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, 2019
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 every Interactive Data File required to be submitted 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 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 |
☒ |
|
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 ☒
Securities registered pursuant to Section 12(b) of the Act:
|
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
|
Common stock, par value $.0001 per share |
ATEC |
The NASDAQ Global Select Market |
As of April 30, 2019, there were 46,857,420 shares of the registrant’s common stock outstanding.
QUARTERLY REPORT ON FORM 10-Q
March 31, 2019
Table of Contents
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Page |
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Item 1. |
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3 |
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Condensed Consolidated Balance Sheets as of March 31, 2019 (unaudited) and December 31, 2018 |
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3 |
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4 |
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5 |
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6 |
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7 |
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Notes to Condensed Consolidated Financial Statements (unaudited) |
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8 |
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Item 2. |
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Management's Discussion and Analysis of Financial Condition and Results of Operations |
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23 |
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Item 3. |
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32 |
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Item 4. |
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32 |
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Item 1. |
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34 |
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Item 1A. |
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34 |
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Item 2. |
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34 |
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Item 5. |
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34 |
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Item 6. |
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35 |
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36 |
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2
ALPHATEC HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except for par value data)
|
|
|
March 31, 2019 |
|
|
December 31, 2018 |
|
||
|
Assets |
|
(Unaudited) |
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
Cash |
|
$ |
16,419 |
|
|
$ |
29,054 |
|
|
Accounts receivable, net |
|
|
13,760 |
|
|
|
15,095 |
|
|
Inventories, net |
|
|
31,166 |
|
|
|
28,765 |
|
|
Prepaid expenses and other current assets |
|
|
2,167 |
|
|
|
2,030 |
|
|
Withholding tax receivable from officer |
|
|
— |
|
|
|
350 |
|
|
Current assets of discontinued operations |
|
|
237 |
|
|
|
242 |
|
|
Total current assets |
|
|
63,749 |
|
|
|
75,536 |
|
|
Property and equipment, net |
|
|
12,821 |
|
|
|
13,235 |
|
|
Operating lease right-of-use asset |
|
|
2,394 |
|
|
|
— |
|
|
Goodwill |
|
|
13,897 |
|
|
|
13,897 |
|
|
Intangibles, net |
|
|
26,226 |
|
|
|
26,408 |
|
|
Other assets |
|
|
277 |
|
|
|
347 |
|
|
Noncurrent assets of discontinued operations |
|
|
53 |
|
|
|
54 |
|
|
Total assets |
|
$ |
119,417 |
|
|
$ |
129,477 |
|
|
Liabilities and Stockholders’ Equity |
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
6,780 |
|
|
$ |
4,399 |
|
|
Accrued expenses |
|
|
18,527 |
|
|
|
22,316 |
|
|
Current portion of long-term debt |
|
|
619 |
|
|
|
3,276 |
|
|
Current portion of operating lease liability |
|
|
1,132 |
|
|
|
— |
|
|
Current liabilities of discontinued operations |
|
|
569 |
|
|
|
621 |
|
|
Total current liabilities |
|
|
27,627 |
|
|
|
30,612 |
|
|
Long-term debt, less current portion |
|
|
42,559 |
|
|
|
42,299 |
|
|
Operating lease liability |
|
|
1,778 |
|
|
|
— |
|
|
Other long-term liabilities |
|
|
14,600 |
|
|
|
15,389 |
|
|
Redeemable preferred stock, $0.0001 par value; 20,000 shares authorized at March 31, 2019 and December 31, 2018; 3,319 shares issued and outstanding at both March 31, 2019 and December 31, 2018 |
|
|
23,603 |
|
|
|
23,603 |
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
Stockholders' equity: |
|
|
|
|
|
|
|
|
|
Series A convertible preferred stock, $0.0001 par value; 15 shares authorized at March 31, 2019 and December 31, 2018; 0 and 4 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively |
|
|
— |
|
|
|
— |
|
|
Series B convertible preferred stock, $0.0001 par value; 45 shares authorized at March 31, 2019 and December 31, 2018; 0 shares issued and outstanding at March 31, 2019 and December 31, 2018 |
|
|
— |
|
|
|
— |
|
|
Common stock, $0.0001 par value; 200,000 shares authorized at March 31, 2019 and December 31, 2018; 46,853 issued and 46,578 outstanding at March 31, 2019 net of 275 unvested shares and 43,368 shares issued and outstanding at December 31, 2018 |
|
|
4 |
|
|
|
4 |
|
|
Treasury stock, at cost, 2 shares, at both March 31, 2019 and December 31, 2018 |
|
|
(97 |
) |
|
|
(97 |
) |
|
Additional paid-in capital |
|
|
528,094 |
|
|
|
523,525 |
|
|
Shareholder note receivable |
|
|
(5,000 |
) |
|
|
(5,000 |
) |
|
Accumulated other comprehensive income |
|
|
1,139 |
|
|
|
1,064 |
|
|
Accumulated deficit |
|
|
(514,890 |
) |
|
|
(501,922 |
) |
|
Total stockholders’ equity |
|
|
9,250 |
|
|
|
17,574 |
|
|
Total liabilities and stockholders’ equity |
|
$ |
119,417 |
|
|
$ |
129,477 |
|
See accompanying notes to unaudited condensed consolidated financial statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except per share amounts)
|
|
|
Three Months Ended |
|
|||||
|
|
|
March 31, |
|
|||||
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2019 |
|
|
2018 |
|
||
|
Revenues: |
|
|
|
|
|
|
|
|
|
Revenue from U.S. products |
|
$ |
22,955 |
|
|
$ |
19,201 |
|
|
Revenue from international supply agreement |
|
|
1,600 |
|
|
|
2,106 |
|
|
Total revenues |
|
|
24,555 |
|
|
|
21,307 |
|
|
Cost of revenues |
|
|
7,987 |
|
|
|
6,402 |
|
|
Gross profit |
|
|
16,568 |
|
|
|
14,905 |
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
Research and development |
|
|
3,469 |
|
|
|
1,786 |
|
|
Sales, general and administrative |
|
|
21,000 |
|
|
|
17,257 |
|
|
Litigation-related expenses |
|
|
2,623 |
|
|
|
580 |
|
|
Amortization of intangible assets |
|
|
182 |
|
|
|
177 |
|
|
Transaction-related expenses |
|
|
— |
|
|
|
1,542 |
|
|
Gain on settlement |
|
|
— |
|
|
|
(6,168 |
) |
|
Restructuring expenses |
|
|
60 |
|
|
|
398 |
|
|
Total operating expenses |
|
|
27,334 |
|
|
|
15,572 |
|
|
Operating loss |
|
|
(10,766 |
) |
|
|
(667 |
) |
|
Total other income (expense), net |
|
|
(2,119 |
) |
|
|
(1,645 |
) |
|
Loss from continuing operations before taxes |
|
|
(12,885 |
) |
|
|
(2,312 |
) |
|
Income tax provision (benefit) |
|
|
31 |
|
|
|
(458 |
) |
|
Loss from continuing operations |
|
|
(12,916 |
) |
|
|
(1,854 |
) |
|
Loss from discontinued operations, net of applicable taxes |
|
|
(52 |
) |
|
|
(62 |
) |
|
Net loss |
|
$ |
(12,968 |
) |
|
$ |
(1,916 |
) |
|
Net loss per share, basic and diluted: |
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
(0.29 |
) |
|
$ |
(0.09 |
) |
|
Discontinued operations |
|
$ |
(0.00 |
) |
|
$ |
(0.00 |
) |
|
Net loss per share, basic and diluted |
|
$ |
(0.29 |
) |
|
$ |
(0.09 |
) |
|
Shares used in calculating basic and diluted net loss per share |
|
|
45,020 |
|
|
|
21,212 |
|
See accompanying notes to unaudited condensed consolidated financial statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(UNAUDITED)
(In thousands)
|
|
|
Three Months Ended |
|
|||||
|
|
|
March 31, |
|
|||||
|
|
|
2019 |
|
|
2018 |
|
||
|
Net loss |
|
$ |
(12,968 |
) |
|
$ |
(1,916 |
) |
|
Foreign currency translation adjustments related to continuing operations |
|
|
75 |
|
|
|
(22 |
) |
|
Comprehensive loss |
|
$ |
(12,893 |
) |
|
$ |
(1,938 |
) |
See accompanying notes to unaudited condensed consolidated financial statements.
5
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
(In thousands)
|
|
|
Common stock |
|
|
Series A Convertible Preferred Stock |
|
|
Series B Convertible Preferred Stock |
|
|
Additional paid-in |
|
|
Shareholder note |
|
|
Treasury |
|
|
Accumulated other comprehensive |
|
|
Accumulated |
|
|
Total stockholders’ |
|
|||||||||||||||||||||
|
|
|
Shares |
|
|
Par Value |
|
|
Shares |
|
|
Par Value |
|
|
Shares |
|
|
Par Value |
|
|
capital |
|
|
receivable |
|
|
stock |
|
|
income (loss) |
|
|
deficit |
|
|
equity |
|
||||||||||||
|
Balance at January 1, 2018 |
|
|
19,857 |
|
|
$ |
2 |
|
|
|
5 |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
— |
|
|
$ |
436,803 |
|
|
$ |
(5,000 |
) |
|
$ |
(97 |
) |
|
$ |
1,093 |
|
|
$ |
(459,459 |
) |
|
$ |
(26,658 |
) |
|
Stock-based compensation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
812 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
812 |
|
|
Issuance of Series B preferred stock, net of offering costs of $2.6 million |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
45 |
|
|
|
— |
|
|
|
42,823 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
42,823 |
|
|
Common stock issued for conversion of Series A preferred stock |
|
|
637 |
|
|
|
— |
|
|
|
(1 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Common stock issued for vesting of restricted stock awards, net of shares repurchased for tax liability |
|
|
38 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Common stock issued for warrant exercises |
|
|
2,061 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
4,128 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4,128 |
|
|
Issuance of common stock and warrants for the acquisition of SafeOp |
|
|
2,975 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
11,468 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
11,468 |
|
|
Prepaid forward contract for the additional shares to be issued for the acquisition of SafeOp |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
938 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
938 |
|
|
Foreign currency translation adjustments |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(22 |
) |
|
|
— |
|
|
|
(22 |
) |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,916 |
) |
|
|
(1,916 |
) |
|
Balance at March 31, 2018 |
|
|
25,568 |
|
|
$ |
2 |
|
|
|
4 |
|
|
$ |
— |
|
|
|
45 |
|
|
$ |
— |
|
|
$ |
496,972 |
|
|
$ |
(5,000 |
) |
|
$ |
(97 |
) |
|
$ |
1,071 |
|
|
$ |
(461,375 |
) |
|
$ |
31,573 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2019 |
|
|
43,368 |
|
|
$ |
4 |
|
|
|
4 |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
— |
|
|
$ |
523,525 |
|
|
$ |
(5,000 |
) |
|
$ |
(97 |
) |
|
$ |
1,064 |
|
|
$ |
(501,922 |
) |
|
$ |
17,574 |
|
|
Stock-based compensation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,565 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,565 |
|
|
Distributor equity incentives |
|
|
15 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
42 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
42 |
|
|
Common stock issued for conversion of Series A preferred stock |
|
|
1,858 |
|
|
|
— |
|
|
|
(4 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Recognition of beneficial conversion feature - SafeOp Convertible Notes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
242 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
242 |
|
|
Common stock issued for stock option exercises |
|
|
8 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
14 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
14 |
|
|
Common stock issued for vesting of restricted stock awards, net of shares repurchased for tax liability |
|
|
442 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(183 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(183 |
) |
|
Issuance of common stock for acquisition of SafeOp - Milestone 2 |
|
|
887 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,889 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,889 |
|
|
Foreign currency translation adjustments |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
75 |
|
|
|
— |
|
|
|
75 |
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,968 |
) |
|
|
(12,968 |
) |
|
Balance at March 31, 2019 |
|
|
46,578 |
|
|
$ |
4 |
|
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
— |
|
|
$ |
528,094 |
|
|
$ |
(5,000 |
) |
|
$ |
(97 |
) |
|
$ |
1,139 |
|
|
$ |
(514,890 |
) |
|
$ |
9,250 |
|
See accompanying notes to unaudited condensed consolidated financial statements
6
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
|
|
|
Three Months Ended March 31, |
|
|||||
|
|
|
2019 |
|
|
2018 |
|
||
|
Operating activities: |
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(12,968 |
) |
|
$ |
(1,916 |
) |
|
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
1,785 |
|
|
|
1,886 |
|
|
Stock-based compensation |
|
|
1,612 |
|
|
|
619 |
|
|
Amortization of debt discount and debt issuance costs |
|
|
503 |
|
|
|
589 |
|
|
Amortization of right-of-use asset |
|
|
217 |
|
|
|
— |
|
|
Provision for doubtful accounts |
|
|
66 |
|
|
|
55 |
|
|
Provision for excess and obsolete inventory |
|
|
1,997 |
|
|
|
1,345 |
|
|
Deferred income tax benefit |
|
|
4 |
|
|
|
31 |
|
|
Gain on settlement |
|
|
— |
|
|
|
(6,168 |
) |
|
Beneficial conversion feature from convertible notes |
|
|
242 |
|
|
|
— |
|
|
Gain on disposal of instruments |
|
|
(275 |
) |
|
|
(131 |
) |
|
Accretion to contingent consideration |
|
|
289 |
|
|
|
— |
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
|
1,268 |
|
|
|
2,846 |
|
|
Inventories, net |
|
|
(4,398 |
) |
|
|
(2,733 |
) |
|
Prepaid expenses and other current assets |
|
|
198 |
|
|
|
(217 |
) |
|
Other assets |
|
|
69 |
|
|
|
37 |
|
|
Other long-term assets |
|
|
(2,612 |
) |
|
|
— |
|
|
Accounts payable |
|
|
3,319 |
|
|
|
(192 |
) |
|
Accrued expenses and other |
|
|
(1,071 |
) |
|
|
(258 |
) |
|
Lease liability |
|
|
2,910 |
|
|
|
— |
|
|
Other long-term liabilities |
|
|
(1,099 |
) |
|
|
(1,093 |
) |
|
Net cash used in operating activities |
|
|
(7,944 |
) |
|
|
(5,300 |
) |
|
Investing activities: |
|
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
(1,068 |
) |
|
|
(410 |
) |
|
Cash paid for acquisition of SafeOp Surgical, Inc. |
|
|
— |
|
|
|
(13,844 |
) |
|
Cash received from sale of equipment |
|
|
— |
|
|
|
172 |
|
|
Net cash used in investing activities |
|
|
(1,068 |
) |
|
|
(14,082 |
) |
|
Financing activities: |
|
|
|
|
|
|
|
|
|
Proceeds from sale of stock, net |
|
|
14 |
|
|
|
47,259 |
|
|
Borrowings under lines of credit |
|
|
26,433 |
|
|
|
22,433 |
|
|
Repayments under lines of credit |
|
|
(26,822 |
) |
|
|
(24,178 |
) |
|
Principal payments on capital lease obligations |
|
|
(5 |
) |
|
|
(31 |
) |
|
Debt issuance costs |
|
|
(300 |
) |
|
|
— |
|
|
Principal payments on term loan |
|
|
(3,022 |
) |
|
|
(900 |
) |
|
Net cash (used in) provided by financing activities |
|
|
(3,702 |
) |
|
|
44,583 |
|
|
Effect of exchange rate changes on cash |
|
|
79 |
|
|
|
(22 |
) |
|
Net increase (decrease) in cash |
|
|
(12,635 |
) |
|
|
25,179 |
|
|
Cash at beginning of period, including discontinued operations |
|
|
29,054 |
|
|
|
22,466 |
|
|
Cash at end of period, including discontinued operations |
|
$ |
16,419 |
|
|
$ |
47,645 |
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
1,357 |
|
|
$ |
1,092 |
|
|
Cash paid for income taxes |
|
$ |
23 |
|
|
$ |
6 |
|
|
Purchases of property and equipment in accounts payable |
|
$ |
785 |
|
|
$ |
515 |
|
|
Common stock issued for achievement of SafeOp contingent consideration |
|
$ |
2,889 |
|
|
$ |
— |
|
See accompanying notes to unaudited condensed consolidated financial statements.
7
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 subsidiaries, Alphatec Spine, Inc. (“Alphatec Spine”) and SafeOp Surgical, Inc. (“SafeOp”), is a medical technology company that designs, develops, and markets spinal fusion technology products and solutions for the treatment of spinal disorders associated with disease and degeneration, congenital deformities, and trauma. The Company markets its products in the U.S. via independent sales agents and a direct sales force.
On March 8, 2018, the Company completed its acquisition of SafeOp, a Delaware corporation, pursuant to a reverse triangular merger of SafeOp into a newly-created wholly-owned subsidiary of the Company, with SafeOp being the surviving corporation and a wholly-owned subsidiary of the Company. See Note 8 for further information.
On September 1, 2016, the Company completed the sale of its international distribution operations and agreements (collectively, the “International Business”) to Globus Medical Ireland, Ltd., a subsidiary of Globus Medical, Inc., and its affiliated entities (collectively “Globus”). As a result of this transaction, the 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.
Basis of Presentation
The accompanying condensed consolidated balance sheet as of December 31, 2018, 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 unaudited interim 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, 2018, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 that was filed with the SEC on March 29, 2019. Operating results for the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019, or any other future periods.
Liquidity
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.
The Company’s annual operating plan projects that its existing working capital at March 31, 2019 of $36.1 million (including cash of $16.4 million) along with the use of the Expanded Credit Facility with Squadron Medical Finance Solutions LLC (“Squadron”) of $30.0 million that closed on March 27, 2019 allows the Company to fund its operations through at least 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 Company’s inability to raise additional capital from outside sources will have a material adverse impact on its operations.
8
As more fully described in Note 5, the Company’s debt agreements include traditional lending and reporting covenants, including a financial covenant that requires the Company to maintain a minimum fixed charge coverage ratio beginning in April 2020 and a minimum liquidity covenant of $5.0 million effective through March 2020. Should at any time the Company fail to maintain compliance with these covenants, the Company will need to seek waivers or amendments to the debt agreements. If the Company is unable to secure such waivers or amendments, it may be required to classify its obligations under the debt agreements in current liabilities on its consolidated balance sheet. The Company may also be required to repay all or a portion of outstanding indebtedness under the debt agreements, which would require the Company to obtain further financing. There is no assurance that the Company will be able to obtain further financing, or do so on reasonable terms.
Reclassification
Certain amounts in the condensed consolidated statement of cash flows for the three months ended March 31, 2018 have been reclassified to conform to the current period's presentation. These reclassifications include the depreciation expense for surgical instruments, which was reclassified, to be consistent with industry practice, out of cost of revenues and into sales, general and administrative expense on the Company’s consolidated statements of operations. This resulted in a reclassification of $1.3 million of depreciation expense for the three months ended March 31, 2018. In addition, general and administrative expense for 2018 was combined into a single line item with sales and marketing expense for a new expense line titled “Sales, general and administrative expense” and litigation-related expenses primarily pertaining to the ongoing litigation with NuVasive, Inc. were classified out of selling, general and administrative expense on the Company’s consolidated statement of operations for the three months ended March 31, 2018 and onto its own expense line item. None of the adjustments had any effect on the prior period net loss.
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, 2018, which are included in the Company’s Annual Report on Form 10-K that was filed with the SEC on March 29, 2019. Except as discussed below, these accounting policies have not changed during the three months ended March 31, 2019.
Operating Lease
Effective January 1, 2019, the Company adopted ASC No. 2016‑02, Leases (Topic 842) (“ASU 2016‑02” or “ASC 842”), which supersedes the current accounting for leases, using the modified retrospective transition method. The Company has elected to apply the practical expedients allowed by the standard for existing leases. The new standard, while retaining two distinct types of leases, finance and operating, (i) requires lessees to record a right-of-use (“ROU”)asset and a related liability for the rights and obligations associated with a lease, regardless of lease classification, and recognize lease expense in a manner similar to current accounting, (ii) eliminates current real estate specific lease provisions, (iii) modifies the lease classification criteria and (iv) aligns many of the underlying lessor model principles with those in the new revenue standard. The Company determines the initial classification and measurement of its ROU asset and lease liabilities at the lease commencement date and thereafter, if modified. The Company recognizes a ROU asset for its operating leases with lease terms greater than 12 months. The lease term includes any renewal options and termination options that the Company is reasonably assured to exercise. The present value of lease payments is determined by using the incremental borrowing rate for operating leases determined by using the incremental borrowing rate of interest that the Company would pay to borrow on a collateralized basis an amount equal to the lease payments in a similar economic environment. The Company applied the new guidance to its existing facility lease at the time of adoption and recognized a ROU asset of $2.4 million and operating lease liability of $2.9 million as of March 31, 2019 and recorded a reversal of the previous deferred rent balance under the previous lease guidance of approximately $0.6 million.
Rent expense for operating leases is recognized on a straight-line basis over the reasonably assured lease term based on the total lease payments and is included in research and development and general and administrative expenses in the statements of operations.
Beneficial Conversion Feature – SafeOp Convertible Notes
In March 2019, the Company’s Convertible Note outstanding reached maturity and allowed for the noteholders to elect settlement in cash or shares of common stock. As the Convertible Note provided the holders the benefit to convert to shares of common stock, a beneficial conversion feature (“BCF”) with a calculated intrinsic fair value at issuance of $0.2 million existed as of the date the Convertible Note was able to be converted into shares of common stock. Although the holders elected for cash settlement, the BCF was required to be recognized as interest expense on the Company’s consolidated statement of operations and within additional paid-in-capital within the Company’s condensed consolidated statement of stockholders’ equity for the three months ended March 31, 2019.
9
The carrying amount of financial instruments consisting of cash, restricted cash, trade accounts receivable, prepaid expenses and other current assets, accounts payable, accrued expenses, accrued compensation and current portion of long-term debt included in the Company’s consolidated financial statements are reasonable estimates of fair value due to their short maturities. Based on the borrowing rates currently available to the Company for loans with similar terms, management believes the fair value of long-term debt approximates its carrying value.
Authoritative guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
|
|
Level 1: |
Observable inputs such as quoted prices in active markets; |
|
|
Level 2: |
Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and |
|
|
Level 3: |
Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions. |
The Company does not maintain any financial assets that are considered to be Level 1, Level 2 or Level 3 instruments as of March 31, 2019. The fair value of the contingent consideration liability assumed in the SafeOp acquisition was recorded as part of the purchase price consideration of the acquisition. The contingent consideration related to the SafeOp acquisition is classified within Level 3 of the fair value hierarchy as the Company is using a probability-weighted income approach, utilizing significant unobservable inputs including the probability of achieving each of the potential milestones and an estimated discount rate related to the risks of the expected cash flows attributable to the milestones.
The following table provides a reconciliation of liabilities measured at fair value using significant unobservable inputs (Level 3) for the three months ended March 31, 2019 (in thousands):
|
|
|
Level 3 Liabilities |
|
|
|
Balance at January 1, 2019 |
|
$ |
2,600 |
|
|
Settlement of Milestone #2 |
|
|
(2,889 |
) |
|
Change in fair value measurement |
||||