atec-10q_20190331.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 March 31, 2019

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to

Commission File 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  

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common stock, par value $.0001 per share

ATEC

The NASDAQ Global Select Market

As of April 30, 2019, there were 46,857,420 shares of the registrant’s common stock outstanding.

 


ALPHATEC HOLDINGS, INC.

QUARTERLY REPORT ON FORM 10-Q

March 31, 2019

Table of Contents

 

 

 

 

 

Page

 

 

PART I – FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Financial Statements

 

3

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2019 (unaudited) and December 31, 2018

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2019 and 2018 (unaudited)

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Loss for the Three Months Ended March 31, 2019 and 2018 (unaudited)

 

5

 

 

Condensed Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2019
and 2018 (unaudited)

 

6

 

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019
and 2018 (unaudited)

 

7

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

8

 

 

 

 

 

Item 2.

 

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

 

23

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

32

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

32

 

 

 

 

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

34

 

 

 

 

 

Item 1A.

 

Risk Factors

 

34

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

34

 

 

 

 

 

Item 5.

 

Other Information

 

34

 

 

 

 

 

Item 6.

 

Exhibits

 

35

 

 

 

 

 

SIGNATURES

 

36

 

 

 

2


PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

ALPHATEC HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except for par value data) 

 

 

 

March 31, 2019

 

 

December 31, 2018

 

Assets

 

(Unaudited)

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash

 

$

16,419

 

 

$

29,054

 

Accounts receivable, net

 

 

13,760

 

 

 

15,095

 

Inventories, net

 

 

31,166

 

 

 

28,765

 

Prepaid expenses and other current assets

 

 

2,167

 

 

 

2,030

 

Withholding tax receivable from officer

 

 

 

 

 

350

 

Current assets of discontinued operations

 

 

237

 

 

 

242

 

Total current assets

 

 

63,749

 

 

 

75,536

 

Property and equipment, net

 

 

12,821

 

 

 

13,235

 

Operating lease right-of-use asset

 

 

2,394

 

 

 

 

Goodwill

 

 

13,897

 

 

 

13,897

 

Intangibles, net

 

 

26,226

 

 

 

26,408

 

Other assets

 

 

277

 

 

 

347

 

Noncurrent assets of discontinued operations

 

 

53

 

 

 

54

 

Total assets

 

$

119,417

 

 

$

129,477

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

6,780

 

 

$

4,399

 

Accrued expenses

 

 

18,527

 

 

 

22,316

 

Current portion of long-term debt

 

 

619

 

 

 

3,276

 

Current portion of operating lease liability

 

 

1,132

 

 

 

 

Current liabilities of discontinued operations

 

 

569

 

 

 

621

 

Total current liabilities

 

 

27,627

 

 

 

30,612

 

Long-term debt, less current portion

 

 

42,559

 

 

 

42,299

 

Operating lease liability

 

 

1,778

 

 

 

 

Other long-term liabilities

 

 

14,600

 

 

 

15,389

 

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

   March 31, 2019 and December 31, 2018; 3,319 shares issued and outstanding

   at both March 31, 2019 and December 31, 2018

 

 

23,603

 

 

 

23,603

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

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

   at March 31, 2019 and December 31, 2018; 0 and 4 shares issued and

   outstanding at March 31, 2019 and December 31, 2018, respectively

 

 

 

 

 

 

Series B convertible preferred stock, $0.0001 par value; 45 shares authorized

   at March 31, 2019 and December 31, 2018; 0 shares issued and

   outstanding at March 31, 2019 and December 31, 2018

 

 

 

 

 

 

Common stock, $0.0001 par value; 200,000 shares authorized at March 31, 2019 and

   December 31, 2018; 46,853 issued and 46,578 outstanding at March 31, 2019 net of

   275 unvested shares and 43,368 shares issued and outstanding at December 31, 2018

 

 

4

 

 

 

4

 

Treasury stock, at cost, 2 shares, at both March 31, 2019 and December 31, 2018

 

 

(97

)

 

 

(97

)

Additional paid-in capital

 

 

528,094

 

 

 

523,525

 

Shareholder note receivable

 

 

(5,000

)

 

 

(5,000

)

Accumulated other comprehensive income

 

 

1,139

 

 

 

1,064

 

Accumulated deficit

 

 

(514,890

)

 

 

(501,922

)

Total stockholders’ equity

 

 

9,250

 

 

 

17,574

 

Total liabilities and stockholders’ equity

 

$

119,417

 

 

$

129,477

 

 

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

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

Revenues:

 

 

 

 

 

 

 

 

Revenue from U.S. products

 

$

22,955

 

 

$

19,201

 

Revenue from international supply agreement

 

 

1,600

 

 

 

2,106

 

Total revenues

 

 

24,555

 

 

 

21,307

 

Cost of revenues

 

 

7,987

 

 

 

6,402

 

Gross profit

 

 

16,568

 

 

 

14,905

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

3,469

 

 

 

1,786

 

Sales, general and administrative

 

 

21,000

 

 

 

17,257

 

Litigation-related expenses

 

 

2,623

 

 

 

580

 

Amortization of intangible assets

 

 

182

 

 

 

177

 

Transaction-related expenses

 

 

 

 

 

1,542

 

Gain on settlement

 

 

 

 

 

(6,168

)

Restructuring expenses

 

 

60

 

 

 

398

 

Total operating expenses

 

 

27,334

 

 

 

15,572

 

Operating loss

 

 

(10,766

)

 

 

(667

)

Total other income (expense), net

 

 

(2,119

)

 

 

(1,645

)

Loss from continuing operations before taxes

 

 

(12,885

)

 

 

(2,312

)

Income tax provision (benefit)

 

 

31

 

 

 

(458

)

Loss from continuing operations

 

 

(12,916

)

 

 

(1,854

)

Loss from discontinued operations, net of applicable taxes

 

 

(52

)

 

 

(62

)

Net loss

 

$

(12,968

)

 

$

(1,916

)

Net loss per share, basic and diluted:

 

 

 

 

 

 

 

 

Continuing operations

 

$

(0.29

)

 

$

(0.09

)

Discontinued operations

 

$

(0.00

)

 

$

(0.00

)

Net loss per share, basic and diluted

 

$

(0.29

)

 

$

(0.09

)

Shares used in calculating basic and diluted net loss per share

 

 

45,020

 

 

 

21,212

 

 

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

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

Net loss

 

$

(12,968

)

 

$

(1,916

)

Foreign currency translation adjustments related to continuing

   operations

 

 

75

 

 

 

(22

)

Comprehensive loss

 

$

(12,893

)

 

$

(1,938

)

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

5


ALPHATEC HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(UNAUDITED)

 

(In thousands)

 

 

 

Common stock

 

 

Series A Convertible

Preferred Stock

 

 

Series B Convertible

Preferred Stock

 

 

Additional

paid-in

 

 

Shareholder

note

 

 

Treasury

 

 

Accumulated

other

comprehensive

 

 

Accumulated

 

 

Total

stockholders’

 

 

 

Shares

 

 

Par Value

 

 

Shares

 

 

Par Value

 

 

Shares

 

 

Par Value

 

 

capital

 

 

receivable

 

 

stock

 

 

income (loss)

 

 

deficit

 

 

equity

 

Balance at  January 1, 2018

 

 

19,857

 

 

$

2

 

 

 

5

 

 

$

 

 

 

 

 

$

 

 

$

436,803

 

 

$

(5,000

)

 

$

(97

)

 

$

1,093

 

 

$

(459,459

)

 

$

(26,658

)

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

812

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

812

 

Issuance of Series B preferred stock, net of

   offering costs of $2.6 million

 

 

 

 

 

 

 

 

 

 

 

 

 

 

45

 

 

 

 

 

 

42,823

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

42,823

 

Common stock issued for conversion of

   Series A preferred stock

 

 

637

 

 

 

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issued for vesting of

   restricted stock awards, net of shares

   repurchased for tax liability

 

 

38

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issued for warrant exercises

 

 

2,061

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,128

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,128

 

Issuance of common stock and warrants for

   the acquisition of SafeOp

 

 

2,975

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11,468

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11,468

 

Prepaid forward contract for the additional

   shares to be issued for the acquisition of

   SafeOp

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

938

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

938

 

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(22

)

 

 

 

 

 

(22

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,916

)

 

 

(1,916

)

Balance at March 31, 2018

 

 

25,568

 

 

$

2

 

 

 

4

 

 

$

 

 

 

45

 

 

$

 

 

$

496,972

 

 

$

(5,000

)

 

$

(97

)

 

$

1,071

 

 

$

(461,375

)

 

$

31,573

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at  January 1, 2019

 

 

43,368

 

 

$

4

 

 

 

4

 

 

$

 

 

 

 

 

$

 

 

$

523,525

 

 

$

(5,000

)

 

$

(97

)

 

$

1,064

 

 

$

(501,922

)

 

$

17,574

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,565

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,565

 

Distributor equity incentives

 

 

15

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

42

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

42

 

Common stock issued for conversion of

   Series A preferred stock

 

 

1,858

 

 

 

 

 

 

(4

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recognition of beneficial conversion feature -

   SafeOp Convertible Notes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

242

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

242

 

Common stock issued for stock option

   exercises

 

 

8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

14

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

14

 

Common stock issued for vesting of

   restricted stock awards, net of shares

   repurchased for tax liability

 

 

442

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(183

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(183

)

Issuance of common stock for acquisition of

   SafeOp - Milestone 2

 

 

887

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,889

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,889

 

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

75

 

 

 

 

 

 

75

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(12,968

)

 

 

(12,968

)

Balance at March 31, 2019

 

 

46,578

 

 

$

4

 

 

 

 

 

$

 

 

 

 

 

$

 

 

$

528,094

 

 

$

(5,000

)

 

$

(97

)

 

$

1,139

 

 

$

(514,890

)

 

$

9,250

 

 

See accompanying notes to unaudited condensed consolidated financial statements

 

 

6


ALPHATEC HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(12,968

)

 

$

(1,916

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,785

 

 

 

1,886

 

Stock-based compensation

 

 

1,612

 

 

 

619

 

Amortization of debt discount and debt issuance costs

 

 

503

 

 

 

589

 

Amortization of right-of-use asset

 

 

217

 

 

 

 

Provision for doubtful accounts

 

 

66

 

 

 

55

 

Provision for excess and obsolete inventory

 

 

1,997

 

 

 

1,345

 

Deferred income tax benefit

 

 

4

 

 

 

31

 

Gain on settlement

 

 

 

 

 

(6,168

)

Beneficial conversion feature from convertible notes

 

 

242

 

 

 

 

Gain on disposal of instruments

 

 

(275

)

 

 

(131

)

Accretion to contingent consideration

 

 

289

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

1,268

 

 

 

2,846

 

Inventories, net

 

 

(4,398

)

 

 

(2,733

)

Prepaid expenses and other current assets

 

 

198

 

 

 

(217

)

Other assets

 

 

69

 

 

 

37

 

Other long-term assets

 

 

(2,612

)

 

 

 

Accounts payable

 

 

3,319

 

 

 

(192

)

Accrued expenses and other

 

 

(1,071

)

 

 

(258

)

Lease liability

 

 

2,910

 

 

 

 

Other long-term liabilities

 

 

(1,099

)

 

 

(1,093

)

Net cash used in operating activities

 

 

(7,944

)

 

 

(5,300

)

Investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(1,068

)

 

 

(410

)

Cash paid for acquisition of SafeOp Surgical, Inc.

 

 

 

 

 

(13,844

)

Cash received from sale of equipment

 

 

 

 

 

172

 

Net cash used in investing activities

 

 

(1,068

)

 

 

(14,082

)

Financing activities:

 

 

 

 

 

 

 

 

Proceeds from sale of stock, net

 

 

14

 

 

 

47,259

 

Borrowings under lines of credit

 

 

26,433

 

 

 

22,433

 

Repayments under lines of credit

 

 

(26,822

)

 

 

(24,178

)

Principal payments on capital lease obligations

 

 

(5

)

 

 

(31

)

Debt issuance costs

 

 

(300

)

 

 

 

Principal payments on term loan

 

 

(3,022

)

 

 

(900

)

Net cash (used in) provided by financing activities

 

 

(3,702

)

 

 

44,583

 

Effect of exchange rate changes on cash

 

 

79

 

 

 

(22

)

Net increase (decrease) in cash

 

 

(12,635

)

 

 

25,179

 

Cash at beginning of period, including discontinued operations

 

 

29,054

 

 

 

22,466

 

Cash at end of period, including discontinued operations

 

$

16,419

 

 

$

47,645

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

1,357

 

 

$

1,092

 

Cash paid for income taxes

 

$

23

 

 

$

6

 

Purchases of property and equipment in accounts payable

 

$

785

 

 

$

515

 

Common stock issued for achievement of SafeOp contingent consideration

 

$

2,889

 

 

$

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

7


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 spinal fusion technology products and solutions for the treatment of spinal disorders associated with disease and degeneration, congenital deformities, and trauma. The Company markets its products in the U.S. via independent sales agents and a direct sales force.

On March 8, 2018, the Company completed its acquisition of SafeOp, a Delaware corporation, pursuant to a reverse triangular merger of SafeOp into a newly-created wholly-owned subsidiary of the Company, 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 (collectively, the “International Business”) to Globus Medical Ireland, Ltd., a subsidiary of Globus Medical, Inc., and its affiliated entities (collectively “Globus”). As a result of this 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.

Basis of Presentation

The accompanying condensed consolidated balance sheet as of December 31, 2018, 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, 2018, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 that was filed with the SEC on March 29, 2019. Operating results for the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019, or any other future periods.

Liquidity

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 March 31, 2019 of $36.1 million (including cash of $16.4 million) along with the use of the Expanded Credit Facility with Squadron Medical Finance Solutions LLC (“Squadron”) of $30.0 million that closed on March 27, 2019 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. The Company’s inability to raise additional capital from outside sources will have a material adverse impact on its operations.

8


As more fully described in Note 5, the Company’s 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 2020 and a minimum liquidity covenant of $5.0 million effective through March 2020. Should at any time the Company fail to maintain compliance with these covenants, 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.

Reclassification

Certain amounts in the condensed consolidated statement of cash flows for the three months ended March 31, 2018 have been reclassified to conform to the current period's presentation. These reclassifications include the depreciation expense for surgical instruments, which was reclassified, to be consistent with industry practice, out of cost of revenues and into sales, general and administrative expense on the Company’s consolidated statements of operations. This resulted in a reclassification of $1.3 million of depreciation expense for the three months ended March 31, 2018. In addition, general and administrative expense for 2018 was combined into a single line item with sales and marketing expense for a new expense line titled “Sales, general and administrative expense” and litigation-related expenses primarily pertaining to the ongoing litigation with NuVasive, Inc. were classified out of selling, general and administrative expense on the Company’s consolidated statement of operations for the three months ended March 31, 2018 and onto its own expense line item. 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, 2018, which are included in the Company’s Annual Report on Form 10-K that was filed with the SEC on March 29, 2019. Except as discussed below, these accounting policies have not changed during the three months ended March 31, 2019.

Operating Lease

Effective January 1, 2019, the Company adopted ASC No. 2016‑02, Leases (Topic 842) (“ASU 2016‑02” or “ASC 842”), which supersedes the current accounting for leases, using the modified retrospective transition method. The Company has elected to apply the practical expedients allowed by the standard for existing leases. The new standard, while retaining two distinct types of leases, finance and operating, (i) requires lessees to record a right-of-use (“ROU”)asset and a related liability for the rights and obligations associated with a lease, regardless of lease classification, and recognize lease expense in a manner similar to current accounting, (ii) eliminates current real estate specific lease provisions, (iii) modifies the lease classification criteria and (iv) aligns many of the underlying lessor model principles with those in the new revenue standard. The Company determines the initial classification and measurement of its ROU asset and lease liabilities at the lease commencement date and thereafter, if modified. The Company recognizes a ROU asset for its operating leases with lease terms greater than 12 months.  The lease term includes any renewal options and termination options that the Company is reasonably assured to exercise. The present value of lease payments is determined by using the incremental borrowing rate for operating leases determined by using the incremental borrowing rate of interest that the Company would pay to borrow on a collateralized basis an amount equal to the lease payments in a similar economic environment. The Company applied the new guidance to its existing facility lease at the time of adoption and recognized a ROU asset of $2.4 million and operating lease liability of $2.9 million as of March 31, 2019 and recorded a reversal of the previous deferred rent balance under the previous lease guidance of approximately $0.6 million.

 

Rent expense for operating leases is recognized on a straight-line basis over the reasonably assured lease term based on the total lease payments and is included in research and development and general and administrative expenses in the statements of operations.

Beneficial Conversion Feature – SafeOp Convertible Notes

In March 2019, the Company’s Convertible Note outstanding reached maturity and allowed for the noteholders to elect settlement in cash or shares of common stock.  As the Convertible Note provided the holders the benefit to convert to shares of common stock, a beneficial conversion feature (“BCF”) with a calculated intrinsic fair value at issuance of $0.2 million existed as of the date the Convertible Note was able to be converted into shares of common stock. Although the holders elected for cash settlement, the BCF was required to be recognized as interest expense on the Company’s consolidated statement of operations and within additional paid-in-capital within the Company’s condensed consolidated statement of stockholders’ equity for the three months ended March 31, 2019.

9


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 March 31, 2019. The fair value of the contingent consideration liability assumed in the SafeOp acquisition was 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.

The following table provides a reconciliation of liabilities measured at fair value using significant unobservable inputs (Level 3) for the three months ended March 31, 2019 (in thousands):

 

 

 

Level 3

Liabilities

 

Balance at January 1, 2019

 

$

2,600

 

Settlement of Milestone #2

 

 

(2,889

)

Change in fair value measurement

 

 

289