Alphatec Spine, Inc.
Alphatec Holdings, Inc. (Form: 10-Q, Received: 05/08/2012 16:37:11)
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 March 31, 2012

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   x     No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-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 May 7, 2012, there were 89,617,795 shares of the registrant’s common stock outstanding.

 

 

 


Table of Contents

ALPHATEC HOLDINGS, INC.

QUARTERLY REPORT ON FORM 10-Q

March 31, 2012

Table of Contents

 

          Page  
   PART I – FINANCIAL INFORMATION   

Item 1

   Financial Statements (Unaudited)      3   
   Condensed Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011      3   
   Condensed Consolidated Statements of Operations for the three months ended March 31, 2012 and 2011      4   
   Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2012 and 2011      5   
   Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011      6   
   Notes to Condensed Consolidated Financial Statements      7   

Item 2

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      17   

Item 3

   Quantitative and Qualitative Disclosures About Market Risk      25   

Item 4

   Controls and Procedures      26   
   PART II – OTHER INFORMATION   

Item 1

   Legal Proceedings      26   

Item 1A

   Risk Factors      28   

Item 2

   Unregistered Sales of Equity Securities and Use of Proceeds      28   

Item 6

   Exhibits      29   

SIGNATURES

     30   

 

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ALPHATEC HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(In thousands, except for par value data)

 

     March 31,
2012
    December 31,
2011
 
Assets     

Current assets:

    

Cash and cash equivalents

   $ 16,859      $ 20,666   

Accounts receivable, net

     40,570        41,711   

Inventories, net

     48,155        45,916   

Prepaid expenses and other current assets

     5,901        6,888   

Deferred income tax assets

     1,401        1,248   
  

 

 

   

 

 

 

Total current assets

     112,886        116,429   

Property and equipment, net

     32,089        31,476   

Goodwill

     171,386        168,609   

Intangibles, net

     45,628        47,144   

Other assets

     2,693        3,034   
  

 

 

   

 

 

 

Total assets

   $ 364,682      $ 366,692   
  

 

 

   

 

 

 
Liabilities and Stockholders’ Equity     

Current liabilities:

    

Accounts payable

   $ 14,431      $ 17,390   

Accrued expenses

     28,359        32,583   

Deferred revenue

     3,124        2,768   

Current portion of long-term debt

     3,653        4,396   
  

 

 

   

 

 

 

Total current liabilities

     49,567        57,137   

Long-term debt, less current portion

     26,649        23,802   

Other long-term liabilities

     11,679        12,997   

Deferred income tax liabilities

     4,309        3,825   

Redeemable preferred stock, $0.0001 par value; 20,000 authorized at March 31, 2012 and December 31, 2011; 3,319 shares issued and outstanding at both March 31, 2012 and December 31, 2011

     23,603        23,603   

Commitments and contingencies

    

Stockholders’ equity:

    

Common stock, $0.0001 par value; 200,000 authorized at March 31, 2012 and December 31, 2011; 89,599 and 89,362 shares issued and outstanding at March 31, 2012 and December 31, 2011, respectively

     9        9   

Treasury stock, 19 shares

     (97     (97

Additional paid-in capital

     386,786        386,224   

Accumulated other comprehensive income (loss)

     1,434        (2,812

Accumulated deficit

     (139,257     (137,996
  

 

 

   

 

 

 

Total stockholders’ equity

     248,875        245,328   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 364,682      $ 366,692   
  

 

 

   

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

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ALPHATEC HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(in thousands, except per share amounts)

 

     Three Months Ended
March 31,
 
     2012     2011  

Revenues

   $ 48,461      $ 49,720   

Cost of revenues

     16,263        17,373   

Amortization of acquired intangible assets

     379        396   
  

 

 

   

 

 

 

Gross profit

     31,819        31,951   

Operating expenses:

    

Research and development

     4,010        5,413   

Sales and marketing

     18,536        18,629   

General and administrative

     8,825        9,142   

Amortization of acquired intangible assets

     574        530   

Restructuring expenses

     —          599   
  

 

 

   

 

 

 

Total operating expenses

     31,945        34,313   
  

 

 

   

 

 

 

Operating loss

     (126     (2,362

Other income (expense):

    

Interest income

     39        4   

Interest expense

     (708     (679

Other income (expense), net

     (259     421   
  

 

 

   

 

 

 

Total other expense

     (928     (254
  

 

 

   

 

 

 

Loss before taxes

     (1,054     (2,616

Income tax provision (benefit)

     207        (749
  

 

 

   

 

 

 

Net loss

   $ (1,261   $ (1,867
  

 

 

   

 

 

 

Net loss per common share:

    

Basic and diluted net loss per share

   $ (0.01   $ (0.02
  

 

 

   

 

 

 

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

    

Basic and diluted

     88,938        88,697   
  

 

 

   

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

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ALPHATEC HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

(in thousands)

 

     Three Months Ended
March 31,
 
     2012     2011  

Net loss, as reported

   $ (1,261   $ (1,867

Foreign currency translation adjustments

     4,246        9,863   
  

 

 

   

 

 

 

Comprehensive income

   $ 2,985      $ 7,996   
  

 

 

   

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

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ALPHATEC HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(in thousands)

 

     Three Months Ended March 31,  
             2012                     2011          

Operating activities:

    

Net loss

   $ (1,261   $ (1,867

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

    

Depreciation and amortization

     5,803        5,003   

Stock-based compensation

     547        714   

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

     102        97   

Provision for doubtful accounts

     396        6   

Provision for excess and obsolete inventory

     845        692   

Other

     242        —     

Deferred income tax expense (benefit)

     162        (830

Changes in operating assets and liabilities:

    

Accounts receivable

     685        (2,765

Inventories

     (2,562     (1,088

Prepaid expenses and other current assets

     1,435        664   

Other assets

     508        72   

Accounts payable

     (3,083     397   

Accrued expenses and other

     (4,965     647   

Deferred revenues

     (285     (130
  

 

 

   

 

 

 

Net cash (used in) provided by operating activities

     (1,431     1,612   

Investing activities:

    

Cash paid for acquisition of Brazilian subsidiary

     —          (365

Purchases of property and equipment

     (3,519     (1,663

Purchase of intangible assets

     —          (445
  

 

 

   

 

 

 

Net cash used in investing activities

     (3,519     (2,473

Financing activities:

    

Exercise of stock options

     16        1   

Borrowings under lines of credit

     3,583        430   

Repayments under lines of credit

     (937     (430

Principal payments on capital lease obligations

     (110     (22

Principal payments on notes payable

     (1,881     (753
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     671        (774
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     472        (56
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (3,807     (1,691

Cash and cash equivalents at beginning of period

     20,666        23,168   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 16,859      $ 21,477   
  

 

 

   

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

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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. and its subsidiaries (“Alphatec Spine”) designs, develops, manufactures and markets products for the surgical treatment of spine disorders, primarily focused on the aging spine. In addition to its U.S. operations, the Company also markets its products in over 50 international markets through its subsidiary, Scient’x S.A.S. and its subsidiaries (“Scient’x”), via a direct salesforce in France, Italy and the United Kingdom and via independent distributors in the rest of Europe, the Middle East and Africa, South America and Latin America. In Asia and Australia, the Company markets its products through its subsidiary, Alphatec Pacific, Inc. and its subsidiaries (“Alphatec Pacific”) via a direct sales force and independent distributors, and through Scient’x’s distributors in China, Korea and Australia.

Basis of Presentation

The accompanying condensed consolidated balance sheet as of December 31, 2011, which has been derived from audited financial statements, and the unaudited interim condensed consolidated financial statements have been prepared by the Company in accordance with U.S. generally accepted accounting principles (“GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”) related to a quarterly report on Form 10-Q. Certain information and note disclosures normally included in annual audited financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made in this quarterly report on Form 10-Q are adequate to make the information not misleading. The interim unaudited financial condensed consolidated statements reflect all adjustments which, in the opinion of management, are necessary for a fair statement of the financial position and results of operations for the periods presented. All such adjustments are of a normal and recurring nature. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2011, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 that was filed with the SEC on March 5, 2012.

Operating results for the three months ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012, or any other future periods.

The accompanying 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 annual operating plan, management believes that its existing cash and cash equivalents of $16.9 million and accounts receivable of $40.6 million at March 31, 2012 will be sufficient to fund its cash requirements through at least March 31, 2013. The Company’s amended credit facility (the “Amended Credit Facility”) with Silicon Valley Bank (“SVB”) contains financial covenants consisting of a monthly minimum adjusted quick ratio and a quarterly minimum EBITDA level, as well as a maximum annual capital expenditures limit (see Note 6). In February 2012, the Company executed an additional amendment to the Amended Credit Facility which included a waiver from SVB for non-compliance with the minimum quarterly EBITDA covenant as of December 31, 2011 and the minimum adjusted quick ratio at December 31, 2011, January 31, 2012 and February 29, 2012. The amendment also accelerated one of the quarterly term loan payments of $0.6 million and it reduced the maximum amount available on the working capital line of credit from $22.0 million to $19.5 million (see Note 6).

Based on the Company’s board approved current operating plan, the Company believes that it is reasonably likely that it will be in compliance with the financial covenants of the Amended Credit Facility in the foreseeable future. However, there is no assurance that the Company will be able to do so. If the Company is not able to achieve its planned revenue growth or incurs costs in excess of its forecasts, it may be required to substantially reduce discretionary spending and it could be in default of the Amended Credit Facility. In addition to the financial covenants, the Amended Credit Facility contains other covenants including subjective clauses that would allow the lender to declare the loan immediately due and payable. Upon the occurrence of a covenant violation or other event of default that is not waived, the lender could elect to declare all amounts outstanding under the Amended Credit Facility to be immediately due and payable and terminate all commitments to extend further credit. If the lender were to accelerate the repayment of borrowings under the Amended Credit Facility for any reason, the Company may not have sufficient cash on hand to repay the amounts borrowed under the Amended Credit Facility and would be forced to obtain alternative financing.

If the Company is not able to achieve the minimum targeted revenue growth and related improvements in profitability to meet the monthly and quarterly covenants or has other unanticipated expenditures, the Company may be required to attempt to seek a waiver of such covenants, renegotiate the Amended Credit Facility, and/or substantially reduce discretionary spending, which could have a material adverse effect on the Company’s ability to achieve its intended business objectives. There can be no assurances that such a waiver could be obtained, that the Amended Credit Facility could be successfully renegotiated or that the Company can modify its operations to maintain liquidity. If the Company is unable to obtain any required waivers or amendments, the lender would have the right to exercise remedies specified in the Amended Credit Facility, including accelerating the repayment of debt obligations as discussed above. The Company may be forced to seek additional financing, which may include additional debt and/or equity financing or funding through other third party agreements. There can be no assurances that additional financing will be available on acceptable terms or available at all. Furthermore, any equity financing may result in dilution to existing stockholders and any debt financing may include restrictive covenants.

 

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2. Summary of Significant Accounting Policies

The Company’s significant accounting policies are described in Note 2 to its audited consolidated financial statements for the year ended December 31, 2011, which are included in the Company’s Annual Report on Form 10-K that was filed with the SEC on March 5, 2012. These accounting policies have not significantly changed during the three months ended March 31, 2012.

Recent Accounting Pronouncements

In September 2011, the Financial Accounting Standards Board (“FASB”) amended its goodwill guidance by providing entities an option to use a qualitative approach to test goodwill for impairment. An entity will be able to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, it is necessary to perform the currently prescribed two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. The amendment is effective for the Company beginning January 1, 2012. This amendment did not have a material impact on its consolidated financial position or results of operations.

In 2011, the FASB issued new accounting guidance that requires total comprehensive income, the components of net income and the components of other comprehensive income to be presented either in a single continuous statement or in two separate but consecutive statements. This guidance is effective for the Company beginning January 1, 2012. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of shareholders’ equity. While the new guidance changes the presentation of other comprehensive income, there are no changes to the components that are recognized in other comprehensive income. Other than presentation, the adoption of this guidance did not have an impact on the Company’s financial consolidated position or results of operations.

3. Acquisitions

Acquisition of Cibramed

In January 2011, the Company acquired Cibramed Productos Medicos (“Cibramed”), a Brazilian medical device company. The Company purchased Cibramed to acquire its ANVISA regulatory registration certificates and its general licenses to conduct business in Brazil. The Company recorded an intangible asset of $0.6 million for the ANVISA regulatory registration certificates and licenses it purchased. The Company is amortizing this asset on a straight-line basis over its estimate life of 15 years. No product distribution rights were acquired. The purchase price of $0.6 million was paid in installments consisting of (i) 60% upon execution of the acquisition agreement; (ii) 20% due 90 days from the execution of the acquisition agreement and; (iii) 20% due 180 days from the execution of the acquisition agreement. The Company paid the full purchase price of $0.6 million in 2011.

4. Balance Sheet Details

Accounts Receivable

Accounts receivable consist of the following (in thousands):

 

     March 31,
2012
    December 31,
2011
 

Accounts receivable

   $ 41,974      $ 42,766   

Allowance for doubtful accounts

     (1,404     (1,055
  

 

 

   

 

 

 

Accounts receivables, net

   $ 40,570      $ 41,711   
  

 

 

   

 

 

 

 

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Inventories

Inventories consist of the following (in thousands):

 

     March 31, 2012      December 31, 2011  
     Gross      Reserve for
excess and
obsolete
    Net      Gross      Reserve for
excess and
obsolete
    Net  

Raw materials

   $ 4,652       $ —        $ 4,652       $ 3,715       $ —        $ 3,715   

Work-in-process

     1,369         —          1,369         2,088         —          2,088   

Finished goods

     55,689         (13,555     42,134         53,287         (13,174     40,113   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Inventories, net

   $ 61,710       $ (13,555   $ 48,155       $ 59,090       $ (13,174   $ 45,916   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Property and Equipment

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

 

     Useful lives
(in years)
     March 31,
2012
    December 31,
2011
 

Surgical instruments

     4       $ 53,909      $ 52,690   

Machinery and equipment

     7         13,122        12,462   

Computer equipment

     5         3,009        3,013   

Office furniture and equipment

     5         3,574        3,578   

Leasehold improvements

     various         4,075        3,657   

Building

     39         67        71   

Land

     n/a         13        14   

Construction in progress

     n/a         859        634   
     

 

 

   

 

 

 
        78,628        76,119   

Less accumulated depreciation and amortization

        (46,539     (44,643
     

 

 

   

 

 

 

Property and equipment, net

      $ 32,089      $ 31,476   
     

 

 

   

 

 

 

Total depreciation expense was $3.5 million and $3.8 million for the three months ended March 31, 2012 and 2011, respectively.

Intangible Assets

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

 

     Useful lives
(in years)
     March 31,
2012
    December 31,
2011
 

Developed product technology

     5-8       $ 23,144      $ 22,875   

Distribution rights

     3         4,381        4,531   

Intellectual property

     5         1,004        1,004   

License agreements

     1-7         14,297        14,297   

Core technology

     10         3,591        3,489   

In-process technology

     Indefinite         1,729        1,680   

Trademarks and trade names

     5-9         3,759        3,671   

Customer-related

     15         15,847        15,476   

Distribution network

     10         1,614        1,614   

Physician education programs

     10         3,059        2,972   

Supply agreement

     10         225        225   
     

 

 

   

 

 

 
        72,650        71,834   

Less accumulated amortization

        (27,022     (24,690
     

 

 

   

 

 

 

Intangible assets, net

      $ 45,628      $ 47,144   
     

 

 

   

 

 

 

Total amortization expense was $2.3 million and $1.2 million for the three months ended March 31, 2012 and 2011, respectively.

 

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5. License and Developmental Consulting Agreements

The Company’s license and developmental consulting agreements are described in Note 5 to its audited consolidated financial statements for the year ended December 31, 2011, which are included in its Annual Report on Form 10-K which was filed with the SEC on March 5, 2012.

6. Debt

Loan and Security Agreement

As of March 31, 2012, the Company has a loan and security agreement with SVB that includes four amendments (collectively the “Amended Credit Facility”). The Amended Credit Facility consists of a $10.0 million term loan and a $19.5 million working capital line of credit. The term loan carries a fixed interest rate equal to the greater of 8.5% or the SVB prime rate plus 4.5% with principal plus interest repayments due in 16 equal quarterly installments. The term loan matures October 2015 and the Company is subject to a prepayment penalty if the term loan is repaid prior to maturity. The actual amount available under the line of credit is based on eligible accounts receivable and eligible inventory. The working capital line of credit carries an interest rate equal to the SVB prime rate plus 3.5%, which can be adjusted downward to the SVB prime rate plus a range of 1.0% to 3.0% depending on the result of the adjusted quick ratio covenant computed monthly. Minimum monthly interest totals $0.1 million. Interest only payments are due monthly and the principal is due at maturity, October 2013.

To secure the repayment of any amounts borrowed under the Amended Credit Facility, the Company granted to SVB a first-priority security interest in all of its assets, other than its owned and licensed intellectual property assets. The Company also agreed not to pledge or otherwise encumber its intellectual property assets without the consent of SVB. The Amended Credit Facility contains customary lending and reporting covenants, which, among other things, prohibit the Company from assuming further debt obligations and any liens, unless otherwise permitted under the Amended Credit Facility. Upon the occurrence of an event of default, which includes 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 or change that could have a material adverse effect on the Company, the interest to be charged pursuant to the Amended Credit Facility will be increased to a rate that is up to five percentage points above the rate effective immediately before the event of default, and all outstanding obligations become immediately due and payable.

Under the Amended Credit Facility, the Company is required to maintain compliance with financial covenants consisting of a monthly minimum adjusted quick ratio and a quarterly minimum EBITDA level, as well as a maximum annual capital expenditures limit. The minimum adjust quick ratio is defined as the sum of the Company’s cash and 80% of eligible domestic accounts receivable divided by the Amended Credit Facility balance. As of March 31, 2012, the Company was in compliance with the minimum adjusted quick ratio covenant and the minimum quarterly EBITDA covenant.

In February 2012, the Company executed a fourth amendment to the Amended Credit Facility due to the Company not complying with the minimum quarterly EBITDA covenant as of December 31, 2011 and the minimum monthly adjusted quick ratio covenant as of December 31, 2011, January 31, 2012 and February 29, 2012. The amendment included a waiver for such non-compliance. The amendment also reduced the maximum amount available on the working capital line of credit from $22 million to $19.5 million and accelerated one of the quarterly term loan payments of $0.6 million which was due and payable upon execution of the fourth amendment. There was no change to the financial covenant requirements. In conjunction with this amendment, the Company paid SVB a fee of $50,000.

During the three months ended March 31, 2012, the Company repaid $0.9 million and drew an additional $3.6 million on the working capital line of credit and repaid $1.3 million under the term loan. The balance of the line of credit as of March 31, 2012 was $19.5 million. Amortization of debt discount and debt issuance costs, which were recorded as non-cash interest expense, totaled $0.1 for the three months ended March 31, 2012 and 2011.

The Company has various capital lease arrangements. The leases bear interest at rates ranging from 4.5% to 8.4%, are generally due in monthly principal and interest installments, are collateralized by the related equipment, and have various maturity dates through April 2017. As of March 31, 2012, the balance of these capital leases totaled $1.3 million. In the first quarter of 2012, the Company entered into leases for machinery and equipment for an aggregate principal balance of $1.1 million.

 

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Principal payments on debt are as follows as of March 31, 2012 (in thousands):

 

Year Ending December 31,

      

Remainder of 2012

   $ 2,719   

2013

     22,017   

2014

     2,504   

2015

     1,875   

2016

     —     

Thereafter

     —     
  

 

 

 

Total

     29,115   

Unamortized debt discount

     (88

Add: capital lease principal payments

     1,275   
  

 

 

 

Total

     30,302   

Less: current portion of long-term debt

     (3,653
  

 

 

 

Long-term debt, net of current portion

   $ 26,649   
  

 

 

 

7. Commitments and Contingencies

Leases

The Company leases certain equipment under capital leases which expire on various dates through 2014. The Company and Scient’x also lease their 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 2012

   $ 2,962       $ 328   

2013

     3,454         336   

2014

     2,594         267   

2015

     2,390         266   

2016

     1,280         243   

Thereafter

     430         79   
  

 

 

    

 

 

 
   $ 13,110         1,519   
  

 

 

    

Less: amount representing interest

        (244
     

 

 

 

Present value of minimum lease payments

        1,275   

Current portion of capital leases

        (347
     

 

 

 

Capital leases, less current portion

      $ 928   
     

 

 

 

Rent expense under operating leases for the three months ended March 31, 2012 and 2011 was $1.0 million and $0.9 million, respectively.

Litigation

In 1998, Eurosurgical, a French company in the business of sales and marketing of spinal implants, entered into a distribution agreement for the United States, Mexico, Canada, India and Australia with Orthotec, LLC, a California company, or Orthotec. In 2004, Orthotec sued Eurosurgical in connection with a contractual dispute and a $9 million judgment was entered against Eurosurgical by a California court. At the same time, a federal court in California declared Eurosurgical liable to Orthotec for $30 million in connection with an intellectual property dispute. In 2006, Eurosurgical’s European assets were ultimately acquired by Surgiview, SAS, or Surgiview, in a sale agreement approved by a French court. Pursuant to this sale, Surgiview became a subsidiary of Scient’x in 2006. Orthotec attempted to recover on Eurosurgical’s obligations in California and federal courts by filing a motion in a California court to add Surgiview to the judgment against Eurosurgical on theories including successor liability and fraudulent conveyance. In February 2007, the California court denied Orthotec’s motion, indicating that Orthotec had not carried its burdens of proof. Orthotec chose to not proceed with a further hearing in September 2007. In May 2008, after the acquisition of Scient’x by HealthpointCapital in 2007, Orthotec sued Scient’x, Surgiview, HealthpointCapital and former certain Scient’x directors (who currently serve on our board) in a new action in California state court. In addition, at the same time, a similar action was filed in New York against HealthpointCapital and two former directors of Scient’x (who currently serve on our board). In April 2009, the California court dismissed this matter on jurisdictional grounds, and Orthotec appealed such ruling. In December 2010, the California Court of Appeal issued a decision that

 

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affirmed in part and reversed in part the trial court’s decision dismissing the entire California action based on lack of personal jurisdiction. The Court of Appeal affirmed the trial court’s ruling that Orthotec failed to establish personal jurisdiction over all parties except Surgiview, finding that the trial court could exercise jurisdiction over that entity. In November 2009, the New York court dismissed Orthotec’s claims based on collateral estoppel, and Orthotec appealed this ruling. In March 2011, the state appeals court in New York reversed the lower court’s decision to dismiss Orthotec’s claims, and the New York matter is proceeding with HealthpointCapital and certain former Scient’x directors (who currently serve on our board) as the only defendants. While the Company intends to vigorously defend against the complaint, and believes that the plaintiff’s allegations are without merit, the outcome of the litigation cannot be predicted at this time and any outcome in favor of Orthotec could have a significant adverse effect on the Company’s financial condition and results of operations.

In 2004, Scient’x’s wholly owned U.S. subsidiary, Scient’x USA, Inc. (“Scient’x USA”), entered into a distribution agreement with DAK Surgical, Inc. and DAK Spine, Inc., two independent distributors (collectively “DAK”), for the distribution of products in certain defined sales areas. In September 2007, shortly after the expiration of the distribution contract, DAK, and their principals filed a lawsuit in Florida state court against Scient’x USA and Scient’x in which they alleged, among other things, that (i) Scient’x USA breached the distribution agreement, (ii) Scient’x USA interfered with DAK’s business relationships, and (iii) personnel at Scient’x USA made defamatory remarks regarding the principals of DAK. In February 2011, the court granted Scient’x USA’s Partial Motion for Summary Judgment finding that there was no obligation for Scient’x USA or Scient’x to pay DAK under a change of ownership clause in the distribution agreement with DAK. On April 5, 2012, the parties to this litigation reached an oral settlement agreement that is pending definitive documentation. Pursuant to the oral settlement agreement neither the Company nor any of its subsidiaries will make any payments to the plaintiffs. The final settlement and dismissal of this matter is contingent upon the execution of the definitive documentation.

In August 2009, a complaint filed under the qui tam provisions of the United States Federal False Claims Act (the “FCA”) that had been filed by private parties against Scient’x USA was unsealed by the United States District Court for the Middle District of Florida (Hudak v. Scient’x USA, Inc., et al. (Civil Action No. 6:08-cv-1556-Orl-22DAB, U.S. District Court, W.D. Florida). The complaint alleged violations of the FCA arising from allegations that Scient’x USA engaged in improper activities related to consulting payments to surgeon customers. The relators in the complaint were the principals of the plaintiff in the DAK Surgical matter discussed above. Under the FCA, the United States Department of Justice, Civil Division, (“DOJ”), had a certain period of time in which to decide whether to intervene and conduct the action against Scient’x, or to decline to intervene and allow the private plaintiffs to proceed with the case. In August 2009, the DOJ filed a notice informing the court that it was declining to intervene in the case. In December 2009, the private plaintiffs who filed the action moved the court to dismiss the matter without prejudice, the Attorney General consented to such dismissal and the matter was dismissed without prejudice. Despite the dismissal of this matter, the DOJ is continuing its review of the facts alleged by the original plaintiffs in this matter. To date, neither the Company nor Scient’x USA have been subpoenaed by any governmental agency in connection with this review. The Company believes that Scient’x USA’s business practices were in compliance with the FCA and intends to vigorously defend itself with respect to the allegations contained in the qui tam complaint, however, the outcome of the matter cannot be predicted at this time and any adverse outcome could have a significant adverse effect on the Company’s financial condition and results of operations.

On August 10, 2010, a purported securities class action complaint was filed in the United States District Court for the Southern District of California on behalf of all persons who purchased the Company’s common stock between December 19, 2009 and August 5, 2010 against us and certain of its directors and executives alleging violations of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 thereunder. On February 17, 2011, an amended complaint was filed against the Company and certain of its directors and officers adding alleged violations of the Securities Act of 1933. HealthpointCapital, Jefferies & Company, Inc., Canaccord Adams, Inc., Cowen and Company, Inc., and Lazard Capital Markets LLC are also defendants in this action. The complaint alleges that the defendants made false or misleading statements, as well as failed to disclose material facts, about the Company’s business, financial condition, operations and prospects, particularly relating to the Scient’x transaction and the Company’s financial guidance following the closing of the acquisition. The complaint seeks unspecified monetary damages, attorneys’ fees, and other unspecified relief. On March 21, 2012, the Court granted the defendants’ motions to dismiss the plaintiff’s complaint against all defendants and gave the plaintiff leave to file an amended complaint. On April 19, 2012, the plaintiff filed an amended complaint. The Company believes the claims are without merit and intends to vigorously defend itself against this complaint; however no assurances can be given as to the timing or outcome of this lawsuit.

On August 25, 2010, an alleged shareholder of the Company’s filed a derivative lawsuit in the Superior Court of California, San Diego County, purporting to assert claims on behalf of the Company against all of its directors and certain of its officers and HealthpointCapital. Following the filing of this complaint, similar complaints were filed in the same court and in the U.S. District Court for the Southern District of California against the same defendants containing similar allegations. The complaint filed in Federal court was dismissed by the plaintiff without prejudice in July 2011. The state court complaints have been consolidated into a single action. The Company has been named as a nominal defendant in the consolidated action. Each complaint alleges that the Company’s directors and certain of its officers breached their fiduciary duties to the Company related to the Scient’x transaction, and by making allegedly false statements that led to unjust enrichment of HealthpointCapital and certain of the Company’s directors. The complaints

 

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seek unspecified monetary damages and an order directing the Company to adopt certain measures purportedly designed to improve its corporate governance and internal procedures. This consolidated lawsuit has been stayed by order of the court until August 26, 2012. The Company believes the claims are without merit and intends to vigorously defend itself against these complaints; however no assurances can be given as to the timing or outcome of this lawsuit.

At March 31, 2012, the probable outcome of any of the aforementioned litigation matters cannot be determined nor can the Company estimate a range of potential loss. Accordingly, in accordance with the authoritative guidance on the evaluation of contingencies, the Company has not recorded an accrual related to these litigation matters. The Company is and may become involved in various other legal proceedings arising from its business activities. While management does not believe the ultimate disposition of these matters will have a material adverse impact on the Company’s consolidated results of operations, cash flows or financial position, litigation is inherently unpredictable, and depending on the nature and timing of these proceedings, an unfavorable resolution could materially affect the Company’s future consolidated results of operations, cash flows or financial position in a particular period.

Royalties

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

 

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8. Net Loss Per Share

Basic earnings per share (“EPS”) is calculated by dividing the net income or loss available to common stockholders by the weighted average number of common shares outstanding for the period, without consideration for common stock equivalents. Diluted EPS is computed by dividing the net income available to common stockholders by the weighted average number of common shares outstanding for the period and the weighted average number of dilutive common stock equivalents outstanding for the period determined using the treasury-stock method. For purposes of this calculation, common stock subject to repurchase by the Company 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 March 31,  
             2012                     2011          

Numerator:

    

Net loss

   $ (1,261   $ (1,867
  

 

 

   

 

 

 

Denominator:

    

Weighted average common shares outstanding

     89,445        89,024   

Weighted average unvested common shares subject to repurchase

     (507     (327
  

 

 

   

 

 

 

Weighted average common shares outstanding—basic

     88,938        88,697   

Effect of dilutive securities:

    

Options, warrants and restricted share awards

     —          —     
  

 

 

   

 

 

 

Weighted average common shares outstanding—diluted

     88,938        88,697   
  

 

 

   

 

 

 

Net loss per common share:

    

Basic and diluted net loss per share

   $ (0.01   $ (0.02
  

 

 

   

 

 

 

 

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

 

     Three Months Ended March 31,  
     2012      2011  

Options to purchase common stock

     4,592         4,200   

Unvested restricted share awards

     507         327   
  

 

 

    

 

 

 

Total

     5,099         4,527   
  

 

 

    

 

 

 

9. Equity Transactions

Warrants

In March 2012, the Company entered into a consulting agreement and pursuant to such consulting agreement, the Company issued a warrant to the consultant to purchase an aggregate of 500,000 shares of the Company’s common stock at an exercise price of $2.50 per share. The warrant vests 25% on the last day of September 2012, December 2012, March 2013 and June 2013 and the warrant expires on March 1, 2015. The fair value of the warrants of $0.3 million was determined on the grant date using the Black-Scholes-Merton valuation method with the following assumptions: risk free interest rates of 1.17%, volatility of 77.8%, a 1 year term and no dividends yield.

10. Income Taxes

To calculate its interim tax provision, 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 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 recognizes interest and penalties related to uncertain tax positions as a component of the income tax provision. The Company’s unrecognized tax benefits increased $0.1 million during the three months ended March 31, 2012. The increase in unrecognized tax benefits during the three months ended March 31, 2012 was primarily related to an increase related to state research credits. The unrecognized tax benefits at March 31, 2012 were $4.3 million. With the facts and circumstances currently available to the Company, it is reasonably possible that $0.2 million of the Company’s unrecognized tax benefits could decrease within the next 12 months due to the expiration of statutes of limitations or tax examination settlement.

The income tax provision consists primarily of income tax provisions related to acquired Scient’x operations, state income taxes, and the tax effect of changes in deferred tax liabilities associated with tax deductible goodwill offset by operations in Japan.

The Company is not currently under examination by the IRS. The Company has been contacted by the state of Texas and will be undergoing an exam of the 2009 year. A subsidiary of Scienti’x’s 2008, 2009 and 2010 tax years are currently under audit by the French tax authorities. No adjustments have been proposed that will have a material impact on the Statement of Operations.

11. Segment and Geographical Information

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 months ended March 31, 2012 and 2011 the Company operated in two geographic regions, the U.S. and International which consists of locations outside of the U.S. For the three months ended March 31, 2012, included in International revenues were sales in Japan totaling $6.8 million which represented greater than 10 percent of consolidated revenues. For the three months ended March 31, 2011, included in International revenues were sales in Japan totaling $5.5 million which represented greater than 10 percent of consolidated revenues.

 

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Revenues attributed to the geographic location of the customer were as follows (in thousands):

 

     Three Months Ended
March 31,
 
     2012      2011  

United States

   $ 32,561       $ 33,860   

International

     15,900         15,860   
  

 

 

    

 

 

 

Total consolidated revenues

   $ 48,461       $ 49,720   
  

 

 

    

 

 

 

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

 

     March 31,
2012
     December 31,
2011
 

United States

   $ 193,360       $ 198,578   

International

     171,322         168,114   
  

 

 

    

 

 

 

Total consolidated assets

   $ 364,682       $ 366,692   
  

 

 

    

 

 

 

12. Related Party Transactions

As of March 31, 2012, the Company had a liability of $0.1 million payable to HealthpointCapital, LLC for travel and administrative 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 Partners, L.P. and HealthpointCapital Partners II, L.P.

The Company has entered into indemnification agreements with certain of its directors which are named defendants in the Orthotec matter (See Note 7 – Commitments and Contingencies – Litigation). The indemnification agreements requires the Company to indemnify these individuals to the fullest extent permitted by applicable law and to advance expenses incurred by them in connection with any proceeding against them with respect to which they may be entitled to indemnification by the Company. For the three months ended March 31, 2012, the Company incurred legal expenses of approximately $0.4 million in connection with the Company’s indemnification obligations in the Orthotec matter.

Dr. Stephen H. Hochschuler served as a member of the Company’s and Alphatec Spine’s board of directors through April 30, 2012 and still serves as the Chairman of Alphatec Spine’s Scientific Advisory Board. The Company, Alphatec Spine and Dr. Hochschuler entered into a 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 March 31, 2012 and 2011, the Company incurred costs of $30,000 and $60,000, respectively, in each period for advisory services provided by Dr. Hochschuler.

13. Restructuring Activities

Restructuring expense consists of severance and other personnel costs connected to the reorganization of the Company’s management and those costs associated with exit or disposal activities related to the acquisition of Scient’x.

14. Supplemental Cash Flow Disclosures

Purchases of property, plant and equipment included in accounts payable was $3.4 million and $2.4 million at March 31, 2012 and 2011, respectively. Property, plant and equipment purchased under capital lease obligations was $1.1 million for the three months ended March 31, 2012.

15. Subsequent Events

Equity Transaction

On May 8, 2012, the Company entered into an equity line of credit arrangement with Eclipse Advisors, LLC (“Eclipse”). Specifically, the Company entered into an Investment Agreement (the “Investment Agreement”), which provides that, upon the terms and subject to the conditions set forth therein, Eclipse is committed to purchase up to $25 million worth of shares of the Company’s common stock over the 24-month term of the Investment Agreement; provided, however, that the Company may not sell more than that number of shares of common stock that would require the Company to obtain stockholder approval under any applicable rule or regulation of the principal trading exchange or market for the common stock, including NASDAQ Listing Rule 5635, without first obtaining such stockholder approval. From time to time over the term of the Investment Agreement, and at the Company’s sole discretion, the Company may present Eclipse with put notices, to purchase the Company’s common stock in two tranches over a 31-day period (a “put period”) with each put period subject to being reduced by the Company based on a minimum threshold price of the Company’s common stock during the put period.

Once presented with a put notice, Eclipse is required to purchase: (i) 50% of the dollar amount of the shares specified in the put notice on the 16th day after the date of the put notice; and (ii) 50% of the dollar amount of the shares specified in the put notice on the 31st day after the date of the put notice. The price per share for the sale of such common stock for each of the two closings in a put period shall be 90% of the volume weighted average price for the Company’s common stock over the trading days that exist during the 15 days prior to such closing date. If the daily volume weighted average price of the Company’s common stock falls below a threshold price established by the Company on any trading day during a put period, the Company has the right to send a cancellation notice to Eclipse, which will reduce the Company’s obligation to sell the shares to Eclipse to no greater than 50% of the dollar amount set forth in the put notice.

Upon execution of the Investment Agreement and as provided for therein, the Company issued Eclipse 231,045 shares of common stock representing a $500,000 commitment fee, determined by dividing $500,000 by the volume weighted average price for the Company’s common stock for the five trading days preceding the effective date of the Investment Agreement.

 

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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 this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ending December 31, 2011, as well as any updates to those risk factors filed from time to time in our Quarterly Reports on Form 10-Q or Current Reports on Form 8-K.

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. We have a comprehensive product portfolio and pipeline that addresses the cervical, thoracolumbar and intervertebral regions of the spine and covers a variety of major spinal disorders and procedures such as vertebral compression fracture, disorders related to poor bone quality, spinal stenosis and minimally invasive access techniques. Our principal product offerings are focused on the global market for orthopedic spinal disorder solution products. 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, cobalt chrome, ceramic, and a strong, heat resistant, radiolucent, biocompatible plastic called polyetheretherketone, or PEEK. We also sell products made of allograft, which is human tissue that surgeons can use in place of metal and PEEK. We also sell bone-grafting products that are comprised of both human tissue 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 U.S. Food and Drug Administration, or FDA, clearance have been cleared by the FDA.

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 screws and complementary products, vertebral body replacement devices, plates, products to treat vertebral compression fractures and bone grafting materials. Our revenues are generated by our direct sales force and independent distributors. Our products are requested directly by surgeons and shipped and billed to hospitals or surgical centers. In general, except for those countries where we have a direct sales force (Japan, France, and the United Kingdom), we use independent distributors that purchase our products and market them to their surgeon customers. A majority of our business is conducted with customers within markets in which we have experience and with payment terms that are customary. If we offer payment terms greater than our customary business terms or begin operating in a new market, revenues are deferred until the sooner of when payments become due or cash is received from the related distributors.

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, and raw materials and components. The product costs of certain of our biologics products include the cost of procuring 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 process. Amortization of purchased intangibles consists of amortization of developed product technology.

Research and development expense. Research and development expense consists of costs associated with the design, development, testing, and enhancement of our products. Research and development expense also includes 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.

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

Restructuring expense. Restructuring expense consists of severance and other personnel costs connected to the reorganization of the Company’s management and those costs associated with exit or disposal activities related to the acquisition of Scient’x.

 

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

Income tax (benefit) expense. Income tax (benefit) expense consists primarily of state and foreign income taxes and the tax effect of changes in deferred tax liabilities associated with tax deductible 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 assumption 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 months ended March 31, 2012 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, 2012.

 

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Results of Operations

The table below sets forth certain statements of operations data 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
March 31,
 
     2012     2011  

Revenues

   $ 48,461      $ 49,720   

Cost of revenues

     16,263        17,373   

Amortization of acquired intangible assets

     379        396   
  

 

 

   

 

 

 

Gross profit

     31,819        31,951   

Operating expenses:

    

Research and development

     4,010        5,413   

Sales and marketing

     18,536        18,629   

General and administrative

     8,825        9,142   

Amortization of acquired intangible assets

     574        530   

Restructuring expenses

     —          599   
  

 

 

   

 

 

 

Total operating expenses

     31,945        34,313   
  

 

 

   

 

 

 

Operating loss

     (126     (2,362

Other income (expense):

    

Interest income

     39        4   

Interest expense

     (708     (679

Other income (expense), net

     (259     421   
  

 

 

   

 

 

 

Total other income (expense)

     (928     (254
  

 

 

   

 

 

 

Loss from continuing operations before taxes

     (1,054     (2,616

Income tax (benefit) provision

     207        (749
  

 

 

   

 

 

 

Net loss

   $ (1,261   $ (1,867
  

 

 

   

 

 

 

Three Months Ended March 31, 2012 Compared to the Three Months Ended March 31, 2011

Revenues. Revenues were $48.5 million for the three months ended March 31, 2012 compared to $49.7 million for the three months ended March 31, 2011, representing a decrease of $1.3 million, or 2.5%. The decrease was comprised of $1.3 million of sales in the U.S. region.

U.S. revenues were $32.6 million for the three months ended March 31, 2012 compared to $33.9 million for the three months ended March 31, 2011, representing a decrease of $1.3 million, or 3.8%. The decrease was due to decrease in the sales of instruments and implants ($1.7 million) and a decrease in the sales of Scient’x products ($0.8 million), partially offset by an increase in Biologics ($1.2 million).

International revenues were $15.9 million for the three months ended March 31, 2012 and for the three months ended March 31, 2011. The sales of Alphatec products and Scient’x products were consistent in both periods. The revenues are inclusive of $0.1 million in unfavorable exchange rate effect.

Cost of revenues. Cost of revenues was $16.3 million for the three months ended March 31, 2012 compared to $17.4 million for the three months ended March 31, 2011, representing a decrease of $1.1 million, or 6.4%. The decrease was primarily related to lower product costs due to a decrease in sales and variation in product mix ($1.4 million) and a decrease in inventory step-up expense related to the Scient’x acquisition ($0.4 million), offset by the amortization expenses associated with the settlement agreement we entered into in December 2011 with Biomet related to royalties on the sales of our polyaxial screws ($1.0 million).

Amortization of acquired intangible assets. Amortization of acquired intangible assets was $0.4 million for the three months ended March 31, 2012 and for the three months ended March 31, 2011. This expense represents amortization in the period for intangible assets associated with product related assets obtained in the Scient’x acquisition.

Gross profit. Gross profit was $31.8 million for the three months ended March 31, 2012 compared to $32.0 million for the three months ended March 31, 2011, representing a decrease of $0.1 million, or 0.4%. The decrease is the result of a decrease in sales year over year, offset by an improvement in cost of sales.

 

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Gross margin. Gross margin was 65.7% for the three months ended March 31, 2012 compared to 64.3% for the three months ended March 31, 2011. The increase of 1.4% was the result of a decrease in cost of revenues, offset by a variance in product mix.

Gross margin for the U.S. region was 70.2% for the three months ended March 31, 2012 compared to 72.1% for the three months ended March 31, 2011. The decrease of 1.9% was primarily the result of added amortization expense of $1.0 million associated with the settlement agreement we entered into in December 2011 with Biomet related to royalties on the sales of our polyaxial screws.

Gross margin for the International region was 56.4% for the three months ended March 31, 2012 compared to 47.5% for the three months ended March 31, 2011. The increase of 8.9% was the result of a decrease in inventory step-up expense related to the Scient’x acquisition of $0.4 million and variance in regional and product mix.

Research and development expense. Research and development expense was $4.0 million for the three months ended March 31, 2012 compared to $5.4 million for the three months ended March 31, 2011, representing a decrease of $1.4 million, or 25.9%. The decrease was primarily related to reduced European research and development activities to support the Scient’x products ($0.4 million), reduced personnel expenses in the U.S. ($0.4 million), and reduced activity due to the variation in the timing of the cycle for development and testing ($0.6 million).

Sales and marketing expense . Sales and marketing expense was $18.5 million for the three months ended March 31, 2012 compared to $18.6 million for the three months ended March 31, 2011, representing a decrease of $0.1 million, or 0.5%. The expense profile in 2012 is consistent with 2011.

General and administrative expense. General and administrative expense was $8.8 million for the three months ended March 31, 2012 compared to $9.1 million for the three months ended March 31, 2011, representing a decrease of $0.3 million, or 3.5%. The expense profile in 2012 is consistent with 2011.

Amortization of acquired intangible assets. Amortization of acquired intangible assets was $0.6 million for the three months ended March 31, 2012 compared to $0.5 million for the three months ended March 31, 2011, representing an increase of $0.1 million, or 8.3%. This expense represents amortization in the period for intangible assets associated with general business assets obtained in the Scient’x acquisition.

Restructuring expense. Restructuring expense was $0 for the three months ended March 31, 2012 compared to $0.6 million for the three months ended March 31, 2011. The restructuring expenses were due to severance and other personnel costs incurred in connection with restructuring activities in the United States and Europe.

Interest expense. Interest expense was $0.7 million for the three months ended March 31, 2012 and for the three months ended March 31, 2011. Interest expense consisted primarily of interest related to loan agreements and lines of credit with Silicon Valley Bank and the associated amortization expenses related to loan costs.

Other income (expense), net. Other expense was $0.3 million for the three months ended March 31, 2012 compared to $0.4 million of income for the three months ended March 31, 2011, representing a decrease in income of $0.7 million, or 161.5%. The decrease was due to unfavorable foreign currency exchange results realized in 2012 as compared to favorable results in 2011.

Income tax provision (benefit). Income tax was a provision of $0.2 million for the three months ended March 31, 2012 compared to a benefit of ($0.7) million for the three months ended March 31, 2011. The income tax provision consists primarily of income tax provisions related to acquired Scient’x operations, state income taxes, and the tax effect of changes in deferred tax liabilities associated with tax deductible goodwill offset by operations in Japan.

Non-GAAP Financial Measures

We utilize certain financial measures that are not calculated based on Generally Accepted Accounting Principles, or GAAP. Certain of these financial measures are considered “non-GAAP” financial measures within the meaning of Item 10 of Regulation S-K promulgated by the SEC. We believe that non-GAAP financial measures reflect an additional way of viewing aspects of our operations that, when viewed with the GAAP results, provide a more complete understanding of our results of operations and the factors and trends affecting our business. These non-GAAP financial measures are also used by our management to evaluate financial results and to plan and forecast future periods. However, non-GAAP financial measures should be considered as a supplement to, and not as a substitute for, or superior to, the corresponding measures calculated in accordance with GAAP. Non-GAAP financial measures used by us may differ from the non-GAAP measures used by other companies, including our competitors.

Adjusted EBITDA represents net income (loss) excluding the effects of interest, taxes, depreciation, amortization, stock-based compensation and other non-recurring income or expense items, such as in-process research and development expense and acquisition related transaction expenses, restructuring expenses and litigation settlement expenses. We believe that the most directly comparable GAAP financial measure to adjusted EBITDA is net income (loss). Adjusted EBITDA has limitations, therefore, it should not be

 

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considered either in isolation or as a substitute for analysis of our results as reported under GAAP. Furthermore, adjusted EBITDA should not be considered as an alternative to operating income (loss) or net income (loss) as a measure of operating performance or to net cash provided by operating, investing or financing activities, or as a measure of our ability to meet cash needs.

The following is a reconciliation of adjusted EBITDA to the most comparable GAAP measure, net loss, for the three months ended March 31, 2012 and 2011 (in thousands):

 

     Three Months Ended March 31,  
             2012                     2011          

Net loss

   $ (1,261   $ (1,867

Stock-based compensation

     547        714   

Depreciation

     3,456        3,772   

Amortization of intangible assets

     1,394        305   

Amortization of acquired intangible assets

     953        926   

Interest expense, net

     669        675   

Income tax provision (benefit)

     207        (749

Other (income) expense, net

     259        (421

Acquisition-related inventory step-up

     —          430   

Restructuring expenses

     —          599   
  

 

 

   

 

 

 

Adjusted EBITDA

   $ 6,224      $ 4,384   
  

 

 

   

 

 

 

Liquidity and Capital Resources

At March 31, 2012, our principal sources of liquidity consisted of cash and cash equivalents of $16.9 million and accounts receivable, net of $40.6 million. Based on our operating plan and cash forecast, management believes that on a combined basis, such amounts will be sufficient to fund our projected operating requirements through at least March 31, 2013.

Our Amended Credit Facility with Silicon Valley Bank, or SVB, contains financial covenants consisting of a minimum adjusted quick ratio and minimum quarterly free cash flow. As of March 31, 2012, we were in compliance with both the minimum adjusted quick ratio covenant and the minimum quarterly free cash flow covenant (See “Credit Facility and Other Debt” below).

Based on our current operating plan, we believe that it is reasonably likely that we will be in compliance with our financial covenants of the Amended Credit Facility in the foreseeable future. However, there is no assurance that we will be able to do so. If we are not able to achieve our planned revenue growth or incur costs in excess of our forecasts, we may be required to substantially reduce discretionary spending, and we could be in default of the Amended Credit Facility. In addition to the financial covenants, the Amended Credit Facility contains other covenants including subjective covenants that would allow the lender to declare the loan immediately due and payable. Upon the occurrence of a covenant violation or other event of default that is not waived, the lender could elect to declare all amounts outstanding under the Amended Credit Facility to be immediately due and payable and terminate all commitments to extend further credit. If the lender were to accelerate the repayment of borrowings under the Amended Credit Facility for any reason, we may not have sufficient cash on hand to repay the amounts borrowed under the Amended Credit Facility and would be forced to obtain alternative financing.

If we are not able to achieve the minimum targeted revenue growth and related improvements in profitability to meet the monthly and quarterly covenants or we have other unanticipated expenditures, we may be required to attempt to seek a waiver of such covenants, renegotiate the amended credit facility, seek additional capital and/or substantially reduce discretionary spending, which could have a material adverse effect on our ability to achieve our intended business objectives. There can be no assurances that such a waiver could be obtained, that the Amended Credit Facility could be successfully renegotiated or that we could modify our operations to maintain liquidity. If we are unable to obtain any required waivers or amendments, the lender would have the right to exercise remedies specified in the Amended Credit Facility, including accelerating the repayment of debt obligations as discussed above. We may be forced to seek additional financing, which may include additional debt and/or equity financing or funding through other third party agreements. There can be no assurances that additional financing will be available on acceptable terms or available at all. Furthermore, any equity financing may result in dilution to existing stockholders and any debt financing may include restrictive covenants.

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.

 

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We will need to invest in working capital and surgical instruments (the costs of which are capitalized) in order to support our revenue projections through 2012. Should we not be able to achieve our revenue forecast and cash consumption starts to exceed forecasted consumption, management will need to adjust our investment in surgical instruments and manage our inventory to the decreased sales volumes. If we do not make these adjustments in a timely manner, there could be an adverse impact on our financial resources.

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 did not hold any marketable securities as of March 31, 2012.

As a result of the continued 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 $1.4 million from operating activities for the three months ended March 31, 2012. During this period, net cash used in operating activities primarily consisted of a net loss of $1.3 million and an increase in working capital and other assets of $8.3 million, which were offset by $8.1 million of non-cash costs including amortization, depreciation, deferred income taxes, stock-based compensation, provision for excess and obsolete inventory, and interest expense related to amortization of debt discount and issue costs. The increase in working capital and other assets of $8.3 million consisted of increases in inventory of $2.6 million and decreases in accounts payable of $3.1 and decreases in accrued expenses and other liabilities of $5.0 million, partially offset by decreases in accounts receivable of $0.7 million and decreases in prepaid expenses and other assets of $1.9 million. The large decrease in accrued expenses was primarily attributable to a $5 million payment in January 2012 in connection with the Biomet litigation settlement.

Investing Activities

We used net cash of $3.5 million in investing activities for the three months ended March 31, 2012 primarily for the purchase of surgical instruments.

Financing Activities

Financing activities provided net cash of $0.7 million from for the three months ended March 31, 2012. Cash received from borrowings under our line of credit totaled $3.6 million. We made principal payments on notes payable totaling $1.9 million, of which $1.3 million was on our term loan with SVB, and $0.9 million was on our line of credit with SVB.

Credit Facility and Other Debt

As of March 31, 2012, the Company has a loan and security agreement with SVB that includes four amendments (collectively the “Amended Credit Facility”). The Amended Credit Facility consists of a $10.0 million term loan and a $19.5 million working capital line of credit. The term loan carries a fixed interest rate equal to the greater of 8.5% or the SVB prime rate plus 4.5% with principal plus interest repayments due in 16 equal quarterly installments. The term loan matures October 2015 and the Company is subject to a prepayment penalty if the term loan is repaid prior to maturity. The actual amount available under the line of credit is based on eligible accounts receivable and eligible inventory. The working capital line of credit carries an interest rate equal to the SVB prime rate plus 3.5%, which can be adjusted downward to the SVB prime rate plus a range of 1.0% to 3.0% depending on the result of the adjusted quick ratio covenant computed monthly. Minimum monthly interest totals $0.1 million. Interest only payments are due monthly and the principal is due at maturity, October 2013.

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

 

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The Amended Credit Facility contains customary lending and reporting covenants, which, among other things, prohibit the Company from assuming further debt obligations and any liens, unless otherwise permitted under the Amended Credit Facility. Upon the occurrence of an event of default, which includes 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 or change that could have a material adverse effect on the Company, the interest to be charged pursuant to the Amended Credit Facility will be increased to a rate that is up to five percentage points above the rate effective immediately before the event of default, and all outstanding obligations become immediately due and payable.

Under the Amended Credit Facility, the Company is required to maintain compliance with financial covenants consisting of a quarterly minimum adjusted quick ratio and a quarterly minimum EBITDA level, as well as a maximum annual capital expenditures limit. The minimum adjust quick ratio is defined as the sum of the Company’s cash held with SVB and 80% of eligible domestic accounts receivable divided by the Amended Credit Facility balance. As of March 31, 2012, the Company was in compliance with the minimum adjusted quick ratio covenant and the minimum quarterly EBITDA covenant.

In February 2012, the Company executed a fourth amendment to the Amended Credit Facility due to the Company not complying with the minimum quarterly EBITDA covenant as of December 31, 2011 and the minimum adjusted quick ratio at December 31, 2011, January 31, 2012 and February 29, 2012. The amendment included a waiver for such non-compliance for the quarterly period ended December 31, 2011. The amendment also reduced the maximum amount available on the working capital line of credit from $22 million to $19.5 million and accelerated one of the quarterly term loan payments of $0.6 million which was due and payable upon execution of the amendment. There was no change to the financial covenant requirements. In conjunction with this amendment, the Company paid SVB a fee of $50,000.

During the three months ended March 31, 2012, the Company repaid $0.9 million and drew an additional $3.6 million on the working capital line of credit and repaid $1.3 million under the term loan. The balance of the line of credit as of March 31, 2012 was $19.5 million.

We have various capital lease arrangements. The leases bear interest at rates ranging from 4.5% to 8.4%, are generally due in monthly principal and interest installments, are collateralized by the related equipment, and have various maturity dates through April 2017. As of March 31, 2012, the balance of these capital leases totaled $1.3 million. In the first quarter of 2012, we entered into leases for machinery and equipment for an aggregate principal balance of $1.1 million.

Contractual obligations and commercial commitments

Total contractual obligations and commercial commitments as of March 31, 2012 are summarized in the following table (in thousands):

 

     Payment Due by Year  
     Total      2012
(9 months)
     2013      2014      2015      2016      Thereafter  

Term loan with SVB

   $ 8,750       $ 1,875       $ 2,500      $ 2,500       $ 1,875      $ —         $ —     

Line of Credit with SVB

     19,500         —           19,500         —           —           —           —     

Note payable to Oracle

     155         155         —           —           —           —           —     

Notes payable for insurance premiums

     617         617         —           —           —           —           —     

Notes payable to Japanese banks

     136         72         60         4         —           —           —     

Capital lease obligations

     1,275         261         264         213         230         229         78   

Operating lease obligations

     13,109         2,962         3,453         2,594         2,390         1,280         430   

Guaranteed minimum royalty obligations

     5,640         1,248         1,098         1,098         1,098         1,098         —     

New product development milestones (1)

     9,700         3,000         1,600         —           2700         200         2,200   

Litigation Settlement

     13,000         3,000         3,000         4,000         3,000         
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 71,882       $ 13,190       $ 31,475       $ 10,409       $ 11,293       $ 2,807       $ 2,708   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(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.

 

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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 March 31,  
             2012                     2011          

Cost of revenues

   $ 30      $ 47   

Research and development

     85        101   

Sales and marketing

     157        205   

General and administrative

     275        361   
  

 

 

   

 

 

 

Total

   $ 547      $ 714   
  

 

 

   

 

 

 

Effect on basic and diluted net loss per share

   $ (0.01   $ (0.01
  

 

 

   

 

 

 

Recent Accounting Pronouncements

In September 2011, the Financial Accounting Standards Board (“FASB”) amended its goodwill guidance by providing entities an option to use a qualitative approach to test goodwill for impairment. An entity will be able to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, it is necessary to perform the currently prescribed two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. The amendment is effective for the Company beginning January 1, 2012. This amendment did not have a material impact on its consolidated financial position or results of operations.

In 2011, the FASB issued new accounting guidance that requires total comprehensive income, the components of net income and the components of other comprehensive income to be presented either in a single continuous statement or in two separate but consecutive statements. This guidance is effective for the Company beginning January 1, 2012. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of shareholders’ equity. While the new guidance changes the presentation of other comprehensive income, there are no changes to the components that are recognized in other comprehensive income. Other than presentation, the adoption of this guidance did not have an impact on the Company’s consolidated financial position or results of operations.

Forward Looking Statements

This Quarterly Report on Form 10-Q incorporates a number of forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Exchange Act, including statements regarding:

 

   

our estimates regarding anticipated operating losses, future revenue, expenses, capital requirements, and liquidity, including our anticipated revenue growth and cost savings following our acquisition of Scient’x;

 

   

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 integrate, and realize benefits from our acquisition of, Scient’x;

 

   

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

 

   

the effect of any existing or future federal, state or international regulations on our ability to effectively conduct our business;

 

   

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

 

   

the amount of our legal expenses associated with the securities and stockholder derivative litigation, litigation regarding our intellectual property and any future litigation that may arise, and the adequacy of our insurance policy coverage regarding those expenses and any damages or settlement payments related to such litigation;

 

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

 

   

our ability to enhance our U.S. and international sales networks and product penetration;

 

   

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 maintain compliance with the quality requirements of the FDA and similar regulatory authorities outside of the U.S.;

 

   

our ability to meet the financial covenants under our credit facilities;

 

   

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

 

   

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

 

   

the effects of the loss of key personnel;

 

   

potential liability resulting from litigation;

 

   

potential liability resulting from a governmental review of our or Scient’x’s business practices; and

 

   

other factors discussed elsewhere in this Form 10-Q or any document incorporated by reference herein or therein.

Any or all of our forward-looking statements in this Quarterly Report may turn out to be wrong. 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 this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2011 as well as any updates to those risk factors filed from time to time in our Quarterly Reports on Form 10-Q or Current Reports on Form 8-K. 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 March 31, 2012, our outstanding floating rate indebtedness totaled $19.5 million. The primary base interest rate is the U.S. federal 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 $0.2 million. Other outstanding debt consists of fixed rate instruments, including notes payable and capital leases.

Foreign Currency Risk

Our foreign currency exposure continues to evolve as we grow internationally. Our exposure to foreign currency transaction gains and losses is the result of certain net receivables due from our foreign subsidiaries and customers being denominated in currencies other than the U.S. dollar, primarily the Euro, Japanese Yen and Brazilian Real, in which our revenues and profits are denominated. We do not currently engage in hedging or similar transactions to reduce these risks. Fluctuations in currency exchange rates could impact our results of operations, financial position, and cash flows.

 

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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 March 31, 2012.

 

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 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. 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, to ensure 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.

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

Litigation

In 1998, Eurosurgical, a French company in the business of sales and marketing of spinal implants, entered into a distribution agreement for the United States, Mexico, Canada, India and Australia with Orthotec, LLC, a California company, or Orthotec. In 2004, Orthotec sued Eurosurgical in connection with a contractual dispute and a $9 million judgment was entered against Eurosurgical by a California court. At the same time, a federal court in California declared Eurosurgical liable to Orthotec for $30 million in connection with an intellectual property dispute. In 2006, Eurosurgical’s European assets were ultimately acquired by Surgiview, SAS, or Surgiview, in a sale agreement approved by a French court. Pursuant to this sale, Surgiview became a subsidiary of Scient’x in 2006. Orthotec attempted to recover on Eurosurgical’s obligations in California and federal courts by filing a motion in a California

 

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court to add Surgiview to the judgment against Eurosurgical on theories including successor liability and fraudulent conveyance. In February 2007, the California court denied Orthotec’s motion, indicating that Orthotec had not carried its burdens of proof. Orthotec chose to not proceed with a further hearing in September 2007. In May 2008, after the acquisition of Scient’x by HealthpointCapital in 2007, Orthotec sued Scient’x, Surgiview, HealthpointCapital and former certain Scient’x directors (who currently serve on our board) in a new action in California state court. In addition, at the same time, a similar action was filed in New York against HealthpointCapital and two former directors of Scient’x (who currently serve on our board). In April 2009, the California court dismissed this matter on jurisdictional grounds, and Orthotec appealed such ruling. In December 2010, the California Court of Appeal issued a decision that affirmed in part and reversed in part the trial court’s decision dismissing the entire California action based on lack of personal jurisdiction. The Court of Appeal affirmed the trial court’s ruling that Orthotec failed to establish personal jurisdiction over all parties except Surgiview, finding that the trial court could exercise jurisdiction over that entity. In November 2009, the New York court dismissed Orthotec’s claims based on collateral estoppel, and Orthotec appealed this ruling. In March 2011, the state appeals court in New York reversed the lower court’s decision to dismiss Orthotec’s claims, and the New York matter is proceeding with HealthpointCapital and certain former Scient’x directors (who currently serve on our board) as the only defendants. While the Company intends to vigorously defend against the complaint, and believes that the plaintiff’s allegations are without merit, the outcome of the litigation cannot be predicted at this time and any outcome in favor of Orthotec could have a significant adverse effect on the Company’s financial condition and results of operations.

In 2004, Scient’x’s wholly owned U.S. subsidiary, Scient’x USA, Inc. (“Scient’x USA”), entered into a distribution agreement with DAK Surgical, Inc. and DAK Spine, Inc., two independent distributors (collectively “DAK”), for the distribution of products in certain defined sales areas. In September 2007, shortly after the expiration of the distribution contract, DAK, and their principals filed a lawsuit in Florida state court against Scient’x USA and Scient’x in which they alleged, among other things, that (i) Scient’x USA breached the distribution agreement, (ii) Scient’x USA interfered with DAK’s business relationships, and (iii) personnel at Scient’x USA made defamatory remarks regarding the principals of DAK. In February 2011, the court granted Scient’x USA’s Partial Motion for Summary Judgment finding that there was no obligation for Scient’x USA or Scient’x to pay DAK under a change of ownership clause in the distribution agreement with DAK. On April 5, 2012, the parties to this litigation reached an oral settlement agreement that is pending definitive documentation. Pursuant to the oral settlement agreement neither the Company nor any of its subsidiaries will make any payments to the plaintiffs. The final settlement and dismissal of this matter is contingent upon the execution of the definitive documentation.

In August 2009, a complaint filed under the qui tam provisions of the United States Federal False Claims Act (the “FCA”) that had been filed by private parties against Scient’x USA was unsealed by the United States District Court for the Middle District of Florida (Hudak v. Scient’x USA, Inc., et al. (Civil Action No. 6:08-cv-1556-Orl-22DAB, U.S. District Court, W.D. Florida). The complaint alleged violations of the FCA arising from allegations that Scient’x USA engaged in improper activities related to consulting payments to surgeon customers. The relators in the complaint were the principals of the plaintiff in the DAK Surgical matter discussed above. Under the FCA, the United States Department of Justice, Civil Division, (“DOJ”), had a certain period of time in which to decide whether to intervene and conduct the action against Scient’x, or to decline to intervene and allow the private plaintiffs to proceed with the case. In August 2009, the DOJ filed a notice informing the court that it was declining to intervene in the case. In December 2009, the private plaintiffs who filed the action moved the court to dismiss the matter without prejudice, the Attorney General consented to such dismissal and the matter was dismissed without prejudice. Despite the dismissal of this matter, the DOJ is continuing its review of the facts alleged by the original plaintiffs in this matter. To date, neither the Company nor Scient’x USA have been subpoenaed by any governmental agency in connection with this review. The Company believes that Scient’x USA’s business practices were in compliance with the FCA and intends to vigorously defend itself with respect to the allegations contained in the qui tam complaint, however, the outcome of the matter cannot be predicted at this time and any adverse outcome could have a significant adverse effect on the Company’s financial condition and results of operations.

On August 10, 2010, a purported securities class action complaint was filed in the United States District Court for the Southern District of California on behalf of all persons who purchased the Company’s common stock between December 19, 2009 and August 5, 2010 against us and certain of its directors and executives alleging violations of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 thereunder. On February 17, 2011, an amended complaint was filed against the Company and certain of its directors and officers adding alleged violations of the Securities Act of 1933. HealthpointCapital, Jefferies & Company, Inc., Canaccord Adams, Inc., Cowen and Company, Inc., and Lazard Capital Markets LLC are also defendants in this action. The complaint alleges that the defendants made false or misleading statements, as well as failed to disclose material facts, about the Company’s business, financial condition, operations and prospects, particularly relating to the Scient’x transaction and the Company’s financial guidance following the closing of the acquisition. The complaint seeks unspecified monetary damages, attorneys’ fees, and other unspecified relief. On March 21, 2012, the Court granted the defendants’ motions to dismiss the plaintiff’s complaint against all defendants and gave the plaintiff leave to file an amended complaint. On April 19, 2012, the plaintiff filed an amended complaint. The Company believes the claims are without merit and intends to vigorously defend itself against this complaint; however no assurances can be given as to the timing or outcome of this lawsuit.

 

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Table of Contents

On August 25, 2010, an alleged shareholder of the Company’s filed a derivative lawsuit in the Superior Court of California, San Diego County, purporting to assert claims on behalf of the Company against all of its directors and certain of its officers and HealthpointCapital. Following the filing of this complaint, similar complaints were filed in the same court and in the U.S. District Court for the Southern District of California against the same defendants containing similar allegations. The complaint filed in Federal court was dismissed by the plaintiff without prejudice in July 2011. The state court complaints have been consolidated into a single action. The Company has been named as a nominal defendant in the consolidated action. Each complaint alleges that the Company’s directors and certain of its officers breached their fiduciary duties to the Company related to the Scient’x transaction, and by making allegedly false statements that led to unjust enrichment of HealthpointCapital and certain of the Company’s directors. The complaints seek unspecified monetary damages and an order directing the Company to adopt certain measures purportedly designed to improve its corporate governance and internal procedures. This consolidated lawsuit has been stayed by order of the court until August 26, 2012. The Company believes the claims are without merit and intends to vigorously defend itself against these complaints; however no assurances can be given as to the timing or outcome of this lawsuit.

At March 31, 2012, the probable outcome of any of the aforementioned litigation matters cannot be determined nor can the Company estimate a range of potential loss. Accordingly, in accordance with the authoritative guidance on the evaluation of contingencies, the Company has not recorded an accrual related to these litigation matters. The Company is and may become involved in various other legal proceedings arising from its business activities. While management does not believe the ultimate disposition of these matters will have a material adverse impact on the Company’s consolidated results of operations, cash flows or financial position, litigation is inherently unpredictable, and depending on the nature and timing of these proceedings, an unfavorable resolution could materially affect the Company’s future consolidated results of operations, cash flows or financial position in a particular period.

 

Item 1A. Risk Factors

There have been no material changes to the risk factors described under Item 1A of Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 as well as any updates to those risk factors filed from time to time in our Quarterly Reports on Form 10-Q.

 

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

Unregistered Sales of Equity Securities

On March 26, 2012, in connection with a consulting agreement we entered into with a consultant, we issued to such consultants a warrant to purchase 500,000 shares of our common stock at an exercise price of $2.50 per share. The warrant may be exercised by the holder by paying the exercise price in cash pursuant to “cashless exercise” of the warrant of by a combination of the two methods. The warrant vests 25% on the last day of September 2012, December 2012, March 2013 and June 2013. We did not receive any consideration for the issuance of the warrants. The warrants were issued in reliance upon the private offering exemption of Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”) and/or the private offering safe harbor provision of Rule 506 of Regulation D promulgated there under based on the following factors: (i) there was only one recipient of the warrant; (ii) the absence of general solicitation; (iii) representations obtained from the warrant holder relative to its accreditation and/or sophistication; (iv) the provision of appropriate disclosure; and (v) the placement of restrictive legends on the certificates reflecting the securities coupled with investment representations obtained from the warrant holder. The Company does not have an obligation, nor does it anticipate, registering the warrant or the shares of common stock issued upon the exercise of such warrant for resale on a registration statement pursuant to the Securities Act.

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 March 31, 2012 were as follows:

 

Month/Year

   Total Number
of Shares
Purchased
     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
 

January 2012

     —         $ —           —           —     

February 2012

     —         $ —           —           —     

March 2012

     —         $ —           —           —     

 

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Table of Contents
Item 6. Exhibits

 

*10.1    Employment Agreement by and among Alphatec Spine, Inc., Alphatec Holdings, Inc. and Leslie H. Cross, dated February 26, 2012.
*10.2    Second Amended and Restated Employment Agreement by and among Alphatec Spine, Inc., Alphatec Holdings, Inc. and Dirk Kuyper, dated February 26, 2012.
*10.3    Summary Description of the Alphatec Holdings, Inc. 2012 Bonus Plan
  10.4    Fourth Amendment to the Amended and Restated Loan and Security Agreement by and among Alphatec Spine, Inc., Alphatec Holdings, Inc. and Silicon Valley Bank, dated February 26, 2012.
  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.
101    The following materials from Alphatec Holdings, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, formatted in XBRL (eXtensible Business Reporting Language); (i) Condensed Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011, (ii) Condensed Consolidated Statements of Operations for the three months ended March 31, 2012 and 2011, (iii) Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011, and (iv) Notes to Condensed Consolidated Financial Statements**.

 

* Management contract or compensatory plan or arrangement
** Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

 

29


Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

ALPHATEC HOLDINGS, INC.
By:  

/s/ Leslie H. Cross

 

Leslie H. Cross

Chairman and Chief Executive Officer

(principal executive officer)

By:  

/s/ Michael O’Neill

 

Michael O’Neill

Chief Financial Officer, Vice President and

Treasurer

(principal financial and accounting officer)

Date: May 8, 2012

 

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Table of Contents

Exhibit Index

 

*10.1    Employment Agreement by and among Alphatec Spine, Inc., Alphatec Holdings, Inc. and Leslie H. Cross, dated February 26, 2012.
*10.2    Second Amended and Restated Employment Agreement by and among Alphatec Spine, Inc., Alphatec Holdings, Inc. and Dirk Kuyper, dated February 26, 2012.
*10.3    Summary Description of the Alphatec Holdings, Inc. 2012 Bonus Plan
  10.4    Fourth Amendment to the Amended and Restated Loan and Security Agreement by and among Alphatec Spine, Inc., Alphatec Holdings, Inc. and Silicon Valley Bank, dated February 26, 2012.
  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.
101    The following materials from Alphatec Holdings, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, formatted in XBRL (eXtensible Business Reporting Language); (i) Condensed Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011, (ii) Condensed Consolidated Statements of Operations for the three months ended March 31, 2012 and 2011, (iii) Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011, and (iv) Notes to Condensed Consolidated Financial Statements**.

 

* Management contract or compensatory plan or arrangement
** Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

 

31

Exhibit 10.1

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (the “Agreement”), made this 26 th day of February, 2012 (the “Effective Date”), is entered into among Leslie Cross (“Executive”), Alphatec Spine, Inc., a California corporation (“ASI”), and Alphatec Holdings, Inc., a Delaware corporation (“Parent”) (collectively, ASI and Parent shall be referred to as the “Company”).

1.         Commencement . This Agreement, which shall govern Executive’s employment by the Company, shall become effective on the Effective Date and the parties to this Agreement agree and acknowledge that Executive’s employment pursuant to the terms of this Agreement shall begin on February 26, 2012 (the “Commencement Date”).

2.         At-Will Employment . The parties to this Agreement agree and acknowledge that the Executive’s employment pursuant to this Agreement shall be considered at-will. Either party may terminate this Agreement at any time, with or without cause pursuant to the terms of this Agreement.

3.         Title; Capacity; Office . The Company shall employ Executive, and Executive agrees to work for the Company as its Chairman and Chief Executive Officer. Executive shall perform the duties and responsibilities inherent in the position in which Executive serves and such other duties and responsibilities as the Board of Directors (the “Board”) (or its designee) shall from time to time reasonably assign to Executive. Executive shall report to the Chairman of the Executive Committee of the Board of Directors. In addition, it is the Company’s intention that the Executive will be appointed or elected to serve as the Chairman of the Company’s Board of Directors (the “Board”) during the term of the Executive’s employment.

4.         Compensation and Benefits . While employed by the Company, Executive shall be entitled to the following (it being agreed, for the avoidance of doubt, that other than as expressly set forth herein, amounts payable on the happening of any specified event will not be payable if the Executive is not employed by the Company upon the happening of such event):

4.1     Salary . Commencing on the Commencement Date, the Company shall pay Executive a salary (the “Base Salary”) at an annualized rate of $500,000, less applicable payroll withholdings, payable in accordance with the Company’s customary payroll practices.

4.2     Performance Bonus . Executive will be eligible to receive a discretionary cash performance bonus each fiscal year in an amount equal to 75% of the annual base salary for such fiscal year (the “Target Bonus Amount”). The payment of the Target Bonus Amount shall be subject to the Company’s and Executive’s achievement of goals to be established and presented to the Executive each fiscal year. The goals for the 2012 bonus payment are set forth on Exhibit A attached hereto.

4.3     Other Benefits . Executive shall be entitled to participate in all benefit programs that the Company establishes and makes available to its management employees.


4.4      Reimbursement of Expenses . Executive shall be entitled to prompt reimbursement for reasonable expenses incurred or paid by Executive in connection with, or related to the performance of, Executive’s duties, responsibilities or services under this Agreement, upon presentation by Executive of documentation, expense statements, vouchers and/or such other supporting information as the Company may reasonably request. Expenses that do not comply with applicable law will not be reimbursed under any circumstances.

4.5     Equity . Upon the approval of the Compensation Committee of the Board, the Executive shall receive a grant of 200,000 shares of restricted common stock of Parent (the “Shares”). The Shares shall initially be unvested. All of the Shares shall vest on the anniversary of the date of issuance, provided that the stock performance metric set forth in Exhibit B attached hereto (the “Stock Performance Metric”) has been achieved, as determined by the Compensation Committee of the Board in its sole reasonable discretion. Other than as expressly set forth herein, any shares that do not vest on an applicable vesting date shall not be subject to vesting in the future. Notwithstanding the foregoing, any unvested Shares shall vest on the business day immediately prior to the consummation of a Change in Control (as defined in the Plan referenced below). Executive may file an election under Section 83(b) of the United States Internal Revenue Code within thirty (30) days of the issuance date, provided Executive provides the Company with a copy of such election. The Company shall retain any certificates representing Executive’s ownership of the Shares until Executive vests in such Shares. The Shares shall be subject, in all respects, to (i) the Parent’s 2005 Employee, Director and Consultant Stock Plan, as amended (the “Plan”); and (ii) a Restricted Stock Agreement to be entered into by Executive and the Parent.

4.6     Vacation . The Executive may take up to 20 days of paid vacation during each year at such times as shall be consistent with the Company’s vacation policies and with vacations scheduled for other executives and employees of the Company.

5.         Termination of Employment . The Executive’s employment can terminate at any time by either the Company or the Executive with or without cause or notice.

 

6.         Additional Covenants of the Executive .

6.1     Noncompetition; Nonsolicitation; Nondisparagement .

(a)    During Executive’s employment with the Company, Executive shall not, directly or indirectly, render services of a business, professional or commercial nature to any other person or entity that competes with the Company’s business, whether for compensation or otherwise, or engage in any business activities competitive with the Company’s business, whether alone, as an Executive, as a partner, or as a shareholder (other than: (i) any equity of DJO Global, Inc. (or its successor) owned by the Executive; or (ii) as the holder of not more than 1% of the combined voting power of the outstanding stock of a public company), officer or director of any corporation or other business entity, or as a trustee, fiduciary or in any other similar representative capacity of any other entity. Notwithstanding the foregoing, the expenditure of reasonable amounts of time as a member of the board of directors of DJO Global, Inc. (or its successor) shall not be deemed a breach of this Section 6.1(a).

 

2


(b)    During Executive’s employment with the Company, and for a period of one year following the termination of the Executive’s employment with the Company, the Executive shall not, without the prior written consent of the Company:

(i)    either individually or on behalf of or through any third party, directly or indirectly, solicit, entice or persuade or attempt to solicit, entice or persuade any employee, agent, consultant or contractor of the Company or any of its affiliates (the “Company Group”) to leave the service of the Company Group for any reason; or

(ii)    either individually or on behalf of or through any third party, directly or indirectly, interfere with, or attempt to interfere with, the business relationship between the Company Group and any vendor, supplier, surgeon or hospital with which the Company has interacted during the term of Executive’s employment with the Company.

(c)    During Executive’s employment with the Company and at all times thereafter, Executive shall not make any statements that are professionally or personally disparaging about, or adverse to, the interests of the Company or any of its divisions, affiliates, subsidiaries or other related entities, or their respective directors, officers, employees, agents, successors and assigns (collectively, “Company-Related Parties”), including, but not limited to, any statements that disparage any person, product, service, finances, financial condition, capability or any other aspect of the business of any Company-Related Party, and that Executive will not engage in any conduct which could reasonably be expected to harm professionally or personally the reputation of any Company-Related Party.

(d)    If any restriction set forth in this Section 6.1 is found by any court of competent jurisdiction to be unenforceable because it extends for too long a period of time or over too great a range of activities or in too broad a geographic area, it shall be interpreted to extend only over the maximum period of time, range of activities or geographic area as to which it may be enforceable.

(e)    The restrictions contained in this Section 6.1 are necessary for the protection of the confidential, nonpublic information relating to the Company and its operations, strategies, development plans, financial information and other proprietary corporate information, and are considered by Executive to be reasonable for such purpose. Executive agrees that any breach of this Section 6 will cause the Company substantial and irrevocable damage and therefore, in the event of any such breach, in addition to such other remedies which may be available, the Company shall have the right to seek specific performance and injunctive relief.

7.         Other Agreements . Executive represents that Executive’s performance of all the terms of this Agreement as an Executive of the Company does not and will not breach any (i) agreement to keep in confidence proprietary information, knowledge or data acquired by Executive in confidence or in trust prior to Executive’s employment with the Company or (ii) agreement to refrain from competing, directly or indirectly, with the business of any previous employer or any other party.

8.         Notices . All notices required or permitted under this Agreement shall be in writing and shall be deemed effective upon (i) a personal delivery, or (ii) deposit in the United States Post Office, by registered or certified mail, postage prepaid.

 

3


9.         Entire Agreement . This Agreement and the agreements specifically referenced herein constitute the entire agreement between the parties as of the date hereof and supersedes all prior agreements and understandings, whether written or oral relating to the subject matter of this Agreement. The Executive and the Company agree and acknowledge that the cash compensation set forth in Section 3(a) of that certain Chairman’s Consulting Agreement, dated July 27, 2011 between the Executive and the Company (the “Consulting Agreement”) shall be null and void after all applicable payments are made through the February 2012 payment. In addition, the Executive and the Company agree and acknowledge that the equity granted pursuant to Section 3(b) of the Consulting Agreement shall vest in accordance with the terms of the Consulting Agreement and the restricted stock agreement related to such shares.

10.         Amendment . This Agreement may be amended or modified only by a written instrument executed by both the Company and Executive.

11.         Successors and Assigns . This Agreement shall be binding upon and inure to the benefit of both parties and their respective successors and assigns, including any corporation into which the Company may be merged or which may succeed to its assets or business, provided, however, that the obligations of Executive are personal and shall not be assigned by Executive. The Company may assign this Agreement following the delivery of written notice to the Executive.

 

12.         Miscellaneous .

12.1     No Waiver . No delay or omission by the Company in exercising any right under this Agreement shall operate as a waiver of that or any other right. A waiver or consent given by the Company on any one occasion shall be effective only in that instance and shall not be construed as a bar or waiver of any right on any other occasion.

12.2     Severability . In case any provision of this Agreement shall be invalid, illegal or otherwise unenforceable, the validity, legality and enforceability of the remaining provisions shall in no way be affected or impaired thereby.

12.3     Governing Law . This Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of California.

12.4     Consent to Arbitration . In the event of a dispute involving this Agreement, the Executive consents and agrees that all disputes shall be resolved in accordance with the terms and conditions of the Mutual Agreement to Arbitrate Claims between the Company and the Executive.

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

[Signature Page Follows]

 

4


IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year set forth above.

 

/s/ Leslie Cross
Leslie Cross

 

ALPHATEC SPINE, INC.
By:/s/ Heather Rider
Name: Heather Rider
Title: SVP, Global Human Resources

 

ALPHATEC HOLDINGS, INC.
By:/s/ Heather Rider
Name: Heather Rider
Title: SVP, Global Human Resources

 

5

Exhibit 10.2

SECOND AMENDED AND RESTATED EMPLOYMENT AGREEMENT

THIS SECOND AMENDED AND RESTATED EMPLOYMENT AGREEMENT (the “Agreement”) is entered into on the 26 th day of February, 2012 (the “Effective Date”), by and between Alphatec Holdings, Inc., Alphatec Spine, Inc. (collectively, each of Alphatec Holdings, Inc. and Alphatec Spine, Inc. shall be referred to as the “Company”), a Delaware corporation, and Dirk Kuyper (the “Executive”) (hereinafter collectively referred to as the “parties”).

WHEREAS, the Company and the Executive entered into that certain Employment Agreement dated June 1, 2007, as amended and restated on January 1, 2011 (the “Original Agreement”)

WHEREAS, the Company and the Executive wish to amended and restated the Original Agreement in accordance with the terms set forth in this Agreement

NOW, THEREFORE, in consideration of the foregoing and the mutual promises contained herein, the parties agree that the Original Agreement is hereby deleted in its entirety and replaced with the following:

1.          At-Will Employment . The parties to this Agreement agree and acknowledge that the Executive’s employment pursuant to this Agreement shall be considered at-will. Either party may terminate this Agreement at any time, with or without cause pursuant to the terms of this Agreement.

2.         Position and Duties . The Executive will be employed as the President, Global Commercial Operations or in such other position(s) as may be mutually agreed upon by the parties, working principally from the Company’s headquarters which currently are located in Carlsbad, California. The Executive will report to the Company’s Chairman and CEO. In addition, it is the Company’s intention that the Executive will be appointed or elected to serve as a member of the Board of Directors of the Company (the “Board”) during the term of the Executive’s employment.

3.         Devotion of Full Time and Attention . The Executive will devote his full working time, attention and skill to the performance of his duties and responsibilities as an executive employee of the Company and will do so in a trustworthy and professional manner. He will use his best efforts to promote the interests of the Company. The Executive will not, without prior written approval of the Chairman and CEO, engage in any other activities that would interfere with the performance of his duties as an employee of the Company, are in violation of written policies of the Company, are in violation of applicable law, or would create an actual or perceived conflict of interest with respect to the Executive’s obligations as an employee of the Company.

4.         Compensation . During his employment, the Executive shall be paid the following as compensation for his services:

A.     Base Salary . The Executive’s initial base salary will be $375,000 per annum (such

 

1


base salary, as it may be adjusted from time to time in accordance with this Agreement, the “Base Salary”), from which shall be deducted all required or authorized payroll deductions, including state and federal withholdings. The Base Salary will be payable in accordance with the Company’s customary payroll practices applicable to its executives. The Base Salary will be reviewed, and may be adjusted, at least annually in a manner determined by the Board or, if the Board so directs, by the Compensation Committee of the Board (the “Compensation Committee”).

B.     Bonus . The Executive will be eligible for a bonus as set forth on Exhibit A of this Agreement.

C.     Equity Compensation .

(i) Effective on July 2, 2007, the Company shall grant the Executive 690,000 shares of restricted Company stock (the “Shares”) pursuant to the Amended and Restated 2005 Employee, Director and Consultant Stock Plan (“Stock Plan”). So long as the Executive continues to be employed by the Company, 1/16 of all such Shares shall become non-forfeitable and the restrictions thereon shall lapse (such shares then being referred to as “vested”) on October 2, 2007 and every three months until all such Shares have vested. Upon termination of his employment the Executive shall forfeit his interest in any Shares which have not vested. In addition, in the event that there is a Change in Control (as defined below) during the Executive’s Employment, any Shares which have not previously vested shall become vested immediately upon such Change in Control. The parties agree and acknowledge that the Shares have been previously granted to the Executive prior to the Effective Date.

a. Change in Control . For purposes of this Section, “Change in Control” means the occurrence of any of the following events:

(x) the acquisition by an individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) (a “Person”) of beneficial ownership of any capital stock of the Company if, after such acquisition, such Person beneficially owns (within the meaning of Rule 13d-3 promulgated under the Exchange Act) in excess of 50% of either the then-outstanding shares of common stock of the Company (the “Outstanding Company Common Stock”) or the combined voting power of the then-outstanding securities of the Company entitled to vote generally in the election of directors (the “Outstanding Company Voting Securities”); provided, however, that for purposes of this subsection (A), the following acquisitions shall not constitute a Change in Control: (1) any acquisition of more than 50% of the Outstanding Company Common Stock directly from the Company (excluding an acquisition pursuant to the exercise, conversion or exchange of any security exercisable for, convertible into or exchangeable for common stock or voting securities of the Company, unless the Person exercising, converting or exchanging such security acquired such security directly from the Company or an underwriter or agent of the Company); (2) any acquisition of more than 50% of the Outstanding Company Common Stock by the Company; (3) any acquisition of more than 50% of the Outstanding Company Common Stock by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company; or (4) any acquisition by any Person who, prior to such acquisition, already owned more than 50% of the Outstanding Company Common Stock or Outstanding Company Voting Securities; or

 

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(y) such time as the majority of the members of the Board (or, if applicable, the board of directors of a successor corporation to the Company) is replaced during any 12-month period (commencing no earlier than the date of this Agreement) by directors whose appointment or election is not endorsed by a majority of the members of the Board prior to the date of the appointment or election; or

(z) the consummation of a merger, consolidation, reorganization, recapitalization or statutory share exchange involving the Company or a sale or other disposition of all or substantially all of the assets of the Company in one or a series of transactions (a “Business Combination”), unless, immediately following such Business Combination, all or substantially all of the individuals and entities who were the beneficial owners of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of the then-outstanding shares of common stock and the combined voting power of the then-outstanding securities entitled to vote generally in the election of directors, respectively, of the resulting or acquiring corporation in such Business Combination (which shall include, without limitation, a corporation which as a result of such transaction owns the Company or substantially all of the Company’s assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, respectively.

(ii) The Executive will also be eligible to be considered by the Compensation Committee for grants or awards of stock options or other stock-based compensation under the Stock Plan or similar plans as in effect from time to time. All such grants or awards shall be governed by the relevant plan documents and requirements and shall be evidenced by the Company’s then-standard form of stock option, restricted stock or other applicable agreement.

5.         Benefits . The Executive will be entitled to participate in all employee benefit plans, practices and programs maintained by the Company and made available to employees generally including, without limitation, all pension, retirement, profit sharing, savings, health, hospitalization, disability, dental, life or travel accident insurance benefit plans, vacation and sick leave in accordance with the terms of such plans, practices and programs as in effect from time to time. In addition, the Executive shall be entitled to the following benefits:

A.     Executive shall receive reimbursement of up to $3,000 per calendar year in connection with premiums paid by Executive for the purchase of a supplemental long term disability insurance policy. Such reimbursement shall occur after proof of payment of such premiums has been submitted to the Company;

B.     Executive shall receive reimbursement of up to $2,500 in 2012 in connection with costs and expenses related to physical examinations conducted in accordance with an executive health program (as an example, the Mayo Clinic’s Executive Health Program, or a similar program).

 

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Such reimbursement shall occur after proof of payment of such premiums has been submitted to the Company; and

C.     For the remainder of the lease period of the Mercedes Benz [MODEL] (the “Leased Auto”) that is currently being leased by the Company, Executive shall be entitled to use the Leased Auto while employed by the Company. Executive shall be responsible for any expenses related to such Leased Auto that are in excess of $1,000 per month. Following the end of the lease for the Leased Auto, Executive shall not be entitled to use the Leased Auto, and Executive shall be entitled to an automobile allowance of $1,000 per month.

6.         Expense Reimbursement . The Company will pay the reasonable and properly documented expenses incurred by the Executive in furtherance of the Company’s business in accordance with applicable Company policies and procedures (the “Expenses”).

7.         Vacation . The Executive may take up to four (4) weeks of paid vacation during each year at such times as shall be consistent with the Company’s vacation policies and with vacations scheduled for other executives and employees of the Company.

8.         Intentionally Omitted .

9.         Intentionally Omitted .

10.         Termination and Compensation Upon Termination . The Executive’s employment shall terminate, other than by expiration of the Employment Term, as set forth in this Section.

A. Definitions .

(i) Cause . For purposes of this Agreement, “Cause” means: (A) a finding by the Board that the Executive failed to substantially perform his duties and obligations to the Company (other than a failure resulting from the Executive’s incapacity because of a Disability, as defined below), including but not limited to one or more acts of gross negligence; (B) a finding by the Board of a material breach of the Company’s Code of Conduct or other policies and procedures; (C) indictment or conviction (including the entry of a plea of guilty or nolo contendere by the Executive) to any felony or any misdemeanor or other criminal offense involving fraud, dishonesty, theft, breach of trust or moral turpitude or that requires mandatory exclusion in any Federal health care program pursuant to 42 U.S.C. § 1320a-7(a) during the Executive’s employment; (D) a finding by the Board that the Executive willfully engaged in conduct which is demonstrably and materially injurious to the Company, monetarily or otherwise; (E) a finding by the Board that the Executive materially breached this Agreement; or (F) the Executive’s violation of the Securities Act of 1933 or the Securities Exchange Act of 1934.

(ii) Disability .

a. Except as set forth in Section 10(A)(ii)(b) below, for purposes of

 

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this Agreement, “Disability” means a physical or mental illness, impairment or infirmity which renders the Executive unable to perform the essential functions of his position, including his duties under this Agreement, with reasonable accommodation, as determined by a physician selected by the Company and acceptable to the Executive or the Executive’s legal representative, for at least one hundred eighty (180) days during any 365-consecutive-day period.

b. Notwithstanding the foregoing, to the extent that any payment under this Agreement that is subject to Code Section 409A may be triggered due to a Disability, “Disability” shall mean Executive (A) is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than twelve (12) months, or (B) is, by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than twelve (12) months, receiving income replacement benefits for a period of not less than three (3) months under a Company-sponsored group disability plan. The Executive shall be entitled to the compensation and benefits provided for under this Agreement for any period during the Term of this Agreement and prior to the establishment of the Executive’s Disability during which the Executive is unable to work due to a physical or mental illness, impairment or infirmity. Notwithstanding anything contained in this Agreement to the contrary, the Executive will be entitled to return to his position with the Company as set forth in this Agreement in which event no Disability of the Executive will be deemed to have occurred, until the Termination Date specified in a Notice of Termination (as each term is hereinafter defined) relating to the Executive’s Disability.

B. Events Resulting in Termination; Compensation Upon Termination.

(i) Termination for Cause . The Company may terminate the Executive’s employment for Cause.

a. If the Executive’s employment is terminated by the Company for Cause, then the Company will pay the Executive all amounts earned or accrued hereunder through the Termination Date but not paid as of the Termination Date, including (1) Base Salary; (2) Expenses incurred by the Executive on behalf of the Company for the period ending on the Termination Date; and (3) any bonus or other compensation that was earned but not paid (collectively, “Accrued Compensation”).

b. In the event that the Company terminates the Executive’s employment without Cause, but the Board determines subsequently that the Company had the right to terminate the Executive’s employment for Cause pursuant to this Section 10B(i), the Company may terminate the payment of all amounts to the Executive pursuant to Section 10B(ii) and the Executive shall return all previous payments made to him pursuant to Section 10B(ii) other than the Accrued Compensation.

(ii) Termination by the Company Without Cause, Termination by either Company or Executive within ninety (90) days of the Effective Date, or Termination by the

 

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Executive for Good Reason . If the Executive’s employment with the Company is terminated: (i) by the Company without Cause (excluding any termination due to the Executive’s death or Disability); (ii) by either the Executive or the Company within the first ninety (90) days after the Effective Date (other than a termination for Cause by the Company during such time period); or (iii) by the Executive for Good Reason, then the Company will pay the Executive:

a. all Accrued Compensation;

b. a severance payment equal to five hundred thousand dollars ($500,000), which shall be paid to the Executive in bi-weekly installments over the subsequent twelve (12) months following the Termination Date, except that the first payment shall not be sooner than the eighth day following the date on which the Executive delivers to the Company the release referred to in Section 10B(ii)(D) below; (C) directly, or by reimbursing the Executive for, the monthly premium for continuation coverage under the Company’s health and dental insurance plans, to the same extent that such insurance is provided to persons currently employed by the Company, provided that the Executive makes a timely election for such continuation coverage under the Consolidate Omnibus Budget Reconciliation Act of 1985 (“COBRA”). The “qualifying event” under COBRA shall be deemed to have occurred on the Termination Date. The Company’s obligation under this paragraph shall end twelve (12) months after the Termination Date or at such earlier date as the Executive becomes eligible for comparable coverage under another employer’s group coverage. The Executive agrees to notify the Company promptly and in writing of any new employment and to make full disclosure to the Company of the health and dental insurance coverage available to him through such new employment; and (D) The Company shall not be obligated to make the payments otherwise provided for in Sections 10B(ii)(B) and (C) unless the Executive provides to the Company, and does not revoke, a general release of claims in a form satisfactory to the Company.

(iii) Disability . The Company may terminate the Executive’s employment upon the Executive’s Disability. If the Executive’s employment with the Company is terminated because of his Disability, then the Company will pay the Executive (A) all Accrued Compensation; and (B) an amount equal to three hundred sixty five thousand dollars ($365,000), multiplied by a fraction, the numerator of which shall be the number of days from the beginning of such fiscal year through the Termination Date and the denominator of which shall be three hundred and sixty-five (365). If the Executive’s Disability meets the definition set forth in Section 10A(ii)(b), the Company will also pay the Executive any deferred compensation. In addition, effective upon the Executive’s Disability, each outstanding option to purchase shares of Common Stock of the Company held by the Executive shall become immediately exercisable in full and will no longer be subject to a right of repurchase by the Company, and each outstanding restricted stock award shall be deemed to be fully vested and will no longer be subject to a right of repurchase by the Company.

(iv) Death . The Executive’s employment shall terminate because of the Executive’s death. If the Executive’s employment with the Company terminates because of the Executive’s death, then the Company will pay the Executive’s beneficiaries or heirs (A) all Accrued Compensation; and (B) an amount equal to three hundred sixty five thousand dollars ($365,000),

 

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multiplied by a fraction, the numerator of which shall be the number of days from the beginning of such fiscal year through the Termination Date and the denominator of which shall be three hundred and sixty-five (365). In addition, effective upon the death of the Executive, each outstanding option to purchase shares of Common Stock of the Company held by the Executive shall become immediately exercisable in full and will no longer be subject to a right of repurchase by the Company, and each outstanding restricted stock award shall be deemed to be fully vested and will no longer be subject to a right of repurchase by the Company.

(v) Resignation . The Executive may terminate this Agreement upon thirty (30) days’ prior written notice to the Board. Other than as set forth in Section 10(B)(ii), if the Executive’s employment with the Company is terminated by the Executive, then the Company will only be obligated to pay the Executive all Accrued Compensation earned through the Termination Date specified in the Notice of Termination.

C. Notice of Termination . Any purported termination by the Company or by the Executive will be communicated by a written Notice of Termination to the other. For purposes of this Agreement, a “Notice of Termination” means a notice which indicates the specific termination provision in this Agreement relied upon and sets forth the Termination Date (as defined below). For purposes of this Agreement, no purported termination of employment will be effective without a Notice of Termination.

D. Termination Date . “Termination Date” will mean (i) in the case of the Executive’s Death, the Executive’s date of Death; (ii) if the Executive’s employment is terminated for Disability, the date of the Executive’s Disability; (iii) if the Executive terminates his employment, on the effective date of termination specified in the Notice of Termination; and (iv) if the Executive’s employment is terminated for any other reason, the date specified in the Notice of Termination, which will not be longer than seven (7) days after the Notice of Termination.

E. Good Reason . “Good Reason” will mean: (i) a material diminution in Executive’s responsibilities or authority; (ii) a greater than 20% reduction of Executive’s Base Salary, except for across-the-board changes for executives at the Executive’s level; or (iii) the geographic location at which the Executive is based is relocated to a place that is more than one hundred (100) miles from Carlsbad, CA (for the avoidance of doubt, the requirement that the Executive travel extensively throughout the world in order to fulfill the Executive’s duties shall not be deemed to constitute Good Reason). For each event described above in this Section 10(E), the Executive must notify the Company within ninety (90) days of the occurrence of the event and the Company shall have thirty (30) days after receiving such notice in which to cure. If the Company fails to cure, the Executive’s resignation shall not be considered to be for Good Reason unless the Executive resigns not later than one hundred eighty (180) days after the occurrence of the relevant event.

F. Timing of Payment . The Accrued Compensation payable to the Executive will be paid as required by applicable state law or within ten (10) business days after the Executive’s Termination Date, whichever period is shorter. Any other compensation provided for in Section 10(b) will be paid as set forth above.

 

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11.         Confidential Information and Intellectual Property; Non-solicitation of Employees.

A. Confidential Information . All information and know-how, whether or not in writing, of a private, secret or confidential nature concerning the Company’s business or financial affairs (collectively, “Confidential Information”) is and shall be the exclusive property of the Company. By way of illustration, but not limitation, Confidential Information may include inventions, products, processes, methods, techniques, formulas, compositions, compounds, projects, developments, plans, research data, clinical data, financial data, personnel data, computer programs, and customer and supplier lists. The Executive will not disclose any Confidential Information to others outside the Company or use the same for any unauthorized purposes without written approval by an officer of the Company, either during or after his employment, unless and until such Proprietary Information has become public knowledge without fault by the Executive.

B. Business Records . All files, letters, memoranda, reports, records, data, sketches, drawings, laboratory notebooks, program listings, or other written, photographic, or other tangible material whether or not containing Confidential Information, whether created By the Executive or others, which shall come into his custody or possession, shall be and are the exclusive property of the Company to be used by the Executive only in the performance of his duties for the Company and shall be returned to the Company upon termination of the Executive’s employment.

C. Third Party Information . The Executive’s obligation not to disclose or use information, know-how and records of the types set forth in paragraphs A and B above, also extends to such types of information, know-how, records and tangible property of subsidiaries and joint ventures of the Company, customers of the Company or suppliers to the Company or other third parties who may have disclosed or entrusted the same to the Company or to the Executive in the course of the Company’s business.

D. Creations . All Creations (as herein defined) shall be the property of the Company. “Creations” shall mean all ideas, prospect and customer lists, inventions, research, plans for products or services, potential marketing and sales relationships, business development strategies, marketing plans, designs, logos, branding, layouts, templates, computer software (including, without limitation, source code), computer programs, original works of authorship, copyrightable expression, characters, know-how, trade secrets, information, data, developments, discoveries, improvements, modifications, technology, methodologies, algorithms and designs, whether or not subject to patent or copyright protection, made, conceived, expressed, developed, or actually or constructively reduced to practice by the Executive solely or jointly with others to the extent relating to or otherwise in connection with the Executive’s employment by the Company. The Executive agrees to cooperate in all respects regarding requests by the Company relating to the Company’s intellectual property rights in the Creations, whether such cooperation is required during or after the termination of the employment period.

E. Non-solicitation . For a period of one (1) year after termination of the Executive’s employment for any reason, the Executive will not recruit, solicit or induce, or attempt to recruit, solicit or induce, any employee of the Company to terminate his or her employment with, nor shall he otherwise interfere in the relationship between the Company and any such employee.

 

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F. Remedy . The restrictions contained in this Section 11 are necessary for the protection of the business and goodwill of the Company and are acknowledged by the Executive to be reasonable. The Executive agrees that any breach of this Section 11 will cause the Company substantial and irrevocable damage and therefore, in the event of any such breach, in addition to such other remedies which may be available, the Company shall have the right to seek specific performance and injunctive relief in a court of law.

12.         Successors and Assigns .

A. Successor to Company . The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company expressly to assume and agree to perform this Agreement to the same extent that the Company would be required to perform it if no such succession had taken place.

B. Successor to the Executive . Neither this Agreement nor any right or interest hereunder will be assignable or transferable by the Executive, his beneficiaries or legal representatives, except by will or by the laws of descent and distribution. This Agreement will inure to the benefit of and be enforceable by the Executive’s legal personal representative.

13.         Arbitration . The Company and the Executive agree that they prefer to arbitrate any dispute they may have instead of litigating in court before a judge or jury. Therefore, any and all disputes, claims and controversies between the Company or any of its Affiliates and the Executive arising out of or relating to this Agreement, or the breach thereof, or otherwise arising out of or relating to the Executive’s employment or the termination thereof will be resolved by binding arbitration in accordance with the National Rules for the Resolution of Employment Disputes of the American Arbitration Association (or any comparable rules then in existence). The arbitration will take place in the San Diego, California metropolitan area. The arbitrator will have no authority to award punitive damages. The award of the arbitrator will be final and judgment thereon may be entered in any court having jurisdiction. The parties will share the costs of the arbitration equally, unless otherwise ordered by the arbitrator. Each party will bear its own attorneys’ fees and costs. Judgment upon the arbitration award may be entered in any federal or state court having jurisdiction. The parties understand and agree that EACH PARTY TO THIS AGREEMENT WAIVES ANY RIGHT TO A JURY TRIAL.

14.         Notice . For the purposes of this Agreement, notices and all other communications provided for in the Agreement (including the Notice of Termination) will be in writing and will be deemed to have been duly given when personally delivered or sent by certified mail, return receipt requested, postage prepaid, addressed to the respective addresses last given by each party to the other, provided that all notices to the Company will be directed to the attention of the Board with a copy to the Secretary of the Company. All notices and communications will be deemed to have been received on the date of delivery thereof or on the third business day after the mailing thereof, except that notice of change of address will be effective only upon receipt.

 

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15.         Non-exclusivity of Rights . Nothing in this Agreement will prevent or limit the Executive’s continuing or future participation in any benefit, bonus, incentive or other plan or program provided by the Company or any of its subsidiaries and for which the Executive may qualify, nor will anything herein limit or reduce such rights as the Executive may have under any other agreements with the Company or any of its subsidiaries. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan or program of the Company or any of its subsidiaries will be payable in accordance with such plan or program, except as explicitly modified by this Agreement.

16.         Miscellaneous . No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and the Company. The Company and the Executive agree that they will negotiate in good faith and jointly execute an amendment to modify this Agreement to the extent necessary to comply with the requirements of Code Section 409A, or any successor statute, regulation and guidance thereto; provided that no such amendment shall increase the total financial obligation of the Company under this Agreement. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party will be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreement or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement.

17.         Governing Law . This Agreement will be governed by and construed and enforced in accordance with the laws of the State of California without giving effect to the conflict of law principles thereof.

18.         Severability . The provisions of this Agreement will be deemed severable and the invalidity or unenforceability of any provision will not affect the validity or enforceability of the other provisions hereof.

19.         Tax Consequences . The Company makes no representation regarding, and does not guarantee, the tax treatment or tax consequences associated with any payment or benefit arising under this Agreement.

20.         Intentionally Omitted .

 

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IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer and the Executive has executed this Agreement as of the day and year first above written.

 

Alphatec Holdings, Inc .

/s/ Leslie Cross

Name:Leslie Cross

Title:Chairman and CEO

 

Alphatec Spine, Inc .

/s/ Leslie Cross

Name:Leslie Cross

Title:Chairman and CEO

 

Dirk Kuyper

/s/ Dirk Kuyper

 

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Exhibit 10.3

Summary of the 2012 Alphatec Holdings, Inc. Bonus Plan

2012 Bonus Plan for Management Employees Located in the United States, other than Dirk Kuyper and Steve Lubischer

With respect management employees located in the United States, other than Dirk Kuyper and Steve Lubischer, the target cash bonuses for fiscal year 2012 were determined according to a formula expressed as percentages of the respective employee’s base salary, and is subject to adjustments based on the percentage to which the targeted applicable performance criteria is achieved, which other than with respect to Les Cross, our Chairman and Chief Executive Officer, is predicated on the achievement of (i) certain free cash flow targets generated in accordance with the Company’s 2012 operating plan that was approved by the Company’s Board of Directors (80% of the total amount of the target bonus); and (ii) each employee’s achievement of certain individual goals related to such employee’s individual objectives for 2012 (80% of the total amount of the target bonus). With respect to Mr. Cross, 100% of his target bonus is predicated on the achievement of the free cash flow targets described above. The Compensation Committee approved all financial criteria for the awarding of such cash bonuses and the financial criteria was presented to each of the employees for his or her confirmation of the achievability of such criteria. In the event the employees exceed such target levels, they are entitled to receive cash bonuses based on higher percentages of their respective base salaries. The table below sets forth for each of the “Named Executive Officers” (as such term is defined in Item 402 of Regulation S-K) for the year ended December 31, 2011 (other than Dirk Kuyper, Steve Lubischer and Mitsuo Asai) that is currently employed by us, and our current Chief Financial Officer, the percentage of the base salary that such executive is eligible to receive as a cash bonus under the 2012 Bonus Plan upon the achievement of the target financial levels.

 

Name

   2012
Base Salary
     2012 Target
Bonus
Percentage
 

Les Cross

   $ 500,000         75

Michael O’Neill

   $ 325,000         50

Pat Ryan

   $ 350,000         50

2012 Bonus Plan for Management Employees Located Outside of the United States, including Mitsuo Asai

With respect to management employees located outside of the United States, including Mitsuo Asai, the target cash bonuses for fiscal year 2012 were determined according to a formula expressed as percentages of the respective employee’s base salary, and is subject to adjustments based on the percentage to which the targeted applicable performance criteria is achieved, which in 2012 is predicated on the achievement of (i) revenue and operating income targets generated in accordance with the Company’s 2012 operating plan that was approved by the Company’s Board of Directors (40% of the total amount of the target bonus); (ii) certain free cash flow targets generated in accordance with the Company’s 2012 operating plan that was approved by the Company’s Board of Directors (40% of the total amount of the target bonus); and (iii) certain regional accounts receivable targets (20% of the total amount of the target bonus). The Compensation Committee approved all financial criteria for the awarding of such cash bonuses and the financial criteria was presented to each of the employees for his or her confirmation of the achievability of such criteria. In the event the employees exceed such target levels, they are entitled to receive cash bonuses based on higher percentages of their respective base salaries.

2012 Bonus Plan for Dirk Kuyper, President Global Commercial Operations

With respect to Mr. Kuyper, the amount, if any, of his cash bonus for fiscal year 2012 shall be determined based upon the Company’s achievement of certain global sales targets. Mr. Kuyper’s does not have a target bonus amount based on a percentage of his base salary. The Compensation Committee approved all financial criteria for the awarding of such cash bonus and the financial criteria was presented to Mr. Kuyper for his confirmation of the achievability of such criteria.


2012 Bonus Plan for Stephen Lubischer, Vice President, Sales

With respect to Mr. Lubischer, the target cash bonus for fiscal year 2012 was determined based upon the Company’s achievement of certain sales targets in the U.S. Upon 100% achievement of all of such sales targets, Mr. Lubischer’s bonus will equal approximately 85% of his base salary of $249,900. The Compensation Committee approved all financial criteria for the awarding of such cash bonus and the financial criteria was presented to Mr. Lubischer for his confirmation of the achievability of such criteria. In the event that U.S. sales exceed certain target levels, Mr. Lubischer is entitled to receive a cash bonus that is higher than the percentage of his base salary set forth above.

Exhibit 10.4

FOURTH AMENDMENT

TO

SECOND AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT

THIS FOURTH AMENDMENT to Second Amended and Restated Loan and Security Agreement (this “ Amendment ”) is entered into as of February 26 th 2012, by and between SILICON VALLEY BANK (“ Bank ”) and ALPHATEC SPINE, INC., a California corporation (“ Alphatec ”) and ALPHATEC HOLDINGS, INC., a Delaware corporation (“ Parent ” and together with Alphatec, each a “ Borrower ” and collectively, “ Borrowers ”) whose address is 5818 El Camino Real, Carlsbad, California 92008.

R ECITALS

A. Bank and Borrowers have entered into that certain Second Amended and Restated Loan and Security Agreement dated as of October 29, 2010, as amended by that certain First Amendment to Second Amended and Restated Loan and Security Agreement dated as of January 31, 2011, that certain Second Amendment to Second Amended and Restated Loan and Security Agreement dated as of August 5, 2011 and that certain Third Amendment to Second Amended and Restate Loan and Security Agreement dated as of December 16, 2011 (as the same may from time to time be further amended, modified, supplemented or restated, the “ Loan Agreement ”).

B. Bank has extended credit to Borrowers for the purposes permitted in the Loan Agreement.

C. Borrowers are currently in default of the Loan Agreement for failing to comply with the covenant set forth in (i) Section 6.9(a) of the Loan Agreement for the January 2012 and February 2012 measuring periods and (ii) Section 6.9(b) of the Loan Agreement for the December 2011 measuring period (collectively, the “ Existing Defaults ”)

D. Borrowers have requested that Bank amend the Loan Agreement to (i) waive the Existing Defaults and (ii) make certain revisions to the Loan Agreement as more fully set forth herein.

E. Bank has agreed to so amend certain provisions of the Loan Agreement, but only to the extent, in accordance with the terms, subject to the conditions and in reliance upon the representations and warranties set forth below.

A GREEMENT

N OW , T HEREFORE , in consideration of the foregoing recitals and other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, and intending to be legally bound, the parties hereto agree as follows:

1. Definitions. Capitalized terms used but not defined in this Amendment shall have the meanings given to them in the Loan Agreement.

2. Amendments to Loan Agreement.

2.1 Section 2.1.1 (Term Loan). The first sentence of Section 2.1.1 of the Loan Agreement hereby is amended and restated in its entirety to read as follows:

“Borrower shall repay the balance of the Term Loan outstanding on the Fourth Amendment Effective Date in (i) equal installments of principal beginning on the Fourth Amendment Effective Date and continuing on the first day of each April, July, October and January thereafter, plus (ii) monthly payments of accrued interest beginning on January 1, 2012 and continuing on the same day of each month thereafter.”

2.2 Section 13 (Definitions). The following terms and their respective definitions hereby are amended in, or added to, Section 13.1 of the Loan Agreement:


Fourth Amendment Effective Date ” means February 26 th 2012.

Revolving Line ” is a Revolving Advance or Revolving Advances in an amount equal to Nineteen Million Five Hundred Thousand Dollars ($19,500,000).

Term Loan Maturity Date ” is July 1, 2015.

2.3 Section 13 (Definitions). The definition of the term “Borrowing Base” as it appears in Section 13 of the Loan Agreement hereby is amended by deleting the phrase “Seven Million Dollars ($7,000,000)” as it appears therein and replacing it with the phrase “Six Million Dollars ($6,000,000).

2.4 Bank hereby waivers the Existing Defaults.

3. Limitation of Amendments.

3.1 The amendments set forth in Section 2, above, are effective for the purposes set forth herein and shall be limited precisely as written and shall not be deemed to (a) be a consent to any amendment, waiver or modification of any other term or condition of any Loan Document, or (b) otherwise prejudice any right or remedy which Bank may now have or may have in the future under or in connection with any Loan Document.

3.2 This Amendment shall be construed in connection with and as part of the Loan Documents and all terms, conditions, representations, warranties, covenants and agreements set forth in the Loan Documents, except as herein amended, are hereby ratified and confirmed and shall remain in full force and effect.

4. Representations and Warranties. To induce Bank to enter into this Amendment, each Borrower hereby represents and warrants to Bank as follows:

4.1 Immediately after giving effect to this Amendment (a) the representations and warranties contained in the Loan Documents are true, accurate and complete in all material respects as of the date hereof (except to the extent such representations and warranties relate to an earlier date, in which case they are true and correct as of such date), and (b) no Event of Default has occurred and is continuing;

4.2 Each Borrower has the power and authority to execute and deliver this Amendment and to perform its obligations under the Loan Agreement, as amended by this Amendment;

4.3 The organizational documents of each Borrower delivered to Bank on the Effective Date remain true, accurate and complete and have not been amended, supplemented or restated and are and continue to be in full force and effect;

4.4 The execution and delivery by each Borrower of this Amendment and the performance by each Borrower of its obligations under the Loan Agreement, as amended by this Amendment, have been duly authorized;

4.5 The execution and delivery by each Borrower of this Amendment and the performance by each Borrower of its obligations under the Loan Agreement, as amended by this Amendment, do not and will not contravene (a) any law or regulation binding on or affecting such Borrower, (b) any contractual restriction with a Person binding on such Borrower, (c) any order, judgment or decree of any court or other governmental or public body or authority, or subdivision thereof, binding on such Borrower, or (d) the organizational documents of such Borrower;

4.6 The execution and delivery by each Borrower of this Amendment and the performance by each Borrower of its obligations under the Loan Agreement, as amended by this Amendment, do not require any order, consent, approval, license, authorization or validation of, or filing, recording or registration with, or exemption by any governmental or public body or authority, or subdivision thereof, binding on either Borrower, except as already has been obtained or made; and

 

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4.7 This Amendment has been duly executed and delivered by each Borrower and is the binding obligation of each Borrower, enforceable against such Borrower in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, liquidation, moratorium or other similar laws of general application and equitable principles relating to or affecting creditors’ rights.

5. Counterparts. This Amendment may be executed in any number of counterparts and all of such counterparts taken together shall be deemed to constitute one and the same instrument.

6. Effectiveness. This Amendment shall be deemed effective upon (i) the due execution and delivery to Bank of this Amendment by each party hereto; (ii) the due execution and delivery to Bank of updated Corporate Borrowing Resolutions by each Borrower; (iii) Borrowers’ payment to Bank of an amendment fee in the amount of Fifty Thousand Dollars ($50,000), which may be debited from any of any Borrower’s accounts; (iv) Borrowers’ payment of the amounts due on the Fourth Amendment Effective Date pursuant to Section 2.1.1.(b) of the Loan Agreement, as amended hereby, which may be debited from any of any Borrower’s accounts (v) Borrowers’ payment of all Bank Expenses, which may be debited from any of any Borrower’s accounts with Bank; and (vi) such other and further matters as Bank may reasonably request.

[ Balance of Page Intentionally Left Blank ]

 

3


I N W ITNESS W HEREOF , the parties hereto have caused this Amendment to be duly executed and delivered as of the date first written above.

 

BANK:     BORROWERS:
   
SILICON VALLEY BANK     ALPHATEC SPINE, INC.
By:   /s/ Derek Brunelle     By:   /s/ Michael O’Neill
Name:   Derek R. Brunelle     Name:   Michael O’Neill
Title:   Deal Team Leader     Title:   VP and CFO
     
     
      ALPHATEC HOLDINGS, INC.
      By:   /s/ Michael O’Neill
      Name:   Michael O’Neill
      Title:   VP and CFO

Exhibit 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

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

I, Leslie H. Cross, 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 Act 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 (the registrant’s fourth fiscal quarter in the case of an annual report) 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/ Leslie H. Cross

  Leslie H. Cross
  Chairman and Chief Executive Officer
  May 8, 2012

Exhibit 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

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

I, Michael O’Neill, 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 Act 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 (the registrant’s fourth fiscal quarter in the case of an annual report) 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/ Michael O’Neill

  Michael O’Neill
  Chief Financial Officer, Vice President and Treasurer
  May 8, 2012

Exhibit 32

CERTIFICATION UNDER

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Alphatec Holdings, Inc. (the “Company”) on Form 10-Q for the quarterly period ended March 31, 2012, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Leslie H. Cross, Chief Executive Officer, certify, to my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Dated: May 8, 2012  

/s/ Leslie H. Cross

 

Leslie H. Cross

Chairman and Chief Executive Officer

(principal executive officer of the Company)

In connection with the Quarterly Report of Alphatec Holdings, Inc. (the “Company”) on Form 10-Q for the quarterly period ended March 31, 2012, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael O’Neill, Chief Financial Officer, certify, to my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Dated: May 8, 2012  

/s/ Michael O’Neill

 

Michael O’Neill

Chief Financial Officer, Vice President and Treasurer

(principal financial and accounting officer of the Company)