Alphatec Spine, Inc.
Alphatec Holdings, Inc. (Form: 10-Q, Received: 05/01/2014 06:08:25)


 
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, 2014
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 000-52024
 
 
ALPHATEC HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
20-2463898
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
5818 El Camino Real
Carlsbad, CA 92008
(Address of principal executive offices, including zip code)
(760) 431-9286
(Registrant’s telephone number, including area code)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   o
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   o
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.
Large accelerated filer
 
o
  
Accelerated filer
 
x
 
 
 
 
 
 
 
Non-accelerated filer
 
o  (Do not check if a small reporting company)
  
Smaller reporting company
 
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)    Yes   o     No   x As of April 29, 2014 , there were 97,675,388 shares of the registrant’s common stock outstanding.
 




ALPHATEC HOLDINGS, INC.
QUARTERLY REPORT ON FORM 10-Q
March 31, 2014
Table of Contents
 
 
 
Page
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Item 4.
 
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 6.
 
 

2



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,
2014
 
December 31,
2013
Assets
 
 
 
Current assets:
 
 
 
Cash
$
23,764

 
$
21,345

Restricted cash
17,750

 

Accounts receivable, net
38,838

 
41,395

Inventories, net
42,542

 
41,939

Prepaid expenses and other current assets
11,168

 
7,694

Deferred income tax assets
1,388

 
1,372

Total current assets
135,450

 
113,745

Property and equipment, net
28,136

 
28,030

Goodwill
183,088

 
183,004

Intangibles, net
37,176

 
39,064

Other assets
2,432

 
1,787

Total assets
$
386,282

 
$
365,630

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
16,462

 
$
10,790

Accrued expenses
62,454

 
62,996

Deferred revenue
1,044

 
1,009

Common stock warrant liabilities
10,250

 

Current portion of long-term debt
4,189

 
4,924

Total current liabilities
94,399

 
79,719

Long-term debt, less current portion
64,115

 
49,978

Other long-term liabilities
36,039

 
38,784

Deferred income tax liabilities
1,998

 
1,870

Redeemable preferred stock, $0.0001 par value; 20,000 authorized at March 31, 2014 and December 31, 2013; 3,319 shares issued and outstanding at both March 31, 2014 and December 31, 2013
23,603

 
23,603

Stockholders’ equity:
 
 
 
Common stock, $0.0001 par value; 200,000 authorized at March 31, 2014 and December 31, 2013; 97,675 and 97,599 shares issued and outstanding at March 31, 2014 and December 31, 2013, respectively
10

 
10

Treasury stock, 19 shares
(97
)
 
(97
)
Additional paid-in capital
404,514

 
403,568

Accumulated other comprehensive loss
4,056

 
3,877

Accumulated deficit
(242,355
)
 
(235,682
)
Total stockholders’ equity
166,128

 
171,676

Total liabilities and stockholders’ equity
$
386,282

 
$
365,630

See accompanying notes to unaudited condensed consolidated financial statements.

3



ALPHATEC HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share amounts)
 
 
Three Months Ended
 
March 31,
 
2014
 
2013
Revenues
$
49,173

 
$
50,443

Cost of revenues
15,433

 
17,270

Amortization of acquired intangible assets
446

 
431

Gross profit
33,294

 
32,742

Operating expenses:
 
 
 
Research and development
4,181

 
3,682

Sales and marketing
18,059

 
18,495

General and administrative
14,222

 
11,130

Amortization of acquired intangible assets
758

 
793

Restructuring expenses
776

 

Total operating expenses
37,996

 
34,100

Operating loss
(4,702
)
 
(1,358
)
Other income (expense):
 
 
 
Interest income
3

 
2

Interest expense
(1,688
)
 
(695
)
Other income (expense), net
383

 
(650
)
Total other income (expense)
(1,302
)
 
(1,343
)
Pretax net loss
(6,004
)
 
(2,701
)
Income tax provision (benefit)
669

 
(52
)
Net loss
$
(6,673
)
 
$
(2,649
)
Net loss per common share:
 
 
 
Basic and diluted net loss per share
$
(0.07
)
 
$
(0.03
)
Weighted-average shares used in computing net loss per share:
 
 
 
Basic and diluted
96,838

 
95,826

See accompanying notes to unaudited condensed consolidated financial statements.

4



ALPHATEC HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(UNAUDITED)
(in thousands)
 
 
 
Three Months Ended
 
March 31,
 
2014
 
2013
Net loss
$
(6,673
)
 
$
(2,649
)
Foreign currency translation adjustments
(179
)
 
(4,485
)
Comprehensive loss
$
(6,852
)
 
$
(7,134
)
See accompanying notes to unaudited condensed consolidated financial statements.

5



ALPHATEC HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
 
 
Three Months Ended March 31,
 
2014
 
2013
Operating activities:
 
 
 
Net loss
$
(6,673
)
 
$
(2,649
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
4,851

 
6,259

Stock-based compensation
944

 
1,184

Interest expense related to amortization of debt discount and debt issuance costs
430

 
129

Provision for doubtful accounts
178

 
57

Provision for excess and obsolete inventory
713

 
1,698

Deferred income tax (benefit) expense
106

 
(204
)
Other noncash items
(335
)
 
285

Changes in operating assets and liabilities:
 
 
 
Restricted cash
(17,750
)
 

Accounts receivable
2,560

 
(674
)
Inventories
(1,239
)
 
(3,387
)
Prepaid expenses and other current assets
(72
)
 
394

Other assets
(128
)
 
39

Accounts payable
4,036

 
897

Accrued expenses and other
(3,984
)
 
(4,318
)
Deferred revenues
(18
)
 
(46
)
Net cash used in operating activities
(16,381
)
 
(336
)
Investing activities:
 
 
 
Purchases of property and equipment
(1,794
)
 
(2,519
)
Purchase of intangible assets

 
(250
)
Cash received from sale of assets
300

 

Net cash used in investing activities
(1,494
)
 
(2,769
)
Financing activities:
 
 
 
Borrowings under lines of credit
39,021

 
34,669

Repayments under lines of credit
(36,601
)
 
(33,497
)
Principal payments on capital lease obligations
(120
)
 
(124
)
Proceeds from notes payable
19,500

 

Principal payments on notes payable
(1,488
)
 
(630
)
Net cash provided by financing activities
20,312

 
418

Effect of exchange rate changes on cash
(18
)
 
(261
)
Net increase (decrease) in cash
2,419

 
(2,948
)
Cash at beginning of period
21,345

 
22,241

Cash at end of period
$
23,764

 
$
19,293



  See accompanying notes to unaudited condensed consolidated financial statements.


6



ALPHATEC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS—(Continued)
(in thousands)
 
Three Months Ended March 31,
 
2014
 
2013
Supplemental disclosure of cash flow information:

 

Cash paid for interest
$
1,189

 
$
936

Cash paid for income taxes
$
142

 
$
958

Purchases of property and equipment in accounts payable
$
1,711

 
$
3,768

Non-cash debt discount
$
500

 
$

Initial fair value of warrant liability
$
10,368

 
$










































See accompanying notes to unaudited condensed consolidated financial statements.

7






ALPHATEC HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. T he 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 the distribution channels of Alphatec Spine and its affiliate, Scient’x S.A.S., and its subsidiaries (“Scient’x”), via a direct sales force in 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, 2013 , 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, 2013 , which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 that was filed with the SEC on March 20, 2014.
Operating results for the three months ended March 31, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014 , 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 $23.8 million combined with anticipated cash flow from operations in 2014 and other working capital, excluding common stock warrant liability, of $27.5 million at March 31, 2014 and the Company's available borrowings under the credit facilities with MidCap Financial, LLC ("MidCap") and Deerfield Private Design Fund II, L.P., Deerfield Private Design International II, L.P., Deerfield Special Situations Fund, L.P. and Deerfield Special Situations International Master Fund, L.P. (collectively, “Deerfield”), will be sufficient to fund its cash requirements, including the required payments due under the Orthotec litigation settlement (Note 6), through at least March 31, 2015 .
The Company’s amended credit facility (the “Amended Credit Facility”) with MidCap contains financial covenants consisting of a monthly fixed charge coverage ratio, a senior leverage ratio and a total leverage ratio (see Note 5). Based on the Company’s current operating plan, the Company believes that it will be in compliance with the financial covenants of the Amended Credit Facility at least through March 31, 2015 . 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 Amended Credit Facility, which would require a waiver from MidCap. There can be no assurance that such a waiver could be obtained, that the Amended 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 Amended Credit Facility, including accelerating the repayment of debt obligations. The Company may be forced to seek additional financing, which may include additional debt and/or equity financing or funding through other third party agreements. There

8



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, 2013 , which are included in the Company’s Annual Report on Form 10-K that was filed with the SEC on March 20, 2014. Except as discussed below, these accounting policies have not significantly changed during the three months ended March 31, 2014 .
Restricted Cash
In March 2014, the Company borrowed and set aside cash for the payment of a portion of the Orthotec litigation settlement (see Note 6) as limited by the terms of the facility agreement that we entered into with Deerfield on March 17, 2014 (see Note 5). The Company classified this cash as restricted, because it may not be used for purposes other than payments of amounts due under the Orthotec litigation settlement agreement.
Warrants for Common Stock
Common stock warrants that contain compliance covenants and cash payment obligations are classified as common stock warrant liabilities on the consolidated balance sheet. The Company records the warrant liability at fair value and adjust the carrying value of these common stock warrants to their estimated fair value at each reporting date with the increases or decreases in the fair value of such warrants at each reporting date recorded as other income (expense) in the consolidated statement of operations.
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 became effective for the Company beginning January 1, 2014. The Company adopted this guidance and the adoption did not have any impact on the Company's financial statements.
3. Select Balance Sheet Details
Accounts Receivable, net
Accounts receivable, net consist of the following (in thousands):
 
 
March 31, 2014
 
December 31, 2013
Accounts receivable
$
39,968

 
$
42,443

Allowance for doubtful accounts
(1,130
)
 
(1,048
)
Accounts receivables, net
$
38,838

 
$
41,395


9



Inventories, net
Inventories, net consist of the following (in thousands):
 
 
March 31, 2014
 
December 31, 2013
 
Gross
 
Reserve for
excess and
obsolete
 
Net
 
Gross
 
Reserve for
excess and
obsolete
 
Net
Raw materials
$
3,996

 
$

 
$
3,996

 
$
4,375

 
$

 
$
4,375

Work-in-process
645

 

 
645

 
531

 

 
531

Finished goods
60,852

 
(22,951
)
 
37,901

 
60,979

 
(23,946
)
 
37,033

Inventories
$
65,493

 
$
(22,951
)
 
$
42,542

 
$
65,885

 
$
(23,946
)
 
$
41,939

Property and Equipment, net
Property and equipment, net consist of the following (in thousands except as indicated):
 
Useful lives
(in years)
 
March 31, 2014
 
December 31, 2013
Surgical instruments
4
 
$
62,602

 
$
62,636

Machinery and equipment
7
 
14,414

 
14,692

Computer equipment
3
 
3,143

 
3,357

Office furniture and equipment
5
 
3,861

 
3,703

Leasehold improvements
various
 
3,733

 
4,161

Building
39
 
77

 
52

Land
n/a
 
11

 
10

Construction in progress
n/a
 
1,270

 
1,228

 
 
 
89,111

 
89,839

Less accumulated depreciation and amortization
 
 
(60,975
)
 
(61,809
)
Property and equipment, net
 
 
$
28,136

 
$
28,030

Total depreciation expense was $3.3 million and $3.5 million for the three months ended March 31, 2014 and 2013 , respectively. At March 31, 2014 , assets recorded under capital leases of $2.4 million were included in the machinery and equipment balance. At December 31, 2013 , assets recorded under capital leases of $1.8 million were included in the machinery and equipment balance and $0.6 million in construction in progress balance. Amortization of assets under capital leases was included in depreciation expense.

10



Intangible Assets, net
Intangible assets, net consist of the following (in thousands except for useful lives):
 
 
Useful lives
(in years)
 
March 31, 2014
 
December 31, 2013
Developed product technology
3-8
 
$
23,641

 
$
23,633

Distribution rights
3
 
2,388

 
2,343

Intellectual property
5
 
1,004

 
1,004

License agreements
1-7
 
16,716

 
17,686

Core technology
10
 
5,140

 
5,137

Trademarks and trade names
3-9
 
3,922

 
3,920

Customer-related
12-15
 
22,171

 
22,161

Distribution network
10-12
 
4,027

 
4,027

Physician education programs
10
 
3,163

 
3,160

Supply agreement
10
 
225

 
225

 
 
 
82,397

 
83,296

Less accumulated amortization
 
 
(45,221
)
 
(44,232
)
Intangible assets, net
 
 
$
37,176

 
$
39,064

Total amortization expense was $1.6 million and $2.7 million for the three months ended March 31, 2014 and 2013 , respectively.
Future amortization expense related to intangible assets subject to amortization are as follows (in thousands):
Year Ending December 31,
 
Remainder of 2014
$
4,739

2015
6,060

2016
5,537

2017
5,240

2018
3,288

Thereafter
12,312

 
$
37,176


11



  Accrued Expenses
Accrued expenses consist of the following (in thousands):
 
 
March 31, 2014
 
December 31, 2013
Legal
$
1,376

 
$
2,139

Accounting
782

 
928

Severance
173

 
297

Restructuring
9,307

 
9,170

Sales milestones
1,958

 
1,828

Accrued taxes
924

 
1,120

Deferred rent
1,073

 
1,163

Royalties
2,436

 
2,347

Commissions
4,376

 
6,180

Payroll and related
10,196

 
9,369

Litigation settlements
22,708

 
22,600

Other
7,145

 
5,855

Total accrued expenses
$
62,454

 
$
62,996

Goodwill
The changes in the carrying amount of goodwill from December 31, 2013 through March 31, 2014 are as follows (in thousands):
 
 
 
Balance at December 31, 2013
$
183,004

Effect of foreign exchange rate on goodwill
84

Balance at March 31, 2014
$
183,088

4. License and Supply 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, 2013 , which are included in its Annual Report on Form 10-K which was filed with the SEC on March 20, 2014.
5. Debt
MidCap Facility Agreement
On August 30, 2013, the Company entered into an Amended and Restated Credit, Security and Guaranty Agreement (the "Amended Credit Facility") with MidCap. The Amended Credit Facility amended and restated the prior credit facility that the Company had with MidCap (the "Credit Facility").
Pursuant to the Amended Credit Facility, the Company increased the borrowing limit from $50 million to $73 million . The Company also extended the maturity to August 2016 . The Amended Credit Facility consists of a $28 million term loan drawn at closing with a $5 million delayed draw within 12 months, for a total term loan maximum borrowing of $33 million and a revolving line of credit with a maximum borrowing base of $40 million . The Company used the term loan proceeds of $28 million to repay a portion of the outstanding balance on the prior revolving line of credit. The $5 million delayed draw was borrowed on April 1, 2014.
The term loan interest rate is priced at the London Interbank Offered Rate ( "LIBOR") plus 8.0% , subject to a 9.5% floor, and the revolving line of credit interest rate remains priced at LIBOR plus 6.0% , reset monthly. At March 31, 2014 , the revolving line of credit carried an interest rate of 6.2% and the term loan carries an interest rate of 9.5% . The borrowing base is determined, from time to time, based on the value of domestic eligible accounts receivable and domestic eligible inventory. As collateral for the Amended 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. In addition to monthly payments

12



of interest, monthly repayments of $0.3 million of the principal for the term loan are due beginning in October 2013 through maturity, with the remaining principal due upon maturity.
In connection with the execution of the Amended Credit Facility, the Company incurred an additional $0.4 million in costs that were capitalized as debt issuance costs within the unaudited consolidated balance sheets as of September 30, 2013. At March 31, 2014 , $0.7 million remains as unamortized debt issuance costs related to the prior and Amended Credit Facility within the unaudited consolidated balance sheets, which will be amortized over the remaining term of the Amended Credit Facility.
The Amended Credit Facility includes traditional lending and reporting covenants including a fixed charge coverage ratio, a senior leverage ratio and a total leverage ratio to be maintained by the Company. The Amended 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”). Under the Waiver, MidCap gave the Company its consent to waive certain provisions of the Credit Facility in connection with the acquisition of Phygen and related to the 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 to the Credit Facility”). The First Amendment to the Credit Facility allowed 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 to the Credit Facility, the Company paid MidCap a fee of $0.1 million . In July 2013, the Company entered into a second limited waiver and limited consent agreement with MidCap (the “Second Waiver”). Under the Second Waiver, MidCap gave the Company its consent to waive certain provisions of the Credit Facility related to the maintenance of cash balances in the U.S. for past periods through September 30, 2013. On August 30, 2013, the Company entered into the Amended Credit Agreement with MidCap.
On March 17, 2014, the Company entered into a first amendment to the Amended Credit Facility with MidCap (the "First Amendment to the Amended Credit Facility"). Under the First Amendment to the Amended Credit Facility, MidCap gave the Company its consent to enter into the Facility Agreement (defined below) and make settlement payments in connection with the Orthotec litigation. The First Amendment to the Amended Credit Facility also added a total leverage ratio financial covenant. The Company was in compliance with all of the covenants of the Amended Credit Facility, as amended, as of March 31, 2014 .
Deerfield Facility Agreement
On March 17, 2014, the Company entered into a facility agreement (the “Facility Agreement”) with Deerfield, pursuant to which Deerfield agreed to loan the Company up to $50 million , subject to the terms and conditions set forth in the Facility Agreement. Under the terms of the Facility Agreement, the Company has the option, but is not required, upon certain conditions to draw the entire amount available under the Facility Agreement, at any time until January 30, 2015 (the “Draw Period”), provided that the initial draw be used for a portion of the payments made in connection with the Orthotec settlement described below. Following such initial draw down, the Company may draw down additional amounts under the Facility Agreement up to an aggregate $15 million for working capital or general corporate purposes in $2.5 million increments until the end of the Draw Period. The Company has agreed to pay Deerfield, upon each disbursement of funds under the Facility Agreement, a transaction fee equal to 2.5% of the principal amount of the funds disbursed. Amounts borrowed under the Facility Agreement bear interest at a rate of 8.75% per annum and are payable on the third, fourth and fifth anniversary date of the first amount borrowed under the Facility Agreement, with the final payment due on March 20, 2019.
The Facility Agreement also contains various representations and warranties, and affirmative and negative covenants, customary for financings of this type, including restrictions on the ability of the Company and its subsidiaries to incur additional indebtedness or liens on its assets, except as permitted under the Facility Agreement. As security for our repayment of our obligations under the Facility Agreement, we granted to Deerfield a security interest in substantially all of our property and interests in property that are subordinated to the security interest granted under the Amended Credit Facility.
In connection with the execution of the Facility Agreement on March 17, 2014, the Company issued to Deerfield warrants to purchase an aggregate of 6,250,000 shares of the Company’s common stock (the “Initial Warrants”) (See Note 8). Additionally, each disbursement borrowing under the Facility Agreement shall be accompanied by the issuance to Deerfield of warrants to purchase up to 10,000,000 shares of the Company’s common stock, in proportion to the amount of draw compared to the total $50 million facility (the "Draw Warrants") (See Note 8).
On March 20, 2014, the Company made an initial draw of $20 million under the Facility Agreement and received net proceeds of $19.5 million to fund its 2014 Orthotec settlement payment obligations. The $0.5 million transaction fee is

13



recorded as a debt discount and is being amortized over the term of the draw, which ends March 20, 2019. In connection with this borrowing, the Company issued 4,000,000 Draw Warrants, which were valued at $4.7 million and recorded as a debt discount and is being amortized over the term of the $20 million draw. Additionally, $2.3 million of the Initial Warrants were reclassified as a debt discount and are being amortized through interest expense over the term of the debt using the effective interest method. Orthotec settlement payments of $1.75 million were made in March 2014, leaving remaining proceeds of $17.8 million , which were classified as restricted cash as of March 31, 2014 , as their use is limited under the terms of the Facility Agreement for the payments of amounts due under the Orthotec litigation settlement agreement. The amounts borrowed under the Facility Agreement are due in three equal annual payments beginning March 20, 2017.
Principal payments on debt are as follows as of March 31, 2014 (in thousands):
 
 
 
Year Ending December 31,
 
Remainder of 2014
$
2,997

2015
3,000

2016
48,501

2017
6,667

2018
6,667

Thereafter
6,666

Total
74,498

Add: capital lease principal payments
1,216

Less: debt discount
(7,410
)
Total
68,304

Less: current portion of long-term debt
(4,189
)
Long-term debt, net of current portion
$
64,115


6. 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 January 2019. Future minimum annual lease payments under such leases are as follows (in thousands):
 
Year Ending December 31,
Operating
 
Capital
Remainder of 2014
$
2,452

 
$
391

2015
2,724

 
461

2016
1,424

 
422

2017
247

 
82

2018
58

 

Thereafter
2

 

 
$
6,907

 
1,356

Less: amount representing interest
 
 
(140
)
Present value of minimum lease payments
 
 
1,216

Current portion of capital leases
 
 
(442
)
Capital leases, less current portion
 
 
$
774


14



Rent expense under operating leases for the three months ended March 31, 2014 and 2013 was $1.0 million and $1.0 million , respectively.
Litigation
In 1998, Eurosurgical, a French company in the business of sales and marketing of spinal implants, entered into a distribution agreement for the United States, Mexico, Canada, India and Australia with Orthotec, LLC, a California company (“Orthotec”). In 2004, Orthotec sued Eurosurgical in connection with a contractual dispute and a final $9 million judgment was entered against Eurosurgical by a California court in 2006. In 2007, following a default judgment, 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, ("Surgiview"), in a sale agreement, ("the Partial 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 approximate 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 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 and punitive damages related thereto) to have the defendants bear responsibility for the $39 million in judgments that had been assessed against Eurosurgical, which, together with interest is now greater than $70 million . On February 10, 2014, the jury reached a verdict in which Surgiview was found to have transferred assets for less than fair market value in connection with Surgiview’s purchase of certain assets of Eurosurgical, and to have interfered with certain contractual rights of Orthotec. Although a formal judgment was never entered, the jury awarded monetary damages in the amount of $47.9 million , plus interest, against Surgiview related to various causes of action alleged by Orthotec.
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 and punitive damages related thereto, to have the defendant’s bear responsibility for the $39 million in judgments that had been assessed against Eurosurgical, which, together with interest is now greater than $70 million .
On March 15, 2014, the Company, Orthotec, LLC and certain other parties, including certain directors and affiliates of the Company, entered into a binding term sheet to settle all legal matters between Orthotec and the Company and its directors and affiliates.  Pursuant to the binding term sheet, the Company has agreed to pay Orthotec $49 million in cash, with initial cash payments of $1.75 million paid in March 2014 and $15.75 million paid on April 10, 2014. The remaining $31.5 million will be paid to Orthotec in installments of $1.1 million paid quarterly, beginning in the fourth quarter of 2014. HealthpointCapital has agreed to contribute $5 million to the $49 million settlement amount . In addition, a 7% simple interest rate will accrue on the unpaid portion of the $31.5 million . All accrued interest is not payable until the $49 million is paid, and such accrued interest shall be paid in $1.1 million installments each quarter. This settlement will result in mutual releases of all claims and the dismissal of all Orthotec-related litigation matters involving the Company, its directors and affiliates.
On August 10, 2010, a purported securities class action complaint was filed in the United States District Court for the Southern District of California on behalf of all persons who purchased the Company's common stock between December 19, 2009 and August 5, 2010 against the Company and certain of its directors and officers alleging violations of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder. On February 17, 2011, an amended complaint was filed against the Company and certain of its directors and officers adding alleged violations of the Securities Act of 1933, as amended. HealthpointCapital, Jefferies & Company, Inc., Canaccord Adams, Inc., Cowen and Company, Inc., and Lazard Capital Markets LLC are also defendants in this action. The complaint alleges that the defendants made false or misleading statements, as well as failed to disclose material facts, about the Company’s business, financial condition, operations and prospects, particularly relating to the Scient’x transaction and our financial guidance following the closing of the acquisition. The complaint seeks unspecified monetary damages, attorneys’ fees, and other unspecified relief. The Company believe that the claims are without merit and it intends to vigorously defend itself against this complaint. However, the outcome of the litigation cannot be predicted at this time and any outcome that is adverse to the Company, regardless of who the defendant is, could have a significant adverse effect on its financial condition and results of operations.

15



On August 25, 2010, an alleged shareholder of the Company filed a derivative lawsuit in the Superior Court of California, San Diego County, purporting to assert claims on behalf of the Company against all of its directors and certain of its officers and HealthpointCapital. Following the filing of this complaint, similar complaints were filed in the same court and in the U.S. District Court for the Southern District of California against the same defendants containing similar allegations. The complaint filed in federal court was dismissed by the plaintiff without prejudice in July 2011. The state court complaints have been consolidated into a single action and the Company has been named as a nominal defendant in the consolidated action. Each complaint alleges that the Company’s directors and certain of its officers breached their fiduciary duties to the Company related to the Scient’x transaction, and by making allegedly false statements that led to unjust enrichment of HealthpointCapital and certain of the Company’s directors. The complaints seek unspecified monetary damages and an order directing the Company to adopt certain measures purportedly designed to improve its corporate governance and internal procedures. On January 8, 2014, the parties reached an agreement in principle to resolve all claims in exchange for corporate governance reforms and payment of attorneys’ fees in the amount of $5.25 million , to be paid by the Company’s and HeathpointCapital’s respective insurance carriers. The Company believes the claims are without merit and, subject to final approval of any settlement, intends to vigorously defend itself against these complaints. No assurances can be given as to the timing or outcome of this lawsuit.
At March 31, 2014 , the probable outcome of any of the aforementioned litigation matters that have not reached a settlement 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 any litigation matters that have not reached a settlement. 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.
7. 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,
 
2014
 
2013
Numerator:
 
 
 
Net loss
$
(6,673
)
 
$
(2,649
)
Denominator:
 
 
 
Weighted average common shares outstanding
97,668

 
96,701

Weighted average unvested common shares subject to repurchase
(830
)
 
(875
)
Weighted average common shares outstanding—basic
96,838

 
95,826

Effect of dilutive securities:
 
 
 
Options, warrants and restricted share awards

 

Weighted average common shares outstanding—diluted
96,838

 
95,826

Net loss per common share:
 
 
 
Basic and diluted net loss per share
$
(0.07
)
 
$
(0.03
)

16



The weighted-average anti-dilutive securities not included in diluted net loss per share were as follows (in thousands):
 
 
Three Months Ended 
 March 31,
 
2014
 
2013
Options to purchase common stock
5,378

 
3,939

Unvested restricted share awards
830

 
875

Warrants to purchase common stock
10,844

 
594

Total
17,052

 
5,408

8. Equity Transactions
Warrants
In connection with the execution of the Facility Agreement, on March 17, 2014, the Company issued to Deerfield warrants to purchase an aggregate of 6,250,000 shares of the Company’s common stock immediately exercisable at an exercise price equal to $1.39 (the “Initial Warrants”) expiring on March 17, 2020. The number of shares of common stock into which the Initial Warrants are exercisable and the exercise price will be adjusted to reflect any stock splits, payment of stock dividends, recapitalizations, reclassifications or other similar adjustments in the number of outstanding shares of the Company’s common stock. The warrants have the same dividend rights to the same extent as if the warrants had been exercised for shares of common stock.
Each disbursement borrowing under the Facility Agreement shall be accompanied by the issuance to Deerfield of additional warrants to purchase up to an aggregate of 10,000,000 shares of the Company’s common stock, at an exercise price equal to the lesser of the Initial Warrant exercise price or the average daily volume weighted average price per share of the Company’s common stock for the 15 days following the request for borrowing (the “Draw Warrants”). The number of Draw Warrants issued for each draw will be in proportion to the amount of draw compared to the total $50 million facility.
The Initial Warrants were valued on March 17, 2014 using a Black-Scholes option pricing model that resulted in a value of $5.7 million , which was recorded as a current liability with an offset to a deferred charge asset and will be amortized on a straight line basis through interest expense over the term of the Facility Agreement commitment period ending January 30, 2015. To the extent the Company draws on the $50 million Facility Agreement, a proportionate amount of the unamortized current deferred charge will be reclassified as debt discount and amortized through interest expense over the term of the debt using the effective interest method.
On March 20, 2014, the Company made an initial draw of $20 million under the Facility Agreement and received net proceeds of $19.5 million to fund its 2014 Orthotec settlement payment obligations. In connection with this borrowing, the Company issued Draw Warrants to purchase 4,000,000 shares of common stock at an exercise price of $1.39 . The Draw Warrants were valued at $4.7 million using the Black-Scholes option pricing model, which was recorded as a current liability with an offset to debt discount. In connection with the $20 million draw, $2.3 million of the deferred charge recorded upon the issuance of the Initial Warrants was reclassified as a debt discount.
As of March 31, 2014, the 10,250,000 outstanding Initial Warrants and Draw Warrants were revalued to their fair value with a charge to other income of $0.1 million . The warrant liability of $10.3 million is recorded as common stock warrant liabilities within current liabilities on the condensed consolidated balance sheet as of March 31, 2014 .
At March 31, 2014 , our outstanding warrants were valued using the Black-Scholes option pricing model. This is a Level 3 measurement using the following assumptions:
 
March 31, 2014
Risk-free interest rate
1.9
%
Dividend yield
%
Expected volatility
74
%
Expected life (years)
6.0



17



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 unrecognized tax benefits increased less than $0.1 million during the three months ended March 31, 2014 . The increase in unrecognized tax benefits during the three months ended March 31, 2014 was primarily related to an increase related to state research credits and uncertain tax positions within the Company’s foreign subsidiaries, partially offset by changes in prior year uncertain tax positions within the Company's foreign subsidiaries. The unrecognized tax benefits at March 31, 2014 were $7.9 million . With the facts and circumstances currently available to the Company, it is reasonably possible that the amount that could reverse over the next 12 months is insignificant. Additionally, the French restructuring (see Note 11) may result in limitations on the Company’s ability to utilize its French net operating loss carryforwards to offset future taxable income.
The income tax provision consists primarily of income tax provisions related to 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, or by foreign, state or 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 has one operating and one reportable business segment.
During the three months ended March 31, 2014 and 2013 , the Company operated in two geographic regions, the U.S. and International, which consists of locations outside of the U.S. In the International geographic region, sales in Japan for the three months ended March 31, 2014 totaled $7.7 million , which represented greater than 10 percent of the Company’s consolidated revenues. In the International geographic region, sales in Japan for the three months ended March 31, 2013 totaled $6.4 million , which represented greater than 10 percent of the Company’s consolidated revenues.
Revenues attributed to the geographic location of the customer were as follows (in thousands):
 
 
Three Months Ended
 
March 31,
 
2014
 
2013
United States
$
32,050

 
$
33,062

International
17,123

 
17,381

Total consolidated revenues
$
49,173

 
$
50,443

Total assets by region were as follows (in thousands):
 
 
March 31,
2014
 
December 31,
2013
United States
$
223,667

 
$
196,383

International
162,615

 
169,247

Total consolidated assets
$
386,282

 
$
365,630


18



11. Restructuring
On September 16, 2013, the Company announced that Scient'x has begun a process to significantly restructure its business operations in France in an effort to improve operating efficiencies and rationalize its cost structure. The restructuring includes a reduction and a further expected reduction in 2014 in Scient'x's workforce and closing of the manufacturing facilities in France. The Company estimates that it will record total costs, including employee severance, social plan benefits and related taxes, facility closing costs, manufacturing transfer costs, and contract termination costs of approximately $11.6 million associated with this restructuring. In accordance with ASC Topic 420, Accounting for Costs Associated with Exit or Disposal Activities, and ASC Topic 712 , Non Retirement Postemployment Benefits, the Company has recorded a restructuring charge accrual in accrued expenses of $9.3 million within the condensed consolidated balance sheet as of March 31, 2014 . Additionally, the Company has recorded restructuring expenses of $0.8 million within the condensed consolidated statement of operations for the three months ending March 31, 2014 . The Company estimates that it will record total severance and benefits of approximately $10.0 million and facility closing and other restructuring costs of approximately $1.6 million . The Company expects to complete all the activities associated with the restructuring activities by the end of the second quarter of 2014, a substantial portion of which will be paid by then.
Below is a table of the movement (in thousands):

 
Accrued Balance at
 
Expensed
 
Paid and
 
Accrued Balance at
 
Total Costs
 
Total Expected
 
December 31, 2013
 
March 31, 2014
 
Other
 
March 31, 2014
 
Incurred
 
Remaining Costs
Social plan costs
$
9,170

 
$
287

 
$
(336
)
 
$
9,121

 
$
9,540

 
$
500

Other restructuring costs

 
489

 
(303
)
 
186

 
901

 
700

Total
$
9,170

 
$
776

 
$
(639
)
 
$
9,307

 
$
10,441

 
$
1,200


12. Related Party Transactions
For the three months ended March 31, 2014 , the Company incurred expenses of $0.1 million and had a liability of $0.2 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 6 – Commitments and Contingencies – Litigation). The indemnification agreements require the Company to indemnify these individuals to the fullest extent permitted by applicable law and to advance expenses incurred by them in connection with any proceeding against them with respect to which they may be entitled to indemnification by the Company. For the three months ended March 31, 2014 and 2013 , the Company incurred legal expenses of less than $0.1 million and $0.6 million , respectively, in connection with the Company’s indemnification obligations to two former directors of Scient'x in the New York Orthotec matter.

19




Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following in conjunction with our unaudited condensed consolidated financial statements and the related notes thereto that appear elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto and under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K filed on March 20, 2014. In addition to historical information the following management’s discussion and analysis of our financial condition and results of operations includes forward-looking information that involve risks, uncertainties, and assumptions. Our actual results and the timing of events could differ materially from those anticipated by these forward-looking statements as a result of many factors, such as those set forth in our Annual Report on Form 10-K for the year ending December 31, 2013 and any updates to those risk factors filed from time to time in our Quarterly Reports on Form 10-Q.
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 “physician-inspired culture” enables us to respond to changing surgeon needs 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 surgeons’ and patients’ critical needs. 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, 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 and marketing costs.
General and administrative expense. General and administrative expense consists primarily of salaries and related employee benefits, professional service fees and legal expenses.

20



Restructuring expenses. Restructuring expenses consists of severance, social plan benefits and related taxes, facility closing costs, manufacturing transfer costs and contract termination incurred in connection with the reorganization of the Scient’x operations in France.
Total other income (expense). Total other income (expense) includes interest income, interest expense, gains and losses from foreign currency exchanges, gains and losses on warrant liability and other non-operating gains and losses.
Income tax provision (benefit). Income tax provision (benefit) consists primarily of state and foreign income taxes and the tax effect of changes in deferred tax liabilities associated with tax goodwill.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations is based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. On an on-going basis, we evaluate our estimates and assumptions, including those related to revenue recognition, allowances for accounts receivable, inventories, goodwill and intangible assets, stock-based compensation and income taxes. We base our estimates on historical experience and on various other assumptions that we believe 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, 2014 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, 2013 .
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,
 
2014
 
2013
Revenues
$
49,173

 
$
50,443

Cost of revenues
15,433

 
17,270

Amortization of acquired intangible assets
446

 
431

Gross profit
33,294

 
32,742

Operating expenses:
 
 
 
Research and development
4,181

 
3,682

Sales and marketing
18,059

 
18,495

General and administrative
14,222

 
11,130

Amortization of acquired intangible assets
758

 
793

Restructuring expenses
776

 

Total operating expenses
37,996

 
34,100

Operating loss
(4,702
)
 
(1,358
)
Other income (expense):
 
 
 
Interest income
3

 
2

Interest expense
(1,688
)
 
(695
)
Other income (expense), net
383

 
(650
)
Total other income (expense)
(1,302
)
 
(1,343
)
Pretax net loss
(6,004
)
 
(2,701
)
Income tax provision (benefit)
669

 
(52
)
Net loss
$
(6,673
)
 
$
(2,649
)

21



Three Months Ended March 31, 2014 Compared to the Three Months Ended March 31, 2013
Revenues. Revenues were $49.2 million for the three months ended March 31, 2014 compared to $50.4 million for the three months ended March 31, 2013 , representing a decrease of $1.3 million , or 2.5% . The decrease was primarily comprised of $1.0 million related to sales in the U.S. region and $0.3 million related to sales in the International region.
U.S. revenues were $32.1 million for the three months ended March 31, 2014 compared to $33.1 million for the three months ended March 31, 2013 , representing a decrease of $1.0 million , or 3.1% . The decrease was due primarily to a decline in sales of Biologics of $0.9 million resulting from the voluntary removal of Puregen from the market in 2013 ($1.0 million).
International revenues were $17.1 million for the three months ended March 31, 2014 compared to $17.4 million for the three months ended March 31, 2013 , representing a decrease of $0.3 million , or 1.5% . The decrease was due to a reduction of sales in France as a result of the restructuring ($1.5 million), offset by an increase of sales of Alphatec implants and instruments in Japan ($1.3 million). The decrease in revenue is inclusive of $0.7 million in unfavorable exchange rate effect.
Cost of revenues. Cost of revenues was $15.4 million for the three months ended March 31, 2014 compared to $17.3 million for the three months ended March 31, 2013 , representing a decrease of $1.8 million , or 10.6% . The decrease was primarily the result of a reduction in amortization expense related to the Cross Medical settlement, for which expenses concluded in 2013 ($1.1 million). In addition, there was a decrease related to lower product costs as a result of sales volume and variation in product mix ($1.0 million) and a decrease in inventory reserves and adjustments ($0.4 million), offset by an increase in royalty and milestone expenses due to change in product mix ($0.7 million).
Amortization of acquired intangible assets. Amortization of acquired intangible assets was $0.4 million for both the three months ended March 31, 2014 and 2013. This expense represents amortization in the period for intangible assets associated with product related assets obtained in acquisitions.
Gross profit. Gross profit was $33.3 million for the three months ended March 31, 2014 compared to $32.7 million for the three months ended March 31, 2013 , representing an increase of $0.6 million , or 1.7% . The increase was due to a reduction in the cost of revenues resulting from the decrease in amortization expense ($1.1 million), a decrease in inventory reserves and adjustments ($0.5 million), and improved product cost and mix ($0.7 million), offset by a decrease in sales volume ($1.0 million) and an increase in royalty and milestone expenses due to a change in product mix ($0.7 million).
Gross margin. Gross margin was 67.7% for the three months ended March 31, 2014 compared to 64.9% for the three months ended March 31, 2013 . The increase of 2.8 percentage points was due to a reduction in amortization expense related to the Cross Medical settlement, for which expenses concluded in 2013 (2.2 percentage points), favorable variation in pricing and product mix (1.4 percentage points) and a decrease in inventory reserves and adjustments (0.6 percentage points), offset by an increase in royalty and milestone expenses due to a change in product mix (1.4 percentage points).
Gross margin for the U.S. region was 71.9% for the three months ended March 31, 2014 compared to 67.8% for the three months ended March 31, 2013 . The increase of 4.1 percentage points was due to a reduction in amortization expense related to the Cross Medical settlement, for which expenses concluded in 2013 (3.3 percentage points) and favorable variation in pricing and product mix (3.6 percentage points), offset by an increase in royalty and milestone expenses due to a change in product mix (2.3 percentage points), and an increase in inventory reserves and adjustments (0.5 percentage points).
Gross margin for the International region was 59.8% for the three months ended March 31, 2014 compared to 59.4% for the three months ended March 31, 2013 . The increase of 0.4 percentage points was due to a reduction in inventory reserves and adjustments (3.0 percentage points), offset by an unfavorable variation in pricing and product mix (2.6 percentage points).
Research and development expense. Research and development expense was $4.2 million for the three months ended March 31, 2014 compared to $3.7 million for the three months ended March 31, 2013 , representing an increase of $0.5 million , or 13.6% . The increase 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 $18.1 million for the three months ended March 31, 2014 compared to $18.5 million for the three months ended March 31, 2013 , representing a decrease of $0.4 million , or 2.4% . The decrease was primarily due to a reduction of marketing expenses in the International region resulting from the restructuring of the Scient'x organization.
General and administrative expense. General and administrative expense was $14.2 million for the three months ended March 31, 2014 compared to $11.1 million for the three months ended March 31, 2013 , representing an increase of $3.1 million , or 27.8% . The increase was due to an increase in the legal expenses associated with the Orthotec litigation.
Amortization of acquired intangible assets. Amortization of acquired intangible assets was $0.8 million for the three months ended March 31, 2014 compared to $0.8 million for the three months ended March 31, 2013 . This expense represents amortization in the period for intangible assets associated with general business assets obtained in acquisitions.

22



Restructuring expenses . Restructuring expenses was $0.8 million for the three months ended March 31, 2014 compared to $0.0 million for the three months ended March 31, 2013 . On September 16, 2013, we announced that Scient'x had begun a process to significantly restructure its business operations in France in an effort to improve operating efficiencies and rationalize its cost structure. The restructuring includes an expected further reduction in Scient'x's workforce and closing of the manufacturing facilities in France. We estimate that we will record total costs, including employee severance, social plan benefits and related taxes, facility closing costs, manufacturing transfer costs and contract termination costs of approximate ly $10.4 million associated with this restructuring. We expect to complete all the activities associated with the restructuring activities by the end of the second quarter of 2014, a substantial portion of which will be paid by then.
Interest expense. Interest expense was $1.7 million for the three months ended March 31, 2014 and $0.7 million for the three months ended March 31, 2013 representing an increase of $1.0 million , or 142.9% . The increase of $1.0 million is primarily due to interest on higher levels of borrowings under the MidCap facility of $0.4 million and interest expense and amortization of debt discount of $0.3 million related to the Deerfield facility.
Other income (expense), net. Other income (expense), net was income of $0.4 million for the three months ended March 31, 2014 compared to expense of $(0.7) million for the three months ended March 31, 2013 . The income for the three months ended March 31, 2014 was primarily due to favorable foreign currency exchange results realized in 2014 due to having U.S. dollar denominated assets and liabilities on our foreign subsidiaries books as compared to 2013 and $0.1 million of income related to the change in fair value of common stock warrant liability.
Income tax provision (benefit). Income tax provision (benefit) was a provision of $0.7 million for the three months ended March 31, 2014 compared to a benefit of $(0.1) million for the three months ended March 31, 2013 . The income tax provision in 2014 consists primarily of state and foreign income taxes and the tax effect of changes in deferred tax liabilities associated with tax deductible goodwill. The income tax benefit in 2013 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 our other foreign jurisdictions.
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, other income (expense) and other non-recurring income or expense items, such as litigation expenses and trial costs, in-process research and development expense, acquisition related transaction expenses and restructuring expenses. We believe that the most directly comparable GAAP financial measure to adjusted EBITDA is net income (loss). Adjusted EBITDA has limitations. Therefore, adjusted EBITDA 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.

23



The following is a reconciliation of adjusted EBITDA to the most comparable GAAP measure, net loss, for the three months ended March 31, 2014 and 2013 (in thousands):
 
 
Three Months Ended March 31,
 
2014
 
2013
Net loss
$
(6,673
)
 
$
(2,649
)
Stock-based compensation
944

 
1,184

Depreciation
3,250

 
3,521

Amortization of intangible assets
397

 
1,514

Amortization of acquired intangible assets
1,204

 
1,224

Interest expense, net
1,685

 
693

Income tax provision (benefit)
669

 
(52
)
Other income (expense), net
(383
)
 
650

Restructuring and other expenses
812

 

Litigation expenses and trial costs
4,779

 

Adjusted EBITDA
$
6,684

 
$
6,085

Liquidity and Capital Resources
At March 31, 2014 , our principal sources of liquidity consisted of cash of $23.8 million and accounts receivable, net of $38.8 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, 2015 . We expect to fund the operating expenses, including the French Scient'x restructuring expenses, from available cash, cash flow from operating activity and unused availability under the revolving credit and term loan with MidCap Financial, LLC, or MidCap, and a facility agreement, ("the Facility Agreement"), with Deerfield Private Design Fund II, L.P., Deerfield Private Design International II, L.P., Deerfield Special Situations Fund, L.P., and Deerfield Special Situations International Master Fund, L.P., (collectively, "Deerfield") entered into during the three months ended March 31, 2014. We will use the restricted cash of $17.8 million and proceeds from the Facility Agreement to pay amounts due under the Orthotec settlement discussed below.
On June 7, 2012, we entered into a credit facility, or the Credit Facility, with MidCap, which was amended and restated on August 30, 2013 to, among other things, increase the borrowing limit from $50 million to $73 million. The Credit Facility is due in August 2016 and consists of a revolving line of credit with a maximum borrowing base of $40 million and a $28 million term loan with an additional $5 million delayed draw for 12 months. The $5 million delayed draw was borrowed on April 1, 2014. The revolving line bears an interest rate equal to the London Interbank Market Rate, or LIBOR, plus 6.0% and the term loan bears an interest rate of LIBOR plus 8.0%, subject to a 9.5% floor.
The Credit Facility contains certain financial covenants which require us to maintain a certain fixed charge coverage ratio, a senior leverage ratio and a total 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, 2014 . See “Credit Facility and Other Debt” below.
On March 15, 2014, we, Orthotec and certain other parties, including certain directors and affiliates entered into a binding term sheet to settle the pending litigation in the Orthotec, LLC vs. Surgical S.A.S. legal matter and all other litigation matters between Orthotec, LLC and us and our directors and affiliates. Pursuant to the binding term sheet, we have agreed to pay Orthotec $49 million in cash payments. In accordance with the binding term sheet, we made payments totaling $1.75 million in March 2014 and we made an additional $15.75 million payment on April 10, 2014. We will pay the remaining $31.5 million to Orthotec in 28 quarterly installments of $1.1 million beginning in the fourth quarter of 2014. HealthpointCapital has agreed to contribute $5 million to the $49 million settlement amount . In addition, a 7% simple interest rate will accrue on the unpaid portion of the remaining $31.5 million that we owe, which we will pay in $1.1 million quarterly payments after the $49 million settlement amount is paid. We anticipate funding a portion of the 2014 payment obligations with proceeds from the Facility Agreement described in the next paragraph.
On March 17, 2014, we entered into the Facility Agreement, pursuant to which Deerfield agreed to loan us up to $50 million, subject to the terms and conditions set forth in the Facility Agreement. Under the terms of the Facility Agreement, we have the option, but are not required, upon certain conditions to draw the entire amount available under the Facility Agreement, at any time until January 30, 2015 provided that the initial draw be used for a portion of the payments made in connection with the Orthotec settlement described above, or the Litigation Satisfaction. Following such initial draw down, we may draw down additional amounts under the Facility Agreement up to an aggregate of $15.0 million for working capital or general corporate

24



purposes. In addition, in the event the Litigation Satisfaction has not occurred prior to December 15, 2014, we may request no later than January 30, 2015 a draw of the entire amount available under the Facility Agreement; provided that such amount will remain in a special deposit account until the Litigation Satisfaction occurs. We agreed to pay Deerfield, upon each disbursement of funds under the Facility Agreement, a transaction fee equal to 2.5% of the principal amount of the funds disbursed in addition to the issuance of additional warrants to purchase up to 10,000,000 shares of the Company's common stock to Deerfield. On March 20, 2014, we drew $20 million under the Facility Agreement and received net proceeds of $19.5 million to fund the 2014 Orthotec settlement payment obligations.
Based on our current operating plan, we believe that we will be in compliance with our financial covenants under the Credit Facility and the Facility Agreement 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 if we 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 and the Facility Agreement. Upon the occurrence of an event of default which is not waived by MidCap or Deerfield, they could declare the amounts outstanding under the Credit Facility and the Facility Agreement immediately due and payable and refuse to extend further credit. If MidCap or Deerfield were to accelerate the repayment of borrowings under the Credit Facility and the Facility Agreement, we may not have sufficient cash on hand to repay the amounts due under the Credit Facility and the Facility Agreement and would have to seek to amend the terms of the Credit Facility and the Facility Agreement or seek alternative financing. There can be no assurance that in the event of a default, a waiver could be obtained from MidCap or Deerfield, that the Credit Facility and the Facility Agreement 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 assurance 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.
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 under the Credit Facility and payments due under the Cross Medical and Orthotec settlement agreements. 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 if we require additional liquidity for operations, it will be funded through borrowings under our revolving Credit Facility or Facility Agreement, 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 the end of 2014 . 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. At times, however, our deposits, 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, 2014 .

25



Operating Activities
We used net cash of $16.4 million from operating activities for the three months ended March 31, 2014 . During this period, net cash used in operating activities primarily consisted of a net loss of $6.7 million and working capital and other assets of $16.6 million , which were offset by $6.9 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. Working capital and other assets of $16.6 million consisted of increases in restricted cash of $17.8 million , inventory of $1.2 million and in other assets of $0.1 million and decreases in accrued expenses and other liabilities of $4.0 million , partially offset by decreases in accounts receivable of $2.6 million and increases in accounts payable of $4.0 million . The increase in restricted cash was funded by proceeds of $19.5 million from notes payable included in financing activities and was reduced by payments of $1.8 million for the Orthotec settlement, with a corresponding decrease in accrued liabilities.
Investing Activities
We used cash of $1.5 million , net of accounts payable, in investing activities for the three months ended March 31, 2014 , including $1.8 million for the purchase of surgical instruments, offset by a $0.3 million cash receipt for the sale of assets.
Financing Activities
Financing activities provided net cash of $20.3 million for the three months ended March 31, 2014 . We drew $20 million under the Deerfield facility and received cash proceeds of $19.5 million , net of a transaction fee of $0.5 million. Payments net of borrowings under the Credit Facility revolving line of credit totaled $2.4 million in the three months ended March 31, 2014 . We made principal payments on notes payable and capital leases totaling $1.6 million in the three months ended March 31, 2014 .
Credit Facility and Other Debt
On August 30, 2013, we entered into an Amended and Restated Credit, Security and Guaranty Agreement with MidCap to, among other things, increase the borrowing limit from $50 million to $73 million . We also extended the maturity to August 2016 . The Credit Facility consists of a $28 million term loan drawn at closing with a $5 million delayed draw within 12 months, for a total term loan maximum borrowing of $33 million and a revolving line of credit with a maximum borrowing base of $40 million . We used the term loan proceeds of $28 million to repay a portion of the outstanding balance on the prior revolving line of credit. The $5 million delayed draw was borrowed on April 1, 2014. In addition to monthly payments of interest, monthly repayments of $0.3 million of the principal for the term loan were made beginning in October 2013 and are due through maturity, with the remaining principal due upon maturity.
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. We were in compliance with all of the covenants of the Credit Facility as of March 31, 2014 .
On March 17, 2014, we entered into a First Amendment to Amended and Restated Credit, Security and Guaranty Agreement, or the First Amendment, with MidCap as Administrative Agent and lender and other lenders from time to time a party thereto, or together with MidCap, the Lenders. The First Amendment permits, among other things, our execution of, and borrowing of loans, under the Facility Agreement and Alphatec Spine’s granting of liens as security therefore, and the consummation of a Litigation Satisfaction and the completion of certain conditions. The First Amendment also added a total leverage ratio financial covenant.
On March 20, 2014, we drew $20 million under the Facility Agreement with Deerfield and received net proceeds of $19.5 million to fund the 2014 Orthotec settlement payment obligations. The amounts borrowed under the Facility Agreement are due in three equal annual payments beginning March 20, 2017.
We have various capital lease arrangements. The leases bear interest at rates ranging from 6.6% to 9.6%, are generally due in monthly principal and interest installments, are collateralized by the related equipment, and have various maturity dates through June 2017 . As of March 31, 2014 , the balance of these capital leases, net of interest totaled $1.2 million .

26



Contractual obligations and commercial commitments
Total contractual obligations and commercial commitments as of March 31, 2014 are summarized in the following table (in thousands):
 
 
Payment Due by Year
 
 
 
2014
 
 
 
 
 
 
 
 
 
 
 
Total
 
(9 months)
 
2015
 
2016
 
2017
 
2018
 
Thereafter
Credit Facility with MidCap
$
53,751

 
$
2,250

 
$
3,000

 
$
48,501

 
$

 
$

 
$

Credit Facility with Deerfield
20,000

 

 

 

 
6,667

 
6,667

 
6,666

Interest expense
19,173

 
4,725

 
6,052

 
4,458

 
1,750

 
1,750

 
438

Note payable for insurance premiums
747

 
747

 

 

 

 

 

Capital lease obligations
1,356

 
391

 
461

 
422

 
82

 

 

Operating lease obligations
6,907

 
2,452

 
2,724

 
1,424

 
247

 
58

 
2

Litigation settlement obligations
62,083

 
19,850

 
7,400

 
4,400

 
4,400

 
4,400

 
21,633

Minimum purchase commitments
35,415

 
6,165

 
5,850

 
5,850

 
5,850

 
5,850

 
5,850

Guaranteed minimum royalty obligations
12,624

 
2,307

 
2,418

 
2,218

 
2,218

 
2,245

 
1,218

New product development milestones (1)
2,700

 

 

 
2,700

 

 

 

Total
$
214,756

 
$
38,887

 
$
27,905

 
$
69,973

 
$
21,214

 
$
20,970

 
$
35,807

__________________________
(1)
This commitment represents payments in cash, and is subject to attaining certain sales milestones, development milestones such as U.S. Food and Drug Administration approval, product design and functionality testing requirements, which we believe are reasonably likely to be achieved in 2014 through 2016.
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,
 
2014
 
2013
Cost of revenues
$
66

 
$
55

Research and development
420

 
46

Sales and marketing
125

 
103

General and administrative
333

 
980

Total
$
944

 
$
1,184

Effect on basic and diluted net loss per share
$
(0.01
)
 
$
(0.01
)
Recent Accounting Pronouncements
In March 2013, the Financial Accounting Standards Board, or “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 became effective for us on January 1, 2014. We adopted this guidance and the adoption did not have any impact on our financial statements.

27



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, uses of cash and liquidity, including our anticipated revenue growth and cost savings;
our ability to market, improve, grow, commercialize and achieve market acceptance of any of our products or any product candidates that we are developing or may develop in the future;
the effect of our strategy to streamline our organization and lower our costs, including the effect of the restructuring of our French operations, on the financial condition and operations of our business, and the timing of such effects;
our beliefs about the attractiveness of the features and benefits of our products;
our ability to successfully integrate, and realize benefits from acquisitions;
our ability to successfully achieve and maintain regulatory clearance or approval for our products in applicable jurisdictions and in a timely manner;
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 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;
our ability to achieve profitability, and the potential need to raise additional funding;
our ability to maintain an adequate sales network for our products, including to attract and retain independent distributors;
our ability to enhance our 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 meet or exceed the industry standard in clinical and legal compliance and corporate governance programs;
potential liability resulting from litigation;
potential liability resulting from a governmental review of our business practices;
our beliefs about the usefulness of the non-GAAP financial measures included in this Quarterly Report on Form 10-Q;
potential liability from not meeting the payment obligations under either the Cross Medical or Orthotec settlements; and
other factors discussed elsewhere in this Quarterly Report on Form 10-Q or any document incorporated by reference herein or therein.
Any or all of our forward-looking statements in this Quarterly Report on Form 10-Q may turn out to be wrong. They can be affected by inaccurate assumptions by known or unknown risks and uncertainties. Many factors mentioned in our discussion in this Quarterly Report on Form 10-Q will be important in determining future results. Consequently, no forward-looking statement can be guaranteed. Actual future results may vary materially from expected results.
We also provide a cautionary discussion of risks and uncertainties under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013 and any updates to those risk factors filed from time to time in our Quarterly

28



Reports on Form 10-Q. 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 “believe,” “anticipate,” “plan,” “expect,” “estimate,” “may,” “will,” “should,” “could,” “would,” “seek,” “intend,” “continue,” “project,” and similar expressions are intended to identify forward-looking statements. There are a number of factors and uncertainties 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 “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013 . 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.

29



Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
Our borrowings under our Credit Facility expose us to market risk related to changes in interest rates. As of March 31, 2014 , our outstanding floating rate indebtedness totaled $53.8 million. The primary base interest rate is the LIBOR rate. Assuming the outstanding balance on our floating rate indebtedness remains constant over a year, a 100 basis point increase in the interest rate would decrease pre-tax income and cash flow by approximately $0.5 million. Other outstanding debt consists of fixed rate instruments, including notes payable and capital leases.
Foreign Currency Risk
Our foreign currency exposure continues to grow as we expand internationally. Our exposure to foreign currency transaction gains and losses is primarily the result of certain net receivables due from our foreign subsidiaries and customers being denominated in currencies other than the U.S. dollar, primarily the Euro and Japanese Yen, in which our revenues and profits are denominated. Additionally, we have exposure in U.S dollar denominated debt of approximately $6.3 million recorded on our Japanese Yen functional currency subsidiary. 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, 2014 .
Item 4.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in our reports that we file or submit pursuant to the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s, or SEC'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 our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the 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, and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting, identified in connection with the evaluation of such internal control that occurred during the quarter ended March 31, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


30



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 (“Orthotec”). In 2004, Orthotec sued Eurosurgical in connection with a contractual dispute and a final $9 million judgment was entered against Eurosurgical by a California court in 2006. In 2007, following a default judgment, 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, or the Partial 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 approximate 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 HealthpointCapital 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 and punitive damages related thereto) to have the defendants bear responsibility for the $39 million in judgments that had been assessed against Eurosurgical, which, together with interest is now greater than $70 million . On February 10, 2014, the jury reached a verdict in which Surgiview was found to have transferred assets for less than fair market value in connection with Surgiview’s purchase of certain assets of Eurosurgical, and to have interfered with certain contractual rights of Orthotec. Although a formal judgment has not yet been entered, the jury awarded monetary damages in the amount of $47.9 million , plus interest, against Surgiview related to various causes of action alleged by Orthotec.
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 and punitive damages related thereto, to have the defendant’s bear responsibility for the $39 million in judgments that had been assessed against Eurosurgical, which, together with interest is now greater than $70 million .
On March 15, 2014, we, Orthotec, LLC and certain other parties, including certain of our directors and affiliates, entered into a binding term sheet to settle all legal matters between Orthotec and us and our directors and affiliates. Pursuant to the binding term sheet, we have agreed to pay Orthotec $49 million in cash, with initial cash payments of $1.75 million paid in March 2014 and $15.75 million paid on April 10, 2014. We will pay the remaining $31.5 million to Orthotec in installments of $1.1 million paid quarterly, beginning in the fourth quarter of 2014. HealthpointCapital has agreed to contribute $5 million to the $49 million settlement amount . In addition, a 7% simple interest rate will accrue on the unpaid portion of the $31.5 million . All accrued interest is not payable until the $49 million is paid, and such accrued interest shall be paid in $1.1 million installments each quarter. This settlement will result in mutual releases of all claims and the dismissal of all Orthotec-related litigation matters involving us and our directors and affiliates.
On August 10, 2010, a purported securities class action complaint was filed in the United States District Court for the Southern District of California on behalf of all persons who purchased our common stock between December 19, 2009 and August 5, 2010 against and certain of our directors and officers alleging violations of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder. On February 17, 2011, an amended complaint was filed against us and certain of our directors and officers adding alleged violations of the Securities Act of 1933, as amended. HealthpointCapital, Jefferies & Company, Inc., Canaccord Adams, Inc., Cowen and Company, Inc., and Lazard Capital Markets LLC are also defendants in this action. The complaint alleges that the defendants made false or misleading statements, as well as failed to disclose material facts, about our business, financial condition, operations and prospects, particularly relating to the Scient’x transaction and our financial guidance following the closing of the acquisition. The complaint seeks unspecified monetary damages, attorneys’ fees, and other unspecified relief. We believe that the claims are without merit and we intend to vigorously defend ourselves against this complaint. However, the outcome of the litigation cannot be predicted at this time and any

31



outcome that is adverse to us, regardless of who the defendant is, could have a significant adverse effect on our financial condition and results of operations.
On August 25, 2010, an alleged shareholder of ours filed a derivative lawsuit in the Superior Court of California, San Diego County, purporting to assert claims on behalf of us against all of our directors and certain of our officers and HealthpointCapital. Following the filing of this complaint, similar complaints were filed in the same court and in the U.S. District Court for the Southern District of California against the same defendants containing similar allegations. The complaint filed in federal court was dismissed by the plaintiff without prejudice in July 2011. The state court complaints have been consolidated into a single action and we have been named as a nominal defendant in the consolidated action. Each complaint alleges that our directors and certain of our officers breached their fiduciary duties to us related to the Scient’x transaction, and by making allegedly false statements that led to unjust enrichment of HealthpointCapital and certain of our directors. The complaints seek unspecified monetary damages and an order directing us to adopt certain measures purportedly designed to improve its corporate governance and internal procedures. On January 8, 2014, the parties reached an agreement in principle to resolve all claims in exchange for corporate governance reforms and payment of attorneys’ fees in the amount of $5.25 million , to be paid by our and HeathpointCapital’s respective insurance carriers. We believe the claims are without merit and, subject to final approval of any settlement, intend to vigorously defend ourselves against these complaints. No assurances can be given as to the timing or outcome of this lawsuit.
At March 31, 2014 , the probable outcome of any of the aforementioned litigation matters that have not reached a settlement cannot be determined nor can we estimate a range of potential loss. Accordingly, in accordance with the authoritative guidance on the evaluation of contingencies, we have not recorded an accrual related to any litigation matters that have not reached a settlement. We are and may become involved in various other legal proceedings arising from our business activities. While management does not believe the ultimate disposition of these matters will have a material adverse impact on our 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 our 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 our Annual Report on Form 10-K for the fiscal year ended December 31, 2013 .
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities
None, except for the warrants issued to Deerfield to purchase common stock, which was previously disclosed in our Current Reports on Form 8-K filed with the SEC on March 19, 2014 and March 26, 2014.

32



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. No shares were repurchased during the three months ended March 31, 2014 .
 
Period
Total Number
of Shares
Purchased (1)
 
Average Price
Paid per
Share
 
Total Number of
Shares Purchased
as part of Publicly
Announced  Plans
or Programs
 
Maximum Number
of Shares That May
Yet Be Purchased
Under the Plans or
Programs
January 1, 2014 through January 31, 2014

 
$

 

 

February 1, 2014 through February 28, 2014

 
$

 

 

March 1, 2014 through March 31, 2014

 
$

 

 

__________________________
(1)
There were no shares forfeited and retired in connection with the payment of minimum statutory withholding taxes due upon the vesting of certain stock awards or the exercise of certain stock options.

33



Item 6.
Exhibits
Exhibit Number
Exhibit Description
Filed with this Report
Incorporated by Reference herein from Form or Schedule
Filing Date
SEC File/ Reg. Number
4.1
Form of Warrant to Purchase Common Stock.

Form 8-K
(Exhibit 4.1)
3/19/14
000-52024






4.2
Registration Rights Agreement, dated March 17, 2014, by and among Alphatec Holdings, Inc., Deerfield Private Design Fund II, L.P., Deerfield Private Design International II, L.P., Deerfield Special Situations Fund, L.P. and Deerfield Special Situations International Master Fund, L.P.

Form 8-K
(Exhibit 4.2)
3/19/14
000-52024






10.1 †
Facility Agreement, dated March 17, 2014, by and among Alphatec Holdings, Inc., Deerfield Private Design Fund II, L.P., Deerfield Private Design International II, L.P., Deerfield Special Situations Fund, L.P., and Deerfield Special Situations International Master Fund, L.P.

Form 8-K
(Exhibit 10.1)
3/19/14
000-52024






10.2
Guaranty and Security Agreement, dated March 17, 2014, by and among Alphatec Holdings, Inc., Alphatec Spine, Inc., Alphatec International LLC, Alphatec Pacific, Inc., Deerfield Private Design Fund II, L.P., Deerfield Private Design International II, L.P., Deerfield Special Situations Fund, L.P., Deerfield Special Situations International Master Fund, L.P. and Deerfield Mgmt, L.P.

Form 8-K (Exhibit 10.2)
3/19/14
000-52024






10.3 †
First Amendment to Amended and Restated Credit, Security and Guaranty Agreement, dated March 17, 2014, with MidCap Funding IV, LLC as Administrative Agent and lender and other lenders from time to time a party thereto.

Form 8-K
(Exhibit 10.3)
3/19/14
000-52024






10.4
Employment Agreement by and among Michael Plunkett, Alphatec Spine, Inc., and Alphatec Holdings, Inc., dated February 17, 2014.
X









10.5
Employment Agreement by and among Alphatec Holdings, Inc. and its subsidiaries, Alphatec Spine, Inc. and Alphatec Pacific, Inc., and Mitsuo Asai, dated January 15, 2014.
X









10.6
Binding Term Sheet by and among Alphatec Holdings, Inc., Healthpoint Capital, LLC, and OrthoTec, LLC, dated March 15, 2014.
X









31.1
Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
X









31.2
Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
X









32
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
X









101
The following materials from the Alphatec Holdings, Inc. Quarterly Report on Form 10-Q for the quarter ended March 31, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of March 31, 2014 and December 31, 2013, (ii) Condensed Consolidated Statements of Operations for the three months ended March 31, 2014 and 2013, (iii) Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2014 and 2013, (iv) Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2014 and 2013, and (v) Notes to Condensed Consolidated Financial Statements.
X



__________________________
Confidential treatment has been requested from the Securities and Exchange Commission as to certain portions of this document.


34



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 officer and principal accounting officer)
Date: April 30, 2014

35



Exhibit Index
 
Exhibit Number
Exhibit Description
Filed with this Report
Incorporated by Reference herein from Form or Schedule
Filing Date
SEC File/ Reg. Number
4.1
Form of Warrant to Purchase Common Stock.

Form 8-K
(Exhibit 4.1)
3/19/14
000-52024






4.2
Registration Rights Agreement, dated March 17, 2014, by and among Alphatec Holdings, Inc., Deerfield Private Design Fund II, L.P., Deerfield Private Design International II, L.P., Deerfield Special Situations Fund, L.P. and Deerfield Special Situations International Master Fund, L.P.

Form 8-K
(Exhibit 4.2)
3/19/14
000-52024






10.1 †
Facility Agreement, dated March 17, 2014, by and among Alphatec Holdings, Inc., Deerfield Private Design Fund II, L.P., Deerfield Private Design International II, L.P., Deerfield Special Situations Fund, L.P., and Deerfield Special Situations International Master Fund, L.P.

Form 8-K
(Exhibit 10.1)
3/19/14
000-52024






10.2
Guaranty and Security Agreement, dated March 17, 2014, by and among Alphatec Holdings, Inc., Alphatec Spine, Inc., Alphatec International LLC, Alphatec Pacific, Inc., Deerfield Private Design Fund II, L.P., Deerfield Private Design International II, L.P., Deerfield Special Situations Fund, L.P., Deerfield Special Situations International Master Fund, L.P. and Deerfield Mgmt, L.P.

Form 8-K (Exhibit 10.2)
3/19/14
000-52024






10.3 †
First Amendment to Amended and Restated Credit, Security and Guaranty Agreement, dated March 17, 2014, with MidCap Funding IV, LLC as Administrative Agent and lender and other lenders from time to time a party thereto.

Form 8-K
(Exhibit 10.3)
3/19/14
000-52024






10.4
Employment Agreement by and among Michael Plunkett, Alphatec Spine, Inc., and Alphatec Holdings, Inc., dated February 17, 2014.
X









10.5
Employment Agreement by and among Alphatec Holdings, Inc. and its subsidiaries, Alphatec Spine, Inc. and Alphatec Pacific, Inc., and Mitsuo Asai, dated January 15, 2014.
X









10.6
Binding Term Sheet by and among Alphatec Holdings, Inc., Healthpoint Capital, LLC, and OrthoTec, LLC, dated March 15, 2014.
X









31.1
Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
X









31.2
Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
X









32
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
X









101
The following materials from the Alphatec Holdings, Inc. Quarterly Report on Form 10-Q for the quarter ended March 31, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of March 31, 2014 and December 31, 2013, (ii) Condensed Consolidated Statements of Operations for the three months ended March 31, 2014 and 2013, (iii) Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2014 and 2013, (iv) Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2014 and 2013, and (v) Notes to Condensed Consolidated Financial Statements.
X



__________________________
Confidential treatment has been requested from the Securities and Exchange Commission as to certain portions of this document.



36
        

Exhibit 10.4
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the “Agreement”), made this 17th day February of 2014 (the "Effective Date"), is entered into among Michael Plunkett (“Executive”), Alphatec Spine, Inc., a California corporation (the “ASI”), and Alphatec Holdings, Inc., a Delaware corporation (“Parent”) (collectively, ASI and Parent shall be referred to as the "Company").
Commencement . This Agreement, which shall govern Executive’s employment by the Company, shall become effective on the Effective Date and the parties to this Agreement agree and acknowledge that Executive's employment pursuant to the terms of this Agreement shall begin on January 1, 2014, (the "Commencement Date").
2.      At-Will Employment . The parties to this Agreement agree and acknowledge that the Executive's employment pursuant to this Agreement shall be considered at-will. Either party may terminate this Agreement at any time, with or without cause pursuant to the terms of this Agreement. Similarly, the Company may change Executive’s position, responsibilities or compensation with or without cause or notice.
3.      Title; Capacity; Office . The Company shall employ Executive, and Executive agrees to work for the Company initially as its Chief Operating Officer. Executive shall perform the duties and responsibilities inherent in the position in which Executive serves and such other duties and responsibilities as the Chairman and Chief Executive Officer (or his or her designee(s)) shall from time to time reasonably assign to Executive. Executive shall report to the Chairman and Chief Executive Officer (or his or her designee(s)).     
4.      Compensation and Benefits . While employed by the Company, Executive shall be entitled to the following (it being agreed, for the avoidance of doubt, that, except as provided in Section 6.2, amounts payable on the happening of any specified event will not be payable if the Executive is not employed by the Company upon the happening of such event):
4.1      Salary . Commencing on the Commencement Date, the Company shall pay Executive a salary at an annualized rate of $325,000 less applicable payroll withholdings, payable in accordance with the Company’s customary payroll practices.
4.2      Performance Bonus . If Executive remains employed through the last day of a fiscal year, Executive will be eligible to receive a discretionary cash performance bonus each fiscal year in an amount equal to 60% of the annual base salary for such fiscal year (the "Target Bonus Amount"). The payment of the Target Bonus Amount shall be subject to the Company's and Executive's achievement of goals to be established and presented to the Executive each fiscal year.
4.3      Fringe Benefits . Executive shall be entitled to participate in all benefit programs that the Company establishes and makes available to its management employees.






4.4      Reimbursement of Expenses . Executive shall be entitled to prompt reimbursement for reasonable expenses incurred or paid by Executive in connection with, or related to the performance of, Executive's duties, responsibilities or services under this Agreement, upon presentation by Executive of documentation, expense statements, vouchers and/or such other supporting information as the Company may reasonably request. Expenses that do not comply with applicable law will not be reimbursed under any circumstances.
4.5      Equity . Following the Effective Date, the Company will recommend to the board of directors of the Parent that Executive receive a grant of options to purchase 25,000 shares of the common stock of Parent (the “Options”). If granted, the Options shall have an exercise price equal to the closing price of Parent's common stock on the trading day that such Options are issued. The Options shall vest over a four-year period, with 25% of such options vesting on the anniversary of the grant date, and the remaining 75% vesting in 12 tranches each three months thereafter. The Options shall be subject, in all respects, to (i) the Alphatec Holdings, Inc. 2005 Employee, Director and Consultant Stock Plan (the “Plan”), and (ii) an Incentive Stock Option Agreement to be entered into by the Parent and the Executive. Following the Effective Date, the Company will recommend to the board of directors of the Parent that Executive receive a grant of 75,000 shares of restricted common stock of the Parent (the “Restricted Stock”). If granted, the Restricted Stock shall vest over a four-year period in for equal amounts beginning on the first anniversary after the date of issuance. The Restricted Stock shall be subject, in all respects, to (i) the Alphatec Holdings, Inc. 2005 Employee, Director and Consultant Stock Plan (the “Plan”), and (ii) a Restricted Stock Agreement to be entered into by the Parent and the Executive. In the event of termination of Executive’s employment due to death, any unvested Options or Restricted Stock granted under this Agreement shall become fully vested and not subject to forfeiture or repurchase.
4.6     Vacation . The Executive may take up to twenty-three (23) days of paid vacation during each year at such times as shall be consistent with the Company’s vacation policies and with vacations scheduled for other executives and employees of the Company.
5.      Termination of Employment . The Executive’s employment can terminate at any time with or without cause or notice:
5.1      Termination by the Company for Cause . If the Company terminates Executive’s employment for Cause, the Company shall have no obligation to Executive other than for payment of wages earned through the termination date. For purposes of this Agreement, “Cause” means any one of the following: (i) Executive being convicted of a felony; (ii) Executive committing any act of fraud or dishonesty resulting or intended to result directly or indirectly in personal enrichment at the expense of the Company; (iii) failure or refusal by Executive to follow policies or directives reasonably established by the President and Chief Executive Officer or his or her designee(s) that goes uncorrected after notice has been provided to Executive; (iv) a material breach of this Agreement that goes uncorrected after notice has been provided to Executive; (v) any gross or willful misconduct, dishonesty, fraud or negligence by Executive in the performance of Executive's duties; (vi) egregious conduct by Executive that brings Company or any of its subsidiaries or affiliates into public disgrace or disrepute; or (vii) a material violation of the Company's Code of Conduct.


2




5.2      Termination by the Company Without Cause . In the event that Executive's employment is terminated without Cause, the Company shall continue for a period of nine months (the “Severance Period”), to pay to Executive the annual base salary then in effect. During the Severance Period, if the Executive elects to have COBRA coverage and is eligible for such coverage, the Company shall make a monthly payment to the Executive equal to the monthly cost of COBRA coverage under the Company’s group health plan for the Executive and those family members that are entitled to such COBRA coverage, provided that the Execute certifies each month that no other insurance coverage exists. The payment obligations set forth in this Section 5.2 shall be contingent upon the Executive first executing a release of claims (which shall contain post-employment covenants similar to those set forth in Section 6), the form of which is satisfactory to the Company, and the lapse of the applicable rescission period related thereto.
6.      Additional Covenants of the Executive .
6.1      Noncompetition; Nonsolicitation; Nondisparagement .

(a)      During Executive's employment with the Company, Executive shall not, directly or indirectly, render services of a business, professional or commercial nature to any other person or entity that competes with the Company’s business, whether for compensation or otherwise, or engage in any business activities competitive with the Company’s business, whether alone, as an Executive, as a partner, or as a shareholder (other than as the holder of not more than one percent of the combined voting power of the outstanding stock of a public company), officer or director of any corporation or other business entity, or as a trustee, fiduciary or in any other similar representative capacity of any other entity. Notwithstanding the foregoing, the expenditure of reasonable amounts of time as a member of other companies’ Board of Directors shall not be deemed a breach of this if those activities do not materially interfere with the services required under this Agreement.

(b)      During Executive's employment with the Company, and for a period of one (1) year following the termination of the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company:
(i)      either individually or on behalf of or through any third party, directly or indirectly, solicit, entice or persuade or attempt to solicit, entice or persuade any employee, agent, consultant or contractor of the Company or any of its affiliates (the "Company Group") to leave the service of the Company Group for any reason; or
(ii)      either individually or on behalf of or through any third party, directly or indirectly, interfere with, or attempt to interfere with, the business relationship between the Company Group and any vendor, supplier, surgeon or hospital with which the Executive has interacted during the course of Executive’s employment with the Company.


3




(c)      During Executive's employment with the Company and at all times thereafter, Executive shall not make any statements that are professionally or personally disparaging about, or adverse to, the interests of the Company or any of its divisions, affiliates, subsidiaries or other related entities, or their respective directors, officers, employees, agents, successors and assigns (collectively, “Company-Related Parties”), including, but not limited to, any statements that disparage any person, product, service, finances, financial condition, capability or any other aspect of the business of any Company-Related Party, and that Executive will not engage in any conduct which could reasonably be expected to harm professionally or personally the reputation of any Company-Related Party.
6.2      If any restriction set forth in this Section 6 is found by any court of competent jurisdiction to be unenforceable because it extends for too long a period of time or over too great a range of activities or in too broad a geographic area, it shall be interpreted to extend only over the maximum period of time, range of activities or geographic area as to which it may be enforceable.
6.3      The restrictions contained in this Section 6 are necessary for the protection of the confidential, nonpublic information relating to the Company and its operations, strategies, development plans, financial information and other proprietary corporate information, and are considered by Executive to be reasonable for such purpose. Executive agrees that any breach of this Section 6 will cause the Company substantial and irrevocable damage and therefore, in the event of any such breach, in addition to such other remedies which may be available, the Company shall have the right to seek specific performance and injunctive relief.
7.      Other Agreements . Executive represents that Executive's performance of all the terms of this Agreement as an Executive of the Company does not and will not breach any (i) agreement to keep in confidence proprietary information, knowledge or data acquired by Executive in confidence or in trust prior to Executive's employment with the Company or (ii) agreement to refrain from competing, directly or indirectly, with the business of any previous employer or any other party.
8.      Notices . All notices required or permitted under this Agreement shall be in writing and shall be deemed effective upon (a) a personal delivery, or (b) deposit in the United States Post Office, by registered or certified mail, postage prepaid.
9.      Entire Agreement . This Agreement and the agreements related to the Options constitute the entire agreement between the parties and supersedes all prior agreements and understandings, whether written or oral relating to the subject matter of this Agreement.
10.      Amendment . This Agreement may be amended or modified only by a written instrument executed by both the Company and Executive.
11.      Successors and Assigns . This Agreement shall be binding upon and inure to the benefit of both parties and their respective successors and assigns, including any corporation into which the Company may be merged or which may succeed to its assets or business, provided, however, that the obligations of Executive are personal and shall not be assigned by Executive. The Company may assign this Agreement following the delivery of written notice to the Executive.

4




12.      Miscellaneous .
12.1      No Waiver . No delay or omission by the Company in exercising any right under this Agreement shall operate as a waiver of that or any other right. A waiver or consent given by the Company on any one occasion shall be effective only in that instance and shall not be construed as a bar or waiver of any right on any other occasion.
12.2      Severability . In case any provision of this Agreement shall be invalid, illegal or otherwise unenforceable, the validity, legality and enforceability of the remaining provisions shall in no way be affected or impaired thereby.
12.3      Governing Law . This Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of California.
12.4      Consent to Arbitration . In the event of a dispute involving this Agreement, the Executive consents and agrees that all disputes shall be resolved in accordance with the terms and conditions of the Mutual Agreement to Arbitrate Claims between the Company and the Executive.
12.5      Counterparts . This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument.

[Signature Page Follows]

5




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

/s/ Michael Plunkett                
Michael Plunkett

ALPHATEC SPINE, INC.
By: /s/ Roy Burchill    
        Name: Roy Burchill
        Title: VP, Global Human Resources
    
ALPHATEC HOLDINGS, INC.
By: /s/ Roy Burchill    
        Name: Roy Burchill
        Title: VP, Global Human Resources
        



6



Exhibit 10.5
Effective as of January 15, 2014

Mr. Mitsuo Asai

Dear Mr. Asai (hereinafter, "you" or "your"),

I am very pleased to provide you with a summary of your revised terms of employment with Alphatec Holdings, Inc. and its subsidiaries, Alphatec Spine, Inc. and Alphatec Pacific, Inc. (collectively, "Alphatec").

1.
Position .

Your position will be President, Alphatec Pacific, Inc., reporting to Patrick Ryan, President International and COO. As you progress with Alphatec, your position and assignments are, of course, subject to change. As an Alphatec employee, we expect that you will perform any and all duties and responsibilities normally associated with your position in a satisfactory manner and to the best of your abilities at all times.

2.
Starting Date/Nature of Relationship .

Upon accepting these revised terms of employment, and any conditions set forth herein are satisfied, your revised terms of employment with Alphatec will begin on January 15, 2014 (the "Commencement Date"). Thereafter, you will be expected to devote all of your working time to the performance of your duties at Alphatec throughout your employment. The term of your employment (the "Term") shall be for three years, which term shall begin on the Commencement Date.

3.
Compensation, Benefits, Vacation, Bonus .

Your initial base compensation shall be at a monthly rate of ¥2,676,583 (¥32,119,000 per year). Included in the base compensation amount is a monthly base salary of ¥2,343,250 (¥28,119,000 per year) and a monthly housing allowance as described below. If you remain employed through the last day of a fiscal year, you will be eligible to receive a discretionary cash performance bonus each fiscal year in an amount equal to 50% of the annual base salary for such



fiscal year (the "Target Bonus Amount"). The payment of the Target Bonus Amount shall be subject to Alphatec's and your achievement of goals to be established and presented to you each fiscal year.

You may take advantage of various benefits offered by Alphatec Pacific, Inc. You shall be entitled to 20 paid vacation days per calendar year. Alphatec shall provide a furnished corporate apartment in Tokyo, Japan for your use, and Alphatec shall pay (i) up to ¥333,333 monthly (¥4,000,000 per year) in rent and expenses related to such apartment, and (ii) all commissions, deposits and expenses incurred prior to the execution of the lease of such apartment. Alphatec shall provide you with a monthly travel allowance of ¥70,000 provided that (i) such amounts are used for travel between Tokyo, Japan and your home in Osaka, Japan; and (ii) Alphatec is not obligated to reimburse you in accordance with such allowance until you provide receipts to Alphatec that document the incurred travel expenses. Alphatec agrees to reimburse you for the annual premium associated with your purchase of a workmen's accident compensation insurance policy covering you. In the event that you become disabled during the Term through any illness, injury, accident or condition of either a physical or psychological nature, and, as a result, are unable to perform all of your duties and responsibilities hereunder for a period of 90 consecutive days, Alphatec shall continue to pay you your base salary then in effect for such 90-day period. You shall be entitled to fly business class on all employment-related trips between Japan and the United States.

4.
Your Representations and Warranties to Alphatec .

As a condition of your continued employment with Alphatec you hereby represent and warrant to Alphatec that (i) you are free to fully perform the duties of your position and that you are not subject to any employment, confidentiality, non-competition or other agreement that would restrict your employment by Alphatec, (ii) your signing this letter does not violate any order,
judgment or injunction applicable to you, or conflict with or breach any agreement to which you are a party or by which you are bound, (iii) you have disclosed to Alphatec any applicable agreements that address confidentiality or other post-employment obligations, (iv) you have not disclosed and will not disclose to Alphatec any proprietary, trade secret or confidential information belonging to another, (v) you have removed no documents or data from a prior employer or a third party, and you are in compliance and will remain in compliance with any obligations of confidentiality to a third party, and (vi) all facts you have presented or will present to Alphatec are accurate and true. This includes, but is not limited to, all oral and written statements you have made (including those pertaining to your education, training, qualifications, licensing and prior work experience) on any job application, resume or c.v. , or in any interview or discussion with Alphatec.




5.
Non-solicitation/Trade Secrets/Non disclosure .

You hereby agree and acknowledge that based upon your position within Alphatec that you will have access to certain Trade Secrets (as defined below), which, if disclosed to a third party would cause Alphatec to suffer irreparable harm. In order to protect Alphatec from unauthorized use of such Trade Secrets following the termination of your employment, for a period of nine months following the termination your employment relationship for any reason, you will not (i) either individually or on behalf of or through any third party, directly or indirectly, solicit, entice or persuade or attempt to solicit, entice or persuade any employee, agent, consultant or contractor of Alphatec or any of its affiliates (the "Company Group") to leave the service of the Company Group for any reason; or (ii) either individually or on behalf of or through any third party, directly or indirectly, interfere with, or attempt to interfere with, the business relationship between the Company Group and any vendor, supplier, surgeon or hospital with which you have interacted during the course of your employment with Alphatec.

You agree that all information and know-how, whether or not in writing, of a proprietary, private, secret or confidential nature concerning Alphatec's business or financial affairs (collectively, "Trade Secrets") is and shall be the exclusive property of Alphatec. By way of illustration, but not limitation, Trade Secrets include inventions, products, processes, methods, techniques, formulas, compositions, compounds, projects, developments, inventions, projections, sales programs and commission rates, development projects and programs, research data, clinical data, financial data, personnel data, computer programs, and vendor and supplier lists. You will not disclose any Trade Secrets to others outside Alphatec or use the same for any unauthorized purposes without written approval of Alphatec, either during or after your employment, unless and until such Trade Secrets have become public knowledge without fault by you or any third party that was not obligated to keep such Trade Secrets confidential. It is agreed and acknowledged by the parties that the terms of this letter shall be deemed to be a Trade Secret and you shall only disclose such terms to your spouse or advisor acting in a fiduciary capacity (i.e., attorney or accountant).
 
You agree that all files, letters, memoranda, reports, records, data, sketches, drawings, laboratory notebooks, program listings, or other written, photographic, or other tangible material containing Trade Secrets, whether created by you or others, which shall come into your custody or possession, shall be and are the exclusive property of Alphatec and shall solely be used by you in the performance of your duties for Alphatec. You agree to immediately return to Alphatec all Trade Secrets and all materials containing Trade Secrets following the termination of your employment relationship.

You agree that your obligation not to disclose or misuse Trade Secrets, also includes such similar types of information of subsidiaries, affiliates and joint ventures of Alphatec, customers of Alphatec or suppliers to Alphatec or other third parties who may have disclosed or entrusted such similar types of information to Alphatec or to you in the course of Alphatec’s business.
    
You recognize that a breach or threatened breach by you of any of the provisions contained in this Section 5 will cause Alphatec irreparable injury. You therefore agree that Alphatec shall be



entitled, in addition to any other right or remedy, to a temporary, preliminary and permanent injunction, without the necessity of proving the inadequacy of monetary damages or the posting of any bond or security, enjoining or restraining you from any such violation or threatened violations.

6.
Termination of Employment: Effect of Termination of Employment .

During the Term, this Agreement may be terminated as follows: (i) by either Alphatec or you without Cause (as defined below) upon ten days notice; or (ii) by Alphatec for Cause in accordance with the notice provisions set forth below.

Your employment may be terminated by Alphatec for Cause upon the occurrence of any of the following (each of which shall constitute “Cause”): (i) your being convicted of a crime involving dishonesty, fraud or theft; (ii) your committing any act of fraud or dishonesty resulting or intended to result directly or indirectly in personal enrichment at the expense of Alphatec; (iii) failure or refusal by you to follow policies or directives reasonably established by the Chairman & CEO of Alphatec, or his/her designee, that goes uncorrected for a period of 30 consecutive days after written notice has been provided to you; (iv) a material breach of this Agreement that goes uncorrected for a period of 30 consecutive days after written notice has been provided to you; (v) any gross or willful misconduct or gross negligence by you in the performance of your duties; (vi) a material violation of the Alphatec’s Code of Conduct; or (vii) your inability to perform your duties for 90 consecutive days due to a disability; or (viii) your death.

In the event that your employment is terminated for Cause or at your election, Alphatec shall have no further obligations under this Agreement other than to pay you the base salary and benefits, including payment for accrued but untaken vacation days, otherwise payable to you through the last day of your actual employment with Alphatec.

In the event that your employment is terminated by Alphatec without Cause, Alphatec shall continue to pay you the annual base salary then in effect for a period of 12 months from the last day of your actual employment with Alphatec.

In the event that your employment is terminated due to your inability to perform your duties for 90 consecutive days due to a disability, Alphatec shall have no further obligations under this Agreement other than to pay you the base salary and benefits, including payment for accrued but untaken vacation days, otherwise payable to you through the last day of your actual employment with Alphatec. In the event that your employment is terminated due to your death, Alphatec shall continue to pay your estate the annual base salary then in effect for a period of six months from the last day of your actual employment with Alphatec.




7.
Miscellaneous .

This letter constitutes Alphatec's entire offer regarding the terms and conditions of your prospective employment with Alphatec. It supersedes any prior agreements, or other promises or statements (whether oral or written) regarding the terms of your employment, including that certain Employment Agreement between you and Alphatec dated January 14, 2008 and January 15, 2011. This letter shall be governed by and construed and enforced in accordance with the internal laws of the State of California. In the event of a dispute involving this Agreement, you consent and agree that all disputes shall be resolved in accordance with the terms and conditions of the Mutual Agreement to Arbitrate Claims between Alphatec and you.




[Signature Page Follows]






You may accept these revised terms of employment hereof by signing a copy of this letter. Your signature on the copy of this letter and your submission of a signed copy to me will evidence your agreement set forth herein.

We are pleased to extend the terms of your employment with Alphatec, and we look forward to your continued success. We are confident that you will continue to make an important contribution to our unique and exciting enterprise.


Sincerely,



/s/ Michael O'Neill, CFO, VP and Treasurer        12/20/2013
Michael O'Neill                        Date
Chief Financial Officer, Vice President and Treasurer





Read, Agreed and Acknowledged:



/s/ Mitsuo Asai                    12/20/2013
Mitsuo Asai                         Date
 


Exhibit 10.6

BINDING TERM SHEET

1. This Binding Term Sheet (the “Agreement”) is entered into on March 15, 2014.
2.      Alphatec Holdings, Inc., Healthpoint Capital, LLC, will pay OrthoTec, LLC, the amounts specified according to this Binding Term Sheet as specifically set forth in Attachment A hereto.
3.      The payments set forth in Attachment A will be guaranteed by Stipulated Judgments against (i) Alphatec Holdings, Inc., (ii) Healthpoint Capital Partners, L.P., Healthpoint Capital Partners II, L.P., (iii) Healthpoint Capital, LLC, and (iii) John H. Foster and Mortimer Berkowitz, III. The Stipulated Judgments will reflect the total amounts set forth in Attachment A. The Stipulated Judgments will be held and entered only in the event of a default and will be enforced against the judgment debtors in the order specified above. In the event of a default, OrthoTec’s sole remedy will be to sue to collect on the Stipulated Judgment amounts, less the amounts already paid, plus reasonable attorneys’ fees and costs incurred in pursuing collection.
4.      The foregoing payment is to settle (i) OrthoTec, LLC. v. Surgiview, S.A.S., et al. , Case No. BC 390346, in the Los Angeles Superior Court (the “Alphatec Action”), (ii) OrthoTec, LLC., v. Healthpoint Capital, LLC., et al. , Case No. 08601377, in New York Supreme Court (the “Healthpoint Action”); (iii) OrthoTec, LLC v. Olivier Carli , Case No. BC533849, in the Los Angeles Superior Court (the “Carli Action”); and (iv) Patrick Bertranou v. Kenneth Weisberg and Stellar Weisberg, Case No. BC513436, in the Los Angeles Superior Court (the “Weisberg Action”).
5.      Upon payment of the initial, lump sum payment pursuant to Attachment A ($15.75 million) the parties will execute and file dismissals with prejudice of the actions noted above. The respective courts will retain jurisdiction to enforce this Agreement.
6.      RELEASED PARTIES.
A.      Defendant Released Parties : The Defendant Released Parties shall mean
i.      Alphatec Released Parties : The Alphatec Released Parties shall include:
(1)      Alphatec Holdings, Inc., and all of its direct and indirect subsidiaries throughout the world, including, without limitation, Alphatec Spine, Inc., Alphatec Pacific Inc., Alphatec Spine GmbH, Millerton Ltd., Japan Ortho Medical; Alphatec Holdings International CV, Cooperatie Alphatec Holdings Europa U.A., Alphatec International, LLC., Scient’x S.A.S., Cibramed Productos Medicos, Ltda., Scient’x UK Ltd., Scient’x AUS, Scient’s USA, Scientx Asial Pacific, Scient’x Italia, Surgiview S.A.S., and each of their direct and indirect subsidiaries and affiliates.
(2)      All current or former successors, partners, associates, officers, directors, employees, insurers, agents, advisors, attorneys and representatives of or for any of the Alphatec Entities. It is understood that such terms may vary from country to country, and this

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Agreement releases all claims against entities and individuals whose liability would be predicated on any action or inaction on their part that was in any manner connected to the individual or entity’s affiliation with one or more of the Alphatec Entities, or whose action or inaction could give rise to any liability (direct or indirect, whether by way of respondeat superior , indemnity, contribution, or any other basis) on the part of the Alphatec Released Parties.
B.      Healthpoint Released Parties: The Healthpoint Released Parties shall include
i.      HealthpointCapital, LLC., Healthpoint Capital Partners, LP, HealthpointCapital Partners II, LP, John H. Foster, Mortimer Berkowitz, III (hereafter the “Healthpoint Parties”).
ii.      All current or former affiliates, subsidiaries, partners, associates, officers, directors, employees, insurers, agents, advisors, attorneys and representatives (and each of their respective predecessors, successors, assigns, and, as applicable, heirs) throughout the world of or for any of the Healthpoint Parties. It is understood that such terms may vary from country to country, and this Agreement releases all claims against individuals or entities whose liability would be predicated on any action or inaction on their part that was in any manner connected to the individual or entity’s affiliation with one or more of the Healthpoint Parties, or whose action or inaction could give rise to any liability (direct or indirect, whether by way of respondeat superior , indemnity, contribution, or any other basis) of the Healthpoint Released Parties.
C.      The Carli Released Parties: The Carli Released Parties shall include Olivier Carli, members of his family, heirs, advisors, attorneys and representatives of Mr. Carli or his family, and any person or entity with which Mr. Carli has or has had or may in the future have an affiliation of any sort, including without limitation ownership (direct or indirect) or serving as an officer, director, advisor, or employee of any sort.
D.      The Weissberg Released Parties. The Weissberg Released Parties shall include Kenneth Weissberg and Selarl Weissberg and their affiliates, heirs, advisors, attorneys and representatives, and any other person or entity allegedly involved in any matter with the French proceedings at issue in the Weissberg Action or the Weissberg Action.
E.      The OrthoTec Released Parties : The OrthoTec Released Parties shall include OrthoTec, LLC, Patrick Bertranou, and all current or former successors, partners, associates, officers, directors, employees, insurers, agents, advisors, attorneys and representatives of or for any OrthoTec. It is understood that such terms may vary from country to country, and this Agreement releases all claims against individuals or entities whose liability would be predicated on any action or inaction on their part that was in any manner connected to the individual or entity’s affiliation with OrthoTec, or whose action or inaction could give rise to any liability (direct or indirect, whether by way of respondeat superior , indemnity, contribution, or any other basis) of OrthoTec.
7.      Releases.
A.      Release by Alphatec and Healthpoint of OrthoTec Released Parties.

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iii.      Alphatec and Healthpoint hereby release, effective as of the date of this Agreement, the OrthoTec Released Parties, and each of them, from any and all claims, demands, and causes of action, whether known or unknown, in contract or tort, arising out of or incurred in connection with any facts or circumstances existing prior to the date of this Agreement.
B.      Release by OrthoTec of the Alphatec Released Parties, the Healthpoint Released Parties, the Carli Released Parties and the Weissberg Released Parties.
i.      OrthoTec hereby releases, effective as of the time of this Agreement, the Alphatec Released Parties, the Healthpoint Released Parties, the Carli Released Parties and the Weissberg Released Parties and each of them, from any and all claims, demands, and causes of action, whether known or unknown, in contract or in tort, arising out of or incurred in connection with any action, conduct, or omission or other facts or circumstance existing or occurring from the beginning of time up to the date of this Agreement, including, without limitation, the allegations made or that could have been made in the Alphatec Action, the Healthpoint Action, the Carli Action, and the Weissberg action.
ii.      By way of limitation, it is agreed that as to OrthoTec’s release of unnamed affiliates, associates, outside insurers, agents, advisors, attorneys and representatives, OrthoTec’s release shall be of claims, demands, or causes of action that related in any way to the claims or allegations in the Alphatec Action, the Healthpoint Action, the Carli Action, and the Weissberg action. For clarity, releases of such unnamed persons or entities shall not include unknown claims.
8.      The parties expressly waive the benefits of Section 1542 of the California Civil Code, or any comparable provision under New York or other potentially applicable law
9.      Alphatec Holdings, Healthpoint Capital, Healthpoint Capital Partners, LP, Healthpoint Capital Partners II, LP, John H. Foster, and Mortimer Berkowitz, III deny any and all allegations made by OrthoTec in the above-referenced actions. This Agreement contains no admission of liability whatever.
10.      This Agreement is entered into in the State of California and will be governed and interpreted under the laws of California. Any action to enforce this Agreement will be brought in the Los Angeles County Superior Court (if the dispute is between OrthoTec, on the one hand, and Alphatec Holdings, on the other) or in the Supreme Court of New York (if the dispute is between OrthoTec, on the one hand, and Healthpoint Capital LLC, John H. Foster, and/or Mortimer Berkowitz, III on the other).
11.      This Agreement will be memorialized in a final settlement agreement containing customary terms and provisions, but will be enforceable if no final settlement agreement is entered. The parties will work in good faith to draft and execute the final settlement agreement within 15 days.

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Signature page to the Binding Term Sheet, dated March 15, 2014

Dated:     3/15/14                     Alphatec Holdings, Inc.

/s/ Siri Marshall            
By: Siri Marshall, for the Alphatec Special Committee of the Board of Directors

Dated: 3/15/14
HealthpointPartners, Healthpoint Capital Partners, LP, HealthpointCapital Partners II, LP

/s/ John Foster                
By:

Dated: 3/15/14                         John Foster

/s/ John Foster                
By: John Foster

Dated: 3/15/14                         Mortimer Berkowitz, III

/s/ Mortimer Berkowitz III        
By: Mortimer Berkowitz III


Dated: 3/15/14                         OrthoTec, LLC

/s/ Patrick Bertranou            
By: Patrick Bertranou

Dated: 3/15/14                         Patrick Bertanou

/s/ Patrick Bertranou            
By: Patrick Bertranou


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Approved as to form:

Dated: 3/15/14
Munger, Tolles & Olson LLP,
Counsel for Alphatec


/s/ Michael Doyen            
By: Michael Doyen


Approved as to form:

Dated: 3/15/14
Mintz Levin Cohn Ferris Glovsky and Popeo PC,
Counsel for Healthpoint


/s/ Stephen C Curley            
By: Stephen C Curley


Approved as to form:

Dated: 3/15/14                         Brown George Ross LLP
Counsel for OrthoTec


/s/ Peter W. Ross            
By: Peter W. Ross

 


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Attachment A
March 15, 2014

1.
ATTACHMENT PART OF BINDING TERM SHEET

1.1.
Reference is herein made to that certain Binding Term Sheet (the “Agreement”) by and among the Alphatec Holdings, Inc., the Healthpoint Parties, and the OrthoTec Parties (each as defined in the Agreement).

2.
PAYMENT TERMS

2.1.
Alphatec shall pay to OrthoTec the following sums:

2.2.
Lump sum payment : By March 24, 2014, Alphatec shall make a payment of $1 million ($1,000,000.00) and by March 31 will pay an additional $750,000.00. Within 25 days of Alphatec closing a suitable credit facility, but in no event later than June 15, 2014, Alphatec shall pay $15.75 million ($15,750,000.00).

2.3.
Quarterly payments : $31.5 million ($31,500,000.00) payable in 29 quarterly installments of $1.1 million and then one additional quarterly payment of $600,000.00. Each such quarterly payment shall be due on the first day of the quarter, commencing October 1, 2014.

2.4.
Interest: Simple Interest of 7% will accrue beginning May 15, 2014, on the unpaid balance of the $31.5 million ($31,500,000.00) until such amount has been paid in full. Following the full payment of the $31.5 million ($31,500.000.00), the accrued interest will be paid in quarterly installments of $1.1 million ($1,100,000.00) until the accrued interest amount is paid (for clarity, it is understood that the final quarterly payment of interest may be less than $1.1 million ($1,100,00.00), but shall be sufficient to pay the accrued interest in full). No interest shall accrue on the accrued interest. In the event that $31.5 million ($31,500,000.00) is prepaid, interest shall not accrue on such prepaid amount.










Signature page to the Agreement re Plans, dated March 15, 2014


Dated: 3/15/14                         OrthoTec, LLC

/s/ Patrick Bertranou            
By: Patrick Bertranou

Dated: 3/15/14                         Patrick Bertanou

/s/ Patrick Bertranou            
By: Patrick Bertranou

Dated: 3/15/14                         Alphatec Holdings, Inc.

/s/ Les Cross                
By: Les Cross
Alphatec Chairman and CEO

Approved as to form:

Dated: 3/15/14
Munger, Tolles & Olson LLP,
Counsel for Alphatec


/s/ Michael Doyen            
By: Michael Doyen

Approved as to form:

Dated: 3/15/14                      Brown George Ross LLP
Counsel for OrthoTec


/s/ Peter W. Ross            
By: Peter W. Ross




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(principal executive officer)
 
April 30, 2014







Exhibit 31.2
CERTIFICATION OF PRINCIPAL EXECUTIVE 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
<