Alphatec Spine, Inc.
Alphatec Holdings, Inc. (Form: 10-Q, Received: 08/04/2009 15:06:34)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

 

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

For the quarterly period ended June 30, 2009

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)

N/A

(Former name, former address and former fiscal year, if changed since last report)

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   x     No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes   ¨     No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨   Accelerated filer   x   Non-accelerated filer   ¨   Small reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

Yes   ¨     No   x

As of August 3, 2009, there were 52,311,204 shares of the registrant’s common stock outstanding.

 

 

 


Table of Contents

ALPHATEC HOLDINGS, INC.

QUARTERLY REPORT ON FORM 10-Q

June 30, 2009

Table of Contents

 

         Page
PART I – FINANCIAL INFORMATION

Item 1.

  Financial Statements (Unaudited)    3
  Condensed Consolidated Balance Sheets as of June 30, 2009 and December 31, 2008    3
  Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2009 and 2008    4
  Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2009 and 2008    5
  Notes to Condensed Consolidated Financial Statements    7

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations    20

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk    29

Item 4.

  Controls and Procedures    30
PART II – OTHER INFORMATION

Item 1.

  Legal Proceedings    31

Item 1A.

  Risk Factors    31

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds    31

Item 3.

  Defaults Upon Senior Securities    31

Item 4.

  Submission of Matters to a Vote of Security Holders    31

Item 5.

  Other Information    32

Item 6.

  Exhibits    32

SIGNATURES

   33

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

ALPHATEC HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(In thousands, except for par value data)

 

     June 30,
2009
    December 31,
2008
 
Assets     

Current assets:

    

Cash and cash equivalents

   $ 19,731      $ 18,315   

Accounts receivable, net

     23,824        18,759   

Inventories, net

     27,749        24,170   

Prepaid expenses and other current assets

     4,038        3,847   

Deferred income tax assets

     413        418   
                

Total current assets

     75,755        65,509   

Property and equipment, net

     28,862        23,093   

Goodwill

     60,087        60,124   

Intangibles, net

     2,705        4,280   

Other assets

     1,706        2,542   
                

Total assets

   $ 169,115      $ 155,548   
                
Liabilities and Stockholders’ Equity     

Current liabilities:

    

Accounts payable

   $ 13,809      $ 10,504   

Accrued expenses

     22,167        16,739   

Deferred revenue

     2,865        1,858   

Current portion of long-term debt

     4,439        2,109   
                

Total current liabilities

     43,280        31,210   

Long-term debt, less current portion

     26,577        26,488   

Other long-term liabilities

     1,747        1,889   

Deferred income tax liabilities

     964        887   

Redeemable preferred stock, $0.0001 par value; 20,000 authorized at June 30, 2009 and December 31, 2008; 3,319 and 3,320 shares issued and outstanding at June 30, 2009 and December 31, 2008, respectively

     23,605        23,605   

Commitments and contingencies

    

Stockholders’ equity:

    

Common stock, $0.0001 par value; 200,000 authorized at June 30, 2009 and December 31, 2008; 51,760 and 47,411 shares issued and outstanding at June 30, 2009 and December 31, 2008, respectively

     5        5   

Additional paid-in capital

     170,671        158,140   

Accumulated other comprehensive income

     1,123        1,495   

Accumulated deficit

     (98,857     (88,171
                

Total stockholders’ equity

     72,942        71,469   
                

Total liabilities and stockholders’ equity

   $ 169,115      $ 155,548   
                

See accompanying notes to unaudited condensed consolidated financial statements.

 

3


Table of Contents

ALPHATEC HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(in thousands, except per share amounts)

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2009     2008     2009     2008  

Revenues

   $ 32,263      $ 23,853      $ 62,873      $ 47,050   

Cost of revenues

     11,412        8,016        22,242        15,903   
                                

Gross profit

     20,851        15,837        40,631        31,147   

Operating expenses:

        

Research and development

     3,436        3,354        6,303        6,558   

In-process research and development

     4,493        —          5,783        1,300   

Sales and marketing

     12,810        10,062        25,594        20,165   

General and administrative

     5,563        5,740        11,526        11,304   

Litigation settlement

     —          —          —          11,000   
                                

Total operating expenses

     26,302        19,156        49,206        50,327   
                                

Operating loss

     (5,451     (3,319     (8,575     (19,180

Other income (expense):

        

Interest income

     16        104        50        305   

Interest expense

     (918     (269     (1,834     (447

Other income (expense), net

     166        (38     (95     113   
                                

Total other income (expense)

     (736     (203     (1,879     (29
                                

Loss before taxes

     (6,187     (3,522     (10,454     (19,209

Income tax provision

     116        69        232        161   
                                

Net loss

   $ (6,303   $ (3,591   $ (10,686   $ (19,370
                                

Net loss per common share:

        

Basic and diluted

   $ (0.13   $ (0.08   $ (0.23   $ (0.42
                                

Weighted-average shares used in computing net loss per share:

        

Basic and diluted

     47,157        46,274        46,832        46,138   
                                

See accompanying notes to unaudited condensed consolidated financial statements.

 

4


Table of Contents

ALPHATEC HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(in thousands)

 

     Six Months Ended June 30,  
     2009     2008  

Operating activities:

    

Net loss

   $ (10,686   $ (19,370

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

    

Depreciation and amortization

     5,498        3,673   

Stock-based compensation

     1,465        1,440   

Interest expense related to amortization of debt discount and debt issuance costs

     297        —     

In-process research and development paid in stock

     3,013        650   

Provision for (recoveries from) doubtful accounts

     (25     106   

Provision for excess and obsolete inventory

     506        1,295   

Gain on sale of property and equipment

     (20     —     

Deferred income taxes

     82        330   

Changes in operating assets and liabilities:

    

Accounts receivable

     (5,268     (2,139

Inventories

     (4,212     (2,059

Prepaid expenses and other current assets

     49        (306

Other assets

     425        (826

Accounts payable

     287        804   

Accrued expenses and other

     3,648        942   

Deferred revenues

     1,007        1,385   
                

Net cash used in operating activities

     (3,934     (14,075

Investing activities:

    

Proceeds from sale of Noas investment

     383        —     

Purchase of intangible assets

     —          (389

Purchases of property and equipment (including instruments)

     (6,648     (7,184

Sale of certificate of deposit

     —          2,000   
                

Net cash used in investing activities

     (6,265     (5,573

Financing activities:

    

Net proceeds from issuance of common stock

     9,884        —     

Borrowings under lines of credit

     3,868        8,500   

Repayments under lines of credit

     (755     (1,869

Principal payments on capital lease obligations

     (197     (263

Proceeds from issuance of notes payable

     —          1,815   

Principal payments on notes payable

     (893     (1,151

Other

     —          22   
                

Net cash provided by financing activities

     11,907        7,054   
                

Effect of exchange rate changes on cash and cash equivalents

     (292     (178
                

Net increase (decrease) in cash and cash equivalents

     1,416        (12,772

Cash and cash equivalents at beginning of period

     18,315        25,843   
                

Cash and cash equivalents at end of period

   $ 19,731      $ 13,071   
                

See accompanying notes to unaudited condensed consolidated financial statements.

 

5


Table of Contents

ALPHATEC HOLDINGS, INC.

STATEMENTS OF CASH FLOWS – (continued)

(UNAUDITED)

(in thousands)

 

     Six Months Ended June 30,
     2009    2008

Supplemental cash flow information:

     

Cash paid for interest

   $ 1,182    $ 363

Cash paid for income taxes

   $ 153    $ 368

Purchases of property and equipment (including instruments) in accounts payable

   $ 3,135    $ —  

Financing of insurance premium by insurance provider

   $ 301    $ —  

See accompanying notes to unaudited condensed consolidated financial statements.

 

6


Table of Contents

ALPHATEC HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. The Company and Basis of Presentation

The Company

Alphatec Holdings, Inc. (“Alphatec,” “Alphatec Holdings” or the “Company”), through its wholly-owned subsidiary, Alphatec Spine, Inc. (“Alphatec Spine”) is engaged in the development, manufacturing and sale of medical devices for use in spinal surgeries with a focus on providing solutions for products affecting the aging spine. Alphatec Holdings’ principal operating activities are conducted through Alphatec Spine and its wholly owned and consolidated subsidiaries, Nexmed, Inc. (“Nexmed”), a California corporation, Alphatec Pacific, Inc. (“Alphatec Pacific”), a Japanese corporation, and Milverton Limited, a Hong Kong corporation.

Basis of Presentation

The consolidated financial statements include the accounts of Alphatec and Alphatec Spine and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in the condensed consolidated financial statements.

The accompanying condensed balance sheet as of December 31, 2008, 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 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 are adequate to make the information not misleading. The interim financial statements reflect all adjustments which, in the opinion of management, are necessary for a fair statement of the results for the periods presented. All such adjustments are of a normal and recurring nature. These unaudited consolidated financial statements should be read in conjunction with the audited financial statements included in Alphatec Holdings’ Annual Report on Form 10-K and Amendment No. 1 thereto for the fiscal year ended December 31, 2008 filed with the SEC on March 4, 2009 and July 7, 2009, respectively. Further, in connection with the condensed consolidated financial statements and in accordance with the recently issued Statement of Financial Accounting Standards No. 165, Subsequent Events , (“SFAS No. 165”), the Company evaluated subsequent events after the balance sheet date of June 30, 2009 through August 4, 2009, the date of the filing of these condensed consolidated financial statements.

Operating results for the three months ended June 30, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009, or any other future periods.

The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern. 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. Based on the Company’s updated operating plan, management believes that its existing cash and cash equivalents of $19.7 million and available credit of $0.4 million at June 30, 2009 will be sufficient to fund its cash requirements through at least June 30, 2010.

In December 2008, the Company entered into a Loan and Security Agreement (the “Credit Facility”) with Silicon Valley Bank and Oxford Finance Corporation (the “Lenders”) (See Note 6). In conjunction with the Credit Facility, the Company is required to maintain compliance with individual quarterly measurement of financial covenants, which include a minimum level of revenues and a minimum level of Adjusted EBITDA (a non-GAAP term defined in Note 6). The minimum covenants escalate each quarter during fiscal 2009. In order to meet the financial covenants for 2009, the Company will need to achieve growth over its historical quarterly revenue and earnings levels. The Company’s 2009 board of directors approved operating plan shows that the Company would meet the quarterly financial covenants and management believes that it will be able to achieve this operating plan. However, if the Company is not able to achieve its planned revenue growth or incurs costs in excess of its forecast, it could be in default of the Credit Facility. In addition to the financial covenants described above, there are other clauses including subjective clauses that would allow the Lenders to declare the loan immediately due and payable (See Note 6). Upon the occurrence of an event of default under the Credit Facility, the Lenders could elect to declare all amounts outstanding under the Credit Facility to be immediately due and payable and terminate all commitments to extend further credit. If the Lenders were to accelerate the repayment of borrowings under the Credit Facility for any reason, the Company may not have sufficient cash on hand to repay the amounts borrowed under the Credit Facility.

 

7


Table of Contents

If the Company is not able to achieve the minimum targeted revenue growth and related improvements in profitability to meet the quarterly covenants or has other unanticipated expenditures, the Company would be required to attempt to renegotiate the Credit Facility and may be required to seek additional capital and/or to substantially reduce discretionary spending, which could have a material adverse effect on the Company’s ability to achieve its intended business objectives. The Company may seek additional financing, which may include additional debt and/or equity financing or funding through other third party agreements. There can be no assurance that any additional financing will be available on acceptable terms or available at all. Any equity financing may result in dilution to existing stockholders and any debt financing may include restrictive covenants.

Reclassification

Certain prior year balances have been reclassified in the accompanying condensed consolidated financial statements to conform to the current year presentation. In the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2008 filed with the SEC on August 6, 2008, the Company’s operating expenses in Japan were classified as general and administrative expenses. In this Quarterly Report on Form 10-Q, Alphatec separated the Japanese sales and marketing expenses from the general and administrative expenses. This reclassification has no impact upon total operating expenses and net loss, and resulted in the reclassification of $1.0 million of general and administrative expense to sales and marketing expense for the three months ended June 30, 2008 and of $2.0 million of general and administrative expense to sales and marketing expense for the six months ended June 30, 2008.

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 fiscal year ended December 31, 2008, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 4, 2009, as amended. These accounting policies have not significantly changed during the three months ended June 30, 2009.

Recent Accounting Pronouncements

In May 2009, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 165 which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS No. 165 is effective for the Company for interim and annual reporting periods ending after June 15, 2009. The adoption of SFAS No. 165 did not have a material impact on the Company’s consolidated financial statements.

In April 2009, the FASB issued FSP SFAS No. 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies . FSP SFAS No. 141(R)-1 addresses application issues on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. FSP SFAS No. 141(R)-1 is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. FSP SFAS No. 141(R)-1 is effective for the Company beginning January 1, 2009 and will apply to business combinations completed on or after that date.

In December 2007, the FASB issued SFAS No. 141(R) (revised 2007), Business Combinations , which replaces SFAS No 141. The statement retains the purchase method of accounting for acquisitions, but requires an acquiring company to measure all assets acquired and liabilities assumed, including contingent considerations and contractual contingencies, at fair value as of the acquisition date. In addition, an acquiring company is required to capitalize in-process research and development and either amortize it over the life of the product, or expense it upon abandonment or impairment. SFAS No. 141(R) also requires expensing of acquisition-related costs as incurred. SFAS No. 141(R) is effective for the Company beginning January 1, 2009 and will apply to business combinations completed on or after that date.

In April 2008, the FASB issued FSP No. 142-3, Determination of Useful Life of Intangible Assets . FSP No. 142-3 amends the factors that should be considered in developing the renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets . FSP No. 142-3 also requires expanded disclosure related to the determination of intangible asset useful lives. FSP 142-3 is effective for the Company beginning January 1, 2009. The adoption of FSP No. 142-3 did not have a material impact on the Company’s consolidated financial statements.

In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles , which identifies the sources of accounting principles and provides entities with a framework for selecting the principles used in preparation of financial statements that are presented in conformity with GAAP. SFAS No. 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AICPA Codification of Auditing Standards, AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles . The adoption of SFAS No. 162 is not expected to have a material impact on the Company’s consolidated financial statements.

 

8


Table of Contents

Fair Value of Financial Instruments

The carrying value of accounts receivable, foreign cash accounts, prepaid expenses, other current assets, accounts payable, accrued expenses, and current portion of debt are considered to be representative of their respective fair values because of the short-term nature of those instruments. Based on the borrowing rates currently available to the Company for loans with similar terms, management believes the fair value of notes payable, capital leases and other long-term debt approximates their carrying values.

SFAS No. 157 establishes a framework for fair value using “levels” which are defined as follows: Level 1 fair value is determined from observable, quoted prices in active markets for identical assets or liabilities. Level 2 fair value is determined from quoted prices for similar items in active markets or quoted prices for identical or similar items in markets that are not active. Level 3 fair value is determined using the entity’s own assumptions about the inputs that market participants would use in pricing an asset or liability. As of June 30, 2009, the Company had cash and cash equivalents of $19.7 million which are considered Level 1 assets. The Company does not have any financial assets or liabilities determined under Levels 2 or 3.

3. Balance Sheet Details

Accounts Receivable

Accounts receivable consist of the following (in thousands):

 

     June 30,
2009
    December 31,
2008
 

Accounts receivable

   $ 24,130      $ 19,092   

Allowance for doubtful accounts

     (306     (333
                

Accounts receivables, net

   $ 23,824      $ 18,759   
                

Inventories

Inventories consist of the following (in thousands):

 

     June 30, 2009    December 31, 2008
     Gross    Reserve for
excess and
obsolete
    Net    Gross    Reserve for
excess and
obsolete
    Net

Raw materials

   $ 2,155    $ —        $ 2,155    $ 1,814    $ —        $ 1,814

Work-in-process

     1,765      —          1,765      1,208      —          1,208

Finished goods

     34,842      (11,013     23,829      32,317      (11,169     21,148
                                           

Inventories, net

   $ 38,762    $ (11,013   $ 27,749    $ 35,339    $ (11,169   $ 24,170
                                           

Property and Equipment

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

 

     Useful lives
(in years)
   June 30,
2009
    December 31,
2008
 

Surgical instruments

   4    $ 29,525      $ 23,505   

Machinery and equipment

   7      9,715        8,209   

Computer equipment

   5      2,578        2,446   

Office furniture and equipment

   5      3,101        3,011   

Leasehold improvements

   various      3,146        1,972   

Building

   39      194        204   

Land

   n/a      14        15   

Construction in progress

   n/a      508        787   
                   
        48,781        40,149   

Less accumulated depreciation and amortization

        (19,919     (17,056
                   

Property and equipment, net

      $ 28,862      $ 23,093   
                   

Total depreciation expense, including depreciation expense for assets under capital leases, was $2.1 million and $1.1 million for the three months ended June 30, 2009 and 2008, respectively, and $3.9 million and $2.1 million for the six months ended June 30, 2009 and 2008, respectively.

 

9


Table of Contents

The Company has assets under capital leases of $3.0 million at both June 30, 2009 and December 31, 2008, respectively. Accumulated depreciation on these assets totaled $2.4 million and $2.2 million at June 30, 2009 and December 31, 2008, respectively. Depreciation expense for these capital leases was $0.1 million and $0.1 million for the three months ended June 30, 2009 and 2008, respectively, and $0.2 million and $0.2 million for the six months ended June 30, 2009 and 2008, respectively.

Intangible Assets

Intangible assets consist of the following (in thousands except as indicated):

 

     Useful lives
(in years)
   June 30,
2009
    December 31,
2008
 

Developed product technology

   5    $ 13,700      $ 13,700   

Distribution rights

   3      3,615        3,787   

Supply agreement

   10      225        225   
                   
        17,540        17,712   

Less accumulated amortization

        (14,835     (13,432
                   

Intangible assets, net

      $ 2,705      $ 4,280   
                   

Total amortization expense was $0.8 million and $0.5 million for the three months ended June 30, 2009 and 2008, respectively, and $1.6 million for both the six months ended June 30, 2009 and 2008.

The future expected amortization expense related to intangible assets as of June 30, 2009 is as follows (in thousands):

 

Year Ending December 31,

    

Remainder of 2009

   $ 1,555

2010

     876

2011

     100

2012

     100

2013

     55

Thereafter

     19
      

Total

   $ 2,705
      

Accrued Expenses

Accrued expenses consist of the following (in thousands):

 

     June 30,
2009
   December 31,
2008

Payroll and related

   $ 3,709    $ 3,522

Accrued milestone payment

     3,550      —  

Commissions

     3,057      2,305

Royalties

     2,680      3,011

Reserve for litigation costs

     2,200      2,200

Deferred rent

     2,657      1,170

Consumption tax

     608      76

Legal

     500      295

Current portion of severance payable

     49      423

Accrued earnout

     —        316

Other

     3,157      3,421
             

Total accrued expenses

   $ 22,167    $ 16,739
             

Deferred Revenues

During the three months ended June 30, 2009, the Company shipped $1.2 million of product to European distributors, which include extended payment terms. As a result of offering payment terms greater than the Company’s customary U.S. business terms, and operating in a new market in which the Company has limited prior experience, revenues for purchases by distributors in Europe have been deferred until the earlier of either the date upon which payments are due or until cash is received for such purchases. The balance in deferred revenue relating to Europe distributors as of June 30, 2009 was $1.6 million.

 

10


Table of Contents

During the three months ended June 30 2009, the Company shipped $0.2 million of product to a U.S. distributor that did not have an extensive credit history. As a result of a lack of extensive credit history, revenues for purchases by this distributor have been deferred until cash is received. The balance in deferred revenue relating to this distributor as of June 30, 2009 was $1.3 million.

4. Comprehensive Loss

Comprehensive income (loss) is defined as the change in equity of a business enterprise during a period from transactions and other events, including foreign currency translation adjustments. The following table sets forth the computation of comprehensive loss for the three and six months ended June 30, 2009 and 2008 (in thousands):

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2009     2008     2009     2008  

Net loss, as reported

   $ (6,303   $ (3,591   $ (10,686   $ (19,370

Foreign currency translation adjustment

     67        (457     (372     312   
                                

Comprehensive loss

   $ (6,236   $ (4,048   $ (11,058   $ (19,058
                                

5. License and Developmental Consulting Agreements

OsseoFix Fracture Reduction System License Agreement

On April 16, 2009 the Company and Stout Medical Group LP (“Stout”) amended the license agreement that the parties had entered into in September 2007 (the “License Amendment”) that provides the Company with a worldwide license to develop and commercialize Stout’s proprietary intellectual property related to a treatment for vertebral compression fractures. The effective date of the License Amendment is March 31, 2009. Under the License Amendment, the timing of the minimum royalty payments has been adjusted and Stout’s ability to terminate the License Amendment was revised. Under the original license agreement, the Company’s minimum royalty obligation began in the year ending December 31, 2009. Pursuant to the License Amendment, the minimum royalty obligation is suspended until a licensed product obtains regulatory approval from the United States Food and Drug Administration (the “FDA”). In addition, under the terms of the License Amendment, Stout has the ability to terminate the License Amendment if the Company is not using commercially reasonably efforts to obtain regulatory approval to market and sell a licensed product; provided that the Company has the right to delay such termination in exchange for making certain payments to Stout. If, during the time period when such payments are made, the Company were to make a regulatory filing for the marketing and sale of a licensed product, such termination will be null and void. Pursuant to the License Amendment, Stout is entitled to retain all up-front payments that had been previously paid to it. The other material terms to the license agreement were not changed in the License Amendment.

Expandable VBR License and Consulting Agreement

On April 15, 2009, the Company and Stout amended and restated the license agreement that the parties had entered into in March 2008 (the “Amended and Restated License Agreement”) that provides the Company with a worldwide license to develop and commercialize Stout’s proprietary intellectual property related to an expandable interbody/vertebral body replacement device. The effective date of the Amended and Restated License Agreement is March 31, 2009. Under the Amended and Restated License Agreement, the timing of the minimum royalty payments has been adjusted and Stout’s ability to terminate the Amended and Restated License Agreement was revised. Under the original license agreement, the Company’s minimum royalty obligation began in the year ending December 31, 2010. Pursuant to the Amended and Restated License Agreement, if the Company is required to initiate a clinical trial to obtain clearance from the FDA for a licensed product, the minimum royalty obligation is suspended until such licensed product obtains regulatory approval. In addition, under the terms of the Amended and Restated License Agreement, Stout has the ability to terminate the Amended and Restated License Agreement if the Company has not filed for regulatory approval to market and sell a licensed product within an allotted time period; provided that the Company has the right to delay such termination in exchange for making certain payments to Stout. If, during the time period when such payments are made, the Company were to make a regulatory filing for the marketing and sale of a licensed product, such termination would be null and void. Pursuant to the Amended and Restated License Agreement, Stout is entitled to retain all up-front payments that had been previously paid to it. The other material terms to the original license agreement were not changed in the Amended and Restated License Agreement.

Additionally, effective March 31, 2009 the Company and Stout amended and restated the developmental consulting agreement that the parties had entered into in March 2008 (the “Amended and Restated Consulting Agreement”) pursuant to which Stout agreed to provide consulting services related to the development of an expandable interbody/vertebral body replacement device. Under the Amended and Restated Consulting Agreement, the timing and amount of consulting fees has been adjusted. Under the original consulting agreement, the Company was obligated to make ten monthly payments of $50,000 to compensate Stout for providing development services. As of the effective date of the Amended and Restated Consulting Agreement, the Company had paid Stout $0.4 million of such consulting fees, and had expensed $0.2 million of such expenses. Pursuant to the Amended and Restated Consulting Agreement, Stout is obligated to return such $0.4 million to the Company, which was received in April 2009. The terms of the Amended and Restated Consulting Agreement call for the Company to pay consulting fees of $20,000 per month for 12 months beginning in July 2009, provided that the agreement is in full force and effect. Pursuant to the Amended and Restated Consulting

 

11


Table of Contents

Agreement, Stout is entitled to retain the 101,944 shares of restricted stock of the Company that the Company had previously issued to Stout. Such restricted stock would become vested upon the attainment of a development milestone. The other material terms to the original consulting agreement were not changed in the Amended and Restated Consulting Agreement. As the total cash consideration has been reduced to $0.2 million, the Company is recording the remaining amount that had not yet been expensed over the expected development period.

OsseoScrew License Agreement

In December 2007, the Company entered into an exclusive license agreement, or the OsseoScrew License Agreement, with Progressive Spinal Technologies LLC (“PST”), that provides the Company with an exclusive worldwide license to develop and commercialize PST’s technology related to a pedicle screw designed to be used for patients that have osteopenic bone or poor bone density. The financial terms of the OsseoScrew License Agreement include: (i) a cash payment payable following the execution of the agreement; (ii) development and sales milestone payments in cash and the Company’s common stock that began to be achieved and paid in 2008; and (iii) a royalty payment based on net sales of licensed products with minimum annual royalties beginning in 2009. The Company recorded an IPR&D charge of $2.0 million in the fourth quarter of 2007 for the initial payment, as the technological feasibility associated with the IPR&D since the final prototype of the device had not been established and no alternative future use exists. The agreement includes milestone payments of $3.6 million consisting of cash and its common stock upon the completion of the biomechanical testing. Furthermore, the agreement includes milestone payments of $2.5 million consisting of cash and the Company’s common stock upon market launch, which may occur in the second half of 2009. During the three months ended June 30, 2009, the Company successfully completed one of its development milestones. The Company recorded an IPR&D charge totaling $3.6 million, which consisted of a cash payment of $1.8 million and the issuance of $1.8 million of shares of the Company’s common stock. The amounts were expensed as the technological feasibility associated with the IPR&D had not been established since the final prototype of the device had not been completed, and no alternative future use exists. The total number of shares of common stock, which were issued on July 15, 2009 was 567,821.

Assignment Agreement with Spine Vision, S.A.

In January 2009, the Company entered into an assignment agreement (the “Patent and Technology Assignment Agreement”) with Spine Vision, S.A (“Spine Vision”) that assigns the Company all rights, title and interests to certain patents and technology of Spine Vision that relate to a stand-alone locking interbody device. The financial terms of the Patent and Technology Assignment Agreement include: (i) an initial payment of $0.5 million; and (ii) a royalty payment based on the net sales of any product that contains the assigned intellectual property. During the first quarter of 2009, the Company recorded an IPR&D charge of $0.5 million for the initial payment, as the technological feasibility associated with the IPR&D had not been established since the final prototype of the device had not been completed, and no alternative future use exists.

License Agreement with Helix Point, LLC

In February 2009, the Company entered into a License Agreement with Helix Point, LLC (the “Helifuse/Helifix License Agreement”) that provides the Company with a worldwide exclusive license (excluding the People’s Republic of China) to develop and commercialize Helix Point’s proprietary intellectual property related to a device for the treatment of spinal stenosis. The financial terms of the Helifuse/Helifix License Agreement include: (i) a cash payment of $250,000 payable following the execution of the Helifuse/Helifix License Agreement; (ii) the issuance of $350,000 of shares of the Company’s common stock following the execution of the Helifuse/Helifix License Agreement; (iii) development and sales milestone payments in cash and the Company’s common stock that could begin to be achieved and paid in 2009; and (iv) a royalty payment based on net sales of licensed products, with minimum annual royalties beginning in the year after the first commercial sale of a licensed product. During the first quarter of 2009, the Company recorded an IPR&D charge of $0.6 million for the initial cash and stock payment, as the technological feasibility associated with the IPR&D had not been established since the final prototype of the device had not been completed, and no alternative future use exists.

License Agreement with International Spinal Innovations, LLC

In June 2009, the Company entered into a Cross License Agreement with International Spinal Innovations, LLC (the “ISI License Agreement”) that provides the Company with a worldwide license to develop and commercialize ISI’s proprietary intellectual property related to a stand-alone anterior lumbar interbody fusion device. The financial terms of the ISI License Agreement include: (i) the issuance of 260,000 shares of the Company’s common stock following the execution of the ISI License Agreement; (ii) sales milestone payments in cash that could begin to be achieved and paid in 2011; and (iii) a royalty payment based on net sales of licensed products with minimum annual royalties beginning in the year after the first commercial sale of a licensed product. During the three months ended June 30, 2009, the Company recorded an IPR&D charge of $0.9 million for the stock issuance on June 30, 2009, as the technological feasibility associated with the IPR&D had not been established since the final prototype of the device had not been completed, and no alternative future use exists.

 

12


Table of Contents

6. Debt and Other Financing Activity

Private Placement

In June 2009, the Company entered into a Subscription Agreement with one of its existing shareholders, Healthpoint Capital Partners II, LP (“Healthpoint”). The Company sold 3,937,007 shares of its common stock at a price of $2.54 per share in a private placement (the “Placement”) for an aggregate purchase price of approximately $10.0 million. The Company paid approximately $0.1 million for transaction fees related to the Placement and received aggregate net proceeds of approximately $9.9 million. The Company recorded the transaction fees as a reduction to additional paid in capital.

Loan and Security Agreement

In December 2008, the Company entered into the Credit Facility with the Lenders consisting of a $15.0 million term loan and a $15.0 million working capital line of credit. The term loan carries a fixed interest rate of 11.25% with interest payments due monthly but no principal repayment through September 2009. Thereafter, the Company will be required to repay the principal plus interest in 30 equal monthly installments, ending in April 2012. An additional finance charge of $0.8 million is due in April 2012. The finance charge is being accrued to interest expense through April 2012. The Company will pay a prepayment penalty if the loan is repaid prior to maturity. The Company does not currently anticipate repaying the debt early.

The working capital line of credit carries an interest rate equal to the prime rate plus either 2.5% or 2.0%, depending on the Company’s financial performance. Interest-only payments are due monthly and the principal is due at maturity in April 2012. As of June 30, 2009 the Company has $0.4 million remaining available to be drawn under the working capital line of credit.

In connection with this Credit Facility, the Company issued warrants to the Lenders to purchase an aggregate of approximately 476,000 shares of the Company’s common stock. The warrants are immediately exercisable and have an exercise price of $1.89 per share and a ten year term. The Company recorded the value of the warrants of $0.9 million as a debt discount. The value of the warrants was determined on the date of grant using the Black-Scholes valuation method with the following assumptions: risk free interest rate of 2.67%, volatility of 60.9%, a ten year term and no dividend yield.

To secure the repayment of any amounts borrowed under this Credit Facility, the Company granted to the Lenders a first priority security interest in all of its assets, other than its owned and licensed intellectual property rights. The Company also agreed not to pledge or otherwise encumber its intellectual property assets without the consent of the Lenders.

The Company is also required to maintain compliance with financial covenants which include a minimum level of revenues and a minimum level of Adjusted EBITDA (a non-GAAP term defined as net income (loss) excluding the effects of interest, taxes, depreciation, amortization, stock-based compensation and in-process R&D). As of June 30, 2009, the Company was in compliance with the financial covenants set forth in the Credit Facility.

The Lenders have the right to declare the loan immediately due and payable in an event of default under the Credit Facility, which includes, among other things, the failure to make payments when due, breaches of representations, warranties or covenants, the occurrence of certain insolvency events, the occurrence of a non-appealable legal judgment against the Company that is not satisfied within ten days, or the occurrence of an event which, in the opinion of the Lenders, could have a material adverse effect on the Company.

During the three months ended June 30, 2009, the Company drew an additional $1.9 million and repaid $0.3 million on the working capital line of credit. As of June 30, 2009 the balance of the line of credit was $14.6 million. The balance on the term loan was $14.3 million, net of the debt discount. Amortization of the debt discount and issuance costs and accretion of the additional finance charge, which are recorded to interest expense, totaled $0.2 million and $0.5 million for the three and six months ended June 30, 2009, respectively. Interest expense for the Credit Facility, excluding debt discount and issuance cost amortization and accretion of the additional finance charge, totaled $0.6 million and $1.3 million for the three and six months ended June 30, 2009, respectively.

Other Debt Agreements

In September 2008, Alphatec Pacific paid $0.8 million on its Resona Bank line of credit and replaced the line of credit with $0.6 million of term debt with Resona Bank, which is payable over 30 months with a 3.75% interest rate. Alphatec Pacific has additional notes payable to Japanese banks and a bond payable, bearing interest at rates ranging from 1.5% to 6.5% and maturity dates through January 2014 which are collateralized by substantially all of the assets of Alphatec Pacific and Japan Ortho Medical, a subsidiary of Alphatec Pacific. As of June 30, 2009, the balance of the notes and the bond totaled $1.4 million.

 

13


Table of Contents

The Company has various capital lease arrangements. The leases bear interest at rates ranging from 5.52% to 7.46%, are generally due in monthly principal and interest installments, are collateralized by the related equipment, and have various maturity dates through March 2010. As of June 30, 2009, the balance of these capital leases totaled $0.1 million.

The Company has a note payable with Microsoft, Inc. for the purchase of software licenses, bearing interest at a rate of 2.7% and a maturity date of February 2011. The balance of this note as of June 30, 2009 was $0.3 million.

During the three months ended June 30, 2009 the Company executed financing agreements totaling $0.3 million for the payment of premiums on a product liability insurance policy and a director and officer insurance policy as the term was expiring on each of the prior policies. The financing arrangements bear interest at 5.2% payable through June 2010. The balance of these financing agreements as of June 30, 2009 totaled $0.2 million.

Principal payments on debt are as follows as of June 30, 2009 (in thousands):

 

Year Ending December 31,

      

Remainder of 2009

   $ 1,473   

2010

     6,467   

2011

     6,565   

2012

     17,727   

2013

     48   

Thereafter

     4   
        

Total

     32,284   

Less: additional finance charge being accrued to interest expense through April 2012, and debt discount

     (1,410

Add: capital lease principal payments

     142   
        

Total

     31,016   

Less: current portion of long-term debt

     (4,439
        

Long-term debt, net of current portion

   $ 26,577   
        

7. Commitments and Contingencies

Leases

The Company leases certain equipment under capital leases which expire on various dates through 2010. The Company also leases its buildings and certain equipment and vehicles under operating leases which expire on various dates through 2017. Future minimum annual lease payments under such leases are as follows (in thousands):

 

Year Ending December 31,

   Operating    Capital  

Remainder of 2009

   $ 1,168    $ 132   

2010

     2,802      13   

2011

     2,489      —     

2012

     2,193      —     

2013

     2,211      —     

Thereafter

     5,829      —     
               
   $ 16,692      145   
         

Less: amount representing interest

        (3
           

Present value of minimum lease payments

        142   

Current portion of capital leases

        (142
           

Capital leases, less current portion

      $ —     
           

Rent expense under operating leases for the three months ended June 30, 2009 and 2008 was $0.4 million and $0.6 million, respectively. Rent expense under operating leases for the six months ended June 30, 2009 and 2008 was $1.2 million and $1.0 million, respectively.

Litigation

On April 12, 2006, Alphatec Spine and HealthpointCapital, L.P. , the Company’s majority stockholder, and its affiliate, HealthpointCapital, LLC, were served with a complaint by Drs. Darryl Brodke, Alan Hilibrand, Richard Ozuna and Jeffrey Wang, or the “claimant surgeons,” in the Superior Court of California in the County of Orange, claiming, among other things, that, pursuant to certain contractual arrangements Alphatec Spine allegedly entered into with the claimant surgeons in 2001, it was required to pay the claimant surgeons quarterly royalties in an aggregate amount of 6% of the net sales of polyaxial screws (as defined in the alleged contractual arrangement), which the claimant surgeons allege were developed with their assistance prior to the cessation of such development activities in March 2002. Alphatec Spine first began to sell polyaxial screws in 2004 and has continued to sell them

 

14


Table of Contents

through the date of this Quarterly Report on Form 10-Q. In October of 2006, the parties to this litigation initiated a mediation session in an attempt to mediate a resolution to this matter, but were unsuccessful in doing so. The claimant surgeons assert causes of action for breach of contract, fraud, conversion, breach of fiduciary duty, and unjust enrichment. In the first quarter of 2009, the claimant surgeons dismissed all claims against both HealthpointCapital entities. The fraud, conversion and breach of fiduciary duty claims were dismissed in summary judgment in the third quarter of 2009. A trial is scheduled on the remaining claims in the third quarter of 2009. Alphatec Spine does not believe that any of the claimant surgeons are entitled to any royalty amounts, has filed counterclaims against certain of the claimant surgeons, and intends to vigorously defend itself against this complaint; however, Alphatec Spine cannot predict the outcome to this matter or the impact on its financial statements, if any.

A judgment against Alphatec Spine or the Company in excess of the amount accrued and/or legal costs significantly in excess of amounts currently budgeted in the Company’s operating plan may cause an acceleration of the Company’s Credit Facility through a financial covenant violation or a material adverse change claim by the Lenders (See Note 6). While the outcome to the litigation is uncertain, management does not believe that the ultimate outcome of claims against the Company will result in an adverse material impact to the Company.

Royalties

The Company has entered into various intellectual property agreements requiring the payment of royalties based on products sold. These royalties primarily relate to products sold by Alphatec Spine and are calculated either as a percentage of net revenue or on a per unit basis. Royalties are included on the accompanying consolidated statement of operations as a component of cost of revenues.

8. Net Loss Per Share

The Company calculates net loss per share in accordance with SFAS No. 128, Earnings 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 and options are considered to be common stock equivalents and are only included in the calculation of diluted earnings per share when their effect is dilutive. (In thousands, except per share data):

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2009     2008     2009     2008  

Numerator:

        

Net loss

   $ (6,303   $ (3,591   $ (10,686   $ (19,370
                                

Denominator:

        

Weighted average common shares outstanding

     47,981        47,374        47,710        47,276   

Weighted average unvested common shares subject to repurchase

     (824     (1,100     (878     (1,138
                                

Weighted average common shares outstanding - basic

     47,157        46,274        46,832        46,138   

Effect of dilutive securities:

        

Options, warrants and restricted share awards

     —          —          —          —     
                                

Weighted average common shares outstanding - diluted

     47,157        46,274        46,832        46,138   
                                

Net loss per common share:

        

Basic and diluted

   $ (0.13   $ (0.08   $ (0.23   $ (0.42
                                

The weighted-average anti-dilutive securities not included in diluted net loss per share were as follows (in thousands):

 

     Three Months Ended June 30,    Six Months Ended June 30,
     2009    2008    2009    2008

Options to purchase common stock

   2,202    1,178    2,249    1,068

Warrants to purchase common stock

   476    —      476    —  

Unvested restricted share awards

   926    1,202    980    1,240
                   

Total

   3,604    2,380    3,705    2,308
                   

 

15


Table of Contents

9. Stock-Based Compensation

The Company accounts for stock-based compensation under the provisions of SFAS No. 123(R), Share-Based Payment . SFAS No. 123(R) requires that share-based payment transactions with employees be recognized in the financial statements based on their fair value and recognized as compensation expense over the vesting period. The amount of expense recognized during the period is affected by many complex and subjective assumptions, including: estimates of the Company’s future volatility, the expected term for its stock options, option exercise behavior, the number of options expected to ultimately vest, and the timing of vesting for the Company’s share-based awards.

The Company accounts for stock option grants to non-employees in accordance with SFAS No. 123R and EITF Issue No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services , which require that the fair value of these instruments be recognized as an expense over the period in which the related services are rendered.

Under SFAS No, 123(R), share-based compensation expense of awards with performance conditions is recognized over the period from the date the performance condition is determined to be probable of occurring through the time the applicable condition is met. Determining the likelihood and timing of achieving performance conditions is a subjective judgment made by management which may affect the amount and timing of expense related to these share-based awards. Share-based compensation is adjusted to reflect the value of options which ultimately vest as such amounts become known in future periods.

Valuation of Stock Option Awards

The assumptions used to compute the share-based compensation costs for the stock options granted during the three months ended June 30, 2009 and 2008 are as follows:

 

     Three Months Ended June 30,  
     2009     2008  
Employee Stock Options     

Risk-free interest rate

   2.00   3.48

Expected dividend yield

   —     —  

Weighted average expected life (years)

   6.2      6.2   

Volatility

   58   46

The assumed dividend yield was based on the Company’s expectation of not paying dividends in the foreseeable future.

Compensation Costs

The compensation cost that has been included in the Company’s consolidated statements of operations for all stock-based compensation arrangements is detailed as follows (in thousands, except per share amounts):

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2009     2008     2009     2008  

Cost of revenues

   $ 51      $ 59      $ 103      $ 127   

Research and development

     265        106        329        337   

Sales and marketing

     177        204        348        363   

General and administrative

     338        302        685        613   
                                

Total

   $ 831      $ 671      $ 1,465      $ 1,440   
                                

Effect on basic and diluted net loss per share

   $ (0.02   $ (0.01   $ (0.03   $ (0.03
                                

 

16


Table of Contents

Stock Options

A summary of the Company’s stock option activity under its Amended and Restated 2005 Employee, Director and Consultant Stock Plan (the “2005 Plan”) and related information is as follows (in thousands, except as indicated and per share data):

 

     Shares     Weighted
average
exercise
price
   Weighted
average
remaining
contractual
term
(in years)
   Aggregate
intrinsic
value

Outstanding at December 31, 2008

   2,265      $ 4.23    8.92    $ 97

Granted year to date

   443      $ 1.83    —        —  

Exercised year to date

   —        $ —      —        —  

Forfeited year to date

   (205   $ 4.19    —        —  
              

Outstanding at June 30, 2009

   2,503      $ 3.81    8.67    $ 834
                        

Options vested and exercisable at June 30, 2009

   1,987      $ 3.82    8.65    $ 653
                        

Options vested and expected to vest at June 30, 2009

   430      $ 4.07    7.77    $ 70
                        

The weighted-average grant-date fair value of stock options granted during the three and six months ended June 30, 2009 was $3.00 and $1.83, respectively. The aggregate intrinsic value of options at June 30, 2009 is based on the Company’s closing stock price on that date of $3.32 per share.

As of June 30, 2009, there was $4.0 million of unrecognized compensation expense for stock options and awards which is expected to be recognized on a straight-line basis over a weighted average period of approximately 2.9 years. There were no options exercised during the three and six months ended June 30, 2009. The total intrinsic value of options exercised was immaterial for the three and six months ended June 30, 2008. At June 30, 2009, approximately 1,926,000 shares of common stock remained available for issuance under the 2005 Plan.

Restricted Stock Awards

The following table summarizes information about the restricted stock awards activity (in thousands, except as indicated and per share data):

 

     Shares     Weighted
average
grant
date fair
value
   Weighted
average
remaining
recognition
period
(in years)
   Aggregate
intrinsic
value

Outstanding at December 31, 2008

   882      $ 6.40    2.19    $ 5,645

Awarded year to date

   5     $ 2.99      

Released year to date

   (150   $ 5.76      

Forfeited year to date

   (20   $ 9.80      
              

Outstanding at June 30, 2009

   717      $ 6.42    1.73    $ 4,602
                        

The table above does not include the 101,944 shares of restricted stock granted to Stout in March 2008. The weighted average fair value per share of awards granted during the three months ended June 30, 2009 was $2.99. There were no restricted awards granted during the first quarter of 2009.

Warrants

In December 2008, the Company issued warrants to the Lenders in the Credit Facility to purchase 476,000 shares of the Company’s common stock with an exercise price of $1.89 per share. The warrants are immediately exercisable and have a ten year term. The Company recorded the value of the warrants of $0.9 million as a debt discount. The value of the warrants was determined on the grant date using the Black-Scholes valuation method with the following assumptions: risk free interest rates of 2.67%, volatility of 60.9%, a ten year term and no dividends yield. All of the warrants were outstanding as of June 30, 2009.

10. Income Taxes

The Company calculates its interim tax provision in accordance with Accounting Principles Board Opinion No. 28, Interim Financial Reporting , and FASB Interpretation No. 18, Accounting for Income Taxes in Interim Periods (“FIN No. 18”). At the end of each interim period, the Company estimates the annual effective tax rate and applies that to its ordinary quarterly earnings. In addition, the effect of changes in enacted tax laws or rates or tax status is recognized in the interim period in which the change occurs. The computation of the annual estimated effective tax rate at each interim period requires certain estimates and significant judgment

 

17


Table of Contents

including, but not limited to, the expected operating income for the year, projections of the proportion of income earned and taxed in foreign jurisdictions, permanent and temporary differences between book and tax amounts, and the likelihood of recovering deferred tax assets generated in the current year. The accounting estimates used to compute the provision for income taxes may change as new events occur, additional information is obtained or as the tax environment changes.

The Company accounts for uncertain tax positions in accordance with Financial Accounting Standards Board Interpretation, or FIN, No. 48, Accounting for Uncertainty in Income Taxes . FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with SFAS No. 109 , Accounting for Income Taxes, and prescribes a recognition threshold and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken on a tax return. The Company recognizes interest and penalties related to uncertain tax positions as a component of the income tax provision. The Company’s unrecognized tax benefits increased $0.2 million during the three months ended June 30, 2009. The unrecognized tax benefits at June 30, 2009 were $2.1 million. The Company anticipates a $0.1 million decrease to its unrecognized tax benefits within the next 12 months.

The U.S. income tax expense consists primarily of state income taxes and the tax effect of changes in deferred tax liabilities associated with tax deductible goodwill. The foreign income tax expense consists primarily of Japanese provincial and city income taxes.

During the three months ended June 30, 2009, the Company recorded a reduction to payroll taxes, included in general and administrative expense, of approximately $0.5 million relating to the expiration of the statute of limitations for a tax contingency reserve established in 2005.

11. Segment and Geographical Information

The Company applies the provisions of SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information . SFAS No. 131 requires public companies to report financial and descriptive information about their reportable operating segments. Operating segments are defined as components of an enterprise for which separate financial information is available and evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company operates in one reportable business segment.

During the three and six months ended June 30, 2009, the Company operated in three geographic locations, the U.S., Asia and Europe. During the three and six months ended June 30, 2008, the Company operated in two geographic locations, the U.S. and Asia. The Company commenced sales in Europe in the second half of 2008. Revenues, attributed to the geographic location of the customer, were as follows (in thousands):

 

     Three Months Ended June 30,    Six Months Ended June 30,
     2009    2008    2009    2008

United States

   $ 26,378    $ 19,359    $ 50,191    $ 38,006

Asia

     5,473      4,494      11,303      9,044

Europe

     412      —        1,379      —  
                           

Total consolidated revenues

   $ 32,263    $ 23,853    $ 62,873    $ 47,050
                           

Total assets by region were as follows (in thousands):

 

     June 30,
2009
   December 31,
2008

United States

   $ 155,836    $ 141,658

Asia

     13,213      13,890

Europe

     66      —  
             

Total consolidated assets

   $ 169,115    $ 155,548
             

12. Related Party Transactions

For the six months ended June 30, 2009 and 2008, the Company incurred costs of $0.1 million and $0, respectively, to Foster Management Company and HealthpointCapital, LLC for travel expenses, including the use of Foster Management Company’s airplane. Foster Management Company is an entity owned by John H. Foster, a member of the Company’s board of directors. John H. Foster is a significant equity holder of HealthpointCapital, LLC, an affiliate of HealthpointCapital, L.P., the Company’s principal stockholder. For the three months ended June 30, 2009 and 2008, the Company did not incur any such costs.

 

18


Table of Contents

For the three and six months ended June 30, 2009, the Company incurred costs of $0.2 million for legal services paid on behalf of Healthpoint Capital, LLC in connection with the Brodke litigation.

In June 2009, the Company entered into a subscription agreement with Healthpoint Capital Partners II, LP. The Company sold 3,937,007 shares of its common stock at a price of $2.54 per share in a private placement for an aggregate purchase price of approximately $10.0 million. The Company paid approximately $0.1 million for transaction fees and received aggregate net proceeds of approximately $9.9 million.

Dr. Stephen H. Hochschuler serves as a director of the Company’s and Alphatec Spine’s board of directors and Chairman of Alphatec Spine’s Scientific Advisory Board. The Company, Alphatec Spine and Dr. Hochschuler entered a written consulting agreement on October 13, 2006 (the “Consulting Agreement”). Pursuant to the Consulting Agreement, Dr. Hochschuler is required to provide advisory services related to the spinal implant industry and the Company’s research and development strategies. For the three months ended June 30, 2009 and 2008, the Company incurred costs of $60,000 in each period, for advisory services provided by Dr. Hochschuler. For the six months ended June 30, 2009 and 2008, the Company incurred costs of $120,000 in each period.

 

19


Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Our management’s discussion and analysis of our financial condition and results of operations include the identification of certain trends and other statements that may predict or anticipate future business or financial results that are subject to important factors, such as those set forth in Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ending December 31, 2008, as amended.

Overview

We are a medical technology company focused on the design, development, manufacturing and marketing of products for the surgical treatment of spine disorders, with a focus on products that treat conditions that affect the aging spine. Our broad product portfolio and pipeline includes a variety of spinal disorder products and systems focused on solutions addressing the cervical, thoracolumbar, intervertebral, minimally invasive, vertebral compression fracture, osteoporotic bone, and spinal stenosis markets. Our principal product offerings are focused on the market for orthopedic spinal disorder solution products, which is estimated in the U.S. to be approximately $5.8 billion in revenue in 2008 and is expected to grow more than 10% annually over the next three years. Our “surgeons’ culture” emphasizes collaboration with spinal surgeons to conceptualize, design and co-develop a broad range of products. We have a state-of-the-art, in-house manufacturing facility that provides us with a unique competitive advantage, and enables us to rapidly deliver solutions to meet surgeons’ and patients’ critical needs. Our products and systems are made of titanium, titanium alloy, stainless steel and a strong, heat resistant, radiolucent, biocompatible plastic called polyetheretherketone, or PEEK. We also sell products made of allograft, a precision-milled and processed human bone that surgeons can use in place of metal and synthetic materials. We also sell bone-grafting products that are comprised of both tissue-based and synthetic materials. We believe that our products and systems have enhanced features and benefits that make them attractive to surgeons and that our broad portfolio of products and systems provide a comprehensive solution for the safe and successful surgical treatment of spine disorders. All of our implants that are sold in the U.S. that require FDA clearance have been cleared by the FDA and these products have been used in over 10,700 and 8,600 spine disorder surgeries in 2008 and 2007, respectively. In addition to selling our products in the U.S., we also sell our products in Japan, the European Union and Hong Kong.

Although our products generally are purchased by hospitals and surgical centers, orders are typically placed at the request of surgeons who then use our products in a surgical procedure. During the three and six months ended June 30, 2009 and 2008, no single surgeon, hospital or surgical center represented greater than 10% of our consolidated revenues. Additionally, we sell a broad array of products, which diminishes our reliance on any single product or spine disorder.

In 2007, as part of our strategy to focus on disorders affecting the aging spine, we began entering into license agreements with third parties that we believe will enable us to rapidly develop and commercialize unique products for the treatment of spinal disorders that disproportionately affect the aging population. Through June 30, 2009, we licensed or acquired approximately 42 patent and patent applications from third parties. A discussion of our license agreements through December 31, 2008 may be found in “Item 1—Business-Intellectual Property” included in our Annual Report on Form 10-K for the year ending December 31, 2008, as amended.

To assist us in evaluating our product development strategy, we regularly monitor long-term technology trends in the spinal implant industry. Additionally, we consider the information obtained from discussions with the surgeon community and our Scientific Advisory Board in connection with the demand for our products, including potential new product launches. We also use this information to help determine our competitive position in the spinal implant industry and the capacity requirements of our manufacturing facility.

Revenue and Expense Components

The following is a description of the primary components of our revenues and expenses:

Revenues. We derive our revenues primarily from the sale of spinal surgery implants used in the treatment of spine disorders. Spinal implant products include spine screw systems and complementary products, vertebral body replacement devices, plates and bone grafting materials. Our revenues are generated by our direct sales force and independent distributors. Our products are ordered directly by surgeons and shipped and billed to hospitals or surgical centers. In Japan, where orthopedic trauma surgeons also perform spine surgeries, we have sold and will continue to sell orthopedic trauma products in order to introduce our spine products to Japanese surgeons. In Europe, we use independent distributors that purchase our products and market them to their surgeon customers. As a result of offering payment terms greater than our customary U.S. business terms and operating in a new market in which we have limited prior experience, revenues for sales to our European distributors have been deferred until payments become due or cash is received.

 

20


Table of Contents

Cost of revenues.  Cost of revenues consists of direct product costs, royalties, depreciation of our surgical instruments, and the amortization of purchased intangibles. We manufacture substantially all of the non-allograft implants that we sell. Our product costs consist primarily of direct labor, manufacturing overhead, raw materials and components. Allograft product costs include the cost of procurement and processing of human tissue. We incur royalties related to technology we license from others and products developed in part by surgeons with whom we collaborate in the product development. Amortization of purchased intangibles consists of amortization of developed product technology.

Research and development. Research and development expense consists of costs associated with the design, development, testing, and enhancement of our products. Research and development costs also include salaries and related employee benefits, research-related overhead expenses, fees paid to external service providers, and costs associated with our Scientific Advisory Board and Executive Surgeon Panels.

In-process research and development. In-process research and development, or IPR&D, consists of acquired research and development assets that were not technologically feasible on the date we acquired worldwide licenses for technology related to spinal products and had no alternative future use at that date. At the time of acquisition, we expect all acquired IPR&D will reach technological feasibility, but there can be no assurance that commercial viability of a product will be achieved. The nature of the efforts to develop the acquired technologies into commercially viable products consists principally of planning, designing, and obtaining regulatory clearances. The risks associated with achieving commercialization include, but are not limited to, delays or failures during the development process, delays or failures to obtain regulatory clearances, and intellectual property rights of third parties.

Sales and marketing. Sales and marketing expense consists primarily of salaries and related employee benefits, sales commissions and support costs, professional service fees, travel, medical education, trade show and marketing costs.

General and administrative. General and administrative expense consists primarily of salaries and related employee benefits, professional service fees and legal costs.

Litigation settlement. Litigation settlement expense consists of material settlements of lawsuits.

Total other income (expense). Total other income (expense) includes interest income, interest expense, gains and losses from foreign currency exchanges and other non-operating gains and losses.

Income tax provision. Income tax expense consists primarily of state and foreign income taxes and the tax effect of changes in deferred tax liabilities associated with tax goodwill.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. On an on-going basis, we evaluate our estimates and assumptions, including those related to revenue recognition, allowances for accounts receivable, inventories, goodwill and intangible assets, stock-based compensation and income taxes. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions conditions.

Critical accounting policies are those that, in management’s view, are most important in the portrayal of our financial condition and results of operations. Management believes there have been no material changes during the three and six months ended June 30, 2009 to the critical accounting policies discussed in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of our Annual Report on Form 10-K for the year ended December 31, 2008, as amended.

 

21


Table of Contents

Results of Operations

The table below sets forth certain statements of operations data expressed as a percentage of revenues for the periods indicated. Our historical results are not necessarily indicative of the operating results that may be expected in the future.

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2009     2008     2009     2008  

Revenue

   100.0   100.0   100.0   100.0

Cost of revenues

   35.4      33.6      35.4      33.8   
                        

Gross profit

   64.6      66.4      64.6      66.2   

Operating expenses:

        

Research and development

   10.7      14.1      10.0      13.9   

In-process research and development

   13.9      —        9.2      2.8   

Sales and marketing

   39.7      42.2      40.7      42.9   

General and administrative

   17.2      24.0      18.3      24.0   

Litigation settlement

   —        —        —        23.4   
                        

Total operating expenses

   81.5      80.3      78.2      107.0   
                        

Operating loss

   (16.9   (13.9   (13.6   (40.8
                        

Other income (expense):

        

Interest income

   0.1      0.4      0.1      0.6   

Interest expense

   (2.8   (1.1   (2.9   (1.0

Other income (expense), net

   0.5      (0.2   (0.2   0.3   
                        

Total other income (expense)

   (2.2   (0.9   (3.0   (0.1
                        

Loss before taxes

   (19.1   (14.8   (16.6   (40.9

Income tax provision

   0.4      0.3      0.4      0.3   
                        

Net loss

   (19.5 )%    (15.1 )%    (17.0 )%    (41.2 )% 
                        

Reclassification

Certain prior year balances have been reclassified in the accompanying condensed consolidated financial statements to conform to the current year presentation. In our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2008 filed with the SEC on August 6, 2008, our operating expenses in Japan were classified as general and administrative expenses. In this Quarterly Report on Form 10-Q, we separated the Japanese sales and marketing expenses from the general and administrative expenses. This reclassification has no impact upon total operating expenses and net loss, and resulted in a reclassification of $1.0 million of general and administrative expense to sales and marketing expense for the three months ended June 30, 2008 and $2.0 million of general and administrative expense to sales and marketing expense for the six months ended June 30, 2008.

Three Months Ended June 30, 2009 Compared to the Three Months Ended June 30, 2008

Revenues. Revenues were $32.3 million for the three months ended June 30, 2009 compared to $23.9 million for the three months ended June 30, 2008, representing an increase of $8.4 million, or 35.3%. U.S. revenues increased $7.0 million, or 36.3%, primarily due to increased sales of our Zodiac, Novel, Trestle, Biologics and Solanas product lines. In addition, Asia revenues increased $1.0 million, or 21.8%, due to both sales volume ($0.6 million) and the favorable affect of foreign currency exchange rates. We commenced sales in Europe in the third quarter of 2008. We recognized revenue of $0.4 million in European sales in the three months ended June 30, 2009.

Cost of revenues . Cost of revenues were $11.4 million for the three months ended June 30, 2009 compared to $8.0 million for the three months ended June 30, 2008, representing an increase of $3.4 million, or 42.4%. The increase was primarily due to $1.5 million in higher product costs associated with increased revenue performance, increased royalty payments of $0.8 million due to increased sales volume and the new royalty payments made in connection with the Biedermann/DePuy litigation settlement, as disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008, as amended, increased depreciation costs of $0.7 million based on a larger installed surgical instruments asset base capitalized during 2009 and higher amortization expenses of $0.4 million due to the absence of an intangible write-off that occurred in the three months ended June 30, 2008.

Gross profit. Gross profit was $20.9 million for the three months ended June 30, 2009 compared to $15.8 million for the three months ended June 30, 2008, representing an increase of $5.1 million, or 31.7%. Gross margin of 64.6% of revenues for the three months ended June 30, 2009 decreased 1.8 percentage points from the three months ended June 30, 2008. The 1.8 percentage point decrease was primarily due to increased royalty payments of 0.9 percentage points, increased instrument depreciation of 1.7 percentage points, an increase of 0.9 percentage points related to amortization of intangibles, partially offset by a decrease of 1.8 percentage points related to improved manufacturing efficiencies.

 

22


Table of Contents

Research and development.  Research and development expenses were $3.4 million for the three months ended June 30, 2009 compared to $3.4 million for the three months ended June 30, 2008, representing substantially no change.

In-process research and development . In-process research and development expenses were $4.5 million for the three months ended June 30, 2009 compared to $0 for the three months ended June 30, 2008. In the three months ended June 30, 2009, we incurred expenses of $3.6 million related to a milestone achieved in connection with successfully meeting a development milestone involving an expandable pedicle screw ($1.8 million in stock and $1.8 million in cash) and $0.9 million in non-cash costs related to our acquisition of technology related to a stand-alone anterior lumbar interbody fusion device.

Sales and marketing . Sales and marketing expenses were $12.8 million for the three months ended June 30, 2009 compared to $10.1 million for the three months ended June 30, 2008, representing an increase of $2.7 million, or 27.3%. The increase was primarily due to higher commission expense of $1.9 million due to the higher U.S. sales volume and an increase of $0.8 million primarily in Asia as we increase our product mix towards Alphatec’s spinal products.

General and administrative . General and administrative expenses were $5.6 million for the three months ended June 30, 2009 compared to $5.7 million for the three months ended June 30, 2008, representing a decrease of $0.1 million, or 3.1%. The decrease was primarily related to the reduction of $0.5 million in payroll taxes relating to the expiration of the statute of limitations for a tax contingency reserve established in 2005, less spending in finance and accounting of $0.2 million, offset by increased legal expenses of $0.6 million.

Interest Income. Interest income was $0 for the three months ended June 30, 2009 compared to $0.1 million for the three months ended June 30, 2008, representing a decrease of $0.1 million. The decrease was primarily due to lower cash and cash equivalent balances.

Interest Expense. Interest expense was $0.9 million for the three months ended June 30, 2009 compared to $0.3 million for the three months ended June 30, 2008, representing an increase of $0.6 million. The increase was primarily due to increased interest expense for our loan agreement and line of credit with Silicon Valley Bank and Oxford Finance Corporation. We repaid our line of credit with General Electric Capital Corporation in the fourth quarter of 2008.

Other income (expense), net.  Other income (expense), net was $0.2 million for the three months ended June 30, 2009 compared to $0 for the three months ended June 30, 2008, representing an increase in income of $0.2 million. The increase was due to greater foreign currency exchange gains realized in the second quarter of 2009 as compared to the second quarter of 2008.

Income tax provision. Income tax provision was $0.1 million for the three months ended June 30, 2009 compared to $0.1 million for the three months ended June 30, 2008, representing substantially no change. The U.S. income tax expense consists primarily of state income taxes and the tax effect of changes in deferred tax liabilities associated with tax deductible goodwill. The foreign income tax expense consists primarily of Japanese provincial and city income taxes.

Six Months Ended June 30, 2009 Compared to the Six Months Ended June 30, 2008

Revenues. Revenues were $62.9 million for the six months ended June 30, 2009 compared to $47.1 million for the six months ended June 30, 2008, representing an increase of $15.8 million, or 33.6%. U.S. revenues increased $12.2 million, or 32.1%, primarily due to increased sales of our Zodiac, Novel, Trestle, Biologics and Solanas product lines, partially offset by a decrease in our Reveal product line. In addition, Asia revenues increased $2.3 million, or 25.0%, due to both sales volumes ($1.3 million) and the favorable affect of foreign currency exchange rates. We commenced sales in Europe in the third quarter of 2008. We recognized revenue of $1.4 million in European sales in the six months ended June 30, 2009.

Cost of revenues . Cost of revenues were $22.2 million for the six months ended June 30, 2009 compared to $15.9 million for the six months ended June 30, 2008, representing an increase of $6.3 million, or 39.9%. The increase was primarily due to $2.8 million in higher product costs associated with increased revenue performance, increased royalty payments of $1.8 million due to increased sales volume and the new royalty payments made in connection with the Biedermann/DePuy litigation settlement, as disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008, as amended, increased depreciation costs of $1.4 million based on a larger installed surgical instruments asset base capitalized during 2009 and higher amortization expenses of $0.3 million due primarily to the absence of an intangible write-off that occurred in the three months ended June 30, 2008.

Gross profit . Gross profit was $40.6 million for the six months ended June 30, 2009 compared to $31.1 million for the six months ended June 30, 2008, representing an increase of $9.5 million, or 30.4%. Gross margin of 64.6% of revenues for the six months ended June 30, 2009 decreased 1.6 percentage points from the six months ended June 30, 2008. The 1.6 percentage point decrease was primarily due to increased royalty payments of 1.4 percentage points, increased instrument depreciation of 1.8 percentage points, partially offset by a decrease of 1.6 percentage points related to improved manufacturing efficiencies.

 

23


Table of Contents

Research and development.  Research and development expenses were $6.3 million for the six months ended June 30, 2009 compared to $6.6 million for the six months ended June 30, 2008, representing a decrease of $0.3 million, or 3.9%. The decrease was primarily due to decreases in outsourced prototype and other development activities.

In-process research and development. In-process research and development expenses were $5.8 million for the six months ended June 30, 2009 compared to $1.3 million for the six months ended June 30, 2008, representing an increase of $4.5 million. In the six months ended June 30, 2009, we incurred expenses of $3.6 million related to a development milestone that was achieved in connection with our intellectual property involving an expandable pedicle screw ($1.8 million in stock and $1.8 million in cash), $0.9 million in non-cash costs related to our acquisition of technology related to a stand-alone anterior lumbar interbody fusion device, $0.5 million related to our acquisition of technology related to a stand-alone interbody device, $0.6 million related to our acquisition of technology related to a device for the treatment of spinal stenosis ($0.25 million in cash and $0.35 million in stock (174,129 shares)), and $0.3 million combined for six in-process research and development collaborations with third parties. In the six months ended June 30, 2008, we incurred costs for the licenses for the technology related to the expandable VBR license of $1.0 million and a dynamic cervical plate of $0.3 million.

Sales and marketing . Sales and marketing expenses were $25.6 million for the six months ended June 30, 2009 compared to $20.2 million for the six months ended June 30, 2008, representing an increase of $5.4 million, or 26.9%. The increase was primarily due to higher commission expense of $3.7 million due to the higher U.S. sales volume and an increase of $1.7 million primarily in Asia as we increase our product mix towards Alphatec’s spinal products.

General and administrative . General and administrative expenses were $11.5 million for the six months ended June 30, 2009 compared to $11.3 million for the six months ended June 30, 2008, representing an increase of $0.2 million, or 2.0%. The increase was primarily due to an increase in legal fees, as well as legal fees and expenses related to the prosecution of our patent portfolio.

Litigation Settlement. Litigation settlement was $11.0 million for the six months ended June 30, 2008. The expense was due to a settlement agreement we entered into in May 2008 with Biedermann and DePuy, and the corresponding one-time settlement payment. This one-time settlement payment was paid in May 2008. There was no corresponding litigation settlement expense during the six months ended June 30, 2009.

Interest Income. Interest income was $0.1 million for the six months ended June 30, 2009 compared to $0.3 million for the six months ended June 30, 2008, representing a decrease of $0.2 million. The decrease was primarily due to lower cash and cash equivalent balances.

Interest Expense. Interest expense was $1.8 million for the six months ended June 30, 2009 compared to $0.4 million for the six months ended June 30, 2008, representing an increase of $1.4 million. The increase was primarily due to increased interest expense for our loan agreement and line of credit with Silicon Valley Bank and Oxford Finance Corporation. We repaid our line of credit with General Electric Capital Corporation in the fourth quarter of 2008.

Other income (expense), net.  Other income (expense), net was ($0.1) million for the six months ended June 30, 2009 compared to $0.1 million for the six months ended June 30, 2008, representing a decrease in income of $0.2 million. The decrease was due to greater foreign currency exchange losses realized in 2009 as compared to 2008.

Income tax provision. Income tax provision was $0.2 million for the six months ended June 30, 2009 compared to $0.2 million for the six months ended June 30, 2008, representing substantially no change. The U.S. income tax expense consists primarily of state income taxes and the tax effect of changes in deferred tax liabilities associated with tax deductible goodwill. The foreign income tax expense consists primarily of Japanese provincial and city income taxes.

 

24


Table of Contents

Liquidity and Capital Resources

At June 30, 2009, our principal sources of liquidity consisted of cash and cash equivalents of $19.7 million, accounts receivable, net of $23.8 million, and remaining amounts available under our credit facility of $0.4 million. We believe such amounts will be sufficient to fund our projected operating requirements through at least June 30, 2010.

Historically, our principal sources of cash have included customer payments from the sale of our products, proceeds from the issuance of common and preferred stock and proceeds from the issuance of debt. Our principal uses of cash have included cash used in operations, acquisitions of businesses and intellectual property rights, payments relating to purchases of property and equipment and repayments of borrowings. We expect that our principal uses of cash in the future will be for operations, working capital, capital expenditures, and potential acquisitions. We expect that, as our revenues grow, our sales and marketing and research and development expenses will continue to grow and, as a result, we will need to generate significant net revenues to achieve profitability. We believe that our current cash and cash equivalents, revenues from our operations, and our ability to draw down on secured credit facilities will be sufficient to fund our projected operating requirements including potential R&D license milestone obligations through at least July 1, 2010. In June 2009, we entered into a subscription agreement with one of our existing shareholders, Healthpoint Capital Partners II, LP. We sold 3,937,007 shares of our common stock at a price of $2.54 per share in a private placement for an aggregate purchase price of approximately $10.0 million. We paid approximately $0.1 million for transaction fees and received aggregate net proceeds of approximately $9.9 million. We intend to use the net proceeds of the placement for general working capital purposes. If we believe it is in our interest to raise additional funds, we may seek to sell additional equity or debt securities or borrow additional money. The sale of additional equity or convertible debt securities could result in dilution to our stockholders. If additional funds are raised through the issuance of equity or debt securities, these securities could have rights senior to those associated with our common stock and could contain covenants that would restrict our operations. Any additional financing may not be available in amounts or on terms acceptable to us, or at all.

A substantial portion of our available cash funds is in business accounts with reputable financial institutions. However, our deposits, at times, may exceed federally insured limits. The capital markets have recently been highly volatile and there has been a lack of liquidity for certain financial instruments, especially those with exposure to mortgage-backed securities and auction rate securities. This lack of liquidity has made it difficult for the fair value of these types of instruments to be determined. We do not hold any marketable securities as of June 30, 2009.

As a result of recent volatility in the capital markets, the cost and availability of credit has been and may continue to be adversely affected by illiquid credit markets and wider credit spreads. Concern about the stability of the markets generally and the strength of counterparties specifically has led many lenders and institutional investors to reduce, and in some cases, cease to provide funding to borrowers. Continued turbulence in the U.S. and international markets and economies may adversely affect our ability to obtain additional financing on terms acceptable to us, or at all. If these market conditions continue, they may limit our ability to timely replace maturing liabilities and to access the capital markets to meet liquidity needs.

Operating activities

We used net cash of $3.9 million in operating activities for the six months ended June 30, 2009. During this period, net cash used in operating activities primarily consisted of a net loss of $10.7 million, a decrease in working capital and other assets of $4.1 million, primarily due to increases in accounts receivable of $5.3 million and inventory of $4.2 million in support of the higher sales volume, partially offset by decreases in prepaid expenses and other assets of $0.5 million, increases in accounts payable, accrued expenses and deferred revenues of $4.9 million, and offset by $10.8 million of non-cash costs including amortization, depreciation, deferred income taxes, stock-based compensation, in-process research and development that was purchased using our common stock and interest expense related to amortization of debt discount and issue costs.

Investing activities

We used net cash of $6.3 million in investing activities for the six months ended June 30, 2009 primarily for the purchase of $6.7 million in instruments, computer equipment, leasehold improvements and manufacturing equipment, partially offset by the $0.4 million proceeds from the sale of our prior investment in Noas Medical Company, a Japanese spinal and orthopedic implant distributor.

Financing activities

We generated net cash of $11.9 million from financing activities for the six months ended June 30, 2009. In June 2009 we entered into a subscription agreement to sell shares of our common stock. Net proceeds from such sale totaled $9.9 million. Net proceeds from borrowings under our line of credit totaled $3.9 million. We made payments on our line of credit and made other principal payments on notes payable and capital lease obligations totaling $1.8 million.

 

25


Table of Contents

Credit Facility and other debt

In December 2008, we entered into a Loan and Security Agreement, or the Credit Facility, with Silicon Valley Bank and Oxford Finance Corporation, or the Lenders, consisting of a $15.0 million term loan and a $15.0 million working capital line of credit. The term loan carries a fixed interest rate of 11.25% with interest payments due monthly but no principal repayment through September 2009. Thereafter, we will be required to repay the principal plus interest in 30 equal monthly installments, ending in April 2012. An additional finance charge of $0.8 million is due in April 2012. We will pay a prepayment penalty if the loan is repaid prior to maturity. We do not currently anticipate repaying the debt early.

The working capital line of credit carries a variable interest rate equal to the prime rate plus either 2.5% or 2.0%, depending on our financial performance. Interest only payments are due monthly and the principal is due at maturity in April 2012.

In connection with the term loan, we issued warrants to the Lenders to purchase an aggregate of approximately 476,000 shares of our common stock. The warrants are immediately exercisable and have an exercise price of $1.89 per share and a ten year term. We recorded the value of the warrants of $0.9 million as a debt discount.

We are also required to maintain compliance with financial covenants in the Credit Facility, which include a minimum level of revenues and a minimum level of earnings before interest, taxes, depreciation, amortization, and non-cash charges related to equity-based compensation and in-process R&D. The Credit Facility also contains customary affirmative and negative covenants for loan agreements of this type, including, but not limited to, limitations on the incurrence of indebtedness, asset dispositions, acquisitions, investments, dividends and other restricted payments, liens and transactions with affiliates. As of June 30, 2009, we were in compliance with the financial covenants in the Credit Facility. To secure the repayment of any amounts borrowed under the loan agreement, we granted the Lenders a first priority security interest in all of our assets, other than our intellectual property and our rights under license agreements granting us the right to intellectual property. We also agreed not to pledge or otherwise encumber our intellectual property assets without the consent of the Lenders.

The Lenders have the right to declare the loan immediately due and payable in an event of default under the Credit Facility, which includes, among other things, the failure to make payments when due, breaches of representations, warranties or covenants, the occurrence of certain insolvency events, or the occurrence of an event which could have a material adverse effect on us.

During the three months ended June 30, 2009, we repaid $0.3 million and subsequently drew an additional $1.9 million on the working capital line of credit. The balance of the line of credit as of June 30, 2009 was $14.6 million. The balance on the term loan was $14.3 million, net of the debt discount. Amortization of the debt discount and issuance costs and accretion of the additional finance charge, which are recorded to interest expense, totaled $0.2 million and $0.5 million for the three and six months ended June 30, 2009, respectively. Interest expense for the Credit Facility, excluding debt discount and issuance cost amortization and accretion of the additional finance charge, totaled $0.6 million and $1.3 million for the three and six months ended June 30, 2009, respectively.

In September 2008, Alphatec Pacific paid $0.8 million on its Resona Bank line of credit and replaced the line of credit with $0.6 million term debt with Resona Bank, which is payable over 30 months with a 3.75% interest rate. Alphatec Pacific has additional notes payable to Japanese banks and a bond payable, bearing interest at rates ranging from 1.5% to 6.5% and maturity dates through January 2014 which are collateralized by substantially all of the assets of Alphatec Pacific and Japan Ortho Medical. As of June 30, 2009, the balance of the notes and the bond totaled $1.4 million.

We have various capital lease arrangements. The leases bear interest at rates ranging from 5.52% to 7.46%, are generally due in monthly principal and interest installments, are collateralized by the related equipment, and have various maturity dates through March 2010. As of June 30, 2009, the balance of these capital leases totaled $0.1 million.

In April 2008, we entered into a note payable with Microsoft, Inc. for the purchase of software licenses, bearing interest at a rate of 2.7% and a maturity date of February 2011. The balance of this note as of June 30, 2009 was $0.3 million.

During the three months ended June 30, 2009 we executed financing agreements totaling $0.3 million for a product liability insurance policy and a directors and officers insurance policy as the term was expiring on the previous policies. The financing arrangements bear interest at 5.2% payable through June 2010. The balance of these financing agreements as of June 30, 2009 totaled $0.2 million.

 

26


Table of Contents

Contractual obligations and commercial commitments

Total contractual obligations and commercial commitments as of June 30, 2009 are summarized in the following table (in thousands):

 

     Payment Due by Year
     Total    2009
(6 months)
   2010    2011    2012    2013    Thereafter

Line of Credit with SVB/Oxford

   $ 14,613    $ —      $ —      $ —      $ 14,613    $ —      $ —  

Term loan with SVB/Oxford

     15,000      875      5,605      6,269      2,251      —        —  

Term loan final payment

     750      —        —        —        750      —        —  

Notes payable to Microsoft

     278      86      177      15      —        —        —  

Notes payable for insurance premiums

     211      150      61      —        —        —        —  

Notes and bond payable to Japanese banks

     1,432      362      624      281      113      48      4

Capital lease obligations

     142      129      13      —        —        —        —  

Operating lease obligations

     16,692      1,168      2,802      2,489      2,193      2,211      5,829

New product development milestones (1)

     3,100      1,600      1,500      —        —        —        —  
                                                

Total

   $ 52,218    $ 4,370    $ 10,782    $ 9,054    $ 19,920    $ 2,259    $ 5,833
                                                

 

(1) This commitment represents payments in cash, and is subject to attaining certain development milestones such as FDA approval, product design and functionality testing requirements, which we believe are reasonably likely to be achieved in 2009 and 2010.

Real Property Leases

During the first quarter of fiscal year 2008, we entered into a lease agreement and sublease agreement in order to consolidate the use and occupation of our five existing premises into two adjacent facilities.

In February 2008, we entered into a sublease agreement, or the Sublease, for 76,693 square feet of office, engineering, and research and development space, or Building 1. The Sublease term commenced May 2008 and ends on January 31, 2016. We are obligated under the Sublease to pay base rent and certain operating costs and taxes for Building 1. Monthly base rent payable by us is approximately $80,500 during the first year of the Sublease, increasing annually at a fixed annual rate of 2.5% to approximately $93,500 per month in the final year of the Sublease. Our rent is abated for months one through seven of the Sublease. Under the Sublease, we were required to provide the sublessor with a security deposit in the amount of approximately $93,500. Building 1 consolidated all corporate, marketing, finance, administrative, and research and development activities into one building.

In March 2008, we entered into a lease agreement, or the Lease, for 73,480 square feet of office, engineering, research and development and warehouse and distribution space, or Building 2. The Lease term commenced on December 1, 2008 and ends on January 31, 2017. We are obligated under the Lease to pay base rent and certain operating costs and taxes for Building 2. The monthly base rent payable for Building 2 is approximately $73,500 during the first year of the Lease, increasing annually at a fixed annual rate of 3.0% to approximately $93,000 per month in the final year of the Lease. Our rent shall be abated for the months two through eight of the term of the Lease in the amount of $38,480. Under the Lease, we were required to provide the lessor with a security deposit in the amount of $293,200, consisting of cash and/or one or more letters of credit. Following our achievement of certain financial milestones, the lessor is obligated to return a portion of the security deposit to us. The lessor is providing a tenant improvement allowance of $1.1 million and $0.5 million of reimbursable tenant improvement allowances to assist with the configuration of the facility to meet our business needs. We consolidated all manufacturing, distribution and warehousing activities into Building 2 in April 2009.

 

27


Table of Contents

Stock-based Compensation

Stock-based compensation has been classified as follows in the accompanying condensed consolidated statements of operations (in thousands, except per share data):

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2009     2008     2009     2008  

Cost of revenues

   $ 51      $ 59      $ 103      $ 127   

Research and development

     265        106        329        337   

Sales and marketing

     177        204        348        363   

General and administrative

     338        302        685        613   
                                

Total

   $ 831      $ 671      $ 1,465      $ 1,440   
                                

Effect on basic and diluted net loss per share

   $ (0.02   $ (0.01   $ (0.03   $ (0.03
                                

Recent Accounting Pronouncements

In May 2009, Financial Accounting Standards Board, or the FASB, issued SFAS No. 165 which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS No. 161 is effective for us for interim and annual reporting periods ending after June 15, 2009. The adoption of SFAS No. 165 did not have a material impact on our consolidated financial statements.

In April 2009, the FASB issued FSP SFAS No. 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies . FSP SFAS No. 141(R)-1 addresses application issues on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. FSP SFAS No. 141(R)-1 is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. FSP SFAS No. 141(R)-1 is effective for us beginning January 1, 2009 and will apply to business combinations completed on or after that date.

In December 2007, the FASB issued SFAS No. 141(R) (revised 2007), Business Combinations , which replaces SFAS No 141. The statement retains the purchase method of accounting for acquisitions, but requires an acquiring company to measure all assets acquired and liabilities assumed, including contingent considerations and contractual contingencies, at fair value as of the acquisition date. In addition, an acquiring company is required to capitalize in-process research and development and either amortize it over the life of the product, or expense it upon abandonment or impairment. SFAS No. 141(R) also requires expensing of acquisition-related costs as incurred. SFAS No. 141(R) is effective for us beginning January 1, 2009 and will apply to business combinations completed on or after that date.

In April 2008, the FASB issued FSP No. 142-3, Determination of Useful Life of Intangible Assets . FSP No. 142-3 amends the factors that should be considered in developing the renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets . FSP No. 142-3 also requires expanded disclosure related to the determination of intangible asset useful lives. FSP 142-3 is effective for us beginning January 1, 2009. The adoption of FSP No. 142-3 did not have a material impact on our consolidated financial statements.

In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles , which identifies the sources of accounting principles and provides entities with a framework for selecting the principles used in preparation of financial statements that are presented in conformity with GAAP. SFAS No. 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AICPA Codification of Auditing Standards, AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles . The adoption of SFAS No. 162 is not expected to have a material impact on our consolidated financial statements.

 

28


Table of Contents

Forward Looking Statements

This Quarterly Report on Form 10-Q and, in particular, the Risk Factors set forth in Item 1A in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008, as amended, and our Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth in Item 2 herein contain or incorporate a number of forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act, including but not limited to, statements regarding:

 

   

our ability to market, commercialize and achieve market acceptance of any of our products or any product candidates that we are developing or may develop in the future;

 

   

our ability to successfully achieve and maintain regulatory clearance or approval for our products in applicable jurisdictions;

 

   

our estimates of market sizes and anticipated uses of our products, including without limitation the market size of the aging spine market and our ability to successfully penetrate such market;

 

   

our business strategy and our underlying assumptions about market data, demographic trends, reimbursement trends, pricing trends, and trends relating to customer collections;

 

   

trends related to the treatment of spine disorders, including without limitation the aging spine market;

 

   

our estimates regarding anticipated operating losses, future revenue, expenses, capital requirements, and liquidity;

 

   

our ability to control our costs, achieve profitability, and the potential need to raise additional funding;

 

   

our ability to maintain an adequate sales network for our products, including to attract and retain independent distributors;

 

   

our ability to enhance our Japanese and European sales networks;

 

   

our ability to attract and retain a qualified management team, as well as other qualified personnel and advisors;

 

   

our ability to enter into licensing and business combination agreements with third parties and to successfully integrate the acquired technology and/or businesses;

 

   

our management team’s ability to accommodate growth and manage a larger organization;

 

   

our ability to protect our intellectual property, and to not infringe upon the intellectual property of third parties;

 

   

our ability to meet the financial covenants under our Credit Facility with Silicon Valley Bank and Oxford Finance Corporation;

 

   

our ability to conclude that we have effective disclosure controls and procedures; and

 

   

our ability to establish the industry standard in clinical and legal compliance and corporate governance programs.

Any or all of our forward-looking statements in this Quarterly Report may turn out to be inaccurate. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Many factors mentioned in our discussion in this Quarterly Report will be important in determining future results. Consequently, no forward-looking statement can be guaranteed. Actual future results may vary materially.

We also provide a cautionary discussion of risks and uncertainties under “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2008, as amended. These are factors that we think could cause our actual results to differ materially from expected results. Other factors besides those listed there could also adversely affect us.

Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects” and similar expressions are intended to identify forward-looking statements. There are a number of factors that could cause actual events or results to differ materially from those indicated by such forward-looking statements, many of which are beyond our control, including the factors set forth under “Item 1A—Risk Factors.” In addition, the forward-looking statements contained herein represent our estimate only as of the date of this filing and should not be relied upon as representing our estimate as of any subsequent date. While we may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so to reflect actual results, changes in assumptions or changes in other factors affecting such forward-looking statements.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

Our borrowings under our line of credit expose us to market risk related to changes in interest rates. As of June 30, 2009, our outstanding floating rate indebtedness totaled $14.6 million. The primary base interest rate is the Prime rate. Assuming the outstanding balance on our floating rate indebtedness remains constant over a year, a 100 basis point increase in the interest rate would decrease pre-tax income and cash flow by approximately $0.1 million. Other outstanding debt consists of fixed rate instruments, including the term loan and capital leases.

 

29


Table of Contents

Foreign Currency Risk

While a majority of our business is denominated in U.S. dollars, we maintain operations in foreign countries, primarily Japan and Europe, that require payments in the local currency. Fluctuations in the rate of exchange between the U.S. dollar and certain other currencies may affect our results of operations and period-to-period comparisons of our operating results. For example, if the value of the U.S. dollar were to increase relative to the Japanese Yen, then our reported revenues would decrease when we convert the Japanese Yen into U.S. dollars. We do not currently engage in hedging or similar transactions to reduce these risks. However, the currency exposure in our foreign currency revenues is mitigated because foreign subsidiaries expenses are payable in foreign currencies. We do not believe we have a material exposure to foreign currency rate fluctuations at this time.

Commodity Price Risk

We purchase raw materials that are processed from commodities, such as titanium and stainless steel. These purchases expose us to fluctuations in commodity prices. Given the historical volatility of certain commodity prices, this exposure can impact our product costs. However, because our raw material prices comprise a small portion of our cost of revenues, we have not experienced any material impact on our results of operations from changes in commodity prices. A 10% change in commodity prices would not have a material impact on our results of operations for the three months ended June 30, 2009.

 

Item 4. Controls and Procedures

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports pursuant to the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in SEC Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were: (1) designed to ensure that material information relating to us is made known to our Chief Executive Officer and Chief Financial Officer by others within our company, particularly during the period in which this report was being prepared and (2) effective, in that they provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act, is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms.

Changes in Internal Control over Financial Reporting

There has been no change in our internal controls over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

(a)  Evaluation of Disclosure Controls and Procedures . Our principal executive officer and principal financial and accounting officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Quarterly Report on Form 10-Q, have concluded that, based on such evaluation, our disclosure controls and procedures were adequate and effective. In designing and evaluating our disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

(b)  Changes in Internal Controls . There were no changes in our internal control over financial reporting, identified in connection with the evaluation of such internal control that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

30


Table of Contents

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

On April 12, 2006, Alphatec Spine and HealthpointCapital, L.P., our majority stockholder, and its affiliate, HealthpointCapital, LLC, were served with a complaint by Drs. Darryl Brodke, Alan Hilibrand, Richard Ozuna and Jeffrey Wang, or the “claimant surgeons,” in the Superior Court of California in the County of Orange, claiming, among other things, that, pursuant to certain contractual arrangements Alphatec Spine allegedly entered into with the claimant surgeons in 2001, it was required to pay the claimant surgeons quarterly royalties in an aggregate amount of 6% of the net sales of polyaxial screws (as defined in the alleged contractual arrangement), which the claimant surgeons allege were developed with their assistance prior to the cessation of such development activities in March 2002. Alphatec Spine first began to sell polyaxial screws in 2004 and has continued to sell them through the date of this Quarterly Report on Form 10-Q. In October of 2006, the parties to this litigation initiated a mediation session in an attempt to mediate a resolution to this matter, but were unsuccessful in doing so. The claimant surgeons assert causes of action for breach of contract, fraud, conversion, breach of fiduciary duty, and unjust enrichment. In the first quarter of 2009, the claimant surgeons dismissed all claims against both HealthpointCapital entities. The fraud, conversion and breach of fiduciary duty claims were dismissed in summary judgment in the third quarter of 2009. A trial is scheduled on the remaining claims in the third quarter of 2009. Alphatec Spine does not believe that any of the claimant surgeons are entitled to any royalty amounts, has filed counterclaims against certain of the claimant surgeons, and intends to vigorously defend itself against this complaint; however, we cannot predict the outcome to this matter or the impact on our financial statements, if any.

 

Item 1A. Risk Factors

Investing in our common stock involves a high degree of risk, and you should carefully consider the risks and uncertainties described under Item 1A of Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2008, as amended. If any of the risks set forth therein actually occurs, our business, financial condition or results of operations would likely suffer, possibly materially. In that case, the trading price of our common stock could fall.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

Under the terms of our Amended and Restated 2005 Employee, Director and Consultant Stock Plan, or the 2005 Plan, we may award shares of restricted stock to our employees, directors and consultants. These shares of restricted stock are subject to a lapsing right of repurchase by us. We may exercise this right of repurchase in the event that a restricted stock recipient’s employment, directorship or consulting relationship with us terminates prior to the end of the vesting period. If we exercise this right, we are required to repay the purchase price paid by or on behalf of the recipient for the repurchased restricted shares. Repurchased shares are returned to the 2005 Plan and are available for future awards under the terms of the 2005 Plan. Shares repurchased during the three months ended June 30, 2009 were as follows:

 

Month/Year

   Total Number
of Shares
Purchased (1)
   Average Price
Paid per
Share
   Total Number of
Shares Purchased
as part of Publicly
Announced Plans
or Programs
   Maximum Number
of Shares that may
Yet be Purchased
Under Plans or
Programs

April 2009

   —      $ —      —      —  

May 2009

   5,790    $ 0.0005    —      —  

June 2009

   —      $ —      —      —  

 

(1) Not included in the table above are 17,567 forfeited and retired shares in connection with the payment of minimum statutory withholding taxes due upon the vesting of certain stock awards or the exercise of certain stock options. In lieu of making a cash payment with respect to such withholding taxes, the holders of such stock forfeited a number of shares at the then current fair market value to pay such taxes.

 

Item 3. Defaults Upon Senior Securities

None.

 

Item 4. Submission of Matters to a Vote of Security Holders

(a) At the Annual Meeting of Shareholders of the Company, held on June 9, 2009, the matters described below were voted upon:

(1) Election of the following directors for a one-year term until the next annual meeting of stockholders and until their respective successors have been duly elected and qualified, or until their earlier death or resignation: Mortimer Berkowitz III, John H. Foster, R. Ian Molson, Stephen E. O’Neil, Stephen H. Hochschuler, M.D., James R. Glynn, Richard Ravitch, Rohit M. Desai, Dirk Kuyper and Siri S. Marshall; and (2) Ratification of the selection of Ernst & Young, LLP, to serve as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2009.

 

31


Table of Contents

Results of the Annual Meeting votes:

 

     For    Against
or Withheld
(1) To elect the following Directors to for a one-year term until the next annual meeting of stockholders and until their respective successors have been duly elected and qualified, or until their earlier death or resignation:      

Mortimer Berkowitz III

   35,373,177    2,581,749

John H. Foster

   35,858,740    2,096,186

R. Ian Molson

   37,889,077    65,849

Stephen E. O’Neil

   37,878,441    76,485

Stephen H. Hochschuler, M.D.

   37,375,893    579,033

James R. Glynn

   37,854,533    100,393

Richard Ravitch

   37,868,493    86,433

Rohit M. Desai

   37,844,397    110,529

Dirk Kuyper

   35,819,076    2,135,850

Siri S. Marshall

   37,852,533    102,393
(2) To ratify the appointment of Ernst & Young, LLP, to serve as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2009.    37,735,724    219,201

 

Item 5. Other Information

None.

 

Item 6. Exhibits

 

10.1†    Cross License Agreement effective June 30, 2009, by and among the Company, Alphatec Spine, Inc. and International Spinal Innovations, LLC.
10.2    Subscription Agreement effective June 4, 2009, between the Company and HealthpointCapital Partners II, L.P.
10.3†    Third Amendment to the License Agreement effective June 30, 2009, by and among the Company, Alphatec Spine, Inc. and Progressive Spinal Technologies LLC.
31.1    Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2    Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32    Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

Confidential treatment has been requested with respect to portions of this document.

 

32


Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated:

 

Signature

  

Title

 

Date

/s/ Dirk Kuyper

Dirk Kuyper

  

President and Chief Executive Officer

(principal executive officer)

  August 4, 2009

/s/ Peter C. Wulff

Peter C. Wulff

   Chief Financial Officer, Vice President and Treasurer (principal financial and accounting officer)   August 4, 2009

 

33


Table of Contents

Exhibit Index

 

10.1†    Cross License Agreement effective June 30, 2009, by and among the Company, Alphatec Spine, Inc. and International Spinal Innovations, LLC.
10.2    Subscription Agreement effective June 4, 2009, between the Company and HealthpointCapital Partners II, L.P.
10.3†    Third Amendment to the License Agreement effective June 30, 2009, by and among the Company, Alphatec Spine, Inc. and Progressive Spinal Technologies LLC.
31.1    Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2    Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32    Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

Confidential treatment has been requested with respect to portions of this document.

 

34

Exhibit 10.1

CROSS LICENSE AGREEMENT

This License Agreement (this “Agreement”) is made effective as of June 30, 2009 (the “Effective Date”) by and among Alphatec Spine, Inc., a Delaware corporation with a principal place of business at 5818 El Camino Real, Carlsbad, California 92008 (“Alphatec”), International Spinal Innovations, LLC, a limited liability company organized under the laws of the state of Connecticut, with an address at 97 Balfour Drive, West Hartford, CT 06117 (“ISI”), and, for purposes of Sections 4.1, 4.4, 7.3, and 11.15 hereof only, Alphatec Holdings, Inc., a Delaware corporation with a principal place of business at 5818 El Camino Real, Carlsbad, California 92008 (“Holdings”). Alphatec and ISI are each hereafter referred to individually as a “Party” and together as the “Parties”.

WHEREAS, ISI is the owner of, or otherwise controls, certain proprietary Licensed ISI Patents (hereinafter defined);

WHEREAS, Alphatec is the owner of, or otherwise controls, certain proprietary Licensed Alphatec Patents (hereinafter defined);

WHEREAS, Alphatec desires to obtain a license from ISI to the Licensed ISI Patents to develop and commercialize Licensed Alphatec Products (hereinafter defined);

WHEREAS, ISI desires to obtain a license from Alphatec to the Licensed Alphatec Patents to develop and commercialize Licensed ISI Products (hereinafter defined); and

WHEREAS, ISI and Alphatec each desire to cross-license the other on the terms and subject to the conditions of this Agreement.

NOW, THEREFORE, in consideration of the mutual covenants contained herein, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Parties hereby agree as follows:

1. DEFINITIONS

Whenever used in this Agreement with an initial capital letter, the terms defined in this Article 1 shall have the meanings specified.

1.1 “ Affiliate ” shall mean any company, corporation, partnership, limited liability company, trust, or other business entity that directly or indirectly controls, is controlled by, or is under common control with a designated person or entity, and for such purpose “control” shall mean the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of the entity, whether through the ownership of voting securities, by contract or otherwise.

 

1

Portions of this Exhibit were omitted, as indicated by [***], and have been filed separately

with the Secretary of the Commission pursuant to the Registrant’s application requesting

confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934, as

amended.


1.2 “ Common Stock ” shall mean the common stock of Holdings, which trades on Nasdaq under the symbol ATEC and any securities into which such common stock may hereafter be reclassified, converted or exchanged.

1.3 “ Confidential Information ” shall mean with respect to a Party (the “Receiving Party”), all information which is disclosed by the other Party (the “Disclosing Party”) to the Receiving Party hereunder or to any of its employees, consultants, Affiliates, licensees or sublicensees, except to the extent that the Receiving Party can demonstrate by written record or other suitable physical evidence that such information, (a) as of the date of disclosure is known to the Receiving Party or its Affiliates other than by virtue of a prior confidential disclosure to the Receiving Party or its Affiliates; (b) as of the date of disclosure is in, or subsequently enters, the public domain, through no fault or omission of the Receiving Party; (c) is obtained from a Third Party having a lawful right to make such disclosure free from any obligation of confidentiality to the Disclosing Party; or (d) is independently developed by or for the Receiving Party without reference to or reliance upon any Confidential Information of the Disclosing Party.

1.4 “ Guarantee and Agreement ” shall mean the guarantee and agreement of Holdings set forth in Section 11.15 hereof.

1.5 “ Alphatec Inventions ” shall mean any enhancement, invention or discovery created or identified, owned or controlled by Alphatec that does not fall within the Licensed ISI Patents. Alphatec Inventions shall not include any invention conceived in whole or in part before or after the Effective Date by ISI or any of its agents, employees, consultants, or representatives except as provided for in Section 3.1.1 of this Agreement.

1.6 “ ISI Inventions ” shall mean any enhancement, invention or discovery created or identified, owned or controlled by ISI that does not fall within the Licensed Alphatec Patents. ISI Inventions shall not include any invention conceived in whole or in part before or after the Effective Date by Alphatec or any of its agents, employees, consultants (including when ISI acts as a consultant for Alphatec) or representatives.

1.7 “ ISI Indemnitees ” and “ Alphatec Indemnitees ” (each individually an “ Indemnitee ”) shall have the meaning given in Section 8.1.

1.8 “ Licensed Field ” shall mean [***] .

1.9 “ Licensed ISI Patents ” shall mean the patents and patent applications described in Schedule A attached hereto, and all divisional, continuation, continuation-in-part (to the extent that the continuation-in-part is entitled to the priority date of an initial patent or patent application which is the subject of this Agreement), reissue, reexamination, registration, renewal, or extension, or any patent issuing therefrom or any supplementary protection certificates related thereto, and all foreign counterparts to any of the foregoing.

 

2

Portions of this Exhibit were omitted, as indicated by [***], and have been filed separately

with the Secretary of the Commission pursuant to the Registrant’s application requesting

confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934, as

amended.


1.10 “ Licensed Alphatec Patents ” shall mean the patents and patent applications described in Schedule B attached hereto, and any divisional, continuation, continuation-in-part (to the extent that the continuation-in-part is entitled to the priority date of an initial patent or patent application which is the subject of this Agreement), reissue, reexamination, registration, renewal, or extension, or any patent issuing therefrom or any supplementary protection certificates related thereto, and any foreign counterparts to any of the foregoing.

1.11 “ Licensed Alphatec Product ” shall mean any product sold by Alphatec, its affiliates, or Sublicensees that, absent the license provided in this Agreement, would infringe a Valid Claim of the Licensed ISI Patents.

1.12 “ Licensed ISI Product ” shall mean [***] made, used, offered for sale, or sold by ISI, its affiliates, or Sublicensees that, absent the license provided in this Agreement, would infringe a Valid Claim of the Licensed Alphatec Patents.

1.13 “ Net Sales ” shall mean the gross amount invoiced or otherwise payable to Alphatec, its Affiliates, or Sublicensees on account of sales or other transfers of a Licensed Alphatec Product anywhere in the Territory during a designated period, less (to the extent otherwise then or previously included in amounts invoiced for such Licensed Product and in respect of which no previous deduction was taken):

1.13.1 trade, cash and quantity discounts or rebates actually allowed or taken on Licensed Alphatec Products, including discounts or rebates to governmental or managed care organizations;

1.13.2 credits or allowances actually given or made for rejection of, and for uncollectible amounts (except to the extent later collected) on, or return of previously sold Licensed Alphatec Products;

1.13.3 sales commissions paid to a Third-Party;

1.13.4 any charges for insurance, freight, and other transportation costs directly related to the delivery of Licensed Alphatec Product to the extent included in the gross invoiced sales price;

1.13.5 any tax, tariff, duty or governmental charge levied on the sales, transfer, transportation or delivery of a Licensed Alphatec Product (including any tax such as a value added or similar tax or government charge), other than franchise or income tax of any kind whatsoever; and

1.13.6 any import or export duties or their equivalent borne.

In addition, should Alphatec be required, in order to lawfully exercise its rights as to a Licensed Alphatec Product, to obtain additional rights in a country to patents of any Third Parties which are not Affiliates of Alphatec, which patents are (i) pending or

 

3

Portions of this Exhibit were omitted, as indicated by [***], and have been filed separately

with the Secretary of the Commission pursuant to the Registrant’s application requesting

confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934, as

amended.


issued on the Effective Date, and (ii) required for Alphatec to practice the inventions described in the Licensed ISI Patents, then Alphatec may also deduct from Net Sales with respect to a designated period the amount of the royalty Alphatec is required to pay to such Third Party or Parties for such necessary rights to such patents with respect to such Licensed Alphatec Product.

“Net Sales” shall not include amounts invoiced to or otherwise payable by Alphatec, any of its Affiliates and/or any Sublicensees for Licensed Alphatec Products sold or otherwise transferred to Alphatec or any of its Affiliates and/or its Sublicensees, unless the Licensed Alphatec Product is consumed by the invoiced entity.

1.14 “ Shares ” shall have the meaning set forth in Paragraph 4.1.1(a) hereof.

1.15 “ Alphatec Sublicensee ” shall mean any Third Party to whom Alphatec grants a sublicense of some or all of the rights granted to Alphatec under this Agreement.

1.16 “ ISI Sublicensee ” shall mean any Third Party to whom ISI grants a sublicense of some or all of the rights granted to ISI under this Agreement.

1.17 “ Technology ” shall mean all of the following intangible legal rights, whether or not filed, perfected, registered or recorded, applicable to the Licensed Field: (i) inventions, patents, patent disclosures, patent rights, including any and all continuations, continuations-in-part, divisionals, reissues, re-examinations, utility models, industrial designs and design patents or any extensions thereof, (ii) rights associated with works of authorship, including without limitation, copyrights, copyright applications and copyright registrations and (iii) any and all proprietary ideas, inventions, discoveries, Confidential Information, data, results, formulae, designs, specifications, methods, processes, techniques, ideas, know-how, technical information (including, without limitation, structural and functional information), process information, pre-clinical information, clinical information, and any and all proprietary control and manufacturing data and materials, whether or not patentable.

1.18 “ Term ” shall have the meaning given in Section 9.1.

1.19 “ Territory ” shall mean all countries and jurisdictions of the world.

1.20 “ Third Party ” shall mean any person or entity other than Alphatec, ISI and their respective Affiliates.

1.21 “ Valid Claim ” shall mean a claim indicated as allowable in an issued, unexpired patent or in a pending patent application within the Licensed ISI Patents and Licensed Alphatec Patents that (a) has not been finally cancelled, withdrawn, abandoned or rejected by any administrative agency or other body of competent jurisdiction, (b) has not been revoked, held invalid, or declared unpatentable or unenforceable in a decision of a court or other body of competent jurisdiction that is unappealable or unappealed within the time allowed for appeal, (c) has not been rendered unenforceable through disclaimer or otherwise, and (d) is not lost through interference proceedings.

 

4

Portions of this Exhibit were omitted, as indicated by [***], and have been filed separately

with the Secretary of the Commission pursuant to the Registrant’s application requesting

confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934, as

amended.


1.22 “ First Commercial Sale ” shall mean the date of the first transaction, transfer or disposition for value by or on behalf of Alphatec or any Affiliate or Sublicensee of Alphatec to a Third Party of a Licensed Alphatec Product.

2. GRANT OF RIGHTS

2.1 License Grant to Alphatec .

2.1.1 ISI Grant of License to Alphatec . ISI hereby grants to Alphatec an exclusive (even as to ISI, but subject to the limitations set forth in Subsection 2.1.2) royalty-bearing license, including the right to grant sublicenses, to the Licensed ISI Patents to make, have made, import, export, use, offer for sale or sell Licensed Alphatec Products in the Territory, and to conduct research and development in support of the aforementioned licensed uses, in all cases, subject to the terms and conditions of this Agreement. The license granted in this subsection shall entitle Alphatec to sell and market Licensed Alphatec Products through Third-Party distributors.

2.1.2 Limitation of ISI’s License Grant to Alphatec . With respect to any laterally delivered multi-shaft interbody implant, ISI’s license grant to Alphatec in Subsection 2.1.1 is non-exclusive, and shall only be sublicensable in accordance with Subsection 6.2.

2.2 License Grant to ISI . Alphatec hereby grants to ISI a non-exclusive, fully-paid, royalty-free license including the right to grant sublicenses, provided that such sublicense shall only be granted in accordance with Subsection 6.2, to the Licensed Alphatec Patents to make, have made, import, export, use, offer for sale or sell a Licensed ISI Product in the Territory, and to conduct research and development in support of the aforementioned licensed uses, in all cases, subject to the terms and conditions of this Agreement. The license granted in this subsection shall entitle ISI to sell and market ISI Products through Third-Party distributors.

3. DEVELOPMENT AND COMMERCIALIZATION OF LICENSED ALPHATEC PRODUCTS.

3.1 Commercialization .

3.1.1 Responsibility . From and after the Effective Date, Alphatec shall have full control and authority over the development and commercialization of Licensed Alphatec Products in the Licensed Field in the Territory. Alphatec shall own all Alphatec Inventions. Alphatec shall own all Technology resulting from (i) the joint efforts of the agents, Affiliates and employees of ISI and Alphatec during the term of this Agreement, or (ii) any efforts performed by ISI pursuant to Section 3.2.

 

5

Portions of this Exhibit were omitted, as indicated by [***], and have been filed separately

with the Secretary of the Commission pursuant to the Registrant’s application requesting

confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934, as

amended.


3.1.2 Diligence . After the Effective Date, Alphatec will exercise commercially reasonable efforts to develop a Licensed Alphatec Product, such commercially reasonable efforts to take into account the competitiveness of the marketplace, the proprietary position of the Licensed Alphatec Product, the relative potential safety and efficacy of the Licensed Alphatec Product, the cost of goods and availability of capacity to manufacture and supply the Licensed Alphatec Product at commercial scale, the profitability of the applicable Licensed Alphatec Product, and other relevant factors including, without limitation, technical, legal, scientific or medical factors.

3.2 ISI Assistance . ISI shall transfer to Alphatec all drawings, prototypes and other related materials in its possession or control as of the Effective Date that relate to a single-shaft Licensed Alphatec Product (the “Prototype Transfer”). As consideration for the Prototype Transfer, within ten (10) business days of the receipt of an invoice from ISI, Alphatec shall reimburse ISI for all expenses incurred as of the Effective Date in connection with the creation of the materials that are the subject of the Prototype Transfer; provided that such payment shall not exceed [***] . In addition, upon Alphatec’s reasonable request, ISI will provide commercially reasonable assistance to develop Alphatec’s first Licensed Alphatec Product. Alphatec will pay ISI for such assistance [***] plus reasonable travel and out-of-pocket expenses.

4. PAYMENTS AND ROYALTIES

4.1 Initial Payment; Milestone Payments; Royalty Payments; Royalty Rates; and Minimum Quarterly Royalty .

4.1.1 Initial Payment Upon the terms and subject to the conditions contained herein, Alphatec shall issue and transfer with full title guaranteed, two hundred sixty thousand (260,000) shares (the “Shares”) of Common Stock (the “Share Payment”). ISI’s license grant to Alphatec constitutes full consideration for the Share Payment. The Share Payment shall be due and payable within twenty (20) business days of the Effective Date. The payment described in this Subsection 4.1.1 shall not be credited against or otherwise reduce any other amounts payable hereunder.

4.1.2 Milestone Payments . Alphatec shall pay milestone payments to ISI (each such payment a “Milestone Payment”) as specified below no more than thirty (30) days after the occurrence of the corresponding event designated below, unless this Agreement has been terminated prior to such due date. No Milestone Payments described in this Subsection 4.1.2 shall be credited against or otherwise reduce any other amounts payable hereunder.

 

Event

 

Milestone Payment

[ *** ]   [ *** ]
[ *** ]   [ *** ]
[ *** ]   [ *** ]

 

6

Portions of this Exhibit were omitted, as indicated by [***], and have been filed separately

with the Secretary of the Commission pursuant to the Registrant’s application requesting

confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934, as

amended.


4.1.3 Royalty Payments . During the Term of this Agreement, Alphatec shall pay to ISI within thirty (30) days of the end of each calendar quarter royalties of [***] of Net Sales of Licensed Alphatec Products. Only one royalty shall be payable to ISI pursuant to this Section 4.1.3 for each sale of a Licensed Alphatec Product, notwithstanding that more than one patent or patent claim reads upon such Licensed Alphatec Product.

4.1.4 Minimum Royalty Payment . In accordance with the chart set forth in this Subsection 4.1.4, Alphatec shall pay ISI a minimum annual royalty amount. No minimum annual royalty described in this Subsection 4.1.4 shall be credited against or otherwise reduce any other amounts payable hereunder. For a particular year, in the event that the sum of the earned royalties on Net Sales paid pursuant to Subsection 4.1.3 above with respect to such calendar is less than the minimum annual royalty for such year designated below, the obligation to pay the difference to ISI shall accrue on the last day of such year and be payable by Alphatec no later than forty-five (45) days following the end of such year:

 

Twelve (12) Months Ending

 

Minimum Annual Royalty

[ *** ]   [ *** ]

4.2 Payment, Conversion and Withholding .

4.2.1 Payment . All payments hereunder shall originate in the United States and be made in United States dollars.

4.2.2 Conversion . Conversion of foreign currency to United States dollars shall be made at the conversion rate existing in the United States (as reported in The Wall Street Journal ) on the last business day of the quarter immediately preceding the applicable calendar quarter. If The Wall Street Journal ceases to be published, then the rate of exchange to be used shall be that reported in such other business publication of national circulation in the United States as the Parties reasonably agree.

4.2.3 Tax Withholding; Restrictions on Payment . All taxes, assessments and fees of any nature levied or incurred on account of any payments from Alphatec to ISI accruing under this Agreement, by national, state or local governments, will be assumed and paid by Alphatec, except taxes levied thereon as income to ISI and if such taxes are required by applicable law to be withheld by Alphatec they will be deducted from payments due to ISI and will be timely paid by Alphatec to the proper taxing authority for the account of ISI, a receipt or other proof of payment therefore secured and sent to ISI as soon as practicable. Alphatec shall remit all payments to ISI hereunder from within the United States.

 

7

Portions of this Exhibit were omitted, as indicated by [***], and have been filed separately

with the Secretary of the Commission pursuant to the Registrant’s application requesting

confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934, as

amended.


4.3 Records Retention; Review .

4.3.1 Record Retention . Alphatec shall keep accurate books and accounts of the computation of the number of Licensed Alphatec Products sold and the Net Sales of Alphatec, its Affiliates and Sublicensees of Licensed Alphatec Products, and shall cause such Affiliates and Sublicensees to keep such records of their respective sales of Licensed Alphatec Products and Net Sales of Licensed Alphatec Products, in sufficient detail to permit accurate determination of all figures necessary for verification of payments required to be paid hereunder, which books and accounts shall be maintained for at least three (3) years from the end of the calendar year to which they pertain.

4.3.2 Review . At the request of ISI, which shall not be made more frequently than once per calendar year during the Term, on a business day designated by ISI upon at least thirty (30) days’ prior written notice to Alphatec, Alphatec shall permit, under confidentiality obligations with terms substantially the same as those hereunder, an independent certified public accountant reasonably selected by ISI and reasonably acceptable to Alphatec to inspect (during regular business hours) the relevant records required to be maintained by Alphatec under Subsection 4.3.1. In the event such inspection reveals an underpayment, such underpayment shall be due and payable by Alphatec within thirty (30) days of the date of such inspection, together with interest thereon from the date the amount due but unpaid was first due until the date paid, at the lower of [***] per annum or the maximum rate permitted by applicable law. Such inspection shall be at the expense of ISI unless there is an underpayment that differs by greater than [***] from the amount that was otherwise due, in which event Alphatec shall pay the reasonable costs of the inspection. The foregoing is without prejudice to the right of Alphatec to dispute the conclusion of the accountant, but such dispute shall not relieve Alphatec of its obligation to pay interest and, under the circumstances described, costs of inspection as to amount actually due.

4.4 Matters Related to the Issuance of Common Stock .

4.4.1 Representations, Warranties and Certain Covenants of Alphatec and of Holdings . Alphatec and Holdings, each separately and jointly represent, warrant, and covenant that:

(a) Assuming the covenant of ISI contained in Subsection 4.4.2 of this Agreement is complied with, the issuance to ISI of each Share will be in compliance with all applicable federal and state securities laws in connection with the offer, issuance and sale of the securities.

(b) The execution, delivery and performance of this Agreement by Holdings, the issuance and sale of the Shares and the consummation by Holdings of the other transactions by it contemplated hereby do not and will not on the date of the

 

8

Portions of this Exhibit were omitted, as indicated by [***], and have been filed separately

with the Secretary of the Commission pursuant to the Registrant’s application requesting

confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934, as

amended.


issuance and sale of the Shares (i) conflict with or violate any provision of Holdings’ or any of its subsidiaries certificates or articles of incorporation, bylaws or other organizational or charter documents, or (ii) conflict with, or constitute a default (or an event that with notice or lapse of time or both would become a default) under, result in the creation of any lien or encumbrance upon any of the properties or assets of Holdings or any of its subsidiaries, or give to others any rights of termination, amendment, acceleration or cancellation (with or without notice, lapse of time or both) of, any agreement, credit facility, debt or other instrument or other understanding to which Holdings or any of its subsidiaries is a party or by which any property or asset of Holdings or any such subsidiary is bound or affected, in each case with respect to this Subsection (ii), to a degree that would have a material adverse effect on the assets or results of operations of Holdings or its subsidiaries when considered as a whole (a “Material Adverse Effect”), or (iii) conflict with or result in a violation of any law, rule, regulation, order, judgment, injunction, decree or other restriction of any court or governmental authority to which Holdings or any such subsidiary is subject (including federal and state securities laws and regulations), or by which any property or asset of Holdings or any such subsidiary is bound or affected, in each case with respect to this Subsection (iii), to a degree that would have a Material Adverse Effect.

(c) Prior to the issuance of the Shares, Holdings shall obtain all consents, approvals, orders, authorizations or registrations, qualifications, designations, declarations, and make all filings or registrations with any court or other federal, state, local or other governmental authority or other person that is required in order to issue the Shares.

(d) The Shares, when issued in accordance herewith, will be (i) duly authorized, (ii) duly and validly issued, (iii) fully paid and nonassessable, and (iv) free and clear of all liens or encumbrances imposed by Holdings, other than restrictions on transfer provided for herein.

(e) At all times prior to the second anniversary of the last issuance of the Shares during which there are Shares outstanding which have not been previously (i) sold or transferred to or through a broker or dealer or underwriter in a public distribution, or (ii) sold or transferred in a transaction exempt from the registration and prospectus delivery requirements of the Securities Act of 1933, as amended (the “Securities Act”), in the case of either Subsection (i) or Subsection (ii) in such a manner that, upon the consummation of such sale or transfer, all transfer restrictions and restrictive legends with respect to such Shares upon the consummation of such sale or transfer and Holdings shall use its commercially reasonable efforts to: (1) comply with the requirements of Rule 144(c) under the Securities Act with respect to current public information about Holdings, and (2) furnish to ISI such non-publicly available reports and documents of Holdings as ISI may reasonably request to avail itself of Rule 144 of the Securities Act, or any similar rule or regulation of the United States Securities Exchange Commission allowing ISI to sell the Shares without registration.

4.4.2 Representations and Warranties of ISI . ISI represents and warrants that (i) it is an “accredited investor” as that term is defined in Rule 501(a) of Regulation D of the Securities Act; (ii) it is acquiring the Shares for investment for ISI’s own

 

9

Portions of this Exhibit were omitted, as indicated by [***], and have been filed separately

with the Secretary of the Commission pursuant to the Registrant’s application requesting

confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934, as

amended.


account and not as a nominee or agent, and not with a view to the resale or distribution of any part thereof, without prejudice, however, to ISI’s right to at all times to sell or otherwise dispose of any or all of the Shares so issued in compliance with applicable federal and state securities laws and (iii) it does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participation to such person or to any third person, with respect to any of such Shares.

4.4.3 Restrictions on the Shares . ISI understands and agrees that the Shares may not be sold, transferred, or otherwise disposed of without registration under the Securities Act or an exemption therefrom, and that in the absence of an effective registration statement covering the Shares or any available exemption from registration under the Securities Act, the Shares must be held indefinitely. ISI agrees and acknowledges that the following legend will be placed on the back of any certificate evidencing the Shares:

“THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES, THE SALE IS MADE IN ACCORDANCE WITH RULE 144 UNDER THE ACT, OR THE CORPORATION RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THESE SECURITIES REASONABLY SATISFACTORY TO THE CORPORATION, STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT.”

4.4.4 Limitation on the Number of Shares Issued . Notwithstanding anything to the contrary in this Agreement, in no event shall the aggregate number of Shares issued pursuant to this Agreement be greater than nine and ninety-nine one-hundredths percent (9.99%) of the number of shares of Common Stock outstanding on the Effective Date. In the event that an issuance of Shares pursuant to this Agreement would cause an aggregate issuance of Shares that is more than nine and ninety-nine one-hundreths percent (9.99%) of the number of shares Common Stock outstanding on the Effective Date, Alphatec shall make a cash payment to ISI equal to the difference between cash value of the Shares that were scheduled to be issued pursuant to this Agreement, and the value of the Shares that were actually issued after giving effect to the limitation set forth in this Section 4.4.4.

 

10

Portions of this Exhibit were omitted, as indicated by [***], and have been filed separately

with the Secretary of the Commission pursuant to the Registrant’s application requesting

confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934, as

amended.


5. TREATMENT OF CONFIDENTIAL INFORMATION

5.1 Confidential Obligations . ISI and Alphatec each recognize that the other Party’s Confidential Information constitutes highly valuable and proprietary confidential information. ISI and Alphatec each agree that during the Term and for [***] thereafter, it will keep confidential, and will cause its employees, consultants, Affiliates and sublicensees to keep confidential, all Confidential Information of the other Party. Neither ISI nor Alphatec nor any of their respective employees, consultants, Affiliates or Sublicensees shall use Confidential Information of the other Party for any purpose whatsoever other than exercising any rights granted to it or reserved by it hereunder. Without limiting the foregoing, each Party may disclose information to the extent such disclosure is reasonably necessary to (a) file, prosecute or defend litigation in accordance with the provisions of this Agreement or (b) comply with applicable laws, regulations (including those of the United States Securities Exchange Commission) or court orders; provided, however, that if a Party is required to make any such disclosure of the other Party’s Confidential Information in connection with any of the foregoing, it will give reasonable advance notice to the other Party of such disclosure requirement and will use reasonable efforts to cooperate with such other Party in efforts to secure confidential treatment of such information required to be disclosed.

5.2 Limited Disclosure and Use . ISI and Alphatec each agree that any disclosure of the other Party’s Confidential Information to any officer, employee, consultant or agent of the other Party or any of its Affiliates or Sublicensees shall be made only if and to the extent necessary to carry out its rights and responsibilities under this Agreement, shall be limited to the maximum extent possible consistent with such rights and responsibilities and shall only be made to the extent any such persons are bound by written confidentiality obligations to maintain the confidentiality thereof and not to use such Confidential Information except as expressly permitted by this Agreement. ISI and Alphatec each further agree not to disclose or transfer the other Party’s Confidential Information to any Third Parties under any circumstance without the prior written approval from the other Party (such approval not to be unreasonably withheld), except as otherwise required by law, and except as otherwise expressly permitted by this Agreement. Each Party shall take such action, and shall cause its Affiliates or Sublicensees to take such action, to preserve the confidentiality of each other’s Confidential Information as it would customarily take to preserve the confidentiality of its own Confidential Information, using, in all such circumstances, not less than reasonable care. Each Party, upon the request of the other Party, will return all the Confidential Information disclosed or transferred to it by the other Party pursuant to this Agreement, including all copies and extracts of documents and all manifestations in whatever form, within sixty (60) days of such request or, if earlier, the termination or expiration of this Agreement; provided however, that a Party may retain (i) any Confidential Information of the other Party relating to any license which expressly survives such termination, and (ii) one (1) copy of all other Confidential Information in inactive archives in legal counsel’s files solely for the purpose of establishing the contents thereof.

5.3 Publicity . Neither Party may publicly disclose the existence or terms or any other matter of fact regarding this Agreement without the prior written consent of the other Party, which consent shall not be unreasonably withheld or delayed;

 

11

Portions of this Exhibit were omitted, as indicated by [***], and have been filed separately

with the Secretary of the Commission pursuant to the Registrant’s application requesting

confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934, as

amended.


provided, however, that either Party may make such a disclosure (i) to the extent required by law or by the requirements of any nationally recognized securities exchange, quotation system or over-the-counter market on which such Party has its securities listed or traded, or (ii) to any prospective Sublicensees, or to investors, prospective investors, lenders and other potential financing sources, who are obligated to keep such information confidential. The Parties, upon the execution of this Agreement, will mutually agree to a press release with respect to this transaction for publication. Once such press release or any other written statement is approved for disclosure by both Parties, neither Party may make subsequent public disclosure of the contents of such statement without the further approval of the other Party.

5.4 Use of Name . Neither Party shall employ or use the name of the other Party in any promotional materials or advertising without the prior express written permission of the other Party.

6. PROVISIONS CONCERNING THE FILING, PROSECUTION, AND MAINTENANCE OF PATENT RIGHTS

6.1 Certain Patent Filing, Prosecution and Maintenance . With respect to any Licensed ISI Patents and Licensed Alphatec Patents, Alphatec shall be responsible for and shall use reasonably efforts in preparing, filing, prosecuting, obtaining, and maintaining all Licensed ISI Patents and Licensed Alphatec Patents in the countries of its choosing in the Territory using patent counsel chosen by Alphatec. The related costs shall be borne entirely by Alphatec. ISI shall provide reasonable assistance to Alphatec with respect to the prosecution of each patent application of the Licensed ISI Patents. ISI agrees to send Alphatec copies of all file histories and prosecution documents for each of the patent applications of the Licensed ISI Patents, within thirty (30) days of receipt by ISI. ISI shall have the right, but not the obligation, to assume responsibility for any Licensed ISI Patents that Alphatec intends to abandon or otherwise cause or allow to be forfeited. Alphatec shall give ISI at least sixty (60) days written notice prior to abandonment or other forfeiture of any Licensed ISI Patents or any part of the Licensed ISI Patents so as to permit ISI to exercise its rights under this Subsection 6.1.

6.2 Notice of Infringement . If, during the Term, either Party learns of any actual, alleged or threatened infringement by a Third Party of any Licensed ISI Patents or Licensed Alphatec Patents under this Agreement, such Party shall promptly notify the other Party and shall provide such other Party with available evidence of such infringement. Following the delivery of such notice of infringement, neither Party shall be entitled to enter into a sublicense with the Third-Party infringer with respect to any non-exclusive rights that have been granted to such Party in accordance with this Agreement, unless such sublicense was granted in accordance with Subsection 6.3.

6.3 Infringement of Licensed Patents . With respect to any notice of a Third Party infringement of the Licensed ISI Patents or Licensed Alphatec Patents, the Parties shall meet as soon as reasonably practicable to discuss such infringement and

 

12

Portions of this Exhibit were omitted, as indicated by [***], and have been filed separately

with the Secretary of the Commission pursuant to the Registrant’s application requesting

confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934, as

amended.


determine an appropriate course of action. The Parties jointly shall appoint one of the Parties as the “Leading Party” to bring an action against such Third Party infringer or otherwise address such alleged infringement within sixty (60) days from the date of notice and to control such litigation or other means of addressing such infringement as follows:

6.3.1 In the event that the Third Party is believed to solely infringe the non-exclusive rights granted by ISI to Alphatec under this Agreement, then ISI shall have the first option to be the Leading Party. In all other situations, Alphatec shall have the first option to be the Leading Party.

6.3.2 If a Party with the option to be the Leading Party declines such option, the other Party shall have the option to become the Leading Party.

The Party that is the non-Leading Party shall cooperate with the Leading Party in any such suit brought by the Leading Party, and shall have the right to consult with the Leading Party and participate in and be represented by independent counsel in such litigation at its own expense. If a non-Leading Party elects not to be represented by an independent counsel, the Leading Party shall bear all of non-Leading Party’s litigation expenses (including legal fees and costs). The Leading Party shall not have the right to settle any patent infringement litigation under this section in a manner that diminishes the rights or interests of the non-Leading Party without the prior written consent of the non-Leading Party, such consent not to be unreasonably withheld or delayed. Any recoveries obtained by either Party shall be allocated to each Party on a pro rata basis based on the costs and expenses (including reasonable attorneys’ fees and costs) incurred in prosecuting such enforcement action pursuant to this Section 6.3.

7. REPRESENTATIONS AND WARRANTIES

7.1 Representations and Warranties of ISI . As of the Effective Date, ISI represents and warrants to Alphatec as follows:

7.1.1 the execution and delivery of this Agreement and the performance of the transactions contemplated hereby have been duly authorized by all appropriate ISI actions;

7.1.2 this Agreement is a legal and valid obligation binding upon ISI and enforceable in accordance with its terms, and the execution, delivery and performance of this Agreement by the Parties does not conflict with any agreement, instrument or understanding to which ISI is a party or by which it is bound;

7.1.3 ISI has the full right and legal capacity to grant the rights granted to Alphatec hereunder without violating the rights of any Third Party;

7.1.4 ISI Licensed Patents have been properly filed and prosecuted and ISI is the sole owner of the Licensed ISI Patents and the and the materials that are the subject of the Prototype Transfer;

 

13

Portions of this Exhibit were omitted, as indicated by [***], and have been filed separately

with the Secretary of the Commission pursuant to the Registrant’s application requesting

confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934, as

amended.


7.1.5 ISI is not aware of any Third Party patent, patent application or other intellectual property rights that would be infringed by practicing the materials that are the subject of the Prototype Transfer.

7.1.6 The Licensed ISI Patents and the materials that are the subject of the Prototype Transfer represent all of the materials owned or controlled by ISI with respect to the a single-shaft Licensed Alphatec Product.

7.2 Representations and Warranties of Alphatec . As of the Effective Date, Alphatec represents and warrants to ISI as follows:

7.2.1 the execution and delivery of this Agreement and the performance of the transactions contemplated hereby have been duly authorized by all appropriate Alphatec actions;

7.2.2 this Agreement is a legal and valid obligation binding upon Alphatec and enforceable in accordance with its terms, and the execution, delivery and performance of this Agreement by the Parties does not conflict with any agreement, instrument or understanding to which Alphatec is a party or by which it is bound; and

7.2.3 Alphatec has the full right and legal capacity to grant the rights granted to ISI hereunder without violating the rights of any Third Party.

7.3 Representations and Warranties of each Party and Holdings . As of the Effective Date, each Party and Holdings represents and warrants as follows:

7.3.1 the execution, delivery and performance of this Agreement will not constitute a violation, be in conflict with, or result in a breach of any agreement or contract to which it is bound;

7.3.2 it is a corporation or entity duly organized and validly existing under the laws of the state or other jurisdiction of incorporation or formation;

7.3.3 the execution, delivery and performance of this Agreement by it has been duly authorized by all requisite corporate action and do not require any shareholder action or approval;

7.3.4 it has the power and authority to execute and deliver this Agreement and to perform its obligations hereunder; and

7.3.5 it shall at all times comply with all applicable material laws and regulations relating to its activities under the Agreement

7.4 No Warranties . Nothing in this Agreement is or shall be construed as a warranty or representation that anything made, used, sold or otherwise disposed of under any license granted pursuant to this Agreement is or will be free from infringement of

 

14

Portions of this Exhibit were omitted, as indicated by [***], and have been filed separately

with the Secretary of the Commission pursuant to the Registrant’s application requesting

confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934, as

amended.


patents, copyrights, and other rights of Third Parties. EXCEPT AS EXPRESSLY SET FORTH IN THIS SECTION 7, EACH PARTY EXCLUDES ALL OTHER REPRESENTATIONS AND WARRANTIES, EXPRESS OR IMPLIED, INCLUDING AMONG SUCH EXCLUDED REPRESENTATIONS AND WARRANTIES ANY AND ALL REPRESENTATIONS OR WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.

8. INDEMNIFICATION

8.1 Indemnification .

8.1.1 Indemnification by Alphatec . Alphatec shall indemnify, defend and hold harmless ISI, its Affiliates and their respective directors, officers, employees, stockholders and agents and their respective successors, heirs and assigns (the “ISI Indemnitees”) from and against any claims, liability, damage, loss or expense (including reasonable attorneys’ fees and expenses of litigation) (“Losses”) incurred by or imposed upon such ISI Indemnitee, or any of them, in connection with any Third Party claims, suits, actions, demands or judgments to the extent arising out of or related to (i) the design, development, testing, production, manufacture, supply, promotion, marketing, importation, sale, use or instructions for use of any Licensed Alphatec Product (or any component thereof) manufactured or sold by Alphatec or any Affiliate or Sublicensee under this Agreement, including without limitation any claims that (a) the design of any Licensed Alphatec Product by Alphatec infringed the intellectual property right of any Third Party or (b) any Licensed Alphatec Product manufactured or sold by Alphatec or any Affiliate or Sublicensee under this Agreement caused the death of any person or any injury to any person or property, (ii) any material breach of any representation or warranty by Alphatec in Article 7 of this Agreement; or (iii) the gross negligence, willful misconduct or material breach of this Agreement by Alphatec. Notwithstanding anything to the contrary stated above, except with respect to Losses that arise from (i) Alphatec’s breach of Section 7.2; (ii) Holding’s breach of Section 7.3.1 or 7.3.4; or (ii) Alphatec’s gross negligence or willful misconduct, Alphatec’s total maximum indemnification obligation pursuant to this Section 8.1.1 shall be limited to [ *** ] .

8.1.2 Indemnification by ISI . ISI shall indemnify, defend and hold harmless Alphatec, its Affiliates and their respective directors, officers, employees, stockholders and agents and their respective successors, heirs and assigns (the “Alphatec Indemnitees”) from and against any Losses incurred by or imposed upon such Alphatec Indemnitee, or any of them, in connection with any Third Party claims, suits, actions, demands or judgments to the extent arising out of (i) any material breach of any representation or warranty by ISI in Article 7 of this Agreement; or (ii) the gross negligence, willful misconduct or material breach of this Agreement by ISI. Notwithstanding anything to the contrary stated above, except with respect to Losses that arise from (i) ISI’s breach of Section 7.1.2 and 7.1.3; or (ii) ISI’s gross negligence or willful misconduct, ISI’s total maximum indemnification obligation pursuant to this Section 8.1.2 shall be limited to [ *** ] .

 

15

Portions of this Exhibit were omitted, as indicated by [***], and have been filed separately

with the Secretary of the Commission pursuant to the Registrant’s application requesting

confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934, as

amended.


8.2 Indemnification Procedures . In the event that any Indemnitee is seeking indemnification under Subsection 8.1 above from a Party (the “Indemnifying Party”), the Indemnitee shall notify the Indemnifying Party of such claim with respect to such Indemnitee as soon as reasonably practicable after the Indemnitee receives notice of the claim, and the Party seeking indemnification, on behalf of itself and such Indemnitee, shall permit the Indemnifying Party to assume direction and control of the defense of the claim (including the right to settle the claim solely for monetary consideration) and shall cooperate as requested (at the expense of the Indemnifying Party) in the defense of the claim. The indemnification obligations under Article 8 shall not apply to any harm suffered as a direct result of any delay in notice to the Indemnifying Party hereunder or to amounts paid in settlement of any claim, demand, action or other proceeding if such settlement is effected without the consent of the Indemnifying Party, which consent shall not be withheld or delayed unreasonably. The Indemnitee, its employees and agents, shall reasonably cooperate with the Indemnifying Party and its legal representatives in the investigation of any claim, demand, action or other proceeding covered by Subsection 8.1.

9. TERM AND TERMINATION

9.1 Expiration . The term of this Agreement shall commence on the Effective Date and expire when the last Valid Claim of the Licensed ISI Patents is denied or expires (the “Term”). Following the Term, the license granted (i) to Alphatec in Section 2.1, and (ii) to ISI in Section 2.2, each shall remain in full force and effect and irrevocable.

9.2 Termination Rights for Breach .

9.2.1 Termination for Breach . Subject to the other terms of this Agreement, this Agreement and the rights granted herein may be terminated by either Party upon any material breach by the other Party of any material obligation or condition, effective ninety (90) days after giving written notice to the breaching Party of such termination, which notice shall describe such breach in reasonable detail. The foregoing notwithstanding, if such material breach is cured or remedied or shown to be non-existent or not to be material within the aforesaid ninety (90) day period, the notice shall be automatically withdrawn and of no effect.

9.2.2 Voluntary Termination . Alphatec shall have the right to terminate this Agreement upon not less than ninety (90) days prior written notice to ISI.

9.2.3 ISI’s Termination Rights Based on Development Progress . In the event that the First Commercial Sale has not occurred within [***] of the Effective Date, then ISI shall be entitled to terminate the Agreement following [***] written notice to Alphatec. The termination right set forth in this Section 9.2.3 shall not be applicable in the event that Alphatec’s inability to reach the deadline set forth in this Section 9.2.3 are primarily due to ISI’s breach of its obligations under this Agreement. In addition, if during the [***] notice period in the first sentence of this Section 9.2.3, Alphatec (i) completes the First Commercial Sale, or (ii) gives ISI written notice that it desires to continue this Agreement (the “Continuation Notice”), such termination shall be ineffective and void ab initio . In the event Alphatec sends the Continuation Notice, Alphatec hereby agrees to make the following payments to ISI (each

 

16

Portions of this Exhibit were omitted, as indicated by [***], and have been filed separately

with the Secretary of the Commission pursuant to the Registrant’s application requesting

confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934, as

amended.


of which shall be credited against any amounts due to ISI pursuant to Section 4.1.4), [***] , on the anniversary of the first twelve (12)-month period following the date of the Continuation Notice. Each subsequent twelve (12)-month period after the date of the Continuation Notice shall be treated in the same manner. If during the period following the delivery of the Continuation Notice, Alphatec completes the First Commercial Sale, the payment amounts set forth in this Section 9.2.3 shall not be in effect following the date of such First Commercial Sale. If the payment amounts set forth in this Section 9.2.3 are not made by Alphatec, the termination of this Agreement shall be effective without further action by the Parties.

9.3 Effects of Termination

9.3.1 Termination Pursuant to Section 9.2.1 . Upon any termination of this Agreement pursuant to Section 9.2.1, as of the effective date of such termination all relevant licenses and sublicenses granted pursuant to this Agreement shall terminate automatically. Notwithstanding the foregoing, each Party and its Affiliates and Sublicensees shall have the right, for [***] or such longer time period on which the Parties mutually agree in writing, to sell or otherwise dispose of all products then on hand that are being sold pursuant to the licenses granted pursuant to this Agreement.

9.3.2 Termination Pursuant to Sections 9.2.2 or 9.2.3 . Upon any termination of this Agreement pursuant to Section 9.2.2 or 9.2.3, as of the effective date of such termination all relevant licenses and sublicenses granted pursuant to this Agreement shall terminate automatically. Notwithstanding the foregoing: (i) each Party and its Affiliates and Sublicensees shall have the right, for [***] or such longer time period on which the Parties mutually agree in writing, to sell or otherwise dispose of all products then on hand that are being sold pursuant to the licenses granted pursuant to this Agreement; and (ii) upon the written election of ISI, and upon the repayment of [***] the license granted to ISI in Section 2.2, shall remain in full force and effect and irrevocable; provided that the written election and the payment occurs within five (5) business days of the effective date of such termination.

9.4 Remedies . Except as otherwise expressly set forth in this Agreement, the termination provisions of this Article 9 are in addition to any other relief and remedies available to either Party at law or equity.

9.5 Surviving Provisions . Notwithstanding any provision herein to the contrary, the rights and obligations of the Parties set forth in Subsection 3.1.1 (with respect to Alphatec’s ownership of Alphatec Inventions and Technology as set forth therein), and Sections 4.3, 4.4.1(e), 5, 8, 9.3, 9.5, 10.1, 10.2, 11.1, 11.2, 11.4 and 11.15 shall survive the expiration or termination of this Agreement.

 

17

Portions of this Exhibit were omitted, as indicated by [***], and have been filed separately

with the Secretary of the Commission pursuant to the Registrant’s application requesting

confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934, as

amended.


10. DISPUTES

10.1 Negotiation . The Parties recognize that a bona fide dispute as to certain matters may from time to time arise during the term of this Agreement that relates to either Party’s rights and/or obligations hereunder. In the event of the occurrence of such a dispute, either Party may, by written notice to the other Party, have such dispute referred to their respective senior officials designated below or their successors, for attempted resolution by good faith negotiations within sixty (60) days after such notice is received. Said designated senior officials are as follows:

For Alphatec: President and Chief Executive Officer

For ISI: Joseph Aferzon, M.D., Manager

In the event the designated senior officials are not able to resolve such dispute within the sixty (60) day period, either Party may invoke the provisions of Section 10.2.

10.2 Arbitration . Subject to Section 10.1, any dispute, controversy or claim initiated by either Party arising out of, resulting from or relating to this Agreement, or the performance by either Party of its obligations under this Agreement (other than bona fide Third Party actions or proceedings filed or instituted in an action or proceeding by a Third Party against a Party), whether before or after termination of this Agreement, shall be finally resolved by binding arbitration. Whenever a Party shall decide to institute arbitration proceedings, it shall give written notice to that effect to the other Party. Any such arbitration shall be conducted under the Commercial Arbitration Rules of the American Arbitration Association by one arbitrator appointed in accordance with such rules. Any such arbitration shall be held in San Diego, California. The method and manner of discovery in any such arbitration proceeding shall be governed by the laws of the State of California. The arbitrator shall have the authority to grant injunctions and/or specific performance and to allocate between the parties the costs of arbitration in such equitable manner as they determine. Judgment upon the award so rendered may be entered in any court having jurisdiction or application may be made to such court for judicial acceptance of any award and an order of enforcement, as the case may be. In no event shall a demand for arbitration be made after the date when institution of a legal or equitable proceeding based upon such claim, dispute or other matter in question would be barred by the applicable statute of limitations. Notwithstanding the foregoing, either Party shall have the right, without waiving any right or remedy available to such Party under this Agreement or otherwise, to seek and obtain from any court of competent jurisdiction any interim or provisional relief that is necessary or desirable to protect the rights or property of such Party, pending the selection of the arbitrators hereunder or pending the arbitrators’ determination of any dispute, controversy or claim hereunder.

 

18

Portions of this Exhibit were omitted, as indicated by [***], and have been filed separately

with the Secretary of the Commission pursuant to the Registrant’s application requesting

confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934, as

amended.


11. MISCELLANEOUS

11.1 Notification . All notices, requests and other communications hereunder shall be in writing, shall be addressed to the receiving Party’s address set forth below or to such other address as a Party may designate by notice hereunder, and shall be either (i) delivered by hand, (ii) sent by nationally-recognized overnight courier service providing evidence of receipt, or (iii) sent by registered or certified mail, return receipt requested, postage prepaid. The addresses and other contact information for the parties are as follows:

 

  If to ISI:    International Spinal Innovations, LLC
     97 Balfour Drive
     West Hartford, CT 06117
     Attn: Manager
  If to Alphatec:    Alphatec Spine, Inc.
     5818 El Camino Real
     Carlsbad, CA 92008
     Attn: President and CEO

All notices, requests and other communications hereunder shall be deemed to have been given either (i) if by hand, at the time of the delivery thereof to the receiving Party at the address of such Party set forth above, (ii) if made by telecopy or facsimile transmission, at the time that receipt thereof has been acknowledged by the recipient, (iii) if sent by nationally-recognized overnight courier, on the day such notice is delivered to the recipient, or (iv) if sent by registered or certified mail, on the fifth (5 th ) business day following the day such mailing is made.

11.2 Governing Law . This Agreement will be construed and interpreted in accordance with the laws of the State of California.

11.3 Limitations . Except as expressly set forth in this Agreement, neither Party grants to the other Party any right or license to any of its intellectual property.

11.4 Entire Agreement . This is the entire Agreement between the Parties with respect to the subject matter hereof and supersedes all prior representations, understandings and agreements between the Parties with respect to the subject matter hereof. No modification shall be effective unless in writing with specific reference to this Agreement and signed by the Parties.

11.5 Waiver . The terms or conditions of this Agreement may be waived only by a written instrument executed by the Party waiving compliance. The failure of either Party at any time, or times, to require performance of any provision hereof shall in no manner affect its rights at a later time to enforce the same. No waiver by either Party of any condition or term shall be deemed as a continuing waiver of such condition or term or of another condition or term.

 

19

Portions of this Exhibit were omitted, as indicated by [***], and have been filed separately

with the Secretary of the Commission pursuant to the Registrant’s application requesting

confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934, as

amended.


11.6 Headings . Section, Subsection and Paragraph headings are inserted for convenience of reference only and do not form part of this Agreement.

11.7 Assignment . Neither this Agreement nor any right or obligation hereunder may be assigned, delegated or otherwise transferred, in whole or part, by either Party without the prior express written consent of the other Party; provided that a Party may freely assign this Agreement, including all rights and obligations hereunder, at any time to any entity acquiring in the same transaction substantially all of such Party’s business and assets, including those to which this Agreement relates, whether by way of sale, merger, consolidation or other transaction without the prior written consent of the other Party. Any permitted assignee shall assume all obligations of its assignor under this Agreement. Any purported assignment in violation of this Section 11.7 shall be null, void, and of no effect. The terms and conditions of this Agreement shall be binding upon and inure to the benefit of the permitted successors and assigns of the parties.

11.8 Force Majeure . Neither Party shall be liable for failure of or delay in performing obligations set forth in this Agreement, and neither shall be deemed in breach of its obligations, for so long as and to the extent that such failure or delay is due to natural disasters or any causes beyond the reasonable control of such Party. In event of such force majeure, the Party affected thereby shall use reasonable efforts to cure or overcome the same and resume performance of its obligations hereunder.

11.9 Construction . The Parties hereto acknowledge and agree that: (i) each Party and its counsel reviewed and negotiated the terms and provisions of this Agreement and have contributed to its revision; (ii) the rule of construction to the effect that any ambiguities are resolved against the drafting Party shall not be employed in the interpretation of this Agreement; and (iii) the terms and provisions of this Agreement shall be construed fairly as to all Parties hereto and not in favor of or against any Party, regardless of which Party was generally responsible for the preparation of this Agreement.

11.10 Severability . If any provision(s) of this Agreement are or become invalid, are ruled illegal by any court of competent jurisdiction or are deemed unenforceable under then current applicable law from time to time in effect during the Term hereof, it is the intention of the Parties that the remainder of this Agreement shall not be affected thereby provided that a Party’s rights under this Agreement are not thereby materially diminished. The Parties hereto covenant and agree to renegotiate any such term, covenant or application thereof in good faith in order to provide a reasonably acceptable alternative to the term, covenant or condition of this Agreement or the application thereof that is invalid, illegal or unenforceable, it being the intent of the Parties that the basic purposes of this Agreement are to be effectuated.

11.11 Status . Nothing in this Agreement is intended or shall be deemed to constitute a partner, agency, employer-employee, or joint venture relationship between the Parties.

 

20

Portions of this Exhibit were omitted, as indicated by [***], and have been filed separately

with the Secretary of the Commission pursuant to the Registrant’s application requesting

confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934, as

amended.


11.12 Section 365(n) . All licenses granted under this Agreement are deemed to be, for purposes of Section 365(n) of the U.S. Bankruptcy Code, licenses of right to “intellectual property” as defined in Section 101 of such Code. The Parties agree that Alphatec and ISI may fully exercise all of its rights and elections under the U.S. Bankruptcy Code, regardless of whether either Party files for bankruptcy in the United States or other jurisdiction.

11.13 Further Assurances . Each Party agrees to execute, acknowledge and deliver such further instructions, and to do all such other acts, as may be necessary or appropriate in order to carry out the purposes and intent of this Agreement.

11.14 Counterparts . This Agreement may be executed simultaneously in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

11.15 Guarantee and Agreement of Alphatec Holdings, Inc. By its signature below, Holdings hereby guarantees the full and timely payment and performance of all obligations of Alphatec under this Agreement and agrees to issue shares to ISI consistent with the terms of this Agreement, including without limitation Section 4.4 hereof.

[Signature Page Follows]

 

21

Portions of this Exhibit were omitted, as indicated by [***], and have been filed separately

with the Secretary of the Commission pursuant to the Registrant’s application requesting

confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934, as

amended.


IN WITNESS WHEREOF, the Parties and Holdings have caused this Agreement to be executed by their duly authorized representative.

 

ALPHATEC SPINE, INC.     INTERNATIONAL SPINAL INNOVATIONS, LLC
By:  

/s/    Dirk Kuyper

    By:  

/s/    Joseph Aferzon, M.D.

Name:   Dirk Kuyper     Name:   Joseph Aferzon, M.D.
Title:   President and CEO     Title:   Manager
ALPHATEC HOLDINGS, INC.      
By:  

/s/    Dirk Kuyper

     
Name:   Dirk Kuyper      
Title:   President and CEO      

 

22

Portions of this Exhibit were omitted, as indicated by [***], and have been filed separately

with the Secretary of the Commission pursuant to the Registrant’s application requesting

confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934, as

amended.


Schedule A

Licensed ISI Patents

 

Invention Name

 

Application No.

 

Filing Date

  

Jurisdiction

  

Inventors

[ *** ]

  [ *** ]   [ *** ]    [ *** ]    [ *** ]

[ *** ]

  [ *** ]   [ *** ]    [ *** ]    [ *** ]

 

23

Portions of this Exhibit were omitted, as indicated by [***], and have been filed separately

with the Secretary of the Commission pursuant to the Registrant’s application requesting

confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934, as

amended.


Schedule B

Licensed Alphatec Patents

 

Title

 

Jurisdiction

 

Number

  

Inventor

  

Title

[ *** ]

  [ *** ]   [ *** ]    [ *** ]    [ *** ]

[ *** ]

  [ *** ]   [ *** ]    [ *** ]    [ *** ]

 

24

Portions of this Exhibit were omitted, as indicated by [***], and have been filed separately

with the Secretary of the Commission pursuant to the Registrant’s application requesting

confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934, as

amended.

Exhibit 10.2

SUBSCRIPTION AGREEMENT

SUBSCRIPTION AGREEMENT (the “Subscription Agreement”) made as of this 4th day of June 2009 (the “Effective Date”) between Alphatec Holdings, Inc., a corporation organized under the laws of the State of Delaware, (the “Company”), and HealthpointCapital Partners II, L.P. (the “Subscriber”).

WHEREAS, the Company wishes to sell and the Subscriber wishes to purchase $10,000,000 of shares (the “Shares”) of the Company’s Common Stock, par value $0.0001 per share (the “Common Stock”) on the terms and conditions set forth herein.

NOW, THEREFORE, for and in consideration of the premises and the mutual covenants hereinafter set forth, the parties hereto do hereby agree as follows:

I. SUBSCRIPTION FOR SHARES

1.1 Subscription for Shares. Subject to the terms and conditions hereinafter set forth, the Subscriber hereby shall subscribe for and purchase from the Company the number of Shares set forth on the signature page to this Subscription Agreement at a price per share determined in accordance with Section 1.2, with an aggregate purchase price for the Shares of $10,000,000 and upon the acceptance and execution of this Subscription Agreement by the Company, the Company agrees to sell such Shares to the Subscriber for said price per share. The purchase price is payable by certified or bank check made payable to the Company or by wire transfer of funds. The Shares shall be delivered by the Company on the Closing Date. In the event that the purchase price per Share would result in the issuance of a fractional Share to the Subscriber, the aggregate purchase price for the Shares shall be $10,000,000 less the amount allocated to such fractional Share, and the Company shall not issue such fractional Share.

1.2 Price per Share. The purchase price for the Shares shall be the higher of (i) the average closing share price for the Common Stock on the Nasdaq National Market for four trading days consisting of (a) the three trading days prior to the Effective Date and (b) the Effective Date; and (ii) the consolidated closing bid price per share for the Common Stock on the Nasdaq National Market on the Effective Date.

1.3 Delivery of the Shares at the Closing. The completion of the purchase and sale of the Shares (the “Closing”) shall occur at the offices of the Company, on June 20, 2009, or on such later date or at such different location as the parties shall agree in writing, but not prior to the date that the conditions for Closing set forth below have been satisfied or waived by the appropriate party (the “Closing Date”).

II REPRESENTATIONS BY AND COVENANTS OF SUBSCRIBER

2.1 Reliance on Exemptions. The Subscriber acknowledges and understands that the Company is relying in part upon the truth and accuracy of, and the Subscriber’s compliance with, the representations, warranties, agreements, acknowledgments and understandings of the Subscriber set forth herein in order to determine the eligibility of the Subscriber to acquire the Shares.


2.2 Investment Purpose. The Subscriber represents that the Shares are being purchased for its own account, for investment purposes only and not for distribution or resale to others in contravention of the registration requirements of the Securities Act of 1933, as amended (the “1933 Act”). The Subscriber agrees that it will not sell or otherwise transfer the Shares unless they are registered under the 1933 Act or unless an exemption from such registration is available.

2.3 Accredited Investor. The Subscriber represents and warrants that it is an “accredited investor” as such term is defined in Rule 501 of Regulation D promulgated under the 1933 Act, and that it is able to bear the economic risk of any investment in the Shares.

2.4 Risk of Investment. The Subscriber recognizes that the purchase of Shares involves a high degree of risk in that: (a) an investment in the Company is highly speculative and only investors who can afford the loss of their entire investment should consider investing in the Company and the Shares; and (b) transferability of the Shares is limited.

2.5 Information. The Subscriber hereby represents that: (a) the Subscriber has been furnished by the Company during the course of this transaction with all information regarding the Company which it has requested; and (b) that the Subscriber has been afforded the opportunity to ask questions of and receive answers from duly authorized officers of the Company concerning the terms and conditions of this transaction, and any additional information which it has requested.

2.6 Legends. The Subscriber understands that the certificates representing the Shares, until such time as they have been registered under the 1933 Act or are exempt from such registration requirement, shall bear a restrictive legend in substantially the following form (and a stop-transfer order may be placed against transfer of such certificates or other instruments):

THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS, OR (B) AN OPINION OF COUNSEL, IN A REASONABLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR APPLICABLE STATE SECURITIES LAWS, OR (II) UNLESS SOLD PURSUANT TO RULE 144 UNDER SAID ACT.

The legend set forth above shall be removed and the Company shall issue a certificate without such legend to the holder of the Shares upon which it is stamped, if (a) such Shares are being sold pursuant to a registration statement under the 1933 Act, (b) such holder delivers to the Company an opinion of counsel, in a reasonably acceptable form that a disposition of the Shares is being made


pursuant to an exemption from such registration, or (c) such holder provides the Company with reasonable assurance that a disposition of the Shares may be made pursuant to Rule 144 under the 1933 Act without any restriction as to the number of securities acquired as of a particular date that can then be immediately sold.

2.7 No General Solicitation. The Subscriber represents that the Subscriber was not induced to invest by any form of general solicitation or general advertising including, but not limited to, the following: (a) any advertisement, article, notice or other communication published in any newspaper, magazine or similar media or broadcast over the news or radio; and (b) any seminar or meeting whose attendees were invited by any general solicitation or advertising.

2.8 Validity; Enforcement. The Subscriber represents and warrants that: (a) it is authorized and otherwise duly qualified to purchase and hold the Shares; and (b) that this Subscription Agreement has been duly and validly authorized, executed and delivered and constitutes the legal, binding and enforceable obligation of the undersigned.

2.9 Entity Representation. The Subscriber represents and warrants that: (a) it was not formed for the purpose of investing in the Company; and (b) it is authorized and otherwise duly qualified to purchase and hold the Shares.

III. REPRESENTATIONS BY AND COVENANTS OF THE COMPANY

3.1 Organization and Qualification. The Company is duly organized and validly existing in good standing under the laws of the State of Delaware, and has the requisite corporate power and authority to own its properties and to carry on its business as now being conducted. The Company is duly qualified as a foreign corporation to do business and is in good standing in every jurisdiction in which its ownership of property or the nature of the business conducted by it makes such qualification necessary, except to the extent that the failure to be so qualified or be in good standing would not have a Material Adverse Effect. As used in this Subscription Agreement, “Material Adverse Effect” means any material adverse effect on the business, properties, assets, operations, results of operations, financial condition or prospects of the Company, or on the transactions contemplated hereby.

3.2 Authorization; Enforcement; Validity. The Company has the requisite corporate power and authority to enter into and perform its obligations under this Subscription Agreement, to perform its obligations under this Subscription Agreement, and to issue the Shares in accordance with the terms of this Subscription Agreement. When executed and delivered by the Company, the execution and delivery of this Subscription Agreement by the Company and the consummation by the Company of the transactions contemplated by this Subscription Agreement will have been duly authorized by the Company’s board of directors.

3.3 Issuance of Securities. The issuance, sale and delivery of the Shares has been duly authorized by all requisite corporate action by the Company and, upon issuance in accordance with this Subscription Agreement, shall be (a) duly authorized, validly issued, fully paid and non-assessable, and (b) free from all taxes, liens and charges with respect to the issue thereof.


3.4 No Conflicts. The execution, delivery and performance of the transactions contemplated herein, will not (a) result in a violation of the Company’s Certificate of Incorporation, any certificate of designations, preferences and rights of any outstanding series of preferred stock of the Company, or the Company’s bylaws, (b) conflict with, or constitute a default or an event which with notice or lapse of time or both would become a default under, or give to others any rights of termination, amendment, acceleration or cancellation of, any material agreement, lease, license or instrument, or (c) result in a violation of any law, rule, regulation, order, judgment or decree (including Federal and state securities laws and regulations) applicable to the Company or by which any property or asset of the Company is bound or affected.

3.5 Opinion of General Counsel of the Company. The Company hereby covenants, as a condition to Closing, that its General Counsel will deliver an opinion of counsel that the Shares, upon delivery in accordance with Section 1.1 of this Subscription Agreement, will be duly authorized, validly issued fully paid and nonassessable, and not issued in violation of any provision of the certificate of incorporation of the Company or the bylaws of the Company.

IV. REGISTRATION OF THE SHARES; COMPLIANCE WITH THE SECURITIES ACT

4.1 Registration Procedures and Expenses. Within 30 days of the first day after the Closing Date upon which the Company is eligible to file a registration statement on Form S-3, the Company shall:

(a) use its commercially reasonably efforts to prepare and file with the United States Securities and Exchange Commission (the “Commission”) a registration statement on Form S-3 relating to the resale of the Shares by the Subscriber from time to time on the Nasdaq Global Market, or the facilities of any national securities exchange on which the Common Stock is then traded or in privately-negotiated transactions (the “Registration Statement”);

(b) use its commercially reasonable efforts, subject to receipt of necessary information from the Subscriber, to cause the Registration Statement to become automatically effective or the Commission to declare the Registration Statement effective as soon as reasonably practicable;

(c) promptly prepare and file with the Commission such amendments and supplements to the Registration Statement and the prospectus used in connection therewith as may be necessary to keep the Registration Statement effective until the earliest of (i) two years after the Closing Date, (ii) such time as all of the Shares have been sold pursuant to the Registration Statement, or (iii) such time as the Shares become eligible for resale by non-affiliates pursuant to Rule 144 under the 1933 Act or any other rule of similar effect without any volume or manner of sale restrictions or any need for the Company to be current in its Securities Exchange Act of 1934 reporting obligations; and

(d) bear all reasonable expenses in connection with the procedures in paragraphs (a) through (c) of this Section 4.1 and the registration of the Shares pursuant to the Registration Statement, other than fees and expenses, if any, of counsel or other advisers to the Subscriber, if any, in connection with the preparation of the Registration Statement.


4.2 Suspension of Prospectus. Notwithstanding the foregoing, upon the occurrence or existence of any material event that, in the reasonable judgment of the Company, makes it appropriate to suspend the availability of the prospectus (the “Prospectus”) forming a part of the Registration Statement, the Company shall give notice (without notice of the nature or details of such events) to the Subscriber that the availability of the Prospectus is suspended (a “Suspension”) and the Subscriber agrees not to sell any Shares pursuant to the Prospectus until the Subscriber is advised in writing by the Company that the Prospectus may be used, and has received copies of any additional or supplemental filings that are incorporated or deemed incorporated by reference in such Prospectus.

V. MISCELLANEOUS

5.1 Notice. Any notices, consents, waivers or other communications required or permitted to be given under the terms of this Subscription Agreement must be in writing and will be deemed to have been delivered: (a) upon receipt, when delivered personally, (b) upon receipt, when sent by facsimile (provided confirmation of transmission is mechanically or electronically generated and kept on file by the sending party), or (c) one business day after deposit with an overnight courier service, in each case properly addressed to the party to receive the same. The addresses and facsimile numbers for such communications shall be:

If to the Company:

Alphatec Holdings, Inc.

5818 El Camino Real

Carlsbad, CA 92008

If to the Subscriber: Such contact information is set forth on the signature page.

5.2 Entire Agreement; Amendment. This Subscription Agreement supersedes all other prior oral or written agreements between the Subscriber, the Company, their affiliates and persons acting on their behalf with respect to the matters discussed herein, and this Subscription Agreement and the instruments referenced herein contain the entire understanding of the parties with respect to the matters covered herein and therein and, except as specifically set forth herein or therein, neither the Company nor the Subscriber makes any representation, warranty, covenant or undertaking with respect to such matters. No provision of this Subscription Agreement may be amended or waived other than by an instrument in writing signed by the Company and the Subscriber.

5.3 Severability. If any provision of this Subscription Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Subscription Agreement in that jurisdiction or the validity or enforceability of any provision of this Subscription Agreement in any other jurisdiction.


5.4 Governing Law and Jurisdiction. All questions concerning the construction, validity, enforcement and interpretation of this Subscription Agreement shall be governed by the internal laws of the State of New York, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of New York or any other jurisdictions) that would cause the application of the laws of any jurisdictions other than the State of New York. Each party hereby irrevocably submits to the non-exclusive jurisdiction of the state and Federal courts sitting in the Southern District of New York, for the adjudication of any dispute hereunder or in connection herewith.

5.5 Headings. The headings of this Subscription Agreement are for convenience of reference and shall not form part of, or affect the interpretation of, this Subscription Agreement.

5.6 Successors And Assigns. This Subscription Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and assigns. The Company shall not assign this Subscription Agreement or any rights or obligations hereunder without the prior written consent of the Subscriber, except by merger or consolidation. The Subscriber shall not assign its rights hereunder to a non-affiliate without the consent of the Company, which consent shall not be unreasonably withheld.

5.7 No Third Party Beneficiaries. This Subscription Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns, and is not for the benefit of, nor may any provision hereof be enforced by, any other person.

5.8 No Strict Construction. The language used in this Subscription Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party.

5.9 Fees and Expenses. Except as otherwise set forth herein, the Company and the Subscriber shall pay their respective fees and expenses related to the transactions contemplated by this Subscription Agreement.

5.10 Counterparts. This Subscription Agreement may be executed in two or more identical counterparts, all of which shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party.

[Signatures Follow]


IN WITNESS WHEREOF, the parties have executed this Subscription Agreement after the close of the Nasdaq National Market on the Effective Date.

 

ALPHATEC HOLDINGS, INC.     HEALTHPOINTCAPITAL PARTNERS II, L.P.
By:  

/s/    Dirk Kuyper

    By:  

/s/    John c. McCormick

Name:   Dirk Kuyper     Name:   John C. McCormick
Title:   President and CEO     Title:   Managing Director
      Subscriber Address:
      505 Park Avenue 12 th Floor
      New York, NY 10022
      Number of Shares Subscribed for:
      3,937,007
      Purchase Price per Share
      $2.54
      Aggregate Purchase Price Paid for the Shares
      $9,999,997.78

Exhibit 10.3

THIRD AMENDMENT TO

EXCLUSIVE LICENSE AGREEMENT

This Third Amendment to the License and Supply Agreement (this “Amendment”) is made as of June 30, 2009 by and among Alphatec Spine, Inc., a Delaware corporation with a principal place of business at 5818 El Camino Real, Carlsbad, California 92008 (“Licensee”), Progressive Spinal Technologies LLC, a limited liability company organized under the laws of the state of Delaware, with an address at 410 East Walnut Street, Suite #8, Perkasie, Pennsylvania 18944 (“Licensor”) and Alphatec Holdings, Inc., a Delaware corporation with a principal place of business at 5818 El Camino Real, Carlsbad, California 92008 (“Holdings”). Capitalized terms undefined herein shall have the meaning ascribed them in the Agreement.

RECITALS

Reference is made to that certain Exclusive License Agreement dated December 18, 2007, as amended, between the parties to this Amendment (the “Agreement”).

The Parties desire to amend the Agreement as set forth herein.

Now, therefore, in consideration of the mutual promises set forth herein and for other good and valuable consideration, the receipt and sufficiency of which is acknowledged by the Parties hereto, the Parties hereto agree as follows:

1. AMENDMENTS

1.1 Amendment and Restatement of the First Paragraph of Section 4.1.2 . The first paragraph of Section 4.1.2 of the Agreement is hereby deleted and replaced in its entirety with the following language:

“4.1.2 Milestone Payments . Licensee shall pay milestone payments (or in the case of the Common Stock cause the issuance thereof by Holdings) to Licensor (each such payment or issuance a “Milestone Payment”) as specified below no more than thirty (30) days after the occurrence of the corresponding event designated below, unless this Agreement has been terminated prior to such due date; provided that Licensor hereby makes the following assignments, and the Licensee and Holdings approves and acknowledges such assignments: (i) Licensor assigns to [***] the right to receive [***] of the shares of Common Stock to which Licensor is entitled in the event that [***] as described below; (ii) Licensor assigns to [***] the right to receive [***] of the shares of Common Stock to which Licensor is entitled in the event that [***] as described below; and (iii) Licensor assigns to [***], which also does business as [***] the right to receive [***] of the shares of Common Stock to which Licensor is entitled in the event that [***] as described below. In addition, Licensor assigns to each of [***] and [***] Licensor’s right to enforce this Agreement to the extent necessary to obtain the issuance of such shares of Common Stock by Holdings. No Milestone Payments described in this Subsection 4.1.2 shall be credited against or otherwise reduce any other amounts payable hereunder.”

 

Portions of this Exhibit were omitted, as indicated by [***], and have been filed separately

with the Secretary of the Commission pursuant to the Registrant’s application requesting

confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934, as

amended.


2. MISCELLANEOUS

In the event of any conflict between the provisions of this Amendment and the Agreement, the provisions of this Amendment shall prevail. Other than as set forth in this Amendment, the remainder of the Agreement shall remain in full force and effect.

[Signatures Follow]

IN WITNESS WHEREOF, the Parties and Holdings have caused this Amendment to be executed by their duly authorized representative.

 

ALPHATEC SPINE, INC.     PROGRESSIVE SPINAL TECHNOLOGIES LLC
By:  

/s/    Dirk Kuyper

    By:  

/s/    E. Skott Greenhalgh

Name:   Dirk Kuyper     Name:   E. Skott Greenhalgh
Title:   President and CEO     Title:   CEO
ALPHATEC HOLDINGS, INC.      
By:  

/s/    Dirk Kuyper

     
Name:   Dirk Kuyper      
Title:   President and CEO      

 

Portions of this Exhibit were omitted, as indicated by [***], and have been filed separately

with the Secretary of the Commission pursuant to the Registrant’s application requesting

confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934, as

amended.

Exhibit 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Dirk Kuyper, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Alphatec Holdings, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Acts Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

By:   /s/ Dirk Kuyper
  Dirk Kuyper
  President and Chief Executive Officer
  August 4, 2009

Exhibit 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Peter C. Wulff, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Alphatec Holdings, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Acts Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

By:   /s/ Peter C. Wulff
  Peter C. Wulff
  Chief Financial Officer, Vice President and Treasurer
  August 4, 2009

 

Exhibit 32

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), each of the undersigned officers of Alphatec Holdings, Inc., a Delaware corporation (the “Company”), does hereby certify, to such officer’s knowledge, that:

The Quarterly Report for the period ended June 30, 2009 (the “Form 10-Q”) of the Company fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Dated: August 4, 2009     /s/ Dirk Kuyper
    Dirk Kuyper
    President and Chief Executive Officer
    (principal executive officer of the Company)
Dated: August 4, 2009     /s/ Peter C. Wulff
    Peter C. Wulff
    Chief Financial Officer, Vice President and Treasurer
    (principal financial and accounting officer of the Company)