Alphatec Spine, Inc.
Alphatec Holdings, Inc. (Form: 10-Q, Received: 08/11/2017 06:10:34)

 

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 June 30, 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 August 1, 2017, there were 13,782,064 shares of the registrant’s common stock outstanding.

 

 

 


ALPHATEC HOLDINGS, INC.

QUARTERLY REPORT ON FORM 10-Q

June 30, 2017

Table of Contents

 

 

 

 

 

Page

 

 

PART I – FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Financial Statements

 

3

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of June 30, 2017 (unaudited) and December 31, 201 6

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations for the Three and Six Months Ended
June 30, 2017 and 2016 (unaudited)

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Loss for the Three and Six months
Ended June 30, 2017 and 2016 (unaudited)

 

5

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2017
and 2016 (unaudited)

 

6

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

7

 

 

 

 

 

Item 2.

 

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

 

21

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

32

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

32

 

 

 

 

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

33

 

 

 

 

 

Item 1A.

 

Risk Factors

 

33

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

33

 

 

 

 

 

Item 6.

 

Exhibits

 

34

 

 

 

 

 

SIGNATURES

 

36

 

 

 

2


PART I. FINANCI AL INFORMATION

Item 1.

Financial Statements

ALPHATEC HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

(In thousands, except for par value data)

 

 

 

June 30, 2017

 

 

December 31,

2016

 

Assets

 

 

(Unaudited)

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash

 

$

19,107

 

 

$

19,593

 

Accounts receivable, net

 

 

13,126

 

 

 

18,512

 

Inventories, net

 

 

29,810

 

 

 

30,093

 

Prepaid expenses and other current assets

 

 

2,114

 

 

 

4,262

 

Current assets of discontinued operations

 

 

69

 

 

 

364

 

Total current assets

 

 

64,226

 

 

 

72,824

 

Property and equipment, net

 

 

14,467

 

 

 

15,076

 

Intangible assets, net

 

 

5,243

 

 

 

5,711

 

Other assets

 

 

222

 

 

 

516

 

Noncurrent assets of discontinued operations

 

 

39

 

 

 

61

 

Total assets

 

$

84,197

 

 

$

94,188

 

Liabilities and Stockholders’ Deficit

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

2,861

 

 

$

8,701

 

Accrued expenses

 

 

23,917

 

 

 

27,589

 

Current portion of long-term debt

 

 

2,333

 

 

 

3,113

 

Current liabilities of discontinued operations

 

 

464

 

 

 

732

 

Total current liabilities

 

 

29,575

 

 

 

40,135

 

Long-term debt, less current portion

 

 

38,178

 

 

 

43,092

 

Other long-term liabilities

 

 

24,391

 

 

 

28,862

 

Redeemable preferred stock, $0.0001 par value; 20,000 authorized at June 30,

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

   June 30, 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 June 30, 2017 and December 31, 2016; 11 and 0 shares issued and

         outstanding at June 30, 2017 and December 31, 2016, respectively

 

 

 

 

 

 

Common stock, $0.0001 par value; 200,000 authorized at June 30, 2017

   and December 31, 2016; 13,066 and 9,049 shares issued and outstanding at

   June 30, 2017 and December 31, 2016, respectively

 

 

1

 

 

 

1

 

Treasury stock, at cost, 2 shares, at both June 30, 2017 and

   December 31, 2016

 

 

(97

)

 

 

(97

)

Additional paid-in capital

 

 

438,005

 

 

 

419,787

 

Shareholder note receivable

 

 

(5,000

)

 

 

(5,000

)

Accumulated other comprehensive income

 

 

918

 

 

 

970

 

Accumulated deficit

 

 

(465,377

)

 

 

(457,165

)

Total stockholders’ deficit

 

 

(31,550

)

 

 

(41,504

)

Total liabilities and stockholders’ deficit

 

$

84,197

 

 

$

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

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Revenues

 

$

24,379

 

 

$

32,242

 

 

$

52,357

 

 

$

66,448

 

Cost of revenues

 

 

8,631

 

 

 

11,083

 

 

 

19,830

 

 

 

20,802

 

Gross profit

 

 

15,748

 

 

 

21,159

 

 

 

32,527

 

 

 

45,646

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

990

 

 

 

2,072

 

 

 

2,439

 

 

 

5,713

 

Sales and marketing

 

 

10,298

 

 

 

12,794

 

 

 

21,401

 

 

 

27,734

 

General and administrative

 

 

5,351

 

 

 

6,274

 

 

 

11,574

 

 

 

15,278

 

Amortization of intangible assets

 

 

172

 

 

 

255

 

 

 

344

 

 

 

510

 

Restructuring expenses

 

 

528

 

 

 

84

 

 

 

1,759

 

 

 

173

 

Gain on sale of assets

 

 

(856

)

 

 

 

 

 

(856

)

 

 

 

Total operating expenses

 

 

16,483

 

 

 

21,479

 

 

 

36,661

 

 

 

49,408

 

Operating loss

 

 

(735

)

 

 

(320

)

 

 

(4,134

)

 

 

(3,762

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(1,881

)

 

 

(1,015

)

 

 

(3,862

)

 

 

(1,996

)

Other income (expense), net

 

 

2

 

 

 

(563

)

 

 

7

 

 

 

(365

)

Total other income (expense)

 

 

(1,879

)

 

 

(1,578

)

 

 

(3,855

)

 

 

(2,361

)

Loss from continuing operations before taxes

 

 

(2,614

)

 

 

(1,898

)

 

 

(7,989

)

 

 

(6,123

)

Income tax provision

 

 

15

 

 

 

11

 

 

 

64

 

 

 

34

 

Loss from continuing operations

 

 

(2,629

)

 

 

(1,909

)

 

 

(8,053

)

 

 

(6,157

)

Loss from discontinued operations, net of applicable taxes

 

 

(68

)

 

 

(3,324

)

 

 

(159

)

 

 

(5,693

)

Net loss

 

$

(2,697

)

 

$

(5,233

)

 

$

(8,212

)

 

$

(11,850

)

Net loss per share, basic and diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

(0.24

)

 

$

(0.22

)

 

$

(0.80

)

 

$

(0.73

)

Discontinued operations

 

 

(0.01

)

 

 

(0.39

)

 

 

(0.02

)

 

 

(0.67

)

Net loss per share, basic and diluted

 

$

(0.24

)

 

$

(0.62

)

 

$

(0.82

)

 

$

(1.40

)

Shares used in calculating basic and diluted net loss per share

 

 

11,047

 

 

 

8,488

 

 

 

10,033

 

 

 

8,477

 

 

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

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net loss

 

$

(2,697

)

 

$

(5,233

)

 

$

(8,212

)

 

$

(11,850

)

Foreign currency translation adjustments related to continuing

   operations

 

 

(242

)

 

 

849

 

 

 

(52

)

 

 

1,641

 

Comprehensive loss

 

$

(2,939

)

 

$

(4,384

)

 

$

(8,264

)

 

$

(10,209

)

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

5


ALPHATEC HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In thousands)

 

 

 

Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

Operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(8,212

)

 

$

(11,850

)

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

   activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

3,738

 

 

 

7,381

 

Stock-based compensation

 

 

960

 

 

 

363

 

Interest expense related to amortization of debt discount and debt issuance

   costs

 

 

1,423

 

 

 

2,560

 

Provision for doubtful accounts

 

 

(72

)

 

 

470

 

Provision for excess and obsolete inventory

 

 

892

 

 

 

2,374

 

Deferred income tax expense

 

 

(1

)

 

 

(26

)

Gain on sale of assets

 

 

(856

)

 

 

 

 

Other non-cash items

 

 

394

 

 

 

820

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Restricted cash

 

 

-

 

 

 

2,200

 

Accounts receivable, net

 

 

5,458

 

 

 

2,933

 

Inventories, net

 

 

(617

)

 

 

(78

)

Prepaid expenses and other current assets

 

 

2,611

 

 

 

1,292

 

Other assets

 

 

317

 

 

 

162

 

Accounts payable

 

 

(3,546

)

 

 

3,077

 

Accrued expenses and other

 

 

(9,210

)

 

 

(1,754

)

Deferred revenues

 

 

246

 

 

 

148

 

Net cash (used in) provided by operating activities

 

 

(6,475

)

 

 

10,072

 

Investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(5,348

)

 

 

(5,691

)

Cash received from sale of equipment

 

 

 

 

 

1,316

 

Net cash used in investing activities

 

 

(5,348

)

 

 

(4,375

)

Financing activities:

 

 

 

 

 

 

 

 

Borrowings under lines of credit

 

 

47,114

 

 

 

70,155

 

Repayments under lines of credit

 

 

(50,669

)

 

 

(70,963

)

Principal payments on capital lease obligations

 

 

(293

)

 

 

(400

)

Proceeds from sale of stock, net

 

 

17,630

 

 

 

58

 

Principal payments on notes payable and term loan

 

 

(2,557

)

 

 

(4,605

)

Net cash provided by (used in) financing activities

 

 

11,225

 

 

 

(5,755

)

Effect of exchange rate changes on cash

 

 

(47

)

 

 

(1,849

)

Net decrease in cash

 

 

(645

)

 

 

(1,907

)

Cash at beginning of period, including discontinued operations

 

 

19,752

 

 

 

11,229

 

Cash at end of period, including discontinued operations

 

$

19,107

 

 

$

9,322

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

2,437

 

 

$

3,861

 

Cash paid for income taxes

 

$

69

 

 

$

896

 

Purchases of property and equipment in accounts payable

 

$

374

 

 

$

2,451

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

6


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.

 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 Quarterly Report on Form 10-Q 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 and six months ended June 30, 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.

As a result of the sale of the International Business, the Company has retrospectively revised the condensed consolidated statements of operations for the three and six months ended June 30, 2016, to reflect the financial results from the International Business, and the related assets and liabilities, as discontinued operations.

The Company’s annual operating plan projects that its existing working capital at June 30, 2017 of $34.7 million (including cash of $19.1 million), allows the Company to fund its operations through one year subsequent to the date the financial statements are issued.

7


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 Compa ny 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 nee d 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 condensed 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 31, 2017. Except as discussed below, these accounting policies have not significantly changed during the six months ended June 30, 2017.

 

Warrant Accounting

As more fully described in Note 10, the Company issued warrants to purchase shares of the Company’s common stock in connection with a private placement transaction that closed on March 29, 201 7.  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 authoritative accounting guidance.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“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 was effective for the Company for annual and interim reporting periods in fiscal years beginning after December 15, 2016. The adoption, effective January 1, 2017, did not have a material impact on the Company’s condensed consolidated financial statements.

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 and interim reporting 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.

8


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 and interim reporting periods in fiscal years beginning after December 15, 2016. The Company adopted the standard for reporting periods beginning January 1, 20 17. The Company elected to keep its policy consistent for the application of a forfeiture rate and, therefore, the adoption of the guidance did not have a material impact on its unaudited condensed financial statements.

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 in fiscal years 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 evaluating the new guidance and has not determined the impact this standards update may have on its financial statements.

In January 2017, the FASB issued new accounting guidance, which was created to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This guidance provides a screen to determine whether an integrated set of assets and activities is a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. The guidance is effective for annual and interim reporting periods in fiscal years beginning after December 15, 2017. The Company does not anticipate this standard to have an impact on the Company’s consolidated financial statements unless a transaction occurs that would need to be evaluated under this guidance at which time the Company will assess the impact of this standard.

In May 2017, the FASB recently issued ASU 2017-09, Compensation-Stock Compensation , to provide clarity and reduce both 1) diversity in practice and 2) cost and complexity when applying the guidance in Topic 718 to a change in the terms or conditions of a share-based payment award.  ASU 2017-09 provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting under Topic 718.  The amendments in ASU 2017-09 are effective for fiscal and interim reporting periods in fiscal years beginning after December 15, 2017.  Early adoption is permitted, including adoption in any interim period.  The amendments in ASU 2017-09 should be applied prospectively to an award modified on or after the adoption date.   The Company does not anticipate that the adoption of ASU 2017-09 will have a material impact on its consolidated financial statements unless a transaction occurs that would need to be evaluated under this guidance at which time the Company will assess the impact of this standard.

3. Select Condensed Consolidated Balance Sheet Details

Accounts Receivable, net

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

 

 

 

June 30,

2017

 

 

December 31,

2016

 

Accounts receivable

 

$

13,680

 

 

$

19,870

 

Allowance for doubtful accounts

 

 

(554

)

 

 

(1,358

)

Accounts receivable, net

 

$

13,126

 

 

$

18,512

 

 

Inventories, net

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

 

 

 

June 30,

2017

 

 

December 31,

2016

 

Raw materials

 

$

5,882

 

 

$

7,301

 

Work-in-process

 

 

924

 

 

 

823

 

Finished goods

 

 

37,962

 

 

 

38,469

 

 

 

 

44,768

 

 

 

46,593

 

Less reserve for excess and obsolete finished goods

 

 

(14,958

)

 

 

(16,500

)

Inventories, net

 

$

29,810

 

 

$

30,093

 

 

9


Property and Equipment, net

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

 

 

 

Useful lives

(in years)

 

 

June 30,

2017

 

 

December

31, 2016

 

Surgical instruments

 

 

4

 

 

$

53,511

 

 

$

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

 

 

 

1,664

 

 

 

3,467

 

Construction in progress

 

n/a

 

 

 

-

 

 

 

445

 

 

 

 

 

 

 

 

66,886

 

 

 

68,648

 

Less accumulated depreciation and amortization

 

 

 

 

 

 

(52,419

)

 

 

(53,572

)

Property and equipment, net

 

 

 

 

 

$

14,467

 

 

$

15,076

 

 

Total depreciation expense was $1.6 million and $2.5 million for the three months ended June 30, 2017 and 2016 and $3.2 million and $5.3 million for the six months ended June 30, 2017 and 2016, respectively.  At June 30, 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)

 

 

June 30,

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

 

 

 

 

 

 

(27,119

)

 

 

(26,651

)

Intangible assets, net

 

 

 

 

 

$

5,243

 

 

$

5,711

 

 

Total amortization expense was $0.3 million and $1.0 million for the three months ended June 30, 2017 and 2016 and $0.5 million and $2.1 million for the six months ended June 30, 2017 and 2016, respectively.

Future amortization expense related to intangible assets as of June 30, 2017 is as follows (in thousands):

 

Year Ending December 31,

 

 

 

 

Remainder of 2017

 

$

468

 

2018

 

 

750

 

2019

 

 

688

 

2020

 

 

688

 

2021

 

 

688

 

Thereafter

 

 

1,961

 

 

 

$

5,243

 

 

 Accrued Expenses

Accrued expenses consist of the following (in thousands):

 

10


 

 

June 30,

2017

 

 

December 31,

2016

 

Commissions and sales milestones

 

$

3,983

 

 

$

4,202

 

Payroll and payroll related

 

 

2,749

 

 

 

2,384

 

Litigation settlements

 

 

4,400

 

 

 

4,400

 

Globus related accruals

 

 

-

 

 

 

3,830

 

Accrued professional fees

 

 

1,761

 

 

 

3,093

 

Royalties

 

 

1,326

 

 

 

1,347

 

Restructuring and severance accruals

 

 

1,032

 

 

 

1,328

 

Accrued taxes

 

 

293

 

 

 

404

 

Guaranteed collaboration compensation, current

 

 

4,575

 

 

 

2,228

 

Accrued interest

 

 

373

 

 

 

387

 

Other

 

 

3,425

 

 

 

3,986

 

Total accrued expenses

 

$

23,917

 

 

$

27,589

 

 

4. Discontinued Operations

As a result of the Globus Transaction, the Company has retrospectively revised the condensed consolidated statements of operations for the three and six month periods ended June 30, 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 credit facility, as amended to date (the “Amended Credit Facility”) with MidCap Funding IV, LLC (“MidCap”) (described in Note 5), 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 5, 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.

In connection with the Globus Transaction, the Company entered into a product 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

11


periods subject to Globus meeting specified purchase requirements. In accordance with authoritative guidance, certain 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.

Included in the results of continuing operations for the three months ended June 30, 2016 are revenues of $4.0 million and cost of revenue of $3.1 million and for the six months ended June 30, 2016 revenues of $9.0 million and cost of revenue of $7.1 million 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 June 30, 2017, the Company recorded $2.4 million in revenue and $2.1 million in cost of revenue from the Supply Agreement and during the six months ended June 30, 2017, $6.8 million in revenue and $5.8 million in cost of revenue that are included in continuing operations.

In connection with the Globus Transaction, the Company included the interest expense of $2.7 million and $5.1 million for the three and six months ended June 30, 2016, respectively, 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 Facility 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 loss for the three and six months ended June 30, 2017 and 2016 (in thousands):

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

Discontinued operations

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Revenues

 

$

 

 

$

11,548

 

 

$

 

 

$

22,103

 

Cost of revenues

 

 

 

 

 

4,412

 

 

 

 

 

 

8,225

 

Amortization of acquired intangible assets

 

 

 

 

 

377

 

 

 

 

 

 

737

 

Gross profit

 

 

 

 

 

6,759

 

 

 

 

 

 

13,141

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

 

 

 

8

 

 

 

 

 

 

34

 

Sales and marketing

 

 

 

 

 

5,344

 

 

 

 

 

 

9,526

 

General and administrative

 

 

68

 

 

 

1,996

 

 

 

141

 

 

 

3,639

 

Amortization of acquired intangible assets

 

 

 

 

 

236

 

 

 

 

 

 

467

 

Restructuring expenses

 

 

 

 

 

19

 

 

 

 

 

 

616

 

Total operating expenses

 

 

68

 

 

 

7,603

 

 

 

141

 

 

 

14,282

 

Operating loss

 

 

(68

)

 

 

(844

)

 

 

(141

)

 

 

(1,141

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

 

 

 

(2,693

)

 

 

 

 

 

(5,049

)

Other income, net

 

 

 

 

 

802

 

 

 

 

 

 

1,649

 

Total other income (expense)

 

 

 

 

 

(1,891

)

 

 

 

 

 

(3,400

)

Loss from discontinued operations before taxes

 

 

(68

)

 

 

(2,735

)

 

 

(141

)

 

 

(4,541

)

Income tax provision

 

 

 

 

 

589

 

 

 

18

 

 

 

1,152

 

Loss from discontinued operations, net of applicable taxes

 

$

(68

)

 

$

(3,324

)

 

$

(159

)

 

$

(5,693

)

 

12


The following table summarizes the assets and liabilities of discontinued operations as of June 30, 2017 and December 31, 2016 related to the International Business (in thousands):

 

 

 

June 30,

2017

 

 

December 31,

2016

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash

 

$

 

 

$

159

 

Inventories, net

 

 

 

 

 

48

 

Prepaid expenses and other current assets

 

 

69

 

 

 

157

 

Total current assets of discontinued operations

 

 

69

 

 

 

364

 

Other assets

 

 

39

 

 

 

61

 

Total assets of discontinued operations

 

$

108

 

 

$

425

 

Liabilities

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

 

 

$

43

 

Accrued expenses

 

 

464

 

 

 

689

 

Other current liabilities

 

 

 

 

 

 

Total current liabilities of discontinued operations

 

$

464

 

 

$

732

 

Total long-term liabilities of discontinued operations