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iso4217:GBP xbrli:pure iart:asset iso4217:CHF iso4217:EUR iso4217:USD xbrli:shares iso4217:USD xbrli:shares iart:liability iart:renewal_option iart:plan iart:Segment iart:product
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
FORM 10-Q
 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             
COMMISSION FILE NO. 0-26224
 
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
Delaware
 
51-0317849
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
 
(I.R.S. EMPLOYER
IDENTIFICATION NO.)
 
 
311 Enterprise Drive
 
08536
Plainsboro
,
New Jersey
 
(ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
 
Registrant's Telephone Number, Including Area Code: (609275-0500
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report:
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS
TRADING SYMBOL
NAME OF EACH EXCHANGE ON WHICH REGISTERED
COMMON STOCK
IART
NASDAQ
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
 
 
 
 
Non-accelerated filer
  
Smaller reporting company
 
 
 
 
Emerging growth company
 
 




If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes      No  
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.  Yes      No  
The number of shares of the registrant’s Common Stock, $0.01 par value, outstanding as of October 22, 2019 was 85,865,669.
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
INDEX
 

 
Page
Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
EX-101 INSTANCE DOCUMENT
 
EX-101 SCHEMA DOCUMENT
 
EX-101 CALCULATION LINKBASE DOCUMENT
 
EX-101 DEFINITION LINKBASE DOCUMENT
 
EX-101 LABELS LINKBASE DOCUMENT
 
EX-101 PRESENTATION LINKBASE DOCUMENT
 



Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

INTEGRA LIFESCIENCES HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME / (LOSS)
(UNAUDITED)
(In thousands, except per share amounts)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Total revenue, net
$
379,095

 
$
365,854

 
$
1,122,430

 
$
1,089,126

Costs and expenses:
 
 
 
 
 
 

Cost of goods sold
142,636

 
143,245

 
415,219

 
425,032

Research and development
19,003

 
20,309

 
53,280

 
57,742

    In-process research and development
59,889

 

 
61,566

 

Selling, general and administrative
173,098

 
173,355

 
513,345

 
513,518

Intangible asset amortization
5,056

 
5,268

 
21,340

 
15,944

Total costs and expenses
399,682

 
342,177

 
1,064,750

 
1,012,236

Operating income (loss)
(20,587
)
 
23,677

 
57,680

 
76,890

Interest income
2,913

 
75

 
8,051

 
325

Interest expense
(13,962
)
 
(14,478
)
 
(40,495
)
 
(50,750
)
Other income, net
4,127

 
1,750

 
8,461

 
6,422

Income (loss) before income taxes
(27,509
)
 
11,024

 
33,697

 
32,887

Provision (benefit) for income taxes
101

 
(2,271
)
 
(1,185
)
 
(2,776
)
Net income (loss)
$
(27,610
)
 
$
13,295

 
$
34,882

 
$
35,663

 
 
 
 
 
 
 
 
Net income (loss) per share
 
 
 
 
 
 
 
Basic
$
(0.32
)
 
$
0.16

 
$
0.41

 
$
0.43

Diluted
$
(0.32
)
 
$
0.15

 
$
0.40

 
$
0.43

 
 
 
 
 
 
 
 
Weighted average common shares outstanding (See Note 13):
 
 
 
 
 
 
 
Basic
85,688

 
85,193

 
85,536

 
82,058

Diluted
85,688

 
86,299

 
86,581

 
83,142

Comprehensive income (loss) (See Note 14)
$
(46,521
)
 
$
12,330

 
$
(7,288
)
 
$
33,731



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

3

Table of Contents

INTEGRA LIFESCIENCES HOLDINGS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands, except per share amounts)
 
 
September 30, 2019
 
December 31, 2018
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
207,981

 
$
138,838

Trade accounts receivable, net of allowances of $4,006 and $3,719
281,119

 
265,737

Inventories, net
302,622

 
280,347

Prepaid expenses and other current assets
92,091

 
90,160

  Total current assets
883,813

 
775,082

Property, plant and equipment, net
319,384

 
300,112

Right of use asset - operating leases
97,738

 

Intangible assets, net
1,040,350

 
1,079,496

Goodwill
945,282

 
926,475

Deferred tax assets, net
27,005

 
6,805

Other assets
33,008

 
19,917

Total assets
$
3,346,580

 
$
3,107,887

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Current portion of borrowings under senior credit facility
$
45,000

 
$
22,500

Current portion of lease liability - operating leases
11,835

 

Accounts payable, trade
94,158

 
76,050

Contract liabilities
3,984

 
3,764

Accrued compensation
74,415

 
75,693

Accrued expenses and other current liabilities
73,249

 
84,545

  Total current liabilities
302,641

 
262,552

Long-term borrowings under senior credit facility
1,274,049

 
1,210,513

Long-term borrowings under securitization facility
110,000

 
121,200

Lease liability - operating leases
96,820

 

Deferred tax liabilities
59,730

 
57,778

Other liabilities
118,366

 
80,048

Total liabilities
1,961,606

 
1,732,091

Commitments and contingencies (Refer to Note 16)

 

Stockholders’ equity:
 
 
 
Preferred stock; no par value; 15,000 authorized shares; none outstanding

 

Common stock; $0.01 par value; 240,000 authorized shares; 88,689 and 88,044 issued at September 30, 2019 and December 31, 2018, respectively
886

 
880

Additional paid-in capital
1,208,549

 
1,192,601

Treasury stock, at cost; 2,869 shares and 2,881 shares at September 30, 2019 and December 31, 2018, respectively
(120,101
)
 
(120,615
)
Accumulated other comprehensive loss
(87,615
)
 
(45,443
)
Retained earnings
383,255

 
348,373

Total stockholders’ equity
1,384,974

 
1,375,796

Total liabilities and stockholders’ equity
$
3,346,580

 
$
3,107,887



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

4

Table of Contents


INTEGRA LIFESCIENCES HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
 
Nine Months Ended September 30,
 
2019
 
2018
OPERATING ACTIVITIES:
 
 
 
Net income
$
34,882

 
$
35,663

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
81,584

 
83,053

Non-cash in-process research and development expense
59,889

 

Non-cash impairment charges
5,764

 
4,941

Deferred income tax
(10,536
)
 
789

Amortization of debt issuance costs
4,084

 
4,953

Loss on disposal of property and equipment
844

 
969

Change in fair value of contingent consideration and other
10

 
1,214

Share-based compensation
15,744

 
15,786

Changes in assets and liabilities, net of business acquisitions:
 
 
 
Accounts receivable
(17,519
)
 
1,180

Inventories
(30,553
)
 
(3,441
)
Prepaid expenses and other current assets
(8,162
)
 
3,432

Other non-current assets
6,650

 
(1,397
)
Accounts payable, accrued expenses and other current liabilities
366

 
9,418

Contract liabilities
(1,395
)
 
(111
)
Other non-current liabilities
597

 
546

Net cash provided by operating activities
142,249

 
156,995

INVESTING ACTIVITIES:
 
 
 
Purchases of property and equipment
(47,343
)
 
(52,056
)
Proceeds from note receivable
752

 
679

Proceeds from sale of property and equipment
36

 
298

Cash (paid) provided for business acquisitions, net of cash acquired
(30,509
)
 
26,704

Acquired in-process research and development
(64,995
)
 

Net cash used in investing activities
(142,059
)
 
(24,375
)
FINANCING ACTIVITIES:
 
 
 
Proceeds from borrowings of long-term indebtedness
215,800

 
50,000

Payments on debt
(143,250
)
 
(460,000
)
Payment of debt issuance costs

 
(4,388
)
Proceeds from the issuance of common stock, net of issuance costs

 
349,590

Net cash paid for financing liabilities from business acquisitions

 
(33,843
)
Proceeds from exercised stock options
6,948

 
9,239

Cash taxes paid in net equity settlement
(6,272
)
 
(7,415
)
Net cash (used in) / provided by financing activities
73,226

 
(96,817
)
Effect of exchange rate changes on cash and cash equivalents
(4,273
)
 
(4,747
)
Net increase in cash and cash equivalents
69,143

 
31,056

Cash and cash equivalents at beginning of period
138,838

 
174,935

Cash and cash equivalents at end of period
$
207,981

 
$
205,991


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

5

Table of Contents

INTEGRA LIFESCIENCES HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
(UNAUDITED)
(In thousands)

 
Three Months Ended September 30, 2019
 
Common Stock
 
Treasury Stock
 
Additional Paid-In Capital
 
Accumulated Other Comprehensive Loss
 
Retained Earnings
 
Total Equity
Shares
 
Amount
Shares
 
Amount
 
(In thousands)
Balance, June 30, 2019
88,351

 
$
883

 
(2,869
)
 
$
(120,107
)
 
$
1,198,010

 
$
(68,700
)
 
$
410,865

 
$
1,420,951

Net loss

 

 

 

 

 

 
(27,610
)
 
(27,610
)
Other comprehensive loss, net of tax

 

 

 

 

 
(18,915
)
 

 
(18,915
)
Issuance of common stock for vesting of share based awards, net of shares withheld for taxes
338

 
3

 

 
6

 
4,665

 

 

 
4,674

Share-based compensation

 

 

 

 
5,874

 

 

 
5,874

Balance, September 30, 2019
88,689

 
$
886

 
(2,869
)
 
$
(120,101
)
 
$
1,208,549

 
$
(87,615
)
 
$
383,255

 
$
1,384,974


 
Nine Months Ended September 30, 2019
 
Common Stock
 
Treasury Stock
 
Additional Paid-In Capital
 
Accumulated Other Comprehensive Loss
 
Retained Earnings
 
Total Equity
Shares
 
Amount
Shares
 
Amount
 
(In thousands)
Balance, December 31, 2018
88,044

 
$
880

 
(2,881
)
 
$
(120,615
)
 
$
1,192,601

 
$
(45,443
)
 
$
348,373

 
$
1,375,796

Net income

 
$

 

 

 

 

 
34,882

 
34,882

Other comprehensive loss, net of tax

 
$

 

 

 

 
(42,172
)
 

 
(42,172
)
Issuance of common stock for vesting of share based awards, net of shares withheld for taxes
645

 
$
6

 
12

 
514

 
157

 

 

 
677

Share-based compensation

 
$

 

 

 
15,791

 

 

 
15,791

Balance, September 30, 2019
88,689

 
$
886

 
(2,869
)
 
$
(120,101
)
 
$
1,208,549

 
$
(87,615
)
 
$
383,255

 
$
1,384,974


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








6

Table of Contents



INTEGRA LIFESCIENCES HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
(UNAUDITED)
(In thousands)

 
Three Months Ended September 30, 2018
 
Common Stock
 
Treasury Stock
 
Additional Paid-In Capital
 
Accumulated Other Comprehensive Loss
 
Retained Earnings
 
Total Equity
Shares
 
Amount
Shares
 
Amount
 
(In thousands)
Balance, June 30, 2018
87,772

 
$
877

 
(2,890
)
 
$
(120,732
)
 
$
1,177,125

 
$
(25,306
)
 
$
309,941

 
$
1,341,905

Net income

 

 

 

 

 

 
13,295

 
13,295

Other comprehensive loss, net of tax

 

 

 

 

 
(965
)
 

 
(965
)
Issuance of common stock
261

 
3

 

 

 
5,499

 

 

 
5,502

Issuance of common stock for vesting of share based awards, net of shares withheld for taxes
(17
)
 
 
 
7

 
5

 
(220
)
 

 

 
(215
)
Share-based compensation

 

 

 

 
5,559

 

 

 
5,559

Balance, September 30, 2018
88,016

 
$
880

 
(2,883
)
 
$
(120,727
)
 
$
1,187,963

 
$
(26,271
)
 
$
323,236

 
$
1,365,081


 
Nine Months Ended September 30, 2018
 
Common Stock
 
Treasury Stock
 
Additional Paid-In Capital
 
Accumulated Other Comprehensive Loss
 
Retained Earnings
 
Total Equity
Shares
 
Amount
Shares
 
Amount
 
(In thousands)
Balance, December 31, 2017
81,306

 
$
813

 
(2,927
)
 
$
(121,644
)
 
$
821,758

 
$
(23,807
)
 
$
285,186

 
$
962,306

Net income

 

 

 
$

 

 
$

 
35,663

 
35,663

Adoption of Update No. 2014-09

 

 

 

 

 

 
1,854

 
1,854

Other comprehensive loss, net of tax

 

 

 

 

 
(2,464
)
 
533

 
(1,931
)
Issuance of common stock
597

 
6

 

 

 
8,671

 

 

 
8,677

Issuance of common stock through employee stock purchase plan

 

 

 

 
553

 

 

 
553

Issuance of common stock for vesting of share based awards, net of shares withheld for taxes
75

 
1

 
44

 
917

 
(8,332
)
 

 

 
(7,414
)
Equity offering
6,038

 
60

 

 

 
349,538

 

 

 
349,598

Share-based compensation

 

 

 

 
15,775

 

 

 
15,775

Balance, September 30, 2018
88,016

 
$
880

 
(2,883
)
 
$
(120,727
)
 
$
1,187,963

 
$
(26,271
)
 
$
323,236

 
$
1,365,081


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


7

Table of Contents

INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. BASIS OF PRESENTATION
General
The terms “we,” “our,” “us,” “Company” and “Integra” refer to Integra LifeSciences Holdings Corporation, a Delaware corporation, and its subsidiaries unless the context suggests otherwise.
In the opinion of management, the September 30, 2019 unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the financial position, results of operations and cash flows of the Company. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements for the year ended December 31, 2018 included in the Company’s Annual Report on Form 10-K. The December 31, 2018 consolidated balance sheet was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States. Operating results for the three and nine month period ended September 30, 2019 are not necessarily indicative of the results to be expected for the entire year.
The preparation of consolidated financial statements is in conformity with generally accepted accounting principles in the United States ("GAAP") which requires management to make estimates and assumptions that affect the reported amount 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 allowances, net realizable value of inventories, valuation of intangible assets including amortization periods for acquired intangible assets, discount rates and estimated projected cash flows used to value and test impairments of long-lived assets and goodwill, estimates of projected cash flows and depreciation and amortization periods for long-lived assets, computation of taxes, valuation allowances recorded against deferred tax assets, the valuation of stock-based compensation, valuation of derivative instruments, valuation of pension assets and liabilities, valuation of contingent liabilities, the fair value of debt instruments and loss contingencies. These estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the current circumstances. Actual results could differ from these estimates.
Equity Offering
In May 2018, the Company commenced and closed on a public offering of common stock. The Company issued 6.0 million shares of common stock and received total proceeds, net of underwriting fees and offering expenses, of approximately $349.6 million. The net proceeds from the offering were used to reduce outstanding borrowings under the revolving credit portion of the Company's Senior Credit Facility.
Recently Issued Accounting Standards
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (the New Lease Standard). The New Lease Standard requires that lessees recognize virtually all of its leases on the balance sheet by recording a right-of-use asset and lease liability (other than leases that meet the definition of a "short-term lease"). This update became effective for all annual periods and interim reporting periods beginning after December 15, 2018.
The Company adopted the New Lease Standard as of January 1, 2019 using a modified retrospective transition. Under this method, financial results reported in periods prior to January 1, 2019 are unchanged. The Company elected the ‘package of practical expedients’ which permits the company not to reassess the prior conclusions about lease identification, lease classification and initial direct costs under the new standard. The Company also elected the use-of-hindsight practical expedient. As most of the leases do not provide an implicit rate, the Company used our collateralized incremental borrowing rate based on the information available at the lease implementation date in determining the present value of the lease payments. The adoption of the New Lease Standard had an initial impact on the consolidated balance sheet due to the recognition of $76.4 million of lease liabilities with corresponding right-of-use assets ("ROU") of $67.3 million for operating leases. The difference between lease liabilities and right-of-use assets is primarily attributed to unamortized lease incentives which will be amortized over the term of each respective lease.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The ASU requires the measurement of all expected credit losses for financial assets including trade receivables held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. The ASU is effective for

8

INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company is evaluating the impact, if any, that this pronouncement will have on the financial position and results of operations.
In August 2018, the FASB issued ASU 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20): Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans. The new guidance modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans, including removing certain previous disclosure requirements, adding certain new disclosure requirements, and clarifying certain other disclosure requirements. The ASU will be effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted. The adoption is not expected to have a material impact on the Condensed and Consolidated Financial Statements.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40), relating to a customer's accounting for implementation, set-up, and other upfront costs incurred in a cloud computing arrangement that is hosted by a vendor (e.g., a service contract). Under the new guidance, a customer will apply the same criteria for capitalizing implementation costs as it would for an arrangement that has a software license. The new guidance also prescribes the balance sheet, income statement, and cash flow classification of the capitalized implementation costs and related amortization expense, and requires additional quantitative and qualitative disclosures. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early application is permitted. The Company can choose to adopt the new guidance (1) prospectively to eligible costs incurred on or after the date this guidance is first applied or (2) retrospectively. The Company is evaluating the impact, if any, that this pronouncement will have on the financial position and results of operations.
There are no other recently issued accounting pronouncements that are expected to have any significant effect on the Company's financial position, results of operations or cash flows.
2. BUSINESS DEVELOPMENT
Arkis BioSciences Inc.
On July 29, 2019, the Company acquired Arkis BioSciences Inc. ("Arkis") for an acquisition purchase price of $30.6 million (the "Arkis Acquisition") plus contingent consideration of up to $25.5 million, that may be payable based on the successful completion of certain development and commercial milestones. The contingent consideration had an acquisition date fair value of $13.1 million. Arkis was a privately-held company that marketed the CerebroFlo® external ventricular drainage (EVD) catheter with Endexo® technology, a permanent additive designed to reduce the potential for catheter obstruction due to thrombus formation.
Assets Acquired and Liabilities Assumed at Fair Value
The Arkis Acquisition has been accounted for using the acquisition method of accounting. This method requires that assets acquired and liabilities assumed in a business combination to be recognized at their fair values as of the acquisition date. As of September 30, 2019, certain amounts relating to the valuation of intangible assets and tax related matters have not been finalized. The finalization of these matters may result in changes to goodwill.
The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed at the acquisition date:


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INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

 
 Preliminary Valuation as of September 30, 2019
 
Weighted Average Life
 
(Dollars in thousands)
 
 
Cash
$
90

 
 
Other current assets
751

 
 
Property, plant and equipment
159

 
 
Intangible assets:
 
 
 
CerebroFlo developed technology
20,100

 
15 years
Enabling technology license
1,980

 
14 years
Goodwill
27,297

 
 
Total assets acquired
50,377

 
 
 
 
 
 
Accounts payable, accrued expenses and other liabilities
2,908

 
 
Contingent consideration
13,100

 
 
Deferred tax liabilities, net
3,769

 
 
     Net assets acquired
$
30,600

 
 

Intangible Assets
The estimated fair value of the intangible assets was determined using the income approach, which is a valuation technique that provides an estimate of the fair value of an asset based on market participant expectations of the cash flows an asset would generate over its remaining useful life. Some of the more significant assumptions inherent in the development of those asset valuations include the estimated net cash flows for each year for each asset (including net revenues, cost of sales, R&D costs, selling and marketing costs, and working capital/contributory asset charges), the appropriate discount rate to select in order to measure the risk inherent in each future cash flow stream, the assessment of each asset’s life cycle, and competitive trends impacting the asset and each cash flow stream.
The Company used a discount rate of 14.5% to arrive at the present value for the acquired intangible assets to reflect the rate of return a market participant would expect to earn and incremental commercial uncertainty in the cash flow projections. No assurances can be given that the underlying assumptions used to prepare the discounted cash flow analysis will not change. For these and other reasons, actual results may vary significantly from estimated results.  
Goodwill
The Company allocated goodwill related to the Arkis Acquisition to the Codman Specialty Surgical segment. Goodwill is the excess of the consideration transferred over the net assets recognized and represents the expected revenue and cost synergies of the combined company and assembled workforce. One of the key factors that contributes to the recognition of goodwill, and a driver for the Company's acquisition of Arkis, is the planned expansion of the Endexo technology with the existing products within the Codman Specialty Surgical segment. Goodwill recognized as a result of this acquisition is non-deductible for income tax purposes.
Contingent Consideration
The Company determines the acquisition date fair value of contingent consideration obligations based on a probability-weighted income approach derived from revenue estimates and a probability assessment with respect to the likelihood of achieving contingent obligations. The fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement as defined using the fair value concepts in ASC 820. The resultant probability-weighted cash flows are discounted using an appropriate effective annual interest rate. At each reporting date, the contingent consideration obligation will be revalued to estimated fair value and changes in fair value will be reflected as income or expense in our consolidated statement of operations. Changes in the fair value of the contingent consideration obligations may result from changes in discount periods and rates, changes in the timing and amount of revenue estimates and changes in probability assumptions with respect to the likelihood of achieving the various contingent payment obligations. Adverse changes in assumptions utilized in our contingent consideration fair value estimates could result in an increase in our contingent consideration obligation and a corresponding charge to operating results.
As part of the acquisition, the Company is required to pay the former shareholders of Arkis up to $25.5 million based on the timing of certain development milestones of $10 million and commercial sales milestones of $15.5 million, respectively. The Company used a probability weighted income approach to calculate the fair value of the contingent consideration that

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INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

considered the possible outcomes of scenarios related to each specified milestone. The Company estimated the fair value of the contingent consideration to be $13.1 million at the acquisition date.
Deferred Tax Liabilities
Deferred tax liabilities result from identifiable intangible assets’ fair value adjustments. These adjustments create excess book basis over tax basis which is tax-effected by the statutory tax rates of applicable jurisdictions.
The pro forma results are not presented for this acquisition as they are immaterial.
Rebound Therapeutics Corporation
On September 9, 2019, the Company acquired Rebound Therapeutics Corporation (“Rebound”), developers of a single-use medical device known as the AURORA Surgiscope® System ("Aurora") which enables minimally invasive access, using optics and illumination, for visualization, diagnostic and therapeutic use in neurosurgery (the “Rebound transaction”). Under the terms of the Rebound transaction, the Company made an upfront payment of $67.1 million and are committed to pay up to $35.0 million of contingent development milestones upon achievement of certain regulatory milestones. The acquisition of Rebound was primarily concentrated in one single identifiable asset and thus, for accounting purposes, the Company has concluded that the acquired assets do not meet the accounting definition of a business. The initial payment was allocated primarily to Aurora, resulting in a $59.9 million in-process research and development expense. The balance of approximately $7.2 million, which included $2.1 million of cash and cash equivalents and a net deferred tax asset of $4.2 million, was allocated to the remaining net assets acquired. The deferred tax asset primarily resulted from a federal net operating loss carry forward.
Integrated Shoulder Collaboration, Inc.
On January 4, 2019, the Company entered into a licensing agreement with Integrated Shoulder Collaboration, Inc ("ISC"). Under the terms of the agreement, the Company paid ISC $1.7 million for the exclusive, worldwide license to commercialize its short stem and stemless shoulder system. A patent related to short stem and stemless shoulder systems was issued to ISC during the first quarter of 2019. ISC is eligible to receive royalties on sales of the short stem and stemless shoulder system. The Company has the option to acquire ISC at a date four years subsequent to the first commercial sale, which becomes mandatory upon the achievement of a certain sales thresholds of the short stem and stemless shoulder system, for an amount not to exceed $80.0 million. The transaction was accounted for as an asset acquisition as the Company concluded that it acquired primarily one asset. The total upfront payment of $1.7 million was expensed as a component of in-process research and development expense and the future milestone and option payments will be recorded if the corresponding events become probable.
The pro forma results are not presented for this acquisition as they are immaterial.
3. REVENUES FROM CONTRACTS WITH CUSTOMERS
Summary of Accounting Policies on Revenue Recognition
Revenue is recognized upon the transfer of control of promised products or services to the customers in an amount that reflects the consideration the Company expects to receive in exchange for those products and services.
Total revenue, net, includes product sales, product royalties and other revenues, such as fees received for services.
For products shipped with FOB shipping point terms, the control of the product passes to the customer at the time of shipment. For shipments in which the control of the product is transferred when the customer receives the product, the Company recognizes revenue upon receipt by the customer. Certain products that the Company produces for private label customers have no alternative use and the Company has a right of payment for performance to date. Revenues from those products are recognized over the period that the Company manufactures these products, which is typically one to three months. The Company uses the input method to measure the manufacturing activities completed to date, which depicts the progress of the Company's performance obligation of transferring control of goods being manufactured for private label customers.
A portion of the Company's product revenue is generated from consigned inventory maintained at hospitals and distributors, and also from inventory physically held by field sales representatives. For these types of product sales, the Company retains control until the product has been used or implanted, at which time revenue is recognized.   
Revenues from sale of products and services are evidenced by either a contract with the customer or a valid purchase order and an invoice which includes all relevant terms of sale. For product sales, invoices are generally issued upon the transfer of control (or upon the completion of the manufacturing in the case of the private label transactions recognized over time) and are typically payable thirty days after the invoice date. The Company performs a review of each specific customer's creditworthiness and ability to pay prior to acceptance as a customer. Further, the Company performs periodic reviews of its customers' creditworthiness prospectively.
Performance Obligations

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INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

The Company's performance obligations consist mainly of transferring control of goods and services identified in the contracts, purchase orders, or invoices. The Company has no significant multi-element contracts with customers.
Significant Judgments
Usage-based royalties and licenses are estimated based on the provisions of contracts with customers and recognized in the same period that the royalty-based products are sold by the Company's strategic partners. The Company estimates and recognizes royalty revenue based upon communication with licensees, historical information, and expected sales trends. Differences between actual reported licensee sales and those that were estimated are adjusted in the period in which they become known, which is typically the following quarter. Historically, such adjustments have not been significant.
The Company estimates returns, price concessions, and discount allowances using the expected value method based on historical trends and other known factors. Rebate allowances are estimated using the most likely method based on each customer contract.
The Company's return policy, as set forth in its product catalogs and sales invoices, requires review and authorization in advance prior to the return of product. Upon the authorization, a credit will be issued for the goods returned within a set amount of days from the shipment, which is generally ninety days.
The Company disregards the effects of a financing component if the Company expects, at contract inception, that the period between the transfer and customer payment for the goods or services will be one year or less. The Company has no significant revenues recognized on payments expected to be received more than one year after the transfer of control of products or services to customers.
Contract Asset and Liability
Revenues recognized from the Company's private label business that are not invoiced to the customers as a result of recognizing revenue over time are recorded as a contract asset included in the prepaid expenses and other current assets account in the consolidated balance sheet.
Other operating revenues may include fees received under service agreements. Non-refundable fees received under multiple-period service agreements are recognized as revenue as the Company satisfies the performance obligations to the other party. A portion of the transaction price allocated to the performance obligations to be satisfied in the future periods is recognized as contract liability.
The following table summarizes the changes in the contract asset and liability balances for the nine months ended September 30, 2019:
Contract Asset
 
Contract asset, January 1, 2019
$
4,193

Transferred to trade receivable of contract asset included
     in beginning of the year contract asset
(4,193
)
Contract asset, net of transferred to trade receivables on contracts during the period
9,371

Contract asset, September 30, 2019
$
9,371

 
 
Contract Liability
 
Contract liability, January 1, 2019
$
12,716

Recognition of revenue included in beginning of year contract liability
(6,343
)
Contract liability, net of revenue recognized on contracts during the period
4,766

Foreign currency translation
(5
)
Contract liability, September 30, 2019
$
11,134


At September 30, 2019, the short-term portion of the contract liability of $4.0 million and the long-term portion of $7.1 million were included in accrued expenses and other current liabilities and other liabilities in the consolidated balance sheet.
As of September 30, 2019, the Company is expected to recognize approximately 42.0% of our unsatisfied (or partially unsatisfied) performance obligations as revenue through 2020, with the remaining balance to be recognized in 2021 and thereafter.
Shipping and Handling Fees
The Company elected to account for shipping and handling activities as a fulfillment cost rather than a separate performance obligation. Amounts billed to customers for shipping and handling are included as part of the transaction price and recognized as revenue when control of underlying products is transferred to the customer. The related shipping and freight charges incurred by the Company are included in the cost of goods sold.

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INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

Product Warranties
Certain of the Company's medical devices, including monitoring systems and neurosurgical systems, are designed to operate over long periods of time. These products are sold with warranties which may extend for up to two years from the date of purchase. The warranties are not considered a separate performance obligation. The Company estimates its product warranties using the expected value method based on historical trends and other known factors. The Company includes them in accrued expenses and other current liabilities in the consolidated balance sheet.
Taxes Collected from Customers
The Company elected to exclude from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the entity from a customer.
Disaggregated Revenue
The following table presents revenues disaggregated by the major sources of revenues for the three and nine months ended September 30, 2019 and 2018 (amounts in thousands):
 
Three Months Ended September 30, 2019
Three Months Ended September 30, 2018
 
Nine Months Ended September 30, 2019
Nine Months Ended September 30, 2018
 
(amounts in thousands)
Neurosurgery
$
180,103

$
171,680

 
$
523,929

$
509,166

Precision Tools and Instruments
72,881

67,355

 
212,881

205,488

Total Codman Specialty Surgical
252,984

239,035

 
736,810

714,654

 
 
 
 
 
 
Wound Reconstruction and Care
82,213

80,472

 
239,458

230,809

Extremity Orthopedics
20,852

20,524

 
65,299

65,438

Private Label
23,046

25,823

 
80,863

78,225

Total Orthopedics and Tissue Technologies
126,111

126,819

 
385,620

374,472

Total revenue
$
379,095

$
365,854

 
$
1,122,430

$
1,089,126


Prior period amounts were reclassified between categories within the Orthopedics and Tissue Technologies segment to conform to the current period presentation.
See Note 15, Segment and Geographical Information, for details of revenues based on the location of the customer.
Effect of Adoption of ASC Topic 606
On January 1, 2018, the Company adopted Topic 606 using the modified retrospective method applied to all contracts which were not completed as of January 1, 2018. Results of operations for the reporting periods after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with Topic 605, Revenue Recognition.
The adoption of Topic 606 resulted in an increase to the opening retained earnings of $1.9 million, which was recorded net of taxes as of January 1, 2018 to reflect the change in timing of the recognition of revenue related to the Company's private label business from point in time to over time during the manufacturing process and goods in transit for which control was transferred to customers at the time of shipment. The total assets and liabilities increased by $7.1 million and $5.2 million, respectively, as of January 1, 2018.
The impact of adoption in the year of implementation of Topic 606 to the Company's consolidated statement of operations for the three and nine months ended September 30, 2018 was as follows:

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INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

 
Three Months Ended September 30, 2018
Nine Months Ended September 30, 2018
 
As Reported
Excluding Impact of Topic 606
As Reported
Excluding Impact of Topic 606
 
(Amounts in thousands)
Statement of Operations
 
 
 
 
Total revenue, net
$
365,854

$
368,990

$
1,089,126

$
1,089,153

Cost of goods sold
143,245