atec-10q_20170930.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 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, 2017

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 Number: 000-52024

 

ALPHATEC HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

20-2463898

 

 

 

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

5818 El Camino Real

Carlsbad, CA 92008

(Address of principal executive offices, including zip code)

(760) 431-9286

(Registrant’s telephone number, including area code)

 

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 and posted on its corporate Web site, if any, 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

  (Do not check if a small reporting company)

 

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 Exchange Act)    Yes      No   As of November 1, 2017, there were 16,724,080 shares of the registrant’s common stock outstanding.

 

 


ALPHATEC HOLDINGS, INC.

QUARTERLY REPORT ON FORM 10-Q

September 30, 2017

Table of Contents

 

 

 

 

 

Page

 

 

PART I – FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Financial Statements

 

3

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2017 (unaudited) and December 31, 2016

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2017 and 2016 (unaudited)

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine months
Ended September 30, 2017 and 2016 (unaudited)

 

5

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2017
and 2016 (unaudited)

 

6

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

7

 

 

 

 

 

Item 2.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

 

23

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

34

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

34

 

 

 

 

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

35

 

 

 

 

 

Item 1A.

 

Risk Factors

 

35

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

35

 

 

 

 

 

Item 6.

 

Exhibits

 

36

 

 

 

 

 

SIGNATURES

 

37

 

 

 

2


PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

ALPHATEC HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

(In thousands, except for par value data)

 

  

 

September 30, 2017

 

 

December 31,

2016

 

Assets

 

(Unaudited)

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash

 

$

15,437

 

 

$

19,593

 

Accounts receivable, net

 

 

13,303

 

 

 

18,512

 

Inventories, net

 

 

29,747

 

 

 

30,093

 

Prepaid expenses and other current assets

 

 

2,019

 

 

 

4,262

 

Current assets of discontinued operations

 

 

236

 

 

 

364

 

Total current assets

 

 

60,742

 

 

 

72,824

 

Property and equipment, net

 

 

13,275

 

 

 

15,076

 

Intangible assets, net

 

 

5,482

 

 

 

5,711

 

Other assets

 

 

222

 

 

 

516

 

Noncurrent assets of discontinued operations

 

 

52

 

 

 

61

 

Total assets

 

$

79,773

 

 

$

94,188

 

Liabilities and Stockholders’ Deficit

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

2,865

 

 

$

8,701

 

Accrued expenses

 

 

22,606

 

 

 

27,589

 

Current portion of long-term debt

 

 

3,037

 

 

 

3,113

 

Current liabilities of discontinued operations

 

 

283

 

 

 

732

 

Total current liabilities

 

 

28,791

 

 

 

40,135

 

Long-term debt, less current portion

 

 

37,228

 

 

 

43,092

 

Other long-term liabilities

 

 

23,666

 

 

 

28,862

 

Redeemable preferred stock, $0.0001 par value; 20,000 shares authorized at September 30,

   2017 and December 31, 2016; 3,319 shares issued and outstanding at both

   September 30, 2017 and December 31, 2016

 

 

23,603

 

 

 

23,603

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Series A convertible preferred stock, $0.0001 par value; 15 and 0 shares    authorized at September 30, 2017 and December 31, 2016, respectively; 7 shares issued and outstanding at September 30, 2017

 

 

 

 

 

 

Common stock, $0.0001 par value; 200,000 authorized at September 30, 2017

   and December 31, 2016; 15,148 and 9,049 shares issued and outstanding at

   September 30, 2017 and December 31, 2016, respectively

 

 

2

 

 

 

1

 

Treasury stock, at cost, 2 shares, at both September 30, 2017 and

   December 31, 2016

 

 

(97

)

 

 

(97

)

Additional paid-in capital

 

 

438,969

 

 

 

419,787

 

Shareholder note receivable

 

 

(5,000

)

 

 

(5,000

)

Accumulated other comprehensive income

 

 

1,125

 

 

 

970

 

Accumulated deficit

 

 

(468,514

)

 

 

(457,165

)

Total stockholders’ deficit

 

 

(33,515

)

 

 

(41,504

)

Total liabilities and stockholders’ deficit

 

$

79,773

 

 

$

94,188

 

See accompanying notes to unaudited condensed consolidated financial statements.

3


ALPHATEC HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(In thousands, except per share amounts)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Revenues

 

$

23,099

 

 

$

26,711

 

 

$

75,456

 

 

$

93,158

 

Cost of revenues

 

 

8,587

 

 

 

10,849

 

 

 

28,417

 

 

 

31,651

 

Gross profit

 

 

14,512

 

 

 

15,862

 

 

 

47,039

 

 

 

61,507

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

1,044

 

 

 

1,087

 

 

 

3,483

 

 

 

6,799

 

Sales and marketing

 

 

10,015

 

 

 

11,764

 

 

 

31,416

 

 

 

39,498

 

General and administrative

 

 

4,403

 

 

 

4,136

 

 

 

15,977

 

 

 

19,416

 

Amortization of intangible assets

 

 

172

 

 

 

83

 

 

 

516

 

 

 

593

 

Goodwill and intangible asset impairment

 

 

 

 

 

1,736

 

 

 

 

 

 

1,736

 

Restructuring expenses

 

 

139

 

 

 

1,605

 

 

 

1,898

 

 

 

1,778

 

Gain on sale of assets

 

 

 

 

 

 

 

 

(856

)

 

 

 

Total operating expenses

 

 

15,773

 

 

 

20,411

 

 

 

52,434

 

 

 

69,820

 

Operating loss

 

 

(1,261

)

 

 

(4,549

)

 

 

(5,395

)

 

 

(8,313

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(1,807

)

 

 

(1,123

)

 

 

(5,669

)

 

 

(3,118

)

Loss on debt extinguishment

 

 

 

 

 

(9,478

)

 

 

 

 

 

(9,478

)

Other income (expense), net

 

 

(15

)

 

 

90

 

 

 

(8

)

 

 

(273

)

Total other income (expense)

 

 

(1,822

)

 

 

(10,511

)

 

 

(5,677

)

 

 

(12,869

)

Loss from continuing operations before taxes

 

 

(3,083

)

 

 

(15,060

)

 

 

(11,072

)

 

 

(21,182

)

Income tax (benefit) provision

 

 

(7

)

 

 

(4,997

)

 

 

57

 

 

 

(4,962

)

Loss from continuing operations

 

 

(3,076

)

 

 

(10,063

)

 

 

(11,129

)

 

 

(16,220

)

Loss from discontinued operations, net of applicable taxes

 

 

(61

)

 

 

(3,658

)

 

 

(220

)

 

 

(9,351

)

Net loss

 

$

(3,137

)

 

$

(13,721

)

 

$

(11,349

)

 

$

(25,571

)

Net loss per share, basic and diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

(0.22

)

 

$

(1.17

)

 

$

(0.98

)

 

$

(1.91

)

Discontinued operations

 

$

(0.01

)

 

$

(0.43

)

 

$

(0.02

)

 

$

(1.10

)

Net loss per share, basic and diluted

 

$

(0.23

)

 

$

(1.60

)

 

$

(1.00

)

 

$

(3.01

)

Shares used in calculating basic and diluted net loss per share

 

 

13,938

 

 

 

8,560

 

 

 

11,349

 

 

 

8,505

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

4


ALPHATEC HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(UNAUDITED)

(In thousands)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net loss

 

$

(3,137

)

 

$

(13,721

)

 

$

(11,349

)

 

$

(25,571

)

Foreign currency translation adjustments related to continuing

   operations

 

 

207

 

 

 

961

 

 

 

155

 

 

 

2,602

 

Foreign currency translation adjustments related to discontinued

   operations

 

 

 

 

 

19,355

 

 

 

 

 

 

19,355

 

Comprehensive (loss) income

 

$

(2,930

)

 

$

6,595

 

 

$

(11,194

)

 

$

(3,614

)

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

5


ALPHATEC HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In thousands) 

 

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

Operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(11,349

)

 

$

(25,571

)

Adjustments to reconcile net loss to net cash (used in) provided by operating

   activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

5,536

 

 

 

10,403

 

Stock-based compensation

 

 

1,669

 

 

 

1,510

 

Amortization of debt discount and debt issuance costs

 

 

2,107

 

 

 

3,320

 

Impairment of goodwill and intangible assets

 

 

 

 

 

1,736

 

Provision for doubtful accounts

 

 

(145

)

 

 

(53

)

Provision for excess and obsolete inventory

 

 

1,640

 

 

 

4,488

 

Deferred income tax expense

 

 

(1

)

 

 

 

Gain on sale of assets

 

 

(856

)

 

 

 

Loss on disposal of instruments

 

 

1,043

 

 

 

 

Gain on sale of business

 

 

 

 

 

(5,361

)

Loss on extinguishment of debt

 

 

 

 

 

3,863

 

Other non-cash items

 

 

 

 

 

280

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Restricted cash

 

 

 

 

 

2,350

 

Accounts receivable, net

 

 

5,354

 

 

 

10,658

 

Inventories, net

 

 

(1,294

)

 

 

(4,723

)

Prepaid expenses and other current assets

 

 

2,745

 

 

 

1,797

 

Other assets

 

 

297

 

 

 

191

 

Accounts payable

 

 

(3,597

)

 

 

(5,247

)

Accrued expenses and other

 

 

(11,552

)

 

 

233

 

Deferred revenues

 

 

289

 

 

 

 

Net cash used in operating activities

 

 

(8,114

)

 

 

(126

)

Investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(7,185

)

 

 

(7,291

)

Proceeds from sale of business, net

 

 

 

 

 

69,894

 

Cash received from sale of equipment

 

 

869

 

 

 

1,316

 

Net cash (used in) provided by investing activities

 

 

(6,316

)

 

 

63,919

 

Financing activities:

 

 

 

 

 

 

 

 

Borrowings under lines of credit

 

 

70,547

 

 

 

94,241

 

Repayments under lines of credit

 

 

(74,056

)

 

 

(110,840

)

Principal payments on capital lease obligations

 

 

(353

)

 

 

(606

)

Proceeds from sale of stock, net

 

 

17,210

 

 

 

57

 

Proceeds from/(payments on) notes payable, net

 

 

(1,800

)

 

 

23,046

 

Principal payments on notes payable and term loan

 

 

(1,528

)

 

 

(53,820

)

Net cash provided by (used in) financing activities

 

 

10,020

 

 

 

(47,922

)

Effect of exchange rate changes on cash

 

 

254

 

 

 

(1,220

)

Net (decrease) increase in cash

 

 

(4,156

)

 

 

14,651

 

Cash at beginning of period, including discontinued operations

 

 

19,593

 

 

 

11,229

 

Cash at end of period, including discontinued operations

 

$

15,437

 

 

$

25,880

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

3,568

 

 

$

6,122

 

Cash paid for income taxes

 

$

90

 

 

$

920

 

Purchases of property and equipment in accounts payable

 

$

2,240

 

 

$

543

 

Common stock issued for acquisition of intangible assets

 

$

473

 

 

$

-

 

Cashless warrant conversion

 

$

 

 

$

1,074

 

See accompanying notes to unaudited condensed consolidated financial statements.

6


ALPHATEC HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. The Company and Basis of Presentation

The Company

Alphatec Holdings, Inc. (the “Company”), through its wholly owned subsidiary, Alphatec Spine, Inc. and its subsidiaries (“Alphatec Spine”), is a medical technology company focused on the design, development and promotion of products for the surgical treatment of spine disorders. The Company has a comprehensive product portfolio and pipeline that addresses the cervical, thoracolumbar and intervertebral regions of the spine and covers a variety of spinal disorders and surgical procedures. The Company’s principal product offerings are focused on the U.S. market for fusion-based spinal disorder solutions.

On September 1, 2016, the Company completed the sale of its international distribution operations and agreements to Globus Medical Ireland, Ltd., a subsidiary of Globus Medical, Inc., and its affiliated entities (collectively “Globus”), including the Company’s wholly-owned subsidiaries in Japan, Brazil, Australia and Singapore and substantially all of the assets of the Company’s other sales operations in the United Kingdom and Italy (collectively, the “International Business”), pursuant to a purchase and sale agreement, dated as of July 25, 2016 (as amended, the “Purchase and Sale Agreement”) (the “Globus Transaction”). As a result of the Globus Transaction, the Company's International Business has been excluded from continuing operations for all periods presented in this Quarterly Report on Form 10-Q and is reported as discontinued operations. See Note 4 for additional information on the divestiture of the International Business. The Company operates in one reportable business segment.  The sale of the international operations represented a strategic shift and has a significant impact on the Company's operations and financial results.

Basis of Presentation

The accompanying condensed consolidated balance sheet as of December 31, 2016, which has been derived from audited financial statements, and the unaudited interim condensed consolidated financial statements have been prepared by the Company in accordance with U.S. generally accepted accounting principles (“GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”) related to a quarterly report on Form 10-Q. Certain information and note disclosures normally included in annual audited financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made in this Quarterly Report on Form 10-Q are adequate to make the information not misleading. The interim unaudited condensed consolidated financial statements reflect all adjustments, including normal recurring adjustments which, in the opinion of management, are necessary for a fair statement of the financial position and results of operations for the periods presented. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2016, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 that was filed with the SEC on March 31, 2017.

Operating results for the three and nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017, or any other future periods.

On August 24, 2016, the Company filed a certificate of amendment to its certificate of incorporation with the Secretary of State of the state of Delaware to effectuate a 1-for-12 reverse stock split of the Company’s issued and outstanding common stock. The accompanying condensed consolidated financial statements and notes thereto give retrospective effect to the reverse stock split for all periods presented. All issued and outstanding common stock, options exercisable for common stock, warrants exercisable for common stock, restricted stock units, and per share amounts contained in the Company’s condensed consolidated financial statements have been retroactively adjusted to reflect this reverse stock split for all periods presented.

As a result of the sale of the International Business, the Company has retrospectively revised the condensed consolidated statements of operations for the three and nine months ended September 30, 2016, to reflect the financial results from the International Business, and the related assets and liabilities, as discontinued operations.

The Company’s annual operating plan projects that its existing working capital at September 30, 2017 of $32.0 million (including cash of $15.4 million) plus committed financing proceeds and borrowings under the Company’s existing MidCap revolving credit facility allows the Company to fund its operations through one year subsequent to the date the financial statements are issued.

7


The Company has incurred significant net losses since inception and has relied on its ability to fund its operations through revenues from the sale of its products, equity financings and debt financings. As the Company has historically incurred losses, successful transition to profitability is dependent upon achieving a level of revenues adequate to support the Company’s cost structure. This may not occur and, unless and until it does, the Company will continue to need to raise additional capital.  Operating losses and negative cash flows may continue for at least the next year as the Company continues to incur costs related to the execution of its operating plan and introduction of new products.  

As more fully described in Note 5, the Company is a party to debt agreements with MidCap Funding IV, LLC and Globus International (the “Debt Agreements”).  The Debt Agreements include traditional lending and reporting covenants, including a financial covenant that requires the Company to maintain a minimum fixed charge coverage ratio, beginning in April 2018.  Should at any time the Company fail to maintain compliance with this covenant, the Company will need to seek waivers or amendments to the Debt Agreements. If the Company is unable to secure such waivers or amendments, it may be required to classify its obligations under the Debt Agreements in current liabilities on its consolidated balance sheet. The Company may also be required to repay all or a portion of outstanding indebtedness under the Debt Agreements, which would require the Company to obtain further financing.  There is no assurance that the Company will be able to obtain further financing, or do so on reasonable terms.

The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern and do not include any adjustments that might result from the outcome of this uncertainty. A going concern basis of accounting contemplates the recovery of the Company’s assets and the satisfaction of its liabilities in the normal course of business.

Reclassification

Certain amounts in the condensed consolidated financial statements included in our Form 10-Q for the nine months ended September 30, 2016 have been reclassified to conform to current period's presentation. Reclassifications between general and administrative and amortization of intangible assets were made to improve the comparability of the statements. None of the adjustments had any effect on the prior period net loss.

2. Summary of Significant Accounting Policies

The Company’s significant accounting policies are described in Note 2 to its audited consolidated financial statements for the year ended December 31, 2016, which are included in the Company’s Annual Report on Form 10-K that was filed with the SEC on March 31, 2017. Except as discussed below, these accounting policies have not significantly changed during the nine months ended September 30, 2017.

Warrant Accounting

As more fully described in Note 10, the Company issued warrants to purchase shares of the Company’s common stock in connection with a private placement transaction that closed on March 29, 2017.  These warrants contain a feature that could require the transfer of cash in the event of a Fundamental Transaction, as defined in such warrants (other than a Fundamental Transaction not approved by the Company’s Board of Directors).  As of September 30, 2017, the warrant holders did not control the Company’s Board of Directors, and therefore, since potential future cash settlement was deemed to be within the Company’s control, the warrants were classified in stockholder’s equity in accordance with the authoritative accounting guidance.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance related to revenue recognition. This new standard replaces all current U.S. GAAP guidance on this topic and eliminates all industry-specific guidance. The new revenue recognition standard provides a unified model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. This guidance, including all subsequent clarifications, is effective for the Company for annual and interim reporting periods in fiscal years beginning after December 15, 2017 and can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. The Company performed a preliminary assessment of the impact of the new standard on the consolidated financial statements, and considered all items outlined in the standard. In assessing the impact, the Company has outlined all revenue generating activities, mapped those activities to performance obligations and traced those performance obligations to the standard. The Company is now assessing what impact the change

8


in standard will have on those performance obligations. The Company will continue to evaluate the future impact and method of adoption of the new standard and related amendments on the consolidated financial statements and related disclosures throughout 2017. The Company will adopt the new standard beginning January 1, 2018.

In July 2015, the FASB issued new accounting guidance, which changes the measurement principle for inventory from the lower of cost or market to lower of cost and net realizable value for entities that do not measure inventory using the last-in, first-out or retail inventory method. The guidance also eliminates the requirement for these entities to consider replacement cost or net realizable value less an approximately normal profit margin when measuring inventory. The guidance was effective for the Company for annual and interim reporting periods in fiscal years beginning after December 15, 2016. The adoption, effective January 1, 2017, did not have a material impact on the Company’s condensed consolidated financial statements.

In February 2016, the FASB issued new accounting guidance, which changes several aspects of the accounting for leases, including the requirement that all leases with durations greater than twelve months be recognized on the balance sheet. The guidance is effective for annual and interim reporting periods in fiscal years beginning after December 15, 2018. The Company is evaluating the impact of adopting this new accounting standard on its financial statements.

In March 2016, the FASB issued new accounting guidance, which changes several aspects of the accounting for share-based payment award transactions, including accounting and cash flow classification for excess tax benefits and deficiencies, forfeitures, and tax withholding requirements and cash flow classification. The guidance is effective for annual and interim reporting periods in fiscal years beginning after December 15, 2016. The Company adopted the standard for reporting periods beginning January 1, 2017. The Company elected to keep its policy consistent for the application of a forfeiture rate and, therefore, the adoption of the guidance did not have a material impact on its unaudited condensed financial statements.

In August 2016, the FASB issued new accounting guidance, which eliminates the diversity in practice related to the classification of certain cash receipts and payments in the statement of cash flows, by adding or clarifying guidance on eight specific cash flow issues. The guidance is effective for annual and interim reporting periods in fiscal years beginning after December 15, 2017, with early adoption permitted. The amendments in this update should be applied retrospectively to all periods presented, unless deemed impracticable, in which case, prospective application is permitted. The Company is evaluating the new guidance and has not determined the impact this standards update may have on its financial statements.

In January 2017, the FASB issued new accounting guidance, which was created to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This guidance provides a screen to determine whether an integrated set of assets and activities is a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. The guidance is effective for annual and interim reporting periods in fiscal years beginning after December 15, 2017. The Company does not anticipate this standard to have an impact on the Company’s consolidated financial statements unless a transaction occurs that would need to be evaluated under this guidance at which time the Company will assess the impact of this standard.

In May 2017, the FASB recently issued ASU 2017-09, Compensation-Stock Compensation, to provide clarity and reduce both 1) diversity in practice and 2) cost and complexity when applying the guidance in Topic 718 to a change in the terms or conditions of a share-based payment award.  ASU 2017-09 provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting under Topic 718.  The amendments in ASU 2017-09 are effective for fiscal and interim reporting periods in fiscal years beginning after December 15, 2017.  Early adoption is permitted, including adoption in any interim period.  The amendments in ASU 2017-09 should be applied prospectively to an award modified on or after the adoption date.  The Company does not anticipate that the adoption of ASU 2017-09 will have a material impact on its consolidated financial statements unless a transaction occurs that would need to be evaluated under this guidance at which time the Company will assess the impact of this standard.

In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Non-controlling Interests with a Scope Exception. The ASU allows companies to exclude a down round feature when determining whether a financial instrument (or embedded conversion feature) is considered indexed to the entity’s own stock. As a result, financial instruments (or embedded conversion features) with down round features may no longer be required to be accounted classified as liabilities. A company will recognize the value of a down round feature only when it is triggered and the strike price has been adjusted downward. For equity-classified freestanding financial instruments, such as warrants, an entity will treat the value of the effect of the down round,

9


when triggered, as a dividend and a reduction of income available to common shareholders in computing basic earnings per share. For convertible instruments with embedded conversion features containing down round provisions, entities will recognize the value of the down round as a beneficial conversion discount to be amortized to earnings. The guidance in ASU 2017-11 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted, and the guidance is to be applied using a full or modified retrospective approach. The Company does not anticipate that the adoption of ASU 2017-11 will have a material impact on its consolidated financial statements unless a transaction occurs that would need to be evaluated under this guidance at which time the Company will assess the impact of this standard.

3. Select Condensed Consolidated Balance Sheet Details

Accounts Receivable, net

Accounts receivable, net consist of the following (in thousands):

 

 

 

September 30,

2017

 

 

December 31,

2016

 

Accounts receivable

 

$

13,819

 

 

$

19,870

 

Allowance for doubtful accounts

 

 

(516

)

 

 

(1,358

)

Accounts receivable, net

 

$

13,303

 

 

$

18,512

 

 

Inventories, net

Inventories, net consist of the following (in thousands):

 

 

 

September 30,

2017

 

 

December 31,

2016

 

Raw materials

 

$

5,454

 

 

$

7,301

 

Work-in-process

 

 

926

 

 

 

823

 

Finished goods

 

 

38,910

 

 

 

38,469

 

 

 

 

45,290

 

 

 

46,593

 

Less reserve for excess and obsolete finished goods

 

 

(15,543

)

 

 

(16,500

)

Inventories, net

 

$

29,747

 

 

$

30,093

 

 

Property and Equipment, net

Property and equipment, net consist of the following (in thousands except as indicated):

 

 

 

Useful lives

(in years)

 

 

September 30,

2017

 

 

December

31, 2016

 

Surgical instruments

 

 

4

 

 

$

53,116

 

 

$

53,095

 

Machinery and equipment

 

 

7

 

 

 

5,492

 

 

 

5,435

 

Computer equipment

 

 

3

 

 

 

3,512

 

 

 

3,511

 

Office furniture and equipment

 

 

5

 

 

 

2,707

 

 

 

2,695

 

Leasehold improvements

 

various

 

 

 

1,664

 

 

 

3,467

 

Construction in progress

 

n/a

 

 

 

-

 

 

 

445

 

 

 

 

 

 

 

 

66,491

 

 

 

68,648

 

Less accumulated depreciation and amortization

 

 

 

 

 

 

(53,216

)

 

 

(53,572

)

Property and equipment, net

 

 

 

 

 

$

13,275

 

 

$

15,076

 

 

Total depreciation expense was $1.6 million and $1.6 million for the three months ended September 30, 2017 and 2016 and $4.8 million and $5.6 million for the nine months ended September 30, 2017 and 2016, respectively.  At September 30, 2017 and December 31, 2016, assets recorded under capital leases of $2.1 million were included in the machinery and equipment balance. Amortization of assets under capital leases is included in depreciation expense.

10


Intangible Assets, net

Intangible assets, net consist of the following (in thousands except for useful lives):

 

 

 

Remaining

Avg. Useful

lives (in

years)

 

 

September 30,

2017

 

 

December

31, 2016

 

Developed product technology

 

 

 

 

$

13,876

 

 

$

13,876

 

Intellectual property

 

 

 

 

 

1,004

 

 

 

1,004

 

License agreements

 

 

2

 

 

 

5,738

 

 

 

5,265

 

Trademarks and trade names

 

 

 

 

 

732

 

 

 

732

 

Customer-related

 

 

8

 

 

 

7,458

 

 

 

7,458

 

Distribution network

 

 

8

 

 

 

4,027

 

 

 

4,027

 

 

 

 

 

 

 

 

32,835

 

 

 

32,362

 

Less accumulated amortization

 

 

 

 

 

 

(27,353

)

 

 

(26,651

)

Intangible assets, net

 

 

 

 

 

$

5,482

 

 

$

5,711

 

 

Total amortization expense was $0.2 million and $0.3 million for the three months ended September 30, 2017 and 2016 and $0.7 million and $0.9 million for the nine months ended September 30, 2017 and 2016, respectively.

Future amortization expense related to intangible assets as of September 30, 2017 is as follows (in thousands):

 

Year Ending December 31,

 

 

 

 

Remainder of 2017

 

$

234

 

2018

 

 

801

 

2019

 

 

757

 

2020

 

 

756

 

2021

 

 

756

 

Thereafter

 

 

2,178

 

 

 

$

5,482

 

 

Accrued Expenses

Accrued expenses consist of the following (in thousands):

 

 

 

September 30,

2017

 

 

December 31,

2016

 

Commissions and sales milestones

 

$

4,378

 

 

$

4,202

 

Payroll and payroll related

 

 

2,322

 

 

 

2,384

 

Litigation settlements

 

 

4,400

 

 

 

4,400

 

Globus related accruals

 

 

 

 

 

3,830

 

Accrued professional fees

 

 

1,605

 

 

 

3,093

 

Royalties

 

 

1,131

 

 

 

1,347

 

Restructuring and severance accruals

 

 

470

 

 

 

1,328

 

Accrued taxes

 

 

237

 

 

 

404

 

Guaranteed collaboration compensation, current

 

 

4,529

 

 

 

2,228

 

Accrued interest

 

 

361

 

 

 

387

 

Other

 

 

3,173

 

 

 

3,986

 

Total accrued expenses

 

$

22,606

 

 

$

27,589

 

 

4. Discontinued Operations

As a result of the Globus Transaction, the Company has retrospectively revised the condensed consolidated statements of operations for the three and nine month periods ended September 30, 2016 to reflect the financial results from the International Business as discontinued operations.

11


At the closing of the Globus Transaction, Globus paid the Company $80 million in cash, subject to a working capital adjustment. On September 1, 2016, the Company used approximately $66 million of the consideration received to (i) repay in full all amounts outstanding and due under the Company’s Facility Agreement between the Company and Deerfield Private Design Fund II, L.P., Deerfield Private Design International II, L.P., Deerfield Special Situations Fund, L.P. and Deerfield Special Situations International Master Fund, L.P., dated as of March 17, 2014, as amended to date (the “Deerfield Facility Agreement”) and (ii) repay certain of its outstanding indebtedness under the Company’s credit facility, as amended to date (the “Amended Credit Facility”) with MidCap Funding IV, LLC (“MidCap”) (described in Note 5), in each case, including debt-related costs. Also on September 1, 2016, the Company entered into a five-year term credit, security and guaranty agreement with Globus (the “Globus Facility Agreement”), as further described in Note 5, pursuant to which Globus agreed to loan the Company up to $30 million, subject to the terms and conditions set forth in the Globus Facility Agreement.

The following table summarizes the calculation of the gain on sale (in thousands). The Company recorded an adjustment of $104,000 to the preliminary purchase price accounting during November 2016.

 

Consideration received

 

$

80,000

 

Cash included in assets sold

 

 

(4,250

)

Transaction costs

 

 

(5,960

)

Net cash proceeds

 

 

69,790

 

Less:

 

 

 

 

Product supply obligation

 

 

(1,927

)

Working capital adjustment

 

 

(2,295

)

Carrying value of business and assets sold

 

 

(57,633

)

Net gain on sale of business

 

$

7,935

 

 

The results of operations from discontinued operations presented below include certain allocations that management believes fairly reflect the utilization of services provided to the International Business. The allocations do not include amounts related to general corporate administrative expenses. Therefore, the results of operations from the International Business do not necessarily reflect what the results of operations would have been had the International Business operated as a stand-alone entity.

In connection with the Globus Transaction, the Company entered into a product manufacture and supply agreement (the “Supply Agreement”) with Globus, pursuant to which the Company agreed to supply to Globus certain of its implants and instruments (the “Products”), previously offered for sale by the Company in international markets at agreed-upon prices for a minimum term of three years, with the option for Globus to extend the term for up to two additional twelve month periods subject to Globus meeting specified purchase requirements. In accordance with authoritative guidance, certain intercompany sales transactions have been reported under continuing operations as the Company will have continuing involvement due to future sales to Globus under the Supply Agreement. In connection with the Globus Transaction, Globus received a credit of up to $1.9 million to be applied against Product purchases pursuant to the Supply Agreement during a six-month period commencing one month after the closing of the Globus Transaction, which has been included as a reduction of the consideration received for the sale of the International Business and has been recognized as revenue.

Included in the results of continuing operations for the three months ended September 30, 2016 are revenues of $1.4 million and cost of revenue of $1.8 million and for the nine months ended September 30, 2016 revenues of $8.9 million and cost of revenue of $8.9 million that represent intercompany transactions that, prior to the Globus Transaction, were eliminated in the Company's condensed consolidated financial statements.

During the three months ended September 30, 2017, the Company recorded $2.3 million in revenue and $2.0 million in cost of revenue from the Supply Agreement in continuing operations. During the nine months ended September 30, 2017, the Company recorded $9.1 million in revenue and $7.8 million in cost of revenue from the Supply Agreement in continuing operations.

12


In connection with the Globus Transaction, the Company included the interest expense of $2.2 million and $7.2 million for the three and nine months ended September 30, 2016, respectively, incurred in connection with repayment from the proceeds from the Globus Transaction of all amounts outstanding and due under the Deerfield Facility Agreement and Amended Credit Facility in the loss from discontinued operations to the extent these debt facilities were repaid using the proceeds from the Globus Transaction.

The following table summarizes the results of discontinued operations for the periods presented in the condensed consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2017 and 2016 (in thousands):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

Discontinued operations

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Revenues

 

$

 

 

$

18,043

 

 

$

 

 

$

40,146

 

Cost of revenues

 

 

 

 

 

11,469

 

 

 

 

 

 

19,694

 

Amortization of acquired intangible assets

 

 

 

 

 

555

 

 

 

 

 

 

1,291

 

Gross profit

 

 

 

 

 

6,019

 

 

 

 

 

 

19,161

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

 

 

 

16

 

 

 

 

 

 

50

 

Sales and marketing

 

 

 

 

 

2,865

 

 

 

 

 

 

12,391

 

General and administrative

 

 

16

 

 

 

1,440

 

 

 

157

 

 

 

5,079

 

Amortization of acquired intangible assets

 

 

 

 

 

155

 

 

 

 

 

 

622

 

Restructuring expenses

 

 

 

 

 

4

 

 

 

 

 

 

620

 

Net gain on sale of business

 

 

 

 

 

(5,361

)

 

 

 

 

 

(5,361

)

Total operating expenses

 

 

16

 

 

 

(881

)

 

 

157

 

 

 

13,401

 

Operating loss

 

 

(16

)

 

 

6,900

 

 

 

(157

)

 

 

5,760

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

 

 

 

(2,144

)

 

 

 

 

 

(7,194

)

Other income, net

 

 

 

 

 

243

 

 

 

 

 

 

1,892

 

Total other income (expense)

 

 

 

 

 

(1,901

)

 

 

 

 

 

(5,302

)

Loss from discontinued operations before taxes

 

 

(16

)

 

 

4,999

 

 

 

(157

)

 

 

458

 

Income tax provision

 

 

45

 

 

 

8,657

 

 

 

63

 

 

 

9,809

 

Loss from discontinued operations, net of applicable taxes

 

$

(61

)

 

$

(3,658

)

 

$

(220

)

 

$

(9,351

)

 

The following table summarizes the assets and liabilities of discontinued operations as of September 30, 2017 and December 31, 2016 related to the International Business (in thousands):

 

 

 

September 30,

2017

 

 

December 31,

2016

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash

 

$

 

 

$

159

 

Inventories, net

 

 

 

 

 

48

 

Prepaid expenses and other current assets

 

 

236

 

 

 

157

 

Total current assets of discontinued operations

 

 

236