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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, 2020
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.)
 
 
1100 Campus Road
 
08540
Princeton
,
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, Par Value $.01 Per Share
IART
Nasdaq Global Select Market
 
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 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 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 27, 2020 was 84,272,671.
















































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
 




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,
 
2020
 
2019
 
2020
 
2019
Total revenue, net
$
370,232

 
$
379,095

 
$
983,221

 
$
1,122,430

Costs and expenses:
 
 
 
 
 
 
 
Cost of goods sold
134,811

 
142,636

 
373,765

 
415,219

Research and development
19,460

 
19,003

 
55,202

 
54,957

    In-process research and development

 
59,889

 

 
59,889

Selling, general and administrative
150,076

 
173,098

 
432,136

 
513,345

Intangible asset amortization
8,343

 
5,056

 
23,393

 
21,340

Total costs and expenses
312,690

 
399,682

 
884,496

 
1,064,750

Operating income (loss)
57,542

 
(20,587
)
 
98,725

 
57,680

Interest income
2,273

 
2,913

 
7,124

 
8,051

Interest expense
(20,796
)
 
(13,962
)
 
(54,230
)
 
(40,495
)
Other income, net
2,492

 
4,127

 
2,985

 
8,461

Income (loss) before income taxes
41,511

 
(27,509
)
 
54,604

 
33,697

Provision (benefit) for income taxes
9,174

 
101

 
13,456

 
(1,185
)
Net income (loss)
$
32,337

 
$
(27,610
)
 
$
41,148

 
$
34,882

 
 
 
 
 
 
 
 
Net income (loss) per share
 
 
 
 
 
 
 
Basic
$
0.38

 
$
(0.32
)
 
$
0.49

 
$
0.41

Diluted
$
0.38

 
$
(0.32
)
 
$
0.48

 
$
0.40

 
 
 
 
 
 
 
 
Weighted average common shares outstanding (See Note 14):
 
 
 
 
 
 
 
Basic
84,325

 
85,688

 
84,745

 
85,536

Diluted
84,752

 
85,688

 
85,303

 
86,581

Comprehensive income (loss) (See Note 15)
$
43,548

 
$
(46,521
)
 
$
25,637

 
$
(7,288
)


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

4


INTEGRA LIFESCIENCES HOLDINGS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands, except per share amounts) 
 
September 30, 2020
 
December 31, 2019
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
396,279

 
$
198,911

Trade accounts receivable, net of allowances of $6,727 and $4,303
218,184

 
275,296

Inventories, net
307,839

 
316,054

Assets held for sale
159,977

 

Prepaid expenses and other current assets
69,817

 
67,907

  Total current assets
1,152,096

 
858,168

Property, plant and equipment, net
294,439

 
337,404

Right of use asset - operating leases
84,916

 
94,530

Intangible assets, net
973,685

 
1,031,591

Goodwill
919,556

 
954,280

Deferred tax assets, net
8,150

 
12,623

Other assets
20,679

 
14,644

Total assets
$
3,453,521

 
$
3,303,240

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Current portion of borrowings under senior credit facility
$
22,500

 
$
45,000

Current portion of lease liability - operating leases
12,518

 
12,253

Accounts payable, trade
50,254

 
113,090

Contract liabilities
4,875

 
4,772

Accrued compensation
71,712

 
79,385

Liabilities held for sale
12,349

 

Accrued expenses and other current liabilities
80,938

 
76,809

  Total current liabilities
255,146

 
331,309

Long-term borrowings under senior credit facility
944,102

 
1,198,561

Long-term borrowings under securitization facility
92,300

 
104,500

Long-term convertible securities
469,898

 

Lease liability - operating leases
88,778

 
97,504

Deferred tax liabilities
27,780

 
36,553

Other liabilities
177,530

 
118,077

Total liabilities
2,055,534

 
1,886,504

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

 

Common stock; $0.01 par value; 240,000 authorized shares; 89,191 and 88,735 issued at September 30, 2020 and December 31, 2019, respectively
892

 
887

Additional paid-in capital
1,284,711

 
1,213,620

Treasury stock, at cost; 4,915 shares and 2,865 shares at September 30, 2020 and December 31, 2019, respectively
(235,224
)
 
(119,943
)
Accumulated other comprehensive loss
(91,913
)
 
(76,402
)
Retained earnings
439,521

 
398,574

Total stockholders’ equity
1,397,987

 
1,416,736

Total liabilities and stockholders’ equity
$
3,453,521

 
$
3,303,240



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

5



INTEGRA LIFESCIENCES HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
 
Nine Months Ended September 30,
 
2020
 
2019
OPERATING ACTIVITIES:
 
 
 
Net income
$
41,148

 
$
34,882

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
89,853

 
81,584

Non-cash in-process research and development expense

 
59,889

Non-cash impairment charges

 
5,764

Income tax expense (benefit)
4,784

 
(10,536
)
Share-based compensation
14,333

 
15,744

Amortization of debt issuance costs and expenses associated with debt refinancing
10,499

 
4,084

Non-cash lease expense
2,172

 
3,473

Accretion of bond issuance discount
11,075

 

Loss on disposal of property and equipment
559

 
844

Change in fair value of contingent consideration and others
(45
)
 
10

Changes in assets and liabilities:
 
 
 
Accounts receivable
57,863

 
(17,519
)
Inventories
(45,531
)
 
(30,553
)
Prepaid expenses and other current assets
(865
)
 
(8,162
)
Other non-current assets
10,868

 
6,650

Accounts payable, accrued expenses and other current liabilities
(67,178
)
 
366

Contract liabilities
(548
)
 
(1,395
)
Other non-current liabilities
(5,417
)
 
(2,876
)
Net cash provided by operating activities
123,570

 
142,249

INVESTING ACTIVITIES:
 
 
 
Purchases of property and equipment
(30,463
)
 
(47,343
)
Acquired in-process research and development milestone

(5,000
)
 

Proceeds from note receivable

 
752

Proceeds from sale of property and equipment
3,311

 
36

Cash (paid) provided for business acquisitions, net of cash acquired

 
(30,509
)
Acquired in-process research and development

 
(64,995
)
Net cash used in investing activities
(32,152
)
 
(142,059
)
FINANCING ACTIVITIES:
 
 
 
Proceeds from borrowings of long-term indebtedness
151,300

 
215,800

Payments on debt
(441,000
)
 
(143,250
)
Purchase of option hedge on convertible notes
(104,248
)
 

Proceeds from convertible notes issuance
575,000

 

Proceeds from sale of stock purchase warrants
44,563

 

Payment of debt issuance costs
(24,347
)
 

Purchases of treasury stock
(100,000
)
 

Proceeds from exercised stock options
3,821

 
6,948

Cash taxes paid in net equity settlement
(4,686
)
 
(6,272
)
Net cash provided by financing activities
100,403

 
73,226

Effect of exchange rate changes on cash and cash equivalents
5,547

 
(4,273
)
Net increase in cash and cash equivalents
197,368

 
69,143

Cash and cash equivalents at beginning of period
198,911

 
138,838

Cash and cash equivalents at end of period
$
396,279

 
$
207,981


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

6


INTEGRA LIFESCIENCES HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
(UNAUDITED)
(In thousands, except per share amounts) 

 
Nine Months Ended September 30, 2020
 
Common Stock
 
Treasury Stock
 
Additional Paid-In Capital
 
Accumulated Other Comprehensive Loss
 
Retained Earnings
 
Total Equity
Shares
 
Amount
Shares
 
Amount
 
(In thousands)
Balance, January 1, 2020
88,735

 
$
887

 
(2,865
)
 
$
(119,943
)
 
$
1,213,620

 
$
(76,402
)
 
$
398,574

 
$
1,416,736

Net income

 

 

 

 

 

 
9,180

 
9,180

Other comprehensive loss, net of tax

 

 

 

 

 
(28,187
)
 

 
(28,187
)
Issuance of common stock through employee stock purchase plan
13

 

 

 

 
694

 

 

 
694

Issuance of common stock for vesting of share based awards, net of shares withheld for taxes
357

 
2

 
10

 
476

 
(3,217
)
 

 

 
(2,739
)
Share-based compensation
 
 

 

 

 
3,781

 

 

 
3,781

Share repurchase and equity component of the convertible note issuance, net

 

 
(135
)
 
(7,632
)
 
42,538

 

 

 
34,906

Accelerated shares repurchased

 

 
(1,304
)
 
(75,407
)
 
(16,961
)
 

 

 
(92,368
)
Adoption of Update No. 2016-13

 

 

 

 

 

 
(200
)
 
(200
)
Balance, March 31, 2020
89,105

 
$
889

 
(4,294
)
 
$
(202,506
)
 
$
1,240,455

 
$
(104,589
)
 
$
407,553

 
$
1,341,802

Net loss

 

 

 

 

 

 
(369
)
 
(369
)
Other comprehensive income, net of tax

 

 

 

 

 
1,464

 

 
1,464

Issuance of common stock for vesting of share based awards, net of shares withheld for taxes
84

 
3

 

 
(35
)
 
1,282

 

 

 
1,250

Share-based compensation

 

 

 

 
4,948

 

 

 
4,948

Accelerated shares repurchased

 

 
(621
)
 
(32,685
)
 
32,685

 

 

 

Balance, June 30, 2020
89,189

 
$
892

 
(4,915
)
 
$
(235,226
)
 
$
1,279,370

 
$
(103,125
)
 
$
407,184

 
$
1,349,095

Net income

 

 

 

 

 

 
32,337

 
32,337

Other comprehensive income, net of tax

 

 

 

 

 
11,212

 

 
11,212

Issuance of common stock for vesting of share based awards, net of shares withheld for taxes
2

 

 

 
2

 
(69
)
 

 

 
(67
)
Share-based compensation

 

 

 

 
5,410

 

 

 
5,410

Balance, September 30, 2020
89,191


$
892


(4,915
)

$
(235,224
)

$
1,284,711


$
(91,913
)

$
439,521


$
1,397,987



7


 
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, January 1, 2019
88,044

 
$
880

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

 
$
(45,443
)
 
$
348,373

 
$
1,375,796

Net income

 

 

 

 

 

 
32,756

 
32,756

Other comprehensive loss, net of tax

 

 

 

 

 
(11,236
)
 

 
(11,236
)
Issuance of common stock through employee stock purchase plan
17

 

 

 

 
716

 

 

 
716

Issuance of common stock for vesting of share based awards, net of shares withheld for taxes
243

 
2

 
12

 
506

 
(5,629
)
 

 

 
(5,121
)
Share-based compensation

 

 

 

 
4,119

 

 

 
4,119

Balance, March 31, 2019
88,304

 
$
882

 
(2,869
)
 
$
(120,109
)
 
$
1,191,807

 
$
(56,679
)
 
$
381,129

 
$
1,397,030

Net income

 

 

 

 

 

 
29,736

 
29,736

Other comprehensive loss, net of tax

 

 

 

 

 
(12,021
)
 

 
(12,021
)
Issuance of common stock for vesting of share based awards, net of shares withheld for taxes
47

 
1

 

 
2

 
405

 

 

 
408

Share-based compensation

 

 

 

 
5,798

 

 

 
5,798

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


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

8


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, 2020 unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the financial position, statement of changes in shareholder's equity, 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, 2019 included in the Company’s Annual Report on Form 10-K. The December 31, 2019 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, 2020 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 the equity component of convertible debt instruments, 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. The novel coronavirus (“COVID-19”) pandemic and the resulting adverse impacts to global economic conditions, as well as our operations, may impact future estimates including, but not limited to, inventory valuations, fair value measurements, goodwill and long-lived asset impairments, the effectiveness of the Company’s hedging instruments, deferred tax valuation allowances, and allowances for doubtful accounts receivable.
Risks and Uncertainties
The Company is subject to risks and uncertainties as a result of the COVID-19 pandemic. The extent of the impact of the COVID-19 pandemic on the Company's business is highly uncertain and difficult to predict, as the responses to the pandemic and information is rapidly evolving. From late March, the Company's customers diverted resources to treat COVID-19 patients and deferred or canceled elective or non-emergent surgical procedures, all of which impacted hospitals' abilities to meet their obligations, including to the Company. Beginning in May 2020 and through the end of the third quarter of 2020, procedural volumes relevant to the Company’s products steadily increased and, in some geographic areas, began to approach normalized levels. However, on-going uncertainty persists about the continuing sustainability of those procedural volumes as virus outbreaks constrain healthcare networks. Furthermore, capital markets and economies worldwide have also been negatively impacted by the COVID-19 pandemic, and it is possible that it could cause a local and/or global economic recession. Such economic disruption has had an adverse effect on the Company's business as customers curtailed and reduced capital and overall spending. Policymakers around the globe have responded with fiscal policy actions to support the healthcare industry and the economy as a whole. The magnitude and overall effectiveness of these actions remains uncertain. The severity of the impact of the COVID-19 pandemic on the Company's business will depend on a number of factors, including, but not limited to, the duration and severity of the pandemic and the extent and severity of the impact on the Company's customers, all of which are uncertain and cannot be predicted with certainty. The Company's future results of operations and liquidity could be adversely impacted by delays in payments of outstanding receivable amounts beyond normal payment terms, supply chain disruptions and uncertain demand, and the impact of any initiatives or programs that the Company may undertake to address financial and operations challenges faced by its customers. The COVID-19 pandemic continues to cause a financial strain on healthcare systems which varies by location, and as a result we do not expect the same level of spending in the fourth quarter that we experienced last year. Even after the COVID-19 pandemic and government responses thereto have subsided, residual economic and other effects may have an impact on the demand for post-pandemic surgery levels that are difficult to predict. If the downturn is more severe and prolonged than currently expected, the Company may need to take further steps to reduce costs.

9

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



Recently Issued Accounting Standards
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 fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company adopted this guidance on January 1, 2020 using a modified retrospective transition method which requires a cumulative-effect adjustment to the opening balance of retained earnings to be recognized on the date of adoption with no change to financial results reported in prior periods. The cumulative-effect adjustment recorded on January 1, 2020, is not material. The adoption of this ASU did not have a significant impact on the Company's consolidated financial statements and related disclosures.
The Company's exposure to credit losses may increase if its customers are adversely affected by changes in healthcare laws, coverage, and reimbursement, economic pressures or uncertainty associated with local or global economic recessions, disruption associated with the current COVID-19 pandemic, or other customer-specific factors. Although the Company has historically not experienced significant credit losses, it is possible that there could be an adverse impact as hospital's cash flows are impacted by their response to the COVID-19 pandemic.
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 Company's consolidated financial statements and related disclosures.
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. The Company adopted this guidance on January 1, 2020 using a prospective transition method. The adoption of this guidance did not have a significant impact on the Company's consolidated financial statements and related disclosures.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes: Simplifying the Accounting for Income Taxes intended to simplify the accounting for income taxes by eliminating certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The standard is effective for annual periods beginning after December 15, 2020 and interim periods within, with early adoption permitted. Adoption of the standard requires certain changes to be made prospectively, with some changes to be made retrospectively. The Company is currently assessing the impact of this standard on its financial condition and results of operations.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform, which provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. This amendment applies to all entities, subject to meeting certain criteria, that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. This ASU is effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. The Company is currently assessing the impact that this ASU will have on its consolidated financial statements and related disclosures.

In August 2020, the FASB issued ASU No. 2020-06 Debt- Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity's Own Equity (Subtopic 815-40)-Accounting For Convertible Instruments and Contracts in an Entity's Own Equity . The guidance simplifies accounting for convertible instruments by removing major

10

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

separation models required under current GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument with no separate accounting for embedded conversion features. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify. The guidance also simplifies the diluted net income per share calculation in certain areas. The ASU will be effective for annual and interim periods beginning after December 15, 2021, and early adoption is permitted for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The Company is currently assessing the impact of this standard on its consolidated financial statements and related disclosures.
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. ASSETS AND LIABILITIES HELD FOR SALE
On September 29, 2020, the Company and certain of its subsidiaries entered into an agreement to sell its Extremity Orthopedics business to Smith & Nephew USD Limited for approximately $240 million in cash. The transaction includes the sale of the Company’s upper and lower Extremity Orthopedics product portfolio, including ankle and shoulder arthroplasty and hand and wrist product lines. In connection with the transaction, the Company will pay $41.5 million to the Consortium of Focused Orthopedists, LLC (“CFO”) pursuant to the terms of certain agreements between Integra and CFO relating to the development of shoulder arthroplasty products. The transaction is expected to close at or around the end of 2020, subject to the satisfaction of customary conditions, including regulatory approvals and consultation with employee representative bodies.
The Company considered the assets and liabilities associated with the Extremity Orthopedics business to be accounted as held-for-sale as the six criteria under ASC 260 were met during the third quarter of 2020. Upon designation of the assets and liabilities as held for sale, the Company recorded the assets at the lower of their carrying value or their estimated fair value, less estimated costs to sell. Goodwill was allocated to the assets and liabilities held for sale using the relative fair value method of the Extremity Orthopedics business to the Company's Orthopedics and Tissue Technologies reporting unit. The fair value of the business less costs to sell exceeded the related carrying value.

The Extremity Orthopedics business was treated as a single disposal group and presented separately in the condensed consolidated balance sheet as assets and liabilities held for sale as of September 30, 2020. These balances are presented as current assets and liabilities as they are expected to be sold within twelve months. The major classes of assets and liabilities classified as a held for sale consisted of the following as of September 30, 2020 (amounts in thousands):
Prepaid and other current assets
$
748

Other assets
4,448

Deferred tax assets
6,927

Intangible assets
13,332

Property, plant and equipment, net
36,714

Goodwill
47,117

Inventories
50,691

Total assets held for sale
$
159,977

Other liabilities
241

Current portion of lease liability - operating leases

1,060

Accrued compensation
1,584

Deferred tax liabilities
3,035

Lease liability - operating leases

6,429

Total liabilities held for sale

$
12,349



3. 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.

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

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.
The following table summarizes the final fair values of the assets acquired and liabilities assumed at the acquisition date:
 
Final Valuation as of
September 30, 2019
 
Weighted Average Life
 
(Dollars in thousands)
 
 
Cash
$
90

 
 
Other current assets
751

 
 
Property, plant and equipment
457

 
 
Deferred tax assets
1,697

 
 
Intangible assets:
 
 
 
CerebroFlo developed technology
20,100

 
15 years
Enabling technology license
1,980

 
14 years
Goodwill
27,153

 
 
Total assets acquired
52,228

 
 
 
 
 
 
Accounts payable, accrued expenses and other liabilities
2,926

 
 
Contingent consideration
13,100

 
 
Deferred tax liabilities
5,603

 
 
     Net assets acquired
$
30,599

 
 

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 the Company's 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.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

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 $10.0 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 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. The estimated fair value as of September 30, 2020 was $14.2 million. This amount is included in other liabilities at September 30, 2020 in the consolidated balance sheets of the Company.
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 not material.
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 (IPR&D) 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.
During the fourth quarter of 2019, the Company achieved the first developmental milestone which triggered a $5.0 million obligation to be paid to former shareholders of Rebound. The Company recorded $5.0 million as IPR&D expense in the consolidated statements of operations during the year ended December 31, 2019. The obligation was included in accrued expenses and other current liabilities at December 31, 2019 in the consolidated balance sheets. The milestone was paid during the first quarter of 2020.
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. During the quarter ended March 31, 2019, the total upfront payment of $1.7 million was expensed as a component of research and development expense and the future milestone and option payments will be recorded if the corresponding events become probable.
In connection with the sale of the Company's Extremity Orthopedic business, the Company will pay $41.5 million to CFO pursuant to the terms of certain agreements between Integra and CFO relating to the sale of shares of ISC which includes the development of shoulder arthroplasty products effectively terminating our licensing agreement with ISC. See Note 2, Assets and Liabilities Held for Sale, for details of the transaction.
4. 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

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

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
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.