Alphatec Spine, Inc.
Alphatec Holdings, Inc. (Form: 10-Q, Received: 05/02/2013 06:07:32)
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, 2013

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 April 30, 2013, there were 96,683,174 shares of the registrant’s common stock outstanding.

 

 

 


Table of Contents

ALPHATEC HOLDINGS, INC.

QUARTERLY REPORT ON FORM 10-Q

March 31, 2013

Table of Contents

 

          Page  
   PART I – FINANCIAL INFORMATION   
Item 1    Financial Statements (Unaudited)      3   
   Condensed Consolidated Balance Sheets as of March 31, 2013 and December 31, 2012      3   
   Condensed Consolidated Statements of Operations for the three months ended March 31, 2013 and 2012      4   
  

Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2013 and 2012

     5   
   Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2013 and 2012      6   
   Notes to Condensed Consolidated Financial Statements      7   
Item 2    Management’s Discussion and Analysis of Financial Condition and Results of Operations      16   
Item 3    Quantitative and Qualitative Disclosures About Market Risk      23   
Item 4    Controls and Procedures      23   
   PART II – OTHER INFORMATION   
Item 1    Legal Proceedings      24   
Item 1A    Risk Factors      25   
Item 2    Unregistered Sales of Equity Securities and Use of Proceeds      25   
Item 6    Exhibits      26   
SIGNATURES      27   

 

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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,
2013
    December 31,
2012
 
Assets     

Current assets:

    

Cash and cash equivalents

   $ 19,293      $ 22,241   

Accounts receivable, net

     40,711        41,012   

Inventories, net

     50,457        49,855   

Prepaid expenses and other current assets

     5,753        5,953   

Deferred income tax assets

     2,964        2,991   
  

 

 

   

 

 

 

Total current assets

     119,178        122,052   

Property and equipment, net

     31,310        30,403   

Goodwill

     175,669        180,838   

Intangibles, net

     46,227        46,856   

Other assets

     1,815        1,978   
  

 

 

   

 

 

 

Total assets

   $ 374,199      $ 382,127   
  

 

 

   

 

 

 
Liabilities and Stockholders’ Equity     

Current liabilities:

    

Accounts payable

   $ 18,516      $ 15,237   

Accrued expenses

     34,397        38,490   

Deferred revenue

     1,313        1,361   

Current portion of long-term debt

     1,277        1,700   
  

 

 

   

 

 

 

Total current liabilities

     55,503        56,788   

Long-term debt, less current portion

     40,578        39,967   

Other long-term liabilities

     12,556        13,485   

Deferred income tax liabilities

     2,096        2,468   

Redeemable preferred stock, $0.0001 par value; 20,000 authorized at March 31, 2013 and December 31, 2012; 3,319 shares issued and outstanding at both March 31, 2013 and December 31, 2012

     23,603        23,603   

Commitments and contingencies

    

Stockholders’ equity:

    

Common stock, $0.0001 par value; 200,000 authorized at March 31, 2013 and December 31, 2012; 96,683 and 96,703 shares issued and outstanding at March 31, 2013 and December 31, 2012, respectively

     10        10   

Treasury stock, 19 shares

     (97     (97

Additional paid-in capital

     400,427        399,246   

Accumulated other comprehensive (loss) income

     (4,373     112   

Accumulated deficit

     (156,104     (153,455
  

 

 

   

 

 

 

Total stockholders’ equity

     239,863        245,816   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 374,199      $ 382,127   
  

 

 

   

 

 

 

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,
 
     2013     2012  

Revenues

   $ 50,443      $ 48,461   

Cost of revenues

     17,270        16,263   

Amortization of acquired intangible assets

     431        379   
  

 

 

   

 

 

 

Gross profit

     32,742        31,819   

Operating expenses:

    

Research and development

     3,682        4,010   

Sales and marketing

     18,495        18,536   

General and administrative

     11,130        8,825   

Amortization of acquired intangible assets

     793        574   
  

 

 

   

 

 

 

Total operating expenses

     34,100        31,945   
  

 

 

   

 

 

 

Operating loss

     (1,358     (126

Other income (expense):

    

Interest income

     2        39   

Interest expense

     (695     (708

Other expense, net

     (650     (259
  

 

 

   

 

 

 

Total other expense

     (1,343     (928
  

 

 

   

 

 

 

Loss before taxes

     (2,701     (1,054

Income tax (benefit) provision

     (52     207   
  

 

 

   

 

 

 

Net loss

   $ (2,649   $ (1,261
  

 

 

   

 

 

 

Net loss per common share:

    

Basic and diluted net loss per share

   $ (0.03   $ (0.01
  

 

 

   

 

 

 

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

    

Basic and diluted

     95,826        88,938   
  

 

 

   

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

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ALPHATEC HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

(in thousands)

 

 

     Three Months Ended
March 31,
 
     2013     2012  

Net loss, as reported

   $ (2,649   $ (1,261

Foreign currency translation adjustments

     (4,485     4,246   
  

 

 

   

 

 

 

Comprehensive income (loss)

   $ (7,134   $ 2,985   
  

 

 

   

 

 

 

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,  
     2013     2012  

Operating activities:

    

Net loss

   $ (2,649   $ (1,261

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

    

Depreciation and amortization

     6,259        5,803   

Stock-based compensation

     1,184        547   

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

     129        102   

Provision for doubtful accounts

     57        396   

Provision for excess and obsolete inventory

     1,698        845   

Other

     285        242   

Deferred income tax (benefit) expense

     (204     162   

Changes in operating assets and liabilities:

    

Accounts receivable

     (674     685   

Inventories

     (3,387     (2,562

Prepaid expenses and other current assets

     394        1,435   

Other assets

     39        508   

Accounts payable

     897        (3,083

Accrued expenses and other

     (4,318     (4,965

Deferred revenues

     (46     (285
  

 

 

   

 

 

 

Net cash used in operating activities

     (336     (1,431

Investing activities:

    

Purchases of property and equipment

     (2,519     (3,519

Purchase of intangible assets

     (250     —    
  

 

 

   

 

 

 

Net cash used in investing activities

     (2,769     (3,519

Financing activities:

    

Exercise of stock options

     —         16   

Borrowings under lines of credit

     34,669        3,583   

Repayments under lines of credit

     (33,497     (937

Principal payments on capital lease obligations

     (124     (110

Principal payments on notes payable

     (630     (1,881
  

 

 

   

 

 

 

Net cash provided by financing activities

     418        671   
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (261     472   
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (2,948     (3,807

Cash and cash equivalents at beginning of period

     22,241        20,666   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 19,293      $ 16,859   
  

 

 

   

 

 

 

Supplemental cash flow information:

    

Cash paid for interest

   $ 936      $ 590   

Cash paid for income taxes

   $ 958      $ 234   

Purchases of property and equipment in accounts payable

   $ 3,768      $ 3,405   

Property and equipment purchased under capital lease

   $ —       $ 1,148   

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 affiliate, Scient’x S.A.S. and its subsidiaries (“Scient’x”), via a direct sales force in France, Italy and the United Kingdom and via independent distributors in the rest of Europe, the Middle East and Africa. In South America and Latin America, the Company conducts its operations through its Brazilian subsidiary, Cibramed Productos Medicos. In Asia, 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 distributors in other parts of Asia and Australia.

Basis of Presentation

The accompanying condensed consolidated balance sheet as of December 31, 2012, which has been derived from audited financial statements, and the unaudited interim condensed consolidated financial statements have been prepared by the Company in accordance with U.S. generally accepted accounting principles (“GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”) related to a quarterly report on Form 10-Q. Certain information and note disclosures normally included in annual audited financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made in this quarterly report on Form 10-Q are adequate to make the information not misleading. The interim unaudited condensed consolidated financial statements reflect all adjustments 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, 2012, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 that was filed with the SEC on March 4, 2013.

Operating results for the three months ended March 31, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013, or any other future periods.

The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern. A going concern basis of accounting contemplates the recovery of the Company’s assets and the satisfaction of its liabilities in the normal course of business. Based on the Company’s annual operating plan, management believes that its existing cash and cash equivalents of $19.3 million combined with anticipated cash flow from operations in 2013 and other working capital of $44.4 million at March 31, 2013 will be sufficient to fund its cash requirements through at least March 31, 2014. The Company’s credit facility (the “Credit Facility”) with MidCap Financial, LLC (“MidCap”) contains financial covenants consisting of a monthly fixed charge coverage ratio and a senior leverage ratio (see Note 6).

Based on the Company’s board-approved current operating plan, the Company believes that it will be in compliance with the financial covenants of the Credit Facility at least through March 31, 2014. 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 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 Credit Facility which would require a waiver from MidCap. There can be no assurance that such a waiver could be obtained, that the Credit Facility could be successfully renegotiated or that the Company could modify its operations to maintain liquidity. If the Company is unable to obtain any required waivers or amendments, MidCap would have the right to exercise remedies specified in the Credit Facility, including accelerating the repayment of debt obligations. The Company may be forced to seek additional financing, such as additional debt and/or equity financing or funding through other third party agreements. There can be no assurances that additional financing would 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.

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, 2012, which are included in the Company’s Annual Report on Form 10-K that was filed with the SEC on March 4, 2013. These accounting policies have not significantly changed during the three months ended March 31, 2013.

 

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Recent Accounting Pronouncements

In March 2013, the Financial Accounting Standards Board (“FASB”) issued guidance on a parent company’s accounting for the cumulative translation adjustment upon derecognition of a subsidiary or group of assets within a foreign entity. This new guidance requires that the parent release any related cumulative translation adjustment into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. The amendments will be effective for the Company beginning January 1, 2014. We do not anticipate any impact on our financial statements upon adoption.

In February 2013, the FASB issued guidance that requires a company to disaggregate the total change of each component of other comprehensive income either on the face of the income statement or as a separate disclosure in the notes. The new guidance became effective for the Company’s interim period ended March 31, 2013. The Company adopted this guidance and the adoption did not have any impact on its financial position, results of operations or cash flows.

3. Acquisitions

Acquisition of Phygen, LLC

On November 6, 2012, the Company closed the transactions contemplated by the Asset Purchase Agreement (the “Asset Purchase Agreement”) with Phygen, LLC (“Phygen”), pursuant to which the Company agreed to purchase Phygen’s right, title and interest in and certain assets used by Phygen in connection with the design, development, marketing and distribution of certain of Phygen’s spinal implant products, together with the intellectual property rights, contractual rights, inventories and certain liabilities related thereto. At the closing of the transaction the Company issued to Phygen 4,069,087 unregistered shares of the Company’s common stock and paid to Phygen $2 million in cash. The Company placed 1,170,960 unregistered shares of the common stock into an escrow account, which will serve as security against any potential indemnification obligations of Phygen under the Asset Purchase Agreement for a period of 12 months following the closing. In addition, pursuant to the Asset Purchase Agreement, the Company paid to Phygen $4 million in cash in April 2013.

Based on the closing price of Alphatec’s common stock of $1.69 on November 6, 2012, cash consideration and contingent liabilities, the total purchase price for Phygen was as follows (in thousands):

 

Fair value of Alphatec common stock issued upon closing

   $ 8,856   

Cash consideration paid and payable

     5,900   

Contingent consideration

     3,654   
  

 

 

 

Total purchase price

   $ 18,410   
  

 

 

 

Under the acquisition method of accounting, the total purchase price allocated to Phygen’s net tangible and intangible assets was based on their estimated fair values at the date of the completion of the acquisition.

The following table summarizes the allocation of the preliminary purchase price (pending final valuation of intangible assets, deferred income taxes and inventory valuation) for Phygen and the estimated useful lives for the acquired intangible assets (in thousands):

 

     Useful lives
(in years)
     Estimated
Fair Value
 

Net tangible assets assumed

      $ 1,204   

Acquired intangibles:

     

Developed technology

     3         176   

Trademarks

     3         59   

Covenant not-to-compete

     3         384   

Customer-related intangibles

     12         6,239   

Distribution network

     12         2,366   

Goodwill

        7,982   
     

 

 

 

Total purchase price allocation

      $ 18,410   
     

 

 

 

The Company allocated $1.2 million to Phygen’s net tangible assets assumed, $9.2 million to identifiable intangible assets acquired and $3.7 million to contingent consideration. A value of $8.0 million, representing the difference between the total purchase price and the aggregate fair values assigned to the net tangible and intangible assets acquired, less liabilities and contingent consideration assumed, was assigned to goodwill. The Company acquired Phygen to expand its product offerings to Phygen’s existing surgeon base. This and other factors contributed to a purchase price for Phygen that resulted in the recognition of goodwill. The amount recorded as acquired intangibles and goodwill is expected to be deductible for tax purposes.

The Company increased the value of inventory it acquired from Phygen to its estimated fair value (“inventory step-up”), which represented an amount equivalent to estimated selling prices for the inventory less distribution related costs and a normative selling profit. Consistent with stock rotation, the inventory step-up will reverse ratably over six months and is included in the Company’s post-combination financial statements.

For the technology-related assets, the Company determined the values for each of these categories by estimating the present values of the net cash flows expected to be generated by each category of technology.

 

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The Company calculated the value of the trademark by estimating the present value of future royalty costs that would be avoided by a market participant due to ownership of the trademarks acquired.

The Company calculated the value of the covenant not-to-compete by estimating the difference between the present value of future cash flows with and without the covenant not-to-compete in place.

The customer-related intangibles includes hospitals and distributors that take title to Phygen’s products. The Company determined the value of such customer-related intangibles by estimating the present value of expected future net cash flows derived from such customers.

The distribution network includes U.S.-based distributors that sell Phygen’s products to customers on a consignment basis. The Company determined the value of the intangibles related to the distribution network by estimating the difference between the present values of expected future net cash flows generated with and without the distribution network in place.

The Company calculated the value of the contingent consideration by estimating the present value of future minimum royalty payments due under licensing agreements entered into in connection with the Phygen acquisition. The Company will revalue the contingent consideration each reporting period with an offset to any increase or decrease in the statement of operations. This is a Level 3 measurement as significant assumptions used in the measurement include estimates of the royalty payments due.

Pro forma supplemental financial information is not provided as the impact of the Phygen acquisition was not material to operating results in the three months ended March 31, 2012.

4. Balance Sheet Details

Accounts Receivable

Accounts receivable consist of the following (in thousands):

 

     March 31,
2013
    December 31,
2012
 

Accounts receivable

   $ 41,740      $ 42,086   

Allowance for doubtful accounts

     (1,029     (1,074
  

 

 

   

 

 

 

Accounts receivable, net

   $ 40,711      $ 41,012   
  

 

 

   

 

 

 

Inventories

Inventories consist of the following (in thousands):

 

     March 31, 2013      December 31, 2012  
     Gross      Reserve for
excess and
obsolete
    Net      Gross      Reserve for
excess and
obsolete
    Net  

Raw materials

   $ 5,534       $ —       $ 5,534       $ 5,863       $ —       $ 5,863   

Work-in-process

     1,193         —         1,193         1,350         —         1,350   

Finished goods

     61,251         (17,521     43,730         59,864         (17,222     42,642   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Inventories, net

   $ 67,978       $ (17,521   $ 50,457       $ 67,077       $ (17,222   $ 49,855   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

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Property and Equipment

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

 

     Useful lives
(in years)
     March 31,
2013
    December 31,
2012
 

Surgical instruments

     4       $ 59,473      $ 56,712   

Machinery and equipment

     7         14,602        13,996   

Computer equipment

     5         3,259        3,269   

Office furniture and equipment

     5         3,534        3,528   

Leasehold improvements

     various         4,116        4,092   

Building

     39         58        64   

Land

     n/a         12        13   

Construction in progress

     n/a         483        1,045   
     

 

 

   

 

 

 
        85,537        82,719   

Less accumulated depreciation and amortization

        (54,227     (52,316
     

 

 

   

 

 

 

Property and equipment, net

      $ 31,310      $ 30,403   
     

 

 

   

 

 

 

Total depreciation expense was $3.5 million for the three months ended March 31, 2013 and 2012.

Intangible Assets

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

 

     Useful lives
(in years)
     March 31,
2013
    December 31,
2012
 

Developed product technology

     3-8       $ 22,977      $ 23,253   

Distribution rights

     3         4,073        4,281   

Intellectual property

     5         1,004        1,004   

License agreements

     1-7         17,431        17,423   

Core technology

     10         4,790        4,940   

Trademarks and trade names

     3-9         3,705        3,796   

Customer-related

     12-15         21,568        19,221   

Distribution network

     10-12         3,980        3,906   

Physician education programs

     10         2,948        3,039   

Supply agreement

     10         225        225   
     

 

 

   

 

 

 
        82,701        81,088   

Less accumulated amortization

        (36,474     (34,232
     

 

 

   

 

 

 

Intangible assets, net

      $ 46,227      $ 46,856   
     

 

 

   

 

 

 

Total amortization expense was $2.7 million and $2.3 million for the three months ended March 31, 2013 and 2012, respectively.

Goodwill

The changes in the carrying amount of goodwill from December 31, 2012 through March 31, 2013 is as follows (in thousands):

 

     2013  

Balance at December 31, 2012

   $ 180,838   

Change in Phygen goodwill

     (2,142

Effect of foreign exchange rate on goodwill

     (3,027
  

 

 

 

Balance at March 31, 2013

   $ 175,669   
  

 

 

 

 

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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, 2012, which are included in its Annual Report on Form 10-K which was filed with the SEC on March 4, 2013.

6. Debt

Loan and Security Agreement

On June 7, 2012, the Company entered into a credit facility with MidCap, which permits the Company to borrow up to $50 million. The Credit Facility is due in June 2015 and consists of a revolving line of credit with a maximum borrowing base of $40 million, with the option to increase the maximum borrowing base to $50 million with the prior written consent of MidCap. The borrowing base is determined, from time to time, based on the value of domestic and foreign eligible accounts receivable and domestic eligible inventory. As collateral for the Credit Facility, the Company granted MidCap a security interest in substantially all of its assets, including all accounts receivable and all securities evidencing its interests in its subsidiaries. The revolving line of credit carries an interest rate equal to the London Interbank Offered Rate (“LIBOR”) plus 6.0%, which was 6.2% at March 31, 2013.

The Credit Facility includes traditional lending and reporting covenants including a fixed charge coverage ratio and a senior leverage ratio to be maintained by the Company. The Credit Facility also includes several potential events of default, such as payment default and insolvency conditions, which could cause interest to be charged at a rate which is up to five percentage points above the rate effective immediately before the event of default or result in MidCap’s right to declare all outstanding obligations immediately due and payable. In January 2013, the Company entered into a limited waiver and limited consent agreement with MidCap (the “Waiver”). The Waiver gave the Company consent on certain provisions under the Credit Facility related to the acquisition of Phygen and maintenance of cash balances in the U.S. In February 2013, the Company and MidCap entered into a first amendment to the Credit Facility (the First Amendment”). The First Amendment allows the Company to exclude payments related to the Phygen acquisition and the settlement agreement with Cross Medical Products, LLC (“Cross”) from calculation of the fixed charge coverage ratio and the senior leverage ratio. In conjunction with the First Amendment, the Company paid MidCap a fee of $0.1 million. The Company was in compliance with all of the covenants of the Credit Facility as of March 31, 2013.

Principal payments on debt are as follows as of March 31, 2013 (in thousands):

 

Year Ending December 31,

      

Remainder of 2013

   $ 859   

2014

     —    

2015

     39,352   

2016

     —    

2017

     —    

Thereafter

     —    
  

 

 

 

Total

     40,211   

Add: capital lease principal payments

     1,644   
  

 

 

 

Total

     41,855   

Less: current portion of long-term debt

     (1,277
  

 

 

 

Long-term debt, net of current portion

   $ 40,578   
  

 

 

 

7. Commitments and Contingencies

Leases

The Company leases certain equipment under capital leases which expire on various dates through June 2017. The leases bear interest at rates ranging from 6.6% to 9.6%, are generally due in monthly principal and interest installments and are collateralized by the related equipment. The Company also leases its buildings and certain equipment and vehicles under operating leases which expire on various dates through 2017. Future minimum annual lease payments under such leases are as follows (in thousands):

 

Year Ending December 31,

   Operating      Capital  

Remainder of 2013

   $ 2,975       $ 400   

2014

     3,090         527   

2015

     2,649         466   

2016

     1,385         423   

2017

     272         81   

Thereafter

     289         —    
  

 

 

    

 

 

 
   $ 10,660         1,897   
  

 

 

    

Less: amount representing interest

        (253
     

 

 

 

Present value of minimum lease payments

        1,644   

Current portion of capital leases

        (418
     

 

 

 

Capital leases, less current portion

      $ 1,226   
     

 

 

 

 

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Rent expense under operating leases was $1.0 million for the three months ended March 31, 2013 and 2012.

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 in 2006. In 2007, 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. After this sale, Surgiview became a subsidiary of Scient’x in 2006. Orthotec attempted to recover on Eurosurgical’s obligations 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 June 2004, HealthpointCapital (Luxembourg) I S.à.r.l. acquired a minority (33.1 percent) interest in Scient’x. In July 2005, Scient’x acquired an approximately 73 percent interest in Surgiview. At that time, HealthpointCapital Partners, L.P. (through a Luxembourg subsidiary) held a minority interest in Scient’x, which in turn held an interest in Surgiview, but Healthpoint Capital Partners II, L.P. had no ownership interest in Scient’x or Surgiview. On November 21, 2007, more than a year after the Partial Sale Agreement was executed, HealthpointCapital Partners II, L.P. acquired majority ownership of Scient’x. In May 2008, after the acquisition of Scient’x by HealthpointCapital in 2007, Orthotec sued Scient’x, Surgiview, HealthpointCapital LLC and certain former directors of Scient’x (who also serve on the Company’s board) in a new action in California state court in which it sought, in addition to damages related to other causes of action, to have the defendant’s bear responsibility for the $39 million in judgments that had been assessed against Eurosurgical which with interest are now greater than $50 million. In April 2009, the California court dismissed this matter on jurisdictional grounds, and Orthotec appealed the 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 January 2012, OrthoTec amended its complaint and added the Company as a defendant to the California matter asserting claims against the Company based on its 2010 acquisition of Scient’x. Alphatec filed a motion for summary judgment in November 2012. This motion was denied in March 2013. The case is currently scheduled for trial in July 2013.

In addition, also in May 2008, a similar action was filed in New York against HealthpointCapital, HealthpointCapital LLC, HealthpointCapital Partners, L.P., HealthpointCapital Partners II, L.P., Scient’x and two former directors of Scient’x (who also serve on the Company’s board), in which Orthotec sought, in addition to damages related to other causes of action, to have the defendant’s bear responsibility for the $39 million in judgments that had been assessed against Eurosurgical which with interest are now greater than $50 million. In July 2009, Orthotec voluntarily dismissed Scient’x from the action. In November 2009, the court dismissed Orthotec’s claims based on collateral estoppel, and Orthotec appealed this ruling. In March 2011, the state appeals court reversed the lower court’s decision to dismiss Orthotec’s claims. The New York matter then proceeded with discovery, and the defendants filed a motion for summary judgment in December 2012, which has been fully briefed and is awaiting a decision. Additionally, the defendants filed a motion to dismiss one of the plaintiff’s claims based upon Orthotec’s spoliation of evidence, which motion was denied, and that denial is currently on appeal. Since March 2010 the Company has been indemnifying the HealthpointCapital entities and the two former directors of Scient’x in connection with the New York matter.

While the Company intends to vigorously defend against these actions, and believes that the plaintiff’s allegations are without merit, the outcome of the litigations cannot be predicted at this time and any outcome in favor of Orthotec, regardless of who the defendant is, could have a significant adverse effect on the Company’s financial condition and results of operations.

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 plaintiff amended its complaint and refilled it in April 2012. This amended complaint was dismissed with prejudice in March 2013. In April 2013 the plaintiff filed a notice of appeal to the U.S. Court of Appeals for the Ninth Circuit. 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

 

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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 May 10, 2013. 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, 2013, 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.

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,  
         2013             2012      

Numerator:

    

Net loss

   $ (2,649   $ (1,261
  

 

 

   

 

 

 

Denominator:

    

Weighted average common shares outstanding

     96,701        89,445   

Weighted average unvested common shares subject to repurchase

     (875     (507
  

 

 

   

 

 

 

Weighted average common shares outstanding—basic

     95,826        88,938   

Effect of dilutive securities:

    

Options, warrants and restricted share awards

     —         —    
  

 

 

   

 

 

 

Weighted average common shares outstanding—diluted

     95,826        88,938   
  

 

 

   

 

 

 

Net loss per common share:

    

Basic and diluted net loss per share

   $ (0.03   $ (0.01
  

 

 

   

 

 

 

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

 

     Three Months Ended March 31,  
         2013              2012      

Options to purchase common stock

     3,939         4,592   

Unvested restricted share awards

     875         507   
  

 

 

    

 

 

 

Total

     4,814         5,099   
  

 

 

    

 

 

 

 

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9. 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 uncertain tax positions increased $0.3 million during the three months ended March 31, 2013. The increase in uncertain tax positions during the three months ended March 31, 2013 was primarily related to an increase related to federal and state research credits. The uncertain tax positions at March 31, 2013 were $6.2 million. With the facts and circumstances currently available to the Company, it is reasonably possible that less than $0.1 million of the Company’s uncertain tax positions could decrease within the next 12 months due to the expiration of statutes of limitations or tax examination settlement.

The income tax benefit consists primarily of income tax benefits related to operations in Japan and Brazil, partially offset by state income taxes, the tax effect of changes in deferred tax liabilities associated with tax deductible goodwill and operations in other foreign jurisdictions where the Company operates.

The Company is not currently under examination by the IRS, foreign or state and local tax authorities.

10. 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, 2013 and 2012, 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, 2013, included in International revenues were sales in Japan totaling $6.4 million which represented greater than 10 percent of consolidated revenues. 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.

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

 

     Three Months Ended
March 31,
 
     2013      2012  

United States

   $ 33,062       $ 32,561   

International

     17,381         15,900   
  

 

 

    

 

 

 

Total consolidated revenues

   $ 50,443       $ 48,461   
  

 

 

    

 

 

 

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

 

     March 31,
2013
     December 31,
2012
 

United States

   $ 211,382       $ 213,912   

International

     162,817         168,215   
  

 

 

    

 

 

 

Total consolidated assets

   $ 374,199       $ 382,127   
  

 

 

    

 

 

 

11. Related Party Transactions

For the three months ended March 31, 2013, the Company incurred expenses of $0.1 million and had a liability of $0.1 million payable to HealthpointCapital, LLC for travel and administrative expenses.

The Company has entered into indemnification agreements with certain of its directors which are named defendants in the New York Orthotec matter (See Note 7 – Commitments and Contingencies – Litigation). The indemnification agreements require the Company

 

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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, 2013 and 2012, the Company incurred legal expenses of approximately $0.6 million and $0.4 million, respectively, in connection with the Company’s indemnification obligations in the New York Orthotec matter.

 

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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 ended December 31, 2012, 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. 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 surgical procedures. Our principal product offerings are focused on the global market for orthopedic spinal disorder solutions. Our “surgeons’ culture” enables us to respond to the changing needs of surgeons through 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 the critical needs of surgeons’ and patients’. 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 spinal disorders.

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 and surgical centers. In general, except for those countries where we have a direct sales force (the U.S., Japan, France, Italy, and the United Kingdom), we use independent distributors that purchase our products and market them to surgeons. A majority of our business is conducted with customers within markets in which we have experience and with payment terms that are customary to our business. If we offer payment terms greater than our customary business terms or begin operating in a new market, revenues are deferred until the earlier 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, milestones, depreciation of our surgical instruments, and the amortization of purchased intangibles. We manufacture substantially all of the non-tissue-based 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 human tissue. We incur royalties related to the technologies that we license from others and the products that are 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, medical device excise tax and marketing costs.

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

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

Income tax benefit. The income tax benefit consists primarily of income tax benefits related to operations in Japan and Brazil, partially offset by state income taxes, the tax effect of changes in deferred tax liabilities associated with tax deductible goodwill and operations in the Company’s other foreign jurisdictions.

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

 

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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, 2013 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.

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,
 
     2013     2012  

Revenues

   $ 50,443      $ 48,461   

Cost of revenues

     17,270        16,263   

Amortization of acquired intangible assets

     431        379   
  

 

 

   

 

 

 

Gross profit

     32,742        31,819   

Operating expenses:

    

Research and development

     3,682        4,010   

Sales and marketing

     18,495        18,536   

General and administrative

     11,130        8,825   

Amortization of acquired intangible assets

     793        574   
  

 

 

   

 

 

 

Total operating expenses

     34,100        31,945   
  

 

 

   

 

 

 

Operating loss

     (1,358     (126

Other income (expense):

    

Interest income

     2        39   

Interest expense

     (695     (708

Other expense, net

     (650     (259
  

 

 

   

 

 

 

Total other expense

     (1,343     (928
  

 

 

   

 

 

 

Loss from continuing operations before taxes

     (2,701     (1,054

Income tax (benefit) provision

     (52     207   
  

 

 

   

 

 

 

Net loss

   $ (2,649   $ (1,261
  

 

 

   

 

 

 

Three Months Ended March 31, 2013 Compared to the Three Months Ended March 31, 2012

Revenues. Revenues were $50.4 million for the three months ended March 31, 2013 compared to $48.5 million for the three months ended March 31, 2012, representing an increase of $2.0 million, or 4.1%. The increase was comprised of $0.5 million related to sales in the U.S. region and $1.5 million related to sales in the International region.

U.S. revenues were $33.1 million for the three months ended March 31, 2013 compared to $32.6 million for the three months ended March 31, 2012, representing an increase of $0.5 million, or 1.5%. The increase was due to sales resulting from the Phygen acquisition ($2.0 million), partially offset by a decrease in the sales of instruments and implants ($1.5 million).

International revenues were $17.4 million for the three months ended March 31, 2013 compared to $15.9 million for the three months ended March 31, 2012, representing an increase of $1.5 million, or 9.3%. The increase was due to sales of Alphatec implants and instruments. The revenue from Alphatec products continues to grow as products in the aging Scient’x product portfolio are substituted with Alphatec products. The increase in revenue is inclusive of $1.1 million in unfavorable exchange rate effect.

Cost of revenues. Cost of revenues was $17.3 million for the three months ended March 31, 2013 compared to $16.3 million for the three months ended March 31, 2012, representing an increase of $1.0 million, or 6.2%. The increase was primarily related to

 

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greater product costs as a result of a increase in sales volume and variation in product mix ($2.1 million), an increase in the reserve for excess and obsolete inventory ($0.7 million) partially offset by a reduction to inventory adjustments ($1.0 million), and a reduction in royalty and milestone expenses due to the cancellation of certain agreements, change in product mix and an adjustment to accruals ($0.8 million).

Amortization of acquired intangible assets. Amortization of acquired intangible assets was $0.4 million for each of the three months ended March 31, 2013 and March 31, 2012. 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 $32.7million for the three months ended March 31, 2013 compared to $31.8 million for the three months ended March 31, 2012, representing an increase of $0.9 million, or 2.9%. The increase is due to a reduction in the cost of revenues ($0.9 million) and an increase in sales volume ($1.5 million), offset by a decrease resulting from variation in product mix and pricing ($1.5 million).

Gross margin. Gross margin was 64.9% for the three months ended March 31, 2013 compared to 65.7% for the three months ended March 31, 2012. The decrease of 0.8 percentage points was the result of an unfavorable variation in pricing and product mix (3.1 percentage points), offset by a reduction in the cost of revenues (2.3 percentage points).

Gross margin for the U.S. region was 69.7% for the three months ended March 31, 2013 compared to 70.2% for the three months ended March 31, 2012. The decrease of 0.5 percentage points was the result of an unfavorable variation in pricing and product mix (3.1 percentage points), offset by a reduction in the cost of revenues (2.6 percentage points).

Gross margin for the International region was 55.8% for the three months ended March 31, 2013 compared to 56.4% for the three months ended March 31, 2012. The decrease of 0.6 percentage points was the result of an unfavorable variation in pricing and product mix (2.4 percentage points), offset by a reduction in the cost of revenues (1.8 percentage points).

Research and development expense. Research and development expense was $3.7 million for the three months ended March 31, 2013 compared to $4.0 million for the three months ended March 31, 2012, representing a decrease of $0.3 million, or 8.2%. The decrease was primarily related to the variations in the timing of the cycle for development and testing.

Sales and marketing expense . Sales and marketing expense was $18.5 million for each of the three months ended March 31, 2013 and March 31, 2012. A reduction in commission expenses due to product mix changes in the U.S., has been fully offset by the additional expense created by the recently enacted medical device excise tax ($0.6 million).

General and administrative expense. General and administrative expense was $11.1 million for the three months ended March 31, 2013 compared to $8.8 million for the three months ended March 31, 2012, representing an increase of $2.3 million, or 26.1%. The increase was primarily related to increased litigation expense ($1.3 million), increased expenses related to executive management and consulting costs ($1.0 million), and the expenses resulting from the Phygen acquisition ($0.5 million), offset by a reduction in sales and use tax accruals ($0.5 million).

Amortization of acquired intangible assets. Amortization of acquired intangible assets was $0.8 million for the three months ended March 31, 2013 compared to $0.6 million for the three months ended March 31, 2012, representing an increase of $0.2 million, or 38.2%. This expense represents amortization in the period for intangible assets associated with general business assets obtained in the Scient’x and Phygen acquisitions.

Interest expense. Interest expense was $0.7 million for the three months ended March 31, 2013 and $0.7 million for the three months ended March 31, 2012. Interest expense consisted primarily of interest related to loan agreements and lines of credit and the associated amortization expenses related to loan costs.

Other income (expense), net. Other expense was $0.7 million for the three months ended March 31, 2013 compared to $0.3 million for the three months ended March 31, 2012, representing an increase in expense of $0.4 million, or 151.0%. The increase was primarily due to unfavorable foreign currency exchange results realized in 2013 due to having U.S. denominated assets and liabilities on our foreign subsidiaries books as compared to 2012.

Income tax provision (benefit). Income tax was a benefit of $0.1 million for the three months ended March 31, 2013 compared a provision of $0.2 million for the three months ended March 31, 2012. The income tax benefit consists primarily of income tax benefits related to operations in Japan and Brazil, partially offset by state income taxes, the tax effect of changes in deferred tax liabilities associated with tax deductible goodwill and operations in the Company’s other foreign jurisdictions.

 

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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 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, 2013 and 2012 (in thousands):

 

     Three Months Ended March 31,  
         2013             2012      

Net loss

   $ (2,649   $ (1,261

Stock-based compensation

     1,184        547   

Depreciation

     3,521        3,456   

Amortization of intangible assets

     1,514        1,394   

Amortization of acquired intangible assets

     1,224        953   

Interest expense, net

     693        669   

Income tax (benefit) provision

     (52     207   

Other expense, net

     650        259   
  

 

 

   

 

 

 

Adjusted EBITDA

   $ 6,085      $ 6,224   
  

 

 

   

 

 

 

Liquidity and Capital Resources

At March 31, 2013, our principal sources of liquidity consisted of cash and cash equivalents of $19.3 million and accounts receivable, net of $40.7 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, 2014.

On June 7, 2012, we entered into a credit facility, or the Credit Facility, with MidCap Financial, LLC, or MidCap which permits us to borrow up to $50 million. The Credit Facility is due in June 2015 and consists of a revolving line of credit with a maximum borrowing base of $40 million, with the option to increase the maximum borrowing base to $50 million with the consent of MidCap. The Credit Facility bears an interest rate equal to the London Interbank Market Rate, or LIBOR, plus 6.0%.

The Credit Facility contains certain financial covenants which require us to maintain a certain fixed charge coverage ratio and a senior leverage ratio in order to avoid default under the Credit Facility. We were in compliance with all of the covenants of the Credit Facility as of March 31, 2013. (See “Credit Facility and Other Debt” below).

Based on our current operating plan, we believe that we will be in compliance with our financial covenants under the Credit Facility for 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 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 Credit Facility. Upon the occurrence of an event of default which is not waived by MidCap, MidCap could elect to declare the amounts outstanding under the Credit Facility immediately due and payable and refuse to extend further credit. If MidCap were to accelerate the repayment of borrowings under the Credit Facility, we may not have sufficient cash on hand to repay the amounts due under the Credit Facility and would have to seek to amend the terms of the Credit Facility or seek alternative financing. There can be no assurances that in the event of a default, a waiver could be obtained from MidCap, that the Credit Facility could be successfully renegotiated or that we could modify our operations to maintain liquidity. If we are 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 favorable 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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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 surgical instruments, repayments of borrowings and payments due under the Biomet settlement agreement. We expect that our principal uses of cash in the future will be for operations, working capital, capital expenditures, and potential acquisitions. We expect that, as our revenues grow, our sales and marketing and research and development expenses will continue to grow and, as a result, we will need to generate significant net revenues to achieve profitability. We anticipate that to the extent that we require additional liquidity, it will be funded through borrowings under our revolving credit facility, the incurrence of other indebtedness, additional equity financings or a combination of these potential sources of liquidity.

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 2013. 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. Our revenue projections may be negatively impacted as a result of a decline in sales of our products, including declines due to changes in our customers’ ability to obtain third-party coverage and reimbursement for procedures that use our products, increased pricing pressures resulting from intensifying competition, and cost increases and slower product development cycles resulting from a changing regulatory environment.

A substantial portion of our available cash funds is held in business accounts with reputable financial institutions. However, our deposits, at times, may exceed federally insured limits and thus we may face losses in the event of insolvency of any of the financial institutions where our funds are deposited. Additionally, 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, 2013.

Operating Activities

We used net cash of $0.3 million from operating activities for the three months ended March 31, 2013. During this period, net cash used in operating activities primarily consisted of a net loss of $2.6 million and an increase in working capital and other assets of $7.1 million, which were offset by $9.4 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 $7.1 million consisted of increases in inventory of $3.4 million and increases in accounts receivable of $0.7 million and decreases in accrued expenses and other liabilities of $4.3 million, partially offset by decreases in accounts payable of $0.9 million and decreases in prepaid expenses and other assets of $0.4 million.

Investing Activities

We used net cash of $2.8 million in investing activities for the three months ended March 31, 2013 primarily for the purchase of surgical instruments and a payment under a licensing agreement.

Financing Activities

Financing activities provided net cash of $0.4 million from for the three months ended March 31, 2013. Net borrowings under the Credit Facility totaled $1.2 million in the three months ended March 31, 2013. We made principal payments on notes payable and capital leases totaling $0.8 million in the three months ended March 31, 2013.

Credit Facility and Other Debt

On June 7, 2012, we entered into a Credit Facility with MidCap, which permits us to borrow up to $50 million. The Credit Facility is due in June 2015 and consists of a revolving line of credit with a maximum borrowing base of $40 million, with the option to increase the maximum borrowing base to $50 million with the consent of MidCap. The borrowing base is determined, from time to

 

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time, based on the value of domestic and foreign eligible accounts receivable and domestic eligible inventory. As collateral for the Credit Facility, we granted MidCap a security interest in substantially all of our assets, including all accounts receivable and all securities evidencing our interests in our subsidiaries.

The Credit Facility includes traditional lending and reporting covenants which among other things requires us to maintain a fixed charge coverage ratio and a senior leverage ratio. The Credit Facility also includes several potential events of default, such as payment default and insolvency conditions, which could cause interest to be charged at a rate which is up to five percentage points above the rate effective immediately before the event of default or result in MidCap’s right to declare all outstanding obligation immediately due and payable. In January 2013, we entered into a limited waiver and limited consent agreement with MidCap. The waiver gave us consent on certain provisions under the Credit Facility related to the acquisition of Phygen and maintenance of cash balances in the U.S. In February 2013, we entered into a first amendment to the Credit Facility with MidCap. The first amendment allows us to exclude payments related to the Phygen acquisition and the settlement agreement with Cross Medical Products, LLC from calculation of the fixed charge coverage ratio and the senior leverage ratio. In conjunction with the first amendment, we paid MidCap a fee of $0.1 million. We were in compliance with all of the covenants of the Credit Facility as of March 31, 2013.

We have various capital lease arrangements. The leases bear interest at rates ranging from 4.5% to 9.6%, are generally due in monthly principal and interest installments, are collateralized by the related equipment, and have various maturity dates through 2017. As of March 31, 2013, the balance of these capital leases totaled $1.6 million

Contractual obligations and commercial commitments

Total contractual obligations and commercial commitments as of March 31, 2013 are summarized in the following table (in thousands):

 

     Payment Due by Year  
     Total      2013      2014      2015      2016      2017      Thereafter  

Credit Facility with MidCap

     39,352         —          —          39,352         —          —          —    

Interest expense

     5,909         2,445         2,445         1,019         —          —          —    

Note payable for software licenses

     227         227         —          —          —          —          —    

Note payable for insurance premiums

     632         632         —          —          —          —          —    

Capital lease obligations

     1,897         400         527         466         423         81         —    

Operating lease obligations

     10,660         2,975         3,090         2,649         1,385         272         289   

Litigation settlement obligation

     10,000         3,000         4,000         3,000         —          —          —    

Minimum purchase commitments

     15,830         1,304         5,663         5,938         2,925         —          —    

Guaranteed minimum royalty obligations

     10,182         1,090         2,098         2,298         2,098         2,098         500   

New product development milestones (1)

     6,750         750         1,500        —          2,500        —          2,000   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 101,439       $ 12,823       $ 19,323       $ 54,722       $ 9,331       $ 2,451       $ 2,789   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) This commitment represents payments in cash, and is subject to attaining certain development milestones such as FDA approval, product design and functionality testing requirements, which we believe are reasonably likely to be achieved in 2013 through 2018.

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,  
         2013             2012      

Cost of revenues

   $ 55      $ 30   

Research and development

     46        85   

Sales and marketing

     103        157   

General and administrative

     980        275   
  

 

 

   

 

 

 

Total

   $ 1,184      $ 547   
  

 

 

   

 

 

 

Effect on basic and diluted net loss per share

   $ (0.01   $ (0.01
  

 

 

   

 

 

 

 

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Recent Accounting Pronouncements

In March 2013, the FASB issued guidance on a parent company’s accounting for the cumulative translation adjustment upon derecognition of a subsidiary or group of assets within a foreign entity. This new guidance requires that the parent release any related cumulative translation adjustment into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. The amendments are effective for us beginning January 1, 2014. We do not anticipate any impact on our financial statements upon adoption.

In February 2013, the FASB issued guidance that requires a company to disaggregate the total change of each component of other comprehensive income either on the face of the income statement or as a separate disclosure in the notes. The new guidance became effective for our interim period ended March 31, 2013. We adopted this guidance and the adoption did not have any impact on its financial position, results of operations or cash flows.

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 certain assets of Phygen;

 

   

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 certain assets of Phygen;

 

   

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

 

   

the regulatory status of our Puregen product;

 

   

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, the CA and NY Orthotec litigations, 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;

 

   

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 business practices, including without limitation physician owned distributors; 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.

 

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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, 2013, our outstanding floating rate indebtedness totaled $39.4 million. The primary base interest rate is LIBOR. 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 $0.4 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 and 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. Additionally, our subsidiary in Japan has U.S. dollar denominated third-party debt that is subject to fluctuations in exchange rates between the U.S. dollar and Japanese Yen. 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.

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, 2013.

 

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

 

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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 in 2006. In 2007, 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. After this sale, Surgiview became a subsidiary of Scient’x in 2006. Orthotec attempted to recover on Eurosurgical’s obligations 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 June 2004, HealthpointCapital (Luxembourg) I S.à.r.l. acquired a minority (33.1 percent) interest in Scient’x. In July 2005, Scient’x acquired an approximately 73 percent interest in Surgiview. At that time, HealthpointCapital Partners, L.P. (through a Luxembourg subsidiary) held a minority interest in Scient’x, which in turn held an interest in Surgiview, but HealthpointCapital Partners II, L.P. had no ownership interest in Scient’x or Surgiview. On November 21, 2007, more than a year after the Partial Sale Agreement was executed, HealthpointCapital Partners II, L.P. acquired majority ownership of Scient’x. In May 2008, after the acquisition of Scient’x by HealthpointCapita in 2007, Orthotec sued Scient’x, Surgiview, HealthpointCapital LLC and certain former directors of Scient’x (who also serve on our board) in a new action in California state court in which it sought, in addition to damages related to other causes of action, to have the defendant’s bear responsibility for the $39 million in judgments that had been assessed against Eurosurgical which with interest are now greater than $50 million. In April 2009, the California court dismissed this matter on jurisdictional grounds, and Orthotec appealed the 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 January 2012, OrthoTec amended its complaint and added us as a defendant to the California matter asserting claims against us based on our 2010 acquisition of Scient’x. We filed a motion for summary judgment in November 2012. This motion was denied in March 2013. The case is currently scheduled for trial in July 2013.

In addition, also in May 2008, a similar action was filed in New York against HealthpointCapital, HealthpointCapital LLC, HealthpointCapital Partners, L.P., HealthpointCapital Partners II, L.P., Scient’x and two former directors of Scient’x (who also serve on our board), in which Orthotec sought, in addition to damages related to other causes of action, to have the defendant’s bear responsibility for the $39 million in judgments that had been assessed against Eurosurgical which with interest are now greater than $50 million. In July 2009, Orthotec voluntarily dismissed Scient’x from the action. In November 2009, the court dismissed Orthotec’s claims based on collateral estoppel, and Orthotec appealed this ruling. In March 2011, the state appeals court reversed the lower court’s decision to dismiss Orthotec’s claims. The New York matter then proceeded with discovery, and the defendants filed a motion for summary judgment in December 2012, which has been fully briefed and is awaiting a decision. Additionally, the defendants filed a motion to dismiss one of the plaintiff’s claims based upon Orthotec’s spoliation of evidence, which motion was denied, and that denial is currently on appeal. Since March 2010 we have been indemnifying the HealthpointCapital entities and the two former directors of Scient’x in connection with the New York matter.

While we intend to vigorously defend against these actions, and believes that the plaintiff’s allegations are without merit, the outcome of the litigations cannot be predicted at this time and any outcome in favor of Orthotec, regardless of who the defendant is, could have a significant adverse effect on out financial condition and results of operations.

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 plaintiff amended its complaint and refilled it in April 2012. This amended complaint was dismissed with prejudice in March 2013. In April 2013 the plaintiff filed a notice of appeal to the U.S. Court of Appeals for the Ninth Circuit. 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

 

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internal procedures. This consolidated lawsuit has been stayed by order of the court until May 10, 2013. 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, 2013, 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, 2012 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

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, 2013 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 2013

     —        $ —          —          —    

February 2013

     —        $ —          —          —    

March 2013

     —        $ —          —          —    

 

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Item 6. Exhibits

 

*10.1    Alphatec Holdings, Inc. 2005 Employee, Director and Consultant Stock Plan, as amended (incorporated by reference to Exhibit 99.1 to the Company’s Registration Statement on Form S-8 filed with the Securities and Exchange Commission on March 12, 2013 (File No. 333-187190)).
*10.2    Alphatec Holdings, Inc. 2007 Employee Stock Purchase Plan (incorporated by reference to Exhibit 99.1 to the Company’s Registration Statement on Form S-8 filed with the Securities and Exchange Commission on March 12, 2013 (File No. 333-187189)).
  10.3    First Amendment to the Credit Security and Guaranty Agreement, dated February 26, 2013 by and among Alphatec Holdings, Inc., Alphatec Spine, Inc., Alphatec International LLC, Alphatec Pacific, Inc. and Midcap Financial LLC.
  31.1    Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  31.2    Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  32    Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101    The following materials from Alphatec Holdings, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2013, formatted in XBRL (eXtensible Business Reporting Language); (i) Condensed Consolidated Balance Sheets as of March 31, 2013 and December 31, 2012, (ii) Condensed Consolidated Statements of Operations for the three months ended March 31, 2013 and 2012, (iii) Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2013 and 2012, (iv) Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2013 and 2012, and (v) 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.

 

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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 1, 2013

 

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Exhibit Index

 

*10.1    Alphatec Holdings, Inc. 2005 Employee, Director and Consultant Stock Plan, as amended (incorporated by reference to Exhibit 99.1 to the Company’s Registration Statement on Form S-8 filed with the Securities and Exchange Commission on March 12, 2013 (File No. 333-187190)).
*10.2    Alphatec Holdings, Inc. 2007 Employee Stock Purchase Plan (incorporated by reference to Exhibit 99.1 to the Company’s Registration Statement on Form S-8 filed with the Securities and Exchange Commission on March 12, 2013 (File No. 333-187189)).
  10.3    First Amendment to the Credit Security and Guaranty Agreement, dated February 26, 2013 by and among Alphatec Holdings, Inc., Alphatec Spine, Inc., Alphatec International LLC, Alphatec Pacific, Inc. and Midcap Financial LLC.
  31.1    Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  31.2    Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  32    Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101    The following materials from Alphatec Holdings, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2013, formatted in XBRL (eXtensible Business Reporting Language); (i) Condensed Consolidated Balance Sheets as of March 31, 2013 and December 31, 2012, (ii) Condensed Consolidated Statements of Operations for the three months ended March 31, 2013 and 2012, (iii) Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2013 and 2012, (iv) Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2013 and 2012, and (v) 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.

 

28

Exhibit 10.3

FIRST AMENDMENT TO CREDIT, SECURITY AND GUARANTY AGREEMENT

THIS FIRST AMENDMENT TO CREDIT, SECURITY AND GUARANTY AGREEMENT (this “ Agreement ”) is made as of this 26 th day of February, 2013, by and among ALPHATEC HOLDINGS, INC., a Delaware corporation (“ Alphatec Holdings ”), ALPHATEC SPINE, INC., a California corporation (“ Alphatec Spine ”), ALPHATEC INTERNATIONAL LLC, a Delaware limited liability company (“ Alphatec International ”), and ALPHATEC PACIFIC, INC. (also known as Kabushiki-Kaisha Alphatec Pacific), a Japanese company (“ Alphatec Pacific ” and together with Alphatec Holdings, Alphatec Spine, and Alphatec International, each being referred to herein individually as a “ Borrower ”, and collectively as “ Borrowers ”), and MIDCAP FUNDING IV, LLC, a Delaware limited liability company, as successor-by-assignment to MidCap Financial, LLC (as Agent for Lenders, “ Agent ”, and individually, as a Lender), and the other financial institutions or other entities from time to time parties to the Credit Agreement referenced below, each as a Lender.

RECITALS

A. Agent, Lenders, Borrowers and certain of their Affiliates and other Credit Parties that are party thereto, have entered into that certain Credit, Security and Guaranty Agreement, dated as of June 7, 2012 (as the same may have been and may be further amended, modified, supplemented and restated from time to time, the “ Credit Agreement ”), pursuant to which the Lenders have agreed to make certain advances of money and to extend certain financial accommodations to Borrowers and certain of its Affiliates (the “ Loans ”) in the amounts and manner set forth in the Credit Agreement.

B. On October 19, 2012 (the “ APA Closing Date ”), Alphatec Holdings and PHYGEN, LLC, a California limited liability company (the “ Seller ”), entered into that certain Asset Purchase Agreement, dated as of the APA Closing Date (the “ Asset Purchase Agreement ”), pursuant to which Alphatec Holdings (i) acquired certain rights, title and interest in and to certain assets from Seller, including, a spinal implant product, together with the intellectual property rights, accounts receivable, contractual rights, permits and applicable government consents, inventory, and all other Purchased Assets (as defined in the Asset Purchase Agreement), and (ii) assumed certain Assumed Liabilities (as defined in the Asset Purchase Agreement).

C. The Asset Purchase Agreement requires that Alphatec Holdings make cash payments to Seller (collectively, the “ Phygen Payments ”) in an amount equal to (i) $2,000,000 on the APA Closing Date and (ii) $4,000,000 on April 10, 2013.

D. In conjunction with the settlement of litigation between Alphatec Spine and Cross Medical Products, LLC, a subsidiary of Biomet, Inc. (“ Cross Medical ”), Alphatec Spine agreed to pay to Cross Medical (i) an initial cash payment of $5,000,000 no later than January 6, 2012 and (ii) royalty payments in an aggregate amount of $13,000,000 in equal quarterly installments of $1,000,000, with the first payment being due on August 1, 2012 and each subsequent payment due three months thereafter with a final payment on August 1, 2015 (collectively, the “ Cross Medical Payments ”):

E. Borrowers have requested that Agent and Required Lenders exclude the payments of the amounts above from the calculation of certain financial covenants as set forth in Credit Agreement and Agent and Required Lenders have agreed to do so, in accordance with the terms and subject to the conditions set forth herein.


AGREEMENT

NOW, THEREFORE, in consideration of the foregoing, the terms and conditions set forth in this Agreement, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Agent, Required Lenders and Borrowers hereby agree as follows:

1. Recitals . This Agreement shall constitute a Financing Document and the Recitals and each reference to the Credit Agreement, unless otherwise expressly noted, will be deemed to reference the Credit Agreement as amended hereby. The Recitals set forth above shall be construed as part of this Agreement as if set forth fully in the body of this Agreement and capitalized terms used but not otherwise defined herein shall have the meanings ascribed to them in the Credit Agreement (including those capitalize terms used in the Recitals hereto).

2. Amendments to Credit Agreement and Acknowledgement .

(a) The Credit Agreement is hereby amended by replacing the defined term “Fee Letter” in its entirety with the following:

“ “ Fee Letter ” means, collectively, one or more letter agreements between Agent and Borrower relating to fees payable to Agent, for its own account, in connection with the execution of this Agreement and/or any other Financing Document and/or amendment to any of the foregoing.”

(b) The Worksheet for calculation of Fixed Charges in Exhibit B of the Credit Agreement is hereby amended by deleting the row labeled “ Plus : Settlement payment to Cross Medical:” therein. Agent and Required Lenders acknowledge and agree that the Borrower may exclude both the Phygen Payments and the Cross Medical Payments from the calculation of Fixed Charges for the purposes of compliance with the Fixed Charge Coverage Ratio set forth in Section 6.2 of the Credit Agreement.

3. Representations and Warranties; Reaffirmation of Security Interest; Updated Schedules . Each Borrower hereby (a) confirms that all of the representations and warranties set forth in the Credit Agreement are true and correct with respect to such Borrower as of the date hereof, and (b) covenants to perform its respective obligations under the Credit Agreement. Each Borrower further represents and warrants that the organizational documents of such Borrower delivered to Agent on or prior to June 7, 2012 in connection with the Credit Agreement remain true, accurate and complete and have not been amended, supplemented or restated and are, and continue to be, in full force and effect; Each Borrower further confirms and agrees that all security interests and Liens granted to Agent continue in full force and effect, and all Collateral remains free and clear of any Liens, other than those granted to Agent and Permitted Liens. Nothing herein is intended to impair or limit the validity, priority or extent of Agent’s security interests in and Liens on the Collateral. Each Borrower acknowledges and agrees that the Credit Agreement, the other Financing Documents and this Agreement constitute the legal, valid and binding obligation of each Borrower, and are enforceable against each Borrower in accordance with its terms, except as the enforceability thereof may be limited by bankruptcy, insolvency or other similar laws relating to the enforcement of creditors’ rights generally and by general equitable principles.

4. Costs and Fees . Borrower shall pay to Agent all reasonable fees, costs and expenses of Agent incurred in connection with this Agreement and all agreements and documents executed in connection herewith (the “ Reimbursed Expenses ”); provided, however, Agent agrees that the Reimbursed Expenses for which Borrower shall be responsible shall not exceed $10,000; provided, further that, notwithstanding such cap on Reimbursed Expenses, Borrower shall be responsible for all out-of-pocket costs and expenses associated with this Agreement, including, but not limited to all filing fees paid to the United States Patent and Trademark Office (the “ USPTO ”) associated with the filing of the IP Amendment at the USPTO. Borrowers hereby authorize Agent to deduct all of such fees set forth in this Section 4 from the proceeds of the Loan made under the Credit Agreement.

 

2


5. Conditions to Effectiveness . This Agreement shall become effective as of the date on which each of the following conditions has been satisfied (the “ Effective Date ”):

(a) Borrowers shall have delivered to Agent this Agreement, duly executed by an authorized officer of each Borrower;

(b) Borrowers shall have delivered to Agent that certain First Amendment to Intellectual Property Security Agreement, by and among Borrowers and Agent (the “ IP Amendment ”) in substantially the same form attached hereto as Exhibit A ;

(c) all representations and warranties of Borrowers contained herein shall be true and correct in all material respects as of the date hereof (and such parties’ delivery of their respective signatures hereto shall be deemed to be its certification thereof);

(d) after giving effect to the agreements set forth herein, no Default or Event of Default shall exist under any of the Financing Documents;

(e) Borrower shall have delivered such other documents, information, certificates, records, permits, and filings as the Agent may reasonably request; and

(f) Agent shall have received from Borrowers all of the fees owing pursuant to this Agreement and other documents and agreements executed in connection herewith, including without limitation, Agent’s reasonable out-of-pocket legal fees and expenses pursuant to Section 4 (Costs and Fees) of this Agreement.

6. Release . In consideration of the agreements of Agent and Required Lenders contained herein and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, each Borrower, voluntarily, knowingly, unconditionally and irrevocably, with specific and express intent, for and on behalf of itself and all of its respective parents, subsidiaries, affiliates, members, managers, predecessors, successors, and assigns, and each of their respective current and former directors, officers, shareholders, agents, and employees, and each of their respective predecessors, successors, heirs, and assigns (individually and collectively, the “ Releasing Parties ”) does hereby fully and completely release, acquit and forever discharge each of Agent, Lenders, and each their respective parents, subsidiaries, affiliates, members, managers, shareholders, directors, officers and employees, and each of their respective predecessors, successors, heirs, and assigns (individually and collectively, the “ Released Parties ”), of and from any and all actions, causes of action, suits, debts, disputes, damages, claims, obligations, liabilities, costs, expenses and demands of any kind whatsoever, at law or in equity, whether matured or unmatured, liquidated or unliquidated, vested or contingent, choate or inchoate, known or unknown that the Releasing Parties (or any of them) has against the Released Parties or any of them (whether directly or indirectly). Each Borrower acknowledges that the foregoing release is a material inducement to Agent’s and Required Lender’s decision to enter into this Agreement and agree to the modifications contemplated hereunder, and has been relied upon by Agent and Required Lenders in connection therewith.

7. No Waiver or Novation . The execution, delivery and effectiveness of this Agreement shall not, except as expressly provided in this Agreement, operate as a waiver of any right, power or remedy of Agent, nor constitute a waiver of any provision of the Credit Agreement, the Financing Documents or any other documents, instruments and agreements executed or delivered in connection with any of the foregoing. Nothing herein is intended or shall be construed as a waiver of any existing Defaults or Events of Default under the Credit Agreement or other Financing Documents or any of Agent’s rights and remedies in respect of such Defaults or Events of Default. This Agreement (together with any other document executed in connection herewith) is not intended to be, nor shall it be construed as, a novation of the Credit Agreement.

 

3


8. Affirmation . Except as specifically amended pursuant to the terms hereof, each Borrower hereby acknowledges and agrees that the Credit Agreement and all other Financing Documents (and all covenants, terms, conditions and agreements therein) shall remain in full force and effect, and are hereby ratified and confirmed in all respects by Borrowers. Each Borrower covenants and agrees to comply with all of the terms, covenants and conditions of the Credit Agreement and the Financing Documents, notwithstanding any prior course of conduct, waivers, releases or other actions or inactions on Agent’s or any Lender’s part which might otherwise constitute or be construed as a waiver of or amendment to such terms, covenants and conditions.

9. Confidentiality . No Borrower will disclose the contents of this Agreement, the Credit Agreement or any of the other Financing Documents to any third party (including, without limitation, any financial institution or intermediary) without Agent’s prior written consent, other than to Borrowers’ officers and advisors on a need-to-know basis or as otherwise may be required by Law, including to any court or regulatory agency having jurisdiction over such Borrower. Each Borrower agrees to inform all such persons who receive information concerning this Agreement, the Credit Agreement and the other Financing Documents that such information is confidential and may not be disclosed to any other person except as may be required by Law, including to any court or regulatory agency having jurisdiction over such Borrower.

10. Miscellaneous .

(a) Reference to the Effect on the Credit Agreement . Upon the effectiveness of this Agreement, each reference in the Credit Agreement to “this Agreement,” “hereunder,” “hereof,” “herein,” or words of similar import shall mean and be a reference to the Credit Agreement, as amended by this Agreement. Except as specifically amended above, the Credit Agreement, and all other Financing Documents (and all covenants, terms, conditions and agreements therein), shall remain in full force and effect, and are hereby ratified and confirmed in all respects by Borrowers.

(b) Incorporation of Credit Agreement Provisions . The provisions contained in Section 11.6 (Indemnification), Section 12.8 (Governing Law; Submission to Jurisdiction) and Section 12.9 (Waiver of Jury Trial) of the Credit Agreement are incorporated herein by reference to the same extent as if reproduced herein in their entirety.

(c) Headings . Section headings in this Agreement are included for convenience of reference only and shall not constitute a part of this Agreement for any other purpose.

(d) Counterparts . This Agreement may be signed in any number of counterparts, each of which shall be deemed an original and all of which when taken together shall constitute one and the same instrument. Delivery of an executed counterpart of this Agreement by facsimile or by electronic mail delivery of an electronic version (e.g., .pdf or .tif file) of an executed signature page shall be effective as delivery of an original executed counterpart hereof and shall bind the parties hereto.

(e) Entire Agreement . This Agreement constitutes the entire agreement and understanding among the parties hereto and supersedes any and all prior agreements and understandings, oral or written, relating to the subject matter hereof.

(f) Severability . In case any provision of or obligation under this Agreement shall be invalid, illegal or unenforceable in any applicable jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby.

 

4


(g) Successors/Assigns . This Agreement shall bind, and the rights hereunder shall inure to, the respective successors and assigns of the parties hereto, subject to the provisions of the Credit Agreement and the other Financing Documents.

[SIGNATURES APPEAR ON FOLLOWING PAGES]

 

5


IN WITNESS WHEREOF, intending to be legally bound, and intending that this document constitute an agreement executed under seal, the undersigned have executed this Agreement under seal as of the day and year first hereinabove set forth.

 

AGENT:    

MIDCAP FUNDING IV, LLC,

as Agent

 
    By:     /s/Brett Robinson   (SEAL)
    Name:   Brett Robinson  
    Title:   Managing Director  

 

LENDER:    

MIDCAP FUNDING IV, LLC,

as a Lender

 
    By:     /s/Brett Robinson   (SEAL)
    Name:   Brett Robinson  
    Title:   Managing Director  

[Signatures Continue on Following Page]

 

 

 

 

[Signatures Continue on Following Page]


BORROWERS:    

ALPHATEC HOLDINGS, INC.,

a Delaware corporation

 
    By:   /s/Michael O’Neill   (SEAL)
    Name:   Michael O’Neill  
    Title: Chief Financial Officer and Treasurer  

 

   

ALPHATEC SPINE, INC.,

a California corporation

 
    By:   /s/Michael O’Neill   (SEAL)
    Name:   Michael O’Neill  
    Title: Chief Financial Officer and Treasurer  

 

   

ALPHATEC INTERNATIONAL LLC,

a Delaware limited liability company

 
    By:   /s/Michael O’Neill   (SEAL)
    Name:   Michael O’Neill  
    Title: Chief Financial Officer and Treasurer  

 

   

ALPHATEC PACIFIC, INC.

a Japanese company

 
    By:   /s/ Mitsuo Asai   (SEAL)
    Name:   Mitsuo Asai  
    Title: President API  

[End of Signature Pages]


EXHIBIT A

IP Amendment – see attached

 

 

 

 

 

Exhibit A

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 1, 2013

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 1, 2013

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, 2013, 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 1, 2013  

/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, 2013, 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 1, 2013  

/s/ Michael O’Neill

 

Michael O’Neill

Chief Financial Officer, Vice President and Treasurer

(principal financial and accounting officer of the Company)