Alphatec Spine, Inc.
Alphatec Holdings, Inc. (Form: 10-Q, Received: 05/12/2017 06:11:44)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended March 31, 2017

OR

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

For the transition period from                      to

Commission File Number: 000-52024

 

ALPHATEC HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

20-2463898

 

 

 

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

5818 El Camino Real

Carlsbad, CA 92008

(Address of principal executive offices, including zip code)

(760) 431-9286

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes       No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes       No  

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

 

Large accelerated filer

 

 

Accelerated filer

Non-accelerated filer

  (Do not check if a small reporting company)

 

Smaller reporting company

Emerging growth company

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)    Yes       No   As of May 10, 2017, there were 10,857,733 shares of the registrant’s common stock outstanding.

 

 

 


ALPHATEC HOLDINGS, INC.

QUARTERLY REPORT ON FORM 10-Q

March 31, 2017

Table of Contents

 

 

 

 

 

Page

 

 

PART I – FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Financial Statements (Unaudited)

 

3

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2017 and December 31, 201 6

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations for the three months ended
March 31, 2017 and 2016

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Loss for the three months
ended March 31, 2017 and 2016

 

5

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2017
and 2016

 

6

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

8

 

 

 

 

 

Item 2.

 

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

 

22

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

32

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

33

 

 

 

 

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

34

 

 

 

 

 

Item 1A.

 

Risk Factors

 

34

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

34

 

 

 

 

 

Item 6.

 

Exhibits

 

35

 

 

 

 

 

SIGNATURES

 

36

 

 

 

2


PART I. FINANCI AL INFORMATION

Item 1.

Financial Statements

ALPHATEC HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(In thousands, except for par value data)

 

 

 

March 31,

2017

 

 

December 31,

2016

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash

 

$

25,485

 

 

$

19,593

 

Accounts receivable, net

 

 

14,212

 

 

 

18,512

 

Inventories, net

 

 

30,088

 

 

 

30,093

 

Prepaid expenses and other current assets

 

 

2,451

 

 

 

4,262

 

Current assets of discontinued operations

 

 

170

 

 

 

364

 

Total current assets

 

 

72,406

 

 

 

72,824

 

Property and equipment, net

 

 

15,408

 

 

 

15,076

 

Intangible assets, net

 

 

5,477

 

 

 

5,711

 

Other assets

 

 

222

 

 

 

516

 

Noncurrent assets of discontinued operations

 

 

58

 

 

 

61

 

Total assets

 

$

93,571

 

 

$

94,188

 

Liabilities and Stockholders’ Deficit

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

4,245

 

 

$

8,701

 

Accrued expenses

 

 

26,173

 

 

 

27,589

 

Current portion of long-term debt

 

 

2,616

 

 

 

3,113

 

Current liabilities of discontinued operations

 

 

293

 

 

 

732

 

Total current liabilities

 

 

33,327

 

 

 

40,135

 

Long-term debt, less current portion

 

 

40,017

 

 

 

43,092

 

Other long-term liabilities

 

 

25,757

 

 

 

28,862

 

Redeemable preferred stock, $0.0001 par value; 20,000 authorized at March 31,

   2017 and December 31, 2016; 3,319 shares issued and outstanding at both

   March 31, 2017 and December 31, 2016

 

 

23,603

 

 

 

23,603

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders’ deficit:

 

 

 

 

 

 

 

 

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

         at March 31, 2017 and December 31, 2016; 15 and 0 shares issued and

         outstanding at March 31, 2017 and December 31, 2016, respectively

 

 

 

 

 

 

Common stock, $0.0001 par value; 200,000 authorized at March 31, 2017

   and December 31, 2016; 10,858 and 9,049 shares issued and outstanding at

   March 31, 2017 and December 31, 2016, respectively

 

 

1

 

 

 

1

 

Treasury stock, at cost, 2 shares, at both March 31, 2017 and

   December 31, 2016

 

 

(97

)

 

 

(97

)

Additional paid-in capital

 

 

437,483

 

 

 

419,787

 

Shareholder note receivable

 

 

(5,000

)

 

 

(5,000

)

Accumulated other comprehensive income

 

 

1,160

 

 

 

970

 

Accumulated deficit

 

 

(462,680

)

 

 

(457,165

)

Total stockholders’ deficit

 

 

(29,133

)

 

 

(41,504

)

Total liabilities and stockholders’ deficit

 

$

93,571

 

 

$

94,188

 

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,

 

 

 

2017

 

 

2016

 

Revenues

 

$

27,978

 

 

$

34,206

 

Cost of revenues

 

 

11,199

 

 

 

9,719

 

Gross profit

 

 

16,779

 

 

 

24,487

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

1,449

 

 

 

3,641

 

Sales and marketing

 

 

11,103

 

 

 

14,940

 

General and administrative

 

 

6,223

 

 

 

9,004

 

Amortization of intangible assets

 

 

172

 

 

 

255

 

Restructuring expenses

 

 

1,231

 

 

 

89

 

Total operating expenses

 

 

20,178

 

 

 

27,929

 

Operating loss

 

 

(3,399

)

 

 

(3,442

)

Other income (expense):

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(1,981

)

 

 

(981

)

Other income (expense), net

 

 

5

 

 

 

198

 

Total other income (expense)

 

 

(1,976

)

 

 

(783

)

Loss from continuing operations before taxes

 

 

(5,375

)

 

 

(4,225

)

Income tax provision

 

 

49

 

 

 

23

 

Loss from continuing operations

 

 

(5,424

)

 

 

(4,248

)

Loss from discontinued operations, net of applicable taxes

 

 

(91

)

 

 

(2,369

)

Net loss

 

$

(5,515

)

 

$

(6,617

)

Net loss per share, basic and diluted:

 

 

 

 

 

 

 

 

Continuing operations

 

$

(0.60

)

 

$

(0.50

)

Discontinued operations

 

 

(0.01

)

 

 

(0.28

)

Net loss per share, basic and diluted

 

$

(0.61

)

 

$

(0.78

)

Shares used in calculating basic and diluted net loss per share

 

 

9,005

 

 

 

8,466

 

 

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,

 

 

 

2017

 

 

2016

 

Net loss

 

$

(5,515

)

 

$

(6,617

)

Foreign currency translation adjustments related to continuing

   operations

 

 

190

 

 

 

792

 

Comprehensive loss

 

$

(5,325

)

 

$

(5,825

)

 

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,

 

 

 

2017

 

 

2016

 

Operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(5,515

)

 

$

(6,617

)

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

   activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,868

 

 

 

3,884

 

Stock-based compensation

 

 

516

 

 

 

58

 

Interest expense related to amortization of debt discount and debt issuance

   costs

 

 

717

 

 

 

1,432

 

Provision for doubtful accounts

 

 

12

 

 

 

195

 

Provision for excess and obsolete inventory

 

 

306

 

 

 

645

 

Deferred income tax expense

 

 

 

 

 

(76

)

Other non-cash items

 

 

994

 

 

 

(12

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Restricted cash

 

 

 

 

 

1,100

 

Accounts receivable

 

 

4,356

 

 

 

(597

)

Inventories

 

 

(254

)

 

 

(3,048

)

Prepaid expenses and other current assets

 

 

1,958

 

 

 

889

 

Other assets

 

 

291

 

 

 

(20

)

Accounts payable

 

 

(5,433

)

 

 

2,904

 

Accrued expenses and other

 

 

(5,867

)

 

 

(527

)

Net cash (used in) provided by operating activities

 

 

(6,051

)

 

 

210

 

Investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(1,977

)

 

 

(1,686

)

Cash received from sale of assets

 

 

 

 

 

516

 

Net cash used in investing activities

 

 

(1,977

)

 

 

(1,170

)

Financing activities:

 

 

 

 

 

 

 

 

Borrowings under lines of credit

 

 

24,195

 

 

 

34,879

 

Repayments under lines of credit

 

 

(26,426

)

 

 

(33,878

)

Principal payments on capital lease obligations

 

 

(159

)

 

 

(198

)

Proceeds from sale of stock

 

 

17,472

 

 

 

 

Principal payments on notes payable and term loan

 

 

(1,325

)

 

 

(2,340

)

Net cash provided by (used in) financing activities

 

 

13,757

 

 

 

(1,537

)

Effect of exchange rate changes on cash

 

 

96

 

 

 

(971

)

Net increase (decrease) in cash

 

 

5,825

 

 

 

(3,468

)

Cash at beginning of period, including discontinued operations

 

 

19,752

 

 

 

11,229

 

Cash at end of period, including discontinued operations

 

$

25,577

 

 

$

7,761

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

6


ALPHATEC HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS—(Continued)

(UNAUDITED)

(In thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

1,277

 

 

$

1,918

 

Cash paid for income taxes

 

$

198

 

 

$

646

 

Purchases of property and equipment in accounts payable

 

$

3,650

 

 

$

4,495

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

7


ALPHATEC HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. The Company and Basis of Presentation

The Company

Alphatec Holdings, Inc. (the “Company”), through its wholly owned subsidiary, Alphatec Spine, Inc. and its subsidiaries (“Alphatec Spine”), is a medical technology company focused on the design, development and promotion of products for the surgical treatment of spine disorders. The Company has a comprehensive product portfolio and pipeline that addresses the cervical, thoracolumbar and intervertebral regions of the spine and covers a variety of spinal disorders and surgical procedures. The Company’s principal product offerings are focused on the U.S. market for fusion-based spinal disorder solutions.

Prior to September 1, 2016, the Company marketed its products in the U.S. market and 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 conducted its operations through its Brazilian subsidiary, Cibramed Productos Medicos. In Japan, the Company marketed its products through its subsidiary, Alphatec Pacific, Inc. and its subsidiaries.

On September 1, 2016, the Company completed the sale of its international distribution operations and agreements to Globus Medical Ireland, Ltd., a subsidiary of Globus Medical, Inc., and its affiliated entities (collectively “Globus”), including the Company’s wholly-owned subsidiaries in Japan, Brazil, Australia and Singapore and substantially all of the assets of the Company’s other sales operations in the United Kingdom and Italy (collectively, the “International Business”), pursuant to a purchase and sale agreement, dated as of July 25, 2016 (as amended, the “Purchase and Sale Agreement”) (the “Globus Transaction”). As a result of the Globus Transaction, the Company's International Business has been excluded from continuing operations for all periods presented in this report and is reported as discontinued operations. See Note 4 for additional information on the divestiture of the International Business. The Company operates in one reportable business segment.  The sale of the international operations represents a strategic shift and has a significant impact on the Company's operations and financial results.

Basis of Presentation

The accompanying condensed consolidated balance sheet as of December 31, 2016, 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, including normal recurring adjustments which, in the opinion of management, are necessary for a fair statement of the financial position and results of operations for the periods presented. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2016, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 that was filed with the SEC on March 31, 2017.

Operating results for the three months ended March 31, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017, or any other future periods.

On August 24, 2016, the Company filed a certificate of amendment to its certificate of incorporation with the Secretary of State of the state of Delaware to effectuate a 1-for-12 reverse stock split of the Company’s issued and outstanding common stock. The accompanying condensed consolidated financial statements and notes thereto give retrospective effect to the reverse stock split for all periods presented. All issued and outstanding common stock, options exercisable for common stock, warrants exercisable for common stock, restricted stock units, and per share amounts contained in the Company’s condensed consolidated financial statements have been retroactively adjusted to reflect this reverse stock split for all periods presented.

8


As a result of the sale of the International Business, the Company has retrospectively revised the consolidated statements of operations for the three months ended March 31, 2016, to reflect the financial results from the International Business, and the related assets and liabilities, as discontinued operations.

The Company’s Board approved annual operating plan projects that its existing working capital at March 31, 2017 of $39.1 million (including cash of $25.5 million), allows the Company to fund its operations through one year subsequent to the date the financial statements are issued.

The Company has incurred significant net losses since inception and has relied on its ability to fund its operations through revenues from the sale of its products, equity financings and debt financings. As the Company has historically incurred losses, successful transition to profitability is dependent upon achieving a level of revenues adequate to support the Company’s cost structure. This may not occur and, unless and until it does, the Company will continue to need to raise additional capital.  Operating losses and negative cash flows may continue for at least the next year as the Company continues to incur costs related to the execution of its operating plan and introduction of new products.  

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern and do not include any adjustments that might result from the outcome of this uncertainty. A going concern basis of accounting contemplates the recovery of the Company’s assets and the satisfaction of its liabilities in the normal course of business.

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, 2016, which are included in the Company’s Annual Report on Form 10-K that was filed with the SEC on March 30, 2017. Except as discussed below, these accounting policies have not significantly changed during the three months ended March 31, 2017.

 

Warrant Accounting

As more fully described in Note 10, the Company issued warrants to purchase shares of the Company’s common st ock in connection with a private placement transaction that closed on March 29, 2017.  These warrants contain a feature that could require the transfer of cash in the event of a Fundamental Transaction, as defined in such warrants (other than a Fundamental Transaction not approved by the Company’s Board of Directors).  The warrant holders do not control the Company’s Board of Directors, and therefore, since potential future cash settlement is deemed to be within the Company’s control, the warrants are classified in stockholder’s equity in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 480, Distinguishing Liabilities from Equity.

Recent Accounting Pronouncements

In May 2014, the FASB issued new accounting guidance related to revenue recognition. This new standard replaces all current U.S. GAAP guidance on this topic and eliminates all industry-specific guidance. The new revenue recognition standard provides a unified model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. This guidance, including all subsequent clarifications, is effective for the Company for annual and interim reporting periods in fiscal years beginning after December 15, 2017 and can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. The Company performed a preliminary assessment of the impact of the new standard on the consolidated financial statements, and considered all items outlined in the standard. In assessing the impact, the Company has outlined all revenue generating activities, mapped those activities to performance obligations and traced those performance obligations to the standard. The Company is now assessing what impact the change in standard will have on those performance obligations. The Company will continue to evaluate the future impact and method of adoption of the new standard and related amendments on the consolidated financial statements and related disclosures throughout 2017. The Company will adopt the new standard beginning January 1, 2018.

In July 2015, the FASB issued new accounting guidance, which changes the measurement principle for inventory from the lower of cost or market to lower of cost and net realizable value for entities that do not measure inventory using the last-in, first-out or retail inventory method. The guidance also eliminates the requirement for these entities to consider replacement cost or net realizable value less an approximately normal profit margin when measuring inventory. The guidance

9


is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company adopted the standard for reporting periods beginning January 1, 2017.

In February 2016, the FASB issued new accounting guidance, which changes several aspects of the accounting for leases, including the requirement that all leases with durations greater than twelve months be recognized on the balance sheet. The guidance is effective for annual periods and interim periods in fiscal years beginning after December 15, 2018. The Company is evaluating the impact of adopting this new accounting standard on its financial statements.

In March 2016, the FASB issued new accounting guidance, which changes several aspects of the accounting for share-based payment award transactions, including accounting and cash flow classification for excess tax benefits and deficiencies, forfeitures, and tax withholding requirements and cash flow classification. The guidance is effective for annual periods and interim periods in fiscal years beginning after December 15, 2016. The Company adopted the standard for reporting periods beginning January 1, 2017.

In August 2016, the FASB issued new accounting guidance, which eliminates the diversity in practice related to the classification of certain cash receipts and payments in the statement of cash flows, by adding or clarifying guidance on eight specific cash flow issues. The guidance is effective for annual and interim reporting periods beginning after December 15, 2017, with early adoption permitted. The amendments in this update should be applied retrospectively to all periods presented, unless deemed impracticable, in which case, prospective application is permitted. The Company is currently evaluating the new guidance and has not determined the impact this standards update may have on its financial statements.

3. Select Condensed Consolidated Balance Sheet Details

Accounts Receivable, net

Accounts receivable, net consist of the following (in thousands):

 

 

 

March 31,

2017

 

 

December 31,

2016

 

Accounts receivable

 

$

15,190

 

 

$

19,870

 

Allowance for doubtful accounts

 

 

(978

)

 

 

(1,358

)

Accounts receivable, net

 

$

14,212

 

 

$

18,512

 

 

Inventories, net

Inventories, net consist of the following (in thousands):

 

 

 

March 31,

2017

 

 

December 31,

2016

 

Raw materials

 

$

5,664

 

 

$

7,301

 

Work-in-process

 

 

969

 

 

 

823

 

Finished goods

 

 

38,538

 

 

 

38,469

 

 

 

 

45,171

 

 

 

46,593

 

Less reserve for excess and obsolete finished goods

 

 

(15,083

)

 

 

(16,500

)

Inventories, net

 

$

30,088

 

 

$

30,093

 

 

10


Property and Equipment, net

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

 

 

 

Useful lives

(in years)

 

 

March 31,  2017

 

 

December

31, 2016

 

Surgical instruments

 

 

4

 

 

$

54,364

 

 

$

53,095

 

Machinery and equipment

 

 

7

 

 

 

5,492

 

 

 

5,435

 

Computer equipment

 

 

3

 

 

 

3,512

 

 

 

3,511

 

Office furniture and equipment

 

 

5

 

 

 

2,707

 

 

 

2,695

 

Leasehold improvements

 

various

 

 

 

1,653

 

 

 

3,467

 

Construction in progress

 

n/a

 

 

 

-

 

 

 

445

 

 

 

 

 

 

 

 

67,728

 

 

 

68,648

 

Less accumulated depreciation and amortization

 

 

 

 

 

 

(52,320

)

 

 

(53,572

)

Property and equipment, net

 

 

 

 

 

$

15,408

 

 

$

15,076

 

 

Total depreciation expense was $1.6 million and $2.3 million for the three months ended March 31, 2017 and 2016, respectively.  At March 31, 2017 and December 31, 2016, assets recorded under capital leases of $2.1 million were included in the machinery and equipment balance. Amortization of assets under capital leases is included in depreciation expense.

Intangible Assets, net

Intangible assets, net consist of the following (in thousands except for useful lives):

 

 

 

Remaining

Avg. Useful

lives (in

years)

 

 

March

31, 2017

 

 

December

31, 2016

 

Developed product technology

 

 

 

 

$

13,876

 

 

$

13,876

 

Intellectual property

 

 

 

 

 

1,004

 

 

 

1,004

 

License agreements

 

 

2

 

 

 

5,265

 

 

 

5,265

 

Trademarks and trade names

 

 

 

 

 

732

 

 

 

732

 

Customer-related

 

 

8

 

 

 

7,458

 

 

 

7,458

 

Distribution network

 

 

8

 

 

 

4,027

 

 

 

4,027

 

 

 

 

 

 

 

 

32,362

 

 

 

32,362

 

Less accumulated amortization

 

 

 

 

 

 

(26,885

)

 

 

(26,651

)

Intangible assets, net

 

 

 

 

 

$

5,477

 

 

$

5,711

 

 

Total amortization expense was $0.2 million and $0.3 million for the three months ended March 31, 2017 and 2016, respectively.

Future amortization expense related to intangible assets as of March 31, 2017 is as follows (in thousands):

 

Year Ending December 31,

 

 

 

 

Remainder of 2017

 

$

702

 

2018

 

 

750

 

2019

 

 

688

 

2020

 

 

688

 

2021

 

 

688

 

Thereafter

 

 

1,961

 

 

 

$

5,477

 

 

 Accrued Expenses

Accrued expenses consist of the following (in thousands):

 

11


 

 

March 31,

2017

 

 

December 31,

2016

 

Commissions and sales milestones

 

$

4,156

 

 

$

4,202

 

Payroll and payroll related

 

 

2,419

 

 

 

2,384

 

Litigation settlements

 

 

4,400

 

 

 

4,400

 

Globus related accruals

 

 

767

 

 

 

3,830

 

Accrued professional fees

 

 

2,308

 

 

 

3,093

 

Royalties

 

 

1,350

 

 

 

1,347

 

Restructuring and severance accruals

 

 

1,619

 

 

 

1,328

 

Accrued taxes

 

 

419

 

 

 

404

 

Guaranteed collaboration compensation, current

 

 

4,661

 

 

 

2,228

 

Accrued interest

 

 

388

 

 

 

387

 

Other

 

 

3,686

 

 

 

3,986

 

Total accrued expenses

 

$

26,173

 

 

$

27,589

 

 

4. Discontinued Operations

In order to pay down a portion of its debt and improve its liquidity position and future cash flows, on September 1, 2016, the Company closed the Globus Transaction (described in Note 1). Following the closing of the Globus Transaction, the Company only sells its products in the U.S. market and is prohibited from marketing and selling its products outside the United States and its possessions and territories until the date that is two years following the termination of the Supply Agreement (as described below). As a result of the Globus Transaction, the Company has retrospectively revised the condensed consolidated statements of operations and cash flows for the three month periods ended March 31, 2016 to reflect the financial results from the International Business as discontinued operations.

At the closing of the Globus Transaction, Globus paid the Company $80 million in cash, subject to a working capital adjustment. On September 1, 2016, the Company used approximately $66 million of the consideration received to (i) repay in full all amounts outstanding and due under the Company’s Facility Agreement between the Company 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., dated as of March 17, 2014, as amended to date (the “Deerfield Facility Agreement”) and (ii) repay certain of its outstanding indebtedness under the Company’s Amended Credit Facility with MidCap (described in Note 6), in each case, including debt-related costs. Also on September 1, 2016, the Company entered into a five-year term credit, security and guaranty agreement with Globus (the “Globus Facility Agreement”), as further described in Note 6, pursuant to which Globus agreed to loan the Company up to $30 million, subject to the terms and conditions set forth in the Globus Facility Agreement.

The following table summarizes the preliminary calculation of the gain on sale (in thousands):

 

Consideration received

 

$

80,000

 

Cash included in assets sold

 

 

(4,250

)

Transaction costs

 

 

(5,960

)

Net cash proceeds

 

 

69,790

 

Less:

 

 

 

 

Product supply obligation

 

 

(1,927

)

Working capital adjustment

 

 

(2,295

)

Carrying value of business and assets sold

 

 

(57,633

)

Net gain on sale of business

 

$

7,935

 

 

The Company is evaluating certain income tax related items that are pending final resolution.

The results of operations from discontinued operations presented below include certain allocations that management believes fairly reflect the utilization of services provided to the International Business. The allocations do not include amounts related to general corporate administrative expenses. Therefore, the results of operations from the International Business do not necessarily reflect what the results of operations would have been had the International Business operated as a stand-alone entity.

12


In connection with the Globus Transaction, the Company entered into a produ ct manufacture and supply agreement (the “Supply Agreement”) with Globus, pursuant to which the Company agreed to supply to Globus certain of its implants and instruments (the “Products”), previously offered for sale by the Company in international markets at agreed-upon prices for a minimum term of three years, with the option for Globus to extend the term for up to two additional twelve month periods subject to Globus meeting specified purchase requirements. In accordance with authoritative guidance, cert ain intercompany sales transactions have been reported under continuing operations as the Company will have continuing involvement due to future sales to Globus under the Supply Agreement. In connection with the Globus Transaction, Globus received a credit of up to $1.9 million to be applied against Product purchases pursuant to the Supply Agreement during a six-month period commencing one month after the closing of the Globus Transaction, which has been included as a reduction of the consideration received for the sale of the International Business and will be recognized as revenue upon fulfillment by the Company of product purchases by Globus.

The agreements entered into concurrently with the sale of the International Business, including the Transition Services Agreement and Supply Agreement, contain various elements and, as such, are deemed to be an arrangement with multiple deliverables as defined under authoritative accounting guidance. Several non-contingent deliverables were identified within the agreements. The Company identified the International Business, contract supply services, transition services and the Globus Facility as separate non-contingent deliverables within the arrangement.  The Company determined the estimated selling price (fair value) for each of the non-contingent deliverables on a standalone basis by utilizing relevant market data and entity-specific factors.  Based on the respective standalone fair values of the deliverables, there was no discount to allocate among the deliverables and the consideration received for each deliverable approximated standalone fair value.  As such, none of the purchase consideration was allocated to these elements.

Included in the results of continuing operations for the three months ended March 31, 2016 are revenues of $5.0 million and cost of revenue of $4.0 million, respectively, that represent intercompany transactions that, prior to the Globus Transaction, were eliminated in the Company's condensed consolidated financial statements.

During the three months ended March 31, 2017, the Company recorded $4.5 million in revenue and $3.8 million in cost of sales from the Supply Agreement that are included in the continuing operations.

13


In connection with the Globus Transaction, the Company included the interest expense of $2.4 million for the three months ended March 31, 2016 incurred in connection with repayment from the proceeds from the Globus Transaction of all amounts outstanding and due under the Deerfield Facility Agreement and Amended Credit Faci lity in the loss from discontinued operations to the extent these debt facilities were repaid using the proceeds from the Globus Transaction.

The following table summarizes the results of discontinued operations for the periods presented in the condensed consolidated statements of operations and comprehensive income (loss) for the three months ended March 31, 2017 and 2016 (in thousands):

 

 

 

Three Months Ended

 

 

 

March 31,

 

Discontinued operations

 

2017

 

 

2016

 

Revenues

 

$

 

 

$

10,555

 

Cost of revenues

 

 

 

 

 

3,813

 

Amortization of acquired intangible assets

 

 

 

 

 

360

 

Gross profit

 

 

 

 

 

6,382

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

 

 

 

26

 

Sales and marketing

 

 

 

 

 

4,182

 

General and administrative

 

 

73

 

 

 

1,643

 

Amortization of acquired intangible assets

 

 

 

 

 

231

 

Restructuring expenses

 

 

 

 

 

597

 

Total operating expenses

 

 

73

 

 

 

6,679

 

Operating loss

 

 

(73

)

 

 

(297

)

Other income (expense):

 

 

 

 

 

 

 

 

Interest expense, net

 

 

 

 

 

(2,356

)

Other income (expense), net

 

 

 

 

 

847

 

Total other income (expense)

 

 

 

 

 

(1,509

)

Loss from discontinued operations before taxes

 

 

(73

)

 

 

(1,806

)

Income tax provision

 

 

18

 

 

 

563

 

Loss from discontinued operations, net of applicable taxes

 

$

(91

)

 

$

(2,369

)

 

The following table summarizes the assets and liabilities of discontinued operations as of March 31, 2017 and December 31, 2016 related to the International Business (in thousands):

 

 

 

March 31,

2017

 

 

December 31,

2016

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash

 

$

92

 

 

$

159

 

Inventories, net

 

 

 

 

 

48

 

Prepaid expenses and other current assets

 

 

78

 

 

 

157

 

Total current assets of discontinued operations

 

 

170

 

 

 

364

 

Other assets

 

 

58

 

 

 

61

 

Total assets of discontinued operations

 

$

228

 

 

$

425

 

Liabilities

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

72

 

 

$

43

 

Accrued expenses

 

 

206

 

 

 

689

 

Other current liabilities

 

 

15

 

 

 

 

Total current liabilities of discontinued operations

 

$

293

 

 

$

732

 

 

14


Included in the cash flows for the three months ended March 31, 2017 and 2016 are the following non-cash adjustments related to the discontinued operations (in thousands):

 

 

 

Three   Months Ended March 31,

 

 

 

2017

 

 

2016

 

Depreciation and amortization

 

$

 

 

$

1,396

 

Provision for excess and obsolete inventory

 

$

 

 

$

77

 

Capital expenditures

 

$

 

 

$

697

 

Interest expense related to amortization of debt

   discount and debt issuance costs

 

$

 

 

$

646

 

 

5. License and Consulting Agreements

The Company’s license and consulting agreements are described in Note 5 to its audited consolidated financial statements for the year ended December 31, 2016, which are included in its Annual Report on Form 10-K which was filed with the SEC on March 31, 2017.

6. Debt

MidCap Facility Agreement

The Company has a credit facility with MidCap Funding IV, LLC (“MidCap”), as amended to date (the “Amended Credit Facility”), that provides for a revolving credit commitment up to $22.5 million and a  term loan commitment up to $5 million.  As of March 31, 2017, $10.3 million was outstanding under the revolving line of credit and $4.2 million was outstanding under the term loan.

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, 2017, the revolving line of credit carried an interest rate of 6.8% 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 of interest, monthly repayments of $0.2 million in 2017 and $0.3 million in 2018 through maturity are due, with the remaining principal due upon maturity. At March 31, 2017, $1.9 million remains as unamortized debt discount related to the Amended Credit Facility within the condensed consolidated balance sheet, which will be amortized over the remaining term of the Amended Credit Facility.

On March 30, 2017, the Company entered into a sixth amendment to the Amended Credit Facility with MidCap (the “Sixth Amendment”).  The Sixth Amendment extend the date that the financial covenants of the Amended Credit Facility are effective from April 2017 to April 2018.

The Amended Credit Facility includes traditional lending and reporting covenants including a fixed charge coverage ratio to be maintained by the Company. The Amended Credit Facility also includes several event of default provisions, such as payment default, insolvency conditions and a material adverse effect clause, 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. The financial covenants of the Amended Credit Facility are not effective until April 2018. There is no assurance that the Company will be in compliance with the financial covenants of the Amended Credit Facility in the future.

Globus Facility Agreement

On September 1, 2016, the Company and Globus entered into the Globus Facility Agreement, pursuant to which Globus agreed to loan the Company up to $30 million, subject to the terms and conditions set forth in the Globus Facility Agreement. At the closing of the Globus Transaction, the Company made an initial draw of $25 million under the Globus Facility Agreement with an additional draw of $5 million made in the fourth quarter of 2016.  As of March 31, 2017, the outstanding balance under the Globus Facility Agreement was $30.0 million, which becomes due and payable in quarterly payments of $0.8 million starting in September 2018, with a final payment of the remaining amount outstanding due on September 1, 2021.  The term loan interest rate is priced at LIBOR plus 8.0% through September 1, 2018, and LIBOR plus

15


13.0%, thereafter.  At March 31, 2017, unamortized debt discount related to the Globus Facility Agreement within the condensed consolidated balance sh eet was $1.0 million.

On March 30, 2017, the Company entered into a first amendment to the Globus Facility Agreement with Globus (the “Globus First Amendment”).  The Globus First Amendment extended the date that the financial covenants of the Globus Facility Agreement are effective from April 2017 to April 2018.

As collateral for the Globus Facility Agreement, the Company granted Globus a first lien security interest in substantially all of its assets, other than accounts receivable and related assets, which will secure the Globus Facility Agreement on a second lien basis. The Globus Facility Agreement includes traditional lending and reporting covenants including a fixed charge coverage ratio to be maintained by the Company. The financial covenants of the Globus Facility Agreement are not effective until April 2018. There is no assurance that the Company will be in compliance with the financial covenants of the Globus Facility Agreement in the future. The Globus Facility Agreement also includes several event of default provisions, such as payment default, insolvency conditions and a material adverse effect clause, 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 Globus’s right to declare all outstanding obligations immediately due and payable.

Principal payments on the Company's debt are as follows as of March 31, 2017 (in thousands):

 

Year Ending December 31,

 

 

 

 

Remainder of 2017

 

$

2,689

 

2018

 

 

4,046

 

2019

 

 

14,198

 

2020

 

 

3,333

 

2021 and thereafter

 

 

21,667

 

Total

 

 

45,933

 

Add: capital lease principal payments

 

 

314

 

Less: unamortized debt discount and debt issuance costs

 

 

(3,614

)

Total

 

 

42,633

 

Less: current portion of long-term debt

 

 

(2,616

)

Long-term debt, net of current portion

 

$

40,017

 

 

7. Commitments and Contingencies

Leases

The Company leases certain equipment under capital leases which expire on various dates through 2017. The leases bear interest at rates ranging from 6.6% to 9.6% per annum, 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 2021. Future minimum annual lease payments under such leases are as follows as of March 31, 2017 (in thousands):

 

Year Ending December 31,

 

Operating

 

 

Capital

 

Remainder of 2017

 

$

1,205

 

 

$

261

 

2018

 

 

1,556

 

 

 

68

 

2019

 

 

1,543

 

 

 

 

2020

 

 

1,538

 

 

 

 

2021 and thereafter

 

 

971

 

 

 

 

 

 

$

6,813

 

 

 

329

 

Less: amount representing interest

 

 

 

 

 

 

(15

)

Present value of minimum lease payments

 

 

 

 

 

 

314

 

Current portion of capital leases

 

 

 

 

 

 

(270

)

Capital leases, less current portion

 

 

 

 

 

$

44

 

 

Rent expense under operating leases for the three months ended March 31, 2017 and 2016 was $0.4 million and $0.6 million, respectively.

16


Litigation

The Company is and may become involved in various legal proceedings arising from its business activities. While management is not aware of any litigation matter that in and of itself would 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 a proceeding, an unfavorable resolution could materially affect the Company’s future consolidated results of operations, cash flows or financial position in a particular period.  The Company assesses contingencies to determine the degree of probability and range of possible loss for potential accrual or disclosure in the Company's consolidated financial statements. An estimated loss contingency is accrued in the Company’s consolidated financial statements if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Because litigation is inherently unpredictable and unfavorable resolutions could occur, assessing contingencies is highly subjective and requires judgments about future events. When evaluating contingencies, the Company may be unable to provide a meaningful estimate due to a number of factors, including the procedural status of the matter in question, the presence of complex or novel legal theories, and/or the ongoing discovery and development of information important to the matters. In addition, damage amounts claimed in litigation against the Company may be unsupported, exaggerated or unrelated to reasonably possible outcomes, and as such are not meaningful indicators of the Company’s potential liability.

Indemnifications

In the normal course of business, the Company enters into agreements under which it occasionally indemnifies third-parties for intellectual property infringement claims or claims arising from breaches of representations or warranties. In addition, from time to time, the Company provides indemnity protection to third-parties for claims relating to past performance arising from undisclosed liabilities, product liabilities, environmental obligations, representations and warranties, and other claims. In these agreements, the scope and amount of remedy, or the period in which claims can be made, may be limited. It is not possible to determine the maximum potential amount of future payments, if any, due under these indemnities due to the conditional nature of the obligations and the unique facts and circumstances involved in each agreement.

Royalties

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

8. Orthotec Settlement

On September 26, 2014, the Company entered into a Settlement and Release Agreement, dated as of August 13, 2014, by and among the Company and its direct subsidiaries, including Alphatec Spine, Inc., Alphatec Holdings International C.V., Scient'x S.A.S. and Surgiview S.A.S.; HealthpointCapital, LLC, HealthpointCapital Partners, L.P., HealthpointCapital Partners II, L.P., John H. Foster and Mortimer Berkowitz III; and Orthotec, LLC and Patrick Bertranou, (the “Settlement Agreement”). Pursuant to the Settlement Agreement, the Company agreed to pay Orthotec, LLC $49.0 million in cash, including initial cash payments totaling $1.75 million, which the Company previously paid in March 2014, and an additional lump sum payment of $15.75 million, which the Company previously paid in April 2014. The Company agreed to pay the remaining $31.5 million in 28 quarterly installments of $1.1 million and one additional quarterly installment of $0.7 million, commencing October 1, 2014.

As of March 31, 2017, the Company has made installment payments in the aggregate of $28.5 million, with a remaining outstanding balance of $29.3 million. The Company has the right to prepay the amounts due without penalty. In addition, the unpaid balance of the amounts due accrues interest at the rate of 7% per year beginning May 15, 2014 until the amounts due are paid in full. The accrued but unpaid interest will be paid in quarterly installments of $1.1 million (or the full amount of the accrued but unpaid interest if less than $1.1 million) following the full payment of the $31.5 million in quarterly installments described above. No interest will accrue on the accrued interest. The Settlement Agreement provided for mutual releases of all claims in the Orthotec, LLC v. Surgiview, S.A.S, et al. matter in the Superior Court of California, Los Angeles County and all other related litigation matters involving the Company and its directors and affiliates.

17


9. Net Los s 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, options, performance-based restricted stock units and warrants are considered to be common stock equivalents and are only included in the calculation of diluted earnings per share when their effect is dilutive.

The following table presents the computation of basic and diluted net loss per share for continuing and discontinued operations (in thousands, except per share amounts):

 

 

 

Three Months Ended

March 31,

 

 

 

2017

 

 

2016

 

Numerator:

 

 

 

 

 

 

 

 

Loss from continuing operations

 

$

(5,424

)

 

$

(4,248

)

Loss from discontinued operations

 

 

(91

)

 

 

(2,369

)

Net loss

 

$

(5,515

)

 

$

(6,617

)

Denominator:

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

9,089

 

 

 

8,513

 

Weighted average unvested common shares subject

   to repurchase

 

 

(84

)

 

 

(47

)

Weighted average common shares outstanding—basic

 

 

9,005

 

 

 

8,466

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

Conversion of preferred stock

 

 

 

 

 

 

Options

 

 

 

 

 

 

Warrants

 

 

 

 

 

 

Weighted average common shares outstanding—diluted

 

 

9,005

 

 

 

8,466

 

Net loss per share, basic and diluted:

 

 

 

 

 

 

 

 

Continuing operations

 

$

(0.60

)

 

$

(0.50

)

Discontinued operations

 

 

(0.01

)

 

 

(0.28

)

Net loss per share, basic and diluted

 

$

(0.61

)

 

$

(0.78

)

 

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

 

 

 

Three Months Ended

March 31,

 

 

 

2017

 

 

2016

 

Options to purchase common stock

 

 

1,164