third-party prototyping services, outside research and clinical studies activities, and materials, production and other costs associated with development of our products. We expense R&D costs as they are incurred.
While our R&D expenses fluctuate from period to period based on the timing of specific initiatives, we expect these costs will increase over time as we continue to design and commercialize new products and expand our product portfolio, add related personnel and conduct additional clinical activities.
Intangible Amortization
Our intangible amortization, including the amounts reported in cost of goods sold, consists of acquisition-related amortization. We expect total annual amortization expense (including amounts reported in cost of goods sold) to be approximately$7.2 million in 2022,$6.6 million in 2023,$4.6 million in 2024,$3.3 million in 2025, and$3.3 million in 2026. See " RESULTS OF OPERATIONS-Year EndedDecember 31, 2021 Compared to Year EndedDecember 31, 2020 -Impairment of Intangible Assets," below.
COVID-19 Pandemic - Impact on our Business
The COVID-19 pandemic has presented a substantial public health and economic challenge around the world and has materially and adversely affected our business. From lateMarch 2020 tomid-May 2020 , among other impacts on our business related to the pandemic, surgeons and their patients deferred surgical procedures in which our products otherwise could have been used. This decrease in demand for our products temporarily recovered to varying degrees beginning in the latter half ofMay 2020 as conditions improved in certain geographies, allowing patients to resume receiving their treatments. However, from lateNovember 2020 tomid-February 2021 , a significant and sustained increase in COVID-19 cases and hospitalization rates once again caused the deferral of surgical procedures in which our products otherwise could have been used. Additionally, in the third quarter of 2021, hospitalization rates in many geographies increased as a result of the spread of the Delta variant. This, along with hospital support staffing shortages in certain geographies, adversely impacted the number of elective surgical procedures and slowed the partial recovery we had been experiencing. We expect to see continued volatility in the demand for our products in 2022 and thereafter as geographies respond to local conditions. We will continue to closely monitor developments related to the pandemic and our decisions will continue to be driven by the health and well-being of our employees, our distributor and surgeon customers, and their patients while maintaining operations to support our customers and their patients in the near-term. At this time, the full extent of the impact of the pandemic on our business, financial condition and results of operations is uncertain and cannot be predicted with reasonable accuracy and will depend on future developments that are also uncertain and cannot be predicted with reasonable accuracy. 57 --------------------------------------------------------------------------------
The effect of the pandemic will not be fully reflected in our results of operations and overall financial performance until future periods. For additional information on the various risks posed by the pandemic on our business, financial condition and results of operations, please see "Risk Factors" in Part I, Item 1A of this report.
RESULTS OF OPERATIONS
Year Ended December 31,
(In thousands, except percentages) 2021 2020
Total revenue, net $ 191,451 $ 154,345
Cost of goods sold 76,864 56,841
Gross profit 114,587 97,504
Gross margin 60 % 63 %
Operating expenses:
Selling and marketing 107,299 84,304
General and administrative 42,944 35,874
Research and development 22,006 16,258
Intangible amortization 3,316 3,169
Impairment of intangible assets - 1,325
Total operating expenses 175,565 140,930
Operating loss (60,978) (43,426)
Other income, net (5,532) (463)
Loss before income taxes (55,446) (42,963)
(Benefit) provision for income taxes (1,100) 218
Net loss $ (54,346) $ (43,181)
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Year Ended
Revenue
Total revenue, net in 2021 increased by
Year Ended December 31,
2021 2020 2021 vs. 2020
(In thousands) % Change
Orthobiologics $ 91,822 $ 78,383 17 %
United States 83,249 71,346 17 %
International 8,573 7,037 22 %
% of total revenue, net 48 % 51 %
Spinal implants and enabling technologies
31 %
United States 88,192 67,550 31 %
International 11,437 8,412 36 %
% of total revenue, net 52 % 49 %
Total revenue, net $ 191,451 $ 154,345 24 %
Year Ended December 31,
2021 2020 2021 vs. 2020
(In thousands) % Change
United States 171,441 138,896 23 %
% of total revenue, net 90 % 90 %
International 20,010 15,449 30 %
% of total revenue, net 10 % 10 %
Total revenue, net $ 191,451 $ 154,345 24 %
Revenue from orthobiologics sales totaled $91.8 million in 2021, an increase of
$13.4 million compared to 2020. Revenue from orthobiologics sales in the United
States increased $11.9 million in 2021 compared to 2020. Revenue from
orthobiologics sales internationally increased $1.5 million in 2021 compared to
2020. In all geographies, revenue in the prior year period was adversely
impacted due to declines in the volume of surgeries performed due to the effects
of the COVID-19 pandemic. Additionally, the revenue growth in the current year
period was driven primarily by higher sales of our fibers-based demineralized
bone matrix (DBM) products as we continue to expand our market share in the
orthobiologics market.
Revenue from spinal implants and enabling technology sales totaled $99.6 million
in 2021, an increase of $23.7 million compared to 2020. Revenue from spinal
implant and enabling technology sales in the United States increased $20.6
million in 2021 compared to 2020 and included $6.0 million of capital sales from
our acquisition of 7D Surgical in May 2021 . Revenue from international sales of
spinal implants and enabling technologies increased $3.0 million in 2021
compared to 2020 and included $0.7 million of capital sales from recently
acquired 7D Surgical. In all geographies, revenue in the prior year period was
adversely impacted due to declines in the volume of surgeries performed due to
the effects of the COVID-19 pandemic. Additionally, the revenue growth in the
current year period was driven by recently launched products, predominantly
those products that were alpha or fully launched in 2020 and 2021 and which have
been important catalysts to our ability to take market share in the spinal
implants market.
Cost of Goods Sold and Gross Margin
Cost of goods sold in 2021 increased$20.0 million from 2020 to$76.9 million . Gross margin was 60% in 2021 compared to 63% in 2020. The decrease in gross margin was due to the$3.7 million charge related to an unfavorable purchase commitment,$1.6 million of technology-related intangible asset amortization and$0.5 million of inventory purchase accounting fair market 59 --------------------------------------------------------------------------------
value adjustments associated with the 7D Surgical acquisition, and higher
inventory scrap all of which were partially offset by
Cost of goods sold included$2.7 million and$1.0 million of amortization for product technology intangible assets for 2021 and 2020, respectively, and$1.0 million and$1.0 million of depreciation expense for 2021 and 2020, respectively. Cost of goods sold for 2021 includes a$3.7 million charge related to a purchase commitment related to NanoMetalene processing services which primarily represents future fixed payments we are obligated to make to a supplier in connection with securing and maintaining long-term backup processing capacity. We no longer anticipate utilizing the backup processor for a meaningful portion of our future NanoMetalene processing service needs throughout the term of the agreement. Selling and Marketing Selling and marketing expenses increased$23.0 million to$107.3 million in 2021. The increase was driven by higher sales commissions due to increased sales in 2021, 7D Surgical sales and marketing costs, higher sales, marketing, customer service and logistics headcount and related expenses, additional spinal instrument set depreciation and instrument replacement expense due to product launches, and higher freight and third-party logistics expenses.
General and Administrative
General and administrative expenses increased$7.1 million to$42.9 million in 2021. The increase was primarily due to costs related to the restructuring of our European sales and marketing organization, legal and other fees incurred related to our acquisition and integration of 7D Surgical and higher general and administrative headcount. Research and Development
R&D expenses increased
Intangible Amortization
Intangible amortization expense, excluding the amounts reported in cost of goods sold for product technology intangible assets, was$3.3 million in 2021 compared to$3.2 million in 2020.
Impairment of Intangible Assets
There was no impairment of intangible assets for the year endedDecember 31, 2021 . Impairment of expandable interbody product technology intangible assets was$1.3 million for the year endedDecember 31, 2020 . During the year endedDecember 31, 2020 , primarily as a result of an expected shift in future product revenue mix more toward a parallel expanding interbody device designed based on our internally developed technology and, in turn, lower future revenue anticipated for the lordotic expanding implant based on acquired technology, our estimated future net sales associated with those acquired product technologies decreased. Accordingly, we evaluated the ongoing value of the product technology intangible assets associated with the acquisition of these assets. Based on this evaluation, we determined that intangible assets with a carrying amount of$1.6 million were no longer recoverable and were impaired, and we wrote those intangible assets down to their estimated fair value of$0.3 million . Income Taxes Year Ended December 31, 2021 2020 (In thousands) Loss before income taxes$ (55,446) $ (42,963) (Benefit from) provision for income taxes (1,100) 218 Effective tax rate 2.0 % (0.5) % 60
-------------------------------------------------------------------------------- We reported an income tax benefit for the year endedDecember 31, 2021 primarily related to foreign operations including 7D Surgical. We reported an income tax expense for the year endedDecember 31, 2020 primarily related to federal, foreign and state operations. In addition, for any pretax losses incurred by the consolidatedU.S. tax group, we recorded no corresponding tax benefit because we concluded it is more-likely-than-not that we will be unable to realize the full value of any resulting deferred tax assets. We will continue to assess our position in future periods to determine if it is appropriate to reduce a portion of our valuation allowance in the future. The acquisition of 7D Surgical was a treated as an asset purchase for US tax purposes and a stock purchase for Canadian tax purposes. As such, we recorded deferred tax assets and liabilities on our Canadian tax attributes. We are able to use our deferred tax liabilities as a source of income against a portion of our deferred tax assets. A valuation allowance was recorded for the portion of the deferred tax assets that is more-likely-than-not that we will be unable to realize. A net tax benefit of$1.5 million was recorded as a result of the 7D Surgical current year losses. This was offset by expenses recorded for indefinite lived intangibles, current foreign and state taxes and prior year state tax true-ups. InMarch 2020 ,Congress enacted the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) to provide certain relief as a result of the COVID-19 pandemic. The CARES Act, among other things, includes provisions relating to net operating loss carryback periods, alternative minimum tax credit refunds, and modification to the net interest deduction limitations. The CARES Act did not have a material impact on our consolidated financial statements for the years endedDecember 31, 2021 or 2020.
Other Income
Other income for the year ended
Business Factors Affecting the Results of Operations
Special Charges and Gains
We define special charges and gains as expenses or non-operating gains and losses 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 and
financial results in the same way that management does and use this information
in their assessment of our core business and valuation.
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Loss before income taxes includes the following special charges and gains for
the years ended
Year Ended December 31,
2021 2020
Special Charges and (Gains): (In thousands) Severance and other costs associated with European sales and marketing reorganization
1,826 -
Purchase accounting inventory fair market value 542 -
Unfavorable purchase commitment 3,704 -
Idle manufacturing plant costs - 974
Impairment of intangible assets(1) - 1,325
Acquisition and integration-related charges for 7D Surgical 2,302 -
Gain on forgiveness of PPP Loan (6,173) -
Total Special Charges, net $ 2,201 $ 2,299 (1) Relates to the impairment of acquired NLT product technology intangible assets.
The items reported above are reflected in the consolidated statements of
operations as follows:
Year Ended December 31,
2021 2020
(In thousands)
Cost of goods sold $ 4,246 $ 974
Impairment of intangible assets $ - $ 1,325
General and administrative 4,128 -
Other income, net (6,173) $ -
Total Special Charges, net $ 2,201 $ 2,299 Liquidity and Capital Resources
Overview, Capital Resources, and Capital Requirements
As ofDecember 31, 2021 , we had cash and cash equivalents totaling approximately$83.1 million , and$26.4 million of current borrowing capacity was available under our credit facility. We believe that our cash and cash equivalents, and the amount currently available to us under our credit facility, will be sufficient to fund our operations and meet our contractual obligations for at least the next twelve months.
Paycheck Protection Program Loan
InApril 2020 , due to the economic uncertainty resulting from the impact of the COVID-19 pandemic on our operations and to support our ongoing operations and retain all employees, we applied for a loan under the Paycheck Protection Program (PPP) of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). We received a loan in the original principal amount of$7.2 million . The Company subsequently repaid$1.0 million of the loan. We used the loan proceeds for purposes consistent with the terms of the PPP and applied for forgiveness of the entire$6.2 million loan balance, which was granted inJune 2021 . The$6.2 million gain on the loan forgiveness is included in other income, net, in the consolidated statement of operations. There were no amounts outstanding under the loan atDecember 31, 2021 . The loan is subject to audit by theSmall Business Association (SBA) for up to six years after the date of loan forgiveness. If the SBA determines that we did not qualify for all or part of the loan, we would need to repay all or a part of the loan. 62 --------------------------------------------------------------------------------
Credit Facility
We have a
AtDecember 31, 2021 , 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$0.1 million from the$26.4 million available as ofDecember 31, 2021 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$109.0 million atDecember 31, 2021 , and therefore that financial covenant was not applicable at that time. Underwritten Offerings
In
In
Cash and Cash Equivalents
We had cash and cash equivalents totaling approximately
Cash Flows
Year Ended December 31,
2021 2020
(In thousands)
Net cash used in operating activities $ (33,512) $ (24,599)
Net cash used in investing activities (55,358) (17,042)
Net cash provided by financing activities 95,545 98,138
Effect of exchange rate changes on cash and cash equivalents (382) 117
Net change in cash and cash equivalents $ 6,293 $ 56,614
Net cash used in operating activities was
Net cash used by investing activities was$55.4 million in 2021 compared to$17.0 million in 2020. The$38.3 million increase was primarily due to$28.0 million of net cash paid for the 7D Surgical acquisition,$10.0 million increase in purchases of property and equipment and$0.4 million of increased additions to technology assets. 63 --------------------------------------------------------------------------------
Net Cash Provided by Financing Activities
Net cash provided by financing activities was$95.5 million in 2021 compared to$98.1 million in 2020. Cash flows provided by financings in 2021 were comprised primarily of$94.5 million in net proceeds from issuance of common stock,$4.0 million of proceeds from the issuance of common stock under our employee stock purchase plan and from the exercise of stock options partially offset by$2.9 million in repurchases of common stock from vesting of restricted stock awards to cover statutory tax withholding requirements.
Off-Balance Sheet Arrangements
There were no off-balance sheet arrangements as ofDecember 31, 2021 that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to our business.
Contractual Obligations and Commitments
As ofDecember 31, 2021 , we were obligated to pay the following amounts under various agreements: Less than 1 More than 5 Total Year 1-3 Years 4-5 Years Years (In millions) Operating Leases 10.2 2.8 3.2 3.0 1.2 Purchase Obligations 30.7 30.7 - - - Other 4.1 2.4 1.7 - - Total$ 45.0 $ 35.9 $ 4.9 $ 3.0 $ 1.2 The "Other" line item includes minimum milestone payments under certain license agreements. The table above excludes the following liabilities because we cannot reliably estimate the timing of when they may become payable, if ever:
•royalty payments related to the NLT acquisition; and
•up to
Critical Accounting Policies and the Use of Estimates
Our discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States of America . 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, revenue recognition, net realizable value of inventories, discount rates and estimated projected cash flows used to value and test impairments of goodwill, identifiable intangible and long-lived assets, fair value estimates related to business combinations, assumptions related to the timing and probability of product launch dates, discount rates matched to the estimated timing of payments, probability of success rates and discount adjustments on the related cash flows for contingent considerations in business combinations, depreciation and amortization periods for identifiable intangible and long-lived assets, computation of taxes, valuation allowances recorded against deferred tax assets, the valuation of stock-based compensation and loss contingencies. These estimates are based on historical experience and on various other assumptions believed to be reasonable under the current circumstances. Actual results could differ from these estimates. The full extent to which the COVID-19 pandemic will directly or indirectly impact the Company's business, results of operations and financial condition, including revenues, expenses, manufacturing, research and development costs and employee-related compensation, will depend on future developments that are highly uncertain, including as a result of variants of the virus that causes COVID-19 or other information that may emerge concerning COVID-19 and the actions taken to 64 -------------------------------------------------------------------------------- contain or treat COVID-19, as well as the economic impact on local, regional, national and international customers and markets. The Company has made estimates of the impact of the pandemic within its financial statements and there may be changes to those estimates in future periods. Actual results may differ from these estimates.
We believe that the following accounting policies, which form the basis for developing these estimates, are those that are most critical to the presentation of our consolidated financial statements and require the more difficult subjective and complex judgments:
Revenue Recognition
Net sales are derived primarily from the sale of orthobiologics and spinal implants and enabling technology products globally. 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) and in the case of capital equipment, when the equipment has been accepted by the customer. 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. 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. In certain sales arrangements, the Company fulfills its obligations and bills the customer for the products prior to the shipment of goods. The Company allocates the transaction price to the multiple performance obligations under these contracts, including delivery of the products and the third-party logistics (3PL) performance obligations. Revenue related to product sales under these arrangements is not recognized until the Company delivers the products to the customer's dedicated space within the Company's facility, at which point the customer obtains control of the products. Revenue from the related 3PL obligations consists of revenue from storage of products which is recognized ratably over the service period, and revenue from shipping services which is recognized upon performance of such obligation. Additionally, the Company allocates the transaction price to the multiple performance obligations under the contracts related to the sale of capital equipment, including the capital equipment, tools and software, the training and installation and the service. Revenue related to capital equipment, tools and software under these arrangements is recognized upon customer acceptance of the system. Revenue from training and installation is recognized upon completion of the training and installation process. Revenue from service contracts is recognized over the term of the contract. Under certain contracts, the transfer of capital equipment occurs over time as the customer's purchase commitments on other spinal implant and orthobiologics products are met. The Company allocates the transaction price to the multiple performance obligations under these contracts related to the sale of the products (recognized either upon the shipment or delivery of goods, as discussed above), the lease of capital equipment (recognized over the contract period), and of the sale of capital equipment (recognized once the purchase commitments are met).
Deferred revenue primarily consists of payments received in advance of revenue recognition from the sales of the Company's capital equipment and related products as described above and is recognized as the revenue recognition criteria are met.
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Product royalties account for less than 1% of total revenue for any of the
periods presented and are estimated and recognized in the same period that the
royalty-based products are sold by licensees. The Company estimates and
recognizes royalty revenue based upon communication with licensees, historical
information and expected sales trends. Differences between actual revenues and
estimated royalty revenues are adjusted in the period in which they become
known, which is typically the following quarter. Historically, such adjustments
have not been material.
Allowance for Doubtful Accounts Receivable
We evaluate the collectability of accounts receivable based on a combination of factors. In circumstances where a specific customer is unable to meet its financial obligations to us, we record an allowance to reduce the net recognized receivable to the amount we reasonably expect to collect. For all other customers, we record allowances for doubtful accounts based on the length of time the receivables are past due, the current business environment and our historical experience. If the financial condition of customers or the length of time that receivables are past due were to change, we may incur bad debt expense in general and administrative expense.
Inventories
Inventories, consisting of purchased materials, direct labor and manufacturing overhead, are stated at the lower of cost, the value determined by the first-in, first-out method, or the net realizable value methods. At each balance sheet date, we evaluate ending inventories for excess quantities, obsolescence or shelf-life expiration. Our evaluation includes an analysis of our current and future strategic plans, historical sales levels by product, projections of future demand by product, the risk of technological or competitive obsolescence for our products, general market conditions, a review of the shelf-life expiration dates for our products, and the feasibility of reworking or using excess or obsolete products or components in the production or assembly of other products that are not obsolete or for which we do not have excess quantities in inventory. To the extent that we determine there are excess or obsolete quantities or quantities with a shelf life that is too near its expiration for us to reasonably expect that we can sell those products prior to their expiration, we adjust their carrying value to estimated net realizable value. If future demand or market conditions are lower than our projections or if we are unable to rework excess or obsolete quantities into other products, we may record further adjustments to the carrying value of inventory through a charge to cost of goods sold in the period the revision is made. In addition, we capitalize inventory costs associated with certain products prior to regulatory approval, based on management's judgment of probable economic benefit. We could be required to expense previously capitalized costs related to pre-approval inventory upon a change in such judgment, due to, among other potential factors, a denial or delay of approval by necessary regulatory bodies or a decision by management to discontinue the related development program.
Leases
We determine if an arrangement is a lease at inception. Our leases primarily
relate to administrative, manufacturing, research, and distribution facilities
and various manufacturing, office and transportation equipment. Lease assets
represent our right to use an underlying asset for the lease term and lease
liabilities represent the obligation to make lease payments arising from the
lease. Lease assets and liabilities are recognized at commencement date based on
the present value of lease payments over the lease term. As our leases do not
provide an implicit rate, our incremental borrowing rate is used as a discount
rate, based on the information available at the commencement date, in
determining the present value of lease payments. Lease assets also include the
impact of any prepayments made and are reduced by impact of any lease
incentives.
We made an accounting policy election for short-term leases, such that we will
not recognize a lease liability or lease asset on its balance sheet for leases
with a lease term of twelve months or less as of the commencement date. Rather,
any short-term lease payments will be recognized as an expense on a
straight-line basis over the lease term. The current period short-term lease
expense reasonably reflects the Company's short-term lease commitments.
We made a policy election for all classifications of leases to combine lease and
non-lease components and to account for them as a single lease component.
Variable lease payments are excluded from the lease liability and recognized in
the period in which the obligation is incurred. Additionally, lease terms may
include options to extend or terminate the lease when it is reasonably certain
we will exercise the option.
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Valuation of Identifiable Intangible Assets
Our intangible assets are comprised primarily of product technology, customer relationships, and trade name and trademarks. We make significant judgments in relation to the valuation of intangible assets resulting from business combinations and asset acquisitions. Significant estimates include, but are not limited to, measurements estimating cash flows and determining the appropriate discount rate. Upon acquisition, identifiable intangible assets are recorded at fair value and are carried at cost less accumulated amortization. Intangible assets with finite lives are amortized on a straight-line basis over their estimated useful lives of 1 to 20 years. We base the useful lives and related amortization expense on the period of time we estimate the assets will generate revenues or otherwise be used by the Company. We also periodically review the lives assigned to our intangible assets to ensure that our initial estimates do not exceed any revised estimated periods from which we expect to realize cash flows from the technologies. If a change were to occur in any of the above-mentioned factors or estimates, the likelihood of a material change in our reported results would increase. We review identifiable intangible assets with definite lives for impairment quarterly or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider in determining whether a triggering event has occurred include a significant change in the business climate, legal factors, operating performance indicators, competition, sale or disposition of significant assets or products. Application of these impairment tests requires significant judgments, including estimation of future cash flows, which depends on internal forecasts, estimation of the long-term rate of growth for our business, the useful life over which cash flows will occur and determination of our weighted-average cost of capital. Should a triggering event be deemed to occur, we are required to estimate the expected net cash flows to be realized over the life of the asset and/or the asset's fair value. Fair values are determined by a discounted cash flow model. These estimates are also subject to significant management judgment including the determination of many factors such as revenue growth rates, cost growth rates, terminal value assumptions and discount rates. Changes in these estimates can have a significant impact on the determination of cash flows and fair value and could result in future material impairments. Due to market trend factors, new features necessary to be competitive, and changing pricing dynamics, there were shifts in the commercialization strategy of some of the acquired product technologies and the estimated future net sales associated with those technologies. During the years endedDecember 31, 2021 and 2020, we performed a recoverability test and determined that the expected net cash flows to be realized over the life of the technology related intangible assets were no longer recoverable and were impaired. See Note 5, "Balance Sheet", to the Notes to Consolidated Financial Statements included in Part IV of this report for additional information regarding these impairments. If our estimates of expected cash flows continue to decline, we may record additional impairment charges on the related intangible assets in the future.
Goodwill represents the excess of the purchase prices of an acquired business over the fair value of the underlying net tangible and intangible assets. The Company is required to assess goodwill and other indefinite-lived intangible assets for impairment annually, or more frequently if circumstances indicate impairment may have occurred. We first assess qualitative factors to determine whether it is necessary to perform the quantitative goodwill impairment test. If, after completing the qualitative assessment, we determine it is more likely than not that the estimated fair value is greater than the carrying value, we conclude no impairment exists. Alternatively, if we determine in the qualitative assessment that it is more likely than not that the fair value is less than its carrying value, then we perform a quantitative goodwill impairment test to identify both the existence of an impairment and the amount of impairment loss, by comparing the fair value of the reporting unit with its carrying amount, including goodwill. If the estimated fair value of the reporting unit is less than the carrying value, then a goodwill impairment charge will be recognized in the amount by which the carrying amount exceeds the fair value, limited to the total amount of goodwill allocated to that reporting unit. We perform the goodwill annual assessment test during the fourth quarter every year and when an event occurs or circumstances change such that it is reasonably possible that an impairment may exist. We assess qualitative factors to determine whether goodwill is impaired. The qualitative analysis includes assessing the impact of changes in certain factors including: (1) changes in forecasted operating results and comparing actual results to projections, (2) changes in the industry or our competitive environment since the acquisition date, (3) changes in the overall economy, our market share and market interest rates since the acquisition date, (4) trends in the stock price and related market capitalization 67 --------------------------------------------------------------------------------
and enterprise values, (5) trends in peer companies' total enterprise value metrics, and (6) additional factors such as management turnover, changes in regulation and changes in litigation matters.
Based on our qualitative assessment performed during the fourth quarter of 2021, we concluded that it was more likely than not that the estimated fair value of our reporting units exceeded their carrying value as ofDecember 31, 2021 , and therefore, determined it was not necessary to perform a quantitative goodwill impairment test.
Valuation of Stock-Based Compensation
The estimated fair value of stock-based awards exchanged for employee and non-employee director services are expensed over the requisite service period.
For purposes of calculating stock-based compensation, we estimate the fair value of stock options using a Black-Scholes option-pricing model. The determination of the fair value of stock-based payment awards utilizing the Black-Scholes model is affected by our stock price and several assumptions, including expected volatility, expected term, risk-free interest rate and expected dividends. Due to our limited historical data as a separate public company, 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 is calculated using the historical weighted average term of the Company's options. The risk-free interest rates are derived from theU.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. We considered that we have never paid cash dividends and do not currently intend to pay cash dividends. The fair value of restricted stock awards granted is based on the market price of our common stock on the date of grant. In addition, we apply an expected forfeiture rate when amortizing stock-based compensation expense. The expected forfeiture rate is based on historical experience of pre-vesting forfeitures on awards by each homogenous group of shareowners and is estimated to be 9% and 13% annually for all non-executive employees for the years endedDecember 31, 2021 and 2020, respectively. We do not apply a forfeiture rate to awards (including stock options) 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. If factors change and we employ different assumptions, stock-based compensation expense may differ significantly from what we have recorded in the past. If there is a difference between the assumptions used in determining stock-based compensation expense and the actual factors which become known over time, specifically with respect to anticipated forfeitures, we may change the input factors used in determining stock-based compensation costs for future grants. These changes, if any, may materially impact our results of operations in the period such changes are made. Income Taxes Our deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and their basis for income tax purposes, and also the temporary differences created by the tax effects of capital loss, net operating loss and tax credit carryforwards. We record valuation allowances to reduce deferred tax assets to the amounts that are more likely than not to be realized. We could recognize no benefit from our deferred tax assets or we could recognize some or all of the future benefit depending on the amount and timing of taxable income we generate in the future. Changes in the tax rates of the various jurisdictions in which we operate affect our profits. In addition, we maintain a reserve for uncertain tax benefits, changes to which could impact our effective tax rate in the period such changes are made. The effective tax rate can also be impacted by changes in tax law and in valuation allowances of deferred tax assets. Our provision for income taxes may change period-to-period based on specific events, such as the settlement of income tax audits and changes in tax laws, as well as general factors, including the geographic mix of income before taxes, state and local taxes. We recognize a tax benefit from an uncertain tax position only if it is more likely than not to be sustained upon examination based on the technical merits of the position. The amount of the accrual for which an exposure exists is not material for any period presented. 68 -------------------------------------------------------------------------------- We believe that we have identified all reasonably identifiable exposures and the reserve we have established for identifiable exposures is appropriate under the circumstances; however, it is possible that additional exposures exist and that exposures will be settled at amounts different than the amounts reserved. It is also possible that changes in facts and circumstances could cause us to either materially increase or reduce the carrying amount of our tax reserves.
Loss Contingencies
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. The Company accrues for loss contingencies when it is deemed probable that a loss has been incurred and that loss is estimable. The amounts accrued are based on the full amount of the estimated loss before considering insurance proceeds, and do not include an estimate for legal fees expected to be incurred in connection with the loss contingency. The Company accrues legal fees expected to be incurred in connection with loss contingencies as those fees are incurred by outside counsel as a period cost. The Company's financial statements do not reflect any material amounts related to possible unfavorable outcomes of claims and lawsuits to which it is currently a party because it currently believes that such claims and lawsuits are not expected, individually or in the aggregate, to result in a material and adverse effect on its financial condition.
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