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. and 7D Surgical, 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 of our dependence on PcoMed to supply products incorporating NanoMetalene technology and a limited number of third-party suppliers for components and raw materials and certain processing services; 52 -------------------------------------------------------------------------------- •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 inthe United States and internationally, and enforcement of 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; •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. Spin-off from IntegraSeaSpine was incorporated inDelaware onFebruary 12, 2015 in connection with the spin-off of the orthobiologics and spinal implant business of Integra. The spin-off occurred onJuly 1, 2015 . Subsequent to the spin-off, our financial statements are presented on a consolidated basis, as we became a separate publicly-traded company onJuly 1, 2015 . 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 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 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 degenerative, minimally invasive surgery (MIS), and complex spinal deformity procedures. OurU.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 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 distributors that purchase products directly from us and independently sell them. For the years endedDecember 31, 2020 and 2019, international sales accounted for approximately 10% and 11% of our revenue, respectively. Our policy is not to sell our products through or to participate in physician-owned distributorships. For the year endedDecember 31, 2020 , our total revenue, net was$154.3 million and our net loss was$43.2 million . For the same period, revenue from sales of orthobiologics and spinal implants totaled$78.4 million and$75.9 million , respectively. 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, 2020 , our cash and cash equivalents totaled$76.8 million . InJanuary 2020 , we completed an underwritten offering of our common stock that raised net proceeds of approximately$91.6 million , after deducting underwriting discounts and commissions and estimated offering expenses. As ofFebruary 26, 2021 , we had 421 employees. 53 -------------------------------------------------------------------------------- Components of Our Results of Operations Revenue Our net revenue is derived primarily from the sale of orthobiologics and spinal implant products acrossNorth 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. 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 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 implant products, and we assemble them 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 to independent sales agents, 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. 54 -------------------------------------------------------------------------------- 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$4.2 million in 2021,$4.1 million in 2022,$3.4 million in 2023,$1.5 million in 2024, and$0.2 million in 2025. See "RESULTS OF OPERATIONS-Year EndedDecember 31, 2020 Compared to Year EndedDecember 31 , 2019-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. We 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. •Surgery Deferrals: 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 recovered to varying degrees beginning in the latter half of May as local conditions improved in certain geographies that opened after an initial improvement in COVID-19 infection rates, allowing patients to resume receiving their treatments, though demand was below pre-pandemic levels for much of 2020 and continues to be below pre-pandemic levels thus far into 2021. We expect to see continued volatility throughout 2021 and possibly thereafter as geographies respond to current local conditions. The duration of deferrals of surgical procedures, the magnitude of such deferrals, the timing and extent of the economic impact of the pandemic, and the pace at which the economy recovers therefrom, cannot be determined at this time. We continue to work closely with our surgeon customers, distributors and suppliers to navigate through this unforeseen event while maintaining flexible operations and investing for future growth. •Operations. Our sales, marketing and research and development efforts have continued since the outbreak of the pandemic, but steps we have taken in response to the pandemic have adversely affected our business. To protect the safety, health and well-being of our employees, distributor and surgeon customers, and communities, we implemented preventative measures including travel restrictions, the temporary closures of certain of our facilities, and requiring all office-based employees to work from home, except for those related to manufacturing, distribution and select others, as permitted under governmental orders. Production at our Irvine orthobiologics manufacturing facility was temporarily halted in April andMay 2020 and was restarted inJune 2020 . The change in the manner in which our workforce is functioning could adversely affect sales and may delay the product launches we plan to make in 2021 and beyond. Our manufacturing, distribution and supply chain has largely been uninterrupted, but could be disrupted as a result of the pandemic, including because of staffing shortages, production slowdowns, stoppages, or disruptions in delivery systems. •Cost Containment: We initiated actions to generate savings in areas such as travel, events, clinical studies, and consulting. We also implemented a temporary freeze on new hires and our senior leadership team voluntarily agreed to a 25% reduction in their base salaries fromApril 26, 2020 throughJune 20, 2020 . •Product Development: In the early stages of the pandemic, we reduced and/or delayed spending on several planned product development and launch initiatives. We have since increased our spending on product development activities and capital expenditures and inventory for product launches from the reduced levels during the early stages of the pandemic as our revenue and cash flow and demand for our products improved. We continue to evaluate the timing and scope of planned product development and launch initiatives and capital expenditures and inventory growth investments to support those initiatives. Based on that evaluation, we may delay and/or reduce additional spending associated with these initiatives, which may delay the product launches we plan to make in 2021 and beyond, and could adversely affect our future revenue growth or such growth may not be consistent with the timelines we anticipated previously. •Year ended 2020 Results. Due to the impacts from the pandemic, our total revenue, net, gross profit and gross margin for the year endedDecember 31, 2020 were significantly lower compared to the same period in 2019. 55 -------------------------------------------------------------------------------- •Outlook. 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. As of the filing date of this report, the extent to which the pandemic may impact our financial condition or results of operations or guidance is uncertain. 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) 2020 2019
Total revenue, net $ 154,345 $ 159,083
Cost of goods sold 56,841 57,979
Gross profit 97,504 101,104
Gross margin 63 % 64 %
Operating expenses:
Selling and marketing 84,304 83,445
General and administrative 35,874 33,594
Research and development 16,258 15,125
Intangible amortization 3,169 3,169
Impairment of intangible assets 1,325 4,993
Total operating expenses 140,930 140,326
Operating loss (43,426) (39,222)
Other income, net (463) (302)
Loss before income taxes (42,963) (38,920)
Provision for income taxes 218 356
Net loss $ (43,181) $ (39,276)
56-------------------------------------------------------------------------------- Year EndedDecember 31, 2020 Compared to Year EndedDecember 31, 2019 Revenue Total revenue, net for the year ended 2020 decreased by$4.7 million , or 3%, to$154.3 million compared to$159.1 million for the prior year. Year Ended December 31, 2020 2019 2020 vs. 2019 (In thousands) % Change Orthobiologics$ 78,383 $ 81,299 (4) % United States 71,346 73,543 (3) % International 7,037 7,756 (9) % % of total revenue, net 51 % 51 % Spinal Implants$ 75,962 $ 77,784 (2) % United States 67,550 68,308 (1) % International 8,412 9,476 (11) % % of total revenue, net 49 % 49 % Total revenue, net$ 154,345 $ 159,083 (3) % Year Ended December 31, 2020 2019 2020 vs. 2019 (In thousands) % Change United States 138,896 141,851 (2) % % of total revenue, net 90 % 89 % International 15,449 17,232 (10) % % of total revenue, net 10 % 11 % Total revenue, net$ 154,345 $ 159,083 (3) % Revenue from orthobiologics sales inthe United States decreased$2.2 million in 2020 compared to 2019. This decrease was driven by significantly lower demand during the second quarter of 2020 for our orthobiologics products due to hospitals and patients deferring procedures and other factors related to the impact of the COVID-19 pandemic. Revenue from orthobiologics sales internationally decreased$0.7 million in 2020 compared to 2019 and was similarly affected by significantly reduced demand from our stocking distributors caused by the impact of the pandemic. See "COVID-19 Pandemic - Impact on our Business," above. Revenue from spinal implant sales inthe United States decreased$0.8 million in 2020 compared to 2019. This decrease was driven by significantly lower demand during the second quarter of 2020 for our spinal implant products due to hospitals and patients deferring procedures and other factors related to the COVID-19 pandemic. Revenue from international sales of spinal implants decreased$1.1 million in 2020 compared to 2019 and was similarly affected by significantly reduced demand from our stocking distributors caused by the impact of the pandemic. Cost of Goods Sold and Gross Margin Cost of goods sold in 2020 decreased$1.1 million from 2019 to$56.8 million . Gross margin was 63% in 2020 compared to 64% in 2019. The decrease in gross margin was primarily due to the impact of expensing all costs associated with our Irvine manufacturing facility while production there was temporarily halted during April andMay 2020 . Additionally, we incurred higher spinal implant excess and obsolete inventory charges due to declining sales of older systems and from higher purchases of low sales volume implants that are deployed in standard set configurations of new and recently launched systems. These items were offset by$1.2 million in lower product technology intangible asset amortization. 57 -------------------------------------------------------------------------------- Cost of goods sold included$1.0 million and$2.2 million of amortization for product technology intangible assets for 2020 and 2019, respectively, and$1.0 million and$0.9 million of depreciation expense for 2020 and 2019, respectively. Selling and Marketing Selling and marketing expenses increased$0.9 million to$84.3 million in 2020. The increase was mainly driven by higher headcount and related expenses, third party logistics fees and depreciation on recently deployed spinal implant sets, partially offset by lower sales commission expense due to a decline in revenue and decreases in tradeshow and travel costs due to limited in-person events as a result of the pandemic. General and Administrative General and administrative expenses increased$2.3 million to$35.9 million in 2020. The increase was driven by higher salaries and wages and stock-based compensation expense in 2020 compared to 2019 due to increased headcount. The increase also included a$0.4 million change in non-cash losses/(gains) from the settlement of contingent consideration liabilities related to a previous acquisition. Research and Development R&D expenses increased$1.1 million to$16.3 million , or 11% of revenue, in 2020. The increase was due to higher research and development headcount and program-related expenses associated with the increased number of products we launched in 2020, which were slightly offset by lower travel, consulting and other fees. Intangible Amortization Intangible amortization expense, excluding the amounts reported in cost of goods sold for product technology intangible assets, remained consistent at$3.2 million in 2020 compared to 2019. Impairment of Intangible Assets Impairment of intangible assets was$1.3 million and$5.0 million for the year endedDecember 31, 2020 and 2019, respectively. 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 . During the year endedDecember 31, 2019 , we recorded a$5.0 million intangible asset impairment charge related to a shift in our commercialization strategy with respect to those same acquired product technologies 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$1.8 million . Income Taxes Year Ended December 31, 2020 2019 (In thousands) Loss before income taxes$ (42,963) $ (38,920) Provision for income taxes 218 356 Effective tax rate (0.5) % (0.9) % 58
-------------------------------------------------------------------------------- The primary drivers of the effective tax rate in 2020 and 2019 were expenses related to current state and foreign income taxes and the reduction of foreign deferred tax assets. The 2019 expenses were partially offset by a benefit related to the release of uncertain tax positions due to the lapse of the statute of limitations. In addition, for any pretax losses incurred subsequent to the spin-off by the consolidatedU.S. tax group, we recorded no corresponding tax benefit because we have concluded that it is more-likely-than-not that we will be unable to realize the benefit from 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. 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 year endedDecember 31, 2020 . We will continue to monitor any effects that may result on our consolidation financial statements from the CARES Act. 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 years endedDecember 31, 2020 and 2019: Year Ended December 31, 2020 2019 Special Charges/(Gains): (In thousands) Impairment of intangible assets(1) 1,325 4,993 Loss/(Gain) from change in fair value of contingent consideration liabilities(2) 176 (263) Total Special Charges$ 1,501 $ 4,730 (1) Relates to the impairment of acquired product technology intangible assets. (2) Relates to the net increase/(decrease) in the fair value of contingent liabilities associated with an acquisition. The items reported above are reflected in the consolidated statements of operations as follows: Year Ended December 31, 2020 2019 (In thousands) Impairment of intangible assets$ 1,325 $ 4,993 General and administrative 176 (263) Total Special Charges$ 1,501 $ 4,730 59
-------------------------------------------------------------------------------- Liquidity and Capital Resources Overview, Capital Resources, and Capital Requirements As ofDecember 31, 2020 , we had cash and cash equivalents totaling approximately$76.8 million , and$23.0 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 . We subsequently repaid$1.0 million of the loan. Under the terms of the PPP, subject to specified limitations, the loan may be forgiven if the proceeds are used in accordance with the CARES Act. InOctober 2020 , we applied for forgiveness of the entire loan. As ofMarch 5, 2021 , we have not learned the extent to which our loan will be forgiven. Any unforgiven portion of the loan is payable over five years at an interest rate of 1%, with a deferral of payments until the date the lender receives the applicable forgiven amount from the SBA. No assurance is provided that we will obtain forgiveness of the loan in whole or in part. Credit Facility We have a$30.0 million credit facility withWells Fargo Bank, National Association which matures inJuly 2021 , subject to a one-time, one-year extension at our election. In addition, at any time throughJuly 27, 2021 , 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. AtDecember 31, 2020 , 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$3.5 million from the$23.0 million available as ofDecember 31, 2020 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. InApril 2020 , we received the lender's consent to obtain the PPP loan. 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$98.0 million atDecember 31, 2020 , and therefore that financial covenant was not applicable at that time. Business Combinations InAugust 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 inSeptember 2016 and issued 350,000 shares of our common stock inJanuary 2017 as contingent closing consideration. As ofDecember 31, 2020 , included in contingent consideration liabilities was a$0.1 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 through 2030. The contingent milestone payments, if any, are payable in cash or in shares of our common stock, at our election. In each of the monthsJuly 2020 andAugust 2020 , we elected to pay$1.0 million of our milestone payments in shares of our common stock. The contingent royalty payments are payable in cash. Underwritten Offering InJanuary 2020 , we entered into an Underwriting Agreement withPiper Sandler & Co. andCanaccord Genuity LLC relating to the issuance and sale of 6,800,000 shares of our common stock at a public offering price of$12.50 per share, before underwriting discounts and commissions. We granted the underwriters an option, exercisable for 30 days, to purchase up to an additional 1,020,000 shares of common stock. The underwriters exercised this option and the offering closed onJanuary 10 , 60 -------------------------------------------------------------------------------- 2020 with the sale of 7,820,000 shares of our common stock, resulting in proceeds of approximately$91.6 million , after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Cash and Cash Equivalents We had cash and cash equivalents totaling approximately$76.8 million and$20.2 million atDecember 31, 2020 andDecember 31, 2019 , respectively. Cash Flows Year Ended December 31, 2020 2019 (In thousands) Net cash used in operating activities$ (24,599) $ (20,277) Net cash (used in) provided by investing activities (17,042) 17,166 Net cash provided (used in) by financing activities 98,138 (829) Effect of exchange rate changes on cash and cash equivalents 117 (94) Net change in cash and cash equivalents$ 56,614 $ (4,034) Net Cash Flows Used in Operating Activities Net cash used in operating activities was$24.6 million and$20.3 million during 2020 and 2019, respectively. Operating cash outflows during 2020 increased by$4.3 million compared to 2019. The increase was due to a$2.4 million higher change in working capital, with a$12.6 million increase in working capital in 2020 compared to$10.2 million in 2019. The higher working capital change was primarily related to an increase in inventory, partially offset by a decrease in accounts receivable. Additionally, net loss adjusted for non-cash items was higher by$1.9 million , increasing to$12.0 million in 2020, compared to$10.1 million in 2019. Net Cash Flows (Used in) Provided by Investing Activities Net cash used by investing activities was$17.0 million in 2020 compared to net cash provided by investment activities of$17.2 million in 2019. The$34.2 million decrease was primarily due to$25.0 million of purchases of short-term investments,$5.0 million less maturities of short-term investments,$3.2 million more purchases of property and equipment, and$1.0 million of additions to technology assets. Net Cash Flows Provided by (Used in) Financing Activities Net cash provided by financing activities was$98.1 million in 2020 compared to net cash used in financing activities of$0.8 million in 2019. Cash flows provided by financings in 2020 were comprised primarily of$91.6 million from issuance of common stock, net of offering costs,$6.2 million of net proceeds from the PPP loan, and$2.6 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 tax payments of$2.2 million 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 and$0.1 million of contingent consideration payments to NLT. Off-Balance Sheet Arrangements There were no off-balance sheet arrangements as ofDecember 31, 2020 that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to our business. 61 -------------------------------------------------------------------------------- Contractual Obligations and Commitments As ofDecember 31, 2020 , we were obligated to pay the following amounts under various agreements: Less than 1 More than 5 Total Year 1-3 Years 4-5 Years Years (In millions) Operating Leases 11.1 2.6 3.8 2.8 1.9 Purchase Obligations 20.4 20.4 - - - Other 0.2 0.2 - - - Total$ 31.7 $ 23.2 $ 3.8 $ 2.8 $ 1.9 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 asset acquisition; and •up to$2.0 million in the aggregate of potential royalty and milestone payments under a license agreement that may be payable at various stages of developing the licensed technology and sales of products using the licensed technology. 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 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 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 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 our business, results of operations and financial condition, including sales, expenses, manufacturing, research and development costs and employee-related compensation, will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19 and the actions taken to contain it or treat COVID-19, as well as the economic impact on local, regional, national and international customers and markets. We have made estimates of the impact of COVID-19 within our 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 Our net sales are derived primarily from the sale of orthobiologics and spinal implant products globally. Revenue is recognized when obligations under the terms of a contract with our customer are satisfied which occurs with the transfer of control of our 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 62 -------------------------------------------------------------------------------- procedure (implanted in a patient). Revenue is measured as the amount of consideration we expect 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, we estimate 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 our 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 our anticipated performance and all information (historical, current and forecasted) that is reasonably available. We reduce 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. We estimate the amount of sales returns and allowances that will eventually be incurred. Certain contracts with stocking distributors contain provisions requiring us 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, we fulfill our obligations and bill the customer for the products prior to the shipment of goods. We allocate 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 we deliver the products to the customer's dedicated space within our 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. 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. We estimate and recognize 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 63 -------------------------------------------------------------------------------- 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 the 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. 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. Intangible assets 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, 2020 and 2019, 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 4, "Balance Sheet", to the Notes to Consolidated Financial Statements included in Part 64 -------------------------------------------------------------------------------- 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. 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 13% and 14% annually for all non-executive employees for the years endedDecember 31, 2020 and 2019, 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. 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. 65
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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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