atec-10q_20180630.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 June 30, 2018

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 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 Exchange Act)    Yes      No  

As of July 31, 2018, there were 42,396,066 shares of the registrant’s common stock outstanding.

 

 


ALPHATEC HOLDINGS, INC.

QUARTERLY REPORT ON FORM 10-Q

June 30, 2018

Table of Contents

 

 

 

 

 

Page

 

 

PART I – FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Financial Statements

 

3

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of June 30, 2018 (unaudited) and December 31, 2017

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2018 and 2017 (unaudited)

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Loss for the Three and Six Months Ended June 30, 2018 and 2017 (unaudited)

 

5

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2018
and 2017 (unaudited)

 

6

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

7

 

 

 

 

 

Item 2.

 

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

 

27

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

37

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

37

 

 

 

 

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

39

 

 

 

 

 

Item 1A.

 

Risk Factors

 

39

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

39

 

 

 

 

 

Item 6.

 

Exhibits

 

40

 

 

 

 

 

SIGNATURES

 

41

 

 

 

2


PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

ALPHATEC HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except for par value data) 

 

 

 

June 30, 2018

 

 

December 31, 2017

 

Assets

 

(Unaudited)

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash

 

$

44,912

 

 

$

22,466

 

Accounts receivable, net

 

 

11,405

 

 

 

14,822

 

Inventories, net

 

 

28,177

 

 

 

27,292

 

Prepaid expenses and other current assets

 

 

1,778

 

 

 

1,767

 

Current assets of discontinued operations

 

 

251

 

 

 

131

 

Total current assets

 

 

86,523

 

 

 

66,478

 

Property and equipment, net

 

 

12,060

 

 

 

12,670

 

Goodwill

 

 

14,250

 

 

 

 

Intangibles, net

 

 

26,382

 

 

 

5,248

 

Other assets

 

 

225

 

 

 

208

 

Noncurrent assets of discontinued operations

 

 

55

 

 

 

56

 

Total assets

 

$

139,495

 

 

$

84,660

 

Liabilities and Stockholders’ Equity (Deficit)

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

3,354

 

 

$

3,878

 

Accrued expenses

 

 

24,607

 

 

 

22,246

 

Current portion of long-term debt

 

 

6,682

 

 

 

3,306

 

Current liabilities of discontinued operations

 

 

385

 

 

 

312

 

Total current liabilities

 

 

35,028

 

 

 

29,742

 

Long-term debt, less current portion

 

 

33,666

 

 

 

37,767

 

Other long-term liabilities

 

 

16,978

 

 

 

20,206

 

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

   June 30, 2018 and December 31, 2017; 3,319 shares issued and outstanding

   at both June 30, 2018 and December 31, 2017

 

 

23,603

 

 

 

23,603

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders' equity (deficit):

 

 

 

 

 

 

 

 

Series A convertible preferred stock, $0.0001 par value; 15 shares authorized

   at June 30, 2018 and December 31, 2017, respectively; 4 shares issued and

   outstanding at June 30, 2018

 

 

 

 

 

 

Series B convertible preferred stock, $0.0001 par value; 45 and 0 shares authorized at June 30, 2018 and December 31, 2017, respectively; 0 shares issued and outstanding at June 30, 2018

 

 

 

 

 

 

Common stock, $0.0001 par value; 200,000 shares authorized at June 30, 2018

   and December 31, 2017; 42,382 and 19,857 shares issued and outstanding at

   June 30, 2018 and December 31, 2017, respectively

 

 

4

 

 

 

2

 

Treasury stock, at cost, 2 shares at both June 30, 2018 and

   December 31, 2017

 

 

(97

)

 

 

(97

)

Additional paid-in capital

 

 

502,683

 

 

 

436,803

 

Shareholder note receivable

 

 

(5,000

)

 

 

(5,000

)

Accumulated other comprehensive income

 

 

1,081

 

 

 

1,093

 

Accumulated deficit

 

 

(468,451

)

 

 

(459,459

)

Total stockholders’ equity (deficit)

 

 

30,220

 

 

 

(26,658

)

Total liabilities and stockholders’ equity (deficit)

 

$

139,495

 

 

$

84,660

 

 

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

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenues

 

$

22,042

 

 

$

24,379

 

 

$

43,349

 

 

$

52,357

 

Cost of revenues

 

 

7,772

 

 

 

8,631

 

 

 

15,509

 

 

 

19,830

 

Gross profit

 

 

14,270

 

 

 

15,748

 

 

 

27,840

 

 

 

32,527

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

2,009

 

 

 

990

 

 

 

3,795

 

 

 

2,439

 

Sales and marketing

 

 

10,673

 

 

 

10,298

 

 

 

20,733

 

 

 

21,401

 

General and administrative

 

 

7,815

 

 

 

5,351

 

 

 

14,257

 

 

 

11,574

 

Amortization of intangible assets

 

 

187

 

 

 

172

 

 

 

364

 

 

 

344

 

Transaction-related expenses

 

 

(62

)

 

 

 

 

 

1,480

 

 

 

 

Gain on settlement

 

 

 

 

 

 

 

 

(6,168

)

 

 

 

Restructuring expenses

 

 

193

 

 

 

528

 

 

 

591

 

 

 

1,759

 

Gain on sale of assets

 

 

 

 

 

(856

)

 

 

 

 

 

(856

)

Total operating expenses

 

 

20,815

 

 

 

16,483

 

 

 

35,052

 

 

 

36,661

 

Operating loss

 

 

(6,545

)

 

 

(735

)

 

 

(7,212

)

 

 

(4,134

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(1,709

)

 

 

(1,881

)

 

 

(3,416

)

 

 

(3,862

)

Other income (expense), net

 

 

(75

)

 

 

2

 

 

 

(13

)

 

 

7

 

Total other income (expense)

 

 

(1,784

)

 

 

(1,879

)

 

 

(3,429

)

 

 

(3,855

)

Loss from continuing operations before taxes

 

 

(8,329

)

 

 

(2,614

)

 

 

(10,641

)

 

 

(7,989

)

Income tax (benefit) provision

 

 

(1,265

)

 

 

15

 

 

 

(1,723

)

 

 

64

 

Loss from continuing operations

 

 

(7,064

)

 

 

(2,629

)

 

 

(8,918

)

 

 

(8,053

)

Loss from discontinued operations, net of applicable taxes

 

 

(12

)

 

 

(68

)

 

 

(74

)

 

 

(159

)

Net loss

 

$

(7,076

)

 

$

(2,697

)

 

$

(8,992

)

 

$

(8,212

)

Net loss per share, basic and diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

(0.21

)

 

$

(0.24

)

 

$

(0.32

)

 

$

(0.80

)

Discontinued operations

 

$

(0.00

)

 

$

(0.01

)

 

$

(0.00

)

 

$

(0.02

)

Net loss per share, basic and diluted

 

$

(0.21

)

 

$

(0.24

)

 

$

(0.33

)

 

$

(0.82

)

Shares used in calculating basic and diluted net loss per share

 

 

34,030

 

 

 

11,047

 

 

 

27,656

 

 

 

10,033

 

 

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

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net loss

 

$

(7,076

)

 

$

(2,697

)

 

$

(8,992

)

 

$

(8,212

)

Foreign currency translation adjustments related to continuing

   operations

 

 

10

 

 

 

(242

)

 

 

(12

)

 

 

(52

)

Comprehensive loss

 

$

(7,066

)

 

$

(2,939

)

 

$

(9,004

)

 

$

(8,264

)

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

5


ALPHATEC HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In thousands) 

 

 

 

Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

Operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(8,992

)

 

$

(8,212

)

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

   activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

3,475

 

 

 

3,738

 

Stock-based compensation

 

 

1,767

 

 

 

1,219

 

Amortization of debt discount and debt issuance costs

 

 

1,090

 

 

 

1,423

 

Provision for doubtful accounts

 

 

110

 

 

 

(72

)

Provision for excess and obsolete inventory

 

 

2,212

 

 

 

892

 

Deferred income tax expense

 

 

(1,238

)

 

 

(1

)

Gain on settlement

 

 

(6,168

)

 

 

 

Gain on sale of assets

 

 

 

 

 

(856

)

Gain on disposal of instruments

 

 

(285

)

 

 

 

Accretion to contingent consideration

 

 

100

 

 

 

 

Other non-cash items

 

 

 

 

 

394

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

3,346

 

 

 

5,458

 

Inventories, net

 

 

(2,905

)

 

 

(617

)

Prepaid expenses and other current assets

 

 

49

 

 

 

2,611

 

Other assets

 

 

(55

)

 

 

317

 

Accounts payable

 

 

(620

)

 

 

(3,546

)

Accrued expenses and other

 

 

1,768

 

 

 

(5,069

)

Other long-term liabilities

 

 

(2,168

)

 

 

(4,400

)

Deferred revenue

 

 

(197

)

 

 

246

 

Net cash used in operating activities

 

 

(8,711

)

 

 

(6,475

)

Investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(2,387

)

 

 

(5,348

)

Cash paid for acquisition of SafeOp Surgical, Inc.

 

 

(14,344

)

 

 

 

Cash received from sale of equipment

 

 

348

 

 

 

 

Net cash used in investing activities

 

 

(16,383

)

 

 

(5,348

)

Financing activities:

 

 

 

 

 

 

 

 

Borrowings under lines of credit

 

 

44,500

 

 

 

47,114

 

Repayments under lines of credit

 

 

(46,634

)

 

 

(50,669

)

Principal payments on capital lease obligations

 

 

(60

)

 

 

(293

)

Proceeds from sale of stock, net

 

 

51,538

 

 

 

17,630

 

Principal payments on term loan

 

 

(1,800

)

 

 

(2,557

)

Net cash provided by financing activities

 

 

47,544

 

 

 

11,225

 

Effect of exchange rate changes on cash

 

 

(4

)

 

 

(47

)

Net increase (decrease) in cash

 

 

22,446

 

 

 

(645

)

Cash at beginning of period, including discontinued operations

 

 

22,466

 

 

 

19,752

 

Cash at end of period, including discontinued operations

 

$

44,912

 

 

$

19,107

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

2,282

 

 

$

2,437

 

Cash paid for income taxes

 

$

72

 

 

$

69

 

Purchases of property and equipment in accounts payable

 

$

531

 

 

$

374

 

 

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 subsidiaries, Alphatec Spine, Inc. (“Alphatec Spine”) and SafeOp Surgical, Inc. (“SafeOp”), is a medical technology company that designs, develops, and markets technology for the treatment of spinal disorders associated with disease and degeneration, congenital deformities, and trauma.. The Company's mission is to improve lives by providing innovative spine surgery solutions through the relentless pursuit of superior outcomes. The Company markets its products in the U.S. via independent sales agents and a direct sales force.

On March 6, 2018, the Company and its newly-created wholly-owned subsidiary, Safari Merger Sub, Inc. (“Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) with SafeOp, a Delaware corporation, certain Key Stockholders of SafeOp and a Stockholder Representative. The Merger Agreement provides for a reverse triangular merger (the “Merger”), which was consummated on March 8, 2018, in which Sub was merged into SafeOp, with SafeOp being the surviving corporation and a wholly-owned subsidiary of the Company. See Note 8 for further information.

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 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 Business represented a strategic shift and had a significant impact on the Company's operations and financial results.

Recent Developments

In March 2018, the Company entered into financing transactions to raise an aggregate of $50 million, including a $45.2 million private placement of Series B Convertible Preferred Stock and warrants exercisable for common stock (the “2018 Private Placement”), and a warrant exercise agreement with a holder of an existing warrant for aggregate consideration of $4.8 million. On May 17, 2018, the Company’s stockholders approved the 2018 Private Placement and the shares of Series B Convertible Preferred Stock automatically converted into 14,349,236 shares of common stock. The 2018 Private Placement was led by L-5 Healthcare Partners, LLC, a healthcare-dedicated institutional investor, and included certain of the Company’s directors and executive officers, as well as other new and existing institutional and independent investors.  The Company used a portion of the net proceeds from the 2018 Private Placement and warrant exercise to fund the $15.1 million cash portion of the purchase price for SafeOp, of which $14.3 million was paid during the six months ended June 30, 2018, and expects to use the remainder for general corporate purposes including the integration of next-generation neuromonitoring solutions, advancement of its product pipeline, and investment in sales and marketing to expand its market presence. See Note 11 for further information.

Basis of Presentation

The accompanying condensed consolidated balance sheet as of December 31, 2017, 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 unaudited interim 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, 2017, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 that was filed with the SEC on March 9, 2018.

7


Operating results for the three and six months ended June 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018, or any other future periods.

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.

The Company’s annual operating plan projects that its existing working capital at June 30, 2018 of $51.5 million (including cash of $44.9 million) which includes the net proceeds of $51.5 million received as of June 30, 2018 from the equity offering that closed on March 8, 2018 (see Note 11) and warrant exercises, as well as the amendments to its debt facilities (see Note 5), allows the Company to fund its operations through at least one year subsequent to the date the financial statements are issued.

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 (“MidCap”) and Globus (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 2019.  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 may 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.

Reclassification

Certain amounts in the condensed consolidated statement of cash flows for the six months ended June 30, 2017 have been reclassified to conform to the current period's presentation. None of the adjustments had any effect on the prior period cash flow totals.

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, 2017, which are included in the Company’s Annual Report on Form 10-K that was filed with the SEC on March 9, 2018. Except as discussed below, these accounting policies have not changed during the six months ended June 30, 2018.

Revenue Recognition

The Company recognizes revenue from license and collaboration agreements in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“Topic 606”). The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements. This standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaboration arrangements and financial instruments.  Under Topic 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services.  To determine revenue recognition for arrangements that an entity determines are within the scope of Topic 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation.  The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer.  At contract inception, once the contract is determined to be within the scope of Topic 606, the Company

8


assesses the goods or services promised within each contract and determines those that are performance obligations, and assesses whether each promised good or service is distinct.  The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.  

The Company derives its revenues primarily from the sale of spinal surgery implants used in the treatment of spine disorders. The Company sells its products primarily through its direct sales force and independent distributors. Revenue is recognized when control of the promised goods are transferred to the customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods. Transfer of control generally occurs when the Company receives the written acknowledgment that the product has been used in a surgical procedure or upon shipment to third-party customers who immediately accept title to such product.

The Company’s accounts receivable generally have net 30 day payment terms. The Company generally does not allow returns of products that have been delivered. The Company offers standard quality assurance warranty on its products. As of June 30, 2018, accounts receivable related to products and services were $11.4 million. For the three and six months ended June 30, 2018, the Company had no material bad debt expense and there were no material contract assets, contract liabilities or deferred contract costs recorded on the consolidated balance sheet as of June 30, 2018.

Warrants to Purchase Common Stock

Warrants are accounted for in accordance with the applicable accounting guidance as either derivative liabilities or as equity instruments depending on the specific terms of the agreements.  As of June 30, 2018, all warrants are classified within stockholders’ equity. The Company periodically evaluates changes in facts and circumstances that could impact the classification of warrants.  

Transaction-related Expenses

The Company expensed certain costs related to the SafeOp acquisition, which primarily include third-party advisory and legal fees.

Fair Value Measurements

The carrying amount of financial instruments consisting of cash, restricted cash, trade accounts receivable, prepaid expenses and other current assets, accounts payable, accrued expenses, accrued compensation and current portion of long-term debt included in the Company’s consolidated financial statements are reasonable estimates of fair value due to their short maturities. Based on the borrowing rates currently available to the Company for loans with similar terms, management believes the fair value of long-term debt approximates its carrying value.

Authoritative guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

 

 

Level 1:

Observable inputs such as quoted prices in active markets;

 

 

Level 2:

Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

 

 

Level 3:

Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

The Company does not maintain any financial assets that are considered to be Level 1, Level 2 or Level 3 instruments as of June 30, 2018. The fair value of the contingent consideration liability assumed in the SafeOp acquisition is recorded as part of the purchase price consideration of the acquisition. The contingent consideration related to the SafeOp acquisition is classified within Level 3 of the fair value hierarchy as the Company is using a probability-weighted income approach, utilizing significant unobservable inputs including the probability of achieving each of the potential milestones and an estimated discount rate related to the risks of the expected cash flows attributable to the milestones.

9


The following table provides a reconciliation of liabilities measured at fair value using significant unobservable inputs (Level 3) for the three and six months ended June 30, 2018 (in thousands):

 

 

 

June 30,

2018

 

Balance at January 1, 2018

 

$

 

Contingent consideration liability recorded upon acquisition of SafeOp

 

 

3,200

 

Change in fair value measurement

 

 

 

Balance at March 31, 2018

 

 

3,200

 

Change in fair value measurement

 

 

100

 

Balance at June 30, 2018

 

$

3,300

 

 

The material factors that may impact the fair value of the contingent consideration, and therefore, this liability, are the probabilities of achieving the related milestones and the discount rate.  Significant increases or decreases in any of the probabilities of success would result in a significantly higher or lower fair value, respectively.  Any necessary fair value adjustments to the contingent consideration liability will be assessed at each reporting date and recorded through operating expenses in the consolidated statement of operations.

Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), as modified by subsequently issued ASUs 2015-14, 2016-08, 2016-10, 2016-12 and 2016-20 (collectively “ASU 2014-09”). ASU 2014-09 superseded existing revenue recognition standards with a single model unless those contracts are within the scope of other standards. The revenue recognition principle in ASU 2014-09 is that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company adopted the new standard effective January 1, 2018 using the modified retrospective approach applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASU 2014-09, while prior period amounts are not adjusted and continue to be reported in accordance with the historic accounting under ASC 605. The adoption of ASU 2014-09 did not have a material cumulative impact on the Company’s consolidated financial statements as of January 1, 2018.

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 adoption did not have a material cumulative impact on the Company’s consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-01, Clarifying the Definition of a Business, 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 followed this guidance for its acquisition of SafeOp during the first quarter of 2018, which was deemed to qualify as a business.

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 adoption did not have a material cumulative impact on the Company’s consolidated financial statements.

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

10


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 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, 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 early adopted the guidance in conjunction with the 2018 Private Placement.

Recently Issued Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), 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. Although the Company is in the process of evaluating the impact of adoption of the ASU on its consolidated financial statements, the Company currently believes the most significant changes will be related to the recognition of new right-of-use assets and lease liabilities on the Company's consolidated balance sheet for real estate operating leases.

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other, which eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. The standard has tiered effective dates, starting in 2020 for calendar-year public business entities that meet the definition of an SEC filer. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017. The Company is in the process of determining the impacts the adoption will have on its consolidated financial statements as well as whether to early adopt the new guidance.

In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost (that is, the period of time over which share-based payment awards vest and the pattern of cost recognition over that period). The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The amendments also clarify that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606. The guidance is effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year.   Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606. The Company is in the process of determining the impacts the adoption will have on its consolidated financial statements as well as whether to early adopt the new guidance.

3. Select Condensed Consolidated Balance Sheet Details

Accounts Receivable, net

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

 

 

 

June 30,

2018

 

 

December 31,

2017

 

Accounts receivable

 

$

11,542

 

 

$

15,328

 

Allowance for doubtful accounts

 

 

(137

)

 

 

(506

)

Accounts receivable, net

 

$

11,405

 

 

$

14,822

 

 

11


Inventories, net

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

 

 

 

June 30,

2018

 

 

December 31,

2017

 

Raw materials

 

$

5,437

 

 

$

4,969

 

Work-in-process

 

 

968

 

 

 

502

 

Finished goods

 

 

37,740

 

 

 

37,933

 

 

 

 

44,145

 

 

 

43,404

 

Less reserve for excess and obsolete finished goods

 

 

(15,968

)

 

 

(16,112

)

Inventories, net

 

$

28,177

 

 

$

27,292

 

 

Property and Equipment, net

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

 

 

 

Useful lives

(in years)

 

 

June 30,

2018

 

 

December 31,

2017

 

Surgical instruments

 

 

4

 

 

$

52,288

 

 

$

53,198

 

Machinery and equipment

 

 

7

 

 

 

5,920

 

 

 

5,503

 

Computer equipment

 

 

3

 

 

 

3,761

 

 

 

3,500

 

Office furniture and equipment

 

 

5

 

 

 

2,856

 

 

 

2,794

 

Leasehold improvements

 

various

 

 

 

1,759

 

 

 

1,714

 

Construction in progress

 

n/a

 

 

 

153

 

 

 

336

 

 

 

 

 

 

 

 

66,737

 

 

 

67,045

 

Less accumulated depreciation and amortization

 

 

 

 

 

 

(54,677

)

 

 

(54,375

)

Property and equipment, net

 

 

 

 

 

$

12,060

 

 

$

12,670

 

 

Total depreciation expense was $1.5 million and $1.6 million for the three months ended June 30, 2018 and 2017 and $3.0 million and $3.2 million for the six months ended June 30, 2018 and 2017, respectively.  At both June 30, 2018 and December 31, 2017, 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.

Intangible Assets, net

In conjunction with the acquisition of SafeOp in March 2018, the Company recorded $21.6 million of new intangible assets. See Note 8 for further information regarding the acquisition. Intangible assets, net consist of the following (in thousands, except as indicated):

 

 

 

Remaining

Avg. Useful

lives (in

years)

 

 

June 30,

2018

 

 

December 31,

2017

 

Developed technology

 

 

12

 

 

$

26,975

 

 

$

13,876

 

Intellectual property

 

 

 

 

 

1,004

 

 

 

1,004

 

License agreements

 

 

 

 

 

5,738

 

 

 

5,738

 

Trademarks and trade names

 

 

 

 

 

792

 

 

 

732

 

Customer-related

 

 

2

 

 

 

7,458

 

 

 

7,458

 

Distribution network

 

 

4

 

 

 

4,027

 

 

 

4,027

 

In process research and development

 

 

 

 

 

8,400

 

 

 

 

 

 

 

 

 

 

 

54,394

 

 

 

32,835

 

Less accumulated amortization

 

 

 

 

 

 

(28,012

)

 

 

(27,587

)

Intangible assets, net

 

 

 

 

 

$

26,382

 

 

$

5,248

 

 

Total amortization expense was $0.1 million and $0.3 million for the three months ended June 30, 2018 and 2017 and $0.4 million and $0.5 million for the six months ended June 30, 2018 and 2017, respectively.

12


Future amortization expense related to intangible assets as of June 30, 2018 is as follows (in thousands):

 

Year Ending December 31,

 

 

 

 

Remainder of 2018

 

$

403

 

2019

 

 

1,426

 

2020

 

 

1,411

 

2021

 

 

1,411

 

2022

 

 

1,411

 

Thereafter

 

 

20,320

 

 

 

$

26,382

 

 

Accrued Expenses

Accrued expenses consist of the following (in thousands):

 

 

 

June 30,

2018

 

 

December 31,

2017

 

Commissions and sales milestones

 

$

3,661

 

 

$

3,360

 

Payroll and payroll related

 

 

3,060

 

 

 

2,968

 

Litigation settlement obligation

 

 

4,400

 

 

 

4,400

 

Professional fees

 

 

3,567

 

 

 

1,484

 

Royalties

 

 

1,339

 

 

 

1,269

 

Restructuring and severance accruals

 

 

482

 

 

 

520

 

Taxes

 

 

197

 

 

 

246

 

Guaranteed collaboration compensation, current

 

 

 

 

 

4,485

 

Interest

 

 

349

 

 

 

376

 

Acquisition related - contingent consideration

 

 

3,300

 

 

 

 

Other

 

 

4,252

 

 

 

3,138

 

Total accrued expenses

 

$

24,607

 

 

$

22,246

 

 

4. Discontinued Operations

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 supplies 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, sales to Globus are reported under continuing operations as the Company has continuing involvement under the Supply Agreement.

During the three months ended June 30, 2018, the Company recorded $1.6 million in revenue and $1.5 million in cost of revenue from the Supply Agreement in continuing operations and during the six months ended June 30, 2018, the Company recorded $3.7 million in revenue and $3.5 million in cost of revenue from the Supply Agreement in continuing operations. Included in the results of continuing operations for the three months ended June 30, 2017 are revenues of $2.4 million and cost of revenue of $2.1 million and for the six months ended June 30, 2017 revenues of $6.9 million and cost of revenue of $5.9 million from the Supply Agreement. The Company recorded an immaterial amount and $0.1 million in general and administrative expenses pertaining to discontinued operations on the Company’s condensed consolidated statements of operations and comprehensive loss for the three and six months ended June 30, 2018 and 2017, respectively.

In addition, 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, as amended.

13


5. Debt

MidCap Facility Agreement

The Company’s Amended Credit Facility with MidCap provides for a revolving credit commitment up to $22.5 million and a term loan commitment up to $5 million.  As of June 30, 2018, $8.2 million was outstanding under the revolving line of credit and $0.6 million was outstanding under the term loan.

The term loan interest rate is priced at the London Interbank Offered Rate ("LIBOR") plus 8.0%, subject to a 9.5% floor, and the revolving line of credit interest rate is priced at LIBOR plus 6.0%, reset monthly. At June 30, 2018, the revolving line of credit carried an interest rate of 7.91% and the term loan carried an interest rate of 9.91%. The borrowing base is determined, from time to time, based on the value of domestic eligible accounts receivable. As collateral for the Amended Credit Facility, the Company granted MidCap a first lien on accounts receivable and related assets. In addition to monthly payments of interest, monthly repayments of $0.3 million in 2018 are due through the maturity date in August 2018, with the remaining principal due on the maturity date. At June 30, 2018, $1.2 million remains as unamortized debt discount related to the Amended Credit Facility within the condensed consolidated balance sheet, which will be amortized over the remaining term of the Amended Credit Facility.

The Amended Credit Facility also includes several event of default provisions, such as payment default, insolvency conditions and a material adverse effect clause, which could cause interest to be charged at a rate which is up to five percentage points above the rate effective immediately before the event of default or result in MidCap’s right to declare all outstanding obligations immediately due and payable.

On March 8, 2018, the Company entered into a Seventh Amendment to the Amended Credit Facility to extend the date that the financial covenants of the Amended Credit Facility are effective from April 2018 to April 2019, and established a minimum liquidity covenant of $5.0 million through March 2019. The Company was in compliance with the covenants under the Amended Credit Facility at June 30, 2018.

Globus Facility Agreement

On September 1, 2016, the Company and Globus entered into the Globus Facility Agreement, pursuant to which Globus loaned the Company $30 million, subject to the terms and conditions set forth in the Globus Facility Agreement. As of June 30, 2018, the outstanding balance under the Globus Facility Agreement was $30.0 million, which becomes due and payable in quarterly payments of $0.8 million starting in September 2018, with a final payment of the remaining outstanding principal and interest due on September 1, 2021.  The term loan interest rate is priced at LIBOR plus 8.0% through September 1, 2018, and LIBOR plus 13.0%, thereafter.  At June 30, 2018, the unamortized debt discount related to the Globus Facility Agreement within the condensed consolidated balance sheet was $0.7 million, which will be amortized over the remaining term of the Globus Facility Agreement.

As collateral for the Globus Facility Agreement, the Company granted Globus a first lien security interest in substantially all of its assets, other than accounts receivable and related assets, which will secure the Globus Facility Agreement on a second lien basis.

The Globus Facility Agreement also includes several event of default provisions, such as payment default, insolvency conditions and a material adverse effect clause, which could cause interest to be charged at a rate which is up to five percentage points above the rate effective immediately before the event of default or result in Globus’s right to declare all outstanding obligations immediately due and payable.

On March 8, 2018, the Company entered into a Second Amendment to the Globus Facility Agreement to extend the date that the financial covenants of the Globus Facility Agreement are effective from April 2018 to April 2019, and established a minimum liquidity covenant of $5.0 million through March 2019.  The Company was in compliance with the covenants under the Globus Facility Agreement at June 30, 2018.

14


Principal payments on the Company's debt are as follows as of June 30, 2018 (in thousands):

 

Year Ending December 31,

 

 

 

 

Remainder of 2018

 

$

5,446

 

2019

 

 

3,423

 

2020

 

 

3,380

 

2021

 

 

21,667

 

2022 and thereafter

 

 

8,161

 

Total

 

 

42,077

 

Add: capital lease principal payments

 

 

162

 

Less: unamortized debt discount and debt issuance costs

 

 

(1,891

)

Total

 

 

40,348

 

Less: current portion of long-term debt

 

 

(6,682

)

Long-term debt, net of current portion

 

$

33,666

 

 

6. Commitments and Contingencies

Leases

The Company leases certain equipment under capital leases which expire on various dates through 2018. The leases bear interest at rates ranging from 6.40% to 7.64% per annum, are generally due in monthly principal and interest installments and are collateralized by the related equipment. The Company also leases its buildings and certain equipment and vehicles under operating leases which expire on various dates through 2022. Future minimum annual lease payments under such leases are as follows as of June 30, 2018 (in thousands):

 

Year Ending December 31,

 

Operating

 

 

Capital

 

Remainder of 2018

 

$

829

 

 

$

38

 

2019

 

 

1,665

 

 

 

37

 

2020

 

 

1,688

 

 

 

37

 

2021

 

 

1,009

 

 

 

37

 

2022 and thereafter

 

 

 

 

 

37

 

 

 

$

5,191

 

 

 

186

 

Less: amount representing interest

 

 

 

 

 

 

(24

)

Present value of minimum lease payments

 

 

 

 

 

 

162

 

Current portion of capital leases

 

 

 

 

 

 

(38

)

Capital leases, less current portion

 

 

 

 

 

$

124

 

 

Rent expense under operating leases for the three months ended June 30, 2018 and 2017 was $0.3 million and $0.3 million, respectively and for the six months ended June 30, 2018 and 2017 was $0.6 million and $1.0 million, respectively.

Litigation

The Company is and may become involved in various legal proceedings arising from its business activities. While management is not aware of any litigation matter that in and of itself would have a material adverse impact on the Company’s consolidated results of operations, cash flows or financial position, litigation is inherently unpredictable, and depending on the nature and timing of a proceeding, an unfavorable resolution could materially affect the Company’s future consolidated results of operations, cash flows or financial position in a particular period.  The Company assesses contingencies to determine the degree of probability and range of possible loss for potential accrual or disclosure in the Company’s consolidated financial statements. An estimated loss contingency is accrued in the Company’s consolidated financial statements if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Because litigation is inherently unpredictable and unfavorable resolutions could occur, assessing contingencies is highly subjective and requires judgments about future events. When evaluating contingencies, the Company may be unable to provide a meaningful estimate due to a number of factors, including the procedural status of the matter in question, the presence of complex or novel legal theories, and/or the ongoing discovery and development of information important to the matters. In addition, damage amounts claimed in litigation against the Company may be unsupported, exaggerated or unrelated to reasonably possible outcomes, and as such are not meaningful indicators of the Company’s potential liability.

15


On February 13, 2018, NuVasive, Inc. filed suit against the Company in the United States District Court for the Southern District of California, alleging that certain of the Company’s products (including components of the Squadron™ Lateral Retractor, the Battalion™ Lateral Spacer and other components of the Battalion™ Lateral System), infringe, or contribute to the infringement of, U.S. Patent Nos. 7,819,801, 8,355,780, 8,439,832, 8,753,270, 9,833,227 (entitled “Surgical access system and related methods”), U.S. Patent No. 8,361,156 (entitled “Systems and methods for spinal fusion”), and U.S. Design Patent Nos. D652,519 (“Dilator”) and D750,252 (“Intervertebral Implant”) (collectively, the “NuVasive Patents”).  NuVasive is seeking unspecified monetary damages and a court injunction against future infringement by the Company.  

On March 8, 2018, the Company moved to dismiss NuVasive’s claims of infringement of its design patents on the grounds that those allegations fail to state a cognizable legal claim.  On April 12, 2018, the Court took the motion under submission without oral argument.  On May 14, 2018, the Court ruled that NuVasive had failed to state a plausible claim for infringement of the asserted design patents and granted the Company’s motion to dismiss those claims with prejudice, as any further amendment would be futile.  The Company filed its answer, affirmative defenses and counterclaims to NuVasive’s remaining claims on May 21, 2018.

On March 26, 2018, NuVasive moved for a preliminary injunction, which, on March 27, 2018, the Court denied without prejudice for failure to comply with the Court’s chambers rules.  On April 5, 2018, NuVasive again moved for a preliminary injunction.  The Court held a hearing on the matter, having been fully briefed, on June 21, 2018.  On July 10, 2018, the Court ruled that NuVasive had failed to establish either likelihood of success on the merits of its remaining claims or that it would suffer irreparable harm in the absence of a preliminary injunction.  Accordingly, the Court denied NuVasive’s motion for preliminary injunction.  Trial has not been set in the matter.  The parties currently are conducting discovery.

The Company believes that the allegations lack merit and intends to vigorously defend itself against all claims asserted.  In addition, the Company is seeking the following relief: (i) a declaration that the NuVasive Patents are invalid and/or that the Company does not infringe any valid claim of the NuVasive Patents; (ii) a permanent injunction against NuVasive charging that the Company has infringed or is infringing the NuVasive Patents; and (iii) costs and reasonable attorneys’ fees.  It is impossible at this time to assess whether the outcome of this proceeding will have a material adverse effect on the Company’s consolidated results of operations, cash flows or financial position. Therefore, in accordance with authoritative accounting guidance, the Company has not recorded any accrual for a contingent liability associated with this legal proceeding based on its belief that a liability, while possible, is not probable and any range of potential future charge cannot be reasonably estimated at this time.

Indemnifications

In the normal course of business, the Company enters into agreements under which it occasionally indemnifies third-parties for intellectual property infringement claims or claims arising from breaches of representations or warranties. In addition, from time to time, the Company provides indemnity protection to third-parties for claims relating to past performance arising from undisclosed liabilities, product liabilities, environmental obligations, representations and warranties, and other claims. In these agreements, the scope and amount of remedy, or the period in which claims can be made, may be limited. It is not possible to determine the maximum potential amount of future payments, if any, due under these indemnities due to the conditional nature of the obligations and the unique facts and circumstances involved in each agreement.

In October 2017, NuVasive filed a lawsuit against Mr. Miles, the Company’s executive chairman who was a former employee of NuVasive. The Company itself was not a named defendant in this lawsuit. However, the Company agreed to indemnify Mr. Miles in connection with this lawsuit, and recorded an expense of $0.1 million during the year ended December 31, 2017.  As of June 30, 2018, the Company has not recorded any liability in the consolidated balance sheet related to this matter.

Royalties

The Company has entered into various intellectual property agreements requiring the payment of royalties based on the sale of products that utilize such intellectual property. These royalties primarily relate to products sold by Alphatec Spine and are based on fixed fees or calculated either as a percentage of net sales or on a per-unit sold basis. Royalties are included on the accompanying consolidated statements of operations as a component of cost of revenues. As of June 30, 2018, the Company is obligated to pay guaranteed minimum royalty payments under these agreements of approximately $5.9 million through 2022 and beyond.

16


7. Orthotec Settlement

On September 26, 2014, the Company entered into a Settlement and Release Agreement, dated as of August 13, 2014, by and among the Company and its direct subsidiaries, including Alphatec Spine, Inc., Alphatec Holdings International C.V., Scient'x S.A.S. and Surgiview S.A.S.; HealthpointCapital, LLC, HealthpointCapital Partners, L.P., HealthpointCapital Partners II, L.P., John H. Foster and Mortimer Berkowitz III; and Orthotec, LLC and Patrick Bertranou, (the “Settlement Agreement”). Pursuant to the Settlement Agreement, the Company agreed to pay Orthotec, LLC $49.0 million in cash, including initial cash payments totaling $1.75 million, which the Company previously paid in March 2014, and an additional lump sum payment of $15.75 million, which the Company previously paid in April 2014. The Company agreed to pay the remaining $31.5 million in 28 quarterly installments of $1.1 million and one additional quarterly installment of $0.7 million, commencing October 1, 2014. In September 2014, the Company and HealthpointCapital entered into an agreement for joint payment of settlement whereby HealthpointCapital has agreed to contribute $5 million to the $49 million settlement amount. The $5 million is classified within stockholders’ equity on the Company’s condensed consolidated balance sheet due to the related party nature with HealthpointCapital and its affiliates. See Note 14 for further information.

As of June 30, 2018, the Company has made installment payments in the aggregate of $34.0 million, with a remaining outstanding balance of $23.8 million (including interest). The Company has the right to prepay the amounts due without penalty. In addition, the unpaid balance of the amounts due accrues interest at the rate of 7% per year beginning May 15, 2014 until the amounts due are paid in full. The accrued but unpaid interest will be paid in quarterly installments of $1.1 million (or the full amount of the accrued but unpaid interest if less than $1.1 million) following the full payment of the $31.5 million in quarterly installments described above. No interest will accrue on the accrued interest. The Settlement Agreement provides for mutual releases of all claims in the Orthotec, LLC v. Surgiview, S.A.S, et al. matter in the Superior Court of California, Los Angeles County and all other related litigation matters involving the Company and its directors and affiliates.

8. Acquisition of SafeOp Surgical, Inc.

On March 9, 2018, the Company announced its acquisition of SafeOp, a privately-held provider of neuromonitoring technology designed to enable effective intra-operative nerve health assessment. SafeOp currently produces the EPAD ™ neuromonitoring device which entered the market in late 2016 (“EPAD”). SafeOp’s EPAD device is based upon somatosensory evoked potential (“SSEP”), technology and is an FDA 510(k) - cleared device designed to allow ongoing monitoring of critical nerve function. The EPAD seeks to automate SSEP’s where brain activity resulting from touch is measured, thereby eliminating the need for a technician or other neuromonitoring specialist. SafeOp is developing a product that will allow for both free run and triggered specific recording of muscle activity, also known as Electromyography (“EMG”). The Company expects to receive FDA approval for SafeOp’s EMG technology in early 2019 to complement the SSEP solution. In addition to expanding the Company’s market presence in lateral spine surgery, the Company believes that the SafeOp solution will allow it to integrate neuromonitoring into its broader product portfolio and accelerate the transition to procedural integration of the entire portfolio.

The Merger was accounted for using the acquisition method of accounting. The following unaudited pro forma results of operations assume that the Company acquired SafeOp on January 1, 2018 and 2017, respectively (in thousands).

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenue

 

$

22,042

 

 

$

24,436

 

 

$

43,377

 

 

$

52,460

 

Loss from continuing operations

 

 

(6,785

)

 

 

(3,573

)

 

 

(9,467

)

 

 

(10,229

)

Net loss

 

$

(6,797

)

 

$

(3,641

)

 

$

(9,541

)

 

$

(10,388

)

Net loss per share, basic and diluted

 

$

(0.16

)

 

$

(0.22

)

 

$

(0.23

)

 

$

(0.66

)

 

The unaudited pro forma information presented above is not necessarily indicative of either the results of operations that would have occurred had the acquisition of SafeOp been effective on January 1, 2018 or 2017, respectively, or of the Company’s future results of operations.

The results of operations for SafeOp have been included in the Company’s financial results since the acquisition date. For the three and six months ended June 30, 2018, the Company’s total net revenues were not materially impacted from the Merger and net loss increased by $1.4 million and $1.6 million, respectively, due to SafeOp’s operating expenses.

Under the term of the definitive merger agreement, the Company agreed to pay $15.1 million in cash and agreed to issue 3,265,132 shares of common stock. The Company paid $14.1 million in cash consideration during the six months ended

17


June 30, 2018 with $1.0 million to be paid during the remainder of 2018.  On March 8, 2018, the Company issued 2,975,209 shares of common stock valued at $9.8 million, based on the closing share price of $3.30, and issued an additional 115,621 shares of common stock during the second quarter of 2018. The Company expects to issue the 174,302 additional shares during the remainder of 2018.

The Company also issued $3 million in convertible notes that are convertible into a total of 987,578 shares, which includes total expected interest to be incurred, of common stock and issued warrants to purchase 2.2 million shares of common stock at an exercise price of $3.50 per share.  An additional 1,330,263 shares of common stock are issuable upon achievement of post-closing milestones.

The total purchase price is presented below (in thousands):

 

Cash paid and payable

 

$

15,103

 

Common stock issued and issuable

 

 

10,756

 

Note

 

 

3,000

 

Warrants

 

 

1,650

 

Contingent Consideration

 

 

3,200

 

Total

 

$

33,709

 

 

The Company has measured the identifiable assets and liabilities assumed at their acquisition date fair values separately from goodwill. The intangible assets acquired includes the EPAD tradename, in-process research and development (“IPR&D”) for the EMG technology, and the developed technology for SSEP. The fair value of the EPAD tradename was determined to be $60,000 with an estimated useful life of one year. The IPR&D for the EMG technology is considered to have an indefinite life until the development is completed (i.e. once FDA clearance is obtained), at which point the Company will determine the intangible asset’s estimate useful life. The developed SSEP technology has an estimated fair value of $13.1 million with an estimated useful life of 20 years. The Company has not presented any measurement period adjustments to the purchase price or the allocation detailed below for the three months ended June 30, 2018 due to their immaterial nature.

Due to the short time frame since the acquisition date, the Company recorded the net tangible and intangible assets acquired and liabilities assumed based upon the preliminary valuation. The preliminary valuations, along with the Company’s estimates and assumptions, are subject to change within the measurement period (not to exceed one year).  The primary areas of the preliminary purchase price allocation still in process relate to the fair values of assets acquired and liabilities assumed including: IPR&D, EPAD tradename and developed SSEP technology and related deferred tax consequences.

The allocation of the purchase price to the assets acquired and liabilities assumed based on their fair values, is as follows (in thousands):

 

Assets acquired:

 

 

 

Accounts receivable

 

$

40

 

Inventory

 

 

192

 

Prepaid expenses and other current assets

 

 

89

 

Total current assets

 

$

321

 

Property and equipment, net

 

 

20

 

Other long-term assets

 

 

5

 

IPR&D

 

 

8,400

 

EPAD Tradename

 

 

60

 

Developed Technology

 

 

13,100

 

Total assets

 

$

21,906

 

Liabilities assumed:

 

 

 

 

Accounts payable

 

$

54

 

Accrued expenses

 

 

148

 

Deferred tax liability

 

 

2,341

 

Total liabilities

 

$

2,543

 

Goodwill

 

 

14,346

 

Total consideration transferred

 

$

33,709

 

 

The purchase price exceeded the fair value of the net tangible and identifiable intangible assets acquired from SafeOp.  As a result, the Company recorded goodwill in connection with the Merger. Specifically, the goodwill recorded as part of the

18


Merger includes the assembled workforce and synergies associated with the combined entity. The goodwill is not expected to be deductible for tax purposes.

As a result of the Merger, for the six months ended June 30, 2018, the Company incurred $1.5 million in total transaction costs which, in accordance with authoritative accounting guidance, were expensed as incurred.

The Company agreed to issue additional shares of common stock for up to $4.3 million upon achievement of post-closing milestones (the “Contingent Consideration”). The first milestone includes payment of up to $1.4 million 10 days after submission of an application for Regulatory Approval (as that term is defined in the Merger agreement) for an indication for regulatory clearance for use of a product that includes specifically recording of muscle activity (EMG). The second milestone includes a payment of up to $2.9 million 10 days after the receipt of Regulatory Approval from any Regulatory Authority (as those terms are defined in the Merger agreement) for an indication for use of a product that includes specifically EMG. The Contingent Consideration is recorded as a liability and measured at fair value using a probability-weighted income approach, utilizing significant unobservable inputs including the probability of achieving each of the potential milestones and an estimated discount rate related to the risks of the expected cash flows attributable to the milestones. The material factors that may impact the fair value of the Contingent Consideration, and therefore, this liability, are the probabilities of achieving the related milestones and the discount rate.  Significant increases or decreases in any of the probabilities of success would result in a significantly higher or lower fair value, respectively.  The fair value of the Contingent Consideration, and the associated liability relating to the Contingent Consideration at each reporting date, will be re-assessed with the changes in fair value reflected in earnings. For the three months ended June 30, 2018, the fair value for the Contingent Consideration increased by $0.1 million. The amount was recorded within research and development expense on the condensed consolidated statement of operations and a corresponding increase in the liability on the Company’s condensed consolidated balance sheet.

9. Sale of Assets

On May 5, 2017, the Company entered into an agreement to sell certain inventory and intellectual property to a third party for $1.0 million in consideration, payable via a credit to future minimum royalties owed to the third party under an existing exclusive license agreement between the two parties.  The Company recorded a net gain on sale of assets of $0.9 million which is included under operating expenses on the Company’s condensed consolidated statement of operations.

10. Net Loss Per Share

Basic earnings per share (“EPS”) is calculated by dividing the net income or loss available to common stockholders by the weighted average number of common shares outstanding for the period, without consideration for common stock equivalents. Diluted EPS is computed by dividing the net income available to common stockholders by the weighted average number of common shares outstanding for the period and the weighted average number of dilutive common stock equivalents outstanding for the period determined using the treasury-stock method. For purposes of this calculation, common stock subject to repurchase by the Company, options, performance-based restricted stock units and warrants are considered to be common stock equivalents and are only included in the calculation of diluted earnings per share when their effect is dilutive.

19


The following table presents the computation of basic and diluted net loss per share for continuing and discontinued operations (in thousands, except per share amounts):

 

 

 

Three Months Ended

June 30,