SeaSpine Holdings Corp - Annual Report: 2019 (Form 10-K)

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Our integrated orthobiologics business designs and processes an extensive and differentiated offering of orthobiologics products. We offer a broad range of differentiated orthobiologics products that better positions us to meet the needs of our surgeon customers compared to our competitors who focus primarily on spinal implant products. For example, our proprietary Accell Bone Matrix technology is combined with traditional demineralized bone matrix (DBM) forms designed to provide both immediate and sustained availability of the natural array of osteoinductive bone proteins. Similarly, our research and development team developed our proprietary demineralized fiber technology by testing various geometries in an effort to optimize the combination of inductivity, conductivity, handling, and expansion properties. We believe that we have the number two market position in the United States DBM market with an estimated 18% market share.

•	A range of innovative, PEEK interbody devices that incorporate NanoMetalene, a proprietary titanium surface technology. We currently offer a wide range of sterile-packaged interbody devices that incorporate our proprietary

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A synergistic channel strategy for orthobiologics products. Our dual branding strategy allows us to market our orthobiologics products through independent sales agents who carry competitive spinal implant products. Specifically, we market our orthobiologics under the SeaSpine and Isotis brands, which allows sales agents who sell spinal implant products competitive with ours to continue to represent our orthobiologics products. We believe this dual branding strategy allows us to penetrate a greater number of customer accounts than we would otherwise serve if we marketed our orthobiologics products under a single brand.

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Our own orthobiologics design, development and manufacturing operations. While many of our spinal implant competitors source their orthobiologics products from tissue banks or original equipment manufacturers to supplement their spinal implant portfolio, we design and develop the vast majority of our orthobiologics products internally and manufacture them at our facility in Irvine, California. By controlling the design and manufacturing processes, we should be able to better control the cost of our products and provide operational leverage with volume increases.

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Research and development to bring new products and techniques to market. We have recently increased, and intend to continue to increase, our annual research and development spending as a percentage of revenue in an effort to drive higher revenue growth through new product sales. We plan to continue to invest resources and to work with our surgeon customers to understand their needs and develop new and next-generation orthobiologics and spinal implant products designed to improve clinical outcomes. We employ dedicated orthobiologics engineers and scientists with expertise in material sciences, and biology and hardware engineers with expertise in product design and development.

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Commercial infrastructure to further penetrate the U.S. orthobiologics and spinal implant markets and increase our focus in international markets where we currently have a presence. We have recently increased, and intend to continue to increase, the quality, size, exclusivity and geographic breadth of our network of independent sales agents in the United States. To support these efforts, we are investing more in, and are developing comprehensive support for, sales agent and surgeon training and education programs. We have a hands-on cadaveric training facility in Carlsbad, California where we provide training for surgeons and sales agents. In addition, we plan to increase our presence within teaching institutions that provide spinal surgery fellowship programs to educate new surgeons on the use of our products. We believe these combined efforts will help surgeons become adept with our spinal implant products and techniques, thereby improving outcomes for their patients. Internationally, we intend to continue to focus our sales and marketing efforts on expanding and strengthening our presence in those markets where we currently have relationships with stocking distributors and to selectively expand into new markets.

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Clinical affairs programs to generate postmarket data. We plan to invest in additional clinical development programs designed to generate peer-reviewed clinical data that we believe will support the performance of select orthobiologics and spinal implant solutions that may be compared to competing technologies. We believe that our NanoMetalene and Reef Topography technologies may have advantages over many existing implant materials and surface options, and that our fibers-based OsteoStrand® and OsteoStrand Plus tissue products are more efficacious and cost effective than, higher cost cellular allografts bone grafts. We have initiated studies to generate data on the surface characteristics of titanium and the mechanical properties and radiolucency of PEEK interbody implants, which NanoMetalene technology combines into a single device, and on the performance of our fibers-based products.

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Opportunities to enhance our product offering through strategic alliances and acquisitions. We currently market several products under distribution agreements and licenses with third-parties. We intend to continue to pursue alliances and acquisition opportunities that we believe will provide us with technologies to strengthen our market position and grow our business. For example, in September 2019, we announced a development and licensing agreement with restor3D, a privately-held medical device company co-founded by Ken Gall, Professor of Mechanical Engineering at Duke University, to co-develop 3D-printed titanium implants with enhanced anatomical fit and superior integrative properties, and in January 2020, we announced a strategic alliance agreement with 7D Surgical, Inc., a privately-held Toronto-based company developing advanced image guidance technologies and machine-vision-based registration algorithms to improve surgical workflow and patient care, under which we will seek to offer a customized, best-in-class navigational solution and enabling technology to our hospital and surgeon customers on a non-exclusive basis.

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•	lack of experience with our products, techniques, or technologies, or with the equipment necessary to use any of the foregoing;

•	existing relationships with those who sell competitive products;

•	the time required for surgeon and medical staff education and training on new products, techniques and equipment and technologies;

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•	lack or perceived lack of clinical evidence supporting patient benefit relative to competing products;

•	our products not being included on hospital formularies, in integrated delivery networks or on group purchasing organization preferred vendor lists;

•	less attractive coverage and/or reimbursement within healthcare payment systems for our products and procedures compared to other products and procedures;

•	other costs associated with introducing new products and the equipment necessary to use new products; and

•	perceived risk of liability that could be associated with the use of new products, techniques or technologies.

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There has been consolidation among healthcare facilities and purchasers of medical devices, particularly in the U.S. One of the results of such consolidation is that group purchasing organizations, integrated delivery networks and large single accounts use their market power to consolidate purchasing decisions, which intensifies competition to provide products and services to healthcare providers and other industry participants, resulting in greater pricing pressures and the exclusion of certain suppliers from important market segments. For example, some group purchasing organizations negotiate pricing for its member hospitals and require us to discount, or limit our ability to increase, prices for certain of our products. In particular, certain of our DBM products are priced at a premium to competitors' DBM products and a significant price reduction could result in a material adverse effect on our profitability.

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Surgeons increasingly have moved from independent, out-patient practice settings toward employment by hospitals and other larger healthcare organizations, which align surgeons’ product choices with their employers’ price sensitivities and adds to pricing pressures. Hospitals have introduced and may continue to introduce new pricing structures into their contracts to contain healthcare costs, including fixed price formulas and capitated and construct pricing.

•	Certain hospitals provide financial incentives to doctors for reducing hospital costs (known as gainsharing), rewarding physician efficiency (known as physician profiling) and encouraging partnerships with healthcare service and goods providers to reduce prices.

•	Existing and proposed laws, regulations and industry policies, in both domestic and international markets, regulate or seek to increase regulation of sales and marketing practices and the pricing and profitability of companies in the healthcare industry.

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•	obtain regulatory clearance and/or approvals for new products or product enhancements or modifications in a timely manner;

•	receive adequate reimbursement approval of third-party payors such as Medicaid, Medicare and private insurers; and

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•	difficulties in staffing and managing foreign and geographically dispersed operations;

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having to comply with various U.S. and international laws, including the U.S. Foreign Corrupt Practices Act of 1977 and anti-money laundering laws (see also, “Our international operations subject us to laws regarding sanctioned countries, entities and persons, customs and import-export practices, laws regarding transactions in foreign countries, the Foreign Corrupt Practices Act of 1977 and local anti-bribery and other laws regarding interactions with healthcare professionals, and product registration requirements” below);

•	having to comply with export control laws, including, but not limited to, the Export Administration Regulations and trade sanctions against embargoed countries, which are administered by the Office of Foreign Assets Control within the Department of the Treasury, as well as the laws and regulations administered by the Department of Commerce;

•	complex data privacy requirements, including, but not limited to, the EU General Data Protection Regulation;

•	differing regulatory requirements for obtaining clearances or approvals to market our products;

•	changes in, or uncertainties relating to, foreign rules and regulations that may impact our ability to sell our products, perform services or repatriate profits to the United States;

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tariffs, trade barriers and export regulations that adversely impact, and other regulatory and contractual limitations on, our ability to sell our products in certain foreign markets, the scope and consequences of which may increase in light of the Trump Administration’s approach to trade policy, including its stated intent to renegotiate, or potentially terminate, certain existing bilateral or multi-lateral trade agreements;

•	fluctuations in foreign currency exchange rates;

•	limitations on or increase of withholding and other taxes on remittances and other payments by foreign subsidiaries or joint ventures;

•	differing multiple payer reimbursement regimes, government payers or patient self-pay systems;

•	differing labor laws and standards;

•	economic, political or social instability in foreign countries and regions;

•	an inability, or reduced ability, to protect our intellectual property, including any effect of compulsory licensing imposed by government action; and

•	availability of government subsidies or other incentives that benefit competitors in their local markets that are not available to us.

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•	economic conditions worldwide, which could affect the ability of hospitals and other customers to purchase our products and could result in a reduction in elective and non-reimbursed operative procedures;

•	increased competition;

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•	market acceptance of our existing products, as well as products in development, and the demand for, and pricing of, our products and the products of our competitors;

•	costs, benefits and timing of new product introductions;

•	the timing of or failure to obtain regulatory clearances or approvals for new products;

•	lost sales and other expenses resulting from stoppages in our or third parties’ production, including as a result of product recalls or field corrective actions;

•	the availability and cost of components and materials, including raw materials such as human tissue;

•	accurate predictions of product demand and production capabilities sufficient to meet that demand;

•	our ability to realize expected yield improvements and scrap reduction initiatives that we have undertaken at our Irvine facility;

•	higher than anticipated independent sales agent commissions;

•	our ability to purchase or manufacture and ship our products efficiently and in sufficient quantities to meet sales demands;

•	the timing of our research and development expenditures;

•	expenditures for major initiatives;

•	reimbursement, changes in reimbursement or denials in coverage for our products by third-party payors, such as Medicare, Medicaid, private and public health insurers and foreign governmental health systems;

•	the ability of our independent sales agents and stocking distributors to achieve expected sales targets and for new agents and stocking distributors to become familiar with our products in a timely manner;

•	peer-reviewed publications discussing the clinical effectiveness of our products;

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inspections of our manufacturing facilities for compliance with the FDA's Quality System Regulations (Good Manufacturing Practices), which could result in Form 483 observations, warning letters, injunctions or other adverse findings from the FDA or equivalent foreign regulatory bodies, and corrective actions, procedural changes and other actions, including product recalls, that we determine are necessary or appropriate to address the results of those inspections, any of which may affect production and our ability to supply our customers with our products;

•	the costs to comply with new regulations from the FDA or equivalent foreign regulatory bodies, such as the requirements to establish a unique device identification system to adequately identify medical devices through their distribution and use;

•	the increased regulatory scrutiny of certain of our products, including products we manufacture for others, which could result in their being removed from the market;

•	fluctuations in foreign currency exchange rates; and

•	the impact of acquisitions, including the impact of goodwill and intangible asset impairment charges, if future operating results of the acquired businesses are significantly less than the results anticipated at the time of the acquisitions.

•	the number of products sold in the quarter;

•	the unpredictability of sales of full sets of spinal implants and instruments to our international stocking distributors; and

•	the number of selling days in the quarter.

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•	the revenue generated by sales of our products;

•	the costs associated with expanding our sales and marketing efforts;

•	the expenses we incur in procuring, manufacturing and selling our products;

•	the scope, rate of progress and cost of our clinical studies;

•	the cost of obtaining and maintaining regulatory approval or clearance of our products and products in development;

•	the costs associated with complying with state, federal and international laws and regulations, including increased costs associated with the United Kingdom's exit from the European Union and the European Union's new Medical Device Regulations;

•	the cost of filing and prosecuting patent applications and defending and enforcing our patent and other intellectual property rights;

•	the cost of defending, in litigation or otherwise, any claims that we infringe third-party patent or other intellectual property rights;

•	the cost of enforcing or defending against non-competition claims;

•	the number and timing of acquisitions and other strategic transactions;

•	the costs associated with increased capital expenditures, including fixed asset purchases of instrument sets which we consign to hospitals and independent sales agents to support surgeries; and

•	anticipated and unanticipated general and administrative expenses, including insurance expenses.

•	maintain, and, where necessary, increase appropriate product inventory and spinal instruments levels;

•	fund our operations and clinical studies;

•	continue, and, where appropriate, increase our research and development activities;

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•	file, prosecute and defend our intellectual property rights, and defend, in litigation or otherwise, any claims that we infringe third-party patents or other intellectual property rights;

•	address the FDA or other governmental, legal or enforcement actions and remediate underlying problems and address investigations or inquiries into sales and marketing practices from governmental agencies worldwide;

•	commercialize our new products, if any such products receive regulatory clearance or approval for sale; and

•	acquire companies' new products, technology or intellectual property.

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•	take significant time;

•	require the expenditure of substantial resources;

•	involve rigorous and expensive pre-clinical and clinical testing, as well as post-market surveillance;

•	involve modifications, repairs or replacements of our products; and

•	result in limitations on the indicated uses of our products.

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•	stop making, selling or using products or technologies that allegedly infringe the asserted intellectual property;

•	lose the opportunity to license our technology to others or to collect royalty payments based upon successful protection and assertion of our intellectual property rights against others;

•	incur significant legal expenses;

•	pay substantial damages or royalties to the party whose intellectual property rights we may be found to be infringing;

•	pay the attorney fees and costs of litigation to the party whose intellectual property rights we may be found to be infringing;

•	redesign those products that contain the allegedly infringing intellectual property, which could be costly, disruptive and/or infeasible; or

•	attempt to obtain a license to the relevant intellectual property from third parties, which may not be available on reasonable terms or at all.

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•	actual or anticipated fluctuations in our quarterly financial condition and operating performance;

•	introduction of new products by us or our competitors;

•	announcements by us or our competitors of significant acquisitions or dispositions;

•	our ability to obtain financing as needed;

•	a shift in our investor base, including sales of our shares by existing stockholders;

•	any major change in our board of directors or management;

•	threatened or actual litigation or governmental investigations;

•	the number of shares of our common stock publicly owned and available for trading;

•	the operating and stock price performance of similar companies;

•	changes in earnings estimates by securities analysts or our ability to meet earnings guidance;

•	publication of research reports about us or our industry or changes in recommendations or withdrawal of research coverage by securities analysts;

•	changes in laws or regulations affecting our business, including tax legislation;

•	the success or failure of our business strategy;

•	investor perception of us and our industry;

•	changes in accounting standards, policies, guidance, interpretations or principles;

•	the overall performance of the equity markets;

•	general political and economic conditions, and other external factors.

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•	a classified board of directors with three-year staggered terms, which may delay the ability of stockholders to change the membership of a majority of our board of directors;

•	no cumulative voting in the election of directors, which limits the ability of minority stockholders to elect

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•	the ability of our board of directors to determine to issue shares of preferred stock and to determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquirer;

•	the exclusive right of our board of directors to elect a director to fill a vacancy created by the expansion of our board of directors or by the resignation, death or removal of a director, which prevents stockholders from filling vacancies on our board of directors;

•	limitations on the removal of directors;

•	a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of our stockholders;

•	the requirement that a special meeting of stockholders be called only by the chairman of our board of directors, our chief executive officer, our president (in absence of a chief executive officer) or our board of directors, which may delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors;

•	advance notice procedures that stockholders must comply with to nominate candidates to our board of directors or to propose matters to be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of us;

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the requirement for the affirmative vote of holders of at least 66 2⁄3% of the voting power of all of the then outstanding shares of our voting stock, voting together as a single class, to amend or repeal the provisions of our amended and restated certificate of incorporation and of our amended and restated bylaws that relate to the matters described above, which may inhibit the ability of an acquirer from amending our amended and restated certificate of incorporation or amended and restated bylaws to facilitate a hostile acquisition; and

•	the ability of our board of directors, by majority vote, to amend our amended and restated bylaws, which may allow our board of directors to take additional actions to prevent a hostile acquisition and inhibit the ability of an acquirer from amending our amended and restated bylaws to facilitate a hostile acquisition.

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•	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 newly initiated 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;

•	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 in the United States, increased pricing pressure from our competitors or hospitals, exclusion from major healthcare systems, whether as a result of unwillingness to provide required pricing or otherwise, and changes in third-party payment systems;

•	the risk of supply shortages, and the associated potentially long-term disruption to product sales, including as a result 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;

•	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;

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•	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 the 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.”

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•	contingent milestone and royalty payments related to the NLT asset acquisition; and

•	up to $2.9 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.

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*	Confidential treatment has been requested or granted to certain confidential information contained in this exhibit. Such information was omitted from this exhibit by means of redacting a portion of the text and replacing it with an asterisk. We have filed separately with the SEC an unredacted copy of the exhibit.

#	Certain schedules and attachments referenced in this agreement have been omitted in accordance with Item 601(b)(2) of Regulation S-K. A copy of any omitted schedule and attachment will be furnished supplementally to the SEC upon request.

**	Indicates management contract or compensatory plan or arrangement.

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

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The financial information of SeaSpine Holdings Corporation Annual Report on Form 10-K for the year ended December 31, 2019 filed on February 28, 2020 formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Operations, (ii) the Consolidated Statements of Comprehensive Loss, (iii) the Consolidated Balance Sheets, (iv) Parenthetical Data to the Consolidated Balance Sheets, (v) the Consolidated Statements of Cash Flows, (vi) the Consolidated Statements of Equity, and (vii) Notes to Consolidated Financial Statements, is furnished electronically herewith.

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